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

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

                                       OR

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

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

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

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



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

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

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

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

                   Common Stock, no par value (Title of Class)

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

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

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

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

ITEM 1:  Business

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

ITEM 1(a):  General Development of Business

General

     We are 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. Our high volume, large area deposition
systems  are used by our  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 our customers' products.

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

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

     On December 31, 2000, we acquired the Large Area Coatings  division ("LAC")
of Unaxis.  The LAC  division  is now  operating  as Applied  Films  Germany,  a
wholly-owned  subsidiary  of Applied Films  Corporation  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. We are also pursuing the market for coatings on PET bottles for
soft drinks and other beverage markets.

Industry Background

     Flat  Panel  Displays.  FPDs are found in a wide  variety of  consumer  and
industrial products, including cellular telephones, personal digital assistants,
calculators,  laptop computers,  pagers,  scientific  instruments,  televisions,
portable video games,  gasoline  pumps,  automotive  instruments,  point-of-sale
terminals and a number of other electronic devices.  According to DisplaySearch,
the FPD market is expected to grow from  approximately  $11.8 billion in 1998 to
approximately  $80  billion by 2007,  an annual  growth rate in excess of 27.0%.
Growth  in  the  FPD  industry  is  being  driven  by a  number  of  market  and
technological forces, including:

     -    the strong growth in wireless and portable communication devices;

     -    increased consumer demand for displayed information, driven largely by
          the accessibility of information and entertainment on the Internet;

     -    technical  characteristics  of FPDs that make them ideally  suited for
          portable  display  applications,  including thin profile,  low weight,
          high resolution and lower power consumption; and

     -    the emergence of larger high resolution displays such as active matrix
          LCDs and plasma  displays as  attractive  and viable  alternatives  to
          CRTs.

                                       1
<PAGE>
     We address two distinct  markets  within the FPD  industry:  the market for
thin film  coated  glass and the market  for thin film  coating  equipment.  The
market for our thin film coated glass is primarily comprised of manufacturers of
products using black and white displays,  such as those in cellular  telephones,
calculators,  or electronic games. These  manufacturers  typically purchase thin
film coated glass from specialized suppliers such as ourselves.

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

     With shorter product development cycles and rapidly evolving  technologies,
manufacturers  are  seeking   relationships  with  suppliers  that  can  clearly
demonstrate  technical  expertise in complex thin films with the ability to meet
performance expectations and decrease time to market.

     Web  Applications.  The  markets  using web coated  products  are broad and
varied  and  often   completely   independent  of  one  another.   The  products
manufactured  using  our web  coating  technology  are large  rolls of  flexible
substrate,  usually  thin  plastic or a thin metal foil that  require a barrier,
conductive or decorative layer to be utilized in an end product. The majority of
the market growth is driven from two markets, consumer products and electronics.
The growth engine for each of these markets is different. Growth in the consumer
products market as it relates to web coaters is driven by:

     -    demand for products packaged in bags

     -    demand for decorative packaging using foils to enhance consumer appeal

     -    growth in demand for decorative packaging from developing countries.

Growth in the electronics market as it relates to web coaters is as follows:

     -    demand  for  anti-reflective  films for FPD's for the laptop and AMLCD
          markets

     -    demand for touch panel applications

     -    demand for  capacitors as the  capacitor  market  migrates  toward dry
          capacitors.

     Web  coaters  deposit a thin film that  adheres to paper,  plastic or foil,
which  creates a barrier  coated  substrate to enhance the product shelf life or
the opportunity for decorative applications used to enhance the look of packaged
food.  An example  would be the barrier  film on a potato chip bag. In addition,
films are used for certain electronic applications, including capacitors where a
specialized  thin film coated foil is produced  and used as a key  component  of
this  new  market.  The  acquisition  of  LAC  introduces   flexible  substrates
evaporative deposition and barrier coating technology to our product lineup. Our
products deposit thin film layers on rolled material, both plastics and foil, as
the  substrate  moves  through our  machines  at high speed  through a series of
rollers  from a source  roll to a take up roll  where  the  material  exits  the
system.

     We offer our customers a fully integrated  solution and we have the largest
installed base of web coating systems with over 400 systems installed across the
broad line of product offerings for this industry.

     Architectural,  Automotive  and  Solar  Glass  Market.  These  markets  are
addressed  by our large glass  systems.  The products  manufactured  using these
systems are large glass  substrates that through the use of thin films become an
integral  component for the performance of the end product.  The majority of the
market growth is driven from three markets: architectural,  automotive and solar
glass. Growth in these markets is driven by the following:

     -    demand for energy conservation

     -    economic expansion driving commercial and residential growth

     -    expansion in automotive demand

     -    demand for alternative energy sources.

                                       2
<PAGE>
     Glass is used in building  and  construction  throughout  the world and the
manufacturers  of these  products  are  constantly  challenged  to  improve  the
properties  of the glass to resist  environmental  factors  such as UV light and
enhance the  functionality  of the building by using coated glass for heat/solar
control (low-e coatings).

     Automotive  glass  manufacturers  seek to  incorporate  heat/solar  control
properties  in their  glass  as a means of  improving  the  efficiency  of their
heating and/or air conditioning  systems. The architectural and automotive glass
markets  are  well   established   markets.   In  these  markets,   large  glass
manufacturers  install thin film coating  technology  in their glass  production
process to enable them to sell a higher value added  product to their  customer.
These  markets are mature and we expect  growth rates to be lower than our other
markets.

     The most recent  addition to this product area is equipment  that addresses
the solar  market.  Solar energy has been a mainstay in the  alternative  energy
segment  for a number of years.  As energy  costs  rise and as demand  surpasses
supply, solar power becomes a viable alternative.  Solar cells require a complex
thin film stack and,  as this  market  develops,  we will  continue  to position
ourselves with the thin film coating technology and equipment required to enable
the commercialization of these products.

     Barrier  Coatings for PET  bottles.  PET bottles have been used in the soft
drink industry for a number of years, particularly in the United States. Outside
the United States, glass bottles are widely used in all segments of the beverage
industry.  The beverage industry  continues to experience  pricing pressures and
pressure to reduce costs. Glass bottles are heavy and the cost of the raw bottle
as well as the costs associated with the  transportation,  material handling and
logistics of glass bottles will, we believe,  cause bottlers to increasingly use
PET bottles in other parts of the world.

     According to Petrochemical  Consulting  International,  carbonated beverage
bottlers consume 44% of the worlds PET production.  This consumption is expected
to grow at a rate  of 10% per  year  throughout  2007.  Additionally,  the  beer
bottling  industry  which  currently  consumes  less than 0.5% of the worlds PET
production is expected to grow to 4% by 2007.

     Factors driving this growth are the bottlers' desire to:

    -     reduce weight

    -     save transportation and component costs

    -     increase safety

    -     produce PET bottles with  materially the same barrier  characteristics
          as a glass bottle

     PET bottles are widely accepted in many carbonated  beverage markets around
the world, but the latest entrance is in the beer market.

     Approximately  five years ago, The Coca-Cola  Company  invested in the base
technology for applying barrier layers to the outside of PET bottles.  Coca-Cola
acquired various  intellectual  property rights and began working with engineers
at Krones AG and the LAC division to develop a high speed method for  depositing
barrier  layers on PET bottles to improve the shelf life of the  product.  After
several years of research and development,  the LAC division  developed a viable
production method.

     We have agreed to make the barrier coating deposition equipment and sell it
through  Krones AG to Coca-Cola and other beverage  companies.  We jointly share
rights to the technology  and anticipate  expansion of these products into other
markets such as the beer industry.

Strategy

     Our  objective  is to be the leading  global  supplier  of coating  process
technology and thin film deposition equipment to the markets we serve. Essential
elements of our strategy include the following:

     Continue to Develop New Coating and Process  Technologies  for Existing and
Emerging Markets.  We are using our thin films expertise to address the evolving
needs of our markets. For example, we pioneered the commercialization of several
advanced process technologies including the application of MgO, indium tin oxide
("ITO") and chrome copper chrome  ("CrCuCr") on glass. In addition,  we recently
developed coatings for the touch screen and microdisplay  markets, and initiated
sample testing of thin films for use in organic LEDs ("OLEDs"). Our coated glass
operations in Longmont support these and other process development efforts as we
use those  capabilities  in the  commercialization  of thin films.  We pioneered
silicon  barrier  coatings on PET bottles,  and other thin film  applications on
flexible substrates.  We hold

                                       3
<PAGE>
over 200  patents  and we intend to  continue to develop new coating and process
technologies to meet the evolving needs of our customers.

     Leverage and Extend Our  Leadership By Continuing To Invest In Research and
Development.  We leverage our thin film  technology and process  capabilities to
address  the  evolving  requirements  for  more  sophisticated,  technologically
advanced products and  applications.  We must continue to invest in research and
development to ensure that we stay on the leading edge of deposition  technology
for  our  markets.  We  believe  our  technological  capabilities,   history  of
designing, developing and improving our own thin film manufacturing systems, and
extensive  operational  experience  provide us with  competitive  advantages  in
selling  coated glass to FPD  manufacturers  and thin film coating  equipment to
several industries.

     Capture Market Share and Opportunities Created by Growing Demand in Our End
Markets.  As  consumers  continue to demand  more  sophisticated  displays,  FPD
manufacturers are focusing on and increasing capacity to produce high resolution
displays. Food packaging companies continue to focus on reducing their packaging
costs through thin film  development  and are  expanding  their markets to areas
where packaged products are growing rapidly. Automotive, architectural and solar
glass  manufacturers  are  challenging  existing  technology  to reduce cost and
enhance their low-e products.  The conversion from glass beverage bottles to PET
bottles and the ongoing  issues of product  freshness  continue to challenge the
technology in that market. We will continue to align our products and technology
with our customers to ensure that we have the  technology of choice,  which will
enable us to grow with these markets.

     Capitalize  On  Our  Global  Customer  Support  Network.   We  realize  the
importance of our equipment to our  customers'  success.  We meet our customers'
needs by providing in-house and on-site training,  ongoing customer service, and
support  through all phases of  development  and  production.  Our expertise and
experience  as a supplier of thin film coated glass is a  competitive  advantage
that enables us to better assist customers in installing,  testing and operating
the coating equipment we provide.  This hands-on training and support,  combined
with our modular  design,  benefits our  customers by reducing  start-up  times,
maximizing equipment uptime and improving operational efficiencies.

ITEM 1(b):  Financial Information About Industry Segments

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

ITEM 1(c):  Narrative Description of Business

Products

     Our thin  film  coating  systems  are used in many  different  applications
spanning  four distinct  markets.  We design and  manufacture  thin film coating
equipment  for our own in-house  production of coated glass both in Longmont and
in China.  We also  supply  thin film coated  glass  primarily  for LCDs used in
wireless communication devices and other electronic devices.

                                       4
<PAGE>
    The following table illustrates our principal products:
<TABLE>
Market Product Line                               Deposition Method                         General Price Range *
-------------------                               -----------------                         ---------------------
<S>                                               <C>                                        <C>
Display Systems:
     ATX-700                                      Physical Vapor Deposition                          $4-7 million
     New Aristo                                   Physical Vapor Deposition                          $4-7 million
     ZV350                                        Physical Vapor Deposition                          $2-3 million
     BTX                                          Physical Vapor Deposition                          $1-3 million
Web Coaters:
     Multiweb                                     Physical Vapor Deposition                          $4-8 million
     Top Met                                      Evaporative Deposition                             $1-3 million
     Top Beam                                     Evaporative Deposition                             $4-6 million
     Multi Met                                    Evaporative Deposition                             $1-3 million
Architectural, Automotive and Solar Coaters:
     Terra-G                                      Physical Vapor Deposition                        $10-20 million
     A-Series                                     Physical Vapor Deposition                         $7-15 million
     Solaristo                                    Physical Vapor Deposition                          $4-7 million
PET Bottle Barrier Technology:
     BestPET(TM)LG-20                             Evaporative Deposition                             $1-3 million
</TABLE>

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

     The  following  table  sets  forth  our net  revenue  (net of  returns  and
allowances) by our major product  categories and industry  segments for our last
three fiscal years:
<TABLE>

                                                Fiscal Year Ended
                               -----------------------------------------------------
                                 June 30, 2001    July 1, 2000      July 3, 1999
                               -----------------------------------------------------
                                                  (in thousands)
<S>                             <C>               <C>                <C>
Total Thin Film Coated Glass       $    27,523      $    35,159       $    26,906
Thin Film Coating Equipment             85,192            7,133             4,617
                               -----------------------------------------------------
Total Net Sales                    $   112,715      $    42,292       $    31,523
                               =====================================================
</TABLE>

Thin Film Coating Equipment

     Display Systems

     The ATX-700  Series.  The ATX-700 is an advanced  thin film coating  system
that  provides a solution to the  increasing  display  size and  low-particulate
requirements  of PDPs  and  other  FPDs.  The  ATX-700  features  near  vertical
sputtering of glass  substrates,  a minimized  footprint  (half of a traditional
in-line system), lower particulate levels, and reduced manual labor requirements
because  of  robotic  handling.  The  ATX-700 is  particularly  well  suited for
handling the large sheets of glass processed in the PDP  manufacturing  process.
The ATX-700 is modular and can be  configured to meet multiple thin film coating
requirements  for the high-end FPD market.  The ATX-700  platform is designed to
apply  other  critical  coatings  in the plasma  display  fabrication  facility,
including ITO and CrCuCr. This capability allows the display manufacturer to use
a common  platform in multiple  locations in the  manufacturing  line,  creating
operational efficiencies.

     The New ARISTO. The recently introduced New Aristo is an advanced thin film
coating system that provides a solution to the  increasing  display size driving
larger mother glass sizes and low particulate  requirements of the active matrix
LCD and color STN markets. The New Aristo is designed to apply critical coatings
such as  low-temperature  ITO and black matrix  chrome for the Active Matrix LCD
market to the glass substrate. The New Aristo features high throughput, low cost
of ownership and the capability for double-sided coatings.

     The ZV350.  The ZV series is a thin film  coating  system  that  provides a
solution for pilot  production LCD fabrication  operations.  The ZV 350 features
low throughput,  low particulate requirements and smaller glass sizes. The ZV350
is able to coat, on a small scale,  all materials  coated by the ATX-700 and New
Aristo.

                                       5
<PAGE>
     The BTX Series Batch Coaters.  The BTX series is a small sputtering  system
that  consists of a single  chamber  designed to deposit high  quality  films on
display  glass at a very low rate.  These  machines  are ideally  suited for the
color filter manufacturers supplying coated substrates to the color STN market.

