# 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 1934For the fiscal year ended June 29, 2002OR
                               [   ] 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  
(State of other jurisdiction of incorporation
 or organization) | 84-1311581
(I.R.S. Employer 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:   None.
                             Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value (Title of Class)

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

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

The aggregate market value
of the total outstanding common stock of the Registrant, based on a per share
price of $11.16 as of June 28, 2002, was $123,064,780. As of
June 28, 2002, there were outstanding 11,027,310 shares of the
Companys Common Stock (no par value). The aggregate market value of the
common stock held by non-affiliates of the Registrant, based on a per share
price of $11.16 as of June 28, 2002, was $94,240,051.

Documents Incorporated by
Reference: Portions of the Companys Proxy Statement for the 2002 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report.



---

## PART I

## ITEM 1:  Business

The following discussion
contains trend information and other forward-looking statements (including
statements regarding future operating results, future capital expenditures, new
product introductions, technological developments and industry trends) that
involve a number of risks and uncertainties. Our actual results could differ
materially from our historical results of operations and those discussed in the
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those identified in ITEM 7:
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the section entitled Risk Factors. All period
references are to our fiscal periods ended June 29, 2002,
June 30, 2001, or July 1, 2000, unless otherwise indicated.

## ITEM 1(a):  General Development of Business

## Introduction

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

We leverage our thin film
expertise, technology and market presence to address the evolving demand for
more sophisticated, technologically advanced thin film deposition equipment. Our
manufacturing operations in the United States and Germany together with our
global sales and support offices enable us to provide thin film coating
solutions to customers throughout the world. We have sold over 80 FPD deposition
systems, 37 architectural and automotive glass thin film deposition systems, and
470 web coating systems and have sold nine systems for coating plastic bottles.
We have over 50 patents and patent applications related to thin film
technologies.

## Markets We
Serve

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

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

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

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

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

## Our Thin Film
Technology Solutions

Over the past 26 years, we
have developed leading thin film technologies that we leverage to meet our
customers need for sophisticated, technologically advanced thin film
deposition equipment. We have over 50 patents and patent applications related to
thin film technologies, and we continue to invest in research and development.
Historically, we manufactured thin film coated glass and have used that
experience to transition our business to the design and manufacture of thin film
deposition equipment.

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

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

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

## Strategy

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

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

Leverage Our Leadership
in Our Core Markets. We are a market leader with the largest installed base
of inline systems for the FPD, the architectural and automotive glass markets,
and the consumer products packaging and electronics markets. For example, we
have sold over 80 inline FPD deposition systems, 37 architectural and automotive
systems, and 470 web coating systems. We believe our reputation as a high
quality supplier of thin film deposition equipment allows us to build on our
customer relationships to generate additional orders as they grow their
businesses in response to market demands and new product offerings. We intend to
utilize our strong technological capabilities to capture additional market share
in these markets.

Target Emerging High
Growth Market Opportunities. We have recently entered and are focusing our
research and development efforts on three high growth markets-solar cell,
organic light emitting diodes, or OLEDs, and barrier coated PET bottles.
Although the size of the market for barrier coated PET bottles has not been
determined, we believe it presents us with significant opportunities due to our
strategic relationships with The Coca-Cola Company and KRONES AG, a leading
supplier of automated bottling equipment. We have installed equipment in the
OLED, solar cell and coated PET bottle markets, and are working with our
strategic partners to develop our technologies in each of these areas.

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

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

## ITEM 1(b):  Financial Information About Industry Segments

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

## ITEM 1(c):  Narrative Description of Business

## Products

Our thin film coating
systems are used in many different applications spanning four distinct markets.
The following table illustrates our principal products:

`Deposition          Examples of              General Price
    End Markets and Products                Method      End Market Application           Range(1)
    ------------------------              ----------    ---------------------------      --------
     Flat Panel Displays:
       NEW ARISTO                             PVD       Laptop and desktop monitors   $4-7 million
                                                        And plasma televisions
       BTX                                    PVD       Color cell phones/personal    $1-3 million
                                                        Digital assistants
       VES 400                            Evaporative   OLED displays                 $5-10 million

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

     Consumer Products Packaging
       and Electronics:
       MULTIWEB                               PVD       Touch panels                  $4-8 million
       TOPMET                             Evaporative   Potato chip bags              $1-3 million
       TOPBEAM                            Evaporative   Food packaging (transparent)  $4-6 million
       MULTIMET                           Evaporative   Capacitors                    $1-3 million

     Plastic Beverage Bottles:
       BESTPET-LG 20                      Evaporative   Plastic beverage bottles      $1-3 million`

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

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Thin Film Deposition Equipment

Flat Panel Displays

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

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

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

VES 400. Our VES 400 system is an advanced production thin film deposition system for the OLED
market.  The VES 400 applies the metal layers and the organic layers in a
vacuum.  This will provide OLED manufacturers the ability to produce OLED devices in production volumes.  This is the first vertical inline deposition
system for OLED.

Architectural, Automotive and Solar Glass

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

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

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

SOLARISTO. Our
SOLARISTO thin film deposition system, a derivative of the NEW ARISTO, is a
vertical in-line system that handles medium-sized substrates. The SOLARISTO uses
planar magnetron cathodes or a linear PECVD source and deposits multiple thin
films on the substrate, which is moving vertically through the system.

Consumer Products Packaging and Electronics

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

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

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

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

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

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Plastic Beverage Bottles

Our PET bottle barrier
coating processes enhance the material properties of PET bottles, which extends
the shelf life of beverages and other products. Because our barrier coating is
applied to the outside of the bottle, it does not come in contact with the
beverage and does not require United States Food and Drug Administration
approval.

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

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

Thin Film Coated Glass

OLED, Microdisplay and
Touch Panel Coated Glass. We are a leading producer of coated glass
substrates to the OLED, microdisplay and touch panel markets. The microdisplay glass
that we produce is used for near eye applications such as cameras, both video
and still, and for projection applications such as large screen televisions. The
touch panel coated glass we produce is used for touch screen applications such
as ATMs, PDAs, and Kiosks.

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

## Sales,
Marketing and Customers

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

In fiscal 2002, our ten
largest customers accounted for approximately 59% of our gross revenues.
Approximately 39% of our fiscal 2002 net revenues were derived from exports to
our customers outside of the United Sates and Europe, primarily to Asia. The
demand for FPD thin film coated glass is primarily in Asia, and our customers
for thin film deposition equipment have historically been located in Japan,
Korea, China, Taiwan, Europe and the United States. Revenue from two customers,
Guardian Industries and LG International, represented 22% and 10% of net revenue
for fiscal 2002, respectively. Revenue from both customers for fiscal 2002 consisted
solely of thin film coating equipment.

## Customer
Service

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

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

## Manufacturing
and Facilities

Our Longmont, Colorado,
headquarters contains approximately 127,000 square feet and includes general
offices, research and development facilities, and coated glass production
facilities. This facility is leased from an independent third party. We design
thin film coating equipment and produce coated glass at this facility. In
Longmont, we currently operate three coated glass production lines and two
development lines for developing coating and equipment processes.

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Our Alzenau, Germany,
manufacturing facility contains approximately 260,000 square feet and includes
general offices, research and development facilities, and equipment
manufacturing facilities. This facility is leased from an independent third
party. We design and manufacture thin film deposition equipment and can
concurrently build multiple thin film deposition systems at this facility.

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

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

We have multiple sources
for the principal components of our coated glass and deposition equipment
manufacturing operations.

## Competition

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

Our primary competitors in each of our markets are as follows:

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

Architectural,
Automotive and Solar Glass Deposition Equipment. In manufacturing
architectural and automotive glass deposition systems, we primarily compete
against Von Ardenne, AG, a German thin film deposition equipment company. In
manufacturing solar glass deposition systems, we primarily compete against Ulvac
Technologies and Von Ardenne.

Consumer  Products  Packaging and  Electronics  Deposition  Equipment.  Our most  significant  competitors  for web
coating systems are Valmet  General,  headquartered  in the United Kingdom,  Galileo Vacuum Systems s.r.l. of Italy
and Von Ardenne.

Plastic Beverage Bottle
Deposition Equipment. In the coated PET bottle market, we compete with Sidel, a French filling line equipment company and Tetra-Pak (Swiss) SA, an
established manufacturer of pre-made bottles and packages in Switzerland. Our
arc evaporation process applies a barrier coating to the outside of the bottle,
while Sidel and Tetra-Paks chemical vapor deposition process coats a
barrier layer on the inside of the bottle.

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

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

## Research and
Development

We have approximately 43 engineers
and scientists involved in research and development. We will continue to
emphasize improvements in current equipment technology, the development of new
film deposition capabilities, and the modification of thin film material
properties. The foundations of our success are based on engineering solutions,
extensive experience with vacuum technologies, and the depth of our commercial
deposition experience. Our customer oriented solutions include cost effective
thin film deposition, simplified process control, and innovative deposition
equipment designs. We continue to build on these traditions in the development
of process control and deposition design, which lower the cost of ownership to
the customer.

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

- Thermal evaporation by direct heating for organics and inorganics;
- Electron beam evaporation for dielectrics;
- Direct current, radio frequency and radio frequency superimposed direct current
magnetron for reactive and non-reactive sputtering;
- Alternating current magnetron (TWINMAG) for fully reactive sputtering;
- Hollow cathode source for highly reactive coatings;
- Direct current, radio frequency and microwave sources for PECVD;
- Cleaning with direct current glow discharge, radio frequency etch and ion assisted etch; and
- Arc evaporation for high speed deposition of barrier layers on PET bottles.

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

Our research and
development expenditures were $1.4 million in fiscal 2000, $6.5 million in
fiscal 2001 and $9.4 million in fiscal 2002.

## Intellectual
Property

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

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

- dry etch applications;
- TFT displays;
- cluster tools; and
- stationary sputtering.

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

- architectural glass coating and inline automotive glass coating;
- web coating for capacitors and decorative and packaging applications;
- diffusion barriers for certain bottles and containers; and
- certain display coating systems used to coat the non-active portion of a display.

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

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

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

Strategic Relationships with KRONES AG and The Coca-Cola Company

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

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

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

## The LAC
Acquisition

We acquired the LAC business
from Unaxis effective December 31, 2000. The LAC acquisition expanded our
capabilities in the FPD market and enabled our entry into three new product
markets: architectural, automotive and solar glass, consumer products packaging
and electronics and PET plastic bottles.

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

## China Joint
Venture

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

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

|8
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## Employees

As of
June 29, 2002, we employed 560 people, 103 people in the United
States, 404 in Germany and 53 in Asia, including both regular and temporary
employees. Our United States workforce is non-union, the majority of our German
work force is represented by a works council that has employee representation.
Most companies in Germany are required to be represented by works councils. We
negotiate wages and benefits annually with our German workforce. Our workforce
in Asia is primarily dedicated to sales and customer service. We consider our
relationship with our employees to be good.

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

## Environmental
Regulations

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

## Trademarks

ATX-700, NEW ARISTO, BTX,
Terra-G, A-Series, SOLARISTO, MULTIWEB, TOPMET, TOPBEAM, MULTIMET, GMS Tester,
VES 400, and TWINMAG are trademarks or registered trademarks of ours. Coca-Cola and
BESTPET are registered trademark of The Coca-Cola Company. KRONES is a
registered trademark of KRONES AG.

|9
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# Management

## Executive
Officers and Directors

Our executive officers and directors are as follows:

`Name                            Age                Position
                   ----                            ---                --------
                   Thomas T. Edman.............    40    Director, President and Chief Executive Officer
                   Graeme Hennessey............    64    Vice President - Sales and Marketing
                   Lawrence D. Firestone.......    44    Chief Financial Officer, Treasurer and
                                                         Secretary
                   Helmut Frankenberger........    45    Executive Vice President - Thin Film Systems
                   Jim Scholhamer..............    36    Vice President - Operations
                   John S. Chapin..............    61    Director
                   Chad D. Quist...............    40    Director(1)
                   Richard P. Beck.............    69    Director(1), Chairman of the Board
                   Vincent Sollitto, Jr........    54    Director(1)`

__________

(1)        Member of the Audit and Compensation Committees.

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

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

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

Helmut Frankenberger
has served as our Executive Vice President - Thin Film Systems since the LAC
acquisition on December 31, 2000. Prior to the acquisition, Mr. Frankenberger
served as President of Balzers Process Systems, located in Germany, since 2000,
and the Vice President of Large Area Display Division since 1999. From 1997
through 1998, he served as the Division Manager of Display Products, and from
1996 through 1997, served as the Division Manager of Data Storage at Balzers
Process Systems. From 1969 to 1987 Mr. Frankenberger served in various
capacities related to sales, marketing and equipment service for Leybold
Deutschland in Germany, Japan and the United States. Mr. Frankenberger obtained
his bachelors degree in electronic and computer science from University
Darmstadt in Germany.

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

|10
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John S.  Chapin  co-founded  Applied  Films Lab,  Inc. in 1976 and served as Vice  President - Research,  Corporate
Secretary  from  1976 to  November  2000.  Mr.  Chapin  has also  served as a  director  of our  company  since its
inception.  Mr. Chapin is the inventor of the planar  magnetron and  co-inventor of a reactive  sputtering  process
control.  Mr.  Chapin has a bachelors  of science  degree in  geophysics  from the  Colorado  School of Mines and a
masters degree in electrical engineering from the University of Colorado.Chad D. Quist has been a director  of our company  since April 1997.  Mr.  Quist is the  President  of  Information
Products,  Inc., a wholly-owned  subsidiary of Donnelly Corporation.  Mr. Quist has been employed by Donnelly since
1995.  Information  Products,  Inc. is a leading supplier of glass  components for the touch screen industry.  From
1989 to 1995, Mr. Quist served as Vice President of Fisher-Rosemont,  Inc., an industrial  instrumentation company.
Mr.  Quist has a  bachelors  degree in  engineering  from  Stanford  University  and a masters  degree in  business
administration from the Kellogg Graduate School of Business at Northwestern University.Richard P. Beck has been a director  of our  company  since May 1998.  From 1992 until June 2002 Mr. Beck served as
Chief  Financial  Officer of Advanced  Energy  Industries,  Inc., a  manufacturer  of power  conversion and control
systems.  Since 1995,  Mr. Beck has also served as a director of  Advanced  Energy  Industries,  Inc.  From 1987 to
1992, Mr. Beck served as Executive Vice President and Chief  Financial  Officer of Cimage  Corporation,  a computer
software  company.  Mr. Beck serves as a director of Photon  Dynamics,  Inc. and TTM  Incorporated.  Mr. Beck has a
bachelors of science degree in accounting and a masters  degree in business  administration  in finance from Babson
College.Vincent  Sollitto,  Jr. has been a director of our company since October 1999. Mr.  Sollitto has been President and
Chief  Executive  Officer  since  June  1996 and a member  of the  Board of  Directors  since  July  1996 at Photon
Dynamics,  Inc. From August 1993 to 1996,  Mr.  Sollitto was the General  Manager of Business Unit  Operations  for
Fujitsu  Microelectronics,  Inc. From April 1991 to August 1993, he was the Executive  Vice  President of Technical
Operations at Supercomputer Systems,  Incorporated.  Mr. Sollitto spent 21 years in various management positions at
IBM,  including  Director of  Technology  and Process.  Mr.  Sollitto  serves as a director on the boards of Irvine
Sensors  Corporation  and  UltraTech  Stepper.  Mr.  Sollitto  holds a  bachelor  of science  degree in  electrical
engineering from Tufts College.

## Executive
Officers

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

## ITEM 1 (d):  Information About Foreign Operations

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

## ITEM 2:  Properties

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

## ITEM 3:  Legal
Proceedings

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

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

No matters were submitted
during the fourth quarter of fiscal 2002 to a vote of our Shareholders.

# Risk Factors

You should carefully
consider the following risk factors and other information contained or
incorporated by reference in this report before deciding to invest in our common
stock. Investing in our common stock involves a high degree of risk. The risks
and uncertainties described below may not be the only ones we face. If any of
the following risks actually occur, our business could be harmed and the trading
price of our common stock could decline, and you may lose all or part of your
investment. Please see Forward-Looking Statements on page 34 of this
report.

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

|11
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We have experienced and may
continue to experience significant annual and quarter-to-quarter fluctuations in
our operating results as a result of a variety of factors including:

- the cyclical nature of the capital equipment market;
- fluctuation in customer demand,  which is influenced by general economic  conditions in the industries and
         geographic markets we serve;
- our product and revenue mix;
- competition, including competitive pressures on prices of our products;
- the length and variability of the sales cycle for our products;
- manufacturing and operational issues;
- the timing of customer orders;
- issues related to new product development and introduction, including increased
research, development and engineering costs and marketing expenses;
- the  timing of the  recognition  of  revenues  from  capital  equipment  orders  and the  accuracy  of the
         estimation of our costs;
- sales and marketing issues, including our concentration on a small number of customers; and
- fluctuations in foreign currency exchange rates.

These factors are difficult or impossible to forecast.

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

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

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

In fiscal 2001 and fiscal
2002, we experienced a downturn in the FPD market, and there can be no assurance
when or if demand for thin film transistors, or TFTs or plasma display panels
will increase. Unfavorable economic conditions that relate to the consumer
electronics or other industries in which we operate, or that result in
reductions in capital expenditures by our customers, could have a material
adverse effect on our business, operating results, financial condition and
prospects.

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

Our growth strategy and
future success is dependent upon commercial acceptance of products incorporating
technologies we have developed and are continuing to develop.

|12
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The market for
thin film coated glass and thin film deposition equipment is characterized by
rapid change and frequent introductions of enhancements to existing products.
Technological trends have had and will continue to have a significant impact on
our business. Our results of operations and ability to remain competitive are
largely based upon our ability to accurately anticipate customer and market
requirements. Our success in developing, introducing and selling new and
enhanced products depends upon a variety of factors, including:

- accurate technology and product selection;
- timely and efficient completion of product design and development;
- timely and efficient implementation of manufacturing and assembly processes;
- product performance in the field; and
- product support and service and effective sales and marketing.

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

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

- development of new technologies by our competitors;
- changes in product requirements of our customers;
- changes in the way coatings are applied to glass, paper, metal foil or plastic bottles;
- development of new materials that improve the performance of the coated substrate; and
- improvements in the alternatives to our technologies.

