# SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

# FORM 10-K/A(Amendment No. 2)

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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 29, 2002OR
                               [     ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                                       OF THE SECURITIES EXCHANGE ACT OF 1934
                                 For the transition period from _______ to ________
                                            Commission file number 23103

APPLIED FILMS CORPORATION

                               (Exact name of registrant as specified in its charter)

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

9586 I-25 Frontage Road, Longmont CO 80504

                                 (Address of principal executive offices) (Zip Code)

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

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

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

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

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



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# EXPLANATORY NOTE:

Pursuant to this Form 10-K/A, the
Registrant amends Item 7: Managements Discussion and Analysis of Financial
Condition and Results of Operations and Item 8: Financial Statements and
Supplementary Data and Item 14: Exhibits, Financial Statements, Schedules, and
Reports on Form 8-K. No other changes have been made to the Registrants Annual
Report on Form 10-K for the year ended June 29, 2002.

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

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

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

# Overview

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

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

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

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

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

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

1

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

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

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

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

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

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

2

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# Results of Operations

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

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

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

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

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

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

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

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

Research and Development.
Research and development expenses increased 45% from $6.5 million in fiscal 2001 to $9.4
million in fiscal 2002. This increase represents a full year of operations of the combined
company following the LAC

3

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acquisition. Research and development expenses consist primarily
of salaries, outside contractor expenses, lab expenses, and other expenses related to our
ongoing product development and technology development for OLED, Solar, PET bottle process
development and other research and development activities. As a percentage of net
revenues, research and development expenses were 6% in fiscal 2001 and 7% in fiscal 2002.

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):

`Estimated Completion
                                                  % Complete At                Estimated                 Date at time of
                   Projects                        Acquisition                   Value                    Acquisition
                   --------                        -----------                   -----                    -----------

   OLED for flat panel displays...........             6%                      $  3,450                   October 2002
   Barrier coatings for plastic bottles...            45%                         4,255                   June 2002
   Rotatable cathode......................            10%                           230                   June 2002
   Planar cathode.........................             0%                           575                   March 2002
   Thin film coating technology for
   solar cells............................            14%                         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 is undergoing final  acceptance  testing by the customer.  We
intend to continue to improve the OLED  technology  and believe  that the initial  development  will be  concluded by the end of fiscal
2003.  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.  We continue to develop the
technology in an effort to improve the  characteristics  of the barrier  coatings and estimates  that this  development  effort will be
complete by the end of January  2003.  The  estimated  completion  date has  extended  beyond our initial  estimate  because we and our
development partners agreed to develop additional ancillary technology prior to commercialization.
We have discontinued  development of the specific rotatable cathode  technology  projects that were outstanding at the closing and will
instead obtain this technology  from a third party instead of developing it internally.  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.
We have  delivered  four  systems  using thin film coating  technology  for solar cells and  continue to develop  enhancements  to that
technology.  We estimate that we will complete the solar cell coating  development  by July 2003.  The market demand for our solar cell
technology  did not develop as soon as we  anticipated  for  commercial  opportunities,  so we continue  to develop the  technology  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.