Web Coating Systems

     Our web  coating  technology  is  designed to use thin films to enhance the
material  properties on flexible substrates used in various markets such as food
packaging,   decorative  packaging  or  electronic   applications  such  as  EMI
shielding, dry capacitors, and touch panel applications.

     Multiweb.  Our multiweb systems use physical vapor deposition  processes to
apply conductive coatings primarily for touch panel applications.

     Top Met.  Our Top Met Web Coater is an advanced  thin film  coating  system
that provides a solution for coating metal materials on flexible substrates. The
Top Met uses thermal evaporation to deposit thin layers of aluminum in vacuum on
to flexible substrates, usually film, paper or textiles in roll format.

     Top Beam.  Our Top Beam Web Coater is an advanced thin film coating  system
that uses electron beam evaporation  technology to produce  transparent  barrier
coatings used in the food packaging industry.  The Top Beam Web Coaters use high
powered electron beam guns to evaporate metal or metal oxide.

     Multi Met. The Multi Met Web Coater is an advanced film coating system that
uses evaporative  deposition  technology to deposit thin films on very thin foil
at high  speed in vacuum  for the  capacitor  market.  The Multi Met  offers the
ability to mask specific patterns on substrates.

Architectural and Automotive Coating Systems

     Architectural and Automotive  Coating  Equipment.  Our Architectural  Glass
Coating technology is designed to apply low-e coatings on large glass substrates
used in building glass and automotive windshields.

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

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

Barrier Coating Systems

     PET  Bottle  Barrier  Technology.  Our PET  Bottle  barrier  technology  is
designed to enhance the material  properties  on PET beverage  bottles to extend
the shelf life of the beverage within.

     BestPET(TM) - LG20. Our BestPET(TM) LG20 System is a leading technology for
coating barrier properties  including silicon oxide on plastic bottles at a rate
of 20,000  bottles per hour.  The coatings  are  deposited on the outside of the
bottle using  evaporation  technology and the coatings are  transparent.  We are
actively pursuing this new market.

     GMS Tester.  Our GMS Tester is a leading technology for testing the Barrier
Improvement Factor ("BIF") for PET bottles.  These systems use gas and vacuum to
test the permeability of the PET bottles produced and coated on the LG-20.

Thin Film Coated Glass

     TN Coated  Glass.  We are one of the world's  leading  producers of twisted
nematic ("TN") coated glass,  which is used for low  resolution  black and white
LCDs. Our customers  incorporate  these LCDs into consumer products that include
watches, calculators, and electronic instruments. To produce TN coated glass, we
use our proprietary  in-line coating systems to deposit SiO(2) and ITO onto high
quality  glass  panels.  We then package and ship the coated glass panels to our
customers for incorporation into their products.

     STN Coated  Glass.  One portion of our coated glass  business is the market
for STN coated  glass.  STN coated glass is used for high  resolution  black and
white LCDs used in cellular  telephones,  personal  digital  assistants,  office
copiers,

                                       6
<PAGE>
portable  video games and related  products.  The market for STN coated glass is
particularly impacted by demand for wireless  communication  devices. STN coated
glass  requires  thicker  thin film  coating  layers and greater  uniformity  to
improve  conductivity.  Because it is more complex and expensive to produce than
TN coated glass, STN coated glass presently provides us with higher revenues and
gross margins for each panel of glass produced.

     Touch Screens. In June of 1999, we entered into a joint marketing agreement
with Information  Products,  Inc., covering worldwide marketing and distribution
of coated glass for touch screen  applications.  We began commercial  production
and shipment of touch screen  products in the fourth  calendar  quarter of 1999.
Touch  screens  are used as the input  interface  on a variety of  consumer  and
industrial  products,  including  the high growth PDA and related  communication
markets.  To produce the coatings used in touch screens, we deposit a very thin,
highly uniform layer of ITO. In addition,  we are developing optical coatings to
meet anti-reflection requirements in this market.

     Microdisplay  Coated Glass.  The most rapidly growing portion of our coated
glass business is the market for  microdisplay  coated glass. In fiscal 2001, we
gained  market  acceptance  and began  shipping  coated  glass to this  emerging
industry.  Microdisplays are used in several applications such as DLP projection
LCD devices,  projection  televisions  and high quality  small  displays used on
devices such as digital cameras and hand held video recorders.  We are providing
a coated substrate with thin films on both sides of the glass,  consisting of an
index matched ITO on one side and anti-reflective coatings on the other.

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

Sales, Marketing and Customers

     Sales of our  equipment  involve a  broad-based  effort at  various  levels
within  our  organization.  Much of the sales  effort in the  equipment  area is
undertaken by our technical and  marketing  groups,  including  sales offices in
Germany,  Hong Kong, Belgium,  Taiwan,  Korea, Japan and China. Other personnel,
including  our  Chief  Executive  Officer,  Executive  Vice  President  and Vice
President,  make  regular  trips to visit  our  customers  around  the  world to
finalize contracts and ensure proper customer service.  The sales cycle for thin
film coating equipment is long, involving multiple visits to and by the customer
and up to twelve months of technical  sales effort.  Equipment sales efforts are
assisted by  independent  sales and service  representatives  in each region who
have been  selected  with an  emphasis  on their  ability to provide  post sales
service  and  support.  We usually  sell our thin film  coating  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.

     Approximately  67% of our fiscal 2001 gross sales were derived from exports
to our customers  outside of our  manufacturing  centers in the United Sates and
Europe,  primarily to Asia. In fiscal 2001, our ten largest customers  accounted
for approximately 35% of our gross sales. The principal demand for FPD thin film
coated glass is in Asia, and our customers for thin film coating  equipment have
historically been located in Japan,  Korea, China, Taiwan and the United States.
We believe  our  potential  geographic  market for thin film  coating  equipment
includes all the major geographic regions.

     We schedule production of our systems based upon order backlog and customer
requested  delivery.  Because  shipment  dates may be changed and  customers may
cancel  or delay  orders  with  little  or no  penalty,  our  backlog  as of any
particular  date  may  not be a  reliable  indicator  of  actual  sales  for any
succeeding  period.  At June 30, 2001, we had a backlog of  approximately  $99.2
million compared with a backlog of approximately $8.8 million at July 1, 2000.

                                       7
<PAGE>
    The following table sets forth our net revenues by geographic region:
<TABLE>

                                           Fiscal Year Ended
                          ----------------------------------------------------
                           June 30, 2001     July 1, 2000      July 3, 1999
                          ----------------------------------------------------
                                            (in thousands)
<S>                        <C>               <C>               <C>
Asia (other than Japan)       $    48,206      $    24,641       $    17,691
Japan                              27,552           13,929             7,645
United States                      13,764            2,934             4,924
Europe and Other                   23,193              788             1,263
                          ----------------------------------------------------
Total                         $   112,715      $    42,292       $    31,523
                          ====================================================
</TABLE>

Technology

     We believe that our expertise in process and product  engineering,  as well
as research and development  enables us to rapidly develop new  technologies and
products in response to emerging industry trends.  The breadth of our technology
enables  us to  offer  our  customers  a  combination  of thin  film  technology
solutions,  which we believe is critical for today's rapidly  evolving thin film
applications markets.

     Our deposition  technology  solutions offer highly specialized  performance
functions that enhance thin film  characteristics for the electrical and optical
quality of  finished  products  used in various  industries.  For  example,  the
development  of solar control layer systems (based on Si3N4 and TiO2) offers our
customers the choice between deposition of low-e and solar control  architecture
glass layers with the most economical  production  system. The principal methods
of  deposition  that we install with our systems are physical  vapor  deposition
("PVD"), evaporation, and plasma enhanced chemical vapor deposition ("PECVD").

     While coating systems are essential to our customers'  production  process,
they are  usually  just  one  part of our  customers'  production  process.  Our
customers'  products are sold in highly  competitive  global markets  subject to
price pressures.  In many cases, our R&D efforts result in tangible cost savings
in time and  development  effort  for the  customer.  For  example,  the  recent
development  and  optimization  of on-site  process control with a Lambda sensor
saved one customer significantly in their annual production costs.

     The  coating  equipment  that we design  and  produce  enables us and other
manufacturers of thin film coated glass to apply very thin,  transparent  layers
of thin film  coatings to glass.  The coatings  which we apply are  deposited in
microscopic  thicknesses  by physically  bombarding,  or  sputtering,  a cathode
source  coating  material  (a chemical  compound  or  element)  with argon ions.
Individual  atoms and molecules of the source  material are  separated  from the
source by  bombardment  to form a vapor that condenses as a film onto the glass.
Sputtering provides many advantages  including material  flexibility,  thickness
consistency, adaptability to large substrates and high volume production, defect
and  contamination  control,  adhesion and thin film density.  Our technology of
applying a thin film  coating to glass or other  substrate  enables  the display
into which the glass or  substrate  is  incorporated  to  function  as a complex
switch which controls light emission or transmission  from each of the thousands
of segments or pixels that  comprise an FPD.  Our primary thin film coated glass
product is made by  applying  a thin layer of SiO(2) to prevent  sodium in glass
from  leeching into the thin film  conductive  coatings  which are  subsequently
applied.  After the SiO(2) is  applied,  ITO is  applied  to provide  conductive
properties,  permitting  the  glass to be used  for  various  FPD  applications.
Particularly in FPDs, optically transparent, electrically conductive films, such
as those we apply, find common  application in transferring  electrical power to
the picture elements of the displays and allowing light to pass to the viewer.

     The quality of the coatings, the cycle time of the process, the utilization
of materials,  and other factors are controlled by our  proprietary  information
and  technology.  For example,  we are improving the  utilization of the cathode
source material.  We also developed a method of reducing cathode voltage and are
developing the application of this method to ITO coatings.  We believe this will
improve  the  conductivity  of the  ITO  coating.  We  continue  to  work on the
conductivity of our ITO coatings and the barrier qualities of our SiO(2). We are
also  continuing  to work on  improving  our systems  not only to obtain  better
quality coatings, but also to obtain better utilization of coating materials.

     Technological  Foundations.  John  S.  Chapin,  Director  and  one  of  our
founders,  invented the planar  magnetron which first enabled  manufacturers  of
thin film  coated  glass  (as well as of  semiconductor  chips) to  economically
deposit sputtered thin film coatings. Another founder, Research Engineer Richard
Condon, was a pioneer in the development of the in-line coating process which is
currently  used by much of the  industry.  We believe we maintain a  competitive

                                       8
<PAGE>
advantage  because  we  design,  build and  operate  our own thin  film  coating
equipment for thin film coated glass. Further,  because our primary business was
producing  thin film coated glass,  we are able to effectively  incorporate  our
production  know-how into new generation  coating  equipment and improvements in
existing  coating  equipment.  We believe  this  provides us with a capital cost
advantage over most of our competitors.

Manufacturing and Facilities

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

     Our Alzenau,  Germany manufacturing facility contains approximately 190,000
square feet and include general  offices,  research and development  facilities,
and  manufacturing  and production  facilities.  This facility is leased from an
independent  third  party.  We design  and  manufacture  our thin  film  coating
equipment  at this  facility.  We can  concurrently  build  multiple  thin  film
deposition systems at our Alzenau Germany facility.

     We also lease space in the Hanau,  Germany facility.  We are in the process
of  transferring  operations  from Hanau to  Alzenau  and  anticipate  that this
transfer will be complete by the end of fiscal 2002.

     In fiscal  1999,  we entered  into a joint  venture with Nippon Sheet Glass
Co.,  Ltd.,  a major  Japanese  glass  manufacturer,  to supply the low and high
resolution  coated  glass market from a production  base in Suzhou,  China.  The
joint venture  facilities were  incorporated  into existing NSG glass production
facilities  and contain  approximately  60,000 square feet.  This joint venture,
Suzhou NSG -- AFC Thin Film Electronics  LTD, known as "STEC",  has involved the
transfer  of thin film coated  glass  manufacturing  capacity  to China.  In the
second half of calendar  2000,  we  transferred  a Venture  5000 system from our
Longmont facility to the STEC facilities, bringing the number of coating systems
to  three.  STEC's  location  in Asia  allows  us to  produce  coated  glass  in
facilities  immediately  adjacent to our source of raw glass,  NSG, and in close
proximity to our Asian customer base.  This  arrangement  has reduced our labor,
shipping and freight costs while  allowing us to improve  customer  service.  We
intend to continue to  leverage  STEC's  strategic  position  by  expanding  its
manufacturing  capacity in the future including an announced  expansion into the
color STN market by the Joint Venture that will be producing low temperature ITO
glass by December 2001. We will also continue to evaluate business opportunities
that strengthen our position with our customers.

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

Suppliers

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

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

Competition

     Our markets are highly  competitive and each market that we serve has major
competitors that do not generally cross over our markets.

     FPD Thin Film Coating Equipment.  For FPD thin film coating  equipment,  we
compete  against Ulvac Japan,  Ltd.,  and Anelva Ltd.  Japan,  both  established
equipment  manufacturers.  Competition  is  based  on  performance  and  process
technology,  after-sales  support and service,  and price. We believe we compete
favorably with respect to each of these factors.  Key performance and technology
issues include technical capability, systems design, product uniformity, yields,

                                       9
<PAGE>
target  utilization  and  throughput.  We are the only major  thin film  coating
equipment manufacturer that also manufactures thin film coated glass for the FPD
market.  We believe the  experience,  expertise and synergy  resulting from this
provide us with a competitive advantage.

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

     Web Coating  Equipment.  We are aware of several  web  coating  competitors
worldwide,  some of which are large companies with  significant  resources.  Our
most significant  competitors for web coating  equipment are General Vacuum,  of
the  United  Kingdom,  and Von  Ardenne,  a company  headquartered  in  Dresden,
Germany. Competition is based on performance and process technology, after-sales
support and service,  and price. We believe we compete favorably with respect to
each of these factors.  Key performance and technology  issues include technical
capability,  systems design, product uniformity,  yields, target utilization and
throughput.

     Architectural/Automotive/Solar    Glass    Equipment.    In   manufacturing
architectural  glass coaters we compete against Von Ardenne,  a German thin film
coatings company, and BOCTC,  British Oxygen Coating  Technologies  Corporation,
located  in  California.   Competition  is  based  on  performance  and  process
technology,  after-sales  support and service,  and price. We believe we compete
favorably with respect to each of these factors.  Key performance and technology
issues include technical capability, systems design, product uniformity, yields,
target utilization and throughput.