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

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

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

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

|13
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Failure to further
successfully integrate the LAC business may reduce the expected return on our
investment, decrease our operating results and divert corporate resources.

On December 31, 2000, we
completed the LAC acquisition. Because of the size of the acquired operations
and the presence of the LAC business in products and markets different from
those in which we have historically operated, the management of growth
represented by this acquisition has been and may continue to be expensive and
time consuming, and may put pressure on our existing infrastructure. The process
of integrating the acquired operations will continue to require significant
management and financial resources and may result in unforeseen operating
difficulties. Prior to the LAC acquisition, we had limited experience managing
production operations outside the United States. Our future performance may be
adversely affected if we fail to further successfully manage the LAC business
operations in Germany and related sales offices. Some of the risks associated
with the LAC acquisition include:

- Unexpected loss of key employees or customers;
- Conforming the standards, processes, procedures and controls of the LAC business with our operations;
- Coordinating new product and process development;
- Costs of operating, marketing, research and development, human resource and
accounting functions in both our United States and German operations;
- Resolving disputes the LAC business has or may have with certain customers;
- Hiring additional management and other critical personnel; and
- Increasing the scope, geographic diversity and complexity of our operations.

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

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

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

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

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

- better withstand periodic economic downturns;
- compete more effectively on the basis of price and technology;
- more quickly develop enhancements to and new generations of products; and
- more effectively retain existing customers and obtain new customers.

|14
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Many of our customers and
potential customers that purchase deposition equipment are large companies that
require global support and service for their thin film deposition equipment. Our
larger competitors have more extensive infrastructures than we do, which could
place us at a disadvantage when competing for the business of global
manufacturers and other purchasers of thin film deposition equipment.

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

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

- performance of our products;
- quality of our products;
- reliability of our products;
- cost of owning and using our products;
- our ability to ship products on the schedule required;
- quality of the technical service we provide;
- timeliness of the services we provide;
- our success in developing new products and enhancements;
- existing market and economic conditions; and
- price of our products and our competitors' products.

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

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

Export revenues to
customers outside of our manufacturing centers in the United States and Europe
represented approximately 93% of our net revenues in fiscal 2000, 67% of our net
revenues in fiscal 2001 and 39% of our net revenues in fiscal 2002. The
principal international markets into which we and our China JV sell our products
are China (including Hong Kong), Korea, Japan, Taiwan and Malaysia. Banking and
currency problems in Asia have had and may continue to have an adverse impact on
our revenues and operations. Our operations in China will be subject to the
economic and political uncertainties affecting that country. For example, the
Chinese economy has experienced significant growth in the past decade, but such
growth has been uneven across geographic and economic sectors and has recently
been slowing. This growth may continue to decrease, and any slowdown may have a
negative effect on our business. We believe international sales will continue to
represent a significant portion of our sales, and that we will continue to be
subject to the normal risks of conducting business internationally. Such risks
include:

- foreign exchange risks;
- inflation or deflation in foreign economies;
- the burdens of complying with a wide variety of foreign laws;
- unexpected changes in regulatory requirements and the imposition of government controls;
- political and economic instabilities;
- export license requirements;

|15
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- protective trade activities, such as tariffs and other barriers;
- the risk of business interruption;
- difficulties in accounts receivable collections;
- inability to protect intellectual property rights;
- difficulties in staffing and managing foreign sales operations; and
- potentially adverse tax consequences.

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

In fiscal 2002,
approximately 5% of our net revenues were denominated in yen, 82% were
denominated in Euros and 13% were denominated in U.S. dollars. Any strengthening
of the U.S. dollar in relation to the currencies of our competitors or
customers, or strengthening or weakening of the yen or Euro in relation to other
currencies in which our customers or competitors do business, could adversely
affect our competitiveness, as our products will become more expensive to
customers outside the United States and less competitive with products produced
by competitors outside the United States. A strengthening of the dollar or other
competitive factors could put pressure on us to denominate a greater portion of
our Japanese sales in yen, thereby increasing our exposure to fluctuations in
the dollar-yen exchange rate. Our China JV transacts much of its business in
Chinese Yuan Renminbi. While this currency has remained fairly constant in
value, any devaluation of the Chinese Yuan Renminbi would adversely affect our
business, operating results, financial conditions and prospects. Foreign sales
also expose us to collection risks in the event it becomes more expensive for
our foreign customers to convert their local currencies into dollars.
Fluctuations in exchange rates could adversely affect our competitive position
or result in foreign exchange losses, either of which could materially adversely
affect our business, operating results, financial conditions and prospects.

The assets, liabilities and
operating expenses of our German operations are reported in Euros. Our financial
statements, including our consolidated financial statements, are expressed in
dollars. The translation exposures that result from the inclusion of financial
statements that are expressed in functional currencies other than dollars are
not hedged. These net translation exposures are taken into stockholders
equity. As a result, our operating results are exposed to fluctuations of Euros
against the dollar. As of June 29, 2002, the unrealized translation
adjustment was $8.0 million, which was primarily attributable to the goodwill
and other intangible assets from the LAC acquisition that are denominated in
Euros.

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

Our ten largest customers
accounted for 59% of our net revenues in fiscal 2002. Revenue from two customers,
Guardian Industries and LG International, represented 22% and 10% of net revenues
for fiscal 2002, respectively. Net revenues for both customers for fiscal 2002 consisted
solely of thin film coating equipment. Revenue from our largest customers have
varied significantly from year to year and will continue to fluctuate in the
future. We may not be able to retain our key customers, or these customers may
cancel purchase orders or reschedule or decrease their level of purchases from
us. If a large order were delayed or cancelled, our revenues would significantly
decline, and the loss of, or a significant reduction of purchases by, one or
more of our significant customers would materially adversely affect our
business, operating results, financial condition and prospects. In addition, any
difficulty in collecting amounts due from one or more key customers could harm
our financial results. There are a limited number of potential customers in each
of our markets, and we expect that sales to a relatively small number of
customers will continue to account for a high percentage of our revenues in
those markets in the foreseeable future.

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

The success of our strategy
to develop emerging high growth market opportunities depends on the level of
sales, marketing and distribution support we receive from our strategic
partners. For example, we have little experience in the market for barrier
coated plastic bottles.

|16
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We have developed PET bottle deposition equipment for
this market in partnership with The Coca-Cola Company and KRONES AG. Until
September 1, 2002, The Coca-Cola Company is the exclusive distributor of BESTPET
systems, and after September 1, 2002, systems may be sold to The Coca-Cola
Company or to third parties. We are relying on KRONES to provide the necessary
sales, marketing and distribution support of our product to expand our share of
the PET bottle market. The failure of KRONES to devote adequate resources to
marketing and distributing our PET bottle deposition equipment could limit our
ability to grow or sustain our revenues and earnings.

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

We believe our future
growth depends significantly upon our ability to successfully introduce new
products, such as our BESTPET, Solar and VES 400 deposition systems. We are subject
to the risks inherent in the development of new products, including risks
associated with attracting and servicing a customer base, manufacturing products
in a cost-effective and profitable manner, and training qualified engineering,
manufacturing, service and marketing personnel. Product development is based on
our expectations regarding future growth of target markets, but it is difficult
to anticipate the direction of future growth and to design equipment to meet the
needs of a changing market. Changes in technology could render our products less
attractive. If the market for our new products fails to grow, or grows more
slowly than anticipated, we may be unable to realize the expected return on our
investment in product development, and our business, operating results,
financial condition and prospects could be materially adversely affected. Among
other markets, we are anticipating growth in the plastic bottle market. If
commercialization of that technology develops more slowly than we expect, if the
market demand fails to develop as anticipated, or if alternative technologies
are more successful in meeting market needs, our future results will be
negatively affected.

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

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

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

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

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

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

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

|17
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The coated glass market
is highly competitive and subject to pricing pressures, which could adversely
affect our operating results.

The market to supply thin
film coated glass to liquid crystal display, or LCD, manufacturers is highly
competitive. Many of our competitors have substantially greater financial,
technical, marketing and sales resources than we have. Additional competitors
may enter our markets, certain of which may offer lower prices. Prices for much
of our low resolution thin film coated glass products supplied to the LCD market
declined in past years. We have experienced further pricing pressures and
decreased demand in fiscal 2002, and we may in the future experience pricing
pressures as a result of a decline in industry demand, excess inventory levels,
increases in industry capacity or the introduction of new technologies. Many of
our customers are under continuous pressure to reduce prices and we expect to
continue to experience downward pricing pressures on our thin film coated glass
products. We are frequently required to commit to price reductions before we
know that the cost reductions required to maintain profitability can be
achieved. To offset declining sales prices, we must achieve manufacturing
efficiencies and cost reductions and obtain orders for higher volume products.
If we are unable to offset declining sales prices, our gross margins on coated
glass will decline.

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

Our success and ability to
compete depend in large part upon protecting our proprietary technology. We rely
on a combination of patent, trade secret, copyright and trademark laws,
non-disclosure and other contractual agreements and technical measures to
protect our proprietary rights. These agreements and measures may not be
sufficient to protect our technology from third-party infringements, or to
protect us from the claims of others. While we have formally recorded our
ownership of the patents we acquired in the LAC acquisition, we have not filed
our registered patents and trademarks for patent or trademark protection in all
of the jurisdictions in which such filings may be made. There can be no
assurance that the steps taken by us to protect our proprietary rights will be
adequate to prevent misappropriation of such rights or that third parties will
not independently develop a functionally equivalent or superior technology.
Patents issued to us may be challenged, invalidated or circumvented; our rights
granted under those patents may not provide competitive advantages to us; and
third parties may assert that our products infringe their patents, copyrights or
trade secrets. Third parties could also independently develop functionally
equivalent or superior technology and similar products or could duplicate our
products. Monitoring unauthorized use of our products is difficult and we cannot
be certain that the steps we have taken will prevent unauthorized use of our
technology. If competitors are able to use our technology, our ability to
compete effectively could be harmed.

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

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

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

- lose our proprietary rights;
- stop manufacturing or selling our products that incorporate the challenged intellectual property;
- obtain from the owner of the infringed intellectual property right a license to
   sell or use the relevant technology, which license may not be available on
reasonable terms or at all and may involve significant royalty payments;
- pay damages, including treble damages and attorney's fees in some circumstances; or
- redesign those products that use such technology.

|18
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If we are forced to take
any of the foregoing actions, our business could be severely harmed.

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

In fiscal 2002, 39% of our
revenue was derived from sales in foreign countries outside of our manufacturing
centers in the United States and Europe, including certain countries in Asia
such as Taiwan, Korea, China and Japan. The laws of some foreign countries do
not protect our proprietary rights to as great an extent as do the laws of the
United States, and many United States companies have encountered substantial
problems in protecting their proprietary rights against infringement in such
countries. For example, Taiwan is not a signatory of the Patent Cooperation
Treaty, which is designed to specify rules and methods for defending
intellectual property internationally. In many instances, the publication of a
patent prior to the filing of a patent application in Taiwan would invalidate
the ability of a company to obtain a patent in Taiwan. Similarly, in contrast to
the United States where the contents of patents remain confidential during the
patent prosecution process, the contents of a patent are published upon filing,
which provides competitors an advance view of the contents of a patent
application prior to the establishment of the patent rights. There is a risk
that our means of protecting our proprietary rights may not be adequate in these
countries. For example, our competitors in these countries may independently
develop similar technology or duplicate our systems. If we fail to adequately
protect our intellectual property in these countries, it would be easier for our
competitors to sell competing products in those countries.

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

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

- the assessment of damages or imposition of fines against us;
- the suspension of production of our products; or
- the cessation of our operations.

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

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

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

## Our stock
price may fluctuate significantly.

The market price of our
common stock has been, and we expect will continue to be, subject to significant
fluctuations. Factors affecting our market price include:

- the limited number of shares of common stock available for purchase or sale in the public markets;
- quarterly variations in our results of operations;
- failure to meet earnings estimates;

|19
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- changes in earnings estimates or buy/sell recommendations by analysts;
- the operating and stock price performance of comparable companies;
- developments in the financial markets;
- the announcement of new products or product enhancements or business results by us or our competitors; and
- general market conditions or market conditions specific to the industries in which we operate.

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

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

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

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

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

We may issue additional shares and dilute your ownership percentage.

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

- to raise additional capital or finance acquisitions;
- upon the  exercise or  conversion  of  outstanding  options,  warrants and shares of  convertible  preferred
    stock; and/or
- in lieu of cash payment of dividends.

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

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## PART II

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

Our common stock has been
traded on the Nasdaq National Market under the symbol AFCO since
November 21, 1997. The following table sets forth, for the quarters indicated,
the high and low sale prices per share of our common stock as reported on the
Nasdaq National Market.

`High          Low
                                                                 ----          ---
               Fiscal 2001:
                 First Quarter ............................     $    42.00    $    21.06
                 Second Quarter ...........................          37.94         14.75
                 Third Quarter ............................          25.25         10.06
                 Fourth Quarter ...........................          22.50          7.69
               Fiscal 2002:
                 First Quarter ............................     $    25.30    $    12.95
                 Second Quarter ...........................          34.47         15.03
                 Third Quarter ............................          35.20         20.82
                 Fourth Quarter ...........................          27.95          9.05
               Fiscal 2003:
                 First Quarter (through August 23, 2002)...     $    11.99    $     7.90`

On August 23, 2002, the
last reported sale price of our common stock on the Nasdaq National Market was
$9.30 per share and there were approximately 51 stockholders of record of the
common stock. We estimate that there are approximately 2,900 beneficial owners
of the common stock.

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## ITEM 6:  Selected Consolidated Financial Data

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

We derived the consolidated
balance sheet data for the years ended June 30, 2001 and
June 29, 2002, and our consolidated statement of operations data for
each of the three years in the period ended June 29, 2002, from the
audited consolidated financial statements in this report. The financial
statements for June 29, 2002 were audited by Ernst & Young LLP,
independent auditors. The financial statements for the fiscal years 1998 through
2001 were audited by Arthur Andersen LLP, independent auditors. The
consolidated balance sheet data as of June 27, 1998,
July 3, 1999 and July 1, 2000 and the consolidated statement
of operations data for the years ended June 27, 1998 and
July 3, 1999 have been derived from audited consolidated financial
statements that are not included in this report.

`Fiscal Year Ended
                                                            ---------------------------------------------------------------------
                                                              June 27,      July 3,       July 1,      June 30,      June 29,
                                                                1998          1999         2000          2001          2002
                                                            ------------ ------------- ------------- ------------ ---------------
Consolidated Statement of Operations Data:                                 (in thousands, except per share data)
Net revenues..............................................   $   53,041   $   31,523    $   42,292    $  112,715   $  143,718
Cost of goods sold .......................................       42,150       27,070        36,633        90,021      111,524
                                                            ------------ ------------- ------------- ------------ ---------------
Gross profit .............................................       10,891        4,453         5,659        22,694       32,194
Operating expenses:
   Selling, general and administrative ...................        5,067        3,760         4,324        16,027       24,101
   Research and development ..............................        1,243        1,044         1,409         6,484        9,401
   Amortization of goodwill and other intangible assets...         -            -             -           16,536        3,356
                                                            ------------ ------------- ------------- ------------ ---------------
Operating income (loss) ..................................        4,581         (351)          (74)      (16,353)      (4,664)
Interest income (expense) ................................         (496)        (553)          447         1,034          701
Other income, net ........................................          252           40           272           805        2,249
Equity earnings of Joint Venture .........................         -             382         2,381         4,421          465
                                                            ------------ ------------- ------------- ------------ ---------------
Income (loss) before income taxes and cumulative effect
   of change in accounting principle .....................        4,337         (482)        3,026       (10,093)      (1,249)
Income tax benefit (provision) ...........................       (1,480)         258            97         5,760          227
                                                            ------------ ------------- ------------- ------------ ---------------
Income (loss) before cumulative effect of change in
   accounting principle ..................................        2,857         (224)        3,123        (4,333)      (1,022)
Cumulative effect of change in accounting principle, net           -            -              (50)         -            -
     of taxes.............................................
                                                            ------------ ------------- ------------- ------------ ---------------
Net income (loss) ........................................        2,857         (224)        3,073        (4,333)      (1,022)
Preferred dividends ......................................         -            -             -             (367)        (315)
                                                            ------------ ------------- ------------- ------------ ---------------
Net income (loss) applicable to common stockholders.......   $    2,857   $     (224)   $    3,073    $   (4,700)  $   (1,337)
                                                            ============ ============= ============= ============ ===============
Net income (loss) per common share:
   Basic .................................................   $     0.90   $    (0.06)   $     0.72    $    (0.73)  $    (0.14)
                                                            ============ ============= ============= ============ ===============
   Diluted ...............................................   $     0.85   $    (0.06)   $     0.69    $    (0.73)  $    (0.14)
                                                            ============ ============= ============= ============ ===============
Weighted average common shares outstanding:
   Basic .................................................        3,181        3,478         4,255         6,414        9,628
                                                            ============ ============= ============= ============ ===============
   Diluted ...............................................        3,375        3,478         4,439         6,414        9,628
                                                            ============ ============= ============= ============ ===============

                                                                1998          1999         2000          2001            2002
                                                            ------------ ------------- ------------- ------------ ---------------
Consolidated Balance Sheet Data:
Working capital.........................................     $   10,747   $    11,812   $   63,785    $   22,560   $    81,186
Total assets............................................         28,697        30,195       87,478       169,426       215,824
Long-term debt, net of current portion..................          4,175         7,180            -         6,483             -
Total stockholders' equity..............................         14,826        14,658       73,197        89,192       154,570`

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ITEM 7:  Management's Discussion and Analysis of Financial Condition and Results of Operation

# Managements Discussion and Analysis

of Financial Condition and Results of Operation

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

## Overview

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

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

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

The following table sets
forth our net revenues (net of returns and allowances) by our major product
categories and industry segments for the last three fiscal years (in thousands):

`Fiscal year ended
                                           ------------------------------------------------
                                            July 1, 2000  June 30, 2001    June 29, 2002
                                           -------------- --------------- -----------------

          Thin film coated glass........    $     35,159   $     27,523     $     12,661
          Thin film coating equipment...           7,133         85,192          131,057
                                           -------------- --------------- -----------------
             Total net revenues.........    $     42,292   $    112,715     $    143,718
                                           ============== =============== =================`

The following table sets
forth our net revenues as a percentage of total revenues by our major product
categories and industry segments for the last three fiscal years:

`Fiscal year ended
                                           ------------------------------------------------
                                            July 1, 2000   June 30, 2001    June 29, 2002
                                           -------------- ---------------- ----------------
          Thin film coated glass........           83.1%           24.4%             8.8%
          Thin film coating equipment...           16.9%           75.6%            91.2%
                                           -------------- ---------------- ----------------
             Total net revenues.........          100.0%          100.0%           100.0%
                                           ============== ================ ================`

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

The sales cycle for thin
film coating equipment is long, involving multiple visits to and by the customer
and up to 15 months of technical sales effort. We operate with a backlog of new
and in-process equipment orders. Coating equipment backlog was $99.2 million at
the end of fiscal 2001 and $41.1 million at the end of fiscal 2002. The decline
in backlog was caused by a weakness in bookings in the FPD and architectural
glass portions of our equipment business in fiscal 2002. Backlog is comprised of
revenue not yet recognized from deposition equipment contacts denominated in
U.S. dollars, Japanese yen and Euros, and, unless hedged, is subject to
fluctuation depending on changes in the valuation of the foreign currencies
against the dollar. Customers usually make a non-refundable deposit ranging from
20% to 35% of the total purchase price at the time the order is placed and make
progress payments during the period of manufacture. We usually receive
approximately 80%-85% of the purchase price in cash or letter of credit prior to
shipment. We generally ship our thin film coated glass within 30 days of receipt
of the order and therefore we do not customarily have a backlog of coated glass
sales.

