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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K/A

(Amendment No. 1)


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

For the fiscal year ended June 28, 2003
OR


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


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


APPLIED FILMS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


|                                              |  |                                     
|--------------------------------------------- |  | ------------------------------------
|COLORADO                                      |  | 84-1311581                          
|                                              |  |                                     
|(State of Other Jurisdiction of Incorporation |  | (I.R.S. Employer Identification No.)
|or Organization)                              |  |                                     

9586 I-25 Frontage Road, Suite 200, 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 ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes  [X]  No [   ]

The aggregate market value of the common stock held by non-affiliates of the
Registrant, based on a per share price of $20.33 as of December 27, 2002, was
$217,280,046. As of September 10, 2003, there were outstanding 11,224,910
shares of the Companys Common Stock (no par value).

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





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TABLE OF CONTENTS



|                                               |                                                                                              |  |  |  |  |  |  | 
|---------------------------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                        
|                                               | ITEM 1: Business                                                                            
|                                               | ITEM 1(a): General Development of Business                                                  
|                                               | ITEM 1(b): Financial Information About Industry Segments                                    
|                                               | ITEM 1(c): Narrative Description of Business                                                
|                                               | ITEM 1 (d): Information About Foreign Operations                                            
|                                               | ITEM 2: Properties                                                                          
|                                               | ITEM 3: Legal Proceedings                                                                   
|                                               | ITEM 4: Submission of Matters to a Vote of Security Holders                                 
|PART II                                       
|                                               | ITEM 5: Market for Registrants Common Stock and Related Security Holder Matters            
|                                               | ITEM 6: Selected Consolidated Financial Data                                                
|                                               | ITEM 7: Managements Discussion and Analysis of Financial Condition and Results of Operation
|                                               | ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk                         
|                                               | ITEM 8: Financial Statements and Supplementary Data                                         
|                                               | ITEM 9: Changes in and Disagreements With Accountants and Financial Disclosure              
|                                               | ITEM 9A: Controls And Procedures                                                            
|PART III                                      
|                                               | ITEM 10: Directors and Executive Officers of the Registrant                                 
|                                               | ITEM 11: Executive Compensation                                                             
|                                               | ITEM 12: Security Ownership of Certain Beneficial Owners and Management                     
|                                               | ITEM 13: Certain Relationships and Related Transactions                                     
|                                               | ITEM 14: Principal Accountant Fees And Services                                             
|PART IV                                       
|                                               | ITEM 15: Exhibits, Financial Statements, Schedules, and Reports on Form 8-K                 
|SIGNATURES                                    
|EXHIBIT INDEX                                 
|EX-11.1 Statement Re: Computation of Earnings 
|EX-13.1 Annual Report to Shareholders         
|Ex-23.1 Consent of Ernst & Young LLP          
|EX-31.1 Certificate of CEO - Section 302      
|EX-31.2 Certificate of CFO - Section 302      
|EX-32.1 Certificate of CEO & CFO - Section 409



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PART I




ITEM 1: Business

The following discussion contains trend information and other forward looking
statements (including statements regarding future operating results, future
capital expenditures, new product introductions, technological developments and
industry trends) that involve a number of risks and uncertainties. Our actual
results could differ materially from our historical results of operations and
those discussed in the forward looking statements. Factors that could cause
actual results to differ materially include, but are not limited to, those
identified in ITEM 7: Managements Discussion and Analysis of Financial
Condition and Results of Operation and the section entitled Risk Factors.
All period references are to our fiscal periods ended June 28, 2003, June 29,
2002, or June 30, 2001, unless otherwise indicated.

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

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




ITEM 1(a): General Development of Business

Introduction

Applied Films Corporation is a leading provider of thin film deposition
equipment to diverse markets such as the flat panel display, the architectural,
automotive and solar glass, and the consumer products packaging and electronics
industries. Our thin film deposition systems are used to deposit thin films
that enhance the characteristics of a base substrate, such as glass, plastic,
paper or foil. These thin films provide conductive, electronic, reflective,
filter, barrier and other properties that are critical elements of our
customers products. Our thin film deposition systems provide our customers
with reliable, high yield, high throughput, flexible and modular configurations
and innovative coating and process technologies. Equipment sales represented
over 95% of our net revenues in fiscal 2003. In addition, we sell thin film
coated glass to the flat panel display industry. This coated glass is produced
at our China Joint Venture, or China JV.

Our Markets

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

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

Architectural, Automotive and Solar Glass.Thin film coated glass is used in
buildings for exterior window glass, automobile windows and solar energy
collecting applications. Applying certain thin films on glass significantly

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reduces heat transfer through the glass, improving the efficiency of heating
and cooling systems in buildings and vehicles. In addition, thin films form
conductive layers and are integral components of solar cells. Demand for
architectural and automotive coated glass is driven by the need for energy
conservation in commercial and residential construction and increasingly, in
automotive applications. The demand for alternative energy sources, such as
solar cells, is driven by the need to reduce the load on municipal power grids
worldwide.

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

Since our formation, and including the historic sales made by the large area
coatings, or LAC, business of Unaxis Holding AG that we acquired in December
2000, we have sold over 90 FPD thin film deposition systems, 50 architectural,
automotive glass and solar thin film deposition systems and 500 web thin film
deposition systems. We have developed leading thin film process and equipment
technologies to meet our customers needs for sophisticated, technologically
advanced thin film deposition equipment. We have over 80 patents and patent
applications related to thin film technologies, and we continue to invest in
research and development. Our manufacturing operations in Germany, together
with our international sales and support offices enable us to provide thin film
deposition equipment solutions to customers throughout the world, including our
core markets in Asia, Europe and North America.

Our Thin Film Technology Solutions

Historically, we manufactured our own equipment to produce thin film coated
glass and have used that experience to transition our business to the design
and manufacture of thin film deposition equipment. We solve critical
manufacturing issues for our customers with our broad range of thin film
deposition equipment, innovative thin film coating and process technologies,
and after-market support. Our thin film deposition solutions are highly
specialized for our customers to enhance the electrical, optical and barrier
qualities of the substrates used in their products. We believe that the
reliable, high yield, high throughput, flexible and modular configurations of
our thin film deposition equipment and our innovative coating and process
technologies offer several advantages to our customers over the equipment and
technologies of our competitors.

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

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

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Our Strategy

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

Build on our Leadership in our Core Markets.We are a market leader with what
we believe to be the largest installed base of thin film deposition equipment
for the color filter FDP, the architectural and automotive glass markets, and
the consumer products packaging and electronics markets. We believe our
reputation as a high quality supplier of thin film deposition equipment allows
us to establish key customer relationships and to grow with these customers as
they develop new products to meet new market requirements. We intend to use
our strong technological capabilities and long-standing customer relationships
to continue to supply our existing customers with competitive solutions and
capture additional market share in core markets.

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

Continue to Serve Diverse Markets.We have applied our thin film technology to
diverse markets ranging from flat panel displays for televisions and computer
monitors to consumer packaging for potato chip bags. We will continue to invest
in the technologies that address the needs of diverse markets because we
believe this reduces our exposure to the cyclical nature of any individual
market. For example, when the FPD market experienced a downturn in fiscal
years 2001 and 2002, we continued to sell thin film deposition equipment to our
other markets.

Engage in Strategic Relationships. Our strategic relationships have influenced
our technological direction, optimized our research and development
investments, and enhanced the sales, marketing and distribution of our
products. We will continue to pursue strategic relationships with industry
leaders in each new market or market segment that we enter.

Reduce Costs to Improve Margins.In order to reduce our cost of goods sold and
improve our gross and operating margins, we will continue to review all aspects
of producing our thin film deposition equipment, including operating costs,
component costs and product design.

Pursue Selective Acquisitions. We regularly seek and evaluate acquisition
opportunities that would enhance or complement our existing operations or
otherwise offer growth opportunities consistent with our strategy and core
competencies. For example, our acquisition and integration of the LAC business
successfully completed our strategy of transforming our business from coating
glass to manufacturing thin film deposition equipment.




ITEM 1(b): Financial Information About Industry Segments

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

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ITEM 1(c): Narrative Description of Business

Products

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

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



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

Thin Film Deposition Equipment

Flat Panel Displays

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

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

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

Architectural, Automotive and Solar Glass.

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

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

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

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

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

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

Consumer Products Packaging and Electronics

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

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

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

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

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

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

Thin Film Coated Glass

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

Sales, Marketing and Customers

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

In fiscal 2003, our ten largest customers accounted for approximately 53% of
our net revenues. Revenue from our largest customer in fiscal 2003, Guardian
Industries Corporation, represented 13.3% of our net revenues for that

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year. Approximately 71% of our fiscal 2003 net revenues were derived from
exports to our customers outside of our manufacturing center in Europe,
primarily to Asia. The demand for FPD thin film coated glass is primarily in
Asia, and our customers for thin film deposition equipment have historically
been predominately located in Japan, Korea, China, Taiwan, Europe and the
United States.

Customer Service

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

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

Manufacturing and Facilities

Our Longmont, Colorado, headquarters contains approximately 87,000 square feet
and includes general offices and research and development. This facility is
leased from an independent third party. We conduct research and development at
this facility.

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

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

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

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

Competition

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

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

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

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

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

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

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

Research and Development

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

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



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

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

Intellectual Property

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

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

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

Strategic Relationships with The Coca-Cola Company

In July 1997, we entered into a strategic relationship with The Coca-Cola
Company to develop and produce thin film deposition equipment to apply barrier
coatings to the outside of plastic bottles. We then entered into a
Commercialization Agreement with The Coca-Cola Company and Krones AG effective
September 2000, which specifies our rights and responsibilities with respect to
this process and technology. We and Krones are responsible for manufacturing
the thin film deposition equipment, including the integration of the bottle
handling components supplied by Krones AG. Krones is responsible for selling
and servicing deposition equipment for coating plastic bottles. We and Krones
may sell to any third parties, provided that Krones and The Coca-Cola Company
receive royalty payments on third party sales. The Commercialization Agreement
continues in effect until August 31, 2005. Even if the agreement is not
renewed, we will retain a worldwide, non-exclusive license of the intellectual
property related to thin film deposition on plastic bottles.

We have delivered several systems using our barrier coating technology for
plastic bottles which is the first of two coatings necessary to achieve the
improved barrier results. At the end of fiscal 2003, we experienced a setback
with the atmospheric barrier protection top coat, as Krones was not able to
deliver a commercially viable coating system for the top coat. We continue to
develop the technology in our own labs in an effort to develop a process that
will improve the characteristics of the barrier coatings. We have not
established a revised estimate for the completion of this technology, however,
we believe that our strategic relationship with The Coca-Cola Company and
Krones presents us with a good foundation for technology development.

The LAC Acquisition

Effective December 31, 2000 we acquired the LAC business from Unaxis, which
expanded our capabilities in the FPD market and enabled our entry into three
new product markets:



| |  |  | color filter FPD;                             
| | - |  | ----------------------------------------------
|
| |  |  | architectural, automotive and solar glass; and
|
| |  |  | consumer products packaging and electronics.  

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

China Joint Venture

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

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

8



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Employees

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

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

Environmental Regulations

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

Trademarks

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




ITEM 1 (d): Information About Foreign Operations

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




ITEM 2: Properties

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




ITEM 3: Legal Proceedings

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




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

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

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ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers and Directors

Our executive officers and directors are as follows:

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



---

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

Thomas T. Edmanhas been employed by our company since June 1996 and has served
as our President and Chief Executive Officer since May 1998. From June 1996
until May 1998, Mr. Edman served as Chief Operating Officer and Executive Vice
President. Mr. Edman has served as a director of our company since July 1998.
From 1993 until joining our company, he served as General Manager of the High
Performance Materials Division of Marubeni Specialty Chemicals, Inc., a
subsidiary of a major Japanese trading corporation. Mr. Edman also serves on
the national board of directors of the American Electronics Association, a
professional trade organization, and is chairman of its audit committee. Mr.
Edman has a Bachelor of Arts degree in East Asian studies (Japan) from Yale and
received a Masters degree in business administration from The Wharton School
at the University of Pennsylvania.