     PET Bottle Coating Equipment.  In manufacturing barrier coating systems for
PET Bottles we compete  with the Sidel  division of  Tetra-Pak,  an  established
manufacturer  of  food  packaging  products  headquartered  in  Sweden.  Our arc
evaporation process applies a barrier coating to the outside of the bottle while
Tetra-Pak's  chemical vapor deposition  ("CVD") process coats a barrier layer on
the inside of the bottle.  Competition is based on technology,  performance  and
process technology,  after-sales  support and service,  and price. We believe we
compete  favorably with respect to each of these factors.  Key  performance  and
technology  issues  include  technical  capability,   systems  design,   product
uniformity, yields, source utilization and throughput.

Research and Development

     Our success can be attributed to focused research and development  programs
in thin film technology,  processes and equipment. We will continue to emphasize
improvements  in  current  equipment  technology,  the  development  of new film
deposition capabilities,  and the modification of thin film material properties.
The  foundations  of our success are based on engineering  solutions,  extensive
experience  with vacuum  technologies,  and the depth of our commercial  coating
experience.  Our customer  oriented  solutions  include cost effective  reactive
depositions,  simplified  process  control,  and  innovative  coating  equipment
designs.  We continue to build on these traditions in the development of process
control and coater design which lower the cost of ownership to the customer.

     The  December  31,  2000  acquisition  of the  LAC  business  significantly
expanded  our  research and  development  capabilities.  We plan to continue our
commitment to new product  development in the future.  Our level of research and
development activity and expenditures has increased significantly as a result of
the  recent  acquisition  of the LAC  business.  Our  research  and  development
expertise comprises a wide range of coating technologies, including:

     -    Thermal evaporation by direct heating for organics and anorganics

     -    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(TM))  for  fully  reactive
          sputtering

     -    Hollow cathode source for highly reactive coatings

                                       10
<PAGE>
     -    Direct current, radio frequency and microwave sources for PECVD

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

     We use teams of electrical and mechanical  engineers and process  engineers
to work out appropriate solutions to meet our customers' requirements.

     -    These project teams are  supported by the R&D  department's  thin film
          functionality  design group, a computer-aided  engineering group and a
          surface  and thin film  analytical  group.  Our  analytical  group has
          access to sophisticated thin film test and measurement equipment.

     Our research and development  expenditures in 1999, 2000 and 2001 were $1.0
million, $1.4 million and $6.4 million, respectively. In addition, during fiscal
2001,  the  Company  recognized  $11.5  of  acquired   in-process  research  and
development obtained in the acquisition of LAC which is included in amortization
of  goodwill  and  other  intangible  assets  on the  accompanying  consolidated
statement of operations.

Intellectual Property

     We believe that due to the rapid pace of  innovation  within our  industry,
factors such as technologically and creatively skilled personnel, the ability to
develop and enhance systems, knowledge and experience of management, reputation,
product quality and customer  service and support are important for establishing
and maintaining a competitive position within the industry, along with patent or
other legal  protections for our  technology.  As part of the December 31, 2000,
acquisition  of the LAC Business,  we acquired over 200 issued  patents and over
200 patent applications and trademarks.  In addition,  we entered into a license
agreement with Unaxis pursuant to which we license certain intellectual property
rights  owned by  Unaxis.  We also  entered  into a second  licensing  agreement
pursuant to which we license certain technology back to Unaxis.

     Under the Newco Intellectual Property License Agreement, we license certain
intellectual  property owned by us to Balzers  Process Systems GmbH, an indirect
subsidiary of Unaxis Holdings AG. The license is an  irrevocable,  royalty-free,
perpetual and  world-wide  license to make and sell products in the areas of dry
etch  applications,  the thin film  process for the back glass of TFT  displays,
cluster tools and  stationary  sputtering and is exclusive in these fields until
December 31, 2002.  The license also may be used by Balzers  Process  Systems in
areas in addition to the specified areas provided,  however, that for a two year
period  ending  December 31, 2002,  the license does not extend to certain areas
reserved  to us. The areas  reserved  to us until  December  31,  2002,  include
architectural glass coating and inline automotive glass coating, web coating for
capacitors  and decorative and packaging  applications,  diffusion  barriers for
certain  bottles and containers and certain display coating systems used to coat
the non-active portion of a display.  After December 31, 2002, neither party has
an  exclusive  field  under  the  license  and  either  party is able to use the
intellectual property to compete in all markets.

     Under the Bravo Intellectual Property License Agreement, we license certain
intellectual  property from Balzers Process Systems GmbH, an indirect subsidiary
of Unaxis  Holdings AG. The license is an irrevocable,  royalty-free,  perpetual
and world-wide  license 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 and is exclusive in these fields until December
31,  2002.  The  license  also  may be used by us in areas  in  addition  to the
specified  areas provided,  however,  that for a two year period ending December
31,  2002,  the  license  does not extend to certain  areas  reserved to Balzers
Process  Systems GmbH. The areas reserved to Balzers Process Systems include dry
etch applications,  TFT displays, cluster tools and stationary sputtering. After
December 31, 2002,  neither  party has an exclusive  field under the license and
either party is able to use the intellectual property to compete in all markets.

     There can be no assurance,  however,  that the steps taken by us to protect
our  proprietary  rights will be adequate  to prevent  misappropriation  of such
rights or that  third  parties  will not  independently  develop a  functionally
equivalent or superior technology.

STEC Joint Venture

     STEC was  formed  as a  limited  liability  company  under  the laws of the
People's Republic of China. NSG and we are each 50% joint venture partners,  and
the term of the joint venture is 50 years. Profits,  dividends, risks and losses
are also shared by the partners in proportion to their equity contributions. The
total investment plan for STEC involves $27.1

                                       11
<PAGE>
million, of which $19.6 million is currently in equity and $7.5 million in debt.
Each party has made $3.2 million  equity  contribution  in cash, and the balance
was derived from the conversion of retained earnings to paid in capital.

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

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

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

     Relationship Between Partners and Joint Venture. Each joint venture partner
provides  marketing,  promotion and sales  assistance to STEC. NSG has agreed to
cause its subsidiary SNSG to sell glass substrate to STEC, and the joint venture
will purchase all of its glass  substrate from SNSG unless a customer  specifies
substrate from another manufacturer. The purchase price for SNSG glass substrate
is at the lowest price and on competitive  terms and conditions  with respect to
quality and delivery compared to those offered to us by any third party.

     Financing.  If the Board  approves third party debt financing with a lender
who requires  the  guaranty of the  parties,  each party must provide a separate
guaranty of such borrowings in accordance with its then current equity interest.
Guarantors  will receive a guaranty  fee to be agreed by the  parties,  and STEC
will indemnify the  guarantors.  Effective July 1, 2001, STEC has entered into a
$10.0 million  revolving  credit  agreement with Sumitomo Bank, which we and NSG
have  guaranteed.  NSG's  guaranty  is secured by all of the assets of the joint
venture.

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

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

Employees

     As of June 30,  2001,  we employed  approximately  642  people.  Our United
States workforce of approximately 200 people is non-union. We have approximately
398 people in Germany,  a majority of which are  represented  by a works council
that has employee  representation.  Most companies in Germany are required to be
represented by works  councils.  We have 44 people in sales and service in other
countries  around the world. We negotiate  wages and benefits  annually with our
German workforce. 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,  local,  and  international
governments and agencies and has been subject to increasing regulation.

                                       12
<PAGE>
Legal Proceedings

     We are not  presently  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.

Executive Officers and Directors

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

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

     Helmut Frankenberger has served as the Executive Vice President,  Thin Film
Systems for us since the acquisition of the Leybold Large Area Coatings division
of Unaxis  Corporation  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 us since August 1997.  Mr.  Scholhamer
currently  is the Vice  President - Thin Film  Coatings 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

                                       13
<PAGE>
Ovonic  Synthetic  Materials,  Inc.,  a division of Energy  Conversion  Devices,
located in  Michigan.  Mr.  Scholhamer  has a  bachelors  of  science  degree in
engineering from the University of Michigan.

     Cecil Van Alsburg  co-founded Applied Films Lab, Inc. in 1976 and served as
our President and Chief Executive Officer from 1976 to May 1998. Mr. Van Alsburg
has also served as a director of our company  since its  inception  and has been
Chairman of the Board since  January  1998.  Prior to 1976,  Mr. Van Alsburg was
employed in various  capacities by Donnelly  Corporation for which he had worked
since 1957. Mr. Van Alsburg majored in civil engineering and architecture at the
University of Michigan.

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

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

     Richard P. Beck has been a director  of our company  since May 1998.  Since
1992,  Mr.  Beck has  served  as Chief  Financial  Officer  of  Advanced  Energy
Industries,  Inc., a manufacturer of power conversion and control systems. Since
1995, Mr. Beck has also served as a director of Advanced Energy Industries, Inc.
From  1987 to 1992,  Mr.  Beck  served as  Executive  Vice  President  and Chief
Financial Officer of Cimage Corporation,  a computer software company.  Mr. Beck
serves as a director of Photon Dynamics  Corporation 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 the Chief  Executive  Officer since June 1996 and a
member of the Board of Directors since July 1996 at Photon  Dynamics,  Inc. From
August  1993 to 1996,  Mr.  Sollitto  was the General  Manager of Business  Unit
Operations for Fujitsu Microelectronics, Inc. From April 1991 to August 1993, he
was the  Executive  Vice  President of  Technical  Operations  at  Supercomputer
Systems,  Incorporated.  Mr.  Sollitto  spent  21 years  in  various  positions,
including Director of Technology and Process at International  Business Machines
Corporation,  before joining Supercomputer Systems,  Incorporated.  Mr. Sollitto
serves as a director of Irvine Sensors Corp. and Ultratek Steppers. Mr. Sollitto
is a graduate of Tufts College where he received a B.S.E.E. in 1970.

     Aitor  Galdos has been a  director  of our  company  since  January,  2001,
following the  acquisition  of the Large Area Coatings  Division of Unaxis.  Mr.
Galdos has served as Vice President and Corporate  Development Manager at Unaxis
Corporation  since 1999,  and served in various  positions,  including  Division
Manager of Development  of TFT Displays  Division at Unaxis  (formerly  Balzers)
since 1988.  Mr.  Galdos was  appointed  to serve on our Board of  Directors  by
Unaxis  pursuant to an  agreement  providing  that Unaxis will have the right to
nominate one director as long as they own 10% or more of our outstanding  common
stock subject to certain terms and conditions.

     Our Board of Directors is currently  composed of seven  directors,  divided
into three  classes.  Messrs.  Edman and Sollitto  serve in the class whose term
expires in 2003; Messrs. Beck and Quist serve in the class whose term expires in
2002; and Messrs.  Van Alsburg,  Chapin and Galdos serve in the class whose term
expires in 2001.  Upon the  expiration  of the term of each class of  directors,
directors  comprising  that class will be elected for a  three-year  term at the
next succeeding annual meeting of stockholders. Each director holds office until
that  director's  successor  has been duly elected and  qualified.  Selection of
nominees for the Board of Directors is made by the entire Board of Directors.

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

ITEM 1 (d):  Information About Foreign Operations

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

                                       14
<PAGE>
ITEM 2:  Properties

     Our headquarters and our domestic  manufacturing  facilities are located in
Longmont, Colorado in approximately 127,000 square feet of leased space. We have
leased facilities in Alzenau, Germany consisting of approximately 190,000 square
feet which  includes  production  facilities,  general  offices and research and
development  facilities.  We have sales and service offices in China, Hong Kong,
Taiwan,  Korea,  Belgium and Japan and utilize inventory warehouses in Japan and
Hong Kong.

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

ITEM 3:  Legal Proceedings

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

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

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

                                  RISK FACTORS

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

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

Our operating results may fluctuate.

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

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

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

     -    the cyclical nature of the capital equipment market;

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

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

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

     -    the accuracy of the estimation of our costs can materially  impact our
          operating results on a quarterly basis

                                       15
<PAGE>
          due to the magnitude of each capital equipment order;

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

     -    fluctuations in foreign currency exchange rates.

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

     The market to supply thin film coated glass to LCD  manufacturers is highly
competitive.  Many of our  competitors  have  substantially  greater  financial,
technical,  marketing and sales  resources than we have.  Prices for much of our
low  resolution  thin film  coated  glass  products  supplied  to the LCD market
declined in past years,  with a 29% price  decrease  during fiscal 1999. We have
experienced  further pricing  pressures in fiscal 2001, and we may in the future
experience pricing pressures as a result of a decline in industry demand, excess
inventory  levels,  increases in industry  capacity or the  introduction  of new
technologies.  Several of our competitors  increased  production capacity during
1999 and 2000,  which we believe has  contributed  to pricing  pressures  on our
products.  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 will decline.

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

Our recent entry into the thin film coating equipment  business through internal
development and by acquisition  exposes us to risks associated with new business
ventures in emerging markets.

     Until fiscal 1997, our business was focused almost  exclusively on the sale
of thin film coated glass. Since then, we have devoted substantial  resources to
the development and sale of the equipment for thin film coating,  and we believe
our future  growth  depends  significantly  upon our  success  in the  equipment
market.  Although the  acquisition of the Large Area Coating  business  provided
additional coating equipment products and expertise,  we must effectively manage
that business or our performance may be adversely affected.

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

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

                                       16
<PAGE>
requirements  in-house,  thus adversely  affecting our sales of thin film coated
glass to such  customers.  Equipment  sales also may be affected  by  customers'
decisions to begin internal  production of glass coatings rather than relying on
an outside supplier such as ourselves.

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

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

     The market for thin film coated glass and thin film deposition equipment is
characterized  by rapid change.  Our future success  depends upon our ability to
introduce new  products,  improve  existing  products and processes to keep pace
with  technological  and market  developments,  and to address the  increasingly
sophisticated  and  demanding  needs of our  customers.  Technological  changes,
process improvements,  or operating  improvements that could adversely affect us
include:

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

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

     -    changes in the way coatings are applied to glass, film and 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.

Even if we are able to develop new products that gain market  acceptance,  sales
of new products could impair our ability to sell existing product lines.

     Competition  from our new systems could have a negative  effect on sales of
our existing thin film coating  systems and the prices we could charge for these
systems.  We may also  divert  sales and  marketing  resources  from our current
systems  in order to  successfully  launch and  promote  our new  systems.  This
diversion  of  resources  could have a further  negative  effect on sales of our
current systems.

