# FORM 10-K
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                                       OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 28, 2003OR
                               [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                                       OF THE SECURITIES EXCHANGE ACT OF 1934
                                 For the transition period from _______ to ________
                                            Commission file number 23103

APPLIED FILMS CORPORATION

                               (Exact name of registrant as specified in its charter)

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

9586 I-25 Frontage Road, Longmont CO 80504

                                 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (303) 774-3200
                         Securities registered pursuant to Section 12(b) of the Act:   None.
                             Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value (Title of Class)

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes XNo ____

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

The aggregate market value of the
common stock held by non-affiliates of the Registrant, based on a per share price of
$20.33 as of December 27, 2002, was $217,280,046. As of August 27, 2003,
there were outstanding 11,187,137 shares of the Companys Common Stock (no par
value).

Documents Incorporated by Reference:
Portions of the Companys Proxy Statement for the 2003 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Report.



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# 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 28, 2003, June 29, 2002, or
June 30, 2001, unless otherwise indicated.

Applied Films Corporations
(Applied Films, or the Company, or We) Internet
address is www.appliedfilms.com. We make available free of charge on our website
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and Exchange
Commission. In addition and at no extra cost, we will also provide, electronic or paper
copies of our reports and other filings made with the Securities and Exchange Commission.
All requests should be directed to Applied Films Corporation, Attention: Lawrence D.
Firestone, 9586 I-25 Frontage Road, Suite 200, Longmont, Colorado 80504.

The information on our website is not
and should not be considered part of this annual report on Form 10-K and is not
incorporated by reference in this report.

# ITEM 1(a): General
Development of Business

# Introduction

Applied Films Corporation is a
leading provider of thin film deposition equipment to the flat panel display, the
architectural, automotive and solar glass, and the consumer products packaging and
electronics industries. Our deposition systems are used to deposit thin films that enhance
the characteristics of a base substrate, such as glass, plastic, paper or foil. These thin
films provide conductive, electronic, reflective, filter, barrier and other properties
that are critical elements of our customers products. Our thin film deposition
systems provide our customers with high yield and throughput, flexible modular
configurations, and innovative coating and process technologies. Through our China Joint
Venture we process and sell thin film coated glass to the flat panel display, or FPD,
industry.

We leverage our thin film expertise,
technology and market presence to address the evolving demand for more sophisticated,
technologically advanced thin film deposition equipment. Our manufacturing operations in
Germany together with our global sales and support offices enable us to provide thin film
coating solutions to customers throughout the world. We have sold over 90 FPD deposition
systems, 45 architectural and automotive glass thin film deposition systems, and 500 web
coating systems. We have over 80 patents and patent applications related to thin film
technologies.

# Markets We Serve

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

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

Architectural, Automotive and
Solar Glass. Thin film coated glass is used in buildings for exterior window glass,
automobiles for windshields and side windows and solar energy collecting applications.
Applying certain thin films on glass significantly reduces heat transfer through the
glass, improving the efficiency of heating and cooling systems in buildings and vehicles.
In addition, thin films form conductive layers and are integral components of solar cells.
Demand for architectural and automotive coated glass is driven by the need for energy
conservation in commercial and residential construction and increasingly, in automotive
applications. The demand for alternative energy sources also drives demand for solar cells
as we seek to reduce the demand on municipal power grids worldwide.

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Consumer Products Packaging and
Electronics. Web coating systems are used to deposit thin films on multi-layer
flexible packaging for consumer food products and cigarettes. Web coating systems are also
used to produce capacitors and other electronic components. Thin films are applied to a
thin plastic or metal foil substrate to create a barrier, extending shelf life in consumer
food products. Thin films provide the conductive and electronic elements critical to the
manufacture of certain electronic products, such as capacitors and touch panel screens.
The packaging market for web coaters is driven by demand for products packaged in bags and
for decorative packaging. Demand for touch panel applications and capacitors is driving
the electronics market for web coaters. We have developed thin films for the plastic
bottling industry that improve the barrier characteristics of polyethylene terephthalate,
or PET bottles, extending the shelf life of beverages by reducing the rate at which
carbonation escapes or contaminants enter the bottle. The demand for PET bottles with more
efficient barrier characteristics is driven by the bottlers desire to transition
away from glass in favor of plastic.

# Our Thin Film Technology
Solutions

Over the past 27 years, we have
developed leading thin film process and equipment technologies that we leverage to meet
our customers needs for sophisticated, technologically advanced thin film deposition
equipment. We have over 80 patents and patent applications related to thin film
technologies, and we continue to invest in research and development. Historically, we
manufactured our own equipment to produce thin film coated glass and have used that
experience to transition our business to the design and manufacture of thin film
deposition equipment.

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

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

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

# Strategy

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

Focus on High Margin Equipment
Opportunities. We have successfully implemented our strategy of transitioning from
supplying thin film coated glass to manufacturing thin film deposition equipment. This
transition has substantially improved our gross profit margins, as higher-margin equipment
sales now constitute greater than 95% of our revenues. We will continue to focus our
research and development on process technologies designed to increase our value to the
customer and further improve our margins.

Leverage Our Leadership in Our
Core Markets. We are a market leader with the largest installed base of inline systems
for the FPD, the architectural and automotive glass markets, and the consumer products
packaging and electronics markets. We have sold over 90 inline FPD deposition systems, 45
architectural and automotive systems, and 500 web coating systems. We believe our
reputation as a high quality supplier of thin film deposition equipment allows us to
establish key customer relationships and to grow with these customers as they develop new
products and to meet new market requirements. We intend to utilize our strong
technological capabilities to capture additional market share in core markets.

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Target Emerging High Growth Market
Opportunities. We have recently entered and are focusing our research and development
efforts on three growth markets for solar cell, organic light emitting diodes, or OLEDs,
and barrier coated PET bottles. We have installed development and pilot production tools
for each of these markets, and are working with our strategic partners to develop our
technologies in each of these areas.

Engage in Strategic
Relationships. Our strategic relationships have influenced our technological
direction, maximized our research and development investments, and enhanced the sales,
marketing and distribution of our products. For example, we have been working with a
strategic customer in the OLED market who has purchased one of our systems and is working
with us as we develop the thin film and process technologies to shorten our development
time for a high volume production solution for color OLEDs. We have also developed
process technology with the cooperation of the major energy companies to advance our
process technologies for the solar cell market. We continue to develop our barrier coating
process technology for PET bottles in partnership with The Coca-Cola Company. We also
entered into a joint venture in China (referred to as the China JV or the Joint Venture)
with Nippon Sheet Glass Co., Ltd., or NSG, one of the worlds largest supplier of
glass to the FPD market, through which we coat and distribute glass to the FPD industry.
We will continue to pursue strategic relationships with industry leaders in each new
market or market segment that we enter.

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

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

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

# ITEM 1(c): Narrative
Description of Business

# Products

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

|End Markets and Products                     | Deposition Method | Examples ofEnd Market Application                  | General PriceRange(1)
|-------------------------------------------- | ----------------- | -------------------------------------------------- | ---------------------
|Flat Panel Displays:                        
|NEW ARISTO                                   | PVD               | Laptop and desktop monitors and plasma televisions | $4-8 million         
|VES 400 (Development)                        | Evaporative       | OLED displays                                      | Price not determined 
|Architectural, Automotive and Solar Glass:  
|Terra-G                                      | PVD               | Low-E window glass                                 | $10-20 million       
|SOLARISTO                                    | PECVD             | Solar panels                                       | $4-7 million         
|ECOVERA (Development)                        | PECVD             | Solar panels                                       | $3-5 million         
|ATON (Development)                           | PVD               | Solar panels                                       | $3-5 million         
|A-650                                        | PVD               | Solar panels                                       | $2-5 million         
|Consumer Products Packaging and Electronics:
|TOPMET                                       | Evaporative       | Potato chip bags                                   | $1-3 million         
|MULTIMET                                     | Evaporative       | Capacitors                                         | $1-3 million         
|TOPBEAM                                      | Evaporative       | Food packaging (transparent)                       | $4-6 million         
|MULTIWEB                                     | PVD               | Touch panels                                       | $4-8 million         
|                                            
|BESTPET-LG 20 (Development)                  | Evaporative       | Plastic beverage bottles                           | $1-3 million         

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

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Thin Film Deposition
Equipment

Flat Panel Displays

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

NEW ARISTO. Our NEW ARISTO is
an advanced thin film deposition system that accommodates the largest mother glass sizes
including generation 6 and 7 and meets the low particulate requirements of the active
matrix LCD, plasma display television and color super twisted nematic, or CSTN, coated
glass markets. The system features high throughput, low cost of ownership and the
capability for double-sided coatings.

VES 400. Our VES 400 system is
an advanced production thin film deposition system for the OLED market. The VES 400
applies all of the thin films necessary for an OLED device including the metal layers and
organic layers in a vacuum. The VES-400 is targeted at providing OLED manufacturers with
the ability to produce OLED devices in production volumes. We believe this is the first
vertical in-line deposition system developed for OLED.

Architectural, Automotive
and Solar Glass

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

Terra-G.  
          Our Terra-G thin film deposition system is our most advanced coating system
          designed for the large architectural and automotive glass market. The Terra-G
          uses large planar magnetron or rotary cathodes and uniformly deposits multiple
          thin films across a large area at very high throughput rates. The Terra-G can be
          up to 130 meters long and can deposit complex layer stacks of different thin
          films on a single side of glass.

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

ECOVERA.Our ECOVERA thin film deposition system is a vertical coating system that
          applies the functional layers and transparent conductive oxide layers for
          amorphous silicon and microcrystalline solar cells.

ATON.Our ATON thin film deposition system is a horizontal sputtering system that
          applies silicon nitride and other thin film layers for a polycrystalline water
          based solar cell.

A-650.Our A-650 thin film deposition system is a horizontal coating system that
          applies the functional layers and other thin film layers for CIS or CIGS solar
          cells.

Consumer Products
Packaging and Electronics

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

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

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

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

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

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

Thin Film Coated Glass

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

# Sales, Marketing and
Customers

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

In fiscal 2003, our ten largest
customers accounted for approximately 53% of our gross revenues. Revenue from Guardian
Industries Corporation represented 13.3% of net revenue for fiscal 2003. Approximately 71%
of our fiscal 2003 net revenues were derived from exports to our customers outside of our
manufacturing center in Europe, primarily to Asia. The demand for FPD thin film coated
glass is primarily in Asia, and our customers for thin film deposition equipment have
historically been predominately located in Japan, Korea, China, Taiwan, Europe and the
United States.

# Customer Service

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

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

# Manufacturing and
Facilities

Our Longmont, Colorado, headquarters net of a sublease
contains approximately 87,000 square feet and include general offices and research and
development. This facility is leased from an independent third party.

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

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

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

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

# Competition

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

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

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

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

Consumer Products Packaging and
Electronics Deposition Equipment. Our most significant competitors for web coating
systems are Valmet General, headquartered in the United Kingdom and Kontex AG of Germany. In
the coated PET bottle market, we compete with Sidel, a French filling line equipment
company, and a division of Tetra-Pak (Swiss) SA.

Thin Film Coated  Glass.  Our primary
competitors  for thin film coated glass are The Samsung  Corning,  Co.,  Ltd,  Merck  Display
Technologies Ltd., Shenzhen Nanbo Display Technology Co. Ltd., and Shenzhen Laibao Vactech Co. Ltd.

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

# Research and Development

We have approximately 50 engineers
and scientists involved in research and development. We will continue to emphasize
improvements in current equipment technology, the development of new process technologies
for thin film deposition, and the modification of thin film material properties. The
foundations of our success are based on engineering solutions, extensive experience with
vacuum technologies, and the depth of our commercial deposition experience. Our customer
oriented solutions include cost effective thin film deposition, simplified process
control, and innovative deposition equipment designs. We continue to build on these
traditions in the development of process control and deposition design, which lower the
cost of ownership to the customer.

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

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- Arc evaporation for high speed deposition of barrier layers.

Our research and development
expenditures were $6.3 million in fiscal 2001, $9.2 million in fiscal 2002 and $12.2
million in fiscal 2003.

# Intellectual Property

We use a combination of patent,
copyright, trademark and trade secret protection as well as non-disclosure agreements and
licensing arrangements to establish and protect our proprietary rights. Steps taken by us
to protect our proprietary rights may not be adequate to prevent misappropriation of such
rights or third parties from independently developing a functionally equivalent or
superior technology. We have over 80 patents and patent applications.

We license certain intellectual
property to Balzers Process Systems GmbH, an indirect subsidiary of Unaxis under an
irrevocable, royalty-free, perpetual and worldwide license agreement. We also license
certain intellectual property from Balzers Process Systems. The license is irrevocable,
royalty-free, perpetual and worldwide.

Certain patents and other
intellectual property related to PET bottle coating technology are licensed from The
Coca-Cola Company.

# Strategic Relationships
with The Coca-Cola Company

In July 1997, we entered into a
strategic relationship with The Coca-Cola Company to develop and produce thin film
deposition equipment to apply barrier coatings to the outside of plastic bottles. We have
designed and constructed prototype machines, and sold pilot lines to Coca-Cola. We
continue to improve our barrier coating process technology and believe that our strategic
relationship with The Coca-Cola Company presents us with a good foundation for technology
development.

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

# The LAC Acquisition

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

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

# China Joint Venture

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

Our strategy for the China JV has
involved the transfer of the majority of our thin film coated glass manufacturing capacity
to China. We have transferred three thin film coating systems to the China JV facilities,
bringing the number of high throughput coating systems to three. The China JVs
location in Asia allows them to produce coated glass in the China JV facility immediately
adjacent to our primary source of raw glass, NSG, and in close proximity to the China
JVs Asian customer base. During fiscal 2003 we expanded into the color STN market by
supplying thin film coated glass over color filter from our China JV. We will also
continue to evaluate business opportunities that strengthen our position with the China
JVs customers.

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# Employees

As of June 28, 2003, we
employed a total of 506 people, with 28 people in the United States, 429 in Europe and 49
in Asia, including regular, contract and temporary employees. Our United States workforce
is non-union, the majority of our German work force is represented by a works council that
has employee representation. Most companies in Germany are required to be represented by
works councils. We negotiate wages and benefits annually with our German workforce. Our
workforce in Asia is primarily dedicated to sales and customer service. We consider our
relationship with our employees to be good.

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

# Environmental Regulations

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

# Trademarks

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

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# ITEM 1 (d): Information
About Foreign Operations

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

# ITEM 2: Properties

See "ITEM 1 (c): Narrative Description of Business -Manufacturing and Facilities"

# ITEM 3: Legal Proceedings

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

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

No matters were submitted during the
fourth quarter of fiscal 2003 to a vote of our Shareholders.

ADDITIONAL ITEM:  EXECUTIVE OFFICERS OF THE REGISTRANT

# Executive Officers and
Directors

Our executive officers and directors
are as follows:

| | Name                                  | Age | Position                                           
| | ------------------------------------- | --- | ---------------------------------------------------
| | Thomas T. Edman...............        | 41  | Director, President and Chief Executive(2)         
| | Graeme Hennessey..............        | 65  | Vice President - Sales and Marketing(2)            
| | Lawrence D. Firestone........         | 45  | Chief Financial Officer, Treasurer and Secretary(2)
| | Helmut Frankenberger.........         | 46  | Executive Vice President - Sales & Marketing(2)    
| | Jim Scholhamer..................      | 37  | Senior Vice President - Operations(2)              
| | Allen Alley.......................... | 49  | Director(1)                                        
| | John S. Chapin....................    | 62  | Director                                           
| | Chad D. Quist.....................    | 41  | Director(1)                                        
| | Richard P. Beck...................    | 70  | Director, Chairman of the Board(1)                 
| | Vincent Sollitto, Jr. ..............  | 55  | Director(1)                                        

_________________

(1)    
          Member of the Audit, Compensation Committees, Nominating and Governance
          Committees.
(2) Executive Officer

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 also serves on the national
board of directors of the American Electronics Association, a professional trade
organization, and is chairman of its audit committee. Mr. Edman has a bachelors of arts
degree in East Asian studies (Japan) from Yale and received a masters degree in business
administration from The Wharton School at the University of Pennsylvania.

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

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

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Helmut Frankenberger served as
our Executive Vice President  Sales & Marketing since the LAC acquisition on
December 31, 2000 through August 31, 2003 when he resigned his
position with Applied Films Corporation. 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 served as
our Senior Vice President since July 2003. From January 2001 to July 2003, Mr. Scholhamer
was the Vice President  Operations and from August 1997 to January 2001 he was the
Director of Operations for Thin Film Coatings. From 1992 until he joined the Company, Mr.
Scholhamer held the titles of Manufacturing Manager and Process Engineer at Viratec Thin
Films, Inc., located in Minnesota. From 1989 to 1992, Mr. Scholhamer served as Production
Manager and Process Engineer at Ovonic Synthetic Materials, Inc., a division of Energy
Conversion Devices, located in Michigan. Mr. Scholhamer has a bachelors of science degree
in engineering from the University of Michigan.