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

Lawrence D. Firestonehas served as our Chief Financial Officer, Treasurer and
Secretary since July 1999 and as our Senior Vice President since July 2003.
From March 1996 until March 1999, Mr. Firestone served as Vice President and
Chief Operating Officer of Avalanche Industries, Inc., a custom cable and
harness manufacturer. From 1993 to 1996, Mr. Firestone served as Director of
Finance and Operations for the Woolson Spice and Coffee Company, a gourmet
coffee roasting and distribution company, and from 1988 to 1993, as Vice
President and Chief Financial Officer for TechniStar Corporation, a
manufacturer of robotic automation equipment. From 1981 to 1988, Mr. Firestone
served in various capacities and finally as Vice President and Chief Financial
Officer at Colorado Manufacturing Technology, a contract manufacturer that
specialized in printed circuit board and cable assembly. Mr. Firestone has a
Bachelor of Science degree in business/accounting from Slippery Rock State
College.

Helmut Frankenbergerserved as our Executive Vice President  Sales & Marketing
since the LAC acquisition on December 31, 2000 through August 31, 2003 when he
resigned his position with Applied Films Corporation. Prior to the acquisition,
Mr. Frankenberger served as President of Balzers Process Systems, located in
Germany, since 2000, and the Vice President of Large Area Display Division
since 1999. From 1997 through 1998, he served as the Division Manager of
Display Products, and from 1996 through 1997, served as the Division Manager of
Data Storage at Balzers Process Systems. From 1969 to 1987 Mr. Frankenberger
served in various capacities related to

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sales, marketing and equipment service for Leybold Deutschland in Germany,
Japan and the United States. Mr. Frankenberger obtained his Bachelors degree
in electronic and computer science from University Darmstadt in Germany.

James P. Scholhamerhas served as our Senior Vice President since July 2003.
From January 2001 to July 2003, Mr. Scholhamer was the Vice
President 
Operations and from August 1997 to January 2001 he was the Director of
Operations for Thin Film Coatings. From 1992 until he joined our company, Mr.
Scholhamer held the titles of Manufacturing Manager and Process Engineer at

Viratec Thin Films, Inc., located in Minnesota. From 1989 to 1992, Mr.
Scholhamer served as Production Manager and Process Engineer at Ovonic
Synthetic Materials, Inc., a division of Energy Conversion Devices, located in
Michigan. Mr. Scholhamer has a Bachelor of Science degree in engineering from
The University of Michigan.

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

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

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

Richard P. Beckhas served as a director of our company since May 1998 and
Chairman of the Board since October 2001. From March 1992 to May 2002, Mr. Beck
served in various capacities for Advanced Energy Industries, Inc., a publicly
held manufacturer of power conversion and integrated technology solutions,
including Senior Vice President from November 2001 to May 2002, Senior Vice
President and Chief Financial Officer from February 1998 to November 2001, and
Vice President and Chief Financial Officer from March 1992 to February 1998,
and he continues to serve as a Director of the company. From November 1987 to
March 1992, Mr. Beck served as Executive Vice President and Chief Financial
Officer of Cimage Corporation, a computer software company. Mr. Beck serves as
a director of Photon Dynamics, Inc. and TTM Technologies, Inc., both publicly
held companies, and he serves as chairman of their audit committees. Mr. Beck
has a Bachelor of Science degree in accounting and a Masters degree in
business administration in finance from Babson College.

Vincent Sollitto, Jr.has served as a director of our company since October
1999. Since June 2003, Mr. Sollitto has been the President and Chief Executive
Officer and member of the board of Brillian Corporation. From July 1996 to
February 2003, Mr. Sollitto was President and Chief Executive Officer and a
member of the Board of Directors at Photon Dynamics, Inc. From August 1993 to
1996, Mr. Sollitto was the General Manager of Business Unit Operations for
Fujitsu Microelectronics, Inc. From April 1991 to August 1993, he was the
Executive Vice President of Technical Operations at Supercomputer Systems,
Incorporated. Prior to 1991, Mr. Sollitto spent 21 years in

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various management positions at IBM, including Director of Technology and
Process. Mr. Sollitto serves as a director on the boards of Irvine Sensors
Corporation and Ultratech Inc.. Mr. Sollitto holds a Bachelor of Science degree
in electrical engineering from Tufts College.

Executive Officers

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

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ADDITIONAL ITEM: RISK FACTORS

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

Risks Related to our Business

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

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



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

These factors are difficult or impossible to forecast.

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

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

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

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

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

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



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

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

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



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

If we fail to adequately invest in research and development or allocate
sufficient resources, we may be unable to compete effectively in the markets in
which we operate.

As a result of the intense competition in our industry, the failure to invest
sufficiently in strategic product development could adversely affect us. We
have limited resources to allocate to research and development and must

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

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

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

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

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



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

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

Some of our competitors offer a broader range of integrated products in a
particular market. If we are unable to develop a more extensive line of
products, customers could elect to purchase products from a supplier that
offers a more extensive range of products, making it more difficult for us to
sell products which are just one part of an integrated process.

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

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



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

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

Effective December 31, 2000 we acquired the LAC business from Unaxis Holding
AG, or Unaxis. Unaxis agreed that, until December 31, 2002, it would not
compete with the LAC business we acquired. We also agreed to license certain
intellectual property from Unaxis, and Unaxis agreed to license certain
intellectual property from us. Since December 31, 2002, Unaxis has been free
to compete with us in our markets with certain intellectual property related to
our deposition technology. Competition by Unaxis may impair sales of our
products.

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

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



| |  |  | foreign exchange risks;                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------
|
| |  |  | inflation or deflation in foreign economies;                                                        
|
| |  |  | the burdens of complying with a wide variety of foreign laws,
including export license requirements;
|
| |  |  | unexpected changes in regulatory requirements and the imposition
of government controls;            
|
| |  |  | political and economic instabilities;                                                               
|
| |  |  | protective trade activities, such as tariffs and other barriers;                                    

16



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| |  |  | the risk of business interruption caused by labor unrest, war or
illness;                                                                      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | difficulties in accounts receivable collections;                                                                                               
|
| |  |  | inability to protect intellectual property rights;                                                                                             
|
| |  |  | the quarantine or closure of any of our facilities, or those of
our customers, due to an outbreak of severe Acute Respiratory Syndrome
or SARs;
|
| |  |  | difficulties in staffing and managing foreign sales operations;
and                                                                            
|
| |  |  | potentially adverse tax consequences.                                                                                                          

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

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

Our consolidated financial statements are expressed in U.S. dollars. However,
the assets, liabilities and results of operations of our German operations are
reported in Euros. The translation exposures that result from the inclusion of
financial statements that are expressed in functional currencies other than
U.S. dollars are reported in the other cumulative comprehensive income (loss)
line in stockholders equity. As of June 28, 2003, the unrealized translation
adjustment in other cumulative comprehensive income (loss) was $11.5 million,
which was primarily attributable to the goodwill and other intangible assets
from the LAC acquisition that are denominated in Euros and intercompany debt
denominated in the functional currency of the country in which our subsidiary
that received the loan is organized.

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

Our ten largest customers accounted for 53% of our net revenues in fiscal 2003.
Revenues from our largest customer in fiscal 2003, Guardian Industries
Corporation, represented 13.3% of our net revenues for that year. Revenues
from our largest customers have varied significantly from year to year and will
continue to fluctuate in the future. We may not be able to retain our key
customers, or these customers may cancel purchase orders or reschedule or
decrease their level of purchases from us. If a large order were delayed or
cancelled, our revenues would significantly decline, and the loss of, or a
significant reduction of purchases by, one or more of our significant customers
would materially adversely affect our business, operating results, financial
condition and prospects. In addition, any difficulty in collecting amounts due
from one or more key customers could harm our financial results. There are a
limited number of potential customers in each of our markets, and we expect
that sales to a relatively small number of customers will continue to account
for a high percentage of our revenues in those markets in the foreseeable
future.

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

The success of our strategy to develop emerging high growth market
opportunities depends on the level of product development and marketing and
distribution support we receive from our strategic partners. For example, we
have been working with a strategic customer in the OLED market who has
purchased one of our systems and is working with us as we develop the thin film
and process technologies to shorten our development time for a high volume
production solution for color OLEDs. We have also entered into a
Commercialization Agreement with The Coca-Cola Company and Krones AG, pursuant
to which we are relying on Krones to provide the necessary sales, marketing and
distribution support of our thin film deposition equipment for coating plastic
bottles when this solution is commercially viable. The failure of our
strategic partners to devote adequate resources toward product development or
failure of Krones to devote adequate resources to marketing and distributing
our plastic bottle deposition equipment could limit our ability to grow or
sustain our revenues and earnings.

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

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

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

We produce all of our thin film deposition equipment in our manufacturing
facilities located in Alzenau, Germany, and our China JV produces all of its
coated glass in its facilities leased in Suzhou, China. Any prolonged
disruption in the operations of our manufacturing facilities, whether due to
technical or labor difficulties, destruction or damage as a result of a fire or
any other reason, could seriously harm our ability to satisfy our customer
order deadlines. If we cannot deliver our systems on time, our revenues could
also be adversely affected.

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

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

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

Our coated glass revenues and equity earnings from our China JV depend solely
on our joint venture with Nippon Sheet Glass Co., Ltd., or NSG, in China. The
results of our China JV depend on the continuing cooperation of NSG. The
success of our China JV is subject to a number of risks, over many of which we
have limited control. We rely on NSG to house our China JV within its glass
fabrication facility and to supply glass to our China JV. We also rely

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on NSGs management personnel to manage the day-to-day operations of our China
JV, and the managing director of our China JV is employed by NSG as well as by
our China JV. We do not have employment agreements with any management
personnel at our China JV. Our China JVs future success will be dependent in
part on our ability to continue to effectively participate in our China JV and
manage our relationship with NSG. Our business, operating results, financial
condition or growth could be materially adversely affected if NSG ceases to
supply glass to our China JV, focuses its management and operational efforts on
other activities or terminates the joint venture.

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

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

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

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

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

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

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

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



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

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

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

In fiscal 2003, 71% of our revenue was derived from sales in foreign countries
outside of our manufacturing center in Europe, including certain countries in
Asia such as Taiwan, Korea, China and Japan. The laws of some foreign countries
do not protect our proprietary rights to as great an extent as do the laws of
Europe and the United States, and many companies have encountered substantial
problems in protecting their proprietary rights against infringement in such
countries. For example, Taiwan is not a signatory of the Patent Cooperation
Treaty, which is designed to specify rules and methods for protecting
intellectual property internationally. In many instances, the publication of a
patent prior to the filing of a patent application in Taiwan would invalidate
the ability of a company to obtain a patent in Taiwan. Similarly, in contrast
to the United States where the contents of patents remain confidential for at
least 18 months after first filing, in Taiwan, the contents of a patent are
published upon filing, which provides competitors an advance view of the
contents of a patent application prior to the establishment of the patent
rights. There is a risk that our means of protecting our proprietary rights may
not be adequate in these countries. For example, our competitors in these
countries may independently develop similar technology or duplicate our
systems. If we fail to adequately protect our intellectual property in these
countries, it would be easier for our competitors to develop competing
technology and sell competing products.

We have significant goodwill and other intangible assets. Consequently,
potential impairment of goodwill and other intangibles may significantly impact
our profitability.

We prepare our financial statements in conformity with the generally accepted
accounting provisions in the United States, or U.S. GAAP. U.S. GAAP requires us
to annually evaluate whether certain assets have been impaired. Goodwill is
tested for impairment using a fair-value-based approach. In addition, U.S. GAAP
also requires us to evaluate the carrying value of all long-lived intangible
assets other than goodwill whenever events or circumstances indicate that the
carrying value of assets may exceed their recoverable amounts. An impairment
loss on long-lived intangible assets other than goodwill is recognized when the
estimated future cash flows (undiscounted and without interest) expected to
result from the use of an asset are less than the carrying amount of the asset.
One or more impairment losses could adversely affect our financial condition
and results of operations.

Recently the Financial Accounting Standards Board, or FASB, issued new
pronouncements under FASB 142 regarding goodwill and intangible assets and
under FASB 144 long-lived assets. As a result of the LAC acquisition
and the adoption of FASB 142 in July of 2001, as of June 28, 2003, we have
$89.0 million in goodwill and other intangible assets on our balance sheet of
which $61.3 million is goodwill, which we do not amortize. We undergo an

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impairment test each year. As a result of the significance of goodwill, our
results of operations and financial position in future periods could be
negatively impacted should one or more impairments of goodwill occur.