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

     Export revenues to customers  outside of our  manufacturing  centers in the
United States and Europe  represented  approximately 85%, 93% and 67% of our net
revenues  in  fiscal  1999,   2000  and  2001,   respectively.   The   principal
international  markets in which we and our STEC joint venture have  historically
operated 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 revenue and  operations.  Although the  acquisition of the
Large Area Coating business has diversified our products and markets, we believe
international  sales will  continue to  represent a  significant  portion of our
sales,  and that we will be subject to the normal risks of  conducting  business
internationally. Such risks include:

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

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

     -    political and economic instabilities;

     -    export license requirements;

     -    foreign exchange risks;

                                       17
<PAGE>
     -    protective trade activities, such as tariffs and other barriers;

     -    difficulties in staffing and managing foreign sales operations; and

     -    potentially adverse tax consequences.

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

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

     Our future  results  will  depend  significantly  on the results of our 50%
owned STEC joint venture with Nippon Sheet Glass Co., Ltd. ("NSG") in China. The
results of the joint venture  depend on the  continuing  cooperation of NSG. The
success of the STEC joint venture is subject to a number of risks,  over many of
which we have limited  control.  We rely on our joint venture  partner,  NSG, to
house the STEC joint venture within its glass fabrication facility and to supply
glass to the joint venture. We also rely on NSG's management personnel to manage
the  day-to-day  operations of the joint venture,  and the managing  director of
STEC is  employed  by the  joint  venture  as well  as by  NSG.  We do not  have
employment  agreements with any of the management at STEC. STEC's future success
will be dependent in part on our ability to continue to effectively  participate
in the joint  venture  and  manage  our  relationship  with NSG.  Our  business,
operating results,  financial condition or growth could be materially  adversely
affected  if NSG  ceases  to  supply  glass to the joint  venture,  focuses  its
management and operational  efforts on other  activities or terminates the joint
venture.

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

Our stock price may fluctuate significantly.

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

     -    quarterly variations in our results of operations;

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

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

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

     -    the operating and stock price performance of comparable companies;

     -    technological innovations by us or our competitors; and

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

     Recent stock prices for many  technology  companies have fluctuated in ways
unrelated or  disproportionate  to the operating  performance  of the companies.
Such  fluctuations may adversely affect the market price of our common stock. We
cannot  assure  that the market  price at any  particular  date will  remain the
market  price in the future.  The closing  market  price of our common stock has
fluctuated  dramatically.  For example,  the closing  market price of our common
stock  fluctuated  from $24.00 on January 3, 2001, to a low of $7.78 on April 4,
2001, and then to $22.50 on May 21, 2001.

Our operating results depend on market conditions in the industries we serve.

     Our business  depends on the purchasing  requirements of  manufacturers  of
FPDs and our  customers in the web coating,  architectural  glass and PET bottle
markets.  We cannot  assure you that the markets we serve will continue to grow,
or that any growth will have a positive impact on our future business or results
of  operations.  Unfavorable  economic  conditions  that relate to the  consumer
electronics  or  other  industries  in  which  we  operate,  or that  result  in
reductions  in  capital  expenditures  by our  customers,  could have a material
adverse effect on these markets.  Our business,

                                       18
<PAGE>
operating  results,  financial  condition  and  prospects  would  be  materially
adversely affected by any future downturns in the markets we serve.

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

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

Our largest  customers are expected to account for a significant  portion of our
revenues  for  certain  types  of  coating  equipment  and  our  revenues  would
significantly  decline  if one or  more of  these  customers  were  to  purchase
significantly fewer of our systems or they delayed or cancelled a large order.

     We operate in the highly concentrated,  capital intensive coating equipment
industry.  For certain  products such as our BESTPET(TM)  system for coating PET
bottles, we anticipate that our largest customers will account for a significant
portion  of  our  revenue.  If  any  of  our  key  customers  were  to  purchase
significantly  fewer of our  systems  in the  future,  or if a large  order were
delayed or cancelled, our revenues would significantly decline. Accordingly, for
certain types of coating equipment, we expect that we will continue to depend on
a small number of large customers for a significant  portion of our revenues for
at least the next several years.

     Our ten  largest  customers  accounted  for 62%,  79% and 35% of our  gross
revenues in fiscal 1999, 2000 and 2001,  respectively.  Although the acquisition
of the Large Area Coating business has diversified our products and markets, 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.  There are a  limited  number of
potential  customers  in our market,  and we expect  that sales to a  relatively
small number of customers will continue to account for a high  percentage of our
revenues in those markets in the  foreseeable  future.  We have not entered into
long-term  agreements with our thin film coated glass customers and they are not
obligated to continue to buy their thin film coated glass from us. Moreover,  in
the event that  customers  purchase thin film coating  equipment from us or from
one of our  competitors  and  begin  coating  glass  in-house,  sales  to  those
customers may decrease sharply.  If such lost sales are not replaced on a timely
basis by new orders of thin film coated glass or equipment from other customers,
our business,  operating  results,  financial  condition and prospects  could be
materially adversely affected.

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

     Our systems are complex,  are often customized and sometimes have contained
defects or failed to meet contractual specifications. If we deliver systems with
defects  or  fail  to  meet  specifications,  our  credibility  and  the  market
acceptance and sales of our systems could be harmed. In addition, if our systems
contain  defects  or fail  to  meet  specifications,  we may  incur  contractual
penalties  and be  required  to expend  significant  capital  and  resources  to
alleviate such problems.  Such problems could also damage our relationships with
specific customers and impair market acceptance of our products.

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

     In fiscal 2001, approximately 6%, 54% and 40% of our total gross sales were
denominated in yen, marks and dollars,  respectively.  Any  strengthening of the
dollar in  relation  to the  currencies  of our  competitors  or  customers,  or
strengthening or weakening of the yen or mark in relation to other currencies in
which our  customers or  competitors  do business,  could  adversely  affect our
competitiveness.  Although a strengthening  dollar may result in some offsetting
cost reductions on the raw materials we import,  such cost reductions may not be
sufficient to enable us to remain competitive.

                                       19
<PAGE>
Moreover,  a strengthening of the dollar or other competitive  factors could put
pressure on us to  denominate a greater  portion of our  Japanese  sales in yen,
thereby increasing our exposure to fluctuations in the dollar-yen exchange rate.
Our joint  venture in China  transacts  much of its  business  in  Chinese  Yuan
Renminbi.  While this  currency  has  remained  fairly  constant  in value,  any
devaluation  of the Chinese Yuan Renminbi would  adversely  affect our business,
operating results, financial conditions and prospects. We cannot assure you that
fluctuations  in  exchange  rates  will not  adversely  affect  our  competitive
position or result in foreign exchange losses,  either of which could materially
adversely  affect our business,  operating  results,  financial  conditions  and
prospects.

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

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

Our rapid growth may make it more difficult to manage our business effectively.

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

Our current and potential  competitors have significantly greater resources than
we do, and increased  competition could impair sales of our products or cause us
to reduce our prices.

     The market for thin film coating 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. Many of
our customers and potential  customers that purchase coating equipment are large
companies that require global support and service for their thin film deposition
capital equipment.  While we believe that our support and service infrastructure
is sufficient to meet the needs of our  customers and potential  customers,  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 depositions equipment.

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

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

Successful  infringement  claims by third  parties  could result in  substantial
damages,  lost  product  sales and the loss of important  intellectual  property
rights by us.

     Our commercial  success depends in part on our ability to avoid  infringing
or misappropriating  patents or other proprietary rights owned by third parties.
From time to time we may receive  communications  from third  parties  asserting
that our products or systems infringe,  or may infringe,  the proprietary rights
of these third parties.  These claims of infringement may lead to protracted and
costly litigation which could require us to pay substantial  damages or have the
sale of our products or systems stopped by injunction. Infringement claims could
also cause  product or system  delays or require us to redesign  our products or
systems, and these delays could result in the loss of substantial  revenues.  We

                                       20
<PAGE>
may  also be  required  to  obtain  a  license  from  the  third  party or cease
activities utilizing the third party's proprietary rights. We may not be able to
enter into such a license or such license may not be  available on  commercially
reasonable  terms.  The loss of  important  intellectual  property  rights could
therefore  prevent  our  ability to sell our  systems,  or make the sale of such
systems more expensive for us.

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.

     The majority of our revenue is derived from sales outside the United States
and Europe, including certain countries in Asia such as China, Taiwan, Korea 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 Europe,  and many
U.S.  companies  have  encountered  substantial  problems  in  protecting  their
proprietary  rights against  infringement in such  countries,  some of which are
countries  in which we have sold and continue to sell  systems.  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.

Protection of our intellectual  property rights, or the efforts of third parties
to enforce their own intellectual  property rights against us, may in the future
result in costly and time-consuming litigation.

     We may be required to initiate  litigation  in order to enforce any patents
issued to or  licensed by us, or to  determine  the scope or validity of a third
party's patent or other proprietary  rights.  In addition,  we may be subject to
lawsuits by third  parties  seeking to enforce their own  intellectual  property
rights. Any such litigation,  regardless of outcome, could be expensive and time
consuming,  and could  subject us to  significant  liabilities  or require us to
re-engineer our product or obtain expensive licenses from third parties.

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

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

     We use hazardous  chemicals in producing our products.  As a result, we are
subject  to a variety  of  local,  state and  federal  governmental  regulations
relating to the storage, discharge, handling, emission, generation,  manufacture
and disposal of toxic or other  hazardous  substances  used to  manufacture  our
products, compliance with which is expensive. The failure to comply with current
or future  regulations  could result in the  imposition  of  substantial  fines,
suspension of production, alteration of its manufacturing processes or cessation
of operations.

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

     All of our outstanding shares,  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,  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.

Failure to successfully integrate the LAC business may adversely affect us.

     On December 31,  2000,  we completed  the  acquisition  of the LAC business
formerly  owned by Unaxis  Holdings,  Ltd. The process of  integrating  acquired
operations  into our  existing  operations  may result in  unforeseen  operating
difficulties  and  may  require  significant   financial  resources  that  would
otherwise  be  available  for the ongoing  development  or expansion of existing
operations.  We have limited experience managing  production  operations outside
the United States.  Our future  performance may be adversely affected if we fail
to successfully  manage the LAC business operations in Germany and related sales
offices. Some of the risks associated with acquisitions include:

     -    Unexpected losses of key employees or customers of the LAC business;

                                       21
<PAGE>
     -    Conforming  the standards,  processes,  procedures and controls of the
          LAC business with our operations;

     -    Coordinating new product and process development;

     -    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  realization of potential  operating  synergies may prove difficult and
may cause management's attention to be diverted from other business concerns. In
addition,  the combined  businesses may fail to achieve the desired synergies of
the combination and other expected benefits of the transaction.

Financial performance of LAC business.

     The LAC business was not  profitable  for the years ended 1999 and 2000 and
there can be no assurance  that the LAC business  will be  profitable  in future
years. The success of the acquisition of the LAC business will depend in part on
our ability to  successfully  integrate and manage the LAC business.  Failure to
successfully integrate and manage the LAC business could have a material adverse
effect on the Company and its stock price.

Operation Separate From Unaxis.

     Because the LAC business was previously  operated as parts of two divisions
of Unaxis,  the costs of operating the LAC business  separate from Unaxis may be
significantly  greater  than  initially  estimated.  The  operation  of the  LAC
business may result in our incurring operating costs and expenses  significantly
greater than we anticipated prior to the acquisition.

Risks related to the Series A Convertible Preferred Stock.

     The conversion of the Series A convertible  preferred shares into shares of
common  stock  and  the  exercise  of  the  related  warrants  could  result  in
substantial numbers of additional shares being issued.

     To the extent the Series A preferred  shares are  converted or dividends on
the  Series A  preferred  shares are added to the stated  value,  a  significant
number  of shares of common  stock  may be sold  into the  market,  which  could
decrease  the price of our common  stock and  encourage  short  sales by selling
security holders or others. Short sales could place further downward pressure on
the price of our common  stock.  In that case,  we could be required to issue an
increasingly   greater  number  of  shares  of  our  common  stock  upon  future
conversions  of the Series A  preferred  shares,  sales of which  could  further
depress the price of our common stock.

     The  conversion  of and the  payment of  dividends  by adding to the stated
value in lieu of cash on the Series A preferred shares may result in substantial
dilution to the interests of other holders 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.

Substantial sales of our common stock could cause our stock price to fall.

     If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of  outstanding  options and upon  conversion of
and  issuance of common  stock  dividends  on the Series A preferred  shares and
exercise of the related  warrants,  the market  price of our common  stock could
fall.  Such sales also might  make it more  difficult  for us to sell  equity or
equity-related  securities  in the  future  at a time  and  price  that  we deem
appropriate.

                                       22
<PAGE>
We may be required to pay  substantial  penalties to the holders of the Series A
preferred shares and related warrants if specific events occur.

     In accordance  with the terms of the documents  relating to the issuance of
the Series A preferred shares and the related  warrants,  we are required to pay
substantial  penalties  to a holder  of the  Series  A  preferred  shares  under
specified circumstances, including, among others:

     -    the  nonpayment  of  dividends  on the Series A preferred  shares in a
          timely manner,

     -    our failure to deliver  shares of our common stock upon  conversion of
          the Series A preferred shares or upon exercise of the related warrants
          after a proper request, and

     -    a registration statement relating to the Series A preferred shares and
          related  warrants,  if after being  declared  effective,  is unable to
          cover  the  resale  of the  shares of  common  stock  underlying  such
          securities.

     Such  penalties are  generally  paid in the form of additions to the stated
value of the Series A preferred shares,  subject to any restrictions  imposed by
applicable  law, on the amount  that a holder of Series A  preferred  shares was
entitled to receive on the date of determination.

                                     PART II

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

     Prior to  November  21,  1997,  there was no public  market  for our Common
Stock. The Common Stock was approved for quotation on the Nasdaq National Market
under the symbol AFCO, beginning November 21, 1997. At June 30, 2001, the number
of common Shareholders of record was 69.