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Amortization  of Goodwill  and Other  Intangible  Assets.  In the fiscal year ended June 30, 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 the fiscal year ended June 29, 2002, amortization of other intangible assets was $3.4 million.Interest  Income.  Interest income was $1.0 million in fiscal 2001 and $701,000 in fiscal 2002.  Because we principally  used available
cash and bank borrowings to fund the LAC  acquisition,  interest income in the first half of fiscal 2001 changed to interest expense in
the  second  half of fiscal  2001,  as we  incurred  interest  expense  under our credit  facility.  The use of our bank line of credit
continued until the second quarter of fiscal 2002 when we raised  additional cash,  through an offering of common stock, and we reduced
our  borrowings.  In the third and fourth  quarters of fiscal 2002, we invested the cash reserves and returned to interest  income.  At
the end of fiscal 2001 our average investment yield was 4.7% compared to 2.6% at the end of fiscal 2002.Other Income.  Other income  increased  from $805,000 in fiscal 2001 to $2.2 million in fiscal 2002.  Other income  includes items such
as realized  foreign currency  transaction  adjustments and royalties earned from the China JV. We receive a 2% royalty on all sales by
the China JV,  payable  quarterly.  Much of the  increase in fiscal 2002 was due to $762,000  for the  reversal of excess  reserves set
aside for the  completion  of the  required  building  reconditioning  cost for the  facility  in  Alzenau  to house all  manufacturing
operations  in a single  location  and  $588,000  for the  recognition  of a  non-refundable  advance  payment from a customer who went
bankrupt which was previously recorded as a liability on our balance sheet.Equity  Earnings of Joint  Venture.  Our equity  earnings  of the China JV  decreased  from $4.4  million in fiscal 2001 to $465,000 in
fiscal 2002. The 90% decrease in equity  earnings is primarily due to the weakness in the market for cellular  phones as excess handset
inventories have reduced the demand for coated glass.Income Tax  Benefit.  We  recorded a tax  benefit  during  fiscal  2002 of  $227,000.  The income tax  benefit  for 2002 was reduced by
approximately  $1.9 million due to the establishment of a valuation  allowance on net operating loss. The income tax benefit for fiscal
2001 of $5.8 million,  reflects the tax effect of goodwill and other intangible  assets,  tax-free  investment and interest income, and
equity  earnings of the Joint  Venture  will be  reinvested  in the Joint  Venture.  For German tax  purposes,  the amount  reported as
goodwill and other  intangible  assets on our balance sheet and the amount of in-process  research and development  that was charged to
expense, will be amortized over 15 years and will be deductible as amortized.Year Ended July 1, 2000 Compared to Year Ended June 30, 2001Net Revenues.  Net revenues  increased  167% from $42.3 million in fiscal 2000 to $112.7  million in fiscal 2001 as a result of the LAC
acquisition.
Net  revenues  from thin film  coating  equipment  increased  from $7.1  million in fiscal 2000 to $85.2  million in fiscal  2001,  due
primarily to the LAC  acquisition.  In the second half of fiscal 2001, over 85% of our revenues was generated from equipment,  compared
with  approximately  25% for the second half of fiscal 2000, when revenues from the sale of the ATX-700 systems began to be recognized.
During fiscal 2000 and early fiscal 2001, we sold three ATX-700 systems and recognized  revenue on a percentage of completion  basis on
two of those systems in the second half of fiscal 2000, with the remainder in the first quarter of fiscal 2001.
Thin film coated glass  revenues  decreased 22% from $35.2 million in fiscal 2000 to $27.5 million in fiscal 2001.  This  reduction was
caused by reduced demand for super twisted  nematic,  or STN,  glass used in cellular  phones due to excess  inventory of handsets.  In
addition,  during  fiscal 2001,  we shifted  production  capacity for  manufacturing  coated glass to the China JV by selling a coating
machine  previously  used in our  Longmont,  Colorado,  facility to the China JV,  shifting  revenues to the China JV and  reducing our
coated glass revenues.Gross Profit.  Gross profit  increased  from $5.7 million in fiscal 2000 to $22.7 million in fiscal 2001,  largely  driven by the shift
in product mix from glass to equipment  revenues and the increased  revenues  resulting from the LAC acquisition.  Gross profit margins
were 13% in fiscal 2000 and 20% in fiscal  2001.  Equipment  revenues  generally  have higher  gross  profit  margins than coated glass
revenues.Selling,  General and  Administrative.  Selling,  general and  administrative  expenses  increased  from $4.3 million in fiscal 2000 to
$16.0 million in fiscal 2001. The substantial  increase in fiscal 2001 resulted largely from the additional  administrative,  sales and
marketing personnel from the LAC acquisition.  As a percentage of net revenues,  selling,  general and administrative expenses were 10%
in fiscal 2000 and 14% in fiscal 2001.  While we expect some synergies in the  combination  of marketing  forces,  we project  selling,
general and  administrative  expenses as a percentage of net revenues to remain at levels similar to those we experienced in the second
half of fiscal 2001.

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Research  and  Development.  Research  and  development  expenses  increased  360% from $1.4  million in fiscal 2000 to $6.5 million in
fiscal 2001. Research and development  expenses consist primarily of salaries,  outside contractor  expenses,  lab expenses,  and other
expenses related to our ongoing product development  efforts.  The increase in research and development  expenses resulted largely from
the additional  staff and research and  development  operations in Germany.  As a percentage of net revenues,  research and development
expenses were 3.3% in fiscal 2000 and 5.7% in fiscal 2001. Because of the significant product development  opportunities,  particularly
in the PET bottle,  OLED and solar markets,  we expect research and  development  expenses as a percent of net revenues for fiscal 2002
to remain at levels similar to those we experienced in the second half of fiscal 2001.In  Process  Research  and  Development.  During  the  fiscal  year  ended  June 30, 2001,  the  Company  recognized  an $11.5  million
non-recurring charge to write-off in-process research and development costs obtained in the acquisition of LAC.Amortization  of Goodwill  and Other  Intangible  Assets.  In the fiscal year ended June 30, 2001,  amortization  of goodwill and other
intangible  assets was $5.0 million.  We had no amortization of goodwill and other  intangible  assets in the fiscal year ended July 1,
2000.Interest  Income.  Interest  income was $447,000 in fiscal 2000 and $1.0 million in fiscal  2001.  The increase in interest  income was
generated from investment of the remaining proceeds of our $55.5 million common stock offering completed in March 2000.Other Income.  Other income  increased  from $272,000 in fiscal 2000 to $805,000 in fiscal 2001.  Other income  includes  items such as
realized foreign currency  transaction  adjustments and royalties earned from the China JV. We receive a 2% royalty on all sales by the
China JV, payable quarterly.Equity  Earnings  of Joint  Venture.  Our equity  earnings of the China JV was $2.4  million in fiscal 2000 and $4.4  million in fiscal
2001. The increase results from the transition of manufacturing capacity to the China JV.Income Tax  Benefit.  We recorded a tax  benefit  during  fiscal  2001 of $5.8  million.  The tax  benefit  reflects  the tax effect of
goodwill and other intangible  assets,  tax-free  investment and interest income,  and equity earnings of the Joint Venture that is not
subject to taxation.  For German tax purposes,  the amount  reported as goodwill and other  intangible  assets on our balance sheet and
the amount of  in-process  research and  development  that was charged to expense,  will be fully  amortized  over 15 years and will be
fully  deductible  as  amortized.  The income tax benefit for fiscal 2000 was $97,000,  representing  an effective tax rate of negative
3.3%.  This  benefit  was  primarily  derived  from the  reversal in fiscal 2000 of the income tax accrual in fiscal 1999 on the equity
income from the China JV due to the  determination  that the  earnings  would not be  distributed  for the  foreseeable  future.  Other
factors  contributing to the relatively low effective tax rate in fiscal 2000 were tax-free  investment and interest income and current
year equity earnings of the China JV that are not subject to tax.