We record our portion of the earnings from our China JV in the investment in
joint venture line item of the balance sheet. This item is a long-lived asset,
and under FASB 144, long-lived assets will undergo our impairment test each
year based on current market conditions. This asset could become impaired and
our financial statements would need to be adjusted to reflect that. This could
negatively impact our financial results.

Potential changes in accounting standards might cause us to revise our
financial disclosure in the future, which might change the way analysts measure
our business or financial performance.

Recently discovered accounting irregularities in various industries have forced
regulators and legislators to take a renewed look at accounting practices,
financial disclosure, companies relationships with their independent auditors
and retirement plan practices. Because it is still unclear what laws or
regulations will develop, we cannot predict the ultimate impact of any future
changes in accounting regulations or practices in general with respect to
public companies or in our operations specifically.

Our prior engagement of Arthur Andersen LLP as our independent auditor may pose
risks to us and limit your ability to seek potential recoveries from them
related to their work.

Our consolidated balance sheets as of July 3, 1999, July 1, 2000, and June 30,
2001 and the consolidated statements of operations for the fiscal years ended
July 3, 1999 and July 1, 2000, were audited by Arthur Andersen LLP. On March
14, 2002, Arthur Andersen was indicted on federal obstruction of justice
charges arising from the governments investigation of Enron Corporation.
While our audit committee and board of directors have no reason to question the
quality or integrity of the audit and other assurance services previously
provided to us by Arthur Andersen, some investors, including significant funds
and institutional investors, may choose not to invest in or hold securities of
a company whose financial statements were audited by Arthur Andersen.

Additionally, the Securities and Exchange Commission, or SEC, rules require us
to present our audited financial statements in various SEC filings, along with
Arthur Andersens consent to our inclusion of its audit report in those
filings. Arthur Anderson has indicated to us that it will be unable to provide
a consent to us related to our inclusion in any future SEC filings of its
report on our consolidated balance sheets as of July 3, 1999, July 1, 2000, and
June 30, 2001 and the consolidated statements of operations for the fiscal
years ended July 3, 1999 and July 1, 2000. Arthur Andersen also will be unable
to provide us with assurance services, such as advice customarily given to
underwriters of our securities offerings and other similar market participants.
The SEC recently has provided regulatory relief designed to allow companies
that file reports with the SEC to dispense with the requirement to file a
consent of Arthur Andersen in certain circumstances. Notwithstanding this
relief, the inability of Arthur Anderson to provide its consent or to provide
assurance services to us could negatively affect our ability to, among other
things, access the public capital markets. Any delay or inability to access
the public markets as a result of this situation could have a material adverse
impact on our business. Also, an investors ability to seek potential
recoveries from Arthur Andersen related to any claims that an investor may
assert as a result of the work performed by Arthur Andersen may be limited
significantly both in the absence of a consent and the diminished amount of
assets of Arthur Andersen that are or may in the future be available for
claims.

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

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



| |  |  | the assessment of damages or imposition of fines against us;
| | - |  | ------------------------------------------------------------
|
| |  |  | the suspension of production of our products; or            

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| |  |  | the cessation of our operations.
| | - |  | --------------------------------

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

We are dependent on third parties to supply all raw materials and components
used in our products. Any interruption or failure by these suppliers to meet
their obligations could have a material adverse effect on our business,
profitability and cash flows.

We rely on third-party suppliers to provide all raw materials and components
for our products. Any interruption or failure by these suppliers, distributors
and collaboration partners to meet their obligations in a timely manner, as
well as any increases in the cost of their components or lapses in quality,
could have a material adverse effect on our business, financial conditions,
profitability and cash flows.

The success of any future acquisitions are subject to uncertainty and any
completed acquisitions may reduce our earnings, be difficult to integrate, not
perform as expected or require us to obtain additional financing.

We from time to time evaluate selective possible acquisitions that we believe
to be consistent with our strategy and core competencies. Such acquisitions
may be carried out through the purchase of assets, joint ventures, licenses or
by acquiring other companies. However, we cannot assure you that we will be
able to complete acquisitions on satisfactory terms, if at all. In particular,
we may not be able to identify suitable acquisition candidates, and we may have
to compete for acquisition candidates. Our competitors may have greater
resources than us and therefore be better able to complete acquisitions or may
cause the ultimate price we pay for acquisitions to increase. If we fail to
achieve our acquisition goals, our grown may be limited.

Acquisitions may expose us to additional risks and may have a material adverse
effect on our profitability and cash flows. Any acquisitions we make may:



| |  |  | fail to accomplish our strategic objectives;         
| | - |  | -----------------------------------------------------
|
| |  |  | not be successfully combined with our operations; and
|
| |  |  | not perform as expected.                             

In addition, acquisitions could initially decrease our income per share and add
significant intangible assets and related amortization charges. Our
acquisition strategy may require us to obtain additional debt or equity
financing, resulting in leverage, or increased debt obligations as compared to
equity, and dilution of ownership. We may not be able to finance acquisitions
on terms satisfactory to us.

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

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

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Risks Related to our Common Stock

Our stock price may fluctuate significantly.

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



| |  |  | the limited number of shares of common stock available for
purchase or sale in the public markets;        
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | quarterly variations in our results of operations;                                                        
|
| |  |  | failure to meet earnings estimates;                                                                       
|
| |  |  | changes in earnings estimates or buy/sell recommendations by
analysts;                                    
|
| |  |  | the operating and stock price performance of comparable
companies;                                        
|
| |  |  | developments in the financial markets;                                                                    
|
| |  |  | the announcement of new products or product enhancements or
business results by us or our competitors; and
|
| |  |  | general market conditions or market conditions specific to the
industries in which we operate.            

Recent stock prices for many technology companies have fluctuated in ways
unrelated or disproportionate to the operating performance of the companies.
Those fluctuations and general economic, political and market conditions, such
as recessions or international currency fluctuations, may adversely affect the
market price of our common stock.

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

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

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

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

We may issue additional shares and dilute your ownership percentage.

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



| |  |  | to raise additional capital or finance acquisitions;                                                              
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | upon the exercise or conversion of outstanding options, warrants
and shares of convertible preferred stock; and/or

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| |  |  | in lieu of cash payment of dividends.
| | - |  | -------------------------------------

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

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PART II




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

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

|             |                                            |  |      |       |     |  |   |       | 
|------------ | ------------------------------------------ |  | ---- | ----- | --- |  | - | ----- | 
|             |                                            |  | High |       | Low
|             |                                            |  |      |       |    
|Fiscal 2002: |                                            |  |      |       |     |  |   |      
|             | First Quarter                              |  | $    | 25.30 |     |  | $ | 12.95 | 
|             | Second Quarter                             |  |      | 34.47 |     |  |   | 15.03 | 
|             | Third Quarter                              |  |      | 35.20 |     |  |   | 20.82 | 
|             | Fourth Quarter                             |  |      | 27.95 |     |  |   | 9.05  | 
|Fiscal 2003: |                                            |  |      |       |     |  |   |      
|             | First Quarter                              |  | $    | 11.99 |     |  | $ | 7.90  | 
|             | Second Quarter                             |  |      | 21.67 |     |  |   | 7.41  | 
|             | Third Quarter                              |  |      | 21.40 |     |  |   | 12.80 | 
|             | Fourth Quarter                             |  |      | 26.15 |     |  |   | 14.90 | 
|Fiscal 2004: |                                            |  |      |       |     |  |   |      
|             | First Quarter (through September 11, 2003) |  | $    | 32.90 |     |  | $ | 23.75 | 

On September 11, 2003, the last reported sale price of our common stock on the
Nasdaq National Market was $28.84 per share, and there were approximately 46
stockholders of record of the common stock. We estimate that there are
approximately 2,250 beneficial owners of the common stock.

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

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ITEM 6: Selected Consolidated Financial Data

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

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

|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |        |  
|--------------------------------------------------------------- | --------------------------------------------------------------- | - | ------------------------------------ | ----- | ------- | - | -------- | ----- | -------- | - | -------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                |                                                                 |   | Fiscal Year Ended                   
|                                                                |                                                                 |   |                                     
|                                                                |                                                                 |   | July 3,                              |       | July 1, |   | June 30, |       | June 29, |   | June 28,
|                                                                |                                                                 |   | 1999                                 |       | 2000    |   | 2001     |       | 2002     |   | 2003    
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |         
|                                                                |                                                                 |   | (in thousands except per share data)
|Consolidated Statement of Operations Data:                      |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|Net revenues                                                    |                                                                 | $ | 4,616                                |       |         | $ | 7,133    |       |          | $ | 96,316   |        |   | $ | 137,142 |        |   | $ | 154,233 |       
|Cost of goods sold                                              |                                                                 |   | 1,920                                |       |         |   | 5,348    |       |          |   | 74,691   |        |   |   | 104,574 |        |   |   | 117,619 |       
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|Gross profit                                                    |                                                                 |   | 2,696                                |       |         |   | 1,785    |       |          |   | 21,625   |        |   |   | 32,568  |        |   |   | 36,614  |       
|Operating expenses:                                             |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|                                                                | Selling, general and administrative                             |   |                                      | 3,341 |         |   |          | 3,937 |          |   |          | 15,657 |   |   |         | 23,747 |   |   |         | 24,312 |  
|                                                                | Research and development                                        |   |                                      | 881   |         |   |          | 1,237 |          |   |          | 6,303  |   |   |         | 9,220  |   |   |         | 12,178 |  
|                                                                | In-process research and development                             |   |                                      |      |         |   |          |      |          |   |          | 11,500 |   |   |         |       |   |   |         |       |  
|                                                                | Amortization of goodwill and other intangible assets            |   |                                      |      |         |   |          |      |          |   |          | 5,036  |   |   |         | 3,356  |   |   |         | 3,779  |  
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|Loss from operations                                            |                                                                 |   | (1,526                               | )     |         |   | (3,389   | )     |          |   | (16,871  | )      |   |   | (3,755  | )      |   |   | (3,655  | )     
|Other income (expense), net                                     |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|                                                                | Interest income (expense), net                                  |   |                                      | (553  | )       |   |          | 447   |          |   |          | 1,034  |   |   |         | 701    |   |   |         | 2,025  |  
|                                                                | Other income, net                                               |   |                                      | 40    |         |   |          | 272   |          |   |          | 805    |   |   |         | 2,249  |   |   |         | 1,600  |  
|                                                                | Equity earnings of Joint Venture                                |   |                                      | 382   |         |   |          | 2,381 |          |   |          | 4,421  |   |   |         | 465    |   |   |         | 2,231  |  
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|Income (loss) from continuing operations before income taxes    |                                                                 |   | (1,657                               | )     |         |   | (289     | )     |          |   | (10,611  | )      |   |   | (340    | )      |   |   | 2,201   |       
|Income tax benefit (expense)                                    |                                                                 |   | 669                                  |       |         |   | 1,257    |       |          |   | 5,941    |        |   |   | (91     | )      |   |   | (491    | )     
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|                                                                | Income (loss) from continuing operations                        |   |                                      | (988  | )       |   |          | 968   |          |   |          | (4,670 | ) |   |         | (431   | ) |   |         | 1,710  |  
|Discontinued operations:                                        |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|                                                                | Income (loss) from discontinued operations, net of tax          |   |                                      | 764   |         |   |          | 2,155 |          |   |          | 337    |   |   |         | (591   | ) |   |         | (85    | )
|                                                                | Gain on disposal of discontinued operations, net of tax         |   |                                      |      |         |   |          |      |          |   |          |       |   |   |         |       |   |   |         | 429    |  
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|Discontinued operations, net of tax                             |                                                                 |   | 764                                  |       |         |   | 2,155    |       |          |   | 337      |        |   |   | (591    | )      |   |   | 344     |       
|Cumulative effect of change in accounting principle, net of tax |                                                                 |   |                                     |       |         |   | (50      | )     |          |   |         |        |   |   |        |        |   |   |        |       
|Net income (loss)                                               |                                                                 |   | (224                                 | )     |         |   | 3,073    |       |          |   | (4,333   | )      |   |   | (1,022  | )      |   |   | 2,054   |       
|                                                                | Preferred stock dividends                                       |   |                                      |      |         |   |          |      |          |   |          | (367   | ) |   |         | (315   | ) |   |         |       |  
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|Net income (loss) applicable to common stockholders             |                                                                 | $ | (224                                 | )     |         | $ | 3,073    |       |          | $ | (4,700   | )      |   | $ | (1,337  | )      |   | $ | 2,054   |       
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|Earnings (loss) per share:                                      |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|Basic:                                                          |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|                                                                | Earnings (loss) from continuing operations                      |   | $                                    | (0.28 | )       |   | $        | 0.22  |          |   | $        | (0.78  | ) |   | $       | (0.08  | ) |   | $       | 0.15   |  
|                                                                | Income (loss) from discontinued operations                      |   |                                      | 0.22  |         |   |          | 0.50  |          |   |          | 0.05   |   |   |         | (0.06  | ) |   |         | 0.03   |  
|                                                                | Cumulative effect of change in accounting principle, net of tax |   |                                      |      |         |   |          | (0.01 | )        |   |          |       |   |   |         |       |   |   |         |       |  
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|                                                                | Basic earnings (loss) per share                                 |   | $                                    | (0.06 | )       |   | $        | 0.72  |          |   | $        | (0.73  | ) |   | $       | (0.14  | ) |   | $       | 0.18   |  
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|Diluted:                                                        |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|                                                                | Earnings (loss) from continuing operations                      |   | $                                    | (0.28 | )       |   | $        | 0.21  |          |   | $        | (0.78  | ) |   | $       | (0.08  | ) |   | $       | 0.15   |  
|                                                                | Income (loss) from discontinued operations                      |   |                                      | 0.22  |         |   |          | 0.49  |          |   |          | 0.05   |   |   |         | (0.06  | ) |   |         | 0.03   |  
|                                                                | Cumulative effect of change in accounting principle, net of tax |   |                                      |      |         |   |          | (0.01 | )        |   |          |       |   |   |         |       |   |   |         |       |  
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|                                                                | Diluted earnings (loss) per share                               |   | $                                    | (0.06 | )       |   | $        | 0.69  |          |   | $        | (0.73  | ) |   | $       | (0.14  | ) |   | $       | 0.18   |  
|                                                                |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|Weighted average common shares outstanding:                     |                                                                 |   |                                      |       |         |   |          |       |          |   |          |        |   |   |         |        |   |   |         |       
|                                                                | Basic                                                           |   |                                      | 3,478 |         |   |          | 4,255 |          |   |          | 6,414  |   |   |         | 9,628  |   |   |         | 11,096 |  
|                                                                | Diluted                                                         |   |                                      | 3,478 |         |   |          | 4,439 |          |   |          | 6,414  |   |   |         | 9,628  |   |   |         | 11,250 |  