     The range of high and low bid  quotations  for our  Common  Stock as quoted
(without  retail  markup or  markdown  and  without  commissions)  on the Nasdaq
National Market since its initial public offering is provided below. They do not
necessarily represent actual transactions.
<TABLE>

                                                                                     High            Low
                  Fiscal 1998                                                        ----            ---
                  <S>                                                            <C>             <C>
                      Second Quarter (since November 21, 1997).........          $      9.13     $      8.25
                      Third Quarter....................................                11.31            7.13
                      Fourth Quarter...................................                 9.63            4.56
                  Fiscal 1999
                      First Quarter....................................          $      5.63     $      2.88
                      Second Quarter...................................                 3.88            2.63
                      Third Quarter....................................                 4.25            1.81
                      Fourth Quarter...................................                 4.25            2.50
                  Fiscal 2000
                      First Quarter....................................          $      4.00     $      3.13
                      Second Quarter...................................                14.75            3.00
                      Third Quarter ...................................                35.75           12.88
                      Fourth Quarter ..................................                39.88           13.13
                  Fiscal 2001
                      First Quarter....................................          $     42.00     $     21.06
                      Second Quarter...................................                37.94           14.75
                      Third Quarter....................................                25.00           10.06
                      Fourth Quarter...................................                22.50            7.69
</TABLE>


ITEM 6:  Selected Consolidated Financial Data

The following selected  consolidated  financial data with respect to our balance
sheet  data as of July 1,  2000 and June 30,  2001,  and,  with  respect  to our
consolidated  statement  of  operations  data for each of the three years in the
period ended June 30, 2001,  have been derived from our  consolidated  financial
statements,  which have been audited by Arthur Andersen LLP,  independent public
accountants,  as indicated in its report included  elsewhere in this report. The
consolidated  balance sheet data as of June 28, 1997,  June 27, 1998 and July 3,
1999 and the consolidated  statement of

                                       23
<PAGE>
operations  data for the years  ended June 28,  1997,  June 27, 1998 and July 3,
1999 have been derived from audited  consolidated  financial statements that are
not  included  in this  report.  This data  should be read in  conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and  the  consolidated  financial  statements  and  notes  included
elsewhere in this report.
<TABLE>
                                                                Fiscal Year Ended
                                               ------------------------------------------------------
                                              June 28,   June 27,    July 3,     July 1,    June 30,
                                                1997       1998        1999        2000        2001
                                             ---------   --------   ---------   ---------   ---------
<S>                                          <C>         <C>         <C>        <C>         <C>
    Consolidated Statement of Operations
Data:
    Net revenues........................      $ 34,050    $ 53,041   $ 31,523    $ 42,292    $112,715
    Cost of goods sold..................        27,352      42,150     27,070      36,633      90,021
                                             ---------    --------   --------   ---------   ---------
    Gross profit........................         6,698      10,891      4,453       5,659      22,694
    Operating expenses:
       Selling, general and administrative       2,996       5,067      3,760       4,324      16,027
       Research and development.........           749       1,243      1,044       1,409       6,484
   Amortization of goodwill and other
     intangible assets..................            --          --         --          --      16,536
                                             ---------   ---------  ---------   ---------   ---------
    Operating income (loss).............         2,953       4,581       (351)        (74)    (16,353)
    Interest income (expense)...........          (822)       (496)      (553)        447       1,034
    Other income (expense), net.........            95         252         40         272         805
    Equity earnings in affiliate........            --          --        382       2,381       4,421
                                             ---------   ---------  ---------   ----------  ---------
Income (loss) before income taxes and
   cumulative effect of change in
   accounting principle.................         2,226       4,337       (482)      3,026     (10,093)
    Income tax benefit (provision)......          (605)     (1,480)       258          97       5,760
                                              --------    --------   --------   ---------   ---------
Net income (loss) before cumulative effect
   of change in accounting principle....         1,621       2,857       (224)      3,123      (4,333)
                                              --------    --------   --------   ---------   ----------
Cumulative effect of change in accounting
   principle............................            --          --         --         (50)         --
                                             ---------   ---------  ---------   ----------  ---------
    Net income (loss)...................         1,621       2,857       (224)      3,073      (4,333)
    Preferred dividends.................            --          --         --          --        (367)
    Net income (loss) per common share..      $  1,621    $  2,857   $   (224)   $  3,073    $ (4,700)
                                             =========   =========  =========   =========   ==========

    Net income (loss) per common share
       Basic............................      $   0.58    $   0.90   $  (0.06)    $  0.72    $  (0.73)
                                              ========    ========   ========    ========   =========
       Diluted..........................      $   0.58    $   0.85   $  (0.06)    $  0.69    $  (0.73)
                                              ========    ========   ========    ========   =========
Weighted average common shares outstanding
       Basic............................         2,796       3,181      3,478       4,255       6,414
                                              ========    ========   ========    ========    ========
       Diluted..........................         2,814       3,375      3,478       4,439       6,414
                                              ========    ========   ========    ========    ========

    Consolidated Balance Sheet Data
    Working capital.....................      $  5,534    $ 10,747   $ 11,812    $ 63,785    $ 15,684
    Total assets........................        21,541      28,697     30,195      87,478     169,426
    Long-term debt, net of current portion       6,448       4,175      7,180          --       6,483
    Total stockholders' equity..........         6,740      14,826     14,658      73,197      89,192
</TABLE>

                                       24
<PAGE>
ITEM 7:  Management's Discussion and Analysis of Financial Condition and Results
         of Operation

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

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

Overview

     We are a leading  provider  of thin film  deposition  equipment  to the FPD
industry,  the  Architectural,  Automotive  and Solar Glass industry and the Web
Packaging industry, and are pursuing the market for coatings on PET bottles. Our
high volume,  large area deposition systems are used by our 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 our customers'
products.

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

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

     On December 31, 2000, we acquired the Large Area Coatings  division ("LAC")
of Unaxis.  The LAC  division  is now  operating  as Applied  Films  Germany,  a
wholly-owned  subsidiary  of Applied Films  Corporation  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. We are also pursuing the market for coatings on PET bottles for
soft drinks and other beverage markets.

     The Applied  Films  Germany  operations  consist of the sale of  equipment,
significantly increasing the revenue base from sales of equipment, customer base
and employee base of Applied Films.

     The  acquisition of the LAC business  substantially  changed the amount and
nature of our  revenues.  The  majority of our revenues are now derived from the
sale of thin film  coating  equipment  to  manufacturers  serving  the  display,
architectural glass and packaging markets.  The equipment we sell to the display
industry is sold to  manufacturers  of Flat Panel Displays  ("FPD") with various
end markets such as Active Matrix LCDs ("AMLCD") used in laptop and flat desktop
monitors and Plasma Display Panels ("PDP") for hang on the wall televisions,  as
well  as  other  emerging  FPD  technologies.  The  equipment  we  sell  to  the
architectural glass industry is sold to manufacturers of large glass panels used
in the construction of commercial buildings,  skyscrapers,  and automobiles,  as
well as to the solar  industry for the  generation of power using light from the
sun or other  sources.  The equipment we sell to the web  packaging  industry is
sold to  manufacturers of rolled films for the packaging  industry.  These films
are usually either plastic or thin foil requiring a thin film layer  application
to enhance  the  barrier  properties  of the final  package  addressing  product
freshness or shelf life if it is a perishable food packaging application.  Other
uses for this equipment platform include decorative  packaging where a thin film
layer  enhances the color or the texture of the package and touch panels where a
conductive  thin film layer is applied.  The  equipment  we are  developing  and
marketing  to the soft drink and beer  bottling  industries  applies an exterior
barrier  coating  designed to enhance the shelf life for  beverages  packaged in
plastic  ("PET")  bottles.  This  high-speed  deposition  equipment  reduces the
permeability  of  the  bottle   preventing  the  carbonation  from  escaping  or
contaminating gases from entering the bottle.

     Revenues for thin film coating  equipment are  generally  recognized on the
percentage-of-completion  method,  measured by the percentage of the total costs
incurred  and  applied to date in relation  to the  estimated  total costs to be

                                       25
<PAGE>
incurred  for each  contract.  The  lead-time  for  completion  of the thin film
coating  equipment is generally six to twelve  months,  depending on the product
line. To date, we have primarily priced our thin film coating  equipment in U.S.
dollars and German marks. Coating equipment backlog increased substantially as a
result of the acquisition to $99.2 million at the end of fiscal 2001 versus $8.8
million at fiscal year end 2000.

     Sales of thin film  coated  glass to  manufacturers  of LCDs  comprise  the
balance of our revenues.  Most of our LCD manufacturing customers are located in
Asia.  In June of 1998,  we formed a 50/50  joint  venture in China with  Nippon
Sheet Glass Co. ("NSG"), to process,  sell and export certain types of thin film
coated glass.

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

     Coated  glass sales and related  costs are  recognized  when  products  are
shipped to the  customer.  Historically,  sales have varied  substantially  from
quarter to quarter, and we expect such variations to continue.  We are typically
able to ship our thin film coated  glass within 30 days of receipt of the order;
therefore, the Company does not customarily have a significant long-term backlog
for coated glass sales.  Historically,  we have  experienced  significant  price
pressure  from time to time in our thin film coated  glass  business.  We expect
continued downward pressure on our selling prices in the future.

     We sell most of our glass and equipment  products to customers in the local
currency of the location of manufacture.  For Longmont,  in U.S. dollars and for
Alzenau,  in  German  marks or  Euros,  except  for  sales to  certain  Japanese
customers which are denominated in Japanese yen. Gross sales in Japanese yen and
German marks were approximately $12.7 million and $0,  respectively,  for fiscal
2000,  and $6.9  million  and $61.5  million,  respectively,  for  fiscal  2001.
Currently,  we engage in international currency hedging transactions to mitigate
our foreign exchange exposure.  We also purchase raw glass from certain Japanese
suppliers in transactions  denominated in yen, which  partially  offsets foreign
currency  risks on thin film coated glass sales.  Our  purchases of raw material
denominated in Japanese yen were  approximately  $2.4 million in fiscal 2000 and
$1.8  million  for  fiscal  2001.  As of  June  30,  2001,  accounts  receivable
denominated in Japanese yen and German marks were approximately $1.3 million and
$4.7 million,  or  approximately  10% and 39%,  respectively,  of total accounts
receivable.  As of June 30, 2001,  accounts payable  denominated in Japanese yen
and German marks were  approximately  $0.9 million and $5.8  million,  or 7% and
45%, respectively, of total accounts payable. We are generally paid by customers
for Japanese yen denominated sales within  approximately 15 to 45 days following
the date of sale.

     As of June 30,  2001,  our  outstanding  bank debt was  approximately  $6.5
million on our line of credit,  compared to $0 at the end of fiscal  2000.  This
level of  borrowings,  together with our $2.5 million debt  guarantees  with our
joint  venture,  represents  the use of the entire  available  credit under this
credit facility.

                                       26
<PAGE>
Results of Operations

     The following table sets forth  information  derived from the  consolidated
statements  of  operations  expressed  as a  percentage  of net revenues for the
periods indicated.
<TABLE>
                                                        Fiscal Year Ended
                                                -----------------------------
                                                July 3,     July 1,     June 30,
                                                  1999        2000         2001
                                              ---------    ---------   ---------
<S>                                           <C>          <C>         <C>
Consolidated Statement of Operations Data:
Net revenues............................         100.0%       100.0%      100.0%
Cost of goods sold......................          85.9         86.6        79.9
                                              --------     --------    --------
Gross profit............................          14.1         13.4        20.1
Operating expenses:
     Selling, general and administrative          11.9         10.2        14.2
     Research and development...........           3.3          3.3         5.7
     Amortization of goodwill and other
     intangible assets..................           --           --         14.7
                                              --------     --------    --------
Operating income (loss).................          (1.1)        (0.1)      (14.5)
Interest income (expense)...............          (1.8)         1.1         0.9
Other income (expense)..................           0.2          0.6         0.7
Equity earnings in affiliate............           1.2          5.6         3.9
                                              --------     --------    --------
Income (loss) before income taxes.......          (1.5)         7.2        (9.0)
Income tax benefit (provision)..........           0.8          0.2         5.1
                                              --------     --------    --------
Net income (loss) before cumulative effect
   of change in accounting principle....           (.7)         7.4        (3.9)
Cumulative effect of change in accounting
  Principle.............................            --         (0.1)        --
                                              ---------    ---------   --------
Net income (loss).......................           (.7)%        7.3%       (3.9)%
                                              ==========   =========   ========
</TABLE>

     Net revenues.  Net revenues were $112.7 million,  $42.3 million,  and $31.5
million in fiscal years 2001,  2000, and 1999,  respectively.  Net revenues rose
167% from fiscal  2000 to fiscal  2001,  due to the  acquisition.  Net  revenues
increased  34% from fiscal  1999 to fiscal  2000 due to the growth in  equipment
revenues  driven by the sales of the ATX-700 into the Plasma  Display  market as
well as growth  during  fiscal 2000 in the coated  glass  segment of the market.
Thin film coated glass sales  decreased 22% from $35.2 million in fiscal 2000 to
$27.5 million in fiscal 2001 This reduction was caused by reduced demand for STN
Glass used in cellular phones as well as the transfer of a coating system to our
joint  venture in China.  Due to the 50% ownership of the joint venture in China
we do not  consolidate  the revenues so any capacity  shift to the joint venture
will result in a reduction of revenue.  Thin film coated  glass sales  increased
from $26.9 million to $35.2 million from fiscal 1999 to fiscal 2000, mainly as a
result of the increase in STN Glass demand used in cellular phones in the second
half of fiscal 2000.

     Revenues from thin film coating equipment increased 1,100% to $85.2 million
for  fiscal  2001  compared  with  $7.1  million  for  fiscal  2000,  due to the
acquisition of the Leybold Large Area Coatings division of Unaxis.  The revenues
of the LAC group consist entirely of the sale of equipment. This growth was also
caused in part by the  sales of the  ATX-700.  During  fiscal  2000 and  shortly
after, we sold three ATX-700  systems and recognized  revenue on a percentage of
completion basis and profit margin on two of those systems in the second half of
fiscal 2000. We had no bookings for revenue for ATX-700 systems for fiscal 1999,
and the equipment  revenue in fiscal 1999 was generated  mainly by the sale of a
refurbished  coating  system  that was in  operation  in  Longmont  to the Joint
Venture.

     Gross Profit.  Gross profits  increased almost fourfold to $22.7 million in
fiscal  2001 from $5.7  million in fiscal  2000,  driven by the  increase in the
equipment revenues from the acquisition. Gross profits increased to $5.7 million
in fiscal 2000 from $4.5  million in fiscal year 1999 driven by the  addition of
the margins from the revenue recognized on the ATX-700 systems.  As a percentage
of net revenues,  gross profit  margins were 20.1%,  13.4%,  and 14.1% in fiscal
years 2001, 2000, and 1999, respectively. This improvement in gross margins as a
percent of sales for fiscal  2001 was driven by the  increase  in the  equipment
revenues which generally have higher profit margins than coated glass revenues.

     Selling,  General and Administrative.  Selling,  general and administrative
expenses totaled $16.0 million,  $4.3 million, and $3.8 million for fiscal years
2001, 2000, and 1999, respectively.  The substantial increase in fiscal 2001 was
driven by the additions to the administration, sales and marketing teams through
the  acquisition.  Fiscal 1999 and 2000,

                                       27
<PAGE>
SG&A expenses remained  sequentially fairly constant.  As a percentage of sales,
selling,  general  and  administrative  costs were 14.2%,  10.2%,  and 11.9% for
fiscal years 2001, 2000, and 1999, respectively.