Allen H. Alley
has been a director of our company since September 2002.  Mr. Alley co-founded Pixelworks and has served as the
President, CEO, and chairman of the board of Pixelworks since its inception in 1997.  From 1992 to 1997, Mr. Alley served as the
Vice President Corporate Development, Engineering and Product Marketing at InFocus Systems, a leading electronic display company.
While at InFocus, Mr. Alley was also the co-CEO of a joint venture with Motorola, Inc. called Motif. From 1986 until 1992, Mr.
Alley served as General Partner with Battery Ventures, a venture capital investment firm.  From 1983 to 1986, Mr. Alley was the
Director of Mechanical Computer Aided Engineering of Computervision Corporation, a computer-aided design software developer.  From
1979 to 1983, Mr. Alley was a Lead Mechanical Engineer at Boeing Commercial Airplane Division.  From 1976 to 1979, Mr. Alley
served as a Product Design Engineer for the Ford Motor Company.  Additionally, Mr. Alley serves on the board of directors of the
Oregon Museum of Science and Industry, is the Chairman of the Oregon Council of Knowledge and Economic Development, and in
February 2002, he accepted an appointment by President George W. Bush to the US-Japan Private Sector Government Commission.  Mr.
Alley holds a bachelors of science degree in mechanical engineering from Purdue University.

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

Chad D. Quist has been a
director of our company since April 1997. Mr. Quist is the President of Optera, Inc., a
wholly-owned subsidiary of Magna Donnelly Corporation. Mr. Quist has been employed by
Magna Donnelly since 1995. Optera, Inc. is a leading supplier of glass components for
the touch screen and display 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 served as
our director since May 1998 and Chairman of the Board since October 2001. From March 1992
to May 2002, Mr. Beck served in various capacities for Advanced Energy Industries, Inc., a
publicly held manufacturer of power conversion and integrated technology solutions,
including Senior Vice President from November 2001 to May 2002, Senior Vice President and
Chief Financial Officer from February 1998 to November 2001, and Vice President and Chief
Financial Officer from March 1992 to February 1998, and he continues to serve as a
Director of the company. From November 1987 to March 1992, Mr. Beck served as Executive
Vice President and Chief Financial Officer of Cimage Corporation, a computer software
company. Mr. Beck serves as a director of Photon Dynamics, Inc. and TTM Technologies,
Inc., both publicly held companies, and he serves as chairman of their audit committees.
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 is the President and Chief
Executive Officer and member of the board of Brillian Corporation. From July 1996 to
February 2003, Mr. Sollitto was President and Chief Executive Officer and a member of the
Board of Directors 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. Prior to 1991, Mr. Sollitto spent 21 years in various
management positions at IBM, including Director of Technology and Process. Mr. Sollitto
serves as a director on the boards of Irvine Sensors Corporation and Ultratech Inc.. Mr.
Sollitto holds a bachelor of science degree in electrical engineering from Tufts College.

10

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# Executive Officers

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

ADDITIONAL
ITEM:  RISK FACTORS

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

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

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

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

These factors are difficult or
impossible to forecast.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

- performance of our products;
- quality
of our products;
- reliability of our products;
- cost of owning and using our products;
- our
ability to ship products on the schedule required;
- quality of the technical service we provide;
- timeliness of the services we provide;

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- our success in developing new products and enhancements;
- existing
market and economic conditions;
- foreign currency exchange conditions; and
- price
of our products and our competitors products.

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

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

Export revenues to customers outside
of our manufacturing center in Europe represented approximately 79% of our net revenues in
fiscal 2001, 60% of our net revenues in fiscal 2002 and 71% of our net revenues in fiscal
2003. The principal international markets into which we and our China JV sell our products
are China (including Hong Kong), Korea, Japan and Taiwan. Banking and currency problems in
Asia have had and may continue to have an adverse impact on our revenues and operations.
Our operations in China will be subject to the economic and political uncertainties
affecting that country. For example, the Chinese economy has experienced significant
growth in the past decade, but such growth has been uneven across geographic and economic
sectors. This growth may continue to be uneven and any slowdown may have a negative effect
on our business. We believe international sales will continue to represent a significant
portion of our sales, and that we will continue to be subject to the normal risks of
conducting business internationally. Such risks include:

- foreign exchange risks;
- inflation or deflation in foreign economies;
- the burdens of complying with a wide variety of foreign laws;
- unexpected changes in regulatory requirements and the imposition of government controls;
- political and economic instabilities;
- export license requirements;
- protective trade activities, such as tariffs and other barriers;
- the risk of business interruption;
- difficulties in accounts receivable collections;
- inability to protect intellectual property rights;
- difficulties in staffing and managing foreign sales operations; and
- potentially adverse tax consequences.

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

In fiscal 2003, approximately 3% of
our net revenues were denominated in yen, 90% were denominated in Euros and 7% were
denominated in U.S. dollars. Any strengthening or weakening of the yen, Euro or U.S.
Dollar in relation to other currencies in which our customers or competitors do business,
could adversely affect our competitiveness, as our products will become more expensive to
customers outside Europe and less competitive with products produced by competitors
outside Europe. A strengthening of the Euro 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 Euro-yen exchange rate. Our China JV
transacts much of its business in Chinese Yuan Renminbi. While this currency has remained
fairly constant in value, any devaluation of the Chinese Yuan Renminbi would adversely
affect our business, operating results, financial conditions and prospects. Foreign sales
also expose us to collection risks in the event it becomes more expensive for our foreign
customers to convert their local currencies into dollars. Fluctuations in exchange rates
could adversely affect our competitive position or result in foreign exchange losses,
either of which could materially adversely affect our business, operating results,
financial conditions and prospects.

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The assets, liabilities and operating
expenses of our German operations are reported in Euros. Our financial statements,
including our consolidated financial statements, are expressed in dollars. The translation
exposures that result from the inclusion of financial statements that are expressed in
functional currencies other than dollars are not hedged. These net translation exposures
are taken into stockholders equity. As a result, our operating results are exposed
to fluctuations of Euros against the dollar. As of June 28, 2003, the unrealized
translation adjustment was $11.5 million, which was primarily attributable to the goodwill
and other intangible assets from the LAC acquisition that are denominated in Euros and
intercompany debt denominated in the functional currency of the country.

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

Our ten largest customers accounted
for 53% of our net revenues in fiscal 2003. Revenues from Guardian Industries represented
13.6% of net revenues for fiscal 2003. Revenues from our largest customers have varied
significantly from year to year and will continue to fluctuate in the future. We may not
be able to retain our key customers, or these customers may cancel purchase orders or
reschedule or decrease their level of purchases from us. If a large order were delayed or
cancelled, our revenues would significantly decline, and the loss of, or a significant
reduction of purchases by, one or more of our significant customers would materially
adversely affect our business, operating results, financial condition and prospects. In
addition, any difficulty in collecting amounts due from one or more key customers could
harm our financial results. There are a limited number of potential customers in each of
our markets, and we expect that sales to a relatively small number of customers will
continue to account for a high percentage of our revenues in those markets in the
foreseeable future.

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

The success of our strategy to
develop emerging high growth market opportunities depends on the level of sales, marketing
and distribution support we receive from our strategic partners. For example, we have
little experience in the market for barrier coated plastic bottles. We have developed PET
bottle deposition equipment for this market in partnership with The Coca-Cola Company and
KRONES AG. We are relying on KRONES to provide the atmospheric top coater and the
necessary sales, marketing and distribution support of our product once it is commercially
viable to introduce our product the PET bottle market. The failure of Coca-Cola to devote
adequate resources toward product development and KRONES to devote adequate resources to
marketing and distributing our PET bottle deposition equipment could limit our ability to
grow or sustain our revenues and earnings.

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

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

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

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

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

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

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

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

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

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

The market to supply thin film coated
glass to liquid crystal display, or LCD, manufacturers is highly competitive. Many of our
competitors have substantially greater financial, technical, marketing and sales resources
than we or our China Joint Venture have. Additional competitors may enter our markets,
certain of which may offer lower prices. Prices for much of our low resolution thin film
coated glass products supplied to the LCD market declined in past years. We and our Joint
Venture have experienced further pricing pressures and decreased demand in fiscal 2003,
and we may in the future experience pricing pressures as a result of a decline in industry
demand, excess inventory levels, increases in industry capacity or the introduction of new
technologies. Many of our customers are under continuous pressure to reduce prices and we
expect to continue to experience downward pricing pressures on our thin film coated glass
products. We and our Joint Venture 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 and our Joint Venture must achieve
manufacturing efficiencies and cost reductions and obtain orders for higher volume
products. If we are unable to offset declining sales prices, our gross margins on coated
glass will decline and equity earnings from the Joint Venture will decline.

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

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

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

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

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

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

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

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

In fiscal 2003, 71% of our revenue
was derived from sales in foreign countries outside of our manufacturing center in Europe,
including certain countries in Asia such as Taiwan, Korea, China and Japan. The laws of
some foreign countries do not protect our proprietary rights to as great an extent as do
the laws of Europe and the United States, and many companies have encountered substantial
problems in protecting their proprietary rights against infringement in such countries.
For example, Taiwan is not a signatory of the Patent Cooperation Treaty, which is designed
to specify rules and methods for defending intellectual property internationally. In many
instances, the publication of a patent prior to the filing of a patent application in
Taiwan would invalidate the ability of a company to obtain a patent in Taiwan. Similarly,
in contrast to the United States where the contents of patents remain confidential during
the patent prosecution process, the contents of a patent are published upon filing, which
provides competitors an advance view of the contents of a patent application prior to the
establishment of the patent rights. There is a risk that our means of protecting our
proprietary rights may not be adequate in these countries. For example, our competitors in
these countries may independently develop similar technology or duplicate our systems. If
we fail to adequately protect our intellectual property in these countries, it would be
easier for our competitors to sell competing products in those countries.

17

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# Our assets may become
impaired

We prepare our financial statements
in conformity with U.S. GAAP. U.S. GAAP requires us to annually evaluate whether certain
assets have been impaired. Goodwill is tested for impairment using a fair-value-based
approach. In addition, GAAP also requires us to evaluate the carrying value of all
long-lived intangible assets other than goodwill whenever events or circumstances indicate
that the carrying value of assets may exceed their recoverable amounts. An impairment loss
on long-lived intangible assets other than goodwill 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. One or more impairment losses
could adversely affect our financial condition and results of operations.

Recently the FASB issued new
pronouncements under FASB 142 regarding goodwill and intangible assets and under FASB 144
long-lived assets. As a result of the acquisition of the large area coatings business and
the adoption of FASB 142 in July of 2001, we have $89.0 million in goodwill and intangible
assets on our balance sheet of which $61.3 million is goodwill, which we do not
amortize. We undergo an impairment test each year and based on future market conditions
these assets could become impaired and our financials would need to be adjusted to reflect
that. This could negatively impact our financial performance.

Because of our 50% ownership in the Joint Venture,
we record our portion of the earnings
from the Joint Venture in the investments in Joint Venture section of the balance sheet.
This item is a long-lived asset and under FASB 144 long-lived assets will undergo our
impairment test each year, based on current market conditions. This asset could become
impaired and our financial statements would need to be adjusted to reflect that. This
could negatively impact our financial performance.

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

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

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

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

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

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

# Our stock price may
fluctuate significantly.

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

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

18

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

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

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

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

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

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

# We may issue additional
shares and dilute your ownership percentage.

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

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

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

19

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# PART II

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

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

| |                                         |   | High |     | Low |   
| | --------------------------------------- | - | ---- | --- | --- | --
| | Fiscal 2002:                            |   |     
| | First Quarter                           | $ | 25   | .30 | $   | 12
| | Second Quarter                          |   | 34   | .47 |     | 15
| | Third Quarter                           |   | 35   | .20 |     | 20
| | Fourth Quarter                          |   | 27   | .95 |     | 9 
| | Fiscal 2003:                            |   |     
| | First Quarter                           | $ | 11   | .99 | $   | 7 
| | Second Quarter                          |   | 21   | .67 |     | 7 
| | Third Quarter                           |   | 21   | .40 |     | 12
| | Fourth Quarter                          |   | 26   | .15 |     | 14
| | Fiscal 2004:                           
| | First Quarter (through August 27, 2003) | $ | 32   | .90 | $   | 23

On August 27, 2003, the last reported
sale price of our common stock on the Nasdaq National Market was $30.951 per share and
there were approximately 47 stockholders of record of the common stock. We estimate that
there are approximately 2,481 beneficial owners of the common stock.

Information required by this item
regarding equity compensation plans is addressed in Item 12 of Part III of this report.

20

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# ITEM 6: Selected
Consolidated Financial Data

This section presents our selected
historical financial data. You should read carefully the financial statements included in
this report, including the notes to the financial statements. The selected data in this
section is not intended to replace the financial statements. The amounts below have been
adjusted to show the operating results of the Longmont Coatings Division, which was sold
on September 24, 2002, as discontinued operations.

We derived the consolidated balance
sheet data for the years ended June 28, 2003 and June 29, 2002, and our
consolidated statement of operations data for each of the three years in the period ended
June 28, 2003, from the audited consolidated financial statements in this
report. The financial statements for June 28, 2003, June 29, 2002 and June 30,
2001 were audited by Ernst & Young LLP, independent auditors. The financial statements
for the fiscal years 1999 and 2000 were audited by Arthur Andersen LLP, independent
auditors. The consolidated balance sheet data as of July 3, 1999,
July 1, 2000, and June 30, 2001 and the consolidated statement of operations
data for the years ended July 3, 1999 have been derived from audited
consolidated financial statements that are not included in this report.

|                                                                | Fiscal Year Ended                    
|--------------------------------------------------------------- | -------------------------------------
|                                                                | July 3,1999                          
|                                                                | (in thousands, except per share data)
|Net revenues                                                    | $    4,616                           
|Cost of goods sold                                              | 1,920                                
|                                                                |                                      
|Gross profit                                                    | 2,696                                
|Operating expenses:                                            
|Selling, general and administrative                             | 3,341                                
|Research and development                                        | 881                                  
|In-process research and development                             | -                                    
|Amortization of intangible assets                               | -                                    
|                                                                |                                      
|Loss from operations                                            | (1,526)                              
|Other income, net                                              
|Interest income, net                                            | (553)                                
|Other income, net                                               | 40                                   
|Equity earnings of Joint Venture                                | 382                                  
|                                                                |                                      
|Income (loss) from continuing operations before income taxes    | (1,657)                              
|Income tax benefit (provision)                                  | 669                                  
|                                                                |                                      
|Income (loss) from continuing operations                        | (988)                                
|Discontinued operations:                                       
|                                                                |                                      
|Income (loss) from discontinued operations, net of tax          | 764                                  
|Gain on disposal of discontinued operations, net of tax         | -                                    
|                                                                |                                      
|Discontinued operations, net of tax                             | 764                                  
|Cumulative effect of change in accounting principle, net of tax | -                                    
|Net income (loss)                                               | (224)                                
|                                                                |                                      
|Preferred dividends                                             | -                                    
|                                                                |                                      
|Net income (loss) applicable to common stockholders             | $     (224)                          
|                                                                |                                      
|Earnings (loss) per share:                                     
|Basic:                                                         
|Earnings (loss) from continuing operations                      | $     (0.28)                         
|Income (loss) from discontinued operations                      | .22                                  
|Cumulative effect of change in accounting principle, net of tax | -                                    
|                                                                |                                      
|Basic earnings (loss) per share                                 | $     (0.06)                         
|                                                                |                                      
|Diluted:                                                       
|Earnings (loss) from continuing operations                      | $     (0.28)                         
|Income (loss) from discontinued operations                      | 0.22                                 
|Cumulative effect of change in accounting principle, net of tax | -                                    
|                                                                |                                      
|Diluted earnings (loss) per share                               | $     (0.06)                         
|                                                                |                                      
|Weighted average common shares outstanding:                    
|Basic                                                           | 3,478                                
|                                                                |                                      
|Diluted                                                         | 3,478                                
|                                                                |                                      

21

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|                                       | July 3,1999 | July 1,2000 | June 30,2001 | June 29,2002 | June 29,2003
|-------------------------------------- | ----------- | ----------- | ------------ | ------------ | ------------
|                                       |             |             |              |              |             
|Consolidated Balance Sheet Data:      
|Working capital                        | $   11,812  | $   63,785  | $   22,417   | $   81,128   | $   88,684  
|Total assets                           | 26,159      | 79,673      | 167,484      | 215,108      | 254,742     
|Long-term debt, net of current portion | 7,180       | -           | 6,483        | -            | -           
|Total stockholders' equity             | 14,658      | 73,197      | 89,192       | 154,570      | 177,198     

22

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

# Managements
Discussion and Analysis of Financial Condition
and Results of Operation

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

# Overview

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

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

Effective September 24, 2002, we sold
certain assets related to our contract glass coating business to Information Products
Longmont, Inc. (since renamed Optera), which is a subsidiary of Magna Donnelly
Corporation. The assets we sold included thin film deposition equipment, inventory, office
furniture and equipment, certain intellectual property rights, including know-how related
to the glass coating operations and certain other assets located at Applied Films
facility in Longmont, Colorado. The transaction did not affect our ownership position in
the China JV or the sale of coated glass that we conduct from our Hong Kong office.