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|                                                 |  |                   |        |         |  |          |        |          |  |          |         |  |  |   |         |  |  |   |         | 
|------------------------------------------------ |  | ----------------- | ------ | ------- |  | -------- | ------ | -------- |  | -------- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                 |  | Fiscal Year Ended
|                                                 |  |                  
|                                                 |  | July 3,           |        | July 1, |  | June 30, |        | June 29, |  | June 28,
|                                                 |  | 1999              |        | 2000    |  | 2001     |        | 2002     |  | 2003    
|                                                 |  |                   |        |         |  |          |        |          |  |         
|                                                 |  | (in thousands)   
|Consolidated Balance Sheet Data:                 |  |                   |        |         |  |          |        |          |  |          |         |  |  |   |         |  |  |   |         | 
|Cash, cash equivalents and
marketable securities |  | $                 | 1,163  |         |  | $        | 52,225 |          |  | $        | 26,236  |  |  | $ | 74,678  |  |  | $ | 74,437  | 
|Restricted cash(1)                               |  |                   |       |         |  |          |       |          |  |          |        |  |  |   | 7,913   |  |  |   | 18,991  | 
|Working capital                                  |  |                   | 11,812 |         |  |          | 63,785 |          |  |          | 22,417  |  |  |   | 81,128  |  |  |   | 88,684  | 
|Total assets                                     |  |                   | 26,159 |         |  |          | 79,673 |          |  |          | 167,484 |  |  |   | 215,108 |  |  |   | 254,742 | 
|Long-term debt, net of current portion           |  |                   | 7,180  |         |  |          |       |          |  |          | 6,483   |  |  |   |        |  |  |   |        | 
|Total stockholders equity                       |  |                   | 14,658 |         |  |          | 73,197 |          |  |          | 89,192  |  |  |   | 154,570 |  |  |   | 177,198 | 



|(1) |  | Restricted cash represents (i) cash that is pledged to provide credit
support for our guaranty of $5.0 million of indebtedness of our China JV
and (ii) cash that is pledged to support bank guarantees on cash deposits
for contracts with certain customers in China.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

Overview

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

Our operations and financial position have been significantly affected by three
corporate transactions that were implemented to advance our strategic
transition from lower gross profit margin sales of coated glass to higher gross
profit margin sales of thin film deposition equipment. In 1998, we entered into
our China JV, a 50%-50% joint venture with Nippon Sheet Glass Co., Ltd. to
supply the low and high resolution coated glass market from a production base
in Suzhou, China. Our China JV began operations in April of 1999. In December
2000, we completed the acquisition of the LAC business of 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 plastic bottles.

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

Our China JV was formed to lower our product cost, and to operate in a closer
proximity to our raw glass supply and our Asian customer base. We buy coated
glass manufactured by our 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 our China
JV, the revenues and expenses of our 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 our China JV is captured in the net income of
our China JV, 50% of which appears as equity earnings of Joint Venture in our
consolidated statements of operations.

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

|                               |                    |   |                   |        |               |   |               |         |  |   |         |         | 
|------------------------------ | ------------------ | - | ----------------- | ------ | ------------- | - | ------------- | ------- |  | - | ------- | ------- | 
|                               |                    |   | Fiscal year ended
|                               |                    |   |                  
|                               |                    |   | (in thousands)   
|                               |                    |   | June 30, 2001     |        | June 29, 2002 |   | June 28, 2003
|                               |                    |   |                   |        |               |   |              
|Thin film coated glass         |                    | $ | 11,124            |        |               | $ | 6,085         |         |  | $ | 6,159   |        
|Thin film deposition equipment |                    |   | 85,192            |        |               |   | 131,057       |         |  |   | 148,074 |        
|                               |                    |   |                   |        |               |   |               |         |  |   |         |        
|                               | Total net revenues |   | $                 | 96,316 |               |   | $             | 137,142 |  |   | $       | 154,233 | 
|                               |                    |   |                   |        |               |   |               |         |  |   |         |        

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

|                               |                    |  |                   |       |               |  |               |       |   |  |      |       |  
|------------------------------ | ------------------ |  | ----------------- | ----- | ------------- |  | ------------- | ----- | - |  | ---- | ----- | -
|                               |                    |  | Fiscal year ended
|                               |                    |  |                  
|                               |                    |  | June 30, 2001     |       | June 29, 2002 |  | June 28, 2003
|                               |                    |  |                   |       |               |  |              
|Thin film coated glass         |                    |  | 11.6              | %     |               |  | 4.0           | %     |   |  | 4.0  | %    
|Thin film deposition equipment |                    |  | 88.4              | %     |               |  | 96.0          | %     |   |  | 96.0 | %    
|                               |                    |  |                   |       |               |  |               |       |   |  |      |      
|                               | Total net revenues |  |                   | 100.0 | %             |  |               | 100.0 | % |  |      | 100.0 | %
|                               |                    |  |                   |       |               |  |               |       |   |  |      |      

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

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

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

Sales of products manufactured in Germany are denominated in Euros, except for
sales of equipment to certain Japanese customers, which are denominated in
Japanese Yen. Sales of products purchased from our China JV for resale to our
customers are generally denominated in U.S. dollars. The U.S. dollar equivalent
of gross revenues in Euros and Japanese yen were approximately $117.3 million
and $7.1 million respectively, for fiscal 2002 and $138.4 million and $5.0
million, respectively, for fiscal 2003. Currently, we engage in international
currency hedging transactions to mitigate our foreign exchange exposure related
to sales of certain equipment, and the effects of foreign exchange rate changes
on foreign currency transactions have not been significant to date. As of June
28, 2003, the U.S. dollar equivalent of accounts receivable denominated in
Euros and Japanese yen were approximately $8.4 million and $1.1 million, or
approximately 71% and 9%, respectively, of total accounts receivable. As of
June 28, 2003, the U.S. dollar equivalent of accounts payable denominated in
Euros and Japanese yen were approximately $9.9 million and $360,000 or
approximately 55% and 1%, respectively, of total accounts payable.

Results of Operations

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

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

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|                                                             |                                                         |                                     |       |                   |     |               |       |               |      |   |       |      |     | 
|------------------------------------------------------------ | ------------------------------------------------------- | ----------------------------------- | ----- | ----------------- | --- | ------------- | ----- | ------------- | ---- | - | ----- | ---- | --- | 
|                                                             |                                                         |                                     |       | Fiscal year ended
|                                                             |                                                         |                                     |       |                  
|                                                             |                                                         |                                     |       | June 30, 2001     |     | June 29, 2002 |       | June 28, 2003
|                                                             |                                                         |                                     |       |                   |     |               |       |              
|Consolidated Statement of Operations Data:                   |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     
|Coated glass revenues                                        |                                                         |                                     | 11.6  | %                 |     |               | 4.0   | %             |      |   | 4.0   | %   
|Equipment revenues                                           |                                                         |                                     | 88.4  |                   |     |               | 96.0  |               |      |   | 96.0  |     
|                                                             |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     
|Net revenues                                                 |                                                         |                                     | 100.0 |                   |     |               | 100.0 |               |      |   | 100.0 |     
|Cost of goods sold                                           |                                                         |                                     | 77.5  |                   |     |               | 76.3  |               |      |   | 76.3  |     
|                                                             |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     
|Gross profit                                                 |                                                         |                                     | 22.5  |                   |     |               | 23.7  |               |      |   | 23.7  |     
|Operating expenses:                                          |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     
|                                                             | Selling, general and administrative                     |                                     |       | 16.3              |     |               |       | 17.3          |      |   |       | 15.8 |    
|                                                             | Research and development                                |                                     |       | 6.5               |     |               |       | 6.7           |      |   |       | 7.9  |    
|                                                             | In-process research and development                     |                                     |       | 11.9              |     |               |       |              |      |   |       |     |    
|                                                             | Amortization of goodwill and other intangible assets    |                                     |       | 5.3               |     |               |       | 2.4           |      |   |       | 2.4  |    
|                                                             |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     
|Operating loss                                               |                                                         |                                     | (17.5 | )                 |     |               | (2.7  | )             |      |   | (2.4  | )   
|Interest income, net                                         |                                                         |                                     | 1.1   |                   |     |               | 0.5   |               |      |   | 1.3   |     
|                                                             | Other income, net                                       |                                     |       | 0.8               |     |               |       | 1.6           |      |   |       | 1.1  |    
|Equity earnings of Joint Venture                             |                                                         |                                     | 4.6   |                   |     |               | 0.3   |               |      |   | 1.4   |     
|                                                             |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     
|Income (loss) from continuing operations before income taxes |                                                         |                                     | (11.0 | )                 |     |               | (0.3  | )             |      |   | 1.4   |     
|Income tax benefit (expense)                                 |                                                         |                                     | 6.2   |                   |     |               | (0.1  | )             |      |   | (0.3  | )   
|                                                             |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     
|Income (loss) from continuing operations                     |                                                         |                                     | (4.8  | )                 |     |               | (0.4  | )             |      |   | 1.1   |     
|Discontinued operations:                                     |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     
|                                                             | Income (loss) from discontinued operations, net of tax  |                                     |       | 0.3               |     |               |       | (0.4          | )    |   |       | (0.1 | )  
|                                                             | Gain on disposal of discontinued operations, net of tax |                                     |       |                  |     |               |       |              |      |   |       | 0.3  |    
|                                                             |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     
|                                                             |                                                         | Discontinued operations, net of tax |       |                   | 0.3 |               |       |               | (0.4 | ) |       |      | 0.2 | 
|                                                             | Net income (loss)                                       |                                     |       | (4.5              | )   |               |       | (0.8          | )    |   |       | 1.3  |    
|                                                             | Preferred stock dividends                               |                                     |       | (0.4              | )   |               |       | (0.2          | )    |   |       |     |    
|                                                             |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     
|Net income (loss) applicable to common shareholders          |                                                         |                                     | (4.9  | )%                |     |               | (1.0  | )%            |      |   | 1.3   | %   
|                                                             |                                                         |                                     |       |                   |     |               |       |               |      |   |       |     

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

Net Revenues.Net revenues increased 12.5% from $137.1 million in fiscal 2002
to $154.2 million in fiscal 2003. Our revenue concentration remained focused on
the equipment segment of our business as our revenues generated by equipment
sales remained constant at 96.0% of total net revenues in fiscal 2002 and
fiscal 2003.