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

`Fiscal 2001 Quarters Ended                 Fiscal 2002 Quarters Ended
                                       ----------------------------------------- --------------------------------------------
                                        Sept 30,   Dec 30,  March 31,  June 30,   Sept 29,   Dec 29,    March 30   June 29,
                                          2000      2000       2001      2001       2001       2001       2002       2002
                                       --------------------------------------------------------------------------------------
                                                          (unaudited in thousands, except per share data)
Net revenues..........................  $16,870    $10,309   $44,981    $40,528   $41,283    $39,231    $32,166    $31,038
Cost of goods sold ...................   14,322      9,861    35,293     30,518    31,261     29,148     25,275     25,840
                                       ---------- --------- ---------- --------- ---------- ---------- ---------- -----------
Gross profit .........................    2,548        448     9,688     10,010    10,022     10,083      6,891      5,198
Operating expenses:
  Selling, general and administrative.    1,689      1,536     6,354      6,446     6,603      6,708      5,942      4,848
  Research and development............      413        485     2,632      2,955     2,079      1,978      2,343      3,001
  In-process research and development.        -          -    11,500          -         -          -          -          -
  Amortization of goodwill and other
     intangible
   assets.............................        -          -     2,469      2,568       839        839        839        839
                                       ---------- --------- ---------- --------- ---------- ---------- ---------- -----------
Operating income (loss)...............      446     (1,573)  (13,267)    (1,959)      501        558     (2,233)    (3,490)
Other (expense) income:
  Interest income (expense)...........      536        666       (90)       (78)      (53)        36        212        506
  Other income (expense)..............      107        230       108        358       309        286          7      1,647
  Equity earnings of joint venture....    1,285      1,647     1,041        448       110        153        150         52
                                       ---------- --------- ---------- --------- ---------- ---------- ---------- -----------
Income (loss) before income taxes.....    2,374        970   (12,208)    (1,231)      867      1,033     (1,864)    (1,285)
Income tax benefit (provision)........     (120)       483     5,399         (2)     (311)      (282)       618        202
                                       ---------- --------- ---------- --------- ---------- ---------- ---------- -----------
Net income (loss).....................  $ 2,254    $ 1,453   $(6,809)   $(1,233)  $   556    $   751    $(1,246)   $(1,083)
                                       ========== ========= ========== ========= ========== ========== ========== ===========

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

7

---

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

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

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

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

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

# Critical Accounting
Policies and Estimates

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

8

---

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

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

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

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

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

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

# Liquidity and Capital
Resources

We have funded our operations with
cash generated from operations, proceeds from public offerings of our common stock, a
private offering of preferred stock and bank borrowings. Cash provided by operating
activities was $20.2 million for fiscal 2001 compared to $37.3 million for fiscal 2002. As
of June 29, 2002, we had cash and cash equivalents of approximately $39.1
million, marketable securities of $43.5 million and working capital of $79.8 million.

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

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

Our $11.5 million credit facility
with a commercial bank will expire on September 17, 2002. As of June 29, 2002,
we had $7.0 million outstanding in a letter of credit, compared with $9.0 million
outstanding in both borrowing and a letter of credit on June 30, 2001. On
June 30, 2001, approximately $5.0 million outstanding under this facility was a
letter of credit representing our guarantee of the debt of the China JV, which increased
to $7.0 million as of June 29, 2002.

9

---

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

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

Cash used by investing activities was
$42.0 million in fiscal 2001 for the LAC acquisition and $54.6 million in fiscal 2002.

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

# Contractual Obligations
and Commercial Commitments

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

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


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

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

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

The operating leases primarily
include leases for offices, factories and office equipment throughout our operations. The
letter of credit represents our guarantee of 50 percent of the China JVs outstanding
debt as of June 29, 2002, which was covered

10

---

by our $11.5 million credit facility
with a commercial bank. The letter of credit is the only obligation against the $11.5
million credit facility at June 29, 2002. Our other commercial commitments
consist of software licenses and third party service contracts. The bank guarantees are
required by our customers primarily in China ensuring the progress payments made to the
Company and are terminated when the contract terms are fulfilled.

# Recent Financial
Accounting Standards Board Statement

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

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

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

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

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

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

11

---

# CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS

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

# ITEM 8:   Financial
Statements and Supplementary Data

# Applied Films
Corporation and Subsidiaries

# Index To Consolidated
Financial Statements

|                                                                                                                                                                                                                                                                                                         | Page 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----
|Applied Films Corporation and Subsidiaries                                                                                                                                                                                                                                                               |      
|Consolidated Balance Sheets as of June 29, 2002 and June 30, 2001.....................................................................................                                                                                                                                                   | 15   
|Consolidated Statements of Operations for the fiscal years ended June 29, 2002, June 30, 2001, and July 1, 2000............                                                                                                                                                                              | 16   
|Consolidated Statements of Stockholders' Equity for the fiscal years ended June 29, 2002, June 30, 2001, and
         July 1, 2000...................................................................................................................................................................... | 17   
|Consolidated Statements of Cash Flows for the fiscal years ended June 29, 2002, June 30, 2001, and July 1, 2000...........
Notes to Consolidated Financial Statements...........................................................................................................................         | 18
19

12

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# Report of Independent
Auditors

To the Stockholders of Applied Films
Corporation:

We have audited the accompanying
consolidated balance sheet of Applied Films Corporation and subsidiaries as of
June 29, 2002 and the related consolidated statements of operations,
stockholders equity and cash flows for the fiscal year ended
June 29, 2002. Our audit also included the financial statement schedule listed
in the index at Item 14(a) for the fiscal year ended June 29, 2002. 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 audit.