     Research and Development.  Research and development expenses in fiscal 2001
grew to $6.5 million,  up from $1.4 million in fiscal 2000, and $1.0 million for
fiscal years 2001,  2000, and 1999,  respectively.  The increase in Research and
Development  expenses was driven by the additional staff and capabilities  added
in Germany  through  the  acquisition.  Research  and  development  expenditures
consisted primarily of salaries,  outside contractor expenses, lab expenses, and
other  expenses  related  to  our  ongoing  product  development  efforts.  As a
percentage of net revenues,  research and development  expenses were 5.7%, 3.3%,
and 3.3% in fiscal years 2001, 2000, and 1999, respectively.

     Interest  Income  (Expense).  Interest  income  (expense) was $1.0 million,
$447,000,  and ($553,000) for fiscal years 2001,  2000, and 1999,  respectively.
The interest income  generated in both fiscal 2000 and 2001 was from investments
on excess cash from the approximately $55 million raised in the follow-on common
stock offering that closed in March 2000. In fiscal 1999 we had interest expense
on the  approximately  $7.2 million in bank debt that was  outstanding as of the
fiscal year end.

     Other Income (Expense). Other income (expense) was $805,000,  $272,000, and
$40,000 in fiscal years 2001, 2000, and 1999  respectively.  Our other income is
generated  from realized  foreign  currency  translation  adjustments as well as
royalties earned from our Joint Venture.

     Income Tax Benefit  (Provision).  We recorded a tax benefit  during  fiscal
2001 of approximately $5.7 million.  The goodwill and other intangibles portions
of the  purchase  price  paid  for  the  acquisition  will  be  deductible  when
amortized. The charge to earnings for in-process R&D that was taken in the third
fiscal quarter related to the acquisition was also deductible.  As a result, our
tax benefit in fiscal 2001 is  substantial.  We recorded a $258,000  tax benefit
during  fiscal  year 1999.  We  received a refund of $522,000 in fiscal 1999 for
estimated  payments  and we applied the tax loss  carryback  to previous  fiscal
years.  The income tax  benefit  for fiscal 2000 was  $97,000,  representing  an
effective tax rate of a negative 3.3%.  This benefit was primarily  derived from
the  reversal  of the income tax  accrual  on the equity  income  from the joint
venture  that was accrued in fiscal  1999.  Other  factors  contributing  to the
relatively  low effective tax rate in fiscal 2000 were interest and current year
equity in earnings in the Joint Venture  income that are not subject to tax. The
tax  benefit  of $5.7  million  for  fiscal  2001  was the  result  of  goodwill
amortization and accrued Research and Development.  Another  contributing factor
is that the  equity in the  earnings  of the Joint  Venture  is not  subject  to
taxation.

                                       29
<PAGE>
Quarterly Results of Operations

     The  following  table  sets forth  summary  unaudited  quarterly  financial
information for the eight fiscal quarters ended June 30, 2001. In the opinion of
management,  such information has been prepared on the same basis as the audited
financial  statements  appearing  elsewhere  in this  report  and  reflects  all
necessary  adjustments   (consisting  of  only  normal  recurring   adjustments)
necessary for a fair  presentation of unaudited  quarterly  results when read in
conjunction  with the  audited  financial  statements  and  notes  thereto.  The
operating results for any quarter are not necessarily  indicative of results for
any future  period and any trends  reflected in such results may not continue in
the future.  Our results of operations may be subject to  significant  quarterly
variations (in thousands).
<TABLE>

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

     The  following  table  sets  forth the  above  unaudited  information  as a
percentage of total net revenues.
<TABLE>

                                                   Fiscal 2000                               Fiscal 2001
                                                   -----------                               -----------
                                                  Quarter Ended                             Quarter Ended
                                      --------------------------------------    ------------------------------------
                                        Sept.    Jan.      Apr.      July         Sep.      Dec.     March      June
                                        1999     2000      2000      2000         2000      2000      2001      2001
                                      -------- --------  --------  --------     --------  -------- -------   -------
<S>                                    <C>      <C>       <C>       <C>         <C>        <C>      <C>       <C>
Net revenues....................       100.0%   100.0%    100.0%    100.0%       100.0%    100.0%   100.0%    100.0%
Cost of goods sold..............        87.6     84.8      87.6      86.4         84.9      95.7     78.5      75.3
                                        ----   ------    ------    ------       ------    ------   ------    ------
Gross profit....................        12.4     15.2      12.4      13.6         15.1       4.3     21.5      24.7
Operating expenses:
   Selling, general and
administrative..................        11.0     10.8       9.2      10.3         10.0      14.9     14.1      15.9
   Research and development.....         4.7      3.8       3.1       2.6          2.5       4.7      5.9       7.3
   Amortization of goodwill and
   other intangible assets......           --      --        --        --           --        --     31.0       6.3
                                        -----    ----     -----      ----         ----     -----    -----     -----
Operating income (loss).........        (3.3)     0.6       0.1       0.7          2.6     (15.3)   (29.5)     (4.8)
Interest income (expense).......        (1.9)    (1.2)      0.3       4.4          3.2       6.5     (0.2)     (0.2)
Other income (expense)..........         2.4      0.2       1.1      (0.2)          .7       2.2      0.2       0.9
Equity earnings in affiliate....         6.1      4.4       5.9       5.8          7.6      16.0      2.3       1.1
                                         ---      ---       ---       ---          ---      ----      ---    ------
Income (loss) before income taxes        3.3      4.0       7.4      10.7         14.1       9.4    (27.2)     (3.0)
Income tax benefit (provision)..        (1.1)     4.1       (.5)      (.7)         (.7)      4.7     12.0        --
                                        -----     ---       ----      ----         ----      ---     ----      ----
Net income (loss) before cumulative
   effect of  change in accounting
   principle....................         2.2      8.1       6.9      10.0         13.4      14.1    (15.2)     (3.0)
Cumulative effect of change in
   accounting principle.........        (0.7)      --        --        --           --        --       --        --
                                         ---      ---       ---      ----         ----      ----     ----      ----
Net income (loss)...............         1.5%     8.1%      6.9%     10.0%        13.4%     14.1%   (15.2)%    (3.0)%
                                         ====     ====      ====     =====        =====     =====   =======  ========
</TABLE>

     The increase in  quarterly  sales during the second half of fiscal 2000 was
driven by the demand for STN coated glass and  recognition of revenue on the two
ATX-700 systems that were sold during the year. Net revenues of thin film coated
glass for fiscal 2001  decreased to $27.6 million  versus $35.2  million  during
fiscal year 2000.  This  reduction in sales for coated glass products was driven
by the transfer of a refurbished  coating machine that was producing  revenue in
Longmont during fiscal 2000 to our Joint Venture in China. Additionally,  coated
glass revenues were negatively affected

                                       29
<PAGE>
by a reduced demand for STN glass used in cellular phones and PDAs in the second
half of fiscal 2001.  Sales and related costs of thin film coated glass products
are recognized when products are shipped.

     Revenue of thin film coating equipment totaled $85.2 million in fiscal 2001
versus  $7.1  million in fiscal  2000.  This  increase in revenue as well as the
concentration  in equipment was due to the  acquisition of the LAC business.  In
the second half of fiscal 2001 greater than 85% of our revenues  were  generated
from the equipment  side of the business  compared to 25% for the second half of
fiscal 2000 when the ATX-700 revenues began to be recognized.

     Equity  earnings  in  affiliate  have grown  substantially  since the joint
venture  commenced  production  in April 1999, to a high of $1.6 million for the
second quarter of fiscal 2001. The joint venture benefited from increased demand
for STN coated glass which allowed STEC to shift production to the higher margin
STN product through the second quarter of fiscal 2001. During the second half of
fiscal  2001,   Joint  Venture   earnings  fell   dramatically   as  cell  phone
manufacturers experienced a surplus inventory of handsets and reduced the demand
for STN coated glass. This industry situation negatively affected our profits at
STEC for the third and fourth quarters of fiscal 2001.

     Because a  significant  portion of our  overhead  is fixed,  our  quarterly
results of operations  may be  materially  affected if sales of thin film coated
glass or thin film coating equipment decline for any reason.

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 Series A
Convertible  Preferred Stock,  and with  borrowings.  Cash provided by operating
activities  for fiscal 2001 was $20.2  million  compared to $3.9 million for the
corresponding  period in fiscal 2000.  As of June 30, 2001, we had cash and cash
equivalents of approximately $26.2 million and working capital of $15.7 million.
As of June 30, 2001, accounts receivable were approximately $12.3 million.

     On  October  18,  2000,  we  entered  into a Share  Purchase  and  Exchange
Agreement  agreeing  to  purchase  the  LAC  business  and the  acquisition  was
completed on December 31, 2000. The purchase price was $65.5 million in cash and
673,353 shares of our common stock, subject to further post-closing  adjustments
based upon a final closing balance sheet for LAC business.  As of June 30, 2001,
we paid Unaxis $58.0  million in cash and  delivered  the 673,353  shares of our
common stock. In addition,  we have accrued $7.5 million  pending  resolution of
the final closing balance sheet for the LAC business.

     The acquired LAC business includes operations and work in process which has
increased  the amount of working  capital we need to  conduct  our  business  in
future periods.

     Our $11.5 million  credit  facility  with a commercial  bank will expire on
September 17, 2002. As of June 30, 2001, we had  $8,982,556  outstanding in both
borrowing and letters of credit,  compared with $0  outstanding on July 1, 2000.
Approximately  $2.5 million of the outstanding  borrowings and letters of credit
under this facility is pledged to guarantee the debt at our Joint Venture.

     Cash  used by  investing  activities  for  fiscal  2001 was  $42.0  million
compared to $21.1 million for fiscal 2000. Capital  expenditures for fiscal 2001
were approximately $1.4, compared to $484,000 for fiscal 2000.

     We believe  that our  working  capital  and  operating  capital  needs will
continue to be met by operations,  borrowings under the existing credit facility
and the proceeds from the $10 million  convertible  preferred  offering that was
closed   subsequent  to  the  quarter  ended  December  30,  2000.  Our  capital
requirements depend on a number of factors,  including,  but not limited to, the
amount and timing of orders we receive and the timing of payments  received from
customers.   If  we  require  additional   capital,   we  may  consider  various
alternatives  such as additional bank financing or the public or private sale of
debt or equity  securities.  There can be no  assurance  that we will be able to
raise such funds on satisfactory terms if and when such funds are needed.

Recent Financial Accounting Standards Board Statement.

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

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

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

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


ITEM 7A:  Quantitative and Qualitative Disclosures about Market Risk

Market Risk Exposure

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

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

Foreign Exchange Exposure

     We are exposed to foreign exchange risk associated with accounts receivable
and payable  denominated  in foreign  currencies,  primarily in Japanese yen. At
June 30, 2001, we had approximately $1.3 million in accounts receivable and $0.9
million of accounts payable denominated in Japanese yen. A one percent change in
exchange  rates  would  result in an  approximate  $4,000  net impact on pre-tax
income based on the quarter end foreign currency denominated accounts receivable
and accounts payable balances.

     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
primarily in our cash,  foreign currency  transactions and operating  results of
our foreign affiliates.

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

                                       31
<PAGE>
     Our cash position includes amounts denominated in foreign  currencies.  The
repatriation of cash balances from certain of our affiliates  could have adverse
consequences  to the  statement  of  operations  as  well  as tax  consequences.
However,  those balances are generally  available without legal  restrictions to
fund ordinary business operations.

     Effective  January  1,  1999,  eleven of fifteen  member  countries  of the
European  Union  established  permanent  rates of exchange  between the members'
national  currency 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 currency is withdrawn by July 2002. Our European operations are located
in Germany which is participating in this monetary union.

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

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

            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.

                                       32
<PAGE>
ITEM 8:  Financial Statements and Supplementary Data

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Historical:

  Applied Films Corporation and Subsidiaries

    Consolidated Balance Sheets as of June 30, 2001 and July 1, 2000.......   35

    Consolidated Statements of Operations for the fiscal years ended
       June 30, 2001, July 1, 2000, and July 3, 1999.......................   36

    Consolidated Statements of Stockholders' Equity for the fiscal
       years ended June 30, 2001, July 1, 2000, and July 3, 1999...........   37

    Consolidated Statements of Cash Flows for the fiscal years
       ended June 30, 2001, July 1, 2000, and July 3, 1999.................   38

    Notes to Consolidated Financial Statements.............................   39



                                       33
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders of Applied Films Corporation:

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

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

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



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



                                       34
<PAGE>
                   APPLIED FILMS CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)
<TABLE>
                                                                                                June 30, 2001      July 1, 2000
                                                                                              ------------------ ------------------
<S>                                                                                           <C>                 <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                                    $      26,236     $      32,058
   Marketable securities                                                                                    -            20,167
   Accounts and trade notes receivable, net of allowance of $1,142 and $188                            12,267             6,273
   Costs and profit in excess of billings                                                              29,717             4,571
   Due from Joint Venture                                                                                   -               219
   Inventories, net of allowance of $613 and $261                                                      16,599            10,006
   Assets held for sale                                                                                     -             2,251
   Prepaid expenses and other                                                                             836               187
   Deferred tax asset, net                                                                                989               480
                                                                                              ------------------ ------------------
     Total current assets                                                                              86,644            76,212

Property, plant and equipment, net of accumulated depreciation of $9,998 and $8,479                     7,746             5,320
Goodwill and other intangible assets, net of accumulated amortization of $5,036 and $0                 58,097                 -
Investment in Joint Venture                                                                             9,852             5,746
Deferred tax asset, net                                                                                 6,780               136
Other assets                                                                                              307                64
                                                                                              ------------------ ------------------
         Total assets                                                                            $    169,426     $      87,478
                                                                                              ================== ==================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Trade accounts payable                                                                       $      13,063     $       9,971
   Accrued expenses                                                                                    39,841             2,138
   Accrued pension benefit obligation                                                                   6,876                 -
   Income taxes payable                                                                                     -                98
   Billings in excess of revenue                                                                        8,716                 -
   Current portion of:
     Deferred revenue                                                                                     279               164
     Deferred gain                                                                                         56                56
Deferred tax liability                                                                                  2,129                 -
                                                                                              ------------------ ------------------
     Total current liabilities                                                                         70,960            12,427

Long-term debt                                                                                          6,483                 -
Deferred revenue, net of current portion                                                                2,202             1,210
Deferred gain, net of current portion                                                                     589               644
                                                                                              ------------------ ------------------
         Total liabilities                                                                             80,234            14,281
                                                                                              ------------------ ------------------

STOCKHOLDERS' EQUITY:
   Series A Convertible Preferred Stock, no par value, 1,000,000 shares authorized;
     1,000 and 0 shares outstanding at June 30, 2001 and July 1, 2000, respectively                     8,571                 -
   Common Stock, no par value, 40,000,000 shares authorized, 6,832,701 and
     6,040,856 shares issued and outstanding at June 30, 2001 and July 1, 2000, respectively           83,207            64,959
   Warrants and stock options                                                                             876                 -
   Other cumulative comprehensive loss                                                                 (7,020)              (20)
   Retained earnings                                                                                    3,558             8,258
                                                                                              ------------------ ------------------
       Total stockholders' equity                                                                      89,192            73,197
                                                                                              ------------------ ------------------

Total liabilities & stockholders' equity                                                        $     169,426     $      87,478
                                                                                              ================== ==================
</TABLE>
          See Accompanying Notes to Consolidated Financial Statements.