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

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

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

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

Research and Development.Research and development expenses increased 32.1%
from $9.2 million in fiscal 2002 to $12.2 million in fiscal 2003. In fiscal
2003, growth in research and development for FPD related products was driven by
the development efforts targeted towards larger glass sizes, including
generation 6 and 7 glass sizes. Research and development expenses consist
primarily of salaries, outside contractor, lab, and other expenses related

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to our ongoing product and technology development for FPD, OLED, solar, and
plastic bottle processes and other research and development programs. As a
percentage of net revenues, research and development expenses were 6.7% in
fiscal 2002 and 7.9% in fiscal 2003.

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

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

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

Equity earnings of Joint Venture.Our equity earnings of our China JV increased
from $465,000 in fiscal 2002 to $2.2 million in fiscal 2003. The 379.8%
increase in equity earnings is primarily due to the increase in the market for
cellular telephones with color displays.

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

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

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

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

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

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

Gross Profit.Gross profit increased from $21.6 million in fiscal 2001 to $32.6
million in fiscal 2002, largely driven by the increased revenues from the
equipment segment of our business as we reported a full year of combined
company operations following the LAC acquisition. Gross margins were 22.5% in
fiscal 2001 and 23.7% in fiscal 2002. Equipment revenues generally have higher
gross margins than coated glass revenues. We also experienced a cost overrun on
a transport system for an architectural glass equipment customer in fiscal 2002
which reduced our gross profit in that year.

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

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

In-Process Research and Development.During the fiscal year ended June 30,
2001, we recognized an $11.5 million non-recurring charge to write-off
in-process research and development (IPR&D) costs attributed to the LAC
acquisition. Several projects were included, of which the principal projects
were based on the following technologies: OLED for FPDs, 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 IPR&D by product and the percentage complete at
December 31, 2000, the LAC acquisition date. The estimated value at the
acquisition date and the estimated completion date at the time of the
acquisition were:

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

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

We have delivered one system using the OLED technology, and that system
achieved its final specification at the customer site. We intend to continue to
improve the OLED technology and believe that the initial development will

32



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be concluded by the end of fiscal 2004. We expect to recognize revenues from
sales of deposition equipment including OLED technology in calendar 2004 and
2005.

We have delivered several systems using our barrier coating technology for
plastic bottles which is the first of two coatings necessary to achieve the
improved barrier results. At the end of fiscal 2003, we experienced a setback
with the atmospheric barrier protection top coat, as our partner Krones AG was
not able to deliver a commercially viable coating system for the top coat. We
continue to develop the technology in our own labs in an effort to develop a
process that will improve the characteristics of the barrier coatings. We have
not established a revised estimate for the completion of this technology.

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

Through fiscal 2002, we delivered four systems using thin film coating
technology for solar cells and continue to develop enhancements to that
technology. With these developments, we continue to position ourselves as a
market leader in developing high volume manufacturing solutions for the solar
cell market.

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

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

Interest Income, Net.Net interest income was $1.0 million in fiscal 2001 and
$701,000 in fiscal 2002. Because we principally used available cash and bank
borrowings under our bank credit facility to fund the LAC acquisition, we
incurred $489,000 of interest expense in fiscal 2001. The use of our credit
facility continued until the second quarter of fiscal 2002 when we raised
additional cash through an offering of common stock, and we repaid all loans
under our credit facility. 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, Net.Net other income increased from $805,000 in fiscal 2001 to
$2.2 million in fiscal 2002. Net other income includes items such as realized
foreign currency transaction adjustments and royalties earned from our China
JV. We receive a 2% royalty on all sales by our 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.The equity earnings of our China JV decreased
from $4.4 million in fiscal 2001 to $465,000 in fiscal 2002. The 89% decrease
in equity earnings is primarily due to the weakness in the market for cellular
phones in fiscal 2002 as excess handset inventories reduced the demand for
coated glass.

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

33



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##### Table of Contents



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

Quarterly Results of Operations

The following table sets forth summary unaudited quarterly financial
information for the eight fiscal quarters ended June 28, 2003. In the opinion
of management, such information has been prepared on the same basis as the
audited financial statements appearing elsewhere in this report and reflects
all necessary adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation of unaudited quarterly results when read in
conjunction with the audited financial statements and notes thereto. The
operating results for any quarter are not necessarily indicative of results for
any future period and any trends reflected in such results may not continue in
the future. Our results of operations may be subject to significant quarterly
variations.

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



|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |        |       |  
|------------------------------------------------------------ | ----------------------------------------------------------- | --------------------------------- | ------ | ------------------------------------- | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ----- | - | ------ | ------ | ----- | -
|                                                             |                                                             |                                   |        | Fiscal 2002 Quarters Ended           
|                                                             |                                                             |                                   |        |                                      
|                                                             |                                                             |                                   |        | 29-Sep                                |      | 29-Dec |        | 30-Mar |      | 29-Jun
|                                                             |                                                             |                                   |        | 2001                                  |      | 2001   |        | 2002   |      | 2002  
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |       
|                                                             |                                                             |                                   |        | (in thousands, except per share data)
|Net revenues                                                 |                                                             | $                                 | 39,273 |                                       |      | $      | 37,885 |        |      | $      | 30,827 |        |       | $ | 29,157 |       
|Cost of goods sold                                           |                                                             |                                   | 29,198 |                                       |      |        | 27,977 |        |      |        | 23,525 |        |       |   | 23,874 |       
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Gross profit                                                 |                                                             |                                   | 10,075 |                                       |      |        | 9,908  |        |      |        | 7,302  |        |       |   | 5,283  |       
|Operating expenses:                                          |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|                                                             | Selling, general and administrative                         |                                   |        | 6,510                                 |      |        |        | 6,609  |      |        |        | 5,827  |       |   |        | 4,801  |      
|                                                             | Research and development                                    |                                   |        | 2,034                                 |      |        |        | 1,933  |      |        |        | 2,298  |       |   |        | 2,955  |      
|                                                             | Amortization of other intangible assets                     |                                   |        | 839                                   |      |        |        | 839    |      |        |        | 839    |       |   |        | 839    |      
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Income (loss) from operations                                |                                                             |                                   | 692    |                                       |      |        | 527    |        |      |        | (1,662 | )      |       |   | (3,312 | )     
|Other income, net:                                           |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|                                                             | Interest income (expense), net                              |                                   |        | (53                                   | )    |        |        | 36     |      |        |        | 212    |       |   |        | 506    |      
|                                                             | Other income, net                                           |                                   |        | 309                                   |      |        |        | 286    |      |        |        | 7      |       |   |        | 1,647  |      
|                                                             | Equity earnings of Joint Venture                            |                                   |        | 110                                   |      |        |        | 153    |      |        |        | 150    |       |   |        | 52     |      
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Income (loss) from continuing operations before
income taxes |                                                             |                                   | 1,058  |                                       |      |        | 1,002  |        |      |        | (1,293 | )      |       |   | (1,107 | )     
|Income tax benefit (expense)                                 |                                                             |                                   | (378   | )                                     |      |        | (271   | )      |      |        | 418    |        |       |   | 140    |       
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Income (loss) from continuing operations                     |                                                             |                                   | 680    |                                       |      |        | 731    |        |      |        | (875   | )      |       |   | (967   | )     
|Discontinued operations:                                     |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|                                                             | Income (loss) from discontinued operations, net of
tax      |                                   |        | (124                                  | )    |        |        | 20     |      |        |        | (371   | )     |   |        | (116   | )    
|                                                             | Gain on the disposal of discontinued operations,
net of tax |                                   |        |                                      |      |        |        |       |      |        |        |       |       |   |        |       |      
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Discontinued operations, net of tax                          |                                                             |                                   | (124   | )                                     |      |        | 20     |        |      |        | (371   | )      |       |   | (116   | )     
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Net income (loss)                                            |                                                             |                                   | 556    |                                       |      |        | 751    |        |      |        | (1,246 | )      |       |   | (1,083 | )     
|Preferred stock dividends                                    |                                                             |                                   | (203   | )                                     |      |        | (112   | )      |      |        |       |        |       |   |       |       
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Net income (loss) applicable to common shareholders          |                                                             | $                                 | 353    |                                       |      | $      | 639    |        |      | $      | (1,246 | )      |       | $ | (1,083 | )     
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Earnings (loss) per share:                                   |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Basic:                                                       |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|                                                             | Basic earnings (loss) from continuing operations            |                                   | $      | 0.07                                  |      |        | $      | 0.07   |      |        | $      | (0.08  | )     |   | $      | (0.09  | )    
|                                                             | Income (loss) from discontinued operations                  |                                   |        | (0.02                                 | )    |        |        | 0.00   |      |        |        | (0.03  | )     |   |        | (0.01  | )    
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|                                                             |                                                             | Basic earnings (loss) per share   |        | $                                     | 0.05 |        |        | $      | 0.07 |        |        | $      | (0.11 | ) |        | $      | (0.10 | )
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Diluted:                                                     |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|                                                             | Diluted Earnings (loss) from continuing operations          |                                   | $      | 0.07                                  |      |        | $      | 0.07   |      |        | $      | (0.08  | )     |   | $      | (0.09  | )    
|                                                             | Income (loss) from discontinued operations                  |                                   |        | (0.02                                 | )    |        |        | 0.00   |      |        |        | (0.03  | )     |   |        | (0.01  | )    
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|                                                             |                                                             | Diluted earnings (loss) per share |        | $                                     | 0.05 |        |        | $      | 0.07 |        |        | $      | (0.11 | ) |        | $      | (0.10 | )
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|Weighted average common shares outstanding:                  |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|                                                             | Basic                                                       |                                   |        | 6,798                                 |      |        |        | 9,086  |      |        |        | 10,998 |       |   |        | 11,022 |      
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       
|                                                             | Diluted                                                     |                                   |        | 6,987                                 |      |        |        | 9,353  |      |        |        | 10,998 |       |   |        | 11,022 |      
|                                                             |                                                             |                                   |        |                                       |      |        |        |        |      |        |        |        |       |   |        |       