The consolidated financial statements of Applied Films Corporation as of June 30, 2001 and the consolidated statements
of operations, stockholders' equity and cash flows for the fiscal years ended June 30, 2001 and July 1, 2000, were
audited by other auditors who have ceased operations and whose report dated July 19, 2001, expressed an unqualified
opinion on those statements.

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

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

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

13

---

# Report of Independent
Public Accountants

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

To the Stockholders of Applied Films
Corporation:

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

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

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

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

14

---

Applied Films
Corporation and Subsidiaries Consolidated Balance
Sheets

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

Property, plant and equipment, net of accumulated depreciation of $11,009 and
     $9,998, respectively......................................................                  7,640                       7,746
Goodwill, net of accumulated amortization of $3,358 and $3,358,
     respectively..............................................................                 40,307                      39,475
Intangible assets, net of accumulated amortization of $5,034 and $1,678,
     respectively..............................................................                 15,101                      18,622
Investment in Joint Venture....................................................                 10,004                       9,852
Deferred tax asset, net........................................................                 11,398                       6,780
Other assets...................................................................                    373                         307
                                                                               -------------------------   -------------------------
Total Assets...................................................................        $       215,824             $       169,426
                                                                               =========================   =========================

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

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

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

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

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

15

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Applied Films Corporation and Subsidiaries Consolidated Statements
Of Operations

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

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

Operating expenses:
  Selling, general and administrative................           24,101               16,027                4,324
  Research and development...........................            9,401                6,484                1,409
  In-process research and development................                -               11,500                    -
  Amortization of goodwill and other intangible
           assets....................................            3,356                5,036                    -
                                                         -------------------- -------------------- ---------------------
Loss from operations.................................           (4,664)             (16,353)                 (74)

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

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

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

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

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

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

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

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

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

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

16

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Applied Films
Corporation and Subsidiaries Consolidated Statements
of Stockholders Equity

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

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

ESPP stock issuance ...................      5,481         39         -            -           -             -         -             39
Stock options, including income tax
   benefits of $253 ...................     48,317        383         -            -           -             -         -            383
Issuance of shares in connection with
   secondary offering (net of offering
   costs of $461) .....................  2,500,000     55,064         -            -           -             -         -         55,064
                                        ----------- ------------ ---------- ----------- -------------- ---------- ---------- ------------
Balances, July 1, 2000.................  6,040,856   $ 64,959         -        $   -       $    (20)     $   -     $  8,258    $ 73,197

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

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

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

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

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

17

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Applied Films
Corporation and Subsidiaries Consolidated Statements
of Cash Flows

`For The Fiscal Years Ended
                                                                                  -----------------------------------------------
                                                                                   June 29, 2002  June 30, 2001   July 1, 2000
                                                                                  --------------- -------------- ----------------
                                                                                                  (in thousands)
Cash Flows from Operating Activities:
Net income (loss)...............................................................      $  (1,022)     $  (4,333)      $   3,073
Adjustments to net income (loss):
  Depreciation and amortization of goodwill and other intangible assets.........          5,575         18,630           1,826
  Amortization of deferred compensation and non-cash compensation expense.......           -               143            -
  Amortization of deferred gain on lease and sale to joint venture..............           (362)          (334)           (220)
  Deferred income tax (benefit) provision.......................................           -            (4,509)           (628)
  Equity earnings of joint venture..............................................           (152)        (4,106)         (2,217)
  Deferred gain on equipment sale to joint venture..............................           -             1,386            -
  Cost of equipment sale to joint venture.......................................           -             2,251            -
  Loss on disposal of equipment.................................................             55           -               -
  Changes in:
    Accounts and trade notes receivable, net....................................          3,107          4,224            (991)
    Revenue in excess of billings...............................................          2,471         (7,203)         (3,011)
    Inventories.................................................................          6,498          8,469          (1,872)
    Prepaid expenses and other..................................................         (1,075)           299             622
    Accounts payable and accrued expenses.......................................         (8,372)        (3,339)          6,503
    Billings in excess of revenue...............................................           (503)         8,716            -
    Income taxes (receivable) payable...........................................           -               (98)            809
                                                                                  --------------- -------------- ----------------
      Net cash flows provided by operating activities...........................          6,220         20,196           3,894

Cash Flows from Investing Activities:
Sale (purchases) of marketable securities.......................................        (43,544)        20,167         (20,167)
Purchases of property, plant, and equipment.....................................         (1,565)        (1,350)           (484)
Funds used for the acquisition of LAC...........................................         (9,459)       (60,857)           -
Purchase of assets held for sale................................................           -              -               (369)
Other...........................................................................           -              -                (64)
                                                                                  --------------- -------------- ----------------
    Net cash flows used in investing activities.................................        (54,568)       (42,040)        (21,084)

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

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

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

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

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

18

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# Applied Films
Corporation and Subsidiary

# Notes to Consolidated
Financial Statements

# NOTE 1. COMPANY
ORGANIZATION AND OPERATIONS

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

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

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

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

# NOTE 2. SIGNIFICANT
ACCOUNTING POLICIES

Principles of
Consolidation

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

Use of Estimates

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

Fiscal Year

The Company has adopted a fiscal year
ending on the Saturday nearest June 30, which will result in fiscal years composed of 52
or 53 weeks. Fiscal years 2002, 2001 and 2000 all include 52 weeks.