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

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

| |                                | Fiscal year ended |              
| | ------------------------------ | ----------------- | -------------
| |                                |                  
| |                                | June 30, 2001     | June 29, 2002
| |                                |                   |              
| | Thin film coated glass         | $    11,124       | $    6,085   
| | Thin film deposition equipment | 85,192            | 131,057      
| |                                |                   |              
| | Total net revenues             | $    96,316       | $    137,142 
| |                                |                   |              

23

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

| |                                | Fiscal year ended |              
| | ------------------------------ | ----------------- | -------------
| |                                |                  
| |                                | June 30, 2001     | June 29, 2002
| |                                |                   |              
| | Thin film coated glass         | 11.6%             | 4.0%         
| | Thin film deposition equipment | 88.4%             | 96.0%        
| |                                |                   |              
| | Total net revenues             | 100.0%            | 100.0%       
| |                                |                   |              

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

The sales cycle for thin film
deposition equipment is long, involving multiple visits to and by the customer and a
protracted technical sales effort. We operate with a backlog of new and in-process
equipment orders. Deposition equipment backlog was $99.2 million at the end of fiscal
2001, $41.1 million at the end of fiscal 2002, and $100.6 million at the end of fiscal
2003. The increase in backlog was caused by strong order volume in fiscal 2003 for all of
our products. Given the average manufacturing time of our products of nine months, this
increase in backlog is comprised of revenue not yet recognized from deposition equipment
contracts denominated in Euros, U.S. dollars and Japanese yen and, unless hedged, is
subject to fluctuation depending on changes in the valuation of the foreign currencies
against the dollar. Customers usually make a non-refundable deposit ranging from 20% to
35% of the total purchase price at the time the order is placed and make progress payments
during the period of manufacture. We usually receive approximately 80%-85% of the purchase
price in cash or letter of credit prior to shipment. We generally ship our thin film
coated glass within 30 days of receipt of the order and therefore we do not customarily
have a backlog of coated glass sales.

Revenues generated from exports to
customers outside of our manufacturing center in Europe were 60% in fiscal 2002 compared
to 71% of revenues for fiscal 2003.

Sales of products purchased from the
China JV for resale to our customers are generally denominated in U.S. dollars and sales
of products manufactured in Germany are generally denominated in Euros. The U.S. dollar
equivalent of gross revenues in Japanese yen and Euros were approximately $7.1 million and
$117.2 million, respectively, for fiscal 2002 and $5.0 million and
$138.4 million, respectively for fiscal 2003. Currently, we engage in international
currency hedging transactions to mitigate our foreign exchange exposure related to sales
of certain equipment, and the effects of foreign exchange rate changes on foreign currency
transactions have not been significant to date. As of June 28, 2003, the U.S.
dollar equivalent of accounts receivable denominated in Japanese yen and Euros were
approximately $1.1 million and $8.4 million, or approximately 9% and 71% respectively, of
total accounts receivable. As of June 28, 2003, the U.S. dollar equivalent of
accounts payable are denominated in Japanese yen and Euros were approximately $363,000 and
$9.9 million, or approximately 1% and 55% respectively, of total accounts payable.

24

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# Results of Operations

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

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

|                                                             | Fiscal year ended
|------------------------------------------------------------ | -----------------
|                                                             |                  
|                                                             | June 30, 2001    
|                                                             |                  
|Consolidated Statement of Operations Data:                   |                  
|Coated Glass Revenue                                         | 11.6%            
|Equipment Revenue                                            | 88.4             
|                                                             |                  
|Net revenues                                                 | 100.0            
|Cost of goods sold                                           | 77.5             
|                                                             |                  
|Gross profit                                                 | 22.5             
|Operating expenses:                                         
|Selling, general and administrative                          | 16.3             
|Research and development                                     | 6.5              
|In-process research and development                          | 11.9             
|Amortization of goodwill and intangible assets               | 5.3              
|                                                             |                  
|Operating loss                                               | (17.5)           
|Interest income (expense)                                    | 1.1              
|Other income, net                                            | 0.8              
|Equity earnings of Joint Venture                             | 4.6              
|                                                             |                  
|Income (loss) from continuing operations before income taxes | (11.0)           
|Income tax benefit (provision)                               | 6.2              
|                                                             |                  
|Income (loss) from continuing operations                     | (4.8)            
|Discontinued operations:                                    
|Results of operations, net of tax                            | 0.3              
|Gain on sale of Longmont Coatings, net of tax                | -                
|                                                             |                  
|Discontinued operations, net of tax                          | 0.3              
|Net income (loss)                                            | (4.5)            
|Preferred Stock Dividends                                    | (0.4)            
|                                                             |                  
|Net income (loss) applicable to common shareholders          | (4.8)%           
|                                                             |                  

# Year Ended June 29, 2002
Compared to Year Ended June 28, 2003

Net Revenues. Net revenues
increased 12.5% from $137.1 million in fiscal 2002 to $154.2 million in fiscal 2003. Our
revenue concentration remained focused on the equipment segment of our business as our
revenues generated by equipment sales remained constant at 96% of total net revenues in
fiscal 2002 and fiscal 2003.

Net revenues from thin film
deposition equipment increased 13.0% from $131.1 million in fiscal 2002 to $148.1 million
in fiscal 2003. This increased reflects orders from Taiwanese display customers during
fiscal 2003 compared with no order activity from Taiwan during fiscal 2002 and strong
orders and increased revenues from our architectural glass customers during fiscal 2003
which led to an increase in equipment backlog from $41.1 million at the end of fiscal 2002
to $100.6 million at the end of fiscal 2003.

Thin film coated glass revenues
increased from $6.1 million in fiscal 2002 to $6.2 million in fiscal 2003.

Gross Profit. Gross profit
increased from $32.6 million in fiscal 2002 to $36.6 million in fiscal 2003. The increase
in gross profits was due primarily to the revenue growth as gross margins were 23.7% in
both fiscal 2002 and fiscal 2003.

Selling, General and
Administrative. As a result of cost management, selling, general and administrative expenses increased 2.5% from $23.7
million in fiscal 2002 to $24.3 million in fiscal 2003. As a percentage of net revenues,
selling, general and administrative expenses declined from 17.3% in fiscal 2002 to 15.8%
in fiscal 2003.

25

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Research and Development.
Research and development expenses increased 32.1% from $9.2 million in fiscal 2002 to
$12.2 million in fiscal 2003. In fiscal 2003 growth in Research and Development for
Display was driven by the development efforts targeted towards generation 6 and 7 glass
sizes. Research and development expenses consist primarily of salaries, outside contractor
expenses, lab expenses, and other expenses related to our ongoing product development and
technology development for Display, OLED, Solar, PET bottle process development and other
research and development activities. As a percentage of net revenues, research and
development expenses were 6.7% in fiscal 2002 and 7.9% in fiscal 2003.

Amortization of Other Intangible
Assets. In the fiscal year ended June 29, 2002, amortization of other intangible
assets related to the LAC acquisition was $3.4 million. In the fiscal year ended
June 28, 2003, amortization of other intangible assets was $3.8 million.
The increase in amortization of other intangible assets was due to the currency
fluctuation between the U.S. dollar and the Euro. The intangible assets are carried on the
balance sheet of our German subsidiary and the strength of the Euro during fiscal 2003
increased this amortization amount as it is reported in US dollars.

Interest Income. Interest
income was $701,000 in fiscal 2002 and $2.0 million in fiscal 2003. At the end of
fiscal 2002 our average investment yield was 2.6% compared to 2.4% at the end of fiscal
2003. The increase in interest income was because the excess cash that was invested as a
result of the equity offering that we closed in November 2001 which was invested for only
part of the fiscal 2002 year as compared to a full year of investment in fiscal 2003.

Other Income. Other income
decreased from $2.2 million in fiscal 2002 to $1.6 million in fiscal 2003. Other
income includes items such as realized foreign currency transaction adjustments and
royalties earned from the China JV. We receive a 2% royalty on all sales by the China JV,
payable quarterly. In fiscal 2002, $762,000 was reported for the reversal of unused
reserves for the completion of the building in Alzenau, Germany. Fiscal 2003 other income
arose primarily from realized currency translation.

Equity earnings of Joint
Venture. Our equity earnings of the China JV increased from $465,000 in fiscal 2002 to
$2.2 million in fiscal 2003. The 379.8% increase in equity earnings is primarily due
to the increase in the market for color STN coated glass for the cellular telephone
handset market.

Income Tax Expense. We
recorded a tax expense for fiscal 2002 of $91,000 compared to $491,000 for fiscal 2003.
The income tax expense reflects the tax effect of the earnings of each operating subsidiary and their
respective tax rates.  The income tax expense for fiscal 2003 was increased by a valuation
allowance against the deferred tax asset.  There are several items which lower our effective tax
rates in some of the countries
in which we operate, such as the tax effect of the amortization of goodwill and other intangible assets in Germany,
tax-free investment and interest income in the U.S., and equity earnings of the Joint Venture which
are reported as tax free because the earnings will be reinvested in the Joint Venture as a
permanent investment.

Discontinued
Operations.  On September 24, 2002, we sold the Longmont Coatings Division
to Information Products for $5.2 million in cash. We accounted for the sale as a
discontinuance of business and our financial statements have been restated to reflect our
business without the results of the Longmont Coatings business. The $85,000 loss reflected
the operating results of that business for fiscal 2003 through September 24, 2002. The
$429,000 gain was the after tax gain on the sale of assets related to discontinued
operations.

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

Net Revenues. Net revenues
increased 42.4% from $96.3 million in fiscal 2001 to $137.1 million in fiscal 2002 as a
result of a full year reporting of combined company results following the LAC acquisition.
Our revenue concentration continued to shift to the equipment segment of our business as
our revenues generated by equipment sales increased from 88.4% of total net revenues in
fiscal 2001 to 96.0% in fiscal 2002.

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

Thin film coated glass revenues
decreased 45% from $11.1 million in fiscal 2001 to $6.1 million in fiscal 2002. This
reduction resulted from lower prices which reduced our gross margins, and reduced demand
for coated glass used in low end LCD displays.

26

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Gross Profit. Gross profit
increased from $21.6 million in fiscal 2001 to $32.6 million in fiscal 2002, largely
driven by the increased revenues from the equipment segment of our business as we reported
a full year of combined company operations following the LAC acquisition. Gross margins
were 22.5% in fiscal 2001 and 23.7% in fiscal 2002. Equipment revenues generally have
higher gross margins than coated glass revenues. Gross margins were negatively affected
during the year by sales of certain coated glass inventory at a market price that had
moved below cost. Additionally we experienced a cost overrun on a transport system for an
architectural glass equipment customer.

Selling, General and
Administrative. Selling, general and administrative expenses increased from $15.6
million in fiscal 2001 to $23.7 million in fiscal 2002. This increase represents a full
year of combined company results following the LAC acquisition. As a percentage of net
revenues, selling, general and administrative expenses were 16.3% in fiscal 2001 and 17.3%
in fiscal 2002.

Research and Development.
Research and development expenses increased 46.3% from $6.3 million in fiscal 2001 to $9.2
million in fiscal 2002. This increase represents a full year of operations of the combined
company following the LAC acquisition. Research and development expenses consist primarily
of salaries, outside contractor expenses, lab expenses, and other expenses related to our
ongoing product development and technology development for OLED, Solar, PET bottle process
development and other research and development activities. As a percentage of net
revenues, research and development expenses were 6.5% in fiscal 2001 and 6.7% in fiscal
2002.

In-Process Research and
Development. During the fiscal year ended June 30, 2001, we recognized an $11.5
million non-recurring charge to write-off in-process research and development (IPR&D)
costs attributed to the LAC acquisition. Several projects were included, of which the
principal projects were based on the following technologies: organic light emitting diodes
(OLED) for flat panel displays, barrier improvement coating technology for plastic
bottles, rotatable cathodes for depositing thin films, planar cathodes for depositing thin
films and thin film coating technology for solar cells used to generate electrical power.

The following table discloses by
product the percentage complete at the December 31, 2000 acquisition date, the estimated
value at the acquisition date and the estimated completion date at the time of the
acquisition (dollars in thousands):

| | Projects                                     | % Complete At Acquisition | Estimated Value | Estimated Complete Date at time of Acquisition
| | -------------------------------------------- | ------------------------- | --------------- | ----------------------------------------------
| |                                              |                           |                
| | OLED for flat panel displays                 | 6.0%                      | $  3,450        | October 2002                                  
| | Barrier coatings for plastic bottles         | 45.0%                     | 4,255           | June 2002                                     
| | Rotatable cathode                            | 10.0%                     | 230             | June 2002                                     
| | Planar cathode                               | 0.0%                      | 575             | March 2002                                    
| | Thin film coating technology for solar cells | 14.0%                     | 2,990           | June 2002                                     
| |                                              |                           |                
| | Total                                        |                           | $ 11,500       
| |                                              |                           |                

The estimates used in valuing
IPR&D were based upon assumptions we believed to be reasonable but which are
inherently uncertain and unpredictable. Risks and uncertainties associated with completing
development within a reasonable period of time include the completion of all planning,
designing and testing activities that are necessary to create a product that provides the
functions, features and technical performance requirements suited for the market and
requested by our customers. Actual results may vary from potential results. If the
IPR&D projects are not completed on a timely basis, we could lose the advantage of
being first to market with new technologies and achieve market share and sales that are
less than what we might have achieved if such products were completed on a timely basis.

We have delivered one system using
the OLED technology, and that system achieved its final specification at the customer
site. We intend to continue to improve the OLED technology and believe that the initial
development will be concluded by the end of fiscal 2004. We expect to recognize revenues
from sales of deposition equipment including OLED technology in calendar 2004 and 2005.

We have delivered several systems
using the BESTPET barrier coating technology for plastic bottles which is the first of two
coatings necessary to achieve the improved barrier results. We recently experienced a
setback with the atmospheric barrier protection top coat, as our partner Krones AG was not
able to deliver a commercially viable coating system for the top coat. We continue to
develop the technology in our own labs in an effort to develop a process that will improve
the characteristics of the barrier coatings. We have not established a revised estimate
for the completion of this technology.

We have discontinued development of
the specific rotatable cathode technology projects that were outstanding at the closing
and decided instead to obtain this technology from a third party. We have also
discontinued efforts to develop the specific planar cathode technology projects that were
outstanding at the closing. We are instead pursuing other planar cathode technologies.

27

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We have delivered five systems using
thin film coating technology for solar cells and continue to develop enhancements to that
technology. With these developments, we continue to position ourselves as a market leader
in developing high volume manufacturing solutions for the solar cell market.

We believe that these technologies
will benefit our future financial performance, although the estimated future benefits
cannot be quantified with certainty and are subject to certain assumptions. We do not
believe that any of the delays we experienced in the development of the acquired IPR&D
technologies have materially affected our financial performance.

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

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

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

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

Income Tax Benefit (expense). We
recorded a tax expense during fiscal 2002 of ($91,000). The income tax expense for 2002 was
reduced by approximately $1.9 million due to the establishment of a valuation allowance on
net operating loss. The income tax benefit for fiscal 2001 of $5.9 million, reflects the
tax effect of goodwill and other intangible assets in Germany, tax-free investment and interest
income, and equity earnings of the Joint Venture which are reported as tax free will be
reinvested in the Joint Venture.

Discontinued
Operations.  On September 24, 2002, we sold the Longmont Coatings Division
to Information Products for $5.2 million in cash. We accounted for the sale as a
discontinuance of business and our financials have been restated to reflect our business
without the results of the Longmont Coatings business. The $85,000 loss reflected the
operating results of that business for fiscal 2003 through September 24, 2002. The
$429,000 gain was the after tax gain on the sale of assets related to discontinued
operations.

28

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# Quarterly Results of
Operations

The following table sets forth
summary unaudited quarterly financial information for the eight fiscal quarters ended
June 28, 2003. 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.

The amounts below have been adjusted
to show the operating results of the Longmont Coatings Division, which was sold on
September 24, 2002, as discontinued operations (in thousands).

|                                    | Fiscal 2002 Quarters Ended | Fiscal 2003 Quarters Ended
|----------------------------------- | -------------------------- | --------------------------
|                                    |                            |                           
|                                    | Sep 29, 2001               | Dec 29, 2001              
|                                    |                            |                           
|Net revenues                        | $  39,273                  | $  37,885                 
|Cost of goods sold                  | 29,198                     | 27,977                    
|                                    |                            |                           
|Gross profit                        | 10,075                     | 9,908                     
|Operating expenses:                
|Selling, general and administrative | 6,510                      | 6,609                     
|Research and development            | 2,034                      | 1,933                     
|Amortization of goodwill and other 
|intangible assets                   | 839                        | 839                       
|                                    |                            |                           
|Operating income (loss)             | 692                        | 527                       
|Other (expense) income:            
|Interest income (expense)           | (53)                       | 36                        
|Other income (expense)              | 309                        | 286                       
|Equity earnings of Joint Venture    | 110                        | 153                       
|                                    |                            |                           
|Income (loss) from continuing      
|operations before                  
|income taxes                        | 1,058                      | 1,002                     
|Income tax benefit (provision)      | (378)                      | (271)                     
|                                    |                            |                           
|Income (loss) from                 
|continuing operations               | $      680                 | $      731                
|Discontinued operations:           
|Income (loss) from discontinued    
|operations, net of                 
|income tax                          | (124)                      | 20                        
|Gain (loss) on the disposal of     
|discontinued operations,           
|net of income taxes                 | -                          | -                         
|                                    |                            |                           
|Discontinued operations, net of tax | (124)                      | 20                        
|                                    |                            |                           
|Net income (loss)                   | 556                        | 751                       
|Preferred stock dividends           | (203)                      | (112)                     
|                                    |                            |                           
|Net income (loss) applicable to    
|common shareholders                 | $      353                 | $      639                
|                                    |                            |                           
|Net income (loss) per share:       
|Basic                              
|Earnings (loss) from               
|continuing operations               | $    0.07                  | $    0.07                 
|Income (loss) from                 
|discontinued operations             | (0.02)                     | 0.00                      
|                                    |                            |                           
|Basic earnings (loss) per share     | $    0.05                  | $    0.07                 
|                                    |                            |                           
|Diluted                            
|Earnings (loss) from               
|continuing operations               | $    0.07                  | $    0.07                 
|Income (loss) from                 
|discontinued operations             | (0.02)                     | 0.00                      
|                                    |                            |                           
|Diluted earnings (loss) per share   | $    0.05                  | $    0.07                 
|                                    |                            |                           
|Weighted average common shares     
|outstanding:                       
|Basic                               | 6,798                      | 9,086                     
|                                    |                            |                           
|Diluted                             | 6,987                      | 9,353                     
|                                    |                            |                           

29

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

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

|                                         | Fiscal 2002 Quarters Ended | Fiscal 2003 Quarters Ended
|---------------------------------------- | -------------------------- | --------------------------
|                                         |                            |                           
|                                         | Sep 29,2001                | Dec 29,2001               
|                                         |                            |                           
|Net revenues                             | 100.0                      | %                         
|Cost of goods sold                       | 74.3                       |                           
|                                         |                            |                           
|Gross profit                             | 25.7                       |                           
|Operating expenses:                     
|Selling, general and administrative      | 16.6                       |                           
|Research and development                 | 5.3                        |                           
|Amortization of goodwill and other      
|intangible assets                        | 2.1                        |                           
|                                         |                            |                           
|Operating income (loss)                  | 1.7                        |                           
|Other (expense) income:                 
|Interest income (expense)                | (0.1                       | )                         
|Other income (expense)                   | 0.8                        |                           
|Equity earnings of Joint Venture         | 0.3                        |                           
|                                         |                            |                           
|Income (loss) from continuing operations | 2.7                        |                           
|before income taxes                     
|Income tax benefit (provision)           | (1.0                       | )                         
|                                         |                            |                           
|Preferred stock dividends               
|Net income (loss) from continuing       
|operations                               | 1.7                        | %                         
|                                         |                            |                           

Our quarterly results of operations
may be subject to significant fluctuations due to several factors, including the timing of
orders, manufacturing and customer budget cycles and general economic conditions as they
affect the industries which use our products. The volume of equipment sales is
significantly dependent on our customers capital spending patterns.