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |        |      | 
|------------------------------------------------------------ | ----------------------------------------------------------- | --------------------------------- | ------ | ------------------------------------- | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ---- | - | ------ | ------ | ---- | 
|                                                             |                                                             |                                   |        | Fiscal 2003 Quarters Ended           
|                                                             |                                                             |                                   |        |                                      
|                                                             |                                                             |                                   |        | 28-Sep                                |       | 28-Dec |        | 29-Mar |       | 28-Jun
|                                                             |                                                             |                                   |        | 2002                                  |       | 2002   |        | 2003   |       | 2003  
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |       
|                                                             |                                                             |                                   |        | (in thousands, except per share data)
|Net revenues                                                 |                                                             | $                                 | 26,875 |                                       |       | $      | 30,483 |        |       | $      | 45,651 |        |      | $ | 51,224 |       
|Cost of goods sold                                           |                                                             |                                   | 20,007 |                                       |       |        | 24,033 |        |       |        | 35,551 |        |      |   | 38,028 |       
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Gross profit                                                 |                                                             |                                   | 6,868  |                                       |       |        | 6,450  |        |       |        | 10,100 |        |      |   | 13,196 |       
|Operating expenses:                                          |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|                                                             | Selling, general and administrative                         |                                   |        | 6,028                                 |       |        |        | 5,884  |       |        |        | 5,819  |      |   |        | 6,581  |     
|                                                             | Research and development                                    |                                   |        | 2,262                                 |       |        |        | 2,570  |       |        |        | 3,603  |      |   |        | 3,743  |     
|                                                             | Amortization of other intangible assets                     |                                   |        | 889                                   |       |        |        | 901    |       |        |        | 967    |      |   |        | 1,022  |     
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Income (loss) from operations                                |                                                             |                                   | (2,311 | )                                     |       |        | (2,905 | )      |       |        | (289   | )      |      |   | 1,850  |       
|Other income, net:                                           |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|                                                             | Interest income (expense), net                              |                                   |        | 693                                   |       |        |        | 624    |       |        |        | 433    |      |   |        | 275    |     
|                                                             | Other income, net                                           |                                   |        | 133                                   |       |        |        | 240    |       |        |        | 544    |      |   |        | 683    |     
|                                                             | Equity earnings of Joint Venture                            |                                   |        | 365                                   |       |        |        | 864    |       |        |        | 432    |      |   |        | 570    |     
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Income (loss) from continuing operations before
income taxes |                                                             |                                   | (1,120 | )                                     |       |        | (1,177 | )      |       |        | 1,120  |        |      |   | 3,378  |       
|Income tax benefit (expense)                                 |                                                             |                                   | 431    |                                       |       |        | 671    |        |       |        | (551   | )      |      |   | (1,042 | )     
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Income (loss) from continuing operations                     |                                                             |                                   | (689   | )                                     |       |        | (506   | )      |       |        | 569    |        |      |   | 2,336  |       
|Discontinued operations:                                     |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|                                                             | Income (loss) from discontinued operations, net of
tax      |                                   |        | (85                                   | )     |        |        |       |       |        |        |       |      |   |        |       |     
|                                                             | Gain on the disposal of discontinued operations,
net of tax |                                   |        | 429                                   |       |        |        |       |       |        |        |       |      |   |        |       |     
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Discontinued operations, net of tax                          |                                                             |                                   | 344    |                                       |       |        |       |        |       |        |       |        |      |   |       |       
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Net income (loss)                                            |                                                             |                                   | (345   | )                                     |       |        | (506   | )      |       |        | 569    |        |      |   | 2,336  |       
|Preferred stock dividends                                    |                                                             |                                   |       |                                       |       |        |       |        |       |        |       |        |      |   |       |       
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Net income (loss) applicable to common shareholders          |                                                             | $                                 | (345   | )                                     |       | $      | (506   | )      |       | $      | 569    |        |      | $ | 2,336  |       
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Earnings (loss) per share:                                   |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Basic:                                                       |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|                                                             | Basic earnings (loss) from continuing operations            |                                   | $      | (0.06                                 | )     |        | $      | (0.05  | )     |        | $      | 0.05   |      |   | $      | 0.21   |     
|                                                             | Income (loss) from discontinued operations                  |                                   |        | 0.03                                  |       |        |        |       |       |        |        |       |      |   |        |       |     
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|                                                             |                                                             | Basic earnings (loss) per share   |        | $                                     | (0.03 | )      |        | $      | (0.05 | )      |        | $      | 0.05 |   |        | $      | 0.21 | 
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Diluted:                                                     |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|                                                             | Diluted Earnings (loss) from continuing operations          |                                   | $      | (0.06                                 | )     |        | $      | (0.05  | )     |        | $      | 0.05   |      |   | $      | 0.21   |     
|                                                             | Income (loss) from discontinued operations                  |                                   |        | 0.03                                  |       |        |        |       |       |        |        |       |      |   |        |       |     
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|                                                             |                                                             | Diluted earnings (loss) per share |        | $                                     | (0.03 | )      |        | $      | (0.05 | )      |        | $      | 0.05 |   |        | $      | 0.21 | 
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|Weighted average common shares outstanding:                  |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|                                                             | Basic                                                       |                                   |        | 11,035                                |       |        |        | 11,086 |       |        |        | 11,115 |      |   |        | 11,146 |     
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       
|                                                             | Diluted                                                     |                                   |        | 11,035                                |       |        |        | 11,086 |       |        |        | 11,145 |      |   |        | 11,373 |     
|                                                             |                                                             |                                   |        |                                       |       |        |        |        |       |        |        |        |      |   |        |       

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

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

|                                                             |                                         |  |                            |      |                            |  |        |      |        |  |        |      |        |  |        |      |        |  |       |      |  |  |       |      |  |  |       |      |  |  |       |      | 
|------------------------------------------------------------ | --------------------------------------- |  | -------------------------- | ---- | -------------------------- |  | ------ | ---- | ------ |  | ------ | ---- | ------ |  | ------ | ---- | ------ |  | ----- | ---- |  |  | ----- | ---- |  |  | ----- | ---- |  |  | ----- | ---- | 
|                                                             |                                         |  | Fiscal 2002 Quarters Ended |      | Fiscal 2003 Quarters Ended
|                                                             |                                         |  |                            |      |                           
|                                                             |                                         |  | 29-Sep                     |      | 29-Dec                     |  | 30-Mar |      | 29-Jun |  | 28-Sep |      | 28-Dec |  | 29-Mar |      | 28-Jun
|                                                             |                                         |  | 2001                       |      | 2001                       |  | 2002   |      | 2002   |  | 2002   |      | 2002   |  | 2003   |      | 2003  
|                                                             |                                         |  |                            |      |                            |  |        |      |        |  |        |      |        |  |        |      |       
|Net revenues                                                 |                                         |  | 100.0                      | %    |                            |  | 100.0  | %    |        |  | 100.0  | %    |        |  | 100.0  | %    |        |  | 100.0 | %    |  |  | 100.0 | %    |  |  | 100.0 | %    |  |  | 100.0 | %   
|Cost of goods sold                                           |                                         |  | 74.3                       |      |                            |  | 73.8   |      |        |  | 76.3   |      |        |  | 81.9   |      |        |  | 74.4  |      |  |  | 78.8  |      |  |  | 77.9  |      |  |  | 74.2  |     
|                                                             |                                         |  |                            |      |                            |  |        |      |        |  |        |      |        |  |        |      |        |  |       |      |  |  |       |      |  |  |       |      |  |  |       |     
|Gross profit                                                 |                                         |  | 25.7                       |      |                            |  | 26.2   |      |        |  | 23.7   |      |        |  | 18.1   |      |        |  | 25.6  |      |  |  | 21.2  |      |  |  | 22.1  |      |  |  | 25.8  |     
|Operating expense:                                           |                                         |  |                            |      |                            |  |        |      |        |  |        |      |        |  |        |      |        |  |       |      |  |  |       |      |  |  |       |      |  |  |       |     
|                                                             | Selling, general and administrative     |  |                            | 16.6 |                            |  |        | 17.4 |        |  |        | 18.9 |        |  |        | 16.5 |        |  |       | 22.4 |  |  |       | 19.3 |  |  |       | 12.7 |  |  |       | 12.8 | 
|                                                             | Research and development                |  |                            | 5.3  |                            |  |        | 5.2  |        |  |        | 7.4  |        |  |        | 10.1 |        |  |       | 8.4  |  |  |       | 8.4  |  |  |       | 7.9  |  |  |       | 7.3  | 
|                                                             | Amortization of other
intangible assets |  |                            | 2.1  |                            |  |        | 2.2  |        |  |        | 2.7  |        |  |        | 2.9  |        |  |       | 3.3  |  |  |       | 3.0  |  |  |       | 2.1  |  |  |       | 2.0  | 
|                                                             |                                         |  |                            |      |                            |  |        |      |        |  |        |      |        |  |        |      |        |  |       |      |  |  |       |      |  |  |       |      |  |  |       |     
|Operating income (loss)                                      |                                         |  | 1.7                        |      |                            |  | 1.4    |      |        |  | (5.3   | )    |        |  | (11.4  | )    |        |  | (8.5  | )    |  |  | (9.5  | )    |  |  | (0.6  | )    |  |  | 3.7   |     
|Other (expense) income,net:                                  |                                         |  |                            |      |                            |  |        |      |        |  |        |      |        |  |        |      |        |  |       |      |  |  |       |      |  |  |       |      |  |  |       |     
|                                                             | Interest income (expense), net          |  |                            | (0.1 | )                          |  |        | 0.1  |        |  |        | 0.6  |        |  |        | 1.7  |        |  |       | 2.6  |  |  |       | 2.0  |  |  |       | 0.9  |  |  |       | 0.5  | 
|                                                             | Other income, net                       |  |                            | 0.8  |                            |  |        | 0.8  |        |  |        | 0.1  |        |  |        | 5.6  |        |  |       | 0.5  |  |  |       | 0.8  |  |  |       | 1.2  |  |  |       | 1.4  | 
|                                                             | Equity earnings of Joint Venture        |  |                            | 0.3  |                            |  |        | 0.4  |        |  |        | 0.4  |        |  |        | 0.2  |        |  |       | 1.4  |  |  |       | 2.8  |  |  |       | 0.9  |  |  |       | 1.1  | 
|                                                             |                                         |  |                            |      |                            |  |        |      |        |  |        |      |        |  |        |      |        |  |       |      |  |  |       |      |  |  |       |      |  |  |       |     
|Income (loss) from continuing operations
before income taxes |                                         |  | 2.7                        |      |                            |  | 2.7    |      |        |  | (4.2   | )    |        |  | (3.9   | )    |        |  | (4.0  | )    |  |  | (3.9  | )    |  |  | 2.4   |      |  |  | 6.7   |     
|Income tax benefit (expense)                                 |                                         |  | (1.0                       | )    |                            |  | (0.7   | )    |        |  | 1.4    |      |        |  | 0.5    |      |        |  | 1.6   |      |  |  | 2.2   |      |  |  | (1.2  | )    |  |  | (2.0  | )   
|                                                             |                                         |  |                            |      |                            |  |        |      |        |  |        |      |        |  |        |      |        |  |       |      |  |  |       |      |  |  |       |      |  |  |       |     
|Net income (loss) from continuing operations                 |                                         |  | 1.7                        | %    |                            |  | 2.0    | %    |        |  | (2.8   | )%   |        |  | (3.4   | )%   |        |  | (2.4  | )%   |  |  | (1.7  | )%   |  |  | 1.2   | %    |  |  | 4.7   | %   
|                                                             |                                         |  |                            |      |                            |  |        |      |        |  |        |      |        |  |        |      |        |  |       |      |  |  |       |      |  |  |       |      |  |  |       |     

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

During fiscal 2002 we experienced a slow down of new orders for our FPD thin
film deposition equipment as well as our architectural glass thin film
deposition equipment. During each of the quarters of fiscal year 2002, we
experienced a drop in backlog from $99.2 million at the beginning of the fiscal
year to $41.1 million at the end of the fiscal year 2002. The lack of new
orders in these product areas reduced revenue from $39.3 million in the first
quarter to $29.2 million in the fourth quarter of fiscal 2002, a decline of
26%.

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

Our gross margins experienced some downward fluctuations during fiscal 2003 in
the second and third quarters as the revenues from a low gross margin coater
that was booked to secure a strategic account were recognized, and the revenue
mix shifted to the lower margin architectural glass coaters. Our gross margins
returned to above 25% in the fourth quarter of fiscal 2003 as the revenues
shifted to higher margin orders for thin film deposition equipment. In the
fourth quarter of fiscal 2002, we experienced a cost overrun on a transport
system for an architectural glass equipment customer which reduced our gross
profit in that quarter.

Selling, general and administrative expenses fluctuated in fiscal 2002 and 2003
as a result of restructuring costs as we reduced our workforce in Longmont,
Colorado and from commission payments to third party sales representatives whom
we use to aid in our sales coverage.

Our quarterly spending in research and development has increased as we
increased our investment in FPD research and development. With the roll out of
generation 5 glass size thin film deposition equipment in Taiwan and the
movement to generation 6 and generation 7 glass sizes, we have for the first
time three major new display platform

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sizes launching at the same time. In addition, we also have continued our
investments for our other emerging technologies in OLED, solar and plastic
bottles.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with U.S. GAAP. 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.

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

We recognize revenues on a majority of contracts relating to the construction
and sale of thin film deposition equipment using the percentage-of-completion
method in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 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. Our 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.

We generally offer warranty coverage for equipment sales for a one year period
after final installation is complete. We estimate the anticipated costs to be
incurred during the warranty period and accrue 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.

The financial results of our foreign subsidiaries are translated into U.S.
dollars using the current-rate method. Assets and liabilities are translated
at the year end spot exchange rate, revenues 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 income (loss).