Cash and Cash Equivalents

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

19

---

Marketable Securities

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

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

Inventories

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

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

Property, Plant, and
Equipment

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

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

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

Goodwill and Other
Intangible Assets

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

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

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

20

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

Goodwill, in its entirety, is related
to the Thin Film Coating Equipment segment. The goodwill balance is reported on the German
subsidiary balance sheet and is subject to unrealized foreign exchange fluctuations
between the Euro and the U.S. Dollar. The changes in the goodwill balance are as follows
(in thousands):

`Final Cash
                June 30, 2001        Settlement       Foreign Exchange     June 29, 2002
              ------------------ ------------------- ------------------- -------------------
Goodwill          $    39,475        $     2,482         $    (1,650)        $    40,307
              ================== =================== =================== ===================`

The additional consideration of $2.5
million represents the final cash settlement paid to Unaxis in February 2002 to complete
the transaction.

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
related to one reporting unit, the thin film coatings equipment division. As a result of
the first annual goodwill impairment test, it was determined there was no impairment of
goodwill.

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

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

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

The aggregate amortization expense
for fiscal years ended June 29, 2002, June 30, 2001 and July 1, 2000 is $3,356,000,
$5,036,000, and $0, respectively. The intangible asset balance is reported on the German
subsidiary balance sheet and therefore 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 28, 2003   June 26 2004  June 25, 2005   June 24, 2006  June 30, 2007
                                      --------------- ------------ ---------------- ------------- ----------------
Intangible Assets:
   Patents                               $  2,856        $  2,856      $  2,856        $  2,856       $  2,856
   Customer Lists                             500             500           500             250           -
                                      --------------- ------------ ---------------- ------------- ----------------
Total estimated amortization expense     $  3,356        $  3,356      $  3,356        $  3,106       $  2,856
                                      =============== ============ ================ ============= ================`

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

21

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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.

Accrued Expenses:

The significant components of accrued
expenses as of June 29, 2002 and June 30, 2001 are as follows (in thousands):

`June 29, 2002      June 30, 2001
                                               ------------------ ------------------
Accrued losses on contracts                       $       9,044      $      13,486
Accrued warranty                                          7,148              5,220
Accrued compensation                                      7,440              5,736
Payable to Unaxis                                            -               6,690
Other accruals                                            2,135              8,709
                                               ------------------ ------------------
Total accrued expenses                            $      25,768      $      39,841
                                               ================== ==================`

Accrued losses on contracts are a
result of costs incurred on projects in excess of the contracted revenue. These costs are
specific to certain projects. Accrued losses on contracts are provided for when the loss
becomes probable and the amount of loss can be reasonably estimated. Loss provisions are
based upon excess costs over the net revenue from the products contemplated by the
specific order. Contract accounting requires management to make 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.

Joint Venture Income Taxes

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

Deferred Gain

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

Coated Glass and Spare
Parts Revenue Recognition

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 for quality defects from our customers. 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.

22

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Equipment Sales Revenue
Recognition

The percentage of completion method
of accounting is used for thin film coating equipment contracts 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, 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 29, 2002 and June 30, 2001 are as follows (in thousands):

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

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

The completed contract method of
accounting 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 29, 2002, the Company had accrued approximately
$9.0 million for loss contracts and $13.5 million as of June 30, 2001. The $4.5
million decrease in losses on contracts is due to the realization of losses upon the
completion of several projects primarily during the third quarter of fiscal 2002. These
projects were obtained in the LAC acquisition and an adequate allowance for losses was
made at the time of acquisition.

Deferred Gross Profit

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

23

---

Research and Development
Expenses

Research and development costs are
expensed as incurred and consist primarily of salaries, supplies, lab expenses, and
depreciation of equipment used in research and development activities. The Company
incurred approximately $9.4 million, $6.5 million, and $1.4 million of research and
development expenses for the fiscal years ended June 29, 2002,
June 30, 2001, and July 1, 2000, respectively, net of reimbursements
received from a 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 $795,000,
$214,000 and $0 in the fiscal years ended June 29, 2002, June 30, 2001 and
July 1, 2000, 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 ended 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 39%, 67% and
93% of its revenues in fiscal years 2002, 2001 and 2000, respectively, from sales to
foreign corporations located outside of the Companys manufacturing centers in the
United States and Europe, which are primarily in Asia. In addition, many of its raw
materials are purchased from foreign corporations. The majority of the Companys
sales and purchases are denominated in U.S. dollars, with the remainder denominated in
Euros or Japanese yen. For those transactions denominated in currencies other than the
functional currency, the Company records the sale or purchase at the spot exchange rate in
effect on the date of sale. Receivables from such sales or payables for such purchases are
translated to the functional currency using the end of the period spot exchange rate.
Realized gains and losses are charged or credited to income during the year, and any
unrealized gains or losses are recorded as an accumulated translation adjustment in
Other cumulative comprehensive loss on the balance sheet at the end of the
period.