During fiscal 2002 we experienced a
slow down of new orders for equipment for our display coater products as well as our
architectural glass coater products. With our book to bill ratio below 1:1 during each of
the quarters of fiscal 2002 we experienced a drop in backlog from $99.2 million at the
beginning of the fiscal year to $41.1 million at the end of the fiscal year 2002. The lack
of new orders in these product areas reduced revenue from $39.3 million in the first
quarter to $29.2 in the fourth quarter of fiscal 2002, a decline of 25%.

During fiscal 2003, we experienced a
stronger flow of orders for our systems across all of our product lines, but specifically
orders for our deposition equipment products for display in Taiwan and our architectural
glass deposition equipment products restored a balance of revenue across our product areas
and provided the momentum that resulted in growth in backlog to record levels of $100.6
million at the end of fiscal 2003 from $41.1 million at the end of fiscal 2002, and growth
in revenues to a high of $51.2 million in the fourth quarter up 90% from the $26.9 million
recognized in the first quarters of fiscal 2003.

Gross Margin experienced some
downward fluctuations during fiscal 2003 in the second and third quarters as the revenues
from a low gross margin coater that was booked to secure a strategic account were
recognized, and the revenue mix shifted to the lower margin architectural glass coaters.
Gross margins returned to above 25% in the fourth quarter as the revenue from a low margin
coater was diminished and the revenue mix shifted to a balance from all of our products.

SG&A per quarter averaged $6.0
million for each of fiscal 2002 and 2003. The quarterly fluctuations resulted from
restructuring costs as we reduced our workforce in Longmont, Colorado and from commission
payments to third party sales representatives whom we use to aid in our sales coverage.

Our quarterly spending in R&D has
been increasing as we have increased our investment in Display R&D. With the roll out
of Generation 5 machines in Taiwan and the movement to Generation 6 and Generation 7 glass
sizes we have for the first time three major new display platform sizes launching at the
same time. At the same time we have continued our investments for our other emerging
technologies in OLED, solar and plastic bottles.

# Critical Accounting
Policies and Estimates

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

30

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

We recognize revenues on a majority
of contracts relating to the construction and sale of thin film deposition equipment using
the percentage-of-completion method in accordance with the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) No. 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. Pursuant to SOP 81-1, revenues are measured by the percentage of the
total costs incurred and applied to date in relation to the estimated total costs to be
incurred for each contract. Management considers costs incurred and applied to be the best
available measure of progress on these contracts. Contract costs include all direct
material and labor costs and those indirect costs related to contract performance. General
and administrative costs are charged to expense as incurred. Changes in performance,
contract conditions and estimated profitability, including those arising from contract
penalty provisions and final contract settlements, may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.

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

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

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

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

# Liquidity and Capital
Resources

We have funded our operations with
cash generated from operations, proceeds from public offerings of our common stock and a
private offering of preferred stock and bank borrowings. Cash used by operating activities
was $1.7 million for fiscal 2002 compared to $2.5 million for fiscal 2003. As of
June 28, 2003, we had cash and cash equivalents of approximately $22.9 million,
marketable securities of $51.6 million and working capital of $88.7 million.

As of June 28, 2003, we had
$5.0 million outstanding in a letter of credit as our portion of the security for the debt
of the Joint Venture, compared with $7.0 million outstanding in a letter of credit on
June 29, 2002 used for the same purpose. We are required under the terms of the
China JV to provide credit support on a several basis for 50% of the China JVs
$10 million bank indebtedness.

Capital expenditures were $1.0
million for fiscal 2002 and $1.4 million for fiscal 2003. We anticipate capital
expenditures of approximately $7.0 million in fiscal 2004. Our capital expenditures have
consisted primarily of equipment purchases related to product development.

Cash used for investing activities
was $50.6 million in fiscal 2002 and $9.5 million in fiscal 2003. During fiscal 2003, we purchased marketable securities of $8.0 million.

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

31

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# Contractual Obligations
and Commercial Commitments

The Company has the following
contractual obligations and commercial commitments as of June 28, 2003 (in
thousands).

|                                 | Payments Due by Period
|-------------------------------- | ----------------------
|                                 |                       
|Contractual Cash Obligations     | Total                 
|                                 |                       
|Operating Leases:               
|Buildings                        | $43,741               
|Office Equipment                 | 414                   
|Other                            | 290                   
|Capital Lease - Office Equipment | 24                    
|                                 |                       
|                                 | $44,469               
|                                 |                       

|                             |                                            |                  |           |               
|---------------------------- | ------------------------------------------ | ---------------- | --------- | --------------
|                             | Amount of Commitment Expiration Per Period
|                             |                                           
|Other Commercial Commitments | Total Amounts Committed                    | Less than 1 year | 1-3 years | Over 3 years  
|                             |                                            |                  |           |               
|Bank Guarantees              | $  19,064                                  | $  18,991        | $    73   | $            -
|Other Commercial Commitments | 821                                        | 675              | 146       | -             
|                             |                                            |                  |           |               
|Total Commercial Commitments | $  19,885                                  | $  19,666        | $  219    | $            -
|                             |                                            |                  |           |               

The operating leases primarily include leases for offices, factories and office equipment throughout our operations. Bank
Guarantees  represents  cash pledged to provide the bank guaranty for 50% of the debt of the Joint Venture and other bank guarantees
on cash deposits for contracts with certain  customers in China. Our other commercial  commitments  consist of software licenses and
third party service contracts.  The bank guarantees are required by our customers  primarily in China ensuring the progress payments
made to the Company and are terminated when the contract terms are fulfilled.

Recent Financial Accounting Standards Board Statement

In May 2003, the FASB issued SFAS 150,  "Accounting for Certain Financial  Instruments with  Characteristics of both Liabilities and
Equity." SFAS 150 improves the accounting for certain  financial  instruments that, under previous  guidance,  issuers could account
for as equity and requires that those  instruments be classified as liabilities (or assets in certain  circumstances)  in statements
of financial  position.  SFAS 150 also requires  disclosures  about  alternative  ways of settling the  instruments  and the capital
structure  of  entities  all of  whose  shares  are  mandatorily  redeemable.  SFAS 150 is  generally  effective  for all  financial
instruments  entered into or modified  after May 31, 2003,  and otherwise is effective at the beginning of the first interim  period
beginning  after June 15,  2003.  The Company does not expect the  adoption of SFAS 150 to have a material  impact on its  financial
position or results of operations.

In April 2003, the FASB issued SFAS 149,  "Amendment of Statement 133 on Derivative  Instruments and Hedging  Activities."  SFAS 149
amends and clarifies  accounting for derivative  instruments,  including certain derivative  instruments embedded in other contracts
and for hedging  activities under SFAS 133,  "Accounting for Derivative  Instruments and Hedging  Activities." SFAS 149 is generally
effective for derivative  instruments,  including  derivative  instruments  embedded in certain contracts,  entered into or modified
after June 30, 2003 and for hedging  relationships  designated after June 30, 2003. The Company does not expect the adoption of SFAS
149 to have a material impact on its financial position or results of operations.

In January 2003, the FASB issued  Interpretation No. 46 (FIN 46),  "Consolidation of Variable Interest Entities." FIN 46 requires an
investor  with a majority of the variable  interests  in a variable  interest  entity to  consolidate  the entity and also  requires

32

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majority and significant  variable  interest  investors to provide certain  disclosures.  A variable interest entity is an entity in
which the equity  investors do not have a  controlling  interest or the equity  investment  at risk is  insufficient  to finance the
entity's activities without receiving  additional  subordinated  financial support from the other parties.  The Company is currently
reviewing its investment  portfolio to determine whether any of its investee companies are variable interest  entities.  The Company
does not expect to identify  any  variable  interest  entities  that must be  consolidated,  but may be required to make  additional
disclosures.

In December  2002, the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based  Compensation  - Transition  and  Disclosure"  which
provides  alternative  methods of transition  for a voluntary  change to the fair value based method of accounting  for  stock-based
employee  compensation.  SFAS No. 148 also  requires  that  disclosures  of the pro forma  effect of using the fair value  method of
accounting for stock-based employee compensation be displayed more prominently and in a tabular format.  Additionally,  SFAS No. 148
requires  disclosure  of the pro forma effect in interim  financial  statements.  The  transition  requirements  of SFAS No. 148 are
effective  for the  Company's  fiscal  year 2003.  The  Company  currently  does not plan to  transition  to a fair value  method of
accounting for stock-based employee compensation.

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

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

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

ITEM 7A:  Quantitative and Qualitative Disclosures about Market Risk

Market Risk Exposure

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

As of June 28, 2003,  our investment consisted primarily of equity securities,  corporate,  government and municipal bonds and money
market mutual funds of  $51.6 million,  and earned  approximately  $2.2 million  for the fiscal year, at an average interest rate of
approximately  2.4%. The impact on interest income of a decrease of one percent in the average  interest rate would have resulted in
approximately $1.3 million less interest income for the fiscal year ended June 28, 2003.

Foreign Exchange Exposure

We are exposed to foreign  exchange risk  associated  with accounts  receivable and payable  denominated in foreign  currencies.  At
June 28, 2003,  we had approximately  $1.1 million of accounts receivable and approximately $360,000 of accounts payable denominated
in Japanese yen. A one percent  change in exchange  rates would result in an  approximate  $7,000 net impact on pre-tax income based
on the foreign currency  denominated  accounts receivable and accounts payable balances at June 28, 2003.  At June 28, 2003,  we had
approximately  $8.4 million of accounts  receivable and approximately  $9.9 million of accounts payable  denominated in Euros. A one
percent change in exchange rates would result in an approximate  $15,000 net impact on pre-tax income based on the foreign  currency
denominated accounts receivable and accounts payable balances at June 28, 2003.

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

33

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

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

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

34

---



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

ITEM 8:  Financial Statements and Supplementary Data

Applied Films Corporation and Subsidiaries

                                             Index To Consolidated Financial Statements

|                                                                                                                                        | Page
|--------------------------------------------------------------------------------------------------------------------------------------- | ----
|Applied Films Corporation and Subsidiaries                                                                                              |     
|Consolidated Balance Sheets as of June 28, 2003 and June 29, 2002                                                                       | 37  
|Consolidated Statements of Operations for the fiscal years ended June 28, 2003, June 29, 2002, and June 30, 2001                        | 38  
|Consolidated  Statements  of  Stockholders'  Equity  for the fiscal  years  ended June 28,  2003,  June 29, 2002,  and
   June 30, 2001 | 39  
|Consolidated Statements of Cash Flows for the fiscal years ended June 28, 2003, June 29, 2002, and June 30, 2001                        | 40  
|Notes to Consolidated Financial Statements                                                                                              | 41  

35

---



Report of Independent Auditors

To the Stockholders of Applied Films Corporation:

We have audited the accompanying  consolidated  balance sheets of Applied Films Corporation and subsidiaries as of June 28, 2003 and
June 29, 2002 and the related  consolidated  statements  of  operations,  stockholders'  equity and cash flows for the fiscal  years
ended  June 28, 2003,  June 29, 2002 and June 30, 2001.  Our audits also included the  financial  statement  schedule  included in
Item 15(a)2 for the fiscal  years  ended  June 28, 2003,  June 29,  2002 and June 30,  2001.  These  financial  statements  and
schedule  are the  responsibility  of the  Company's  management.  Our  responsibility  is to express an opinion on these  financial
statements and schedule 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 28, 2003  and June 29, 2002 and the  consolidated
results of their operations,  stockholders  equity and cash flows for the fiscal years ended  June 28, 2003,  June 29, 2002 and June
20, 2001 in conformity  with  accounting  principles  generally  accepted in the United  States.  Also, in our opinion,  the related
financial  statement  schedule,  when considered in relation to the basic financial  statements taken as a whole,  present fairly in
all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Denver, Colorado
July 24, 2003

36

---



Applied Films Corporation and Subsidiaries
                                                    Consolidated Balance Sheets

|                                                                             |                                  |              
|---------------------------------------------------------------------------- | -------------------------------- | -------------
|                                                                             | June 28, 2003                    | June 29, 2002
|                                                                             |                                  |              
|ASSETS                                                                       | (in thousands except share data)
|Current Assets:                                                             
|Cash and cash equivalents                                                    | $  22,817                        | $   31,134   
|Restricted cash                                                              | 18,991                           | 7,913        
|Marketable securities                                                        | 51,620                           | 43,544       
|Accounts and trade notes receivable, net of allowance of $653 and $855,     
|respectively                                                                 | 12,040                           | 8,171        
|Revenue in excess of billings                                                | 37,728                           | 27,246       
|Inventories, net of allowance of $1.4 million and $8.0 million, respectively | 6,873                            | 7,442        
|Prepaid expenses and other                                                   | 2,488                            | 1,845        
|Net current assets associated with discontinued operations                   | --                               | 2,932        
|                                                                             |                                  |              
|Total current assets                                                         | 152,557                          | 130,227      
|Property, plant and equipment, net of accumulated depreciation of $6,752 and
|$4,333, respectively                                                         | 5,958                            | 6,239        
|Goodwill                                                                     | 57,451                           | 40,307       
|Intangible assets, net of accumulated amortization of $10,613 and $5,034,   
|respectively                                                                 | 17,010                           | 15,101       
|Investment in Joint Venture                                                  | 11,889                           | 10,004       
|Deferred tax asset, net                                                      | 9,549                            | 11,398       
|Long-term assets associated with discontinued operations                     | --                               | 1,401        
|Restricted cash                                                              | 73                               | 58           
|Other assets                                                                 | 255                              | 373          
|                                                                             |                                  |              
|Total assets                                                                 | $254,742                         | $ 215,108    
|                                                                             |                                  |              
|LIABILITIES AND STOCKHOLDERS' EQUITY                                        
|Current Liabilities:                                                        
|Trade accounts payable                                                       | $  18,045                        | $     9,252  
|Accrued expenses                                                             | 23,257                           | 25,462       
|Billings in excess of revenue                                                | 16,773                           | 8,213        
|Current portion of deferred gross profit, deferred gain and lease obligation | 391                              | 414          
|Deferred tax liability                                                       | 5,407                            | 5,758        
|                                                                             |                                  |              
|Total current liabilities                                                    | 63,873                           | 49,099       
|Long-term portion of gross profit, deferred gain and lease obligation        | 2,063                            | 2,427        
|Accrued pension benefit obligation                                           | 11,608                           | 9,012        
|                                                                             |                                  |              
|Total liabilities                                                            | 77,544                           | 60,538       
|                                                                             |                                  |              
|STOCKHOLDERS' EQUITY:                                                       
|Common Stock, no par value, 40,000,000 shares authorized, 11,161,873 and    
|11,027,310 shares issued and outstanding at June 28, 2003 and June 29, 2002,
|respectively                                                                 | 160,685                          | 159,610      
|Warrants                                                                     | 734                              | 734          
|Other cumulative comprehensive income (loss)                                 | 11,504                           | (7,995)      
|Retained earnings                                                            | 4,275                            | 2,221        
|                                                                             |                                  |              
|Total stockholders' equity                                                   | 177,198                          | 154,570      
|                                                                             |                                  |              
|Total Liabilities and stockholders' equity                                   | $254,742                         | $ 215,108    
|                                                                             |                                  |              