In fiscal 2001, 67% of our
revenues were generated from exports to customers outside of our manufacturing
center in the United States, compared to 39% of revenues from exports to
customers outside of our manufacturing centers in the United States and Europe
for fiscal 2002.

We sell most of our glass
and equipment products to customers in the local currency of the location of
manufacture. Accordingly, sales of products manufactured in Longmont, Colorado
or purchased from the China JV for resale to our customers are generally
denominated in U.S. dollars and sales of products manufactured in Germany are
generally denominated in Euros, except in each case for sales of glass to
certain Japanese customers, which are denominated in Japanese yen. The U.S.
dollar equivalent of gross revenues in Japanese yen and Euros were approximately
$6.9 million and $61.5 million, respectively, for fiscal 2001 and $7.1 million
and $117.2 million, respectively, for fiscal 2002. Currently, we engage in
international currency hedging transactions to mitigate our foreign exchange
exposure related to sales of certain equipment, and the effects of foreign
exchange rate changes on foreign currency transactions have not been significant
to date. We also purchase raw glass from certain Japanese suppliers in
transactions denominated in yen, which partially offsets foreign currency
exchange risks on yen-denominated coated glass sales. The U.S. dollar equivalent
of our purchases of raw material denominated in Japanese yen were approximately
$1.8 million for fiscal 2001 and $409,000 for fiscal 2002. As of
June 29, 2002, the U.S. dollar equivalent of accounts receivable
denominated in Japanese yen and Euros were approximately $2.0 million and $4.8
million, or approximately 20% and 47% respectively, of total accounts
receivable. As of June 29, 2002, the U.S. dollar equivalent of
accounts payable denominated in Japanese yen and Euros were approximately
$421,000 and $7.5 million, or approximately 4% and 78% respectively, of total
accounts payable. We are generally paid by customers for Japanese yen
denominated coated glass sales within 15 to 45 days following the date of sale.

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## Results of
Operations

The following table sets
forth information derived from the consolidated statements of operations
expressed as a percentage of net revenues for the periods indicated.

`Fiscal Year Ended
                                                                     ---------------------------------------------
                                                                      July 1, 2000   June 30, 2001  June 29, 2002
Consolidated Statement of Operations Data:
Net revenues .....................................................         100.0%        100.0%         100.0%
Cost of goods sold ...............................................          86.6          79.9           77.6
                                                                     -------------- --------------- --------------
Gross profit .....................................................          13.4          20.1           22.4
Operating expenses:
  Selling, general and administrative ............................          10.2          14.2           16.8
  Research and development .......................................           3.3           5.7            6.5
  Amortization of goodwill and other intangible assets............           -            14.7            2.3
                                                                     -------------- --------------- --------------
Operating loss ...................................................          (0.1)        (14.5)          (3.2)
Interest income (expense) ........................................           1.1           0.9            0.5
  Other income, net ..............................................           0.6           0.7            1.5
Equity earnings of Joint Venture .................................           5.6           3.9            0.3
                                                                     -------------- --------------- --------------
Income (loss) before income taxes and cumulative effect of change            7.2          (9.0)          (0.9)
     in accounting principle......................................
Income tax benefit ...............................................           0.2           5.1            0.2
                                                                     -------------- --------------- --------------
Income (loss) before cumulative effect of change in accounting               7.4          (3.9)          (0.7)
principle.........................................................
Cumulative effect of change in accounting principle, net of taxes           (0.1)          -              -
                                                                     -------------- --------------- --------------
Net income (loss) ................................................           7.3%         (3.9)%         (0.7)%
                                                                     ============== =============== ==============`

## Year Ended
June 30, 2001 Compared to Year Ended June 29, 2002

Net Revenues. Net
revenues increased 28% from $112.7 million in fiscal 2001 to $143.7 million in
fiscal 2002 as a result of a full year reporting of combined company results
following the LAC acquisition. Our revenue concentration continued to shift to
the equipment segment of our business as our revenues generated by equipment
sales increased from 76% of total net revenues in fiscal 2001 to 91% in fiscal
2002.

Net revenues from thin film
coating equipment increased from $85.2 million in fiscal 2001 to $131.1 million
in fiscal 2002, due primarily to a full year reporting of combined company
results following the LAC acquisition. However, equipment backlog declined from
$99.2 million at the end of fiscal 2001 to $41.1 million at the end of fiscal
2002 primarily due to a weakness in bookings for new orders in the architectural
and FPD portions of the equipment business during fiscal 2002.

Thin film coated glass
revenues decreased 54% from $27.5 million in fiscal 2001 to $12.7 million in
fiscal 2002. This reduction resulted from lower prices which reduced our gross
margins, and reduced demand for glass used in cellular phones, touch panels, and
the microdisplay market.

Gross Profit. Gross
profit increased from $22.7 million in fiscal 2001 to $32.2 million in fiscal
2002, largely driven by the increased revenues from the equipment segment of our
business as we reported a full year of combined company operations following the
LAC acquisition. Gross profit margins were 20% in fiscal 2001 and 22% in fiscal
2002. Equipment revenues generally have higher gross profit margins than coated
glass revenues. Gross margins were negatively affected during the year by sales
of certain coated glass inventory at a market price that had moved below cost.
Additionally we experienced a cost overrun on a transport system for an
architectural glass equipment customer.

Selling, General and
Administrative. Selling, general and administrative expenses increased from
$16.0 million in fiscal 2001 to $24.1 million in fiscal 2002. This increase
represents a full year of combined company results following the LAC
acquisition. As a percentage of net revenues, selling, general and
administrative expenses were 14% in fiscal 2001 and 17% in fiscal 2002.

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Research and
Development. Research and development expenses increased 45% from $6.5
million in fiscal 2001 to $9.4 million in fiscal 2002. This increase represents
a full year of operations of the combined company following the LAC acquisition.
Research and development expenses consist primarily of salaries, outside
contractor expenses, lab expenses, and other expenses related to our ongoing
product development and technology development for OLED, Solar, PET bottle
process development and other research and development activities. As a
percentage of net revenues, research and development expenses were 6% in fiscal
2001 and 7% in fiscal 2002.

Amortization of Goodwill
and Other Intangible Assets. In fiscal year 2001, amortization of goodwill
and other intangible assets related to the LAC acquisition included an $11.5
million write off of in-process research and development, $3.4 million related
to goodwill and $1.7 million related to intangible assets. Following the
adoption of Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, on July 1, 2001, goodwill
and certain other intangible assets related to assembled workforce are no longer
being amortized. In fiscal year 2002, amortization of other intangible assets
was $3.4 million.

Interest Income.
Interest income was $1.0 million in fiscal 2001 and $701,000 in fiscal 2002.
Because we principally used available cash and bank borrowings to fund the LAC
acquisition, interest income in the first half of fiscal 2001 changed to
interest expense in the second half of fiscal 2001, as we incurred interest
expense under our credit facility. The use of our bank line of credit continued
until the second quarter of fiscal 2002 when we raised additional cash, through
an offering of common stock, and we reduced our borrowings. In the third and
fourth quarters of fiscal 2002, we invested the cash reserves and returned to
interest income. At the end of fiscal 2001 our average investment yield was 4.7%
compared to 2.6% at the end of fiscal 2002.

Other Income. Other
income increased from $805,000 in fiscal 2001 to $2.2 million in fiscal 2002.
Other income includes items such as realized foreign currency transaction
adjustments and royalties earned from the China JV. We receive a 2% royalty on
all sales by the China JV, payable quarterly. Much of the increase in fiscal
2002 was due to $762,000 for the reversal of excess reserves set aside for the completion of
the required building reconditioning cost for the facility in Alzenau to house
all manufacturing operations in a single location and $588,000 for the recognition of a
non-refundable advance payment from a customer who went bankrupt which was
previously recorded as a liability on our balance sheet.

Equity Earnings of Joint
Venture. Our equity earnings of the China JV decreased from $4.4 million in
fiscal 2001 to $465,000 in fiscal 2002. The 90% decrease in equity earnings is
primarily due to the weakness in the market for cellular phones as excess
handset inventories have reduced the demand for coated glass.

Income Tax Benefit.
We recorded a tax benefit during fiscal 2002 of $227,000. The income tax benefit
for 2002 was reduced by approximately $1.9 million due to the establishment of a
valuation allowance on net operating loss. The income tax benefit for fiscal
2001 of $5.8 million, reflects the tax effect of goodwill and other intangible
assets, tax-free investment and interest income, and equity earnings of the
Joint Venture will be reinvested in the Joint Venture. For German tax purposes,
the amount reported as goodwill and other intangible assets on our balance sheet
and the amount of in-process research and development that was charged to
expense, will be amortized over 15 years and will be deductible as amortized.

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

Net Revenues.  Net revenues  increased  167% from $42.3 million in fiscal 2000 to $112.7  million in fiscal 2001 as
a result of the LAC acquisition.

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

Thin film coated glass
revenues decreased 22% from $35.2 million in fiscal 2000 to $27.5 million in
fiscal 2001. This reduction was caused by reduced demand for super twisted
nematic, or STN, glass used in cellular phones due to excess inventory of
handsets. In addition, during fiscal 2001, we shifted production capacity for
manufacturing coated glass to the China JV by selling a coating machine
previously used in our Longmont, Colorado, facility to the China JV, shifting
revenues to the China JV and reducing our coated glass revenues.

|26
|--

Gross Profit. Gross
profit increased from $5.7 million in fiscal 2000 to $22.7 million in fiscal
2001, largely driven by the shift in product mix from glass to equipment
revenues and the increased revenues resulting from the LAC acquisition. Gross
profit margins were 13% in fiscal 2000 and 20% in fiscal 2001. Equipment
revenues generally have higher gross profit margins than coated glass revenues.

Selling, General and
Administrative. Selling, general and administrative expenses increased from
$4.3 million in fiscal 2000 to $16.0 million in fiscal 2001. The substantial
increase in fiscal 2001 resulted largely from the additional administrative,
sales and marketing personnel from the LAC acquisition. As a percentage of net
revenues, selling, general and administrative expenses were 10% in fiscal 2000
and 14% in fiscal 2001. While we expect some synergies in the combination of
marketing forces, we project selling, general and administrative expenses as a
percentage of net revenues to remain at levels similar to those we experienced
in the second half of fiscal 2001.

Research and
Development. Research and development expenses increased 360% from $1.4
million in fiscal 2000 to $6.5 million in fiscal 2001. Research and development
expenses consist primarily of salaries, outside contractor expenses, lab
expenses, and other expenses related to our ongoing product development efforts.
The increase in research and development expenses resulted largely from the
additional staff and research and development operations in Germany. As a
percentage of net revenues, research and development expenses were 3.3% in
fiscal 2000 and 5.7% in fiscal 2001. Because of the significant product
development opportunities, particularly in the PET bottle, OLED and solar
markets, we expect research and development expenses as a percent of net
revenues for fiscal 2002 to remain at levels similar to those we experienced in
the second half of fiscal 2001.

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

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

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

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

Income Tax Benefit.
We recorded a tax benefit during fiscal 2001 of $5.8 million. The tax benefit
reflects the tax effect of goodwill and other intangible assets, tax-free
investment and interest income, and equity earnings of the Joint Venture that is
not subject to taxation. For German tax purposes, the amount reported as
goodwill and other intangible assets on our balance sheet and the amount of
in-process research and development that was charged to expense, will be fully
amortized over 15 years and will be fully deductible as amortized. The income
tax benefit for fiscal 2000 was $97,000, representing an effective tax rate of
negative 3.3%. This benefit was primarily derived from the reversal in fiscal
2000 of the income tax accrual in fiscal 1999 on the equity income from the
China JV due to the determination that the earnings would not be distributed for
the foreseeable future. Other factors contributing to the relatively low
effective tax rate in fiscal 2000 were tax-free investment and interest income
and current year equity earnings of the China JV that are not subject to tax.

|27
|--

## Quarterly
Results of Operations

The following table sets
forth summary unaudited quarterly financial information for the eight fiscal
quarters ended June 29, 2002. In the opinion of management, such
information has been prepared on the same basis as the audited financial
statements appearing elsewhere in this report and reflects all necessary
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of unaudited quarterly results when read in conjunction with
the audited financial statements and notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period and
any trends reflected in such results may not continue in the future. Our results
of operations may be subject to significant quarterly variations.

`Fiscal 2001 Quarters Ended                 Fiscal 2002 Quarters Ended
                                       --------------------------------------------------------------------------------------
                                        Sept 30,   Dec 30,  March 31,  June 30,   Sept 29,   Dec 29,    March 30   June 29,
                                          2000      2000       2001      2001       2001       2001       2002       2002
                                       --------------------------------------------------------------------------------------
                                                          (unaudited in thousands, except per share data)
Net revenues..........................  $16,870    $10,309   $44,981    $40,528   $41,283    $39,231    $32,166    $31,038
Cost of goods sold ...................   14,322      9,861    35,293     30,518    31,261     29,148     25,275     25,840
                                       ---------- --------- ---------- ---------- --------- ---------- ---------- -----------
Gross profit .........................    2,548        448     9,688     10,010    10,022     10,083      6,891      5,198
Operating expenses:
  Selling, general and administrative.    1,689      1,536     6,354      6,446     6,603      6,708      5,942      4,848
  Research and development............      413        485     2,632      2,955     2,079      1,978      2,343      3,001
   Amortization of goodwill and other
       intangible assets..............     -          -       13,969      2,568       839        839        839        839
                                       ---------- --------- ---------- ---------- --------- ---------- ---------- -----------
Operating income (loss)...............      446     (1,573)  (13,267)    (1,959)      501        558     (2,233)    (3,490)
Other (expense) income:
  Interest income (expense)...........      536        666       (90)       (78)      (53)        36        212        506
  Other income (expense)..............      107        230       108        358       309        286          7      1,647
  Equity earnings of joint venture....    1,285      1,647     1,041        448       110        153        150         52
                                       ---------- --------- ---------- ---------- --------- ---------- ---------- -----------
Income (loss) before income taxes.....    2,374        970   (12,208)    (1,231)      867      1,033     (1,864)    (1,285)
Income tax benefit (provision)........     (120)       483     5,399         (2)     (311)      (282)       618        202
                                       ---------- --------- ---------- ---------- --------- ---------- ---------- -----------
Net income (loss).....................  $ 2,254    $ 1,453   $(6,809)   $(1,233)  $   556    $   751    $(1,246)   $(1,083)
                                       ========== ========= ========== ========== ========= ========== ========== ===========

Net income (loss) per share:
  Basic...............................  $  0.37    $  0.24   $ (1.03)   $ (0.21)  $  0.05    $  0.07    $ (0.11)   $ (0.10)
                                       ========== ========= ========== ========== ========= ========== ========== ===========
  Diluted.............................  $  0.36    $  0.23   $ (1.03)   $ (0.21)  $  0.05    $  0.07    $ (0.11)   $ (0.10)
                                       ========== ========= ========== ========== ========= ========== ========== ===========
Weighted average common shares
outstanding:
  Basic...............................    6,041      6,052     6,752      6,809     6,798      9,086     10,998     11,022
                                       ========== ========= ========== ========== ========= ========== ========== ===========
  Diluted.............................    6,279      6,267     6,752      6,809     6,987      9,353     10,998     11,022
                                       ========== ========= ========== ========== ========= ========== ========== ===========`

|28
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The following table sets
forth the above unaudited information as a percentage of net revenues.