                                       35
<PAGE>
                   APPLIED FILMS CORPORATION AND SUBSIDIARIES

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

                                       36
<PAGE>
                   APPLIED FILMS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

    FOR THE FISCAL YEARS ENDED JUNE 30, 2001, JULY 1, 2000, AND JULY 3, 1999
                       (In thousands, except share data)
<TABLE>
                                                                        Other
                                                                      Cumulative     Common                             Total
                                 Common Stock      Preferred Stock   Comprehensive    Stock     Deferred    Retained  Stockholder's
                               Shares    Amount    Shares    Amount   Gain (Loss)    Warrants  Compensation Earnings    Equity
<S>                           <C>         <C>          <C>     <C>      <C>          <C>         <C>         <C>       <C>
-------------------------------------------------------------------------------------------------------------------------------
Balances, June 27, 1998       3,472,688   $ 9,424        --    $   --   $     --     $  --       $   (7)     $ 5,409   $14,826
-------------------------------------------------------------------------------------------------------------------------------
   Net (loss)...............         --        --        --        --         --        --           --        (224)      (224)
   ESPP stock issuance......     10,564        33        --        --         --        --           --          --         33
   Exercise of stock options      3,806        16        --        --         --        --           --          --         16
   Amortization of deferred
    compensation............         --        --        --        --         --        --            7          --          7
-------------------------------------------------------------------------------------------------------------------------------
Balances, July 3, 1999        3,487,058     9,473        --        --         --        --           --       5,185     14,658
-------------------------------------------------------------------------------------------------------------------------------
   Net income...............         --        --        --        --         --        --           --       3,073      3,073
   ESPP stock issuance......      5,481        39        --        --         --        --           --          --         39
   Stock options, including
    income tax benefits of
    $253      ..............     48,317       383        --        --         --        --           --          --        383
   Issuance of shares in
    connection with
    secondary offering (net
    of offering costs of
    $461)...................  2,500,000    55,064        --        --         --        --           --          --     55,064
   Comprehensive income:
   Unrealized gain (loss)
    on foreign currency
    translation.............         --        --        --        --        (20)       --           --          --        (20)
-------------------------------------------------------------------------------------------------------------------------------
Balances, July 1, 2000        6,040,856    64,959        --        --        (20)       --           --       8,258     73,197
-------------------------------------------------------------------------------------------------------------------------------
   Net income...............         --        --        --        --         --        --           --      (4,333)    (4,333)
   ESPP stock issuance......      3,916        55        --        --         --        --           --          --         55
   Stock options, including
    income tax benefits of
    $515                        114,576       847        --        --         --        --           --          --        847
   Issuance of stock in
    connection with
    acquisition of LAC......    673,353    17,346        --        --         --        --           --          --     17,346
   Issuance of Series A
    convertible preferred
    stock...................         --        --     1,000     8,571         --        --           --          --      8,571
   Issuance of common stock
    warrants in connection
    with issuance of Series
    A convertible preferred
    stock...................         --        --        --        --         --       876           --          --        876
   Preferred stock dividends         --        --        --        --         --        --           --        (367)      (367)
   Comprehensive income:
    Unrealized gain (loss)
    on foreign currency
    translation.............         --        --        --        --     (7,000)       --           --          --     (7,000)
-------------------------------------------------------------------------------------------------------------------------------
Balances, June 30, 2001       6,832,701   $83,207     1,000   $ 8,571   $ (7,020)   $  876      $    --    $  3,558    $89,192
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       37
<PAGE>
                   APPLIED FILMS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
                                                                            For The Fiscal Years Ended
                                                                    --------------------------------------------
                                                                    June 30, 2001    July 1, 2000   July 3, 1999
                                                                    --------------- -------------- -------------
<S>                                                                 <C>              <C>             <C>
Cash Flows from Operating Activities:
   Net income (loss)                                                 $   (4,333)     $    3,073      $     (224)
   Adjustments to reconcile net income (loss) to net cash flows
     from operating activities -
     Depreciation                                                         2,094           1,826           1,759
     Amortization of deferred compensation & new cash
       compensation expense                                                 143               -               7
     Amortization of deferred gain on lease and Joint Venture              (334)           (220)           (108)
     Amortization of goodwill and other intangible assets                16,536               -               -
     Deferred income tax (benefit) provision                             (4,509)           (628)            530
     Equity in earnings of affiliate                                     (4,106)         (2,217)           (330)
     Deferred gain on equipment sale to Joint Venture                     1,386               -           1,588
     Cost of equipment sale to Joint Venture                              2,251               -           1,693
     Changes in:
       Accounts and trade notes receivable, net                           4,224            (991)            385
       Costs and profits in excess of billings                           (7,203)         (3,011)              -
       Inventories                                                        8,469          (1,872)          1,903
       Prepaid expenses and other                                           299             622             253
       Accounts payable - and accrued expenses                           (3,339)          6,503          (2,534)
       Billings in excess of revenue                                      8,716               -               -
       Income taxes (receivable) payable                                    (98)            809          (1,002)
                                                                    --------------- -------------- -------------
Net cash flows from operating activities                                 20,196           3,894           3,920
                                                                    --------------- -------------- -------------

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

Cash flows from Financing Activities:
   Proceeds from borrowings of long-term debt                            18,862           3,623          12,747
   Repayment of long-term debt                                          (12,379)        (11,024)         (9,598)
   Stock issuance on stock purchase plan, and stock options                 387             422              49
   Proceeds from issuance of preferred stock and warrants, net            9,304               -               -
   Proceeds from secondary offering                                           -          55,525               -
   Dividends paid on preferred stock                                       (322)              -               -
   Offering costs                                                             -            (461)              -
                                                                    --------------- -------------- -------------
Net cash flows from financing activities                                 15,852          48,085           3,198
                                                                    --------------- -------------- -------------

Effect of exchange rate changes on cash and cash equivalents                170               -               -
Net (decrease) increase in cash                                          (5,822)         30,895           1,082
Cash and cash equivalents, beginning of period                           32,058           1,163              81
                                                                    --------------- -------------- ------------
Cash and cash equivalents, end of period                             $   26,236      $   32,058      $    1,163
                                                                    =============== ============== =============
Supplemental cash flow information:
   Cash paid for interest, net of amounts capitalized                $      489      $      366      $      735
                                                                    =============== ============== =============
   Cash received for income taxes, net                               $      (15)     $     (560)     $     (100)
                                                                    =============== ============== =============
</TABLE>
  The accompanying notes are an integral part of these consolidated statements.

                                       38
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  COMPANY ORGANIZATION AND OPERATIONS

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

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

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

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

     Joint Venture

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

(2)  SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation

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

     Use of Estimates

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

     Joint Venture Income Taxes

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

                                       39
<PAGE>
     Fiscal Year

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

     Cash and Cash Equivalents

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

     Marketable Securities

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

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

     Inventories

     Inventories  consist of glass related  materials  used in the production of
coated glass, and materials used in the construction of systems. Inventories are
stated at the lower of cost (first-in, first-out) or market. Inventories at June
30, 2001 and July 1, 2000 consist of the following (in thousands):
<TABLE>

                                                 June 30, 2001     July 1, 2000
                                                 -------------     ------------
<S>                                               <C>              <C>
Raw materials, net............................    $    5,116       $    4,003
Work-in-process...............................         5,822               --
Materials for manufacturing systems...........           733              195
Finished goods, net...........................         4,928            5,808
                                                  ----------       ----------
                                                  $   16,599       $   10,006
                                                  ==========       ==========
</TABLE>

     Property, Plant, and Equipment

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

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

     Income Taxes

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

                                       40
<PAGE>
     Deferred Gain

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

     Recoverability of Tangible and Intangible Assets

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

     Coated Glass Revenue Recognition

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

     Equipment Sales Revenue Recognition

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

     Contracts  in progress at June 30, 2001 and July 1, 2000 are as follows (in
thousands):
<TABLE>

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

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

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

                                       41
<PAGE>
     Contracts that do not qualify for the percentage of completion method under
SOP 81-1 are  accounted for using the completed  contract  method.  Revenues are
recognized when all provisions of the contract are fulfilled.  Costs to complete
the contract are deferred until the related revenue is recognized.

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

     Spare Parts Revenue Recognition

     Spare parts revenues are recognized upon shipment to the customer.

     Deferred Revenue

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

     Research and Development Expenses

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

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

     Foreign Currency Transactions

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

     Foreign Currency Translation

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

     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.

                                       42
<PAGE>
     Net Income (Loss) Income Per Common Share

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

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

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

     Goodwill and Other Intangible Assets

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

     Shipping and Handling Costs

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

     Recent Accounting Standards

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

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

     Following  the  acquisition  of LAC on December 31,  2000,  the Company has
entered into foreign currency forward  contracts to mitigate the risk of changes
in exchange rates on firm sale  commitments  denominated in foreign  currencies.

                                       43
<PAGE>
These  contracts  qualify  as  fair  value  hedges  pursuant  to SFAS  No.  133.
Accordingly,  the fair value of the derivative  instruments  are recorded on the
balance  sheet and are offset by changes in the fair value of the  related  firm
commitments.  The ineffective portion of the derivative instruments are recorded
currently in income. Such amounts have not been significant.

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

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

     Related Parties

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

     Reclassifications

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


(3)     ACQUISITION OF LAC

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

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

     The  allocation is  preliminary  and subject to  adjustment  based upon the
final  determination  of the  purchase  consideration  and the fair value of the
assets  acquired  and  liabilities  assumed.  Goodwill is being  amortized  on a
straight-line basis over a seven year period.  Other intangible assets are being
amortized on a straight line basis over periods of

                                       44
<PAGE>
5 to 7 years.  In-process  research and  development  represents  the intangible
value of in-process  research and development  projects that had not yet reached
technical  feasibility.  The  related  technology  had no  alternative  use  and
required substantial additional development by the Company.  In-process research
and  development  was charged to  operations  during the quarter ended March 31,
2001.

     The  following  unaudited  pro  forma  information  reflects  the pro forma
consolidated  results of  operations  for the Company  giving  effect to the LAC
acquisition  and related  issuance of Series A convertible  preferred  stock and
warrants  as if the  transactions  occurred  on July 2,  2000 and July 4,  1999,
respectively.  The unaudited pro forma results include the unaudited  historical
operating  results of LAC for six months  ended  December 31, 2000 and 12 months
ended  July  1,  2000,  respectively.  The  unaudited  pro  forma  data  is  not
necessarily  indicative  of the  Company's  results  of  operations  that  would
actually have been reported if the  transaction  in fact had occurred on July 2,
2000 and July 4, 1999,  respectively,  and is not necessarily  representative of
the Company's consolidated results of operations for any future period.
<TABLE>
                                                                         Fiscal Year Ended
                                                    ------------------------------------------------------------
                                                            June 30, 2001                 July 1, 2000
                                                    ----------------------------- ------------------------------
                                                               (in thousands, except per share data)
                                                      Historical     Pro Forma      Historical     Pro Forma
                                                    ------------- --------------- -------------- ---------------
                                                                            (unaudited)
<S>                                                  <C>            <C>            <C>            <C>
Net revenues                                         $   112,715    $   174,740    $    42,292    $   119,460
Operating income (loss)                                  (16,353)       (23,371)           (74)       (20,387)
Net loss                                                  (4,333)       (12,330)        (3,073)       (10,412)
Income (loss) per common share - basic and diluted        ($0.73)   $     (2.04)        ($0.72)   $     (2.28)
</TABLE>


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

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

(5)     INVESTMENT IN JOINT VENTURE

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

                                       45
<PAGE>
the fourth  quarter of fiscal 2001, the Company  manufactured  an upgrade to its
existing equipment and sold it to the Joint Venture for $915,000.

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

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

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

     Summarized  balance sheet  information for the Joint Venture as of June 30,
2001, July 1, 2000, and July 3, 1999, is presented below (in thousands):
<TABLE>
                                                  June 30, 2001       July 1, 2000       July 3, 1999
                                                  -------------       ------------       ------------
<S>                                                <C>                <C>                 <C>
Assets:
     Current assets..........................      $     8,410        $     9,956         $     5,411
     Property, plant, and equipment, net.....           27,860              9,921              10,414
                                                   -----------        -----------         -----------
                                                   $    36,270        $    19,877         $    15,825
                                                   ===========        ===========         ===========

Capitalization and liabilities:
     Current liabilities......................     $     9,239        $     5,397         $     7,125
     Long-term debt...........................           7,321              2,800               1,596
     Common shareholders' equity..............          19,710             11,680               7,104
                                                   -----------        -----------         -----------
                                                   $    36,270        $    19,877         $    15,825
                                                   ===========        ===========         ===========
</TABLE>

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


(6)      ASSETS HELD FOR SALE

     During  fiscal  2000,  the  Company  entered  into  an  agreement  to  sell
refurbished  equipment to the Joint Venture for approximately $4.7 million.  The
equipment had been used in the  Company's  thin film coated glass  segment.  The
sale was subject to customary  terms,  including  installation and acceptance at
the Joint  Venture's  premises.  The Company

                                       46
<PAGE>
recorded  the sale during the first  quarter of fiscal  2001.  Accordingly,  the
equipment was classified as assets held for sale at July 1, 2000.