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

37

---



Applied Films
Corporation and SubsidiariesConsolidated Statements of Operations

|                                                             |                                       |               |              
|------------------------------------------------------------ | ------------------------------------- | ------------- | -------------
|                                                             | For The Fiscal Years Ended           
|                                                             |                                      
|                                                             | June 28, 2003                         | June 29, 2002 | June 30, 2001
|                                                             |                                      
|                                                             | (in thousands, except per share data)
|Net revenues                                                 | $ 154,233                             | $ 137,142     | $ 96,316     
|Cost of goods sold                                           | 117,619                               | 104,574       | 74,691       
|                                                             |                                       |               |              
|Gross profit                                                 | 36,614                                | 32,568        | 21,625       
|Operating expenses:                                         
|Selling, general and administrative                          | 24,312                                | 23,747        | 15,657       
|Research and development                                     | 12,178                                | 9,220         | 6,303        
|In-process research and development                          | -                                     | -             | 11,500       
|Amortization of goodwill and intangible assets               | 3,779                                 | 3,356         | 5,036        
|                                                             |                                       |               |              
|Loss from operations                                         | (3,655)                               | (3,755)       | (16,871)     
|Other income, net:                                          
|Interest income, net                                         | 2,025                                 | 701           | 1,034        
|Other income, net                                            | 1,600                                 | 2,249         | 805          
|Equity earnings of Joint Venture                             | 2,231                                 | 465           | 4,421        
|                                                             |                                       |               |              
|Income (loss) from continuing operations before income taxes | 2,201                                 | (340)         | (10,611)     
|Income tax benefit (provision)                               | (491)                                 | (91)          | 5,941        
|                                                             |                                       |               |              
|Income (loss) from continuing operations                     | 1,710                                 | (431)         | (4,670)      
|Discontinued operations (Note 3):                           
|Income (loss) from discontinued operations, net of tax       | (85)                                  | (591)         | 337          
|Gain on disposal of discontinued operations, net of tax      | 429                                   | --            | --           
|                                                             |                                      
|Discontinued operations, net of tax                          | 344                                   | (591)         | 337          
|Net income (loss)                                            | 2,054                                 | (1,022)       | (4,333)      
|Preferred stock dividends                                    | --                                    | (315)         | (367)        
|                                                             |                                       |               |              
|Net income (loss) applicable to common stockholders          | $     2,054                           | $  (1,337)    | $(4,700)     
|                                                             |                                       |               |              
|Earnings (loss) per share:                                  
|Basic:                                                      
|Earnings (loss) from continuing operations                   | $       0.15                          | $    (0.08)   | $  (0.78)    
|Income (loss) from discontinued operations                   | 0.03                                  | (0.06)        | 0.05         
|                                                             |                                       |               |              
|Basic earnings (loss) per share                              | $       0.18                          | $    (0.14)   | $  (0.73)    
|                                                             |                                       |               |              
|Diluted:                                                    
|Earnings (loss) from continuing operations                   | $       0.15                          | $    (0.08)   | $  (0.78)    
|Income (loss) from discontinued operations                   | 0.03                                  | (0.06)        | 0.05         
|                                                             |                                       |               |              
|Diluted earnings (loss) per share                            | $       0.18                          | $    (0.14)   | $  (0.73)    
|                                                             |                                       |               |              
|Weighted average common shares outstanding:                 
|Basic                                                        | 11,096                                | 9,628         | 6,414        
|                                                             |                                       |               |              
|Diluted                                                      | 11,250                                | 9,628         | 6,414        
|                                                             |                                       |               |              

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

38

---



Applied Films
Corporation and SubsidiariesConsolidated Statements of Stockholders Equity

|                                       | Other       
|-------------------------------------- | ------------
|                                       | Common Stock
|                                       |             
|                                       | Shares      
|                                      
|Balances, July 1, 2000                 |             
|Comprehensive loss:                   
|Net loss                               |             
|Unrealized loss on foreign currency    |             
|translation                            |             
|                                      
|Total comprehensive loss               |             
|ESPP stock issuance                    |             
|Exercise of stock options, including  
|income tax benefits of $515            |             
|Issuance of stock in connection with  
|acquisition of LAC                     |             
|Issuance of Series A Convertible       |             
|Preferred Stock                        |             
|Issuance of common stock warrants in  
|connection with issuance of Series    
|A convertible preferred stock          |             
|Preferred stock dividends              |             
|                                      
|Balances, June 30, 2001                |             
|Comprehensive loss:                    |             
|Net loss                               |             
|Unrealized loss on foreign currency   
|translation                            |             
|                                      
|Total comprehensive loss               |             
|ESPP stock issuance                    |             
|Exercise of stock options              |             
|Issuance of shares in connection with 
|secondary  offering (net of offering  
|costs of $823)                         |             
|Conversion of Series A Convertible    
|Preferred Stock (net of costs of $6)   |             
|Preferred stock dividends              |             
|                                      
|Balances, June 29, 2002                |             
|                                      
|Comprehensive income:                 
|Net income                             |             
|Unrealized gain on foreign currency   
|translation                            |             
|Unrealized gain on hedged transactions |             
|                                      
|Total comprehensive income             |             
|ESPP stock issuance                    |             
|Exercise of stock options              |             
|                                      
|Balances, June 28, 2003                |             
|                                      

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

39

---



Applied Films
Corporation and Subsidiaries Consolidated Statements of Cash Flows

|                                                                 |                           
|---------------------------------------------------------------- | --------------------------
|                                                                 | For The Fiscal Years Ended
|                                                                 | June 28, 2003             
|                                                                 |                           
|                                                                 | (in thousands)            
|Cash Flows from Operating Activities:                            |                           
|Net income (loss)                                                |                           
|Adjustments to net income (loss) from continuing operations:     |                           
|(Gain) loss from discontinued operations                         |                           
|                                                                 |                           
|Income (loss) from continuing operations                         |                           
|                                                                
|Depreciation and amortization of goodwill and                    |                           
|intangible assets                                                |                           
|Write off of in-process R&D                                      |                           
|Amortization of deferred compensation and non-cash               |                           
|compensation expense                                             |                           
|Amortization of gain on lease and deferred gain                  |                           
|on equipment sale to joint venture                               |                           
|Deferred income taxes                                            |                           
|Equity earnings of Joint Venture                                 |                           
|Gain on equipment sale to joint venture                          |                           
|Cost of equipment sale to joint venture                          |                           
|Loss on disposal of equipment                                    |                           
|Changes in:                                                      |                           
|Restricted cash                                                  |                           
|Accounts and trade notes receivable, net                         |                           
|Revenue in excess of billings                                    |                           
|Inventories                                                      |                           
|Prepaid expenses and other                                       |                           
|Accounts payable and accrued expenses                            |                           
|Billings in excess of revenue                                    |                           
|Income taxes                                                     |                           
|                                                                 |                           
|Net cash flows provided by (used in) operating activities        |                           
|                                                                
|Cash Flows from Investing Activities:                            |                           
|Purchases of property, plant, and equipment                      |                           
|Sales (purchases) of marketable securities, net                  |                           
|Funds used for the acquisition of LAC                            |                           
|                                                                 |                           
|Net cash flows used in investing activities                      |                           
|                                                                
|Cash Flows from Financing Activities:                            |                           
|Proceeds from borrowings of long-term debt                       |                           
|Repayment of long-term debt                                      |                           
|Restricted cash                                                  |                           
|Stock issuance on stock purchase plan and stock options          |                           
|Proceeds from issuance of preferred stock and warrants, net      |                           
|Proceeds from secondary offering                                 |                           
|Offering costs                                                   |                           
|Dividends paid on preferred stock                                |                           
|                                                                 |                           
|Net cash flows provided by financing activities                  |                           
|                                                                
|Cash flows from discontinued operations                          |                           
|                                                                
|Effect of exchange rate changes on cash and cash equivalents     |                           
|                                                                 |                           
|Net (decrease) increase in cash                                  |                           
|Cash and cash equivalents, beginning of period                   |                           
|                                                                 |                           
|Cash and cash equivalents, end of period                         |                           
|                                                                 |                           
|                                                                
|Supplemental cash flow information:                              |                           
|Cash paid for interest, net of amounts capitalized               |                           
|                                                                 |                           
|Cash paid for income taxes, net                                  |                           
|                                                                 |                           
|                                                                
|Noncash financing activity:                                      |                           
|Capital lease obligations incurred for the purchase of equipment |                           
|                                                                 |                           

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

40

---



# Applied Films
Corporation and Subsidiary

# Notes to Consolidated
Financial Statements

# June 28, 2003

# NOTE 1. COMPANY
ORGANIZATION AND OPERATIONS

Applied Films Corporation
(Applied Films or the Company) is a leading provider of thin film
deposition equipment to the Flat Panel Display (FPD) industry, the
Architectural, Automotive and Solar Glass industry, and the Web Packaging industry. 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 and color liquid crystal displays
(LCD). In June of 1998, the Company formed a 50/50 Joint Venture (the
Joint Venture) in China with Nippon Sheet Glass Co. (NSG) to
process, sell and export certain types of thin film coated glass (Note 5).

Since inception in 1976, the Company
has manufactured deposition equipment for use in our coated glass production process. In
1996, when high end flat panel technologies demanded that LCD manufacturers process their
own glass substrates in their factories, the Company expanded its product offerings to
include its proprietary deposition equipment. Since that time, the Company began investing
in the commercialization of thin film deposition equipment and coating processes for the
high end of the LCD market. The recent growth in sales of deposition equipment is the
result of the LAC acquisition 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 deposition
equipment in three product areas with global markets. The principal product areas are
display, architectural glass, automotive glass, solar and web coaters.

On September 24, 2002 the Company
sold its Longmont coating operations to Information Products Inc. a wholly owned subsidiary of
Magna Donnelly Corporation. The sale of this business allowed the Company to exit the manufacturing of
coated glass in the U.S. for customers in the U.S. and Europe. All coated glass revenues
reported in the Companys financial statements are from products manufactured at the
Companys Joint Venture in China, and sold by the Company through its Hong Kong
subsidiary. (Note 3).

# NOTE 2. SIGNIFICANT
ACCOUNTING POLICIES

Principles of
Consolidation

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

Use of Estimates

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

Fiscal Year

The Company has adopted a fiscal year
ending on the Saturday nearest June 30, which will result in fiscal years composed of 52
or 53 weeks. Fiscal years 2003, 2002, and 2001 all include 52 weeks.

41

---



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.

Restricted Cash

The Company has pledged $5.0 million
in cash to provide the bank guaranty for 50% of the debt of the Joint Venture, and the
Company provides bank guarantees on cash deposits for contracts with certain customers in
China and has also agreed to maintain cash on hand at the bank providing the guarantees to
the customers in China.

Marketable Securities

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

As of June 28, 2003, the
Company had $41.9 million in corporate bonds, $3.8 million in municipal debt
securities, $3.0 million in government bonds, $2.6 million in equity securities
and $300,000 related to money market mutual funds accrued interest and cash. The Company
had no significant concentration of credit risk arising from investments and had no
significant unrealized gains or losses at June 28, 2003.

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

Inventories

Inventories consist of materials used
in the construction of systems, work in process for contracts accounted for under the
completed contract method of accounting and finished goods for coated glass purchased from
our Joint Venture. Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories at June 28, 2003 and June 29, 2002 consist of the following
(in thousands):

| |                                     | June 28, 2003 | June 29, 2002
| | ----------------------------------- | ------------- | -------------
| |                                     |               |              
| | Materials for manufacturing systems | 2,004         | 2,621        
| | Work-in-process                     | 4,743         | 3,369        
| | Finished goods, net                 | 126           | 1,452        
| |                                     |               |              
| |                                     | $6,873        | $7,442       
| |                                     |               |              

Property, Plant, and
Equipment

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

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

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

42

---



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

|                               |  | June 28, 2003 |  | June 29, 2002
|------------------------------ |  | ------------- |  | -------------
|                               |  |               |  |              
|Land                           |  | $     270     |  | $     270    
|Building                       |  | 226           |  | 226          
|Machinery and equipment        |  | 7,404         |  | 5,643        
|Office furniture and equipment |  | 3,218         |  | 2,652        
|Leasehold improvements         |  | 1,496         |  | 1,319        
|Other                          |  | 96            |  | 462          
|                               |  |               |  |              
|                               |  | $12,710       |  | $10,572      
|                               |  |              

Depreciation expense was approximately $2.0 million, $2.2 million, and $2.1 million, for the years ended June 28, 2003,
June 29, 2002, and June 30, 2001, respectively.

Goodwill and Other Intangible Assets

The  goodwill  and  intangible  assets are carried on the  balance  sheet of our German  subsidiary.  The  increase in goodwill  and
intangible  assets  was due to the  currency  fluctuation  between  the U.S.  dollar  and the  Euro.  The  increase  in  accumulated
depreciation of intangible assets is due to the current  amortization  expense and the currency  fluctuation between the U.S. dollar
and the Euro. The composition of intangible assets follows (in thousands):

|                                                   |  |              
|-------------------------------------------------- |  | -------------
|                                                   |  | June 28, 2003
|                                                   |  |              
|Intangible Assets:                                
|Patents                                            |  | $      24,553
|Customer lists                                     |  | 3,070        
|                                                   |  |              
|Intangible assets                                  |  | 27,623       
|Less accumulated amortization                      |  | (10,613)     
|                                                   |  |              
|Intangible assets, net of accumulated amortization |  | $      17,010
|                                                   |  |              

From January 1, 2001 to
June 30, 2001, goodwill resulting from acquisitions was amortized using the
straight-line method over an estimated useful life of seven years. Specifically identified
intangible assets were amortized over estimated lives ranging from five to seven years.

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

SFAS Nos. 141 and 142 establish a new
method of testing goodwill for impairment, requiring that goodwill be separately tested on
a reporting basis for impairment using a fair-value-based approach. The provisions apply
not only to goodwill arising from acquisitions completed after June 30, 2001 but
also to the unamortized balance of goodwill at the date of adoption. The Company adopted
the standards early, effective July 1, 2001. All of the Companys goodwill
relates to the thin film deposition equipment division. As a result of the annual goodwill
impairment test that was completed during fiscal 2003, it was determined there was no
impairment of goodwill.

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

|                                               |              
|---------------------------------------------- | -------------
|                                               | June 30, 2001
|                                               |              
|Reported net loss                              | $(4,333)     
|Goodwill amortization                          | 2,105        
|                                               |              
|Adjusted net loss                              | $(2,228)     
|                                               |              
|Basic and diluted loss per share - as reported | $(0.73)      
|                                               |              
|Basic and diluted loss per share - adjusted    | $(0.35)      
|                                               |              

43

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The aggregate amortization expense
for fiscal years ended June 28, 2003, June 29, 2002 and June 30, 2001 is $3,779,000,
$3,356,000 and $5,036,000, respectively. The $5,036,000 includes $3,368,000 for the amortization of goodwill.
The intangible asset balance is reported on the
German subsidiary balance sheet and will be subject to unrealized foreign
exchange fluctuations between the Euro and the U.S. Dollar. The estimated aggregate
amortization expense for the intangible assets for each of the five succeeding fiscal
years is estimated as follows (in thousands):

|                                     | Fiscal Years Ended
|------------------------------------ | ------------------
|                                     |                   
|                                     | June 26           
|                                     | 2004              
|                                     |                   
|Intangible Assets:                  
|Patents                              | $3,200            
|Customer Lists                       | 565               
|                                     |                   
|Total estimated amortization expense | $3,765            
|                                     |                   

Long-Lived Assets and
Impairment of Long Lived Assets

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

The Companys investment in its
Joint Venture qualifies as a long lived asset and the Company will undergo an asset
impairment test annually to ensure that the fair value of the asset exceeds the carrying
value of the asset on the Companys balance sheet. As a result the annual impairment
test was completed during fiscal 2003. It was determined that there was no impairment of
the investment in the Joint Venture.

Accrued Expenses:

The significant components of accrued
expenses as of June 28, 2003 and June 29, 2002 are as follows (in thousands):

| |                             | June 28, 2003 |  | June 29, 2002
| | --------------------------- | ------------- |  | -------------
| |                             |               |  |              
| | Accrued losses on contracts | $   7,428     |  | $   9,044    
| | Accrued warranty            | 5,790         |  | 7,148        
| | Accrued compensation        | 6,739         |  | 7,170        
| | Other accruals              | 3,300         |  | 2,100        
| |                             |               |  |              
| | Total accrued expenses      | $   23,257    |  | $   25,462   
| |                             |               |  |              

Accrued losses on contracts are a
result of additional costs incurred on projects in excess of the contracted revenue.
Accrued losses on contracts are provided for when anticipated. Loss provisions are based
upon excess costs over the net revenue from the products contemplated by the specific
order. Contract accounting requires estimates of future costs over the performance period
of the contract. These estimates are subject to change and result in adjustments to cost
of goods sold, which are reflected in the margins on contracts in progress.

Income Taxes

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

The Joint Venture earnings are taxed in its local jurisdiction
and therefore no provision for taxes on earnings has been accrued in the Company's tax provision
during fiscal years 2001, 2002 and 2003.

Deferred Gain

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

44

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Coated Glass and Spare
Parts Revenue Recognition

Our coated glass products and spare
parts are warranted to be free from material defects caused by workmanship and within our
design or customer specifications. All coated glass products and spare parts are inspected
for workmanship and compliance to specification prior to shipment. Customers who
experience defects in material may return product for credit or replacement. Our returned
product experience rate for coated glass and spare parts has been excellent. We maintain a
reserve to cover sales returns from our customers for quality defects. The provision for
estimated sales returns and allowances is recorded in the period of the sale and is
typically in the range of 0.5% to 1.0% of sales.

Equipment Sales Revenue
Recognition

The percentage of completion method
of accounting is used for products valued at greater than $1 million and a construction
time of greater than six months. In accordance with the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) No. 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. Pursuant to SOP 81-1, revenues are measured by the percentage of the
total costs incurred and applied to date in relation to the estimated total costs to be
incurred for each contract. Management considers costs incurred 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 expensed 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. Our contracts under the percentage of
completion method do not provide for the right of a customer to return the machine once
the title has been transferred.