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 U.S. 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.

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Liquidity and Capital Resources

We have funded our operations with our cash balances, cash generated from
operations, proceeds from public offerings of our common stock and a private
offering of preferred stock, and bank borrowings. Cash generated by operating
activities was $14.2 million for fiscal 2001, and cash used by operating
activities was $1.7 million for fiscal 2002 and $2.5 million for fiscal 2003.
As of June 28, 2003, we had cash and cash equivalents of approximately $22.9
million, marketable securities of $51.6 million and working capital of $88.7
million.

We are required under the terms of our China JV to provide credit support for
50% of our China JVs $10 million bank indebtedness. As of June 28, 2003, we
had $5.0 million cash pledged to provide credit support for our guaranty of
$5.0 million of indebtedness for our China JV, compared with $7.0 million on
June 29, 2002 used for the same purpose.

Capital expenditures were $1.4 million for fiscal 2001, $0.9 million for fiscal
2002 and $1.4 million for fiscal 2003. We anticipate capital expenditures of
approximately $7.0 million in fiscal 2004. Our capital expenditures have
consisted primarily of equipment purchases related to product development.

Cash used for investing activities was $45.5 million in fiscal 2001, $50.6
million in fiscal 2002 and $9.5 million in fiscal 2003. During fiscal 2001, we
had net purchases of marketable securities of $16.8 million, and during fiscal
2002 and fiscal 2003, we had net sales of marketable securities of $40.2
million and $8.1 million, respectively.

Cash generated from financing activities was $15.9 million, $60.8 million, and
$3.1 million for fiscal 2001, fiscal 2002 and fiscal 2003, respectively.

We believe that our working capital and operating needs will continue to be met
by cash on hand, and cash from operations. 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 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

We have the following contractual obligations and commercial commitments as of
June 28, 2003.

|                                 |  |                        |        |        |  |           |       |           |  |         |        |  |  |   |        |       |  |   |       | 
|-------------------------------- |  | ---------------------- | ------ | ------ |  | --------- | ----- | --------- |  | ------- | ------ |  |  | - | ------ | ----- |  | - | ----- | 
|                                 |  | Payments Due by Period
|                                 |  |                       
|                                 |  |                        |        |        |  | Less than |       |           |  |         |        |  |  |   |        | After
|                                 |  | Total                  |        | 1 year |  | 1-3 years |       | 4-5 years |  | 5 years
|                                 |  |                        |        |        |  |           |       |           |  |        
|                                 |  | (in thousands)        
|Contractual Cash Obligations     |  |                        |        |        |  |           |       |           |  |         |        |  |  |   |        |       |  |   |       | 
|Operating leases:                |  |                        |        |        |  |           |       |           |  |         |        |  |  |   |        |       |  |   |       | 
|Buildings                        |  | $                      | 43,741 |        |  | $         | 6,189 |           |  | $       | 17,874 |  |  | $ | 11,888 |       |  | $ | 7,790 | 
|Office equipment                 |  |                        | 414    |        |  |           | 202   |           |  |         | 198    |  |  |   | 14     |       |  |   |      | 
|Other                            |  |                        | 290    |        |  |           | 195   |           |  |         | 95     |  |  |   |       |       |  |   |      | 
|Capital lease - office equipment |  |                        | 24     |        |  |           | 21    |           |  |         | 3      |  |  |   |       |       |  |   |      | 
|                                 |  |                        |        |        |  |           |       |           |  |         |        |  |  |   |        |       |  |   |       | 
|                                 |  | $                      | 44,469 |        |  | $         | 6,607 |           |  | $       | 18,170 |  |  | $ | 11,902 |       |  | $ | 7,790 | 
|                                 |  |                        |        |        |  |           |       |           |  |         |        |  |  |   |        |       |  |   |       | 

|                             |                              |   |                                            |        |           |   |           |        |         |   |      |     |  |   |   |   | 
|---------------------------- | ---------------------------- | - | ------------------------------------------ | ------ | --------- | - | --------- | ------ | ------- | - | ---- | --- |  | - | - | - | 
|                             |                              |   | Amount of commitment expiration per period
|                             |                              |   |                                           
|                             |                              |   | Total Amounts                              |        | Less than |   |           |        |         |   | Over
|                             |                              |   | Committed                                  |        | 1 year    |   | 1-3 years |        | 3 years
|                             |                              |   |                                            |        |           |   |           |        |        
|                             |                              |   | (in thousands)                            
|Other Commercial Commitments |                              |   |                                            |        |           |   |           |        |         |   |      |     |  |   |   |  
|Bank guarantees              |                              | $ | 19,064                                     |        |           | $ | 18,991    |        |         | $ | 73   |     |  | $ |  |  
|Other commercial commitments |                              |   | 865                                        |        |           |   | 709       |        |         |   | 156  |     |  |   |  |  
|                             |                              |   |                                            |        |           |   |           |        |         |   |      |     |  |   |   |  
|                             | Total commercial commitments |   | $                                          | 19,929 |           |   | $         | 19,700 |         |   | $    | 229 |  |   | $ |  | 
|                             |                              |   |                                            |        |           |   |           |        |         |   |      |     |  |   |   |  

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The operating leases primarily include leases for our offices, factories and
office equipment throughout our operations. Bank guarantees represent cash
pledged to provide credit support for our guananty of $5.0 million of
indebtedness of our China JV and other bank guarantees on cash deposits for
contracts with certain customers in China. Our other commercial commitments
consist of software licenses and third party service contracts. The bank
guarantees are required by our customers, primarily in China, to secure our
obligations in respect of progress payments made by our customers and are
terminated when the contract terms are fulfilled.

Recent Financial Accounting Standards Board Statement

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

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

In January 2003, FASB issued Interpretation 46 (FIN 46), Consolidation of
Variable Interest Entities. FIN 46 requires an investor with a majority of the
variable interests in a variable interest entity to consolidate the entity and
also requires majority and significant variable interest investors to provide
certain disclosures. A variable interest entity is an entity in which the
equity investors do not have a controlling interest or the equity investment at
risk is insufficient to finance the entitys activities without receiving
additional subordinated financial support from the other parties. FIN 46 was
effective for variable interest entities created after January 31, 2003, and
for older entities in the first reporting period beginning after June 15, 2003.
We have not created any variable interest entities since January 31, 2003. We
are currently reviewing our investment portfolio to determine whether any of
its investee companies are variable interest entities. We do not expect to
identify any new variable interest entities that must be consolidated, but may
be required to make additional disclosures.

In December 2002, FASB issued SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS 148 also requires that
disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS 148 requires disclosure of the pro
forma effect in interim financial statements. The transition requirements of
SFAS 148 are effective for our fiscal year 2003. We currently do not plan to
transition to a fair value method of accounting for stock-based employee
compensation.

In June 2002, FASB issued SFAS 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 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 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
as incurred, whereas EITF Issue 94-3 required such a liability to be recognized
at the time that an entity committed to an exit play. SFAS 146 was effective
for exit or disposal activities that were initiated after December 31, 2002 and
had no impact on us.

In April 2002, FASB issued SFAS 145, Rescission of FASB Statement 4, 44 and
64, Amendment of FASB Statement 13, and Technical Corrections. This statement
provides guidance on the classification of gains and losses

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from the extinguishment of debt and on the accounting for certain specified
lease transactions. SFAS 145 was effective for fiscal 2003 and did not have a
materal impact on us.

In June 2001, the FASB issued SFAS 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 143 did
not have a material effect on our financial position or results of operations
in fiscal 2003.




ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk

Market Risk Exposure

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

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

Foreign Exchange Exposure

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

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

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

International manufacturing operations in Germany, denominated in Euros,
constitute a significant portion of our revenues and identifiable assets.
International operations result in a large volume of foreign currency committed
and transaction and significant foreign currency net asset exposures.

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

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##### Table of Contents



FORWARD LOOKING STATEMENTS

We have made forward looking statements in this report and in the documents
incorporated by reference into this report within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements, including estimates of future net sales, future net
income and future earnings per share, contained in the section titled
Managements Discussion and Analysis of Financial Condition and Results of
Operation, are subject to risks and uncertainties. Forward looking statements
include the information concerning our possible or assumed results of
operations. Also, statements including words such as believes, expects,
anticipates, intends, estimates, or similar expressions are forward
looking statements. We have based these forward looking statements on our
current expectations and projections about the growth of our business, our
financial performance and the development of our industry. Because these
statements reflect our current views concerning future events, these forward
looking statements involve risks and uncertainties. Investors should note that
many factors, as more fully described in Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of Operation,
Business and elsewhere in this report could affect our future financial
results and could cause our actual results to differ materially from those
expressed in forward looking statements contained in this report. Important
factors that could cause our actual results to differ materially from the
expectations reflected in the forwarding looking statements in this report
include, among others:



| |  |  | insufficient capital resources;                                
| | - |  | ---------------------------------------------------------------
|
| |  |  | adverse economic conditions;                                   
|
| |  |  | unanticipated difficulties in product development;             
|
| |  |  | unexpected changes in regulatory requirements;                 
|
| |  |  | foreign currency fluctuations;                                 
|
| |  |  | failure of our strategic partners to fulfill their obligations;
|
| |  |  | our ability to protect our proprietary technology; and         
|
| |  |  | unanticipated changes in accounting policies.                  

We do not undertake any obligation to update our forward looking statements
after the date of this report for any reason, even if new information becomes
available or other events occur in the future.

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##### Table of Contents






ITEM 8: Financial Statements and Supplementary Data

Index To Consolidated Financial Statements

|                                                                                                                           |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                           |  | Page
|                                                                                                                           |  |     
|Applied Films Corporation and Subsidiaries                                                                                 |  |      |    | 
|Consolidated Balance sheets as of June 28, 2003 and June 29, 2002                                                          |  |      | 42 | 
|Consolidated Statements of Operations for the fiscal years ended June
28, 2003, June 29, 2002 and June 30, 2001            |  |      | 43 | 
|Consolidated Statements of Stockholders Equity for the fiscal years
ended June 28, 2003, June 29, 2002, and June 30, 2001 |  |      | 44 | 
|Consolidated Statements of Cash flows for the fiscal years ended June
28, 2003, June 29, 2002 and June 30, 2001            |  |      | 45 | 
|Notes to Consolidated Financial Statements                                                                                 |  |      | 47 | 

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Report of Independent Auditors

To the Stockholders of Applied Films Corporation:

We have audited the accompanying consolidated balance sheets of Applied Films
Corporation and subsidiaries as of June 28, 2003 and June 29, 2002 and the
related consolidated statements of operations, stockholders equity and cash
flows for the fiscal years ended June 28, 2003, June 29, 2002 and June 30,
2001. Our audits also included the financial statement schedule included in
Item 15(a)2 for the fiscal years ended June 28, 2003, June 29, 2002 and June
30, 2001. These financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Applied Films Corporation and subsidiaries, as of June 28, 2003 and June 29,
2002 and the consolidated results of their operations, stockholders equity and
cash flows for the fiscal years ended June 28, 2003, June 29, 2002 and June 30,
2001 in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

|                 |  |                      
|---------------- |  | ---------------------
|                 |  | /s/ ERNST & YOUNG LLP
|Denver, Colorado |  |                      
|July 24, 2003    |  |                      

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Applied Films Corporation and Subsidiaries
Consolidated Balance Sheets

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

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

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Applied Films Corporation and Subsidiaries
Consolidated Statements of Operations