`Fiscal 2001 Quarter Ended                      Fiscal 2002 Quarter Ended
                                          ---------------------------------------------  ---------------------------------------------
                                           Sept 30,   Dec 30,    March 31,   June 30,     Sept 29,   Dec 29,   March 30,   June 29,
                                             2000       2000       2001        2001         2001      2001       2002        2002
                                          ---------- ---------- ----------- -----------  ---------- --------- ----------- ------------
                                                                                  (unaudited)
Net revenues............................      100.0%     100.0%     100.0%      100.0%       100.0%    100.0%     100.0%      100.0%
Cost of goods sold......................       84.9       95.7       78.5        75.3         75.7      74.3       78.6        83.3
                                          ---------- ---------- ----------- -----------  ---------- --------- ----------- ------------
Gross profit............................       15.1        4.3       21.5        24.7         24.3      25.7       21.4        16.7
Operating expenses:
   Selling, general and administrative..       10.0       14.9       14.1        15.9         16.0      17.1       18.5        15.6
   Research and development.............        2.5        4.7        5.9         7.3          5.1       5.1        7.2         9.7
   Amortization of goodwill and other
       intangible assets................        -          -         31.0         6.3          2.0       2.1        2.6         2.7
                                          ---------- ---------- ----------- -----------  ---------- --------- ----------- ------------
Operating income (loss) ................        2.6      (15.3)     (29.5)       (4.8)         1.2       1.4       (6.9)      (11.3)
Other (expense) income
   Interest income (expense)............        3.2        6.5       (0.2)       (0.2)        (0.1)      0.1        0.6         1.6
   Other income (expense) ..............        0.7        2.2        0.2         0.9          0.7       0.7        0.1         5.3
   Equity earnings of joint venture.....        7.6       16.0        2.3         1.1          0.3       0.4        0.4         0.2
                                          ---------- ---------- ----------- -----------  ---------- --------- ----------- ------------
Income (loss) before income taxes.......       14.1        9.4      (27.2)       (3.0)         2.1       2.6       (5.8)       (4.2)
Income tax benefit (provision)..........       (0.7)       4.7       12.0         -           (0.8)     (0.7)       1.9         0.7
                                          ---------- ---------- ----------- -----------  ---------- --------- ----------- ------------
Net income (loss)......................        13.4%      14.1%     (15.2)%      (3.0)%        1.3%      1.9%      (3.9)%      (3.5)%
                                          ========== ========== =========== ===========  ========== ========= =========== ============`

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

We acquired the LAC
business in the third quarter of fiscal 2001. At the time of the acquisition, we
wrote-off $11.5 million of purchased in-process research and development, and in
the third and fourth quarters of fiscal 2001 amortized a portion of the goodwill
and other intangible assets from the LAC acquisition. During fiscal 2002,
following the adoption of FASB 142, we continued to amortize only the intangible
assets related to the LAC acquisition. Because we principally used available
cash and bank borrowings to fund the LAC acquisition, interest income in the
first half of fiscal 2001 changed to interest expense in the second half of
fiscal 2001, as we incurred interest expense under our credit facility. The use
of our bank line of credit continued until the second quarter of fiscal 2002
when we raised additional cash, through an offering of common stock, and we
reduced our borrowings. In the third and fourth quarters of fiscal 2002, we
invested the cash reserves and returned to interest income.

From the second half of
fiscal 2001 and through all of fiscal 2002, cell phone manufacturers experienced
a surplus inventory of handsets and reduced their demand for STN coated glass
causing our China JVs earnings to fall dramatically and reducing revenues
and margins for glass sold through our Longmont operations. This industry
downturn negatively affected gross margins on coated glass produced in Longmont
and earnings of the China JV for the third and fourth quarters of fiscal 2001
and throughout fiscal 2002.

## Critical
Accounting Policies and Estimates

Our discussion and analysis
of our financial condition and results of operations are based upon our
financial statements, which have been prepared in accordance with generally
accepted accounting principles (GAAP) in the United States. During
preparation of these financial statements, we are required to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses. On an on-going basis, we evaluate our estimates, including those
related to product returns, bad debts, inventories, investments, fixed assets,
intangible assets, income taxes, pension benefits and contingencies. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. The results form the basis of
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

|29
|--

We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our financial statements.

We recognize revenues on a
majority of contracts relating to the construction and sale of thin film coating
equipment using the percentage-of-completion method in accordance with the
American Institute of Certified Public Accountants (AICPA) Statement
of Position (SOP) No. 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. 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.

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

We maintain an allowance
for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. We determine the adequacy of this allowance
by regularly evaluating individual customer receivables and considering a
customers financial condition, credit history, and current economic
conditions. If the financial condition of our customers were to deteriorate,
additional allowances may be required.

We write down our inventory
for estimated obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.

We estimate our actual
current tax exposure together with the temporary differences that have resulted
from the differing treatment of items dictated by GAAP versus U.S. tax laws.
These temporary differences result in deferred tax assets and liabilities. On an
on-going basis, we then assess the likelihood that our deferred tax assets will
be recovered from future taxable income. If we were to believe that the recovery
were less likely, we would establish a valuation allowance against the deferred
tax asset and charge the amount as an income tax expense in the period in which
such a determination were made.

## Liquidity and
Capital Resources

We have funded our
operations with cash generated from operations, proceeds from public offerings
of our common stock, a private offering of preferred stock and bank borrowings.
Cash provided by operating activities was $40.4 million for fiscal 2001 compared
to cash used by operating activities of $37.3 million for fiscal 2002. During
fiscal year 2002, the Company purchased marketable securities of $43.5 million.
Cash from operations primarily decreased as a result of a decline in operating
results. As of June 29, 2002, we had cash and cash equivalents of
approximately $39.1 million, marketable securities of $43.5 million and working
capital of $79.8 million.

The total consideration for
the LAC acquisition was $87.7 million including 673,353 shares of our common
stock, $67.5 million in cash and transaction costs of $2.8 million. The purchase
price of the LAC acquisition was financed through available cash, bank
borrowings and the issuance of $10.0 million of Preferred Stock.

The $10.0 million of
Preferred Stock accrued dividends at a blended rate of 8.2% and dividends were
paid quarterly at a 7% rate until October 16, 2001, when the rate increased to
8.5%. Dividends were paid in cash. During December 2001, the Preferred Stock was
converted into 506,328 shares of Common Stock. Purchasers of Preferred Stock and
their agent also received warrants to purchase an aggregate of 75,949 shares of
common stock with an exercise price of $22.33 per share. In addition, our
placement agent received warrants to purchase 17,468 shares of common stock with
an exercise price of $20.09 per share. As of June 29, 2002, the
warrants remain outstanding.

|30
|--

Our $11.5 million credit
facility with a commercial bank will expire on September 17, 2002. As of
June 29, 2002, we had $7.0 million outstanding in a letter of credit,
compared with $9.0 million outstanding in both borrowing and a letter of credit
on June 30, 2001. On June 30, 2001, approximately $5.0
million outstanding under this facility was a letter of credit representing our
guarantee of the debt of the China JV, which increased to $7.0 million as of
June 29, 2002. We are required under the terms of the China JV to
provide credit support on a several basis for 50% of the China JVs bank
indebtedness. The China JV currently has a $14.0 million revolving credit
facility with Sumitomo Bank, for which we must provide a secured guarantee
covering $7.0 million. The present level of borrowing represents the use of 60% of the
available credit under our facility. The Company pays an annual fee of
approximately 1.75% for the letter of credit. The credit facility generally
restricts our ability to make capital expenditures, incur additional
indebtedness, enter into capital leases or guarantee obligations. To remain in
compliance with the credit agreement, we must also maintain certain financial
ratios. We intend to let this facility expire and establish a credit facility
that will encompass the Joint Venture debt guarantee in the future. We have
currently arranged to provide our guarantee once our line of credit expires, for
the debt at the Joint Venture using a German bank. We will use cash as the
collateral supporting a $7.0 million bank guarantee until an adequate credit
facility is in place.

Capital expenditures were
$1.4 million for fiscal 2001 and $1.6 million for fiscal 2002. We anticipate
capital expenditures of approximately $2.3 million in fiscal 2003. Our capital
expenditures have consisted primarily of purchases related to product
development.

Cash used by investing
activities was $62.2 million in fiscal 2001 for the LAC acquisition and $11.0
million in fiscal 2002.

We believe that our working
capital and operating needs will continue to be met by cash from operations, and
proceeds from the offering, which closed in November 2001. Our capital
requirements depend on a number of factors, including the amount and timing of
orders we receive, the timing of payments received from customers, and capital
requirements associated with new product introductions. If we require additional
capital, we may consider various alternatives such as additional bank financing
or the public or private sale of debt or equity securities. There can be no
assurance that we will be able to raise such funds on satisfactory terms if and
when such funds are needed.

## Contractual
Obligations and Commercial Commitments

The Company has the following contractual obligations and commercial commitments as of June 29, 2002 (in
thousands).

`Payments Due by Period
                                   ---------------------------------------------------------------------
                                                  Less than 1                                 After 5
Contractual Cash Obligations           Total          year       1-3 years     4-5 years       years
---------------------------------- -------------- ------------- ------------- ------------  ------------
Operating Leases:
Buildings.........................  $   43,449     $    5,671    $   15,558    $   10,342    $   11,878
Office Equipment..................         713            421           289             3          -
Other.............................         293            227            66          -             -
Capital Lease - Office Equipment..          87             60            27          -             -
                                   -------------- ------------- ------------- ------------  ------------
                                    $   44,542     $    6,379    $   15,940    $   10,345    $   11,878
                                   ============== ============= ============= ============  ============


                                               Amount of Commitment Expiration Per Period
                                        ----------------------------------------------------------
                                           Total
                                          Amounts      Less than 1
Other Commercial Commitments             Committed        year          1-3 years    Over 3 years
--------------------------------------- ------------- -------------- -------------- --------------
Letter of Credit....................     $     7,000   $      7,000   $       -      $       -
Bank Guarantees.....................           1,739          1,286            453           -
Other Commercial Commitments........           1,267            836            431           -
                                        ------------- -------------- -------------- --------------
   Total Commercial Commitments.....     $    10,006   $      9,122   $        884   $       -
                                        ============= ============== ============== ==============`

The fair value of contracts
outstanding as of June 29, 2002 is as follows (in thousands):

`Fair Value of Contracts at Period-End
                         ----------------------------------------------------------------------
                         Maturity less    Maturity 1-3       Maturity in          Total fair
Source of Fair Value     than 1 year         years       excess of 4 years         value
-----------------------  ---------------  --------------  -------------------   ---------------
Prices actively quoted    $       3,230    $       -       $         -           $       3,230
                         ===============  ==============  ===================   ===============`

|31
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The operating leases
primarily include leases for offices, factories and office equipment throughout
our operations. The letter of credit represents our guarantee of 50 percent of
the China JVs outstanding debt as of June 29, 2002, which was
covered by our $11.5 million credit facility with a commercial bank. The letter
of credit is the only obligation against the $11.5 million credit facility at
June 29, 2002. Our other commercial commitments consist of software
licenses and third party service contracts. The bank guarantees are required by
our customers primarily in China ensuring the progress payments made to the Company and
are terminated when the contract terms are fulfilled.

## Recent
Financial Accounting Standards Board Statement

In June 2002, the FASB
issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). Generally, SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized as incurred, whereas EITF Issue No. 94-3 required such a liability to
be recognized at the time that an entity committed to an exit play. The Company
is currently evaluating the provisions of the new rule, which is effective for
exit or disposal activities that are initiated after December 31, 2002.

In April 2002,  the FASB issued SFAS No. 145,  "Rescission  of FASB  Statement No. 4, 44 and 64,  Amendment of FASB
Statement No. 13, and Technical  Corrections."  This statement provides guidance on the classification of gains and
losses from the  extinguishment  of debt and on the accounting for certain specified lease  transactions.  SFAS No.
145 is not expected to have a material impact on the Company.
In August 2001, the FASB issued SFAS No. 144,  "Accounting  for the  Impairment or Disposal of Long-Lived  Assets".
This statement  addresses  financial  accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes  SFAS No. 121,  "Accounting for the Impairment of Long-Lived  Assets and Long-Lived  Assets
to be Disposed Of". SFAS No. 144 also supersedes the accounting and reporting  provisions of Accounting  Principles
Board  ("APB") No. 30,  "Reporting  the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business,  and Extraordinary,  Unusual and Infrequently  Occurring Events and Transactions",  for the disposal of a
segment of a business.  SFAS No. 144 also amends ARB No. 51 "Consolidated  Financial Statements",  to eliminate the
exception  to  consolidation  for a  subsidiary  for  which  control  is likely to be  temporary.  SFAS No.  144 is
effective for fiscal years  beginning  after  December 15, 2001.  The provisions of this statement are generally to
be  applied  prospectively.  SFAS No. 144 is not  expected  to have a material  effect on the  Company's  financial
position.

In June 2001, the FASB
issued SFAS No. 143, Accounting for Asset Retirement Obligations,
which establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated asset retirement
cost. This Statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. SFAS No. 143 is not expected to
have a material effect on the Companys financial position.

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

SFAS Nos. 141 and 142
establish a new method of testing goodwill for impairment and require that
goodwill be separately tested for impairment using a fair-value-based approach.
The provisions apply not only to goodwill arising from acquisitions completed
after June 30, 2001 but also to the unamortized balance of goodwill at
the date of adoption. We adopted the standard early, effective July 1, 2001. We
completed our first impairment test in fiscal 2002 and the value of the goodwill
exceeded the book value of the asset on our balance sheet. Therefore no
impairment necessary.

## ITEM 7A:  Quantitative and Qualitative Disclosures about Market Risk

## Market Risk
Exposure

Market risk represents the
risk of loss that may impact our financial position, results of operations or
cash flows due to adverse changes in financial market prices. Our exposure to
market risk for changes in interest rates relates primarily to our investment
portfolio. We generally place our investments with high credit quality issuers
and by policy are averse to principal loss and seek to protect and preserve our
invested funds by limiting default risk, market risk and reinvestment risk.

|32
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As of
June 29, 2002, our investment consisted primarily of equity
securities, corporate, government and municipal bonds and money market mutual
funds of $43.5 million, and earned approximately $845,000 for the fiscal year,
at an average interest rate of approximately 2.0%. The impact on interest income
of a decrease of one percent in the average interest rate would have resulted in
approximately $425,000 less interest income for the fiscal year ended
June 29, 2002.

## Foreign
Exchange Exposure

We are exposed to foreign
exchange risk associated with accounts receivable and payable denominated in
foreign currencies. At June 29, 2002, we had approximately $2.0
million of accounts receivable and approximately $421,000 of accounts payable
denominated in Japanese yen. A one percent change in exchange rates would result
in an approximate $16,000 net impact on pre-tax income based on the foreign
currency denominated accounts receivable and accounts payable balances at
June 29, 2002. At June 29, 2002, we had approximately $4.8
million of accounts receivable and approximately $7.5 million of accounts
payable denominated in Euros. A one percent change in exchange rates would
result in an approximate $27,000 net impact on pre-tax income based on the
foreign currency denominated accounts receivable and accounts payable balances
at June 29, 2002.

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

Notwithstanding the above,
actual changes in interest rates and foreign exchange rates could adversely
affect our operating results or financial condition. The potential impact
depends upon the magnitude of the rate change. We are exposed to changes in
interest rates and foreign currency exchange rates primarily in our cash
balance, foreign currency transactions and the operating results of our foreign
affiliates.

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

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

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

Effective October 2001, we
converted our European operations from German marks to the Euro. Any costs
associated with the introduction of the Euro were expensed as incurred.

|33
|--

# 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.

## ITEM 8:  Financial Statements and Supplementary Data

# Applied
Films Corporation and Subsidiaries

# Index To
Consolidated Financial Statements

|                                                                                                                                                                                                                                                                                                         | Page 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----
|Applied Films Corporation and Subsidiaries                                                                                                                                                                                                                                                               |      
|Consolidated Balance Sheets as of June 29, 2002 and June 30, 2001.....................................................................................                                                                                                                                                   | 37   
|Consolidated Statements of Operations for the fiscal years ended June 29, 2002, June 30, 2001, and July 1, 2000............                                                                                                                                                                              | 38   
|Consolidated Statements of Stockholders' Equity for the fiscal years ended June 29, 2002, June 30, 2001, and
         July 1, 2000...................................................................................................................................................................... | 39   
|Consolidated Statements of Cash Flows for the fiscal years ended June 29, 2002, June 30, 2001, and July 1, 2000...........
Notes to Consolidated Financial Statements...........................................................................................................................         | 40
41

|34
|--

## Report of
Independent Auditors

To the Stockholders of Applied Films Corporation:

We have audited the
accompanying consolidated balance sheet of APPLIED FILMS CORPORATION and
subsidiaries as of June 29, 2002 and the related consolidated
statements of operations, stockholders equity and cash flows for the
fiscal year ended June 29, 2002. 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 audit.

We conducted our audit 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 audit provide a reasonable basis for our opinion.

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Applied Films
Corporation and subsidiaries, as of June 29, 2002 and the consolidated
results of their operations and their cash flows for the fiscal year ended
June 29, 2002, in conformity with accounting principles generally
accepted in the United States.

|Denver, Colorado
July 22, 2002. | /s/ ERNST & YOUNG LLP
|------------------------------- | ---------------------

|35
|--

## Report of
Independent Public Accountants

This report is a copy of a previously issued Arthur Andersen LLP report which has not been reissued by Arthur
Andersen LLP.