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

Contracts in progress at
June 28, 2003 and June 29, 2002 are as follows (in thousands):

| |                                                              | June 28, 2003 |  | June 29, 2002
| | ------------------------------------------------------------ | ------------- |  | -------------
| |                                                              |               |  |              
| | Costs incurred on contracts in progress and estimated profit | $   162,042   |  | $   121,273  
| | Less: billings to date                                       | (141,087)     |  | (102,240)    
| |                                                              |               |  |              
| | Revenue in excess of billings, net                           | $   20,955    |  | $   19,033   
| |                                                              |               |  |              

The Company typically collects 80-85%
of the cash due on the total project by the time the equipment ships from our facility.
The remaining 15-20% balance that is due following the ship date is billed in accordance
with the contract terms and those subsequent billings are generally collected within 30
days after billing.

The Company generally offers warranty
coverage for equipment sales for a period of one year 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.

The completed contract method of
accounting is used for standard products that are typically valued at less than $1 million
and have a machine construction time of less than six months. For projects accounted for
using the completed contract method of accounting, we accumulate the project costs in work
in process until we complete the fabrication of the system. Once fabrication of the system
is complete, the customer evaluates the machine at Applied Films manufacturing
facility according to any specific acceptance criteria outlined in the contract. Upon
acceptance, the machine is shipped and installed at the customers facility and title
is transferred to the customer. Applied Films recognizes the revenue, upon transfer of
title. Our contracts under the completed contract method do not provide for the right of a
customer to return the machine once the title has been transferred.

Losses on contracts in process are
recognized in their entirety when the loss becomes probable and the amount of loss can be
reasonably estimated. As of June 28, 2003, the Company had accrued approximately
$7.4 million for loss contracts and $9.0 million as of June 29, 2002. The $1.6
million decrease in losses on contracts is due to the realization of losses upon the
completion of several projects.

45

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Deferred Gross Profit

During fiscal years 2002, 2001 and
1999, the Company sold certain thin film deposition equipment to the Joint Venture
(Note 5). Because the Company owns 50% of the Joint Venture, the Company recorded 50%
of the revenue and related cost of the sales and has deferred 50% of the gross profit,
approximately $0.0, $1.3 million and $1.4 million, respectively, which will be recognized
on a straight-line basis over ten years, consistent with the depreciation schedule at the
Joint Venture and the estimated depreciable life of the equipment. The thin film equipment
sold to the Joint Venture in fiscal year 2002 was sold at cost and did not result in gross
profit. The amortization of the gross profit is included with Equity earnings of
Joint Venture in the accompanying consolidated statements of operations. The
deferred gross profit recognized in fiscal 2003 was $297,000 and $306,000 for fiscal 2002.
The remaining deferred gross profit was $1.9 million on June 28, 2003, $2.2 million on
June 29, 2002, and $2.5 million on June 30, 2001.

Research and Development
Expenses

Research and development costs are
expensed as incurred and consist primarily of salaries, supplies, lab expenses, and
depreciation of equipment used in research and development activities. The Company
incurred approximately $12.2 million, $9.2 million, and $6.3 million, of research and
development expenses for the fiscal years ended June 28, 2003, June 29, 2002,
and June 30, 2001, respectively, net of reimbursements for funded R&D
received from a German governmental agency. The Company is reimbursed up to 50% of the
costs incurred for specific research and development projects. The reimbursement terms are
contained in an agreement between the Company and the agency and is paid when the research
is completed and accepted by the agency. The Company received reimbursements of $599,000,
$795,000, and $214,000 in the fiscal years ended June 28, 2003, June 29, 2002, and
June 30, 2001, respectively.

In addition, during fiscal year 2001,
the Company recognized an $11.5 million non-recurring charge to write-off in-process
research and development costs (IPR&D) obtained in the acquisition of LAC.
This charge is included as a separate item under Operating Expense on the accompanying
consolidated statement of operations.

Management used the discounted cash
flow method to value the IPR&D based on probable future cash flows. The valuation
included the following significant assumptions: that cash flows would begin during the
fiscal year 2002 and end June 29, 2002, that gross profit margins would be approximately
30-34%, and that more significant revenue would be recognized in fiscal years ended June
28, 2003 and June 26, 2004. The valuation used a discount rate of 19.7%.

Foreign Currency
Transactions

The Company generated 71%, 60%, and
79% of its revenues in fiscal years 2003, 2002, and 2001, respectively, from sales to
foreign corporations located outside of the Companys manufacturing center in Europe,
which are primarily in Asia and the United States. In addition, many of its raw materials
are purchased from foreign corporations. The majority of the Companys sales and
purchases are denominated in Euros, with the remainder denominated in U.S. dollars or
Japanese yen. For those transactions denominated in currencies other than the functional
currency, the Company records the sale or purchase at the spot exchange rate in effect on
the date of sale. Receivables from such sales or payables for such purchases are
converted to the functional currency using the end of the period spot exchange rate.
Realized gains and losses are charged or credited to income during the year.

Foreign Currency
Translation

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

The amount of assets in foreign locations is $171,425,000, which is approximately 67% of Total Assets.

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 and the unrealized gain on foreign currency hedge activities.

46

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Net Income (Loss) Per
Common Share

The Company follows SFAS No. 128,
Earnings per Share which establishes standards for computing and presenting
basic and diluted earnings per share (EPS). Under this statement, basic
earnings (loss) per share is computed by dividing the income or loss available to common
stockholders by the weighted average number of shares of common stock outstanding. Diluted
earnings 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. Diluted loss per share is determined by dividing the loss available to
common stockholders by the requested average number of shares; no weight is given to the
dilutive effect of stock options.

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

|                                                      | 2003   | 2002  | 2001 
|----------------------------------------------------- | ------ | ----- | -----
|                                                      |        |       |      
|Weighted average number of common shares outstanding  | 11,096 | 9,628 | 6,414
|(shares used in basic earnings per share computation)
|Effect of potentially dilutive securities             | 154    | N/A   | N/A  
|                                                      |        |       |      
|Shares used in diluted earnings per share computation | 11,250 | 9,628 | 6,414
|                                                      |        |       |      

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

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

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 2003, 2002 and 2001 using the Black-Scholes pricing model and the
following weighted average assumptions:

|                        | 2003    | 2002    | 2001   
|----------------------- | ------- | ------- | -------
|                        |         |         |        
|Risk-free interest rate | 2.84%   | 4.60%   | 5.99%  
|Expected lives          | 7 years | 7 years | 7 years
|Expected volatility     | 76%     | 89%     | 161%   
|Expected dividend yield | 0.0%    | 0.0%    | 0.0%   

To estimate expected lives of options
for this valuation, it was assumed options will be exercised at varying schedules after
becoming fully vested. All options are initially assumed to vest. Cumulative compensation
cost recognized in pro forma net income or loss with respect to options that are forfeited
prior to vesting is adjusted as a reduction of pro forma compensation expense in the
period of forfeiture. Fair value computations are highly sensitive to the volatility
factor assumed; the greater the volatility, the higher the computed fair value of the
options granted.

47

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The total fair value of options
granted was computed to be approximately $2.6 million, $5.8 million, and $4.1
million, for the years ended June 28, 2003, June 29, 2002, and
June 30, 2001, respectively. The amounts are amortized ratably over the vesting
period of the options. Pro forma stock-based compensation, net of the effect of
forfeitures, was $2.2 million, $2.2 million, and $894,000 for the fiscal years
ended June 28, 2003, June 29, 2002, and June 30, 2001,
respectively.

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

|                                   |               |                            |              
|---------------------------------- | ------------- | -------------------------- | -------------
|                                   |               | For The Fiscal Years Ended
|                                   |              
|                                   | June 28, 2003 | June 29, 2002              | June 30, 2001
|                                   |               |                            |              
|Net income (loss) applicable to   
|common shareholders:              
|As reported                        | $      2,054  | $   (1,337)                | $   (4,700)  
|                                   |               |                            |              
|Pro forma                          | $       (129) | $   (3,557)                | $   (5,604)  
|                                   |               |                            |              
|Diluted earnings (loss) per share:
|As reported                        | $ 0.18        | $(0.14)                    | $(0.73)      
|                                   |               |                            |              
|Pro forma                          | $(0.01)       | $(0.37)                    | $(0.87)      
|                                   |               |                            |              

Derivative Instruments
and Hedging Activities

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

The Company has entered into foreign
currency forward contracts to mitigate the risk of changes in exchange rates on firm sale
commitments denominated in foreign currencies. These contracts qualify as fair value
hedges pursuant to SFAS No. 133. Accordingly, the fair value of the derivative instruments
is recorded on the balance sheet and is offset by changes in the fair value of the related
firm commitments. The ineffective portion of the derivative instruments are recorded
currently in income. At June 28, 2003, the unrealized gain on hedged transactions was
$480,000.

Recent Accounting
Standards

In May 2003, the FASB issued SFAS
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS 150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity and
requires that those instruments be classified as liabilities (or assets in certain
circumstances) in statements of financial position. SFAS 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of entities
 all of whose shares are mandatorily redeemable. SFAS 150 is generally effective for
all financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003. The
Company does not expect the adoption of SFAS 150 to have a material impact on its
financial position or results of operations.

In April 2003, the FASB issued SFAS
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts and for hedging
activities under SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 149 is generally effective for derivative instruments, including
derivative instruments embedded in certain contracts, entered into or modified after June
28, 2003 and for hedging relationships designated after June 28, 2003. The Company does
not expect the adoption of SFAS 149 to have a material impact on its financial position or
results of operations.

In January 2003, the FASB issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46
requires an investor with a majority of the variable interests in a variable interest
entity to consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is an entity
in which the equity investors do not have a controlling interest or the equity investment
at risk is insufficient to finance the entitys activities without receiving
additional subordinated financial support from the other parties. The Company is currently
reviewing its investment portfolio to determine whether any of its investee companies are
variable interest entities. The Company does not expect to identify any variable interest
entities that must be consolidated, but may be required to make additional disclosures.

48

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In December 2002, the FASB issued
SFAS No. 148, which provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation. SFAS No.
148 also requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more prominently and in a
tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition requirements of SFAS No. 148 are effective
for the Companys fiscal year 2003. The Company currently does not plan to transition
to a fair value method of accounting for stock-based employee compensation.

In July 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146
supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). SFAS No. 146 eliminates the provisions of EITF Issue No. 94-3 that
required a liability to be recognized for certain exit or disposal activities at the date
an entity committed to an exit plan. SFAS No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002.

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

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

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 2003 the Company purchased $648,000 of spare parts for
the Companys equipment customers, received building rent payments under the sublease
agreement of $194,000, and in September 2002, the Company recorded $5.2 million from the
sale of the Longmont Coatings Division (see Note 3) with a company and its affiliates of
which a member of the Companys board of directors is an officer. During fiscal 2003,
2002 and 2001, the Company had $3.4 million, $3.0 million, and $1.3 million, respectively,
of purchases from a company of which another member of the Companys board of
directors is a member of the board of directors and a former officer.

Reclassifications

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

# NOTE 3. SALE OF THE
LONGMONT COATINGS DIVISION  DISCONTINUED OPERATIONS

Effective
September 24, 2002, the Company sold certain assets related to its contract
glass coating business to Information Products Longmont, Inc., which is a subsidiary of
Magna Donnelly Corporation. The assets sold by the Company included thin film deposition
equipment, inventory, office furniture and equipment, certain intellectual property
rights, including know-how related to the glass coating operations and certain other
assets located at the Companys facility in Longmont, Colorado (the Longmont
Coatings Division).

In connection with the transaction,
Applied Films and Information Products Longmont, Inc. entered into a sublease pursuant to
which Information Products Longmont, Inc. is subleasing approximately 40,900 square feet
at the Company Longmont, Colorado facility, which contains approximately 126,000
square feet. The term of the sublease began on September 24, 2002 and will terminate on
March 31, 2005. Information Products Longmont, Inc. has the option to renew the sublease
for additional periods of one year each commencing at the expiration of the initial term
and continuing until the expiration or termination of the Companys lease for the
Longmont, Colorado facility. The subtenant also holds a right of first refusal with
respect to the assignment or subleasing of, and holds an option to lease, certain
additional space in the Longmont, Colorado facility. Basic rent under the sublease for the
initial term is $252,000 per year plus a pro rata share of certain operating costs
estimated to be approximately $127,000 per year.

49

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Pursuant to the Asset Purchase
Agreement signed on September 24, 2002, Information Products Longmont, Inc. paid
Applied Films a cash purchase price of $5.2 million. Information Products Longmont, Inc.
received inventory and property, plant and equipment with a carrying value of $3.0 million
and $1.3 million, respectively. The Company incurred $286,000 of separation costs and
professional fees related to the transaction and recorded a $429,000 gain.

The Company accounted for the sale of
the Longmont Coatings Division as a discontinuance of the business. As a result, certain
financial information of the Longmont Coatings Division has been restated to give effect
to the classification of the Longmont Coatings Division as a discontinued operation. The
net revenues of the discontinued operation was $1.9 million and $16.4 million for the
fiscal years ended June 29, 2002 and June 28, 2001, respectively.

# NOTE 4. LONG-TERM DEBT

In fiscal year 1998, the Company
entered into an Amended and Restated Credit Agreement (the Agreement) with a
domestic bank providing for a revolving credit facility (Credit Facility) with
a maximum availability of $11.5 million. This Agreement expired on September 17, 2002, and
the Company did not renew the Credit Agreement.

Interest expense was $138,000 and
$489,000 for the fiscal years ended June 29, 2002 and June 30, 2001,
respectively.

# NOTE 5. INVESTMENT IN
JOINT VENTURE

In June 1998, the Company formed a
50/50 Joint Venture with NSG in China to manufacture, process, sell and export certain
types of thin film coated glass. Each party contributed $3.2 million in cash to the Joint
Venture. During fiscal 2002, 2001 and 1999, the Company sold refurbished equipment to the
Joint Venture for use in the process of thin film coating of glass. The sales prices were
approximately $1.2 million, $5.6 million and $5.1 million, respectively. Because the
Company owns 50% of the Joint Venture, the Company recorded 50% of the revenue and related
cost of the sales and has deferred 50% of the gross profit, approximately $0, $1.3 million
and $1.4 million, during fiscal 2002, 2001 and 1999 respectively, which will be recognized on a straight-line basis over ten
years, consistent with the depreciation schedule at the Joint Venture and the estimated
depreciable life of the equipment. The amortization of the gross profit is included with
Equity earnings of Joint Venture in the accompanying consolidated statements
of operations.

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

During fiscal years 2003, 2002, and
2001, the Company purchased coated glass totaling $4.0 million, $2.8 million,
and $5.8 million, respectively, from the Joint Venture, of which $165,000, $243,000,
and $1.1 million, respectively, remained in inventory at the respective year end. In
addition, during fiscal years 2003, 2002, and 2001 the Company received cash royalty
payments from the Joint Venture totaling $404,000, $220,000 and $278,000, respectively. As
of June 28, 2003, the Company has provided a letter of credit under its
commercial loan facility to guarantee approximately $5.0 million of the debt of the Joint
Venture. This amount is reflected as restricted cash in the financial statements.

50

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Summarized statement of operations
information for the Joint Venture for the fiscal years ended June 28, 2003,
June 29, 2002, and June 30, 2001, is presented below (in thousands):

|                                                     |               | Fiscal Year Ended |              
|---------------------------------------------------- | ------------- | ----------------- | -------------
|                                                     |              
|                                                     | June 28, 2003 | June 29, 2002     | June 30, 2001
|                                                     |               |                   |              
|Joint Venture:                                      
|Operating revenues                                   | $45,369       | $24,264           | $32,360      
|                                                     |               |                   |              
|Net income                                           | $  3,808      | $     340         | $  8,202     
|                                                     |               |                   |              
|Applied Films' equity in earnings:                  
|Proportionate share of net income after eliminations | $  1,935      | $     159         | $  4,087     
|Amortization of deferred gain on sale of equipment . | 296           | 306               | 334          
|                                                     |               |                   |              
|Equity earnings of Joint Venture                     | $  2,231      | $     465         | $  4,421     
|                                                     |               |                   |              

Summarized balance sheet information
for the Joint Venture as of June 28, 2003 and June 29, 2002, is
presented below (in thousands):

|                                    | June 28, 2003 | June 29, 2002
|----------------------------------- | ------------- | -------------
|                                    |               |              
|Assets:                            
|Current assets                      | $12,885       | $10,447      
|Property, plant, and equipment, net | 25,565        | 28,434       
|                                    |               |              
|                                    | $38,450       | $38,881      
|                                    |               |              
|Capitalization and liabilities:    
|Current liabilities                 | $  8,059      | $  6,839     
|Long-term debt (1)                  | 6,482         | 12,033       
|Shareholders' equity                | 23,909        | 20,009       
|                                    |               |              
|                                    | $38,450       | $38,881      
|                                    |               |              

As of June 28, 2003 and
June 29, 2002, the Company had accounts payable to the Joint Venture of
approximately $578,000 and $547,000, and receivables from the Joint Venture of
approximately $238,000 and $171,000, respectively.

# NOTE 6.
STOCKHOLDERS EQUITY

Series A Convertible
Preferred Stock

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

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

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.