Foreign Currency
Translation

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

Other Cumulative
Comprehensive Loss

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

Net Income (Loss) Per
Common Share

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

24

---

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

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

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

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

Change in Accounting
Principle

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

Derivative Instruments
and Hedging Activities

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

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

Recent Accounting
Standards

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

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

25

---

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

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

Related Parties

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

Reclassifications

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

# NOTE 3. ACQUISITION OF
LAC

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

The accounts of this acquisition have
been included in the Companys consolidated financial statements from the acquisition
date. The purchase price was allocated based upon the estimated fair value of the
identifiable assets acquired and liabilities assumed. Net current assets include accrued
losses on contracts of $18,172,000. The long-term liabilities assumed included the accrued
pension benefit obligation of $9,012,000. The excess of the purchase price over fair value
of net identifiable assets was allocated to goodwill. The $87,661,000 purchase price was
allocated as follows (in thousands):

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

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

26

---

The following unaudited pro forma
information reflects the pro forma consolidated results of operations for the Company
giving effect to the LAC acquisition and related issuance of Series A Convertible
Preferred Stock and warrants as if the transactions occurred on July 2, 2000 and July 4,
1999, respectively. The unaudited pro forma results include the unaudited historical
operating results of LAC for the fiscal years ended June 30, 2001 and July 1, 2000,
respectively. The unaudited pro forma data is not necessarily indicative of the
Companys results of operations that would actually have been reported if the
transaction in fact had occurred on July 2, 2000 and July 4, 1999, respectively, and is
not necessarily representative of the Companys consolidated results of operations
for any future period.

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

# NOTE 4. LONG-TERM DEBT

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

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

# NOTE 5. INVESTMENT IN
JOINT VENTURE

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

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

27

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

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

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

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

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

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

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

# NOTE 6.
STOCKHOLDERS EQUITY

Series A Convertible
Preferred Stock

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

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

28

---

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

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

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

Secondary Offering

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

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

Stock Options

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

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

Outside Directors Options

In July 2001, the Company amended the
Outside Director Stock Option Plan to cover an aggregate of 124,000 shares of common
stock. The exercise price of the options under this plan is determined based upon the
estimated fair market value.

Statement of Financial
Accounting Standards No. 123

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

29

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

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

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

The total fair value of options
granted was computed to be approximately $5.8 million, $4.1 million, and $738,000, for the
years ended June 29, 2002, June 30, 2001, and July 1, 2000,
respectively. The amounts are amortized ratably over the vesting period of the options.
Pro forma stock-based compensation, net of the effect of forfeitures, was $2.2 million,
$894,000, and $220,000 for the fiscal years ended June 29, 2002,
June 30, 2001, and July 1, 2000, respectively.

If the Company had accounted for its
stock-based compensation plans in accordance with SFAS No. 123, 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 29, 2002    June 30, 2001    July 1, 2000
                                    ----------------- ---------------- ---------------
Net income (loss) applicable to
common shareholders:
  As reported                        $      (1,337)   $      (4,700)   $       3,073
                                    ================= ================ ===============
  Pro forma                          $      (3,557)   $      (5,604)   $       2,846
                                    ================= ================ ===============
Diluted earnings (loss) per share:
  As reported                        $       (0.14)   $       (0.73)   $        0.72
                                    ================= ================ ===============
  Pro forma                          $       (0.37)   $       (0.87)   $        0.67
                                    ================= ================ ===============`

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

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

30

---

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

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

Employee Stock Purchase
Plan

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

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

# NOTE 7. INCOME TAXES

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

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

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

31

---

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

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

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

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

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

# NOTE 8. EMPLOYEE BENEFIT
PLANS

Profit Sharing Plan

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

Pension Plan

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

32

---

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

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

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

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

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

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

# NOTE 9. SIGNIFICANT
CUSTOMERS

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

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

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

33

---

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

# NOTE 10. LEASES

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

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

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

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

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

34

---

# NOTE 11. SEGMENT
INFORMATION

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

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

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

# NOTE 12. FAIR VALUE OF
FINANCIAL INSTRUMENTS

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

# NOTE 13. QUARTERLY
INFORMATION (unaudited)

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

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

35

---

# NOTE 14. PROPERTY, PLANT
AND EQUIPMENT

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

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

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

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

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

`Valuation and Qualifying Accounts                           (dollars in thousands)
   ---------------------------------      Balance at      Charged to
                                         beginning of     costs and     Acquired                  Balance at
Allowance for doubtful accounts            period         expenses       Reserve    Deductions   end of period
---------------------------------------------------------------------------------------------------------------
                2002                    $       1,142  $         730  $      --    $        575   $        997
                2001 (unaudited)                  188            167       1,411            625          1,142
                2000 (unaudited)                  734            240         --             125            188`

|    | 3.                                                                                                                                                                                          | Exhibits.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------
|    |                                                                                                                                                                                             |          
|(b) | Reports on Form 8-K
         The  Registrant  filed a Current  Report on Form 8-K dated  June 13, 2002,  disclosing in Item 4 a change in the  Registrant's
         certifying accountant.
|(c) | Exhibits
         The response to this portion of Item 14 is submitted as a separate section of this report.                                                                               
|(d) | Financial Statement Schedules
         The response to this section of Item 14 is submitted as a separate section of this report.                                                          

36

---

# SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 2 to the 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, President
May 1, 2003 | 
| | --- | ---------------------------------------------------------- | 

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Amendment No. 2 to the
annual report has been signed by the following persons in the capacities indicated on May
1, 2003.