(7)      STOCKHOLDERS' EQUITY

     Secondary Offering

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

     Stock Options

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

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

     Outside Directors Options

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

     Statement of Financial Accounting Standards No. 123

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

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

     To estimate  expected lives of options for this  valuation,  it was assumed
options will be exercised at varying schedules after becoming fully vested.  All
options are initially assumed to vest.  Because of the exercise trend related to
both the 1993 and 1995 option grants,  the expected life of the options has been
extended to seven years in 1999. Cumulative

                                       47
<PAGE>
compensation  cost  recognized  in pro forma net income or loss with  respect to
options  that are  forfeited  prior to vesting is adjusted as a reduction of pro
forma  compensation  expense in the period of  forfeiture.  Until the  Company's
common stock was publicly traded,  the expected market  volatility was estimated
using the estimated  average  volatility of three publicly held companies  which
the  Company  believes to be similar  with  respect to the markets in which they
compete.  Actual  volatility  of  the  Company's  stock  may  vary.  Fair  value
computations are highly sensitive to the volatility factor assumed;  the greater
the volatility, the higher the computed fair value of the options granted.

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

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

     Basic earnings (loss) per share:
         As reported.................................      $    (.73)     $     0.72     $   (0.06)
                                                           ==========     ==========    ===========
         Pro forma...................................      $    (.87)     $     0.67     $   (0.09)
                                                           ==========     ==========    ===========
</TABLE>

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

                                                                    For the Fiscal Years Ended
                                     --------------------------------------------------------------------------------------------
                                           June 30, 2001                    July 1, 2000                    July 3, 1999
                                     ---------------------------     ----------------------------    ----------------------------
                                                    Weighted                         Weighted                         Weighted
                                                     Average                         Average                          Average
                                       Options    Exercise Price       Options    Exercise Price       Options     Exercise Price
                                       -------    --------------       -------    --------------       -------     --------------
<S>                                    <C>           <C>               <C>           <C>               <C>          <C>
Outstanding at beginning of year        455,076      $    4.22          384,296      $    3.42         379,645      $   3.77
         Granted                        230,236          18.31          124,160           6.30          89,568          3.02
         Forfeited                       (8,900)         29.73           (5,063)         (3.16)        (81,111)         4.65
         Exercised                     (114,576)          2.94          (48,317)         (2.88)         (3,806)         2.87

Outstanding at end of year              561,836           9.88          455,076           4.22         384,296          3.42
                                        =======      =========          =======      =========         =======      ========
Exercisable at end of year              228,778           4.16          268,076           3.45         260,288          3.25
                                        =======      =========          =======      =========         =======      ========

Weighted average fair value of
    options granted                                  $   11.87                       $    5.94                      $   2.05
                                                     =========                       =========                      ========
</TABLE>

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

                                       48
<PAGE>
     Employee Stock Purchase Plan

     On September 5, 1997,  the board of directors of the Company  adopted,  and
the shareholders  subsequently  approved, the Applied Films Corporation Employee
Stock  Purchase Plan (the "Purchase  Plan").  On September 8, 2000, the board of
directors  adopted the third  amendment  to the  Applied  Films  Employee  Stock
Purchase Plan. The Purchase Plan will permit  eligible  employees of the Company
to  purchase  shares of common  stock  through  payroll  deductions.  Shares are
purchased  at 85% of the  fair  market  value  of the  common  stock on the last
trading day in each six month  purchase  period.  Up to 100,000 shares of common
stock may be sold under the Purchase  Plan.  Shares sold under the Purchase Plan
may be newly issued shares or shares acquired by the Company in the open market.
Unless  terminated  earlier by the board of  directors,  the Purchase  Plan will
terminate when all shares reserved for issuance have been sold  thereunder.  The
Purchase Plan is intended to qualify as an "employee  stock purchase plan" under
Section  423 of the  Internal  Revenue  Code of 1986,  as  amended,  and will be
administered in accordance with the limitations set forth in Section 423 and the
rules and regulations thereunder.

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

Series A Convertible Preferred Stock

     Overview

     On January 18, 2001, the Company sold $10.0 million in Series A Convertible
Preferred  Stock  ("Series  A")  that is  convertible  into  common  stock  at a
conversion  price of $19.75 per common share. The conversion price of the Series
A is subject to adjustment under certain  circumstances.  The Series A carries a
dividend rate of 7% until October 16, 2001,  and then the rate increases to 8.5%
unless certain  conditions  are satisfied.  During fiscal year 2001, the Company
accrued $366,722, or $367 per share, of Series A in dividends.  The Series A may
be exchanged at the Company's option for a 5% subordinated convertible debenture
due  January  16,  2004.  The  Company  also  issued two grants of  warrants  in
connection  with this  offering:  warrants to purchase  75,949  shares of common
stock at $22.33 per share and warrants to purchase  17,468  shares at $20.09 per
share. The warrants are immediately  exercisable,  and may be exercised any time
over a five and three year period, respectively. The Company determined the fair
value of these warrants to be  approximately  $733,623  using the  Black-Scholes
option pricing model using the following weighted average assumptions:

        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.

     Repurchase Option

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

     Preferred Stockholder's Annual and Special Put Options

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

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

     However, in lieu of allowing the holders of Series A convertible  preferred
stock to exercise  their  annual put option or their  special  put  option,  the
Company may elect to repurchase all or a portion of the outstanding  Series A at
114%

                                       49
<PAGE>
of the stated value of the Series A plus all accrued but unpaid dividends in the
case of a special  put option  and at 100% of the  stated  value of the Series A
plus all accrued but unpaid dividends in the case of the annual put option.

     Required Conversion

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

     Exchange for Debentures

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

     Subordination

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

(8)      INCOME TAXES

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

     The net deferred tax asset  (liability)  is comprised of the  following (in
thousands):
<TABLE>
                                                                       June 30, 2001       July 1, 2000
                                                                       -------------       ------------
    <S>                                                                <C>                 <C>
    Inventories..................................................         $   276            $   160
    Accrued expenses.............................................           2,839                335
    Deferred compensation........................................             202                181
    Deferred gain................................................             240                261
    Deferred revenue.............................................             373                513
    Goodwill and other intangible assets                                    4,601                 --
    Net operating loss carry forwards                                       2,159                 --
                                                                          -------            -------
           Total deferred tax assets.............................          10,690              1,450
                                                                          -------            -------

    Property, plant and equipment................................            (771)              (794)
    Uncompleted contracts........................................          (4,255)                --
    Other  ......................................................             (24)               (41)
                                                                          -------            -------
           Total deferred tax liabilities........................          (5,050)              (835)
                                                                          -------            -------
           Total deferred tax asset, net.........................         $ 5,640            $   615
                                                                          =======            =======
</TABLE>
                                       50
<PAGE>
     Income tax  (benefit)  provision  for the fiscal years ended June 30, 2001,
July 1, 2000, and July 3, 1999 consist of the following (in thousands):
<TABLE>
                                                                                Fiscal Years Ended
                                                                 --------------------------------------------------
                                                                  June 30, 2001    July 1, 2000     July 3, 1999
                                                                  -------------    ------------     ------------
<S>                                                               <C>                 <C>              <C>
Current provision (benefit):
    Federal...................................................      $  (95)           $   484          $ (718)
    State.....................................................          (9)                47             (70)
    Foreign...................................................      (1,147)                --              --
                                                                    -------           -------          ------
       Total current provision (benefit)......................      (1,251)               531            (788)
Deferred provision (benefit):
    Federal...................................................      (1,848)              (572)            483
    State.....................................................        (180)               (56)             47
    Foreign...................................................      (2,481)                --              --
                                                                    -------            -------         ------
       Total deferred provision (benefit).....................      (4,509)              (628)            530
                                                                    -------            -------         ------
       Total tax provision (benefit)..........................     $(5,760)            $  (97)         $ (258)
                                                                   ========            =======         =======
</TABLE>

     Reconciliations   between  the  effective   statutory  federal  income  tax
provision  (benefit)  rate and the  Company's  effective  income  tax  provision
(benefit)  rate as a  percentage  of net  income  (loss)  before  taxes  were as
follows:
<TABLE>
                                                                                        Fiscal Years Ended
                                                                          ----------------------------------------------
                                                                            June 30,         July 1,          July 3,
                                                                              2001             2000             1999
                                                                          --------------  --------------  --------------
<S>                                                                       <C>              <C>             <C>
Statutory federal income tax (benefit) provision rate............             (34.0)%          34.0%           (34.0)%
State income taxes...............................................              (3.3)            3.3             (3.3)
Foreign income taxes and other...................................              (1.8)            0.1              2.0
Equity earnings in Joint Venture.................................             (14.3)          (33.2)              --
Tax exempt interest income.......................................              (3.7)           (6.4)              --
Effect of foreign sales corporation..............................               --             (1.1)           (18.1)
                                                                              ------          ------           ------
    Effective income tax provision (benefit)                                  (57.1)%          (3.3)%          (53.4)%
                                                                              =======         =======          ======
</TABLE>

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


(9)      EMPLOYEE BENEFIT PLANS

     Profit Sharing Plan

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

                                       51
<PAGE>
     Pension Plan

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

     The following table sets forth the benefit obligation, the funded status of
the pension plan,  amounts  recognized on the Company's  consolidated  financial
statements, and the principle weighted average assumptions used (in thousands):
<TABLE>
                                                                     Year end
                                                                   June 30, 2001
                                                                 ------------------
<S>                                                               <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year                           $            -
Service costs                                                                485
Interest costs                                                               428
Actuarial losses                                                             338
Foreign exchange losses                                                      153
Acquisition                                                                5,810
Benefits paid
                                                                 ------------------
Benefit obligation at end of year                                 $        7,214
                                                                 ------------------

Funded Status:
Unrecognized net actuarial gain                                   $       (7,214)
Unrecognized prior service cost                                              338
                                                                 ------------------
Net amount recognized                                             $       (6,876)
                                                                 ------------------

Amounts Recognized in the Balance Sheets:
Accrued Benefit Liability                                         $       (6,876)
                                                                 ------------------
Net amount recognized                                             $       (6,876)
                                                                 ------------------
Weighted-average Assumptions as of June 30, 2001:
Discount rate                                                               6.0%
Expected return on plan assets                                               N/A
Rate of compensation increase:
                  Employee                                                 2.75%
                  Retired                                                  2.25%

Components of Net Periodic Benefit Cost:
Service Cost                                                      $          485
Interest Cost                                                                428
Expected Return on plan assets                                                 -
Amortization of prior service costs                                            -
Recognition of actuarial loss                                                338
                                                                 ------------------
Net periodic benefit costs                                        $        1,251
                                                                 ------------------
</TABLE>

(10)     SIGNIFICANT CUSTOMERS

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

                                       52
<PAGE>
     The  breakdown  of net  revenues  by  geographic  region is as follows  (in
thousands):
<TABLE>
                                                       Fiscal Years Ended
                                           -------------------------------------------
                                              June 30,       July 1,        July 3,
                                                2001           2000           1999
                                           -------------- ------------- --------------
    <S>                                        <C>            <C>            <C>
    Asia (other than Japan)                    $48,206        $24,641        $17,691
    Japan                                       27,552         13,929          7,645
    United States                               13,764          2,934          4,924
    Europe and other                            23,193            788          1,263
                                               -------        -------        -------
    Net revenues                              $112,715        $42,292        $31,523
                                              ========        =======        =======
</TABLE>

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

(11)     COMMITMENTS

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

     The future  minimum  rental  payments  under the leases are as follows  (in
thousands):
<TABLE>
                 Fiscal Year
                 <S>                                             <C>
                 2002.................................           $    957
                 2003.................................                952
                 2004.................................                894
                 2005.................................                890
                 2006.................................                903
                 Thereafter...........................              6,293
                                                                    -----
                                                                 $ 10,889
</TABLE>
                                       53
<PAGE>
(12)     SEGMENT INFORMATION

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

(13)     FAIR VALUE OF FINANCIAL INSTRUMENTS

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


(14)     QUARTERLY INFORMATION (unaudited)

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

(15)     SUBSEQUENT EVENTS

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

                                       54
<PAGE>
ITEM 9:  Changes in and Disagreements With Accountants and Financial Disclosure

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


                                    PART III

ITEM 10:  Directors and Executive Officers of the Registrant

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

ITEM 11:  Executive Compensation

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

ITEM 12:  Security Ownership of Certain Beneficial Owners and Management

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

ITEM 13:  Certain Relationships and Related Transactions

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

                                     PART IV

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

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

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

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

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

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

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

                                       55
<PAGE>
     (d)  Financial Statement Schedules
          The  response to this  section of Item 14 is  submitted  as a separate
     section of this report.















                                       56
<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           APPLIED FILMS CORPORATION

                                           By: /s/ Thomas T. Edman
                                               Thomas T. Edman, President
                                               August 16, 2001

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed by the following  persons in the capacities  indicated on
August 16, 2001. The persons named below each hereby appoint Thomas T. Edman and
Lawrence D. Firestone,  and each of them severally,  as his attorney in fact, to
sign in his name and on his behalf,  as a director or officer of the Registrant,
and to file with the  Commission  any and all  amendments to this report on Form
10-K.

Signature                              Title

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

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

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

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

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

/s/ Vincent Sollitto                   Director
Vincent Sollitto

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

/s/ Aitor Galdos                       Director
Aitor Galdos
<PAGE>
                                  EXHIBIT INDEX

Exhibit No.    Description
-----------    -----------
      3.1      Amended and Restated  Articles of  Incorporation of Applied Films
               Corporation  are  incorporated  by  reference  to Exhibit  3.1 of
               Registrant's Current Report on Form 8-K dated January 16, 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).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     11.1      Statement re: computation of per share earnings.

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

     23.1      Consent of Arthur Andersen LLP.

     24.1      Power of Attorney (included on page 56).
<PAGE>
                                  Exhibit 11.1

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

                                                                        June 30, 2001
                                                                        -------------
<S>                                                                     <C>
BASIC EARNINGS PER SHARE
Net income applicable to common stockholder (loss)                      $     (4,700)
Weighted average number of common shares outstanding                       6,413,802
Basic earnings per share                                                $       (.73)

DILUTED EARNINGS PER SHARE
Net income (loss)                                                       $     (4,333)
Weighted average number of common shares outstanding                       6,666,966
Assuming exercise of stock options                                           655,253
Assuming repurchase of treasury stock                                       (352,449)
                                                                    ----------------------
        Net incremental shares                                               302,804
Weighted average number of common shares
        Outstanding, as adjusted                                           6,969,770
Diluted earnings per share                                              $       (.62)
</TABLE>
<PAGE>
                                  Exhibit 23.1



                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the incorporation of our
report  dated  July 19,  2001  included  in this Form 10-K,  into the  Company's
previously  filed  Registration  Statement  file numbers  333-47951,  333-47967,
333-38426, 333-51175, 333-95367, 333-56376 and 333-56378.



                                                 /s/ARTHUR ANDERSEN LLP

Denver, Colorado,
August 16, 2001