51

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Stock Options

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

In April 1997, the Company adopted
the 1997 Stock Option Plan (the 1997 Plan) covering 272,500 shares of common
stock, as amended. The exercise price of options granted under the 1997 Plan is determined
by the board of directors based upon estimated fair market value. The options granted are
to vest ratably over four years. In October 1999, the shareholders of the Company approved
an increase of 100,000 shares to the 1997 Plan, increasing the shares available for
granting to 372,500 shares. In October 2000, the shareholders of the Company approved an
increase of 650,000 shares to the 1997 Stock Option Plan, increasing the shares available
to 1,022,500 shares. Options vest 25% one year after the grant date of the option, and 25%
every year after for three years, and expire ten years after the grant date of the option.

Outside Directors Options

In July 2001, the Company amended the
Outside Director Stock Option Plan to cover an aggregate of 124,000 shares of common
stock. The exercise price of the options under this plan is determined based upon the
estimated fair market value. Options under this plan vest 100% one year after the grant
date of the option and expire ten years after the grant date of the option.

Employee Stock Purchase
Plan

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

During fiscal years 2003, 2002, and
2001, the Company issued shares to employees of 14,042, 8,799, and 3,916 under this plan,
respectively, at a purchase price ranging from $2.81 to $32.96 per share. A total of
42,802 shares have been issued under the plan since inception.

52

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A summary of the Companys Stock
Option Plans are as follows:

|                                 | For The Fiscal Years Ended
|-------------------------------- | --------------------------
|                                 |                           
|                                 | June 28, 3003             
|                                 |                           
|                                 | Options                   
|                                 |                           
|Outstanding at beginning of year |                           
|Granted                          |                           
|Forfeited                        |                           
|Exercised                        |                           
|                                 |                           
|Outstanding at end of year       |                           
|                                 |                           
|Exercisable at end of year       |                           
|                                 |                           
|Weighted average fair value      |                           
|of options granted               |                           
|                                 |                           

The following table summarizes information about employee stock options outstanding and exercisable at June 28, 2003:

|                         | Options Outstanding | Options Exercisable                
|------------------------ | ------------------- | -----------------------------------
|                         |                     |                                    
|Range of Exercise Prices |                     | Number Outstanding at June 28, 2003
|                         |                     |                                    
|$ 2.75 - $ 9.51          |                     |                                    
|$10.53 - $18.00          |                     |                                    
|$18.36 - $24.75          |                     |                                    
|$25.15 - $38.50          |                     |                                    
|                         |                     |                                    
|                         |                     | 847,654                            
|                         |                     |                                    

# NOTE 7. INCOME TAXES

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

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

|                                  | June 28, 2003 | June 29, 2002
|--------------------------------- | ------------- | -------------
|                                  |               |              
|Inventories                       | $        -    | $      284   
|Accrued expenses                  | 1,307         | 1,590        
|Deferred compensation             | -             | 40           
|Deferred gain                     | 900           | 925          
|Goodwill and  intangible assets   | 3,882         | 4,170        
|Net operating loss carry forwards | 14,832        | 9,005        
|Valuation allowance               | (7,081)       | (1,933)      
|                                  |               |              
|Total deferred tax assets         | 13,840        | 14,091       
|                                  |               |              
|Property, plant and equipment     | (629)         | (669)        
|Uncompleted contracts             | (9,069)       | (7,758)      
|Other                             | -             | (24)         
|                                  |               |              
|Total deferred tax liabilities    | (9,698)       | (8,451)      
|                                  |               |              
|Total deferred tax asset, net     | $ 4,142       | $   5,640    
|                                  |               |              

53

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Income tax (benefit) provision for
the fiscal years ended June 28, 2003, June 29, 2002, and June 30,
2001, consist of the following (in thousands):

|                                                               | Years Ended  
|-------------------------------------------------------------- | -------------
|                                                               |              
|                                                               | June 28, 2003
|                                                               |              
|Current provision (benefit):                                  
|Federal                                                        | $(1,452)     
|State                                                          | -            
|Foreign                                                        | 491          
|                                                               |              
|Total current provision (benefit)                              | (961)        
|Deferred provision (benefit):                                 
|Federal                                                        | 2,019        
|State                                                          | 106          
|Foreign                                                        | (627)        
|                                                               |              
|Total deferred provision (benefit)                             | 1,498        
|                                                               |              
|Total tax provision (benefit)                                  | $     537    
|                                                               |              
|Tax provision (benefit) related to discontinued operations .   | 46           
|                                                               |              
|Total tax provision (benefit) related to continuing operations | $     491    
|                                                               |              

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:

|                                                      | June 28, 2003 | June 29, 2002 | June 30, 2001
|----------------------------------------------------- | ------------- | ------------- | -------------
|                                                      |               |               |              
|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                        | (16.4)        | --            | (1.8)        
|Equity earnings in Joint Venture                      | (34.4)        | (12.7)        | (14.3)       
|Tax exempt interest income                            | --            | --            | (3.7)        
|Foreign tax exempt interest                           | (80.9)        | (20.7)        | --           
|Valuation allowance                                   | 116.7         | 52.6          | --           
|                                                      |               |               |              
|Effective income tax (benefit) provision              | 22.3%         | (18.1)%       | (57.1)%      
|                                                      |               |               |              

As of June 28, 2003, the Company had net operating losses available to offset future taxable income of approximately $6.9 million.
Such net operating loss carry  forwards  expire through 2024.  Under the  provisions of the Internal  Revenue Code, as amended,  the
Company's  foreign sales  corporation may exempt a portion of its export related  taxable income from U.S.  federal and state income
taxes.

# NOTE 8. EMPLOYEE BENEFIT PLANS

Profit Sharing Plan

In August 1992, the Board of Directors adopted a profit sharing plan for all non-executive  employees.  The amount to be contributed
to the profit  sharing pool,  subject to the approval of the  Company's  board of  directors,  is generally 15% of operating  income
excluding any  amortization  of  intangibles  related to the  acquisition.  With the  exception of our  employees in Germany,  whose
compensation  is  governed by a company  tariff  agreement,  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  $75,000,  $77,000,
and $539,000 in fiscal years 2003, 2002, and 2001, respectively, related to this plan.

Pension Plan

LAC maintains a  noncontributory  defined  benefit  pension plan  covering  substantially  all employees of LAC.  Benefits are based
primarily on compensation  during a specified period before  retirement of a specified amount for each year of service.  The assumed
pension liability of $11.6 million is reflected in the accompanying  consolidated balance sheet as of June 28, 2003,  and is subject
to adjustment based upon an assessment of the actuarial value of the obligation. This plan has no assets as of June 28, 2003.

54

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

|                                          | Year End June 28, 2003 | Year End June 29, 2002
|----------------------------------------- | ---------------------- | ----------------------
|                                          |                        |                       
|Change in Benefit Obligation:            
|Benefit obligation at beginning of year   | $   9,071              | $ 7,214               
|Service costs                             | 601                    | 534                   
|Interest costs                            | 628                    | 502                   
|Actuarial (gain) loss                     | (412)                  | (314)                 
|Foreign exchange loss                     | 1,413                  | 1,150                 
|Benefits paid                             | (39)                   | (15)                  
|                                          |                        |                       
|Benefit obligation at end of year         | 11,262                 | $ 9,071               
|                                          |                        |                       
|Funded Status:                           
|Unrecognized net actuarial gain           | $(11,262)              | $(9,071)              
|Unrecognized prior service cost           | (346)                  | 59                    
|                                          |                        |                       
|Net amount recognized                     | $(11,608)              | $(9,012)              
|                                          |                        |                       
|Amounts Recognized in the Balance Sheets:
|Accrued Pension Benefit Obligation        | $(11,608)              | $(9,012)              
|                                          |                        |                       
|Net amount recognized                     | $(11,608)              | $(9,012)              
|                                          |                        |                       
|Weighted-average Assumptions             
|Discount rate                             | 5.75%                  | 6.0%                  
|Expected return on plan assets            | N/A                    | N/A                   
|Rate of compensation increase:           
|Employee                                  | 2.40%                  | 2.75%                 
|Retired                                   | 1.50%                  | 2.00%                 
|Components of Net Periodic Benefit Cost: 
|Service Cost                              | $      601             | $    534              
|Interest Cost                             | 628                    | 502                   
|Expected return on plan assets            | --                     | --                    
|Amortization of prior service costs       | --                     | --                    
|Recognition of actuarial (gain) loss      | (412)                  | (314)                 
|                                          |                        |                       
|Net periodic benefit costs                | $      817             | $    722              
|                                          |                        |                       

# NOTE 9. SIGNIFICANT
CUSTOMERS

During fiscal years 2003, 2002, and
2001, approximately 71%, 60%, and 79%, respectively, of the Companys net revenues
were exported to customers outside of the Companys manufacturing region in Europe.
The Companys ten largest customers accounted for, in the aggregate, approximately
53%, 62%, and 41%, of the Companys net revenues in fiscal 2003, 2002, and 2001,
respectively. Revenues from Guardian Industries represented 13.3% of net revenues for
fiscal 2003. Revenues from this customer for fiscal 2003, consisted solely of thin film
deposition equipment. The loss of, or a significant reduction in purchases by, one or more
of these customers would have a material adverse effect on the Companys operating
results.

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

|                        | Fiscal Year Ended
|----------------------- | -----------------
|                        |                  
|                        | June 28, 2003    
|                        |                  
|Asia (other than Japan) | $  85,952        
|Japan                   | 12,809           
|United States           | 10,576           
|Europe and other        | 44,896           
|                        |                  
|Net revenues            | $154,233         
|                        |                  

55

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The Companys sales are
typically denominated in Euros. However, certain customers of the Company currently pay in
Japanese yen and US Dollars. As a result, the Company recognized approximately $823,000,
$(15,000), and $19,000, of foreign currency exchange rate gain (loss) on foreign currency
exchange rate fluctuations for the fiscal years ended June 28, 2003,
June 29, 2002, and June 30, 2001, respectively. The Company has
approximately $1.1 million and $2.0 million of its accounts receivable and
$360,000 and $421,000 of its accounts payable denominated in Japanese yen as of
June 28, 2003 and June 29, 2002, respectively.

# NOTE 10. LEASES

The Company is obligated under
certain non-cancelable operating leases for office, manufacturing and warehouse
facilities, and various equipment. Beginning in April 2002, the Company entered into an
eight-year lease for the Companys manufacturing and administrative location in
Germany. Under this lease, payments are fixed for the entire term of the lease and there
is an option to renew the term for an additional five years. The Company entered into a
lease for the Companys manufacturing and administrative location in Longmont,
Colorado, which commenced on January 30, 1998; payments were fixed until the first day of
the second lease year, at which time payments increase annually one and one-half percent
plus one-half of the increase in the Consumer Price Index per annum. Lease payments for
the Longmont location have been normalized over the term of the lease. The initial lease
term is 15 years, with two additional five year options to extend. Both of these facility
leases are accounted for as operating leases.

In connection with the sale of the
Longmont Coating Division, the Company and Information Products Longmont, Inc. entered
into a sublease pursuant to which Information Products Longmont, Inc. is subleasing
approximately 40,900 square feet at the Companys Longmont, Colorado facility, which
contains approximately 126,000 square feet. The term of the sublease began on September
24, 2002 and will terminate on March 31, 2005. Information Products Longmont, Inc. has the
option to renew the sublease for additional periods of one year each commencing at the
expiration of the initial term and continuing until the expiration or termination of the
Companys lease for the Longmont, Colorado facility. The subtenant also holds a right
of first refusal with respect to the assignment or subleasing of, and holds an option to
lease, certain additional space in the Longmont, Colorado facility. Basic rent under the
sublease for the initial term is $252,000 annually.

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

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

|Fiscal Year                  | Operating leases
|---------------------------- | ----------------
|                             |                 
|2004                         | $  6,607        
|2005                         | 6,215           
|2006                         | 6,003           
|2007                         | 5,952           
|2008                         | 5,958           
|2009 and thereafter          | 13,734          
|                             |                 
|Total minimum lease payments | $44,469         
|                             |                 

Rent expense under operating leases was
$6.6 million, $5.7 million, and $3.4 million for fiscal years ended
June 28, 2003, June 29, 2002, and June 30, 2001. During
fiscal 2003, rent expense is net of sublease income of $240,000.

56

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# NOTE 11. SEGMENT
INFORMATION

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

|                                                     | Fiscal Years Ended
|---------------------------------------------------- | ------------------
|                                                     |                   
|                                                     | June 28, 2003     
|                                                     |                   
|Net revenues:                                       
|Thin film coated glass                               | $     6,159       
|Thin film deposition equipment                       | 148,074           
|                                                     |                   
|Total net revenues                                   | $ 154,233         
|                                                     |                   
|Operating (loss) income:                            
|Thin film coated glass                               | $        528      
|Thin film deposition equipment                       | (404)             
|Amortization of goodwill and other intangible assets | (3,779)           
|                                                     |                   
|Total operating loss                                 | $  (3,655)        
|                                                     |                   
|                                                     | June 28, 2003     
|                                                     |                   
|Identifiable property, plant and equipment:         
|Thin film coated glass                               | $        109      
|Thin film deposition equipment                       | 3,286             
|Corporate and other                                  | 2,563             
|                                                     |                   
|Total identifiable property, plant and equipment     | $     5,958       
|                                                     |                   

# NOTE 12. FAIR VALUE OF
FINANCIAL INSTRUMENTS

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

57

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# NOTE 13. QUARTERLY
INFORMATION (unaudited)

The following table sets forth
summary unaudited quarterly financial information for the eight fiscal quarters ended
June 28, 2003 (in thousands).

|                                            | Fiscal 2002 Quarters Ended | Fiscal 2003 Quarters Ended
|------------------------------------------- | -------------------------- | --------------------------
|                                            |                            |                           
|                                            |                            | Sep 29,                   
|                                            |                            | 2001                      
|                                            |                            |                           
|Net revenues                                | $                          | 39,273                    
|Cost of goods sold                          |                            | 29,198                    
|                                            |                            |                           
|Gross profit                                |                            | 10,075                    
|Operating expenses:                        
|Selling, general and administrative         |                            | 6,510                     
|Research and development                    |                            | 2,034                     
|Amortization of goodwill and other         
|intangible assets                           |                            | 839                       
|                                            |                            |                           
|Operating income (loss)                     |                            | 692                       
|Other (expense) income:                    
|Interest income (expense)                   |                            | (53                       
|Other income (expense)                      |                            | 309                       
|Equity earnings of Joint Venture            |                            | 110                       
|                                            |                            |                           
|Income (loss) from continuing operations   
|before income taxes                         |                            | 1,058                     
|Income tax benefit (provision)              |                            | (378                      
|                                            |                            |                           
|Income (loss) from continuing              
|operations                                  | $                          | 680                       
|                                           
|Discontinued operations:                   
|Loss from discontinued operations, net     
|of income tax                               |                            | (124                      
|Gain (loss) on the disposal of             
|discontinued operations, net of income     
|taxes                                       |                            | -                         
|                                            |                            |                           
|Discontinued operations, net of tax         |                            | (124                      
|                                            |                            |                           
|Net income (loss)                           |                            | 556                       
|                                           
|Preferred stock dividends                   |                            | (203                      
|                                            |                            |                           
|Net income (loss) applicable to common     
|shareholders                                | $                          | 353                       
|                                            |                            |                           
|                                           
|Net income (loss) per share:               
|Basic                                      
|Earnings (loss) from continuing            
|operations                                  | $                          | 0.10                      
|                                            |                            |                           
|Income from discontinued operations         | $                          | (0.02                     
|                                            |                            |                           
|Basic earnings (loss) per share             | $                          | 0.08                      
|                                           
|Diluted                                    
|Earnings (loss) from continuing            
|operations                                  | $                          | 0.10                      
|                                            |                            |                           
|Income from discontinued operations         | $                          | (0.02                     
|                                            |                            |                           
|Diluted earnings (loss) per share           | $                          | 0.08                      
|                                           
|Weighted average common shares outstanding:
|Basic                                       |                            | 6,798                     
|                                            |                            |                           
|Diluted                                     |                            | 6,987                     
|                                            |                            |                           

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

Applied Films Corporation determined,
for itself and on behalf of its subsidiaries, to dismiss its independent auditors, Arthur
Andersen LLP (Andersen) and to engage the services of Ernst & Young LLP as
its new independent auditors. The change in auditors was approved by the Audit Committee
and the Board of Directors of the Company and was effective as of June 11, 2002.
As a result, Ernst & Young LLP has audited the financial statements of the Company and
its subsidiaries for the fiscal years ending June 28,
2003, June 29, 2002, and July 1, 2001.

58

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

# ITEM 9A: Controls And
Procedures

The Company maintains certain
disclosure controls and procedures that are designed to ensure that information required
to be disclosed in the Companys Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified by the Securities and Exchange
Commission and that such information is accumulated and communicated to the Companys
management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to permit timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, the Companys management
recognizes that any controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving the desired control objectives, and
managements duties require it to make its best judgment in evaluating the
cost-benefit relationship of potential controls and procedures.

The Company and its management,
including the Chief Executive Officer and Chief Financial Officer, engage in a variety of
perpetual procedures to evaluate the effectiveness of the design and implementation of the
Companys disclosure controls and procedures. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures were reasonably effective in meeting the
desired objectives as of June 28, 2003.

There has been no change in the
Companys internal controls over financial reporting during the Companys most
recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.

# 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 2003 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 2003 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 2003 Proxy Statement and is incorporated
herein by reference.

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

Information required to be furnished
by Items 201(d) and 403 of Regulation S-K is included in our 2003 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 2003 Proxy Statement and is incorporated
herein by reference.