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

| | *By: | /s/ Lawrence D. Firestone
Lawrence D. FirestoneAttorney in Fact | 
| | ---- | --------------------------------------------------------------- | 

37

---

# CERTIFICATIONS

I, Thomas T. Edman, certify that:

|1. | I have reviewed this annual report on Form 10-K, as amended, of Applied Films
                    Corporation;
|-- | --------------------------------------------------------------------------------------------------------------

|2. | Based on my knowledge, this annual report does not contain any untrue statement
                    of 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; and
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based on my knowledge, the financial statements, and other financial information
                    included in this annual 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 Annual Report.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated:  May 1, 2003

| | /s/ Thomas T. Edman

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

I, Lawrence D. Firestone, certify
that:

|1. | I have reviewed this annual report on Form 10-K, as amended, of Applied Films
               Corporation;
|-- | ---------------------------------------------------------------------------------------------------------

|2. | Based on my knowledge, this annual report does not contain any untrue statement
               of 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; and
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based on my knowledge, the financial statements, and other financial information
               included in this annual 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 Annual Report.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated:  May 1, 2003

| | /s/ Lawrence D. Firestone

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

38

---

# EXHIBIT INDEX

Exhibit No                Description

|3.1   | Amended and Restated Articles of Incorporation of Applied Films Corporation, as amended, are incorporated by
         reference to Exhibit 3.1 of Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001                                                                                                                                                                                                                                                                                                                                                                                                   
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2   | Amended and Restated Bylaws of Applied Films Corporation are incorporated by reference to Exhibit 3.2 of
         Registrant's Registration Statement on Form S-1, as amended (Reg. No. 333-35331).                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.1   | Specimen common stock certificate is incorporated by reference to Exhibit 4.1 of Registrant's Registration
         Statement on Form S-1, as amended (Reg. No. 333-35331).                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.2   | Specimen Series A Preferred Stock certificate is incorporated by reference to Exhibit 4.1 of Registrant's Current
         Report on Form 8-K dated January 16, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.1  | 1993 Stock Option Plan is incorporated by reference to Exhibit 4 of Registrant's Registration Statement on Form
         S-8 (Reg. No. 333-51175).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.2* | 1997 Stock Option Plan, as amended, is incorporated by reference to Exhibit 10-2 of Registrant's Registration
         Statement on Form S-1, as amended (Reg. No. 333-35331), by reference to Exhibit 4.2 of Registrant's Registration
         Statement on Form S-8 (Reg. No. 333-47967) to reference to Exhibit 4.2 of Registrant's Registration Statement on
         Form S-8 (Reg. No. 333-38426) any by reference to Exhibit 4.2 and 4.3 of Registrant's Registration Statement on
         Form S-8 (Reg. No. 333-56376) and the Fifth Amendment to the 1997 Stock Option Plan is attached hereto as Exhibit
         10.2.
|10.3* | Employee Stock Purchase Plan, as amended, is incorporated by reference to Exhibit 10.3 of Registrant's
         Registration Statement on Form S-1, as amended (Reg. No. 333-35331), by reference to Exhibit 4 to the
         Registrant's Registration Statement on Form S-8 (Reg. No. 333-47951) and by reference to Exhibit 4.2 on
         Registrant's Registration Statement on Form S-8 (Reg. No. 333-56378) and the Fourth Amendment to the Employee
         Stock Purchase Plan is attached hereto as Exhibit 10.3.                                                                                                      
|10.4  | Form of Indemnity Agreement between Registrant and each of its Directors and Executive Officers is incorporated
         by reference to Exhibit 10.4 of Registrant's Registration Statement on Form S-1, as amended (Reg. No. 333-35331).                                                                                                                                                                                                                                                                                                                                                                                          
|10.5  | Lease Agreement dated January 30, 1998, between 9586 East Frontage Road, Longmont, CO 80504 LLC and Registrant is
         incorporated by reference to Exhibit 10.9 of Registrant's Quarterly Report on form 10-Q for the fiscal quarter
         ended December 27, 1997.                                                                                                                                                                                                                                                                                                                                                         
|10.6  | Agreement, dated November 18, 1997, between Nippon Sheet Glass Co., Ltd., NSG Fine Glass Co., Ltd. and Registrant
         is incorporated by reference to Exhibit 10.8 of Registrant's Annual Report on Form 10-K for the fiscal year ended
         June 27, 1998.                                                                                                                                                                                                                                                                                                                                                                
|10.7  | Amended and Restated Credit Agreement, dated September 17, 1999, between Registrant and Bank One, Michigan, is
         incorporated by reference to Exhibit 10.7 of Registrant's Annual Report on Form 10-K for the fiscal year ended
         July 3, 1999.                                                                                                                                                                                                                                                                                                                                                                       
|10.8  | Security Agreement dated June 30, 1994, between Registrant and Bank One, Michigan, formerly NBD Bank, is
         incorporated by reference to Exhibit 10.5 of Registrant's Registration Statement on Form S-1, as amended (Reg.
         333-35331).                                                                                                                                                                                                                                                                                                                                                                               
|10.9  | Outside Director Stock Option Plan is incorporated by reference to Exhibit 4.1 of Registrant's Registration
         Statement on Form S-8 (Reg. No. 333-95367), and by reference to Exhibits 4.2 and 4.3 of Registrant's Registration
         Statement on Form S-8 (Reg. No. 333-75164).                                                                                                                                                                                                                                                                                                                                         
|10.10 | Share Purchase and Exchange Agreement dated October 18, 2000, between Registrant, AFCO GmbH & Co. KG, Balzers
         Process Systems GmbH and Unaxis Holding AG is incorporated by reference to Exhibit 2.1 of Registrant's Current
         Report on Form 8-K dated December 31, 2000.                                                                                                                                                                                                                                                                                                                                          