To the Stockholders of Applied Films Corporation:

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

We conducted our audits in
accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

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

|Denver, Colorado
July 19, 2001. | /s/ ARTHUR ANDERSEN LLP
|------------------------------- | -----------------------

|36
|--

Applied Films Corporation and Subsidiaries
                                            Consolidated Balance Sheets

`June 29, 2002               June 30, 2001
                                                                                  -------------------------   -------------------------
ASSETS                                                                                      (in thousands except share data)
Current Assets:
   Cash and cash equivalents....................................................        $        39,105             $        26,236
   Marketable securities........................................................                 43,544                        -
   Accounts and trade notes receivable, net of allowance of $997 and $1,142,
          respectively..........................................................                  9,160                      12,267
   Revenue in excess of billings................................................                 27,246                      29,717
   Inventories..................................................................                 10,101                      16,599
   Prepaid expenses and other...................................................                  1,845                         836
   Deferred tax asset, net......................................................                   -                            989
                                                                                  -------------------------   -------------------------
     Total current assets.......................................................                131,001                      86,644

Property, plant and equipment, net of accumulated depreciation of $11,009 and
        $9,998, respectively....................................................                  7,640                       7,746
Goodwill and intangible assets, net of accumulated amortization of $8,392 and
        $5,036, respectively....................................................                 55,408                      58,097
Investment in Joint Venture.....................................................                 10,004                       9,852
Deferred tax asset, net.........................................................                 11,398                       6,780
Other assets....................................................................                    373                         307
                                                                                  -------------------------   -------------------------
Total Assets....................................................................        $       215,824             $       169,426
                                                                                  =========================   =========================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Trade accounts payable.......................................................        $         9,662             $        13,063
   Accrued expenses.............................................................                 25,768                      39,841
   Billings in excess of revenue................................................                  8,213                       8,716
   Current portion of deferred gross profit, deferred gain and lease obligation                     414                         335
   Deferred tax liability.......................................................                  5,758                       2,129
                                                                                  -------------------------   -------------------------
        Total current liabilities...............................................                 49,815                      64,084

   Long-term portion of:
     Debt.......................................................................                   -                          6,483
     Deferred gross profit, deferred gain and lease obligation                                    2,427                       2,791
   Accrued pension benefit obligation...........................................                  9,012                       6,876
                                                                                  -------------------------   -------------------------
     Total Liabilities..........................................................                 61,254                      80,234
                                                                                  -------------------------   -------------------------

STOCKHOLDERS' EQUITY:
   Series A Convertible Preferred Stock; no par value, 1,000,000 shares
          authorized; 0 and 1,000 shares outstanding at June 29, 2002 and
          June 30, 2001, respectively...........................................                   -                          8,571
   Common Stock, no par value, 40,000,000 shares authorized, 11,027,310
          and 6,832,701 shares issued and outstanding at June 29, 2002 and
          June 30, 2001, respectively...........................................                159,610                      83,207
   Warrants and stock options...................................................                    734                         876
   Other cumulative comprehensive loss..........................................                 (7,995)                     (7,020)
   Retained earnings............................................................                  2,221                       3,558
                                                                                  -------------------------   -------------------------
        Total Stockholders' Equity..............................................                154,570                      89,192
                                                                                  -------------------------   -------------------------

Total Liabilities and Stockholders' Equity......................................        $       215,824             $       169,426
                                                                                  =========================   =========================`

The accompanying notes are an integral part of these Consolidated Financial Statements.

|37
|--

Applied Films Corporation and Subsidiaries
                                       Consolidated Statements Of Operations

`For The Fiscal Years Ended
                                                         ---------------------------------------------------------------
                                                            June 29, 2002         June 30, 2001        July 1, 2000
                                                         ---------------------------------------------------------------
                                                                     (in thousands, except per share data)
Net revenues.........................................      $   143,718          $   112,715          $    42,292

Cost of goods sold...................................          111,524               90,021               36,633
                                                         -------------------- -------------------- ---------------------
Gross profit.........................................           32,194               22,694                5,659

Operating expenses:
   Selling, general and administrative...............           24,101               16,027                4,324
   Research and development..........................            9,401                6,484                1,409
   Amortization of goodwill and other intangible assets          3,356               16,536                    -
                                                         -------------------- -------------------- ---------------------
Loss from operations.................................           (4,664)             (16,353)                 (74)

Other (expense) income:
   Interest income...................................              701                1,034                  447
   Other income, net.................................            2,249                  805                  272
   Equity earnings of Joint Venture..................              465                4,421                2,381
                                                         -------------------- -------------------- ---------------------
Income (loss) before income taxes and cumulative effect
 of change in accounting principle...................           (1,249)             (10,093)               3,026

Income tax benefit...................................              227                5,760                   97
                                                         -------------------- -------------------- ---------------------

Income (loss) before cumulative effect of change in
        accounting principle.........................           (1,022)              (4,333)               3,123
Cumulative effect of change in accounting principle,
        net of taxes.................................                -                    -                  (50)
                                                         -------------------- -------------------- ---------------------

Net income (loss)....................................           (1,022)              (4,333)               3,073

Preferred stock dividends............................             (315)                (367)                   -
                                                         -------------------- -------------------- ---------------------

Net income (loss) applicable to common stockholders..      $    (1,337)         $    (4,700)         $     3,073
                                                         ==================== ==================== =====================

Basic income (loss) per common share:
     Income (loss) before cumulative effect of change
          in accounting principle....................      $    (0.14)          $     (0.73)         $     0.73
     Cumulative effect of change in accounting principle         -                     -             $    (0.01)
                                                         -------------------- -------------------- ---------------------
     Net income (loss)...............................      $    (0.14)          $     (0.73)         $     0.72
                                                         ==================== ==================== =====================

Diluted income (loss) per common share:
   Income (loss) before cumulative effect of change in
        accounting principle.........................      $      (0.14)        $      (0.73)        $       0.70
   Cumulative effect of change in accounting principle             -                    -                   (0.01)
                                                         -------------------- -------------------- ---------------------
   Net income (loss)                                       $      (0.14)        $      (0.73)        $       0.69
                                                         ==================== ==================== =====================

Weighted average common shares outstanding:
   Basic.............................................            9,628                6,414                4,255
                                                         ==================== ==================== =====================
   Diluted...........................................            9,628                6,414                4,439
                                                         ==================== ==================== =====================`

The accompanying notes are an integral part of these Consolidated Financial Statements.

|38
|--

Applied Films Corporation and Subsidiaries
                                  Consolidated Statements of Stockholders' Equity

`Other
                                             Common Stock           Preferred Stock       Cumulative     Common                 Total
                                        -----------------------------------------------  Comprehensive   Stock     Retained  Stockholders'
                                          Shares       Amount      Shares      Amount        Loss       Warrants   Earnings    Equity
                                        ----------- ------------ ---------- ----------- -------------- ---------- ---------- ------------
                                                                      (in thousands except per share data)
Balances, July 3, 1999.................  3,487,058   $  9,473         -       $    -      $    -        $    -     $  5,185   $  14,658

Comprehensive loss:
   Net income .........................       -          -            -            -           -             -        3,073       3,073
   Other comprehensive loss:
      Unrealized loss on foreign
        currency translation...........       -          -            -            -            (20)         -         -            (20)
                                        ----------- ------------ ---------- ----------- -------------- ---------- ---------- ------------
Total comprehensive loss...............       -          -            -            -            (20)         -        3,073       3,053

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
                                        ----------- ------------ ---------- ----------- -------------- ---------- ---------- ------------
Balances, July 1, 2000.................  6,040,856   $ 64,959         -       $    -      $     (20)    $    -     $  8,258   $  73,197

Comprehensive loss:
   Net loss............................       -          -            -            -           -             -       (4,333)     (4,333)
   Other comprehensive loss:
      Unrealized loss on foreign
        currency translation...........       -          -            -            -         (7,000)         -         -         (7,000)
                                        ----------- ------------ ---------- ----------- -------------- ---------- ---------- ------------
Total comprehensive loss...............       -          -            -            -         (7,000)         -       (4,333)    (11,333)

ESPP stock issuance ...................      3,916         55         -            -           -             -         -             55
Stock options, including income tax
   benefits     of $515 ...............    114,576        847         -            -           -             -         -            847
Issuance of stock in connection with
   acquisition of LAC..................    673,353     17,346         -            -           -             -         -         17,346
Issuance of Series A Convertible
   Preferred Stock ....................       -          -           1,000        8,571        -             -         -          8,571
Issuance of common stock warrants in
   connection with issuance of Series A
   Convertible Preferred Stock ........       -          -            -            -           -             876       -            876
Preferred stock dividends .............       -          -            -            -           -             -         (367)       (367)
                                        ----------- ------------ ---------- ----------- -------------- ---------- ---------- ------------
Balances, June 30, 2001................  6,832,701   $ 83,207        1,000    $   8,571   $  (7,020)    $    876   $  3,558   $  89,192

Comprehensive loss:
   Net loss............................       -          -            -            -           -             -       (1,022)     (1,022)
   Other comprehensive loss:
      Unrealized loss on foreign
        currency translation...........       -          -            -            -           (975)         -         -           (975)
                                        ----------- ------------ ---------- ----------- -------------- ---------- ---------- ------------
Total comprehensive loss...............       -          -            -            -           (975)         -       (1,022)     (1,997)

ESPP stock issuance ...................      8,799        145         -            -           -             -         -            145
Stock options..........................    105,980        756         -            -           -             (142)     -            614
Issuance of shares in connection with
   secondary  offering (net of
   offering costs of $823).............  3,573,502     66,931         -            -           -             -         -         66,931
Conversion of Series A Convertible
   Preferred Stock (net of costs of $6)    506,328      8,571       (1,000)      (8,571)       -             -         -           -
Preferred stock dividends .............       -          -            -            -           -             -         (315)       (315)
                                        ----------- ------------ ---------- ----------- -------------- ---------- ---------- ------------
Balances, June 29, 2002................ 11,027,310   $159,610         -       $    -      $  (7,995)    $     734  $  2,221   $ 154,570
                                        =========== ============ ========== =========== ============== ========== ========== ============`

The accompanying notes are an integral part of these Consolidated Financial Statements.

|39
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Applied Films Corporation and Subsidiaries
                                       Consolidated Statements of Cash Flows

`For The Fiscal Years Ended
                                                                                  -----------------------------------------------
                                                                                   June 29, 2002  June 30, 2001   July 1, 2000
                                                                                  -----------------------------------------------
                                                                                                  (in thousands)
Cash Flows from Operating Activities:
Net income (loss)...............................................................      $  (1,022)     $  (4,333)      $   3,073
Adjustments to net income (loss):
   Depreciation and amortization of goodwill and other intangible assets........          5,575         18,630           1,826
   Amortization of deferred compensation and non-cash compensation expense......           -               143            -
   Amortization of deferred gain on lease and sale to joint venture.............           (362)          (334)           (220)
   Deferred income tax (benefit) provision......................................           -            (4,509)           (628)
   Equity earnings of joint venture.............................................           (152)        (4,106)         (2,217)
   Deferred gain on equipment sale to joint venture.............................           -             1,386            -
   Cost of equipment sale to joint venture......................................           -             2,251            -
   Loss on disposal of equipment................................................             55           -               -
   Changes in:
     Sale (purchases) of marketable securities held as trading securities, net..        (43,544)        20,167         (20,167)
     Accounts and trade notes receivable, net...................................          3,107          4,224            (991)
     Revenue in excess of billings..............................................          2,471         (7,203)         (3,011)
     Inventories................................................................          6,498          8,469          (1,872)
     Prepaid expenses and other.................................................         (1,075)           299             622
     Accounts payable and accrued expenses......................................         (8,372)        (3,339)          6,503
     Billings in excess of revenue..............................................           (503)         8,716            -
     Income taxes (receivable) payable..........................................           -               (98)            809
                                                                                  ---------------- --------------- --------------
       Net cash flows provided by (used in) operating activities................        (37,324)        40,363         (16,273)

Cash Flows from Investing Activities:
Purchases of property, plant, and equipment.....................................         (1,565)        (1,350)           (484)
Funds used for the acquisition of LAC...........................................         (9,459)       (60,857)           -
Purchase of assets held for sale................................................           -              -               (369)


Other...........................................................................           -              -                (64)
                                                                                  ---------------- --------------- --------------
     Net cash flows used in investing activities................................        (11,024)       (62,207)           (917)

Cash Flows from Financing Activities:
Proceeds from borrowings of long-term debt......................................          1,570         18,862           3,623
Repayment of long-term debt.....................................................         (8,053)       (12,379)        (11,024)
Stock issuance on stock purchase plan, and stock options........................            759            387             422
Proceeds from issuance of preferred stock and warrants, net.....................           -             9,304            -
Proceeds from secondary offering................................................         67,754           -             55,525
Offering costs..................................................................           (823)          -               (461)
Dividends paid on preferred stock...............................................           (362)          (322)           -
                                                                                  ---------------- --------------- --------------
     Net cash flows provided by financing activities............................         60,845         15,852          48,085

Effect of exchange rate changes on cash and cash equivalents....................            372            170            -
                                                                                  ---------------- --------------- --------------
Net (decrease) increase in cash.................................................         12,869         (5,822)         30,895
Cash and cash equivalents, beginning of period..................................         26,236         32,058           1,163
                                                                                  ---------------- --------------- --------------
Cash and cash equivalents, end of period........................................      $  39,105      $  26,236       $  32,058
                                                                                  ================ =============== ==============

Supplemental cash flow information:
Cash paid for interest, net of amounts capitalized..............................      $     138      $     489       $     366
                                                                                  ================ =============== ==============
Cash received for income taxes, net.............................................      $    -         $      15       $     560
                                                                                  ================ =============== ==============

Noncash financing activity:
Capital lease obligations incurred for the purchase of equipment................      $      77      $    -          $    -
                                                                                  ================ =============== ==============`

The accompanying notes are an integral part of these Consolidated Financial Statements.

|40
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# Applied
Films Corporation and Subsidiary

# Notes to
Consolidated Financial Statements

## NOTE 1.  COMPANY ORGANIZATION AND OPERATIONS

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

Additionally, the Company
sells coated glass substrates to the FPD industry. These products are used by
its customers as a component in the manufacturing of black and white liquid
crystal displays (LCD). In June of 1998, the Company formed a 50/50
Joint Venture (the Joint Venture) in China with Nippon Sheet Glass
Co. (NSG) to process, sell and export certain types of thin film
coated glass (Note 5).

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

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

## NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation. The results of the Joint Venture are accounted for
using the equity method of accounting in the consolidated financial statements
and the results appear in Equity earnings of Joint Venture (Note 5).

Use of Estimates

The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

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 2002, 2001 and 2000 all include
52 weeks.

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.

|41
|--

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 equity securities, corporate,
government and municipal bonds and money market mutual funds. The Company
classified all of its marketable securities as trading securities. Trading
securities are bought and held principally for the purpose of selling them in
the near term. Realized and unrealized gains and losses on such securities are
reflected as other income in the accompanying statements of operations. Trading
securities are carried at current market value, which are based upon quoted
market prices using the specific identification method.

As of
June 29, 2002, the Company had $26.6 million in corporate bonds, $9.7
million in municipal debt securities, $3.5 million in government bonds, $3.0
million in equity securities and $0.7 million related to money market mutual
funds accrued interest and cash. The Company had no significant concentration of
credit risk arising from investments and had no significant unrealized gains or
losses at June 29, 2002.

Inventories

Inventories consist of
glass related materials used in the production of coated glass, and materials
used in the construction of systems. Inventories are stated at the lower of cost
(first-in, first-out) or market. Inventories at June 29, 2002 and
June 30, 2001 consist of the following (in thousands):

`June 29, 2002   June 30, 2001
                                                         ---------------- ---------------
               Raw materials, net......................   $      1,219     $      5,116
               Work-in-process.........................          4,809            5,822
               Materials for manufacturing systems.....          2,621              733
               Finished goods, net.....................          1,452            4,928
                                                         ---------------- ---------------
                                                          $     10,101     $     16,599
                                                         ================ ===============`

Property, Plant, and Equipment

Property, plant and
equipment are stated at cost. Replacements, renewals and improvements are
capitalized and costs for repairs and maintenance are expensed as incurred.
Depreciation is computed using the straight-line method over the following
estimated useful lives. Leasehold improvements are depreciated using the
straight-line method over the lesser of the useful life of the asset or lease
term.

`Estimated Useful Lives
                                                        -------------------------
                       Building                                         30 years
                       Machinery and equipment                        3-10 years
                       Office furniture and equipment                  3-5 years`

Leased property meeting
certain criteria is capitalized and the present value of the related lease
payments is recorded as a liability. Amortization of capitalized leased assets
is computed on the straight-line method over the term of the lease.

Goodwill and Other Intangible Assets

`(in thousands)                                                     June 29, 2002     June 30, 2001
                                                                   ------------------ ----------------
  Goodwill.........................................................  $    49,977        $    47,495
     Less accumulated depreciation.................................       (3,358)            (3,358)
                                                                   ------------------ ----------------
  Goodwill, net of accumulated amortization........................       46,619             44,137
                                                                   ------------------ ----------------

  Intangible Assets:
     Patents.......................................................       20,000             20,000
     Customer lists................................................        2,500              2,500
                                                                   ------------------ ----------------
       Intangible assets...........................................       22,500             22,500
     Less accumulated depreciation.................................       (5,034)            (1,678)
                                                                   ------------------ ----------------
  Intangible assets, net of accumulated amortization...............       17,466             20,822
                                                                   ------------------ ----------------

  Foreign currency conversion to U.S. dollar.......................       (8,677)            (6,862)
                                                                   ------------------ ----------------
  Goodwill and intangible assets, net of accumulated amortization..  $    55,408        $    58,097
                                                                   ================== ================`

|42
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From January 1, 2001 to
June 30, 2001, goodwill resulting from acquisitions was amortized
using the straight-line method over an estimated useful life of seven years.
Specifically identified intangible assets were amortized over estimated lives
ranging from five to seven years. Additions to goodwill resulted from the final
purchase price adjustment in connection with the LAC acquisition.

In July 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, which among other things requires that the Company discontinue the
amortization of goodwill, which includes certain intangible assets related to
assembled workforce. The remaining intangible assets continue to be amortized
over five to seven year periods.

SFAS Nos. 141 and 142
establish a new method of testing goodwill for impairment, requiring that
goodwill be separately tested for impairment using a fair-value-based approach.
The provisions apply not only to goodwill arising from acquisitions completed
after June 30, 2001 but also to the unamortized balance of goodwill at
the date of adoption. The Company adopted the standards early effective July 1,
2001. As a result of the first annual goodwill impairment test, it was
determined there was no impairment of goodwill.

The following table
summarizes the reported net losses for the fiscal years ended June 29, 2002 and
June 30, 2001, adjusted to exclude goodwill amortization expense, and the
related tax effect, that would not have been recorded had the provisions of SFAS
142 been in effect July 1, 2000 (in thousands, except per share amounts):

`Reported net loss                                       $   (1,022)         $   (4,333)
        Goodwill amortization, net of tax                             -                  2,105
                                                            ----------------    ----------------
             Adjusted net loss                                  $   (1,022)         $   (2,228)
                                                            ================    ================

        Basic and diluted loss per share - as reported          $    (0.14)         $    (0.73)
                                                            ================    ================
        Basic and diluted loss per share - adjusted             $    (0.14)         $    (0.35)
                                                            ================    ================`

Impairment of Long-Lived Assets

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

Income Taxes

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

Joint Venture Income Taxes

During fiscal year 2000,
the Company determined that the earnings from the Joint Venture would not be
distributed to the Company for the foreseeable future; therefore, a provision
for U.S. income taxes need not be provided on the earnings from the Joint
Venture. During fiscal year 1999, the Company accrued for income taxes to be
paid on the earnings from the Joint Venture at a rate of 34%. Based on the
fiscal year 2000 determinations, the taxes originally provided during fiscal
year 1999, as well as those provided through the first quarter of fiscal year
2000 on the earnings from the Joint Venture, were reversed in the second quarter
of fiscal year 2000 resulting in an additional tax benefit for fiscal year 2000
of approximately $260,000. No provision for taxes on Joint Venture earnings has
been accrued during fiscal years 2001 and fiscal year 2002.

|43
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Deferred Gain

During 1997, the Company
entered into a lease transaction with a third party for the Companys
manufacturing and administrative facility in Longmont, Colorado, which included
a purchase option early in the lease period. The Company sold this purchase
option to another third party, who exercised this option and purchased the
building. The Company then entered into a new lease of the facility, which
includes a purchase option (Note 10). The Company received $834,000 from the
original purchase option, which is deferred and is shown on the balance sheet in
current and long term liabilities as deferred gain and is being amortized on a
straight-line basis over the term of the lease of 15 years.