# ITEM 14: Principal
Accountant Fees And Services

Information required to be furnished
by Item 9(e) of Schedule 14A of Regulation S-K is included in our 2003 Proxy Statement and
is incorporated herein by reference.

59

---



# PART IV

# ITEM 15: 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
June 28, 2003, 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

| | Except
for Schedule II set forth below, 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  |                                |                               |                        |                         
|--------------------------------- | ------------------------------ | ----------------------------- | ---------------------- | ------------------------
|Valuation and Qualifying Accounts |                                |                               | (dollars in thousands) |                         
|                                 
|Allowance for doubtful accounts   | Balance at beginning of period | Charged to costs and expenses | Deductions             | Balance at end of period
|                                 
|2003                              | $                  855         | $635                          | $837                   | $   653                 
|2002                              | 1,142                          | 430                           | 717                    | 855                     
|2001                              | 188                            | 157                           | 625                    | 1,142                   

3.
Exhibits

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

(b)
Reports on Form 8-K

The
Registrant filed a Current Report on Form 8-K dated April 24, 2003, disclosing in
Item 12 an earnings press release.

(c)
Exhibits

The
response to this portion of Item 15 is included in the Exhibit Index to this Annual
Report.

(d)
Financial Statement Schedules

The
response to this section of Item 15 is in Item 15(a)(2) above.

60

---



---

# SIGNATURES

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

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

| | By: | /s/ Thomas T. Edman
Thomas T. Edman, Chief Executive Officer and President
August 29, 2003 | 
| | --- | ------------------------------------------------------------------------------------------ | 

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons in the capacities indicated on August 29, 2003. The persons named
below each herby appoint Thomas T. Edman and Lawrence D. Firestone, and each of them
severally, as his attorney in fact, to sign in his name and on his behalf, as a director
or officer of the Registrant, and to file with the Commission any and all amendments to
this report on Form 10-K.

| | Signatures                                      |  | Title                                                                                           
| | ----------------------------------------------- |  | ------------------------------------------------------------------------------------------------
| | /s/ Richard P. Beck 
Richard P. Beck            |  | Director, Chairman of the Board                                                                 
| | /s/ Thomas T. Edman
Thomas T. Edman             |  | Director, President, and Chief Executive Officer (principal executive officer)                  
| | /s/ Lawrence D. Firestone
Lawrence D. Firestone |  | Treasurer and Chief Financial Officer and Secretary (principal financial and
accounting officer)
| | /s/ Allen Alley
Allen Alley                     |  | Director                                                                                        
| | /s/ John S. Chapin 
John S. Chapin              |  | Director                                                                                        
| | /s/ Chad D. Quist
Chad D. Quist                 |  | Director                                                                                        
| | /s/ Vincent Sollitto
Vincent Sollitto           |  | Director                                                                                        



---



# EXHIBIT INDEX

Exhibit No. Description

| | 3.1 |  | Amended and Restated Articles of Incorporation of Applied Films Corporation, as amended,
are incorporated by reference to Exhibit 3.1 of Registrants 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).
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.1 |  | Specimen  common stock  certificate  is  incorporated  by reference  to Exhibit 4.1 of  Registrant's  Registration
                  Statement on Form S-1, as amended (Reg. No. 333-35331).
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 10.2 |  | 1997 Stock Option Plan, as amended,  is incorporated by reference to Exhibit 10-2 of  Registrant's  Registration  Statement
                  on Form S-1, as amended (Reg. No. 333-35331),  by reference to Exhibit 4.2 of Registrant's  Registration Statement
                  on Form S-8 (Reg. No.  333-47967) to reference to Exhibit 4.2 of Registrant's  Registration  Statement on Form S-8
                  (Reg. No.  333-38426) any by reference to Exhibit 4.2 and 4.3 of Registrant's  Registration  Statement on Form S-8
                  (Reg.  No.  333-56376)  and the Fifth  Amendment  to the 1997 Stock  Option Plan is  incorporated  by reference to
                  Exhibit 10.2 to the Registrant's Annual Report on Form 10-K/A for the fiscal year ended June 29, 2002.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 |  | Employee  Stock  Purchase  Plan, as amended,  is  incorporated  by reference to Exhibit 10.3 of  Registrant's  Registration
                  Statement  on Form  S-1,  as  amended  (Reg.  No.  333-35331),  by  reference  to  Exhibit  4 to the  Registrant's
                  Registration  Statement  on Form S-8  (Reg.  No.  333-47951)  and by  reference  to  Exhibit  4.2 on  Registrant's
                  Registration  Statement on Form S-8 (Reg. No.  333-56378) and the Fourth  Amendment to the Employee Stock Purchase
                  Plan is incorporated by reference to Exhibit 10.3 to the Registrant's  Annual Report on Form 10-K/A for the fiscal
                  year ended June 29, 2002.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 |  | Outside  Director Stock Option Plan is incorporated by reference to Exhibit 4.1 of Registrant's  Registration  Statement on
                  Form S-8 (Reg. No. 333-95367),  and by reference to Exhibits 4.2 and 4.3 of Registrant's Registration Statement on
                  Form S-8 (Reg. No. 333-75164).
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 |  | Share Purchase and Exchange Agreement dated October 18, 2000, between Registrant, AFCO
GmbH & Co. KG, Balzers Process Systems GmbH and Unaxis Holding AG is incorporated by
reference to Exhibit 2.1 of Registrants Current Report on Form 8-K dated December
31, 2000.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9 |  | Amendment Agreement dated December 29, 2000, between Registrant, AFCO GmbH & Co. KG,
Balzers Process Systems GmbH and Unaxis Holding AG is incorporated by reference to Exhibit
2.2 of Registrants Current report on Form 8-K dated December 31, 2000.
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---



| | 10.10 |  | Second Amendment Agreement dated February 27, 2002, between Applied Films Corporation,
Applied Films GmbH & Co. KG, Balzers Process Systems GmbH and Unaxis Holding AG is
incorporated by reference to Exhibit 2.7 of Registrants Current Report on Form 8-K/A
dated December 31, 2000.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 |  | Contribution Agreement dated December 29, 2000, between Balzers Process Systems GmbH and
Leybold Coating GmbH & Co. KG is incorporated by reference to Exhibit 2.3 of
Registrants Current Report on Form 8-K dated December 31, 2000.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.12 |  | Bravo Intellectual Property License Agreement dated December 31, 2000, between Balzers
Process Systems GmbH and Leybold Coating GmbH & Co. KG is incorporated by reference to
Exhibit 2.4 of Registrants Current Report on Form 8-K dated December 31, 2000.
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.13 |  | Newco Intellectual Property License Agreement dated December 31, 2000, between Balzers
Process Systems GmbH and Leybold Coating GmbH & Co. KG is incorporated by reference to
Exhibits 2.5 of Registrants Current Report on form 8-K dated December 31, 2000.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.14 |  | 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.
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.15 |  | 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.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 |  | 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.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.17 |  | 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.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.18 |  | 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.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.19 |  | Common Stock  Warrant No. 4 dated January 16, 2001 is  incorporated  by reference to Exhibit 10.6 of  Registrant's  Current
                  Report on Form 8-K dated January 16, 2001.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.20 |  | Lease Agreement between RWE Systems Immobilren GmbH & Co. KG/Lahmeyer Grandbesitz GmbH
& Co. KG and Applied Films GmbH & Co. KG dated January 31, 2001 for the Alzenau,
Germany facility, incorporated by reference to Exhibit 10.22 of Registrants Annual
Report on Form 10-K for the fiscal year ended June 30, 2001.
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.21 |  | Commercialization Agreement between The Coca-Cola Company, KRONES AG and Applied Films
GmbH & Co. KG (as assignee of Balzers Process Systems GmbH) effective September 1,
2000, incorporated by reference to Exhibit 10.23 of the Registrants Annual Report on
Form 10-K/A for the fiscal year ended June 30, 2001.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.22 |  | Non-Employee, Non-Director Officer and Consultant Non-Qualified Stock Option Plan dated
October 24, 2001 is incorporated by reference to Exhibit 10.3 of Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended December 29, 2001.
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.23 |  | Equity Joint Venture Agreement between Applied Films Corporation and Nippon Sheet Glass
Co., Ltd., dated February 17, 1999, is incorporated by reference to Exhibit 10.25 to the
Registrants Annual Report on Form 10-K for the fiscal year ended June 29, 2002.
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.24 |  | Asset Purchase Agreement dated September 24, 2002, by and among Applied Films Corporation
and Information Products Longmont, Inc. is incorporated by reference to Exhibit 2.1 of
Registrants Current Report on Form 8-K dated September 24, 2002.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---



| | 10.25 |  | License Agreement dated September 24, 2002, by and among Applied Films Corporation and
Information Products Longmont, Inc. is incorporated by reference to Exhibit 2.2 of
Registrants Current Report on Form 8-K dated September 24, 2002.
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.26 |  | Sublease dated September 24, 2002, by and among Applied Films Corporation and Information
Products Longmont, Inc. is incorporated by reference to Exhibit 2.3 of Registrants
Current Report on Form 8-K dated September 24, 2002.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.27 |  | Services Agreement dated September 24, 2002, by and among Applied Films Corporation and
Information Products Longmont, Inc. is incorporated by reference to Exhibit 2.4 of
Registrants Current Report on Form 8-K dated September 24, 2002.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.28 |  | Noncompetition Agreement dated September 24, 2002, by and among Applied Films Corporation
and Information Products Longmont, Inc. is incorporated by reference to Exhibit 2.5 of
Registrants Current Report on Form 8-K dated September 24, 2002.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.29 |  | Supply Agreement dated September 24, 2002, by and among Applied Films Corporation and
Information Products Longmont, Inc. is incorporated by reference to Exhibit 2.6 of
Registrants Current Report on Form 8-K dated September 24, 2002.
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 11.1 |  | Statement re: computation of per share earnings.
| | ---- |  | ------------------------------------------------

| | 21.1 |  | Subsidiaries of Applied Films Corporation is incorporated by reference to Exhibit 21 of Registrant's  Registration
                  Statement on Form S-1, as amended (Reg. No. 333-68476).
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 23.1 |  | Consent of Ernst & Young LLP.
| | ---- |  | -----------------------------

| | 24.1 |  | Power of Attorney (included on the signature page hereto).
| | ---- |  | ----------------------------------------------------------

| | 31.1 |  | Certificate of the Chief Executive Officer and President of Applied Films  Corporation  pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 31.2 |  | Certificate  of the  Chief  Financial  Officer  of  Applied  Films  Corporation  pursuant  to  Section  302 of the
 Sarbanes-Oxley
Act of 2002.
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

| | 32.1 |  | Certificate of the Chief Executive Officer and President and of the Chief Financial
Officer of Applied Films Corporation pursuant to Section 409 of the Sarbanes-Oxley Act of
2002.
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---



Exhibit 11.1

Applied Films
CorporationComputation of Earnings Per Share

(in thousands, except
shares and per share)For the year ending June 28, 2003

|                                                                  |                  
|----------------------------------------------------------------- | -----------------
|BASIC EARNINGS PER SHARE                                          |                  
|Earnings (loss) from continuing operations                        | $          1,710 
|Income (loss) from discontinued operations                        | 344              
|                                                                  |                  
|Net Income (loss)                                                 | $          2,054 
|                                                                  |                  
|Weighted average number of common shares outstanding              | 11,095,604       
|                                                                  |                  
|Earnings (loss) per share                                        
|Basic:                                                           
|Earnings (loss) from continuing operations                        | $            0.15
|Income (loss) from discontinued operations                        | $            0.03
|                                                                  |                  
|Net Income (loss)                                                 | $            0.18
|                                                                  |                  
|DILUTED EARNINGS PER SHARE                                       
|Earnings (loss) from continuing operations                        | $          1,710 
|Income (loss) from discontinued operations                        | 344              
|                                                                  |                  
|Net Income (loss)                                                 | $          2,054 
|                                                                  |                  
|Weighted average number of common shares outstanding              | 11,095,604       
|Assuming exercise of stock options                                | 446,422          
|Assuming repurchase of treasury stock                             | (292,468)        
|                                                                  |                  
|Weighted average number of common shares outstanding, as adjusted | 11,249,558       
|                                                                  |                  
|Earnings (loss) per share                                        
|Diluted:                                                         
|Earnings (loss) from continuing operations                        | $            0.15
|Income (loss) from discontinued operations                        | $            0.03
|                                                                  |                  
|Net Income (loss)                                                 | $            0.18
|                                                                  |                  



---



Exhibit 23.1

CONSENT OF INDEPENDENT
AUDITORS

We consent to the incorporation by
reference in the Registration Statements (Form S-3 No. 333-59984 and Form S-8 Nos.
333-47951, 333-47967, 333-38426, 333-51175, 333-95367, 333-56376, 333-75164, and
333-56378) of Applied Films Corporation and in the related Prospectus of our report dated
July 24, 2003, with respect to the consolidated financial statements of Applied Films
Corporation included in the Annual Report (Form 10-K) for the year ended June 28, 2003.

|Denver, Colorado
September 3, 2003 | /s/ ERNST & YOUNG LLP
|---------------------------------- | ---------------------



---



Exhibit 31.1

# CERTIFICATIONS

I, Thomas T. Edman, certify that:

|1. | I have reviewed this Annual Report on Form 10-K of Applied Films Corporation;
|-- | -----------------------------------------------------------------------------

|2. | Based on my knowledge, this report does not contain any untrue statement of a
          material fact or omit to state a material fact necessary to make the statements
          made, in light of the circumstances under which such statements were made, not
          misleading with respect to the period covered by this report;
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based on my knowledge, the financial statements, and other financial information
          included in this report, fairly present in all material respects the financial
          condition, results of operations and cash flows of the registrant as of, and
          for, the periods presented in this report;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | designed such disclosure controls and procedures, or caused such disclosure
               controls and procedures to be designed under our supervision, to ensure that
               material information relating to the registrant, including its consolidated
               subsidiaries, is made known to us by others within those entities, particularly
               during the period in which this report is being prepared;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | evaluated the effectiveness of the registrants disclosure controls and
               procedures and presented in this report our conclusions about the effectiveness
               of the disclosure controls and procedures, as of the end of the period covered
               by this report based on such evaluation; and
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | disclosed in this report any change in the registrants internal control
               over financial reporting that occurred during the registrants most recent
               fiscal quarter (the registrants fourth fiscal quarter in the case of an
               annual report) that has materially affected, or is reasonably likely to
               materially affect, the registrants internal control over financial
               reporting; and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The registrants other certifying officers and I have disclosed, based on
          our most recent evaluation of internal control over financial reporting, to the
          registrants auditors and the audit committee of the registrants
          board of directors (or persons performing the equivalent functions):
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | all significant deficiencies and material weaknesses in the design or operation
               of internal control over financial reporting which are reasonably likely to
               adversely affect the registrants ability to record, process, summarize and
               report financial information; and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | any fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal control over
               financial reporting.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: August 29, 2003

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



---



Exhibit 31.2

# CERTIFICATIONS

I, Lawrence D. Firestone, certify
that:

|1. | I have reviewed this Annual Report on Form 10-K of Applied Films Corporation;
|-- | -----------------------------------------------------------------------------

|2. | Based on my knowledge, this report does not contain any untrue statement of a
          material fact or omit to state a material fact necessary to make the statements
          made, in light of the circumstances under which such statements were made, not
          misleading with respect to the period covered by this report;
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based on my knowledge, the financial statements, and other financial information
          included in this report, fairly present in all material respects the financial
          condition, results of operations and cash flows of the registrant as of, and
          for, the periods presented in this report;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | designed such disclosure controls and procedures, or caused such disclosure
               controls and procedures to be designed under our supervision, to ensure that
               material information relating to the registrant, including its consolidated
               subsidiaries, is made known to us by others within those entities, particularly
               during the period in which this report is being prepared;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | evaluated the effectiveness of the registrants disclosure controls and
               procedures and presented in this report our conclusions about the effectiveness
               of the disclosure controls and procedures, as of the end of the period covered
               by this report based on such evaluation; and
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | disclosed in this report any change in the registrants internal control
               over financial reporting that occurred during the registrants most recent
               fiscal quarter (the registrants fourth fiscal quarter in the case of an
               annual report) that has materially affected, or is reasonably likely to
               materially affect, the registrants internal control over financial
               reporting; and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The registrants other certifying officers and I have disclosed, based on
          our most recent evaluation of internal control over financial reporting, to the
          registrants auditors and the audit committee of the registrants
          board of directors (or persons performing the equivalent functions):
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | all significant deficiencies and material weaknesses in the design or operation
               of internal control over financial reporting which are reasonably likely to
               adversely affect the registrants ability to record, process, summarize and
               report financial information; and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | any fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal control over
               financial reporting.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: August 29, 2003

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



---



Exhibit 32.1

Each of Thomas T. Edman, Chief
Executive Officer and President, and Lawrence D. Firestone, Chief Financial Officer,
Treasurer and Secretary of Applied Films Corporation, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

|(1) | the Annual Report on Form 10-K for the fiscal year ended June 28, 2003 which
          this statement accompanies fully complies with the requirements of Section 13(a)
          or 15(d) of the Securities Exchange Act of 1934, and
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | the information contained in the Annual Report on Form 10-K for the fiscal year
          ended June 28, 2003 fairly presents, in all material respects, the financial
          condition and results of operations of Applied Films Corporation.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: August 29, 2003

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

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

A signed original of this
certification has been provided to Applied Films Corporation and will be retained by
Applied Films Corporation and furnished to the Securities and Exchange Commission upon
request.