39

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|10.11  | Amendment Agreement dated December 29, 2000, between Registrant, AFCO GmbH & Co. KG, Balzers Process Systems GmbH
         and Unaxis Holding AG is incorporated by reference to Exhibit 2.2 of Registrant's Current report on Form 8-K
         dated December 31, 2000.                                                                  
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12  | Second Amendment Agreement dated February 27, 2002, between Applied Films  Corporation, Applied Films GmbH & Co.
         KG, Balzers Process Systems GmbH and Unaxis Holding AG is incorporated by reference to Exhibit 2.7 of
         Registrant's Current Report on Form 8-K/A dated December 31, 2000.                                
|10.13  | Contribution Agreement dated December 29, 2000, between Balzers Process Systems GmbH and Leybold Coating GmbH &
         Co. KG is incorporated by reference to Exhibit 2.3 of Registrant's Current Report on Form 8-K dated December 31,
         2000.                                                                                   
|10.14  | Bravo Intellectual Property License Agreement dated December 31, 2000, between Balzers Process Systems GmbH and
         Leybold Coating GmbH & Co. KG is incorporated by reference to Exhibit 2.4 of Registrant's Current Report on Form
         8-K dated December 31, 2000.                                                            
|10.15  | Newco Intellectual Property License Agreement dated December 31, 2000, between Balzers Process Systems GmbH and
         Leybold Coating GmbH & Co. KG is incorporated by reference to Exhibits 2.5 of Registrant's Current Report on form
         8-K dated December 31, 2000.                                                           
|10.16  | Securities Purchase Agreement dated January 16, 2001, between Registrant and the purchasers identified on the
         signature pages thereto is incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K
         dated January 16, 2001.                                                                    
|10.17  | Registration Rights Agreement dated January 16, 2001, between Registrant and the investors identified on the
         signature pages thereto is incorporated by reference to Exhibit 10.2 of Registrant's Current Report on Form 8-K
         dated January 16, 2001.                                                                     
|10.18  | Common Stock Warrant No. 1 dated January 16, 2001 is incorporated by reference to Exhibit 10.3 of Registrant's
         Current Report on Form 8-K dated January 16, 2001.                                                                                                                                                                 
|10.19  | Common Stock Warrant No. 2 dated January 16, 2001 is incorporated by reference to Exhibit 10.4 of Registrant's
         Current Report on Form 8-K dated January 16, 2001.                                                                                                                                                                 
|10.20  | Common Stock Warrant No. 3 dated January 16, 2001 is incorporated by reference to Exhibit 10.5 of Registrant's
         Current Report on Form 8-K dated January 16, 2001.                                                                                                                                                                 
|10.21  | Common Stock Warrant No. 4 dated January 16, 2001 is incorporated by reference to Exhibit 10.6 of Registrant's
         Current Report on Form 8-K dated January 16, 2001.                                                                                                                                                                 
|10.22  | Lease Agreement between RWE Systems Immobilren GmbH & Co. KG/Lahmeyer Grandbesitz GmbH & Co. KG and Applied Films
         GmbH & Co. KG dated January 31, 2001 for the Alzenau, Germany facility, incorporated by reference to Exhibit
         10.22 of Registrant's Annual Report on Form 10-K for  the fiscal year ended June 30, 2001.
|10.23  | Commercialization Agreement between The Coca-Cola Company, KRONES AG and Applied Films GmbH & Co. KG (as assignee
         of Balzers Process Systems GmbH) effective September 1, 2000, incorporated  by reference to Exhibit 10.23 of the
         Registrant's Annual Report on Form 10-K/A for the fiscal year ended June 30, 2001.    
|10.24  | Non-Employee, Non-Director Officer and Consultant Non-Qualified Stock Option Plan dated October 24, 2001 is
         incorporated by reference to Exhibit 10.3 of Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
         ended December 29, 2001.                                                                      
|10.25* | Equity Joint Venture Agreement between Applied Films Corporation and Nippon Sheet Glass Co., Ltd., dated February
         17, 1999.                                                                                                                                                                                                       
|11.1*  | Statement re: computation of per share earnings.                                                                                                                                                                                                                                                                                           
|13.1*  | Annual Report to Shareholders for the year ended June 29, 2002.  This exhibit is furnished for the information of
         the Securities and Exchange Commission and is not deemed "filed" as part of this filing.                                                                                                                        

40

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|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.                                                                                                                                                                
|99.1* | Certificate of the Chief Executive Officer and President of Applied Films Corporation pursuant to Section 906 of
         the Sarbanes-Oxley Act of 2002.                         
|99.2* | Certificate of the Chief Financial Officer of Applied Films Corporation pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002.                                       

*Indicates previously filed.

41

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EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the  incorporation  by reference  in the  Registration  Statements  (Form S-3 No.  333-59984  and
Form S-8 Nos. 333-47951,  333-47967,  333-38426,  333-51175, 333-95367, 333-56376, 333-75164, and 333-56378) of
Applied Films  Corporation  and in the related  Prospectus  of our report dated July 22, 2002,  with respect to
the  consolidated  financial  statements  of Applied  Films  Corporation  included in Amendment 2 of the Annual
Report (Form 10-K/A) for the year ended June 29, 2002.

| | /s/ ERNST & YOUNG LLP
| | ---------------------

Denver, Colorado
May 12, 2003