Coated Glass and Spare Parts Revenue Recognition

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

Equipment Sales Revenue Recognition

Revenues on a majority of
contracts relating to the construction and sale of thin film coating equipment
are recognized on the percentage-of-completion method in accordance with the
American Institute of Certified Public Accountants (AICPA) Statement
of Position (SOP) No. 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. 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.

Revenues in excess of
billings represent revenues recognized under the percentage of completion method
prior to billing the customer for contractual cash payments. Billings in excess
of revenue represent amounts billed pursuant to the contract terms, which occur
prior to the Companys recognition of revenues on the contract for
financial reporting purposes.

Contracts in progress at
June 29, 2002 and June 30, 2001 are as follows (in
thousands):

`June 29, 2002    June 30, 2001
                                                                   ---------------- ----------------
   Costs incurred on contracts in progress and estimated profit     $    121,273     $    100,013
   Less: billings to date                                               (102,240)         (79,012)
                                                                   ---------------- ----------------
      Revenue in excess of billings, net                            $     19,033     $     21,001
                                                                   ================ ================`

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 5% to 15% of amounts
billed to customers during the progress of the contract. Retainage amounts, that
are actually billed, are included in accounts receivable in the accompanying
balance sheets.

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

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

Losses on contracts in
process are recognized in their entirety when the loss becomes evident and the
amount of loss can be reasonably estimated. As of June 29, 2002, the
Company had accrued approximately $2.6 million for loss contracts and $10
million as of June 30, 2001. The $7.4 million decrease in losses on
contracts is due to the realization of losses upon the completion of several
projects primarily during the third quarter of fiscal 2002. These projects were
obtained during the LAC acquisition and an adequate allowance for losses was
made at the time of acquisition.

|44
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Deferred Gross Profit

During fiscal years 2002,
2001 and 1999, the Company sold certain thin film coating equipment to the Joint
Venture (Note 5). Because the Company owns 50% of the Joint Venture, the
Company recorded 50% of the revenue and related cost of the sales and has
deferred 50% of the gross profit, approximately $0.0, $1.3 million and $1.4
million, respectively, which will be recognized on a straight-line basis over
ten years, consistent with the depreciation schedule at the Joint Venture and
the estimated depreciable life of the equipment. The thin film equipment sold to
the Joint Venture in fiscal year 2002 did not result in gross profit. The
amortization of the gross profit is included with Equity earnings of Joint
Venture in the accompanying consolidated statements of operations.

Research and Development Expenses

Research and development
costs are expensed as incurred and consist primarily of salaries, supplies, lab
expenses, and depreciation of equipment used in research and development
activities. The Company incurred approximately $9.4 million, $6.5 million, and
$1.4 million of research and development expenses for the fiscal years ended
June 29, 2002, June 30, 2001, and July 1, 2000,
respectively, net of reimbursements received from a contracting research
organization.

In addition, during fiscal
year 2001, the Company recognized an $11.5 million non-recurring charge to
write-off in-process research and development costs obtained in the acquisition
of LAC. This charge is included in amortization of goodwill and other intangible
assets on the accompanying consolidated statement of operations.

Foreign Currency Transactions

The Company generated 39%,
67% and 93% of its revenues in fiscal years 2002, 2001 and 2000, respectively,
from sales to foreign corporations located outside of the Companys
manufacturing centers in the United States and Europe, which are primarily in
Asia. In addition, many of its raw materials are purchased from foreign
corporations. The majority of the Companys sales and purchases are
denominated in U.S. dollars, with the remainder denominated in Euros or Japanese
yen. For those transactions denominated in currencies other than the functional
currency, the Company records the sale or purchase at the spot exchange rate in
effect on the date of sale. Receivables from such sales or payables for such
purchases are translated to the functional currency using the end of the period
spot exchange rate. Realized gains and losses are charged or credited to income
during the year, and any unrealized gains or losses are recorded as an
accumulated translation adjustment in Other cumulative comprehensive
loss on the balance sheet at the end of the period.

Foreign Currency Translation

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

Other Cumulative Comprehensive Loss

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

Net Income (Loss) Per Common Share

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

|45
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A reconciliation between
the number of shares used to calculate basic and diluted earnings per share is
as follows (in thousands of shares):

`2002          2001          2000
                                                              ------------- ------------- -------------
 Weighted average number of common shares outstanding               9,628         6,414         4,255
      (shares used in basic earnings per share computation)
 Effect of potentially dilutive securities ................           N/A           N/A           184
                                                              ------------- ------------- -------------
 Shares used in diluted earnings per share computation ....         9,628         6,414         4,439
                                                              ============= ============= =============`

The diluted share base for
fiscal years 2002 and 2001 exclude incremental shares of 285,000 and 556,000,
respectively, related to all outstanding stock options and warrants. These
shares are excluded due to their antidilutive effect as a result of the
Companys loss from continuing operations during fiscal years 2002 and
2001.

For the fiscal years 2002
and 2001, earnings available to common stockholders include a reduction for
dividends on the Series A Convertible Preferred Stock of $315,000 and $367,000,
respectively. As of December 28, 2001, all convertible Preferred Stock was
converted to common stock of the Company and therefore no dividends are due and
payable under this issue following that date (Note 6).

Change in Accounting Principle

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

Derivative Instruments and Hedging Activities

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 adoption of the standard did not
have a material impact on the Company.

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

Recent Accounting Standards

In June 2001, the FASB
issued SFAS No. 143, Accounting for Asset Retirement Obligations,
which establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated asset retirement
cost. This Statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. SFAS No. 143 is not expected to
have a material effect on the Companys financial position.

|46
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In August 2001, the FASB issued SFAS No. 144,  "Accounting  for the  Impairment or Disposal of Long-Lived  Assets".
This statement  addresses  financial  accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes  SFAS No. 121,  "Accounting for the Impairment of Long-Lived  Assets and Long-Lived  Assets
to be Disposed Of". SFAS No. 144 also supersedes the accounting and reporting  provisions of Accounting  Principles
Board  ("APB") No. 30,  "Reporting  the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business,  and Extraordinary,  Unusual and Infrequently  Occurring Events and Transactions",  for the disposal of a
segment of a business.  SFAS No. 144 also amends ARB No. 51 "Consolidated  Financial Statements",  to eliminate the
exception  to  consolidation  for a  subsidiary  for  which  control  is likely to be  temporary.  SFAS No.  144 is
effective for fiscal years  beginning  after  December 15, 2001.  The provisions of this statement are generally to
be applied prospectively. SFAS No. 144 did not have a material effect on the Company's financial position.

In April 2002,  the FASB issued SFAS No. 145,  "Rescission  of FASB  Statement No. 4, 44 and 64,  Amendment of FASB
Statement No. 13, and Technical  Corrections."  This statement provides guidance on the classification of gains and
losses from the  extinguishment  of debt and on the accounting for certain specified lease  transactions.  SFAS No.
145 is not expected to have a material impact on the Company.

In June 2002, the FASB
issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). Generally, SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized as incurred, whereas EITF Issue No. 94-3 required such a liability to
be recognized at the time that an entity committed to an exit play. The Company
is currently evaluating the provisions of the new rule, which is effective for
exit or disposal activities that are initiated after December 31, 2002.

Related Parties

In addition to the
Companys Joint Venture investment described in Note 5, the Company has
engaged in certain related party transactions. During fiscal 2002, 2001 and
2000, the Company recognized approximately $2.9 million, $2.4 million and
$917,000, respectively, of sales revenue to a company and its affiliates of
which a member of the Companys board of directors is an officer, and the
Company had $3.0 million, $1.3 million and $583,000, respectively, of purchases
from a company of which another member of the Companys board of directors
is a member of the board of directors and a former officer.

Reclassifications

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

## NOTE 3.  ACQUISITION OF LAC

The Company completed the
acquisition of LAC on December 31, 2000. The aggregate consideration and costs
paid by the Company was $87,661,000 consisting of $67,474,000 of cash and
673,353 shares of Applied Films Corporation common stock valued at $25.76 per
share (total value of $17,345,000, based upon the average of the closing market
prices for the three days before and after, and the day of, the public
announcement of the transaction, October 18, 2000), and $2,842,000 of
transaction costs. The acquisition was accounted for under the purchase method
of accounting.

The accounts of this
acquisition have been included in the Companys consolidated financial
statements from the acquisition date. The purchase price was allocated based
upon the estimated fair value of the identifiable assets acquired and
liabilities assumed. The excess of the purchase price over fair value of net
identifiable assets was allocated to goodwill. The $87,661,000 purchase price
was allocated as follows (in thousands):

`Net current assets                        $  9,546
                          Long-term liabilities                       (9,029)
                          Goodwill                                    49,977
                          Other intangible assets                     22,500
                          Property, plant and equipment                3,167
                          In-process research and development         11,500
                                                                   -----------
                             Total allocation of purchase price     $ 87,661
                                                                   ===========`

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As a result of the final
settlement of the acquisition transaction, the final valuation of the intangible
assets and the allocation of the purchase price was completed during the third
quarter of fiscal 2002. The determination of the final fair value resulted in an
increase to intangibles and goodwill and a reduction of the net current assets.
Intangible assets are being amortized on a straight line basis over periods of 5
to 7 years. Effective July 1, 2001 the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets, and discontinued amortizing
goodwill. As of June 30, 2001, the Company had amortized $3.4 million
related to goodwill. In-process research and development represents the
intangible value of in-process research and development projects that had not
yet reached technical feasibility. The related technology had no alternative use
and required substantial additional development by the Company. In-process
research and development was charged to operations during the fiscal year 2001.

The following unaudited pro
forma information reflects the pro forma consolidated results of operations for
the Company giving effect to the LAC acquisition and related issuance of Series
A Convertible Preferred Stock and warrants as if the transactions occurred on
July 2, 2000 and July 4, 1999, respectively. The unaudited pro forma results
include the unaudited historical operating results of LAC for six months ended
December 31, 2000 and 12 months ended July 1, 2000, respectively. The unaudited
pro forma data is not necessarily indicative of the Companys results of
operations that would actually have been reported if the transaction in fact had
occurred on July 2, 2000 and July 4, 1999, respectively, and is not necessarily
representative of the Companys consolidated results of operations for any
future period.

`Fiscal Year Ended
                                          --------------------------------------------------------------
                                                  June 30, 2001                    July 1, 2000
                                          -------------------------------   ----------------------------
                                                      (in thousands, except per share data)
                                          Historical        Pro Forma       Historical       Pro Forma
                                          ------------   ----------------   ------------    ------------
                                                                   (unaudited)
Net revenues............................    $112,715       $174,740           $ 42,292        $119,460
Operating loss..........................     (16,353)       (23,272)               (74)        (20,189)
  Net loss..............................      (4,333)       (12,270)            (3,073)        (10,293)
Income (loss) per common share - basic
   and diluted..........................    $  (0.73)      $  (1.94)          $  (0.72)       $  (2.26)
                                          ============   ================   ============    ============`

## NOTE 4.  LONG-TERM DEBT

The Company had outstanding
debt of $6.5 million as of June 30, 2001, which was considered
long-term debt. During the first half of fiscal year 2002 this debt was repaid
in full. Interest expense
was $138,000, $489,000 and $328,000 for the fiscal years ended
June 29, 2002, June 30, 2001 and July 1, 2000,
respectively.

In fiscal year 1998, the
Company entered into an Amended and Restated Credit Agreement (the
Agreement) with a domestic bank providing for a revolving credit
facility (Credit Facility) with a maximum availability of $11.5
million. This Agreement expires on September 17, 2002, and the Company does not
plan to renew. Borrowings are subject to a borrowing base formula based upon
eligible accounts receivable, inventories, and equipment and fixtures; at the
Companys option, borrowing rates are based on the prime rate and/or the
Eurodollar rate plus a factor varying based on earnings before interest, taxes,
depreciation and amortization (EBITDA). The Credit Facility contains
restrictive covenants under which the Company must maintain a certain amount of
tangible net worth and certain financial ratios as defined in the agreement,
including a ratio of debt to EBITDA and a ratio of total liabilities to tangible
net worth. The Company was in compliance with all covenants as of
June 29, 2002. The Company also uses this Credit Facility to guarantee
50% of the debt of the Joint Venture or $7.0 million and $2.5 million as of
June 29, 2002 and June 30, 2001, respectively. As of
June 29, 2002, no amounts were outstanding under the Credit Facility.

## NOTE 5.  INVESTMENT IN JOINT VENTURE

In June 1998, the Company
formed a 50/50 Joint Venture with NSG in China to manufacture, process, sell and
export certain types of thin film coated glass. Each party contributed $3.2
million in cash to the Joint Venture. During fiscal 2002, 2001 and 1999, the
Company sold refurbished equipment to the Joint Venture for use in the process
of thin film coating of glass. The sales prices were approximately $1.2 million,
$5.6 million and $5.1 million, respectively. As the Company owns 50% of the
Joint Venture, 50% of the gross profit on the sale of refurbished equipment was
deferred and is being amortized as a gain in future periods (Note 2: Deferred
Gross Profit).

The Joint Venture began
operations during the fourth quarter of fiscal 1999. The Company records 50% of
income or loss from operations of the Joint Venture after elimination of the
impact of inter-entity transactions. The Companys share of profits
realized by the Joint Venture on sale of inventory to the Company are eliminated
as are adjustments to inventory to the extent that such inventory is held by the
Company at the end of the period. The functional currency for the Joint Venture
is the local Chinese Yuan Renminbi. 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 the Companys
consolidated financial statements.

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During fiscal years 2002,
2001 and 2000, the Company purchased coated glass totaling $2.8 million, $5.8
million and $7.7 million, respectively, from the Joint Venture, of which
$243,000, $1.1 million and $1.2 million, respectively, remained in inventory. In
addition, the Company received cash royalty payments from the Joint Venture
totaling $220,000 for the year ended June 29, 2002, $278,000 for the
year ended June 30, 2001 and $284,000 for the year ended
July 1, 2000. As of June 29, 2002, the Company has provided
a letter of credit under its commercial loan facility to guarantee approximately
$7.0 million of the debt of the Joint Venture.

Summarized statement of
operations information for the Joint Venture for the fiscal years ended
June 29, 2002, June 30, 2001, and July 1, 2000, is
presented below (in thousands):

`Fiscal Year Ended
                                                         -----------------------------------------------
                                                          June 29, 2002   June 30, 2001    July 1, 2000
                                                         --------------- ---------------- --------------
Joint Venture:
  Operating revenues                                      $     24,264    $     32,360     $     23,882
                                                         =============== ================ ==============
  Net income                                              $        340    $      8,202     $      4,095
                                                         =============== ================ ==============
Applied Films' equity in earnings:
  Proportionate share of net income after eliminations    $        159    $      4,087     $      2,217
  Amortization of deferred gain on sale of equipment               306             334              164
                                                         --------------- ---------------- --------------
    Equity earnings of Joint Venture                      $        465    $      4,421     $      2,381
                                                         =============== ================ ==============`

Summarized balance sheet
information for the Joint Venture as of June 29, 2002,
June 30, 2001, and July 1, 2000, is presented below (in
thousands):

`June 29, 2002   June 30, 2001   July 1, 2000
                                                  --------------- ---------------  -------------
        Assets:
           Current assets                             $  10,447       $   8,410        $  9,956
           Property, plant, and equipment, net           28,434          27,860           9,921
                                                  --------------- ---------------  -------------
                                                      $  38,881       $  36,270        $ 19,877
                                                  =============== ===============  =============
        Capitalization and liabilities:
           Current liabilities                        $   6,839       $   9,239        $  5,397
           Long-term debt (1)                            12,033           7,321           2,800
           Common shareholders' equity                   20,009          19,710          11,680
                                                  --------------- ---------------  -------------
                                                      $  38,881       $  36,270        $ 19,877
                                                  =============== ===============  =============

        (1)  The long-term debt is guaranteed 50% by the Company and 50% by NSG.`

As of
June 29, 2002 and June 30, 2001, the Company had accounts
payable to the Joint Venture of approximately $547,000 and $42,000, and
receivables from the Joint Venture of approximately $171,000 and $265,000,
respectively.

## NOTE 6.  STOCKHOLDERS EQUITY

Series A Convertible Preferred Stock

On January 18, 2001, the
Company sold $10.0 million in Series A Convertible Preferred Stock (Series
A Stock) that was convertible into common stock at a conversion price of
$19.75 per common share. The conversion price of the Series A Stock was subject
to adjustment under certain circumstances. The Series A Stock carried a dividend
rate of 7% until October 16, 2001, when the rate increased to 8.5%.

During the second quarter
of fiscal year 2002, the Company issued redemption notices to its Series A Stock
holders with a conversion effective date of January 1, 2002. Prior to January 1,
2002, each holder of the Series A Stock exercised its right to convert its
shares into common stock at a conversion price of $19.75 per share. As a result
of the conversion, the Company issued 506,328 new shares of common stock.

|49
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The Company also issued two
grants of warrants in connection with this offering: warrants to purchase 75,949
shares of common stock at $22.33 per share and warrants to purchase 17,468
shares at $20.09 per share. The warrants are immediately exercisable, and may be
exercised any time over a five and three year period, respectively. The Company
determined the fair value of these warrants to be approximately $733,623 using
the Black-Scholes option pricing model using the following weighted average
assumptions:

`Risk-free interest rate......................         4.99%
                      Expected life................................     1.5 years
                      Expected volatility..........................          100%
                      Expected dividend yield......................          0.0%`

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

Secondary Offering

On November 15, 2001, the
Company sold 3,573,502 shares of common stock for $20.00 per share and received
net proceeds of $67.0 million, net of offering costs of $823,000. A portion of
the proceeds were used to repay $6.5 million of outstanding debt, pay Unaxis
$9.5 million for the remaining portion of the purchase price for the LAC
acquisition, and provide credit support for a guaranty of our China JVs
indebtedness (approximately $7.0 million). The remaining proceeds will be used
to cover working capital and general corporate purposes.

An additional 823,353
shares were sold by the selling shareholders on November 15, 2001. Applied Films
did not receive any of the proceeds from the sale of the common stock shares
sold by the selling shareholders.

Stock Options

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

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

Outside Directors Options

In July 2001, the Company
amended the Outside Director Stock Option Plan to cover an aggregate of 124,000
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.

|50
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Accordingly, for purposes
of the pro forma disclosures presented below, the Company has computed the fair
values of all options granted during fiscal 2002, 2001, and 2000 using the
Black-Scholes pricing model and the following weighted average assumptions:

`2002      2001      2000
                                                      -------   --------  ------
                       Risk-free interest rate....      4.60%     5.99%     6.24%
                       Expected lives.............    7 years   7 years   7 years
                       Expected volatility........        89%      161%      136%
                       Expected dividend yield....       0.0%      0.0%      0.0%`

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. 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. 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 $5.8 million, $4.1 million, and
$738,000, for the years ended June 29, 2002, June 30, 2001,
and July 1, 2000, 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 $2.2 million, $894,000, and $220,000 for the
fiscal years ended June 29, 2002, June 30, 2001, and
July 1, 2000, respectively.

If the Company had
accounted for its stock-based compensation plans in accordance with SFAS No.
123, the Companys net income (loss) would have been reported as follows
(in thousands, except share data):

`For The Fiscal Years Ended
                                           --------------------------------------------------
                                              June 29, 2002    June 30, 2001    July 1, 2000
                                           ---------------- ---------------- ----------------
          Net income (loss):
            As reported                     $      (1,022)   $      (4,333)   $       3,073
                                           ================ ================ ================
            Pro forma                       $      (3,217)   $      (5,227)   $       2,853
                                           ================ ================ ================
          Basic earnings (loss) per share:
            As reported                     $       (0.14)   $       (0.73)   $         0.72
                                           ================ ================ ================
            Pro forma                       $       (0.33)   $       (0.87)   $         0.67
                                           ================ ================ ================`

A summary of the 1993 and 1997 Plans is as follows:

`For The Fiscal Years Ended
                                      -------------------------------------------------------------------------------------
                                             June 29, 2002                June 30, 2001               July 1, 2000
                                      -------------------------------------------------------------------------------------
                                                       Weighted                     Weighted                   Weighted
                                                       Average                      Average                     Average
                                                       Exercise                     Exercise                   Exercise
                                         Options        Price         Options        Price        Options        Price
                                      -------------- ------------- -------------- ------------- ------------- -------------
Outstanding at beginning of year            561,836  $        9.89       455,076  $        4.22      384,296  $        3.42
   Granted                                  290,575          21.84       230,236          18.31      124,160           6.30
   Forfeited                                 (9,262)         31.59        (8,900)         29.73       (5,063)         (3.16)
   Exercised                               (105,992)          5.79      (114,576)          2.94      (48,317)         (2.88)
                                      --------------               --------------               -------------
Outstanding at end of year                  737,157          14.92       561,836           9.88      455,076           4.22
                                      ============== ============= ============== ============= ============= =============
Exercisable at end of year                  228,924           6.94       228,778           4.16      268,076           3.45
                                      ============== ============= ============== ============= ============= =============
Weighted average fair value of
   options granted                                   $       20.31                $       11.87               $        5.94
                                                     =============                =============               =============`

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The following table summarizes information about employee stock options outstanding and exercisable at
June 29, 2002:

`Options Outstanding                    Options Exercisable
                      ---------------------------------------------- -------------------------------
                                        Weighted
                         Number         Average         Weighted         Number         Weighted
                       Outstanding     Remaining        Average       Exercisable       Average
   Range of            at June 29,    Contractual       Exercise      at June 29,       Exercise
   Exercise Prices        2002       Life in Years       Price            2002           Price
   -----------------  -------------- --------------- --------------- --------------- ---------------
   $2.32 - $3.50            199,563            4.64            2.94         143,635            2.89
   $5.26 - $14.00           196,505            7.92           12.46          70,130            9.70
   $17.75 - $24.75          240,425            9.34           20.90           2,800           20.24
   $25.15 - $38.50          100,664            9.01           29.15          12,359           35.36
                      --------------                                 ---------------
                            737,157                                         228,924
                      ==============                                 ===============`

Employee Stock Purchase Plan

On September 5, 1997, the
Board of Directors adopted, and the stockholders subsequently approved, the
Applied Films Corporation Employee Stock Purchase Plan (Purchase
Plan) as amended in October 2000. The Purchase Plan was amended
April 17, 2002 to institute two six-month Option Periods each year
commencing on the first business day of May and November, respectively. The
Purchase Plan permits eligible employees to purchase shares of common stock
through payroll deductions. Shares are purchased at 85% of the fair market value
of the common stock on the Purchase Date. Purchases are priced on the last
business day of April and October, respectively, for the purchases of as many
full shares, but not less than one (1) full share, as may be purchased with the
funds in his or her Purchase Account. Up to 100,000 shares of common stock may
be sold under the Purchase Plan. Shares sold under the Purchase Plan may be
newly issued shares or shares acquired by the Company in the open market. Unless
terminated earlier by the Board of Directors, the Purchase Plan will terminate
when all shares reserved for issuance have been sold thereunder. The Purchase
Plan is intended to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986, as amended, and will be
administered in accordance with the limitations set forth in Section 423 and the
rules and regulations thereunder.

During fiscal years 2002,
2001 and 2000, the Company issued shares to employees of 8,799, 3,916 and 5,481
under this plan, respectively, at a purchase price ranging from $2.81 to $32.96
per share. A total of 28,760 shares have been issued under the plan since
inception.

## NOTE 7.  INCOME
TAXES

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

The net deferred tax asset
(liability) is comprised of the following (in thousands):

`June 29, 2002   June 30, 2001
                                                        ---------------- ---------------
              Inventories............................      $     284        $     276
              Accrued expenses.......................          1,590            2,839
              Deferred compensation..................             40              202
              Deferred gain..........................            219              240
              Deferred revenue.......................            716              373
              Goodwill and other intangible assets...          4,170            4,601
              Net operating loss carry forwards......          9,005            2,159
              Valuation allowance....................         (1,933)               -
                                                        ---------------- ---------------
                 Total deferred tax assets...........         14,091           10,690
                                                        ---------------- ---------------
              Property, plant and equipment..........           (669)            (771)
              Uncompleted contracts..................         (7,758)          (4,255)
              Other..................................            (24)             (24)
                                                        ---------------- ---------------
                 Total deferred tax liabilities......         (8,451)          (5,050)
                                                        ---------------- ---------------
              Total deferred tax asset, net..........      $   5,640        $   5,640
                                                        ================ ===============`

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Income tax (benefit)
provision for the fiscal years ended June 29, 2001,
June 30, 2001, and July 1, 2000, consist of the following
(in thousands):

`Years Ended
                                           -----------------------------------------------
                                           June 29, 2002   June 30, 2001  July 1, 2000
                                           --------------- -------------- ----------------
Current provision (benefit):
     Federal                                $       -       $        (95)  $        484
     State                                          -                 (9)            47
     Foreign                                        (227)         (1,147)          -
                                           --------------- -------------- ----------------
        Total current provision                     (227)         (1,251)           531
        (benefit)
Deferred provision (benefit):
     Federal                                        (567)         (1,848)          (572)
     State                                            50            (180)           (56)
     Foreign                                         517          (2,481)          -
                                           --------------- -------------- ----------------
        Total deferred provision
        (benefit)                                   -             (4,509)          (628)
                                           --------------- -------------- ----------------
Total tax provision (benefit)               $       (227)   $     (5,760)  $        (97)
                                           =============== ============== ================`

Reconciliations between the
effective statutory federal income tax provision (benefit) rate and the
Companys effective income tax provision (benefit) rate as a percentage of
net income (loss) before taxes were as follows:

`Fiscal Years Ended
                                                       -------------------------------------------------
                                                        June 29, 2002   June 30, 2001    July 1, 2000
                                                       --------------- ---------------- ----------------
Statutory federal income tax (benefit) provision rate        (34.0)%         (34.0)%          34.0%
State income taxes                                            (3.3)           (3.3)            3.3
Foreign income taxes and other                                 -              (1.8)            0.1
Equity earnings in Joint Venture                             (12.7)          (14.3)          (33.2)
Tax exempt interest income                                     -              (3.7)           (6.4)
Foreign tax exempt interest                                  (20.7)            -               -
Effect of foreign sales corporation                            -               -              (1.1)
Valuation allowance                                           52.6             -               -
                                                       --------------- ---------------- ----------------
          Effective income tax (benefit) provision           (18.1)%         (57.1)%          (3.3)%
                                                       =============== ================ ================`

As of
June 29, 2002, the Company had net operating losses available to
offset future taxable income of approximately $24.1 million. Such net operating
loss carry forwards expire through 2023. Under the provisions of the Internal
Revenue Code, as amended, the Companys foreign sales corporation may
exempt a portion of its export related taxable income from U.S. federal and
state income taxes.

## NOTE 8.  EMPLOYEE BENEFIT PLANS

Profit Sharing Plan

In August 1992, the Board
of Directors adopted a profit sharing plan for all non-executive employees. The
amount to be contributed to the profit sharing pool, subject to the approval of
the Companys board of directors, is generally 15% of operating income
excluding any amortization of intangibles related to the acquisition. Profit
sharing is paid to employees in cash, quarterly, based on a combination of their
length of service with the Company and their pay level. The Company expensed
approximately $77,000, $539,000, and $299,000 in fiscal years 2002, 2001, and
2000, respectively, related to this plan.

Pension Plan

LAC maintains a
noncontributory defined benefit pension plan covering substantially all
employees of LAC. Benefits are based primarily on compensation during a
specified period before retirement of a specified amount for each year of
service. The assumed pension liability of $9.0 million is reflected in the
accompanying consolidated balance sheet as of June 29, 2002, and is
subject to adjustment based upon an assessment of the actuarial value of the
obligation. This plan has no assets as of June 29, 2002.

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The following table sets
forth the benefit obligation, the funded status of the pension plan, amounts
recognized on the Companys consolidated financial statements, and the
principal weighted average assumptions used (in thousands):

`Year End           Year End
                                                       June 29, 2002       June 30, 2001
                                                      -----------------  ------------------
Change in Benefit Obligation:
   Benefit obligation at beginning of year...........    $     7,214        $      -
   Service costs.....................................            534                485
   Interest costs....................................            502                428
   Actuarial (gain) loss.............................           (314)               338
   Foreign exchange loss.............................          1,150                153
   Acquisition.......................................           -                 5,810
   Benefits paid.....................................            (15)              -
                                                      -----------------  ------------------
   Benefit obligation at end of year.................    $     9,071        $     7,214
                                                      =================  ==================

Funded Status:
   Unrecognized net actuarial gain...................    $    (9,071)       $    (7,214)
   Unrecognized prior service cost...................             59                338
                                                      -----------------  ------------------
   Net amount recognized.............................    $    (9,012)       $    (6,876)
                                                      =================  ==================

Amounts Recognized in the Balance Sheets:
   Accrued Pension Benefit Obligation................    $    (9,012)       $    (6,876)
                                                      -----------------  ------------------
   Net amount recognized.............................    $    (9,012)       $    (6,876)
                                                      =================  ==================

Weighted-average Assumptions
   Discount rate.....................................             6.0%                6.0%
   Expected return on plan assets....................              N/A                 N/A
   Rate of compensation increase:
     Employee........................................            2.75%               2.75%
     Retired.........................................            2.00%               2.25%

Components of Net Periodic Benefit Cost:
   Service Cost......................................    $       534        $       485
   Interest Cost.....................................            502                428
   Expected return on plan assets....................           -                  -
   Amortization of prior service costs...............           -                  -
   Recognition of actuarial (gain) loss..............           (314)               338
                                                      -----------------  ------------------
     Net periodic benefit costs......................    $       722        $     1,251
                                                      =================  ==================`

## NOTE 9.  SIGNIFICANT CUSTOMERS

During fiscal years 2002,
2001, and 2000, approximately 39%, 67%, and 93%, respectively, of the
Companys net revenues were exported to customers outside of the
Companys manufacturing region. The Companys ten largest customers
accounted for, in the aggregate, approximately 59%, 35%, and 79%, of the
Companys net revenues in fiscal 2002, 2001, and 2000, respectively.
Revenues from two customers, Guardian Industries and LG International, represented 22% and
10% of net revenues for fiscal 2002, respectively. Revenues from both customers for
fiscal 2002, consist solely of thin film coating equipment. The loss of, or a
significant reduction in purchases by, one or more of these customers would have
a material adverse effect on the Companys operating results.

The breakdown of net revenues by geographic region is as follows (in thousands):

`Fiscal Year Ended
                            -----------------------------------------------
                            June 29, 2002   June 30, 2001    July 1, 2000
                            --------------- ---------------- --------------
Asia (other than Japan)      $     44,268    $     48,206     $     24,641
Japan                              11,858          27,552           13,929
United States                      29,766          13,764            2,934
Europe and other                   57,826          23,193              788
                            --------------- ---------------- --------------
   Net revenues              $    143,718    $    112,715     $     42,292
                            =============== ================ ==============`

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The Companys sales
are typically denominated in U.S. dollars. However, certain customers of the
Company currently pay in Japanese yen and Euros. As a result, the Company
recognized approximately $(15,000), $19,000, and ($43,000), of foreign currency
exchange rate gain (loss) on foreign currency exchange rate fluctuations for the
fiscal years ended June 29, 2002, June 30, 2001, and
July 1, 2000, respectively. The Company has approximately $2.0 million
and $1.3 million of its accounts receivable and $421,000 and $900,000 of its
accounts payable denominated in Japanese yen as of June 29, 2002 and
June 30, 2001, respectively. The Company has approximately $4.8
million and $5.4 million, of its accounts receivable and $7.5 million and $6.7
million, respectively, of its accounts payable denominated in Euros as of
June 29, 2002 and June 30, 2001, respectively.

## NOTE 10.  LEASES

The Company is obligated
under certain non-cancelable operating leases for office, manufacturing and
warehouse facilities, and various equipment. Beginning in April 2002, the
Company entered into an eight-year lease for the Companys manufacturing
and administrative location in Germany. Under this lease, payments are fixed for
the entire term of the lease and there is an option to renew the term for an
additional 5 years. The Company entered into a lease for the Companys
manufacturing and administrative location in Longmont, Colorado, which commenced
on January 30, 1998; 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
for the Longmont location have been normalized over the term of the lease. The
initial lease term is 15 years, with two additional 5-year options to extend.
Both of these facility leases are accounted for as operating leases.

The Company also has non-cancelable capital leases for certain office equipment.

The future minimum payments
under the operating and capital leases are as follows (in thousands):

`Fiscal Year                                      Operating leases     Capital leases
-----------
2003........................................        $      6,319          $       60
2004........................................               5,458                  24
2005........................................               5,272                   3
2006........................................               5,183                   -
2007........................................               5,167                   -
2008 and thereafter.........................              17,056                   -
                                                 ------------------   ----------------
Total minimum lease payments................        $     44,455                  87
                                                 ==================
Less amount representing interest...........                                      10
                                                                      ----------------
Total present value of minimum payments.....                                      77
Less current portion of such obligations....                                      52
                                                                      ----------------
Long-term obligation........................                              $       25
                                                                      ================`

Rent  expense  under  operating  leases  was  $5.7 million, $3.4 million and $768,000 for fiscal  years  ended
June 29, 2002, June 30, 2001, and July 1, 2000.

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NOTE 11.  SEGMENT INFORMATION

The Company  manages its business and has segregated its activities  into two business  segments,  Thin Film Coated
Glass and Thin Film  Coating  Equipment.  Certain  financial  information  for each  segment is provided  below (in
thousands):

`Fiscal Years Ended
                                                           ---------------------------------------------
                                                            June 29, 2002  June 30, 2001   July 1, 2000
                                                           ---------------------------------------------
Net revenues:
   Thin film coated glass................................   $     12,661    $     27,523   $     35,159
   Thin film coating equipment...........................        131,057          85,192          7,133
                                                           ---------------------------------------------
     Total net revenues..................................   $    143,718    $    112,715   $     42,292
                                                           =============================================
Operating (loss) income:
   Thin film coated glass................................   $     (5,048)   $     (1,798)  $      1,628
   Thin film coating equipment...........................          3,740           1,981         (1,702)
   Amortization of goodwill and other intangible assets..         (3,356)        (16,536)          -
                                                           ---------------------------------------------
     Total operating loss................................   $     (4,664)   $    (16,353)  $        (74)
                                                           =============================================

                                                           June 29, 2002   June 30, 2001
                                                           -------------------------------
Identifiable property, plant and equipment:
   Thin film coated glass................................   $      2,041    $      3,311
   Thin film coating equipment...........................          4,875           3,936
   Corporate and other...................................            724             499
                                                           -------------------------------
     Total identifiable property, plant and equipment....   $      7,640    $      7,746
                                                           ===============================`

## NOTE 12.  FAIR
VALUE OF FINANCIAL INSTRUMENTS

Financial
instruments consist of cash and cash equivalents, marketable securities,
accounts receivable, accounts payable, notes receivable, and debt. Carrying
values of cash and cash equivalents, accounts receivable, and accounts payable
approximate fair value. Investments are reported at fair value. Management
believes differences between fair values and carrying values of notes receivable
and debt would not be materially different because interest rates approximate
market rates for material items.

NOTE 13.  QUARTERLY INFORMATION (unaudited)

The following table sets
forth summary unaudited quarterly financial information for the eight fiscal
quarters ended June 29, 2002 (in thousands).

`Fiscal 2002 Quarter Ended                         Fiscal 2001 Quarter Ended
                                    ------------------------------------------------  -------------------------------------------------
                                     June 29,    March 30,    Dec 29,     Sept 29,     June 30,    March 31,    Dec 30,      Sept 30,
                                       2002        2002         2001        2001         2001        2001         2000         2000
                                    ----------- ------------ ----------- -----------  ----------- ------------ -----------  -----------
Net revenues                         $31,038     $32,166      $39,231     $41,283      $40,528     $44,981      $10,309      $16,870
Cost of goods sold                    25,840      25,275       29,148      31,261       30,518      35,293        9,861       14,322
                                    ----------- ------------ ----------- -----------  ----------- ------------ -----------  -----------
Gross profit                           5,198       6,891       10,083      10,022       10,010       9,688          448        2,548
Operating expenses:
     Selling, general and
     administrative                    4,848       5,942        6,708       6,603        6,446       6,354        1,536        1,689
     Research and development          3,001       2,343        1,978       2,079        2,955       2,632          485          413
     Amortization of goodwill and
         other intangible assets         839         839          839         839        2,568      13,969         -            -
                                    ----------- ------------ ----------- -----------  ----------- ------------ -----------  -----------
Operating income (loss)               (3,490)     (2,233)         558         501       (1,959)    (13,267)      (1,573)         446
Interest income (expense)                506         212           36         (53)         (78)        (90)         666          536
Other income (expense)                 1,647           7          286         309          358         108          230          107
Equity earnings in affiliate              52         150          153         110          448       1,041        1,647        1,285
                                    ----------- ------------ ----------- -----------  ----------- ------------ -----------  -----------
     Income (loss) before income
     taxes                            (1,285)     (1,864)       1,033         867       (1,231)    (12,208)         970        2,374
Income tax benefit (provision)           202         618         (282)       (311)          (2)      5,399          483         (120)
                                    ----------- ------------ ----------- -----------  ----------- ------------ -----------  -----------
    Net income (loss)                $(1,083)    $(1,246)     $   751     $   556      $(1,233)    $(6,809)     $ 1,453      $ 2,254
                                    =========== ============ =========== ===========  =========== ============ ===========  ===========`

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## NOTE 14.  PROPERTY, PLANT AND EQUIPMENT

The composition of property, plant and equipment follows (in thousands):

`Fiscal Years Ended
                                                     June 29, 2002  June 30, 2001
                    Land...........................   $       270    $       270
                    Building.......................           226            226
                    Machinery and equipment........        13,138         12,830
                    Office furniture and equipment.         2,766          2,551
                    Leasehold improvements.........         1,671          1,667
                    Other..........................           578            200
                                                    --------------------------------
                                                      $    18,649    $    17,744
                                                    ================================`

Depreciation expense was
approximately $2.2 million, $2.1 million, and $1.8 million for the years ended
June 29, 2002, June 30, 2001, and July 1, 2000,
respectively.

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ITEM 9:  Changes in and Disagreements With Accountants and Financial Disclosure

Applied Films Corporation
determined, for itself and on behalf of its subsidiaries, to dismiss its
independent auditors, Arthur Andersen LLP (Andersen) and to engage
the services of Ernst & Young LLP as its new independent auditors. The
change in auditors was approved by the Audit Committee and the Board of
Directors of the Company and was effective as of June 11, 2002. As a
result, Ernst & Young LLP has audited the financial statements of the
Company and its subsidiaries for the fiscal year ending June 29, 2002.

Andersens report on
the Companys consolidated financial statements for the past two years did
not contain an adverse opinion or disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principles. During the
last two fiscal years of the Company and through the termination of
Andersens services on June 13, 2002 (the Relevant
Period), there were no disagreements with Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to Andersens satisfaction, would
have caused Andersen to refer to the subject matter of the disagreement(s) in
connection with its reports. Also, during the Relevant Period, there were no
reportable events as described in Item 304(a)(1)(v) (Reportable
Events) of the Securities and Exchange Commissions (the
Commission) Regulation S-K.

## 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 2002 annual meeting of shareholders to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this report relates (the 2002 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 2002 Proxy Statement
and is incorporated herein by reference.

## ITEM 12:  Security Ownership of Certain Beneficial Owners and Management

Information required to be
furnished by Item 403 of Regulation S-K is included in our 2002 Proxy Statement
and is incorporated herein by reference.

## ITEM 13:  Certain Relationships and Related Transactions

Information required to be
furnished by Item 404 of Regulation S-K is included in our 2002 Proxy Statement
and is incorporated herein by reference.

## PART IV

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

|(a) | The following documents are filed as part of this report:
|--- | ---------------------------------------------------------
|    | 1.                                                       
|    |                                                          
|    | 2.                                                       
|    |                                                          
|    | 3.                                                       
|    |                                                          

|58
|--

|(b) | Reports on Form 8-KThe
Registrant filed a Current Report on Form 8-K dated June 13, 2002,
disclosing in Item 4 a change in the Registrants certifying accountant.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) | ExhibitsThe response to this portion of Item 14 is submitted as a separate section of this report.                                                                
|(d) | Financial Statement SchedulesThe response to this section of Item 14 is submitted as a separate section of this report.                                           

|59
|--

# 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 26, 2002 | 
| | --- | -------------------------------------------------------------- | 

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 26,  2002.  The persons  named below each herby  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                                                                                             
| | ----------------------------------------------- |  | --------------------------------------------------------------------------------------------------
| | /s/ Richard P. Beck
Richard P. Beck             |  | Director, Chairman of the Board                                                                   
| | /s/ Thomas T. Edman
Thomas T. Edman             |  | Director, President, and Chief Executive
Officer (principal executive officer)                    
| | /s/ Lawrence D. Firestone
Lawrence D. Firestone |  | Treasurer and Chief Financial Officer and 
Secretary (principal financial and 
accounting officer)
| | /s/ John S. Chapin
John S. Chapin               |  | Director                                                                                          
| | /s/ Vincent Sollitto
Vincent Sollitto, Jr.      |  | Director                                                                                          
| | /s/ Chad D. Quist
Chad D. Quist                 |  | Director                                                                                          



---

## EXHIBIT INDEX

|Exhibit No. | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         | Amended and Restated Articles of Incorporation of Applied Films Corporation, as
amended, are incorporated by reference to Exhibit 3.1 of Registrants
Annual Report on Form 10-K for the fiscal year ended June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                
|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), by reference to Exhibit 4.2 of
          Registrant's Registration Statement on Form S-8 (Reg. No. 333-47967) to reference to Exhibit 4.2 of
          Registrant's Registration Statement on Form S-8 (Reg. No. 333-38426) any by reference to Exhibit 4.2
          and 4.3 of Registrant's Registration Statement on Form S-8 (Reg. No. 333-56376) and the Fifth
          Amendment to the 1997 Stock Option Plan is attached hereto as Exhibit 10.2.
|10.3        | Employee Stock Purchase Plan, as amended, is incorporated by reference to Exhibit 10.3 of
          Registrant's Registration Statement on Form S-1, as amended (Reg. No. 333-35331), by reference to
          Exhibit 4 to the Registrant's Registration Statement on Form S-8 (Reg. No. 333-47951) and by
          reference to Exhibit 4.2 on Registrant's Registration Statement on Form S-8 (Reg. No. 333-56378) and
          the Fourth Amendment to the Employee Stock Purchase Plan is attached hereto as Exhibit 10.3.                                                                                                       
|10.4        | Form of Indemnity Agreement between Registrant and each of its Directors and Executive Officers is
                 incorporated by reference to Exhibit 10.4 of Registrant's Registration Statement on Form S-1, as
                 amended (Reg. No. 333-35331).                                                                                                                                                                                                                                                                                                                                                                      
|10.5        | Lease Agreement dated January 30, 1998, between 9586 East Frontage Road,
Longmont, CO 80504 LLC and Registrant is incorporated by reference to Exhibit
10.9 of Registrants Quarterly Report on form 10-Q for the fiscal quarter
ended December 27, 1997.                                                                                                                                                                                                                                                                                                                                                                                
|10.6        | Agreement, dated November 18, 1997, between Nippon Sheet Glass Co., Ltd., NSG Fine Glass Co., Ltd.
                 and Registrant is incorporated by reference to Exhibit 10.8 of Registrant's Annual Report on Form
                 10-K for the fiscal year ended June 27, 1998.                                                                                                                                                                                                                                                                                                                                                     
|10.7        | Amended and Restated Credit Agreement, dated September 17, 1999, between
Registrant and Bank One, Michigan, is incorporated by reference to Exhibit 10.7
of Registrants Annual Report on Form 10-K for the fiscal year ended July
3, 1999.                                                                                                                                                                                                                                                                                                                                                                                              
|10.8        | Security Agreement dated June 30, 1994, between Registrant and Bank
One, Michigan, formerly NBD Bank, is incorporated by reference to Exhibit 10.5
of Registrants Registration Statement on Form S-1, as amended (Reg.
333-35331).                                                                                                                                                                                                                                                                                                                                                                                                      
|10.9        | Outside Director Stock Option Plan is incorporated by reference to Exhibit 4.1 of Registrant's
                 Registration Statement on Form S-8 (Reg. No. 333-95367), and by reference to Exhibits 4.2 and 4.3 of
                 Registrant's Registration Statement on Form S-8 (Reg. No. 333-75164).                                                                                                                                                                                                                                                                                                                              
|10.10       | Share Purchase and Exchange Agreement dated October 18, 2000, between
Registrant, AFCO GmbH & Co. KG, Balzers Process Systems GmbH and Unaxis
Holding AG is incorporated by reference to Exhibit 2.1 of Registrants
Current Report on Form 8-K dated December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                 



---

|10.11 | Amendment Agreement dated December 29, 2000, between Registrant, AFCO GmbH &
Co. KG, Balzers Process Systems GmbH and Unaxis Holding AG is incorporated by
reference to Exhibit 2.2 of Registrants Current report on Form 8-K dated
December 31, 2000.                                                                    
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12 | Second Amendment Agreement dated February 27, 2002, between Applied Films
Corporation, Applied Films GmbH & Co. KG, Balzers Process Systems GmbH and
Unaxis Holding AG is incorporated by reference to Exhibit 2.7 of
Registrants Current Report on Form 8-K/A dated December 31, 2000.                                   
|10.13 | Contribution Agreement dated December 29, 2000, between Balzers Process Systems
GmbH and Leybold Coating GmbH & Co. KG is incorporated by reference to
Exhibit 2.3 of Registrants Current Report on Form 8-K dated December 31,
2000.                                                                                     
|10.14 | Bravo Intellectual Property License Agreement dated December 31, 2000, between
Balzers Process Systems GmbH and Leybold Coating GmbH & Co. KG is
incorporated by reference to Exhibit 2.4 of Registrants Current Report on
Form 8-K dated December 31, 2000.                                                              
|10.15 | Newco Intellectual Property License Agreement dated December 31, 2000, between
Balzers Process Systems GmbH and Leybold Coating GmbH & Co. KG is
incorporated by reference to Exhibits 2.5 of Registrants Current Report on
form 8-K dated December 31, 2000.                                                             
|10.16 | Securities Purchase Agreement dated January 16, 2001, between Registrant and the
purchasers identified on the signature pages thereto is incorporated by
reference to Exhibit 10.1 of Registrants Current Report on Form 8-K dated
January 16, 2001.                                                                      
|10.17 | Registration Rights Agreement dated January 16, 2001, between Registrant and the
investors identified on the signature pages thereto is incorporated by reference
to Exhibit 10.2 of Registrants Current Report on Form 8-K dated January
16, 2001.                                                                       
|10.18 | Common Stock Warrant No. 1 dated January 16, 2001 is incorporated by reference to Exhibit 10.3 of
Registrant's Current Report on Form 8-K dated January 16, 2001.                                                                                                                                                          
|10.19 | Common Stock Warrant No. 2 dated January 16, 2001 is incorporated by reference to Exhibit 10.4 of
Registrant's Current Report on Form 8-K dated January 16, 2001.                                                                                                                                                          
|10.20 | Common Stock Warrant No. 3 dated January 16, 2001 is incorporated by reference to Exhibit 10.5 of
Registrant's Current Report on Form 8-K dated January 16, 2001.                                                                                                                                                          
|10.21 | Common Stock Warrant No. 4 dated January 16, 2001 is incorporated by reference to Exhibit 10.6 of
Registrant's Current Report on Form 8-K dated January 16, 2001.                                                                                                                                                          
|10.22 | Lease Agreement between RWE Systems Immobilren GmbH & Co. KG/Lahmeyer
Grandbesitz GmbH & Co. KG and Applied Films GmbH & Co. KG dated January
31, 2001 for the Alzenau, Germany facility, is incorporated by reference to
Exhibit 10.22 of Registrants Annual Report on Form 10-K for the fiscal
year ended June 30, 2001.
|10.23 | Commercialization Agreement between The Coca-Cola Company, KRONES AG and Applied
Films GmbH & Co. KG (as assignee of Balzers Process Systems GmbH) effective
September 1, 2000, is incorporated by reference to Exhibit 10.23 of the
Registrants Annual Report on Form 10-K/A for the fiscal year ended
June 30, 2001.    
|10.24 | Non-Employee, Non-Director Officer and Consultant Non-Qualified Stock Option
Plan dated October 24, 2001 is incorporated by reference to Exhibit
10.3 of Registrants Quarterly Report on Form 10-Q for the fiscal quarter
ended December 29, 2001.                                                                        
|11.1  | Statement re: computation of per share earnings.                                                                                                                                                                                                                                                                           
|21.1  | Subsidiaries of Applied Films Corporation is incorporated by reference to Exhibit 21 of Registrant's
       Registration Statement on Form S-1, as amended (Reg. No. 333-68476).                                                                                                                                           



---

|23.1 | Consent of Ernst & Young LLP.                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------
|24.1 | Power of Attorney (included on page 60).                                                                                                        
|99.1 | Certificate of the Chief Executive Officer and President of Applied Films
Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|99.2 | Certificate of the Chief Financial Officer of Applied Films Corporation pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.              

Exhibits not contained in this document can be obtained on the SEC website: WWW.SEC.GOVor contact Applied Films
Corporation, Investor Relations Department.



---

## EXHIBIT 10.2

# FIFTH AMENDMENT TO THE

APPLIED FILMS CORPORATION

1997 STOCK OPTION PLAN

# BACKGROUND

1.        Effective  April 29, 1997,  Applied Films  Corporation  (the  "Company"  adopted and approved the
Applied Films Corporation 1997 Stock Option Plan (the "Company") which plan has been subsequently amended.

2.        The  Company  desires  to amend  the Plan to  provide  that  options  granted  under the Plan may
include either incentive stock options or nonqualified stock options.

# AGREEMENT

1.        The third  sentence of the first  paragraph of Section 6 of the plan is deleted and replaced with
the following sentence:

| | All stock options granted pursuant to the Plan shall be designated as either (i)
incentive stock options intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the Code), or (ii) nonqualified
stock options.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.        Except  as  otherwise  set forth  herein,  the terms of the Plan are  hereby  ratified  and shall
continue in full force and effect.

Approved by the Board of Directors of the Company effective as of April 25, 2001.

| | APPLIED FILMS CORPORATION
| | -------------------------

| | By: | /s/ Lawrence D. Firestone
Lawrence D. Firestone, Secretary | 
| | --- | ---------------------------------------------------------- | 



---

## EXHIBIT 10.3

# FOURTH AMENDMENT TO

APPLIED FILMS CORPORATIONEMPLOYEE STOCK PURCHASE PLAN

# BACKGROUND

1.        Effective  September 19, 1997,  Applied Films Corporation (the "Company") adopted and approved the Applied
Films Corporation Employee Stock Purchase Plan, as amended (the "Plan").

2.        The Company desires to Amend the Plan as provided in this Fourth Amendment.

# AGREEMENT

1.        The final sentence of Section 5 of the Plan is hereby amended to read in its entirety as follows:

| | Thereafter, so long as the Plan remains in effect, a new Option Period shall commence every six
(6) months, beginning on the first business day of May and November, respectively.  Purchase to be priced on the
last business day of April and October, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.        Except as hereinabove provided, the Plan shall remain in full force and effect.

Approved by the Board of Directors of the Company on April 17, 2002.

| | APPLIED FILMS CORPORATION
| | -------------------------

| | By: | /s/ Lawrence D. Firestone
Lawrence D. Firestone, Secretary | 
| | --- | ---------------------------------------------------------- | 



---

## EXHIBIT 11.1

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

                                                                              June 29, 2002
                                                                              -------------
                BASIC EARNINGS PER SHARE
                Net loss applicable to common stockholder                     $     (1,337)
                Weighted average number of common shares outstanding              9,628,058
                Basic earnings per share                                      $      (0.14)

                DILUTED EARNINGS PER SHARE
                Net loss                                                      $     (1,022)
                Weighted average number of common shares outstanding              9,628,058
                Assuming exercise of stock options                                  830,574
                Assuming repurchase of treasury stock                             (545,948)
                                                                              -------------
                   Net incremental shares                                           284,626
                Weighted average number of common shares
                   Outstanding, as adjusted                                       9,912,684
                Diluted earnings per share                                    $      (0.10)`



---

## EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-59984 and Form S-8 Nos. 333-47951, 333-47967, 333-38426,
333-51175, 333-95367, 333-56376, 333-75164 and 333-56378) of Applied Films
Corporation and in the related Prospectus of our report dated July 22, 2002,
with respect to the consolidated financial statements of Applied Films
Corporation included in this Annual Report (Form 10-K) for the year ended June 29, 2002.

|Denver, Colorado
August 26, 2002 | /s/ ERNST & YOUNG LLP
|-------------------------------- | ---------------------



---

## EXHIBIT 99.1

I, Thomas T. Edman, Chief Executive Officer and President of Applied Films Corporation, certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)        the Annual Report on
Form 10-K for the fiscal year ended June 29, 2002 which this statement
accompanies fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, and

(2)        the information contained in the Annual Report on Form 10-K for the fiscal year ended June 29, 2002
fairly presents, in all material respects, the financial condition and results of operations of Applied Films
Corporation.

Dated:  August 26, 2002

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



---

## EXHIBIT 99.2

I, Lawrence D. Firestone, Chief Financial Officer of Applied Films Corporation, certify, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

(1)        the Annual Report on
Form 10-K for the fiscal year ended June 29, 2002 which this statement
accompanies fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, and

(2)        the information contained in the Annual Report on Form 10-K for the fiscal year ended June 29, 2002
fairly presents, in all material respects, the financial condition and results of operations of Applied Films
Corporation.

Dated:  August 26, 2002

| | /s/ Lawrence D. Firestone
Lawrence D. Firestone
Chief Financial Officer, Treasurer
      and Secretary | 
| | ------------------------------------------------------------------------------------------------------ |