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

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

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##### Table of Contents



Applied Films Corporation and Subsidiaries
Consolidated Statements of Stockholders Equity
(in thousands, except shares)



|                                                                                                      |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | --------------- |  | ------ | ------- | ------ |  |  | ------ | - |  | - | ------ | -
|                                                                                                      |  | Common Stock |            | Preferred Stock
|                                                                                                      |  |              |            |                
|                                                                                                      |  | Shares       |            | Amount          |  | Shares |         | Amount
|                                                                                                      |  |              |            |                 |  |        |         |       
|Balances, July 1, 2000                                                                                |  |              | 6,040,856  |                 |  | $      | 64,959  |        |  |  |       |   |  | $ |       |  
|Comprehensive loss:                                                                                   |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  
|Net loss                                                                                              |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|Unrealized loss on foreign currency translation                                                       |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|                                                                                                      |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  
|Total comprehensive loss                                                                              |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|ESPP stock issuance                                                                                   |  |              | 3,916      |                 |  |        | 55      |        |  |  |       |   |  |   |       |  
|Exercise of stock options, including income tax
benefits of $515                                      |  |              | 114,576    |                 |  |        | 847     |        |  |  |       |   |  |   |       |  
|Issuance of stock in connection with acquisition of LAC                                               |  |              | 673,353    |                 |  |        | 17,346  |        |  |  |       |   |  |   |       |  
|Issuance of Series A Convertible
Preferred Stock                                                      |  |              |           |                 |  |        |        |        |  |  | 1,000  |   |  |   | 8,571  |  
|Issuance of common stock warrants in connection with
issuance of Series A convertible preferred stock |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|Preferred stock dividends                                                                             |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|                                                                                                      |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  
|Balances, June 30, 2001                                                                               |  |              | 6,832,701  |                 |  | $      | 83,207  |        |  |  | 1,000  |   |  | $ | 8,571  |  
|Comprehensive loss:                                                                                   |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  
|Net loss                                                                                              |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|Unrealized loss on foreign currency translation                                                       |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|                                                                                                      |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  
|Total comprehensive loss                                                                              |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|ESPP stock issuance                                                                                   |  |              | 8,799      |                 |  |        | 145     |        |  |  |       |   |  |   |       |  
|Exercise of stock options                                                                             |  |              | 105,980    |                 |  |        | 756     |        |  |  |       |   |  |   |       |  
|Issuance of shares in connection with secondary
offering (net of offering costs of $823)              |  |              | 3,573,502  |                 |  |        | 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                                                                             |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|                                                                                                      |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  
|Balances, June 29, 2002                                                                               |  |              | 11,027,310 |                 |  | $      | 159,610 |        |  |  |       |   |  | $ |       |  
|Comprehensive income:                                                                                 |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  
|Net income                                                                                            |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|Unrealized gain on foreign currency translation                                                       |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|Unrealized gain on hedged transactions                                                                |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|                                                                                                      |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  
|Total comprehensive income                                                                            |  |              |           |                 |  |        |        |        |  |  |       |   |  |   |       |  
|ESPP stock issuance                                                                                   |  |              | 15,635     |                 |  |        | 191     |        |  |  |       |   |  |   |       |  
|Exercise of stock options                                                                             |  |              | 118,928    |                 |  |        | 884     |        |  |  |       |   |  |   |       |  
|                                                                                                      |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  
|Balances, June 28, 2003                                                                               |  |              | 11,161,873 |                 |  | $      | 160,685 |        |  |  |       |   |  | $ |       |  
|                                                                                                      |  |              |            |                 |  |        |         |        |  |  |        |   |  |   |        |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                      |  |               |        |          |  |          |      |          |  |               |        |       |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------- | ------ | -------- |  | -------- | ---- | -------- |  | ------------- | ------ | ----- |  | - | ------- | -
|                                                                                                      |  | Other         |        |          |  |          |      |          |  |               |        |       |  |  
|                                                                                                      |  | Cumulative    |        |          |  |          |      |          |  |               |        | Total
|                                                                                                      |  | Comprehensive |        |          |  |          |      | Retained |  | Stockholders
|                                                                                                      |  | Loss          |        | Warrants |  | Earnings |      | Equity  
|                                                                                                      |  |               |        |          |  |          |      |         
|Balances, July 1, 2000                                                                                |  | $             | (20    | )        |  | $        |     |          |  | $             | 8,258  |       |  | $ | 73,197  |  
|Comprehensive loss:                                                                                   |  |               |        |          |  |          |      |          |  |               |        |       |  |   |         |  
|Net loss                                                                                              |  |               |       |          |  |          |     |          |  |               | (4,333 | )     |  |   | (4,333  | )
|Unrealized loss on foreign currency translation                                                       |  |               | (7,000 | )        |  |          |     |          |  |               |       |       |  |   | (7,000  | )
|                                                                                                      |  |               |        |          |  |          |      |          |  |               |        |       |  |   |         |  
|Total comprehensive loss                                                                              |  |               | (7,000 | )        |  |          |     |          |  |               | (4,333 | )     |  |   | (11,333 | )
|ESPP stock issuance                                                                                   |  |               |       |          |  |          |     |          |  |               |       |       |  |   | 55      |  
|Exercise of stock options, including income tax
benefits of $515                                      |  |               |       |          |  |          |     |          |  |               |       |       |  |   | 847     |  
|Issuance of stock in connection with acquisition of LAC                                               |  |               |       |          |  |          |     |          |  |               |       |       |  |   | 17,346  |  
|Issuance of Series A Convertible
Preferred Stock                                                      |  |               |       |          |  |          |     |          |  |               |       |       |  |   | 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                                                                               |  | $             | (7,020 | )        |  | $        | 876  |          |  | $             | 3,558  |       |  | $ | 89,192  |  
|Comprehensive loss:                                                                                   |  |               |        |          |  |          |      |          |  |               |        |       |  |   |         |  
|Net loss                                                                                              |  |               |       |          |  |          |     |          |  |               | (1,022 | )     |  |   | (1,022  | )
|Unrealized loss on foreign currency translation                                                       |  |               | (975   | )        |  |          |     |          |  |               |       |       |  |   | (975    | )
|                                                                                                      |  |               |        |          |  |          |      |          |  |               |        |       |  |   |         |  
|Total comprehensive loss                                                                              |  |               | (975   | )        |  |          |     |          |  |               | (1,022 | )     |  |   | (1,997  | )
|ESPP stock issuance                                                                                   |  |               |       |          |  |          |     |          |  |               |       |       |  |   | 145     |  
|Exercise of stock options                                                                             |  |               |       |          |  |          | (142 | )        |  |               |       |       |  |   | 614     |  
|Issuance of shares in connection with secondary
offering (net of offering costs of $823)              |  |               |       |          |  |          |     |          |  |               |       |       |  |   | 66,931  |  
|Conversion of Series A Convertible Preferred Stock
(net of costs of $6)                               |  |               |       |          |  |          |     |          |  |               |       |       |  |   |        |  
|Preferred stock dividends                                                                             |  |               |       |          |  |          |     |          |  |               | (315   | )     |  |   | (315    | )
|                                                                                                      |  |               |        |          |  |          |      |          |  |               |        |       |  |   |         |  
|Balances, June 29, 2002                                                                               |  | $             | (7,995 | )        |  | $        | 734  |          |  | $             | 2,221  |       |  | $ | 154,570 |  
|Comprehensive income:                                                                                 |  |               |        |          |  |          |      |          |  |               |        |       |  |   |         |  
|Net income                                                                                            |  |               |       |          |  |          |     |          |  |               | 2,054  |       |  |   | 2,054   |  
|Unrealized gain on foreign currency translation                                                       |  |               | 19,019 |          |  |          |     |          |  |               |       |       |  |   | 19,499  |  
|Unrealized gain on hedged transactions                                                                |  |               | 480    |          |  |          |     |          |  |               |       |       |  |   | 480     |  
|                                                                                                      |  |               |        |          |  |          |      |          |  |               |        |       |  |   |         |  
|Total comprehensive income                                                                            |  |               | 19,499 |          |  |          |     |          |  |               | 2,054  |       |  |   | 21,553  |  
|ESPP stock issuance                                                                                   |  |               |       |          |  |          |     |          |  |               |       |       |  |   | 174     |  
|Exercise of stock options                                                                             |  |               |       |          |  |          |     |          |  |               |       |       |  |   | 901     |  
|                                                                                                      |  |               |        |          |  |          |      |          |  |               |        |       |  |   |         |  
|Balances, June 28, 2003                                                                               |  | $             | 11,504 |          |  | $        | 734  |          |  | $             | 4,275  |       |  | $ | 177,198 |  
|                                                                                                      |  |               |        |          |  |          |      |          |  |               |        |       |  |   |         |  

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

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Applied Films Corporation and Subsidiaries
Consolidated Statements of Cash Flows

|                                                             |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |         |        |  
|------------------------------------------------------------ | ----------------------------------------------- | ---------------------------------------------------------------------------------- | ------ | -------------------------- | ------ | ------------- | ------- | -------------- | ------ | - | ------- | ------- | ------ | -
|                                                             |                                                 |                                                                                    |        | For The Fiscal Years Ended
|                                                             |                                                 |                                                                                    |        |                           
|                                                             |                                                 |                                                                                    |        | June 28, 2003              |        | June 29, 2002 |         | June 30, 2001 
|                                                             |                                                 |                                                                                    |        |                            |        |               |         |               
|                                                             |                                                 |                                                                                    |        |                            |        |               |         | (in thousands) |        |   |         |        
|Cash Flows from Operating Activities:                        |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|Net income (loss)                                            |                                                 | $                                                                                  | 2,054  |                            |        | $             | (1,022  | )              |        | $ | (4,333  | )      
|Adjustments to net income (loss) from continuing operations: |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|                                                             | (Gain) loss from discontinued operations        |                                                                                    |        | (344                       | )      |               |         | 591            |        |   |         | (337    | )     
|                                                             |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|                                                             |                                                 | Income (loss) from continuing operations                                           |        |                            | 1,710  |               |         |                | (431   | ) |         |         | (4,670 | )
|                                                             |                                                 | Depreciation and amortization of goodwill and intangible
assets                    |        |                            | 5,773  |               |         |                | 5,178  |   |         |         | 6,587  |  
|                                                             |                                                 | Write off of in-process research and development                                   |        |                            |       |               |         |                |       |   |         |         | 11,500 |  
|                                                             |                                                 | Amortization of deferred compensation and non-cash
compensation expense            |        |                            |       |               |         |                |       |   |         |         | 143    |  
|                                                             |                                                 | Amortization of gain on lease and deferred gain on
equipment sale to joint venture |        |                            | (352   | )             |         |                | (362   | ) |         |         | (334   | )
|                                                             |                                                 | Deferred income taxes                                                              |        |                            | 1,498  |               |         |                |       |   |         |         | (4,509 | )
|                                                             |                                                 | Equity earnings of Joint Venture                                                   |        |                            | (1,885 | )             |         |                | (152   | ) |         |         | (4,106 | )
|                                                             |                                                 | Gain on equipment sale to joint venture                                            |        |                            |       |               |         |                |       |   |         |         | 1,386  |  
|                                                             |                                                 | Cost of equipment sale to joint venture                                            |        |                            |       |               |         |                |       |   |         |         | 2,251  |  
|                                                             |                                                 | Loss on disposal of equipment                                                      |        |                            | 12     |               |         |                | 51     |   |         |         |       |  
|Changes in:                                                  |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|                                                             | Restricted cash                                 |                                                                                    |        | (12,634                    | )      |               |         | (7,635         | )      |   |         | (331    | )     
|                                                             | Accounts and trade notes receivable, net        |                                                                                    |        | (3,868                     | )      |               |         | 2,949          |        |   |         | (589    | )     
|                                                             | Revenue in excess of billings                   |                                                                                    |        | (10,482                    | )      |               |         | 2,471          |        |   |         | (7,203  | )     
|                                                             | Inventories                                     |                                                                                    |        | 569                        |        |               |         | 4,988          |        |   |         | 2,632   |       
|                                                             | Prepaid expenses and other                      |                                                                                    |        | (525                       | )      |               |         | (1,075         | )      |   |         | 299     |       
|                                                             | Accounts payable and accrued expenses           |                                                                                    |        | 9,159                      |        |               |         | (7,146         | )      |   |         | 2,524   |       
|                                                             | Billings in excess of revenue                   |                                                                                    |        | 8,560                      |        |               |         | (503           | )      |   |         | 8,716   |       
|                                                             | Income taxes                                    |                                                                                    |        |                           |        |               |         |               |        |   |         | (98     | )     
|                                                             |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|                                                             |                                                 | Net cash flows provided by (used in) operating activities                          |        |                            | (2,465 | )             |         |                | (1,667 | ) |         |         | 14,198 |  
|Cash Flows from Investing Activities:                        |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|Purchases of property, plant, and equipment                  |                                                 |                                                                                    | (1,408 | )                          |        |               | (933    | )              |        |   | (1,416  | )      
|Sales (purchases) of marketable securities, net              |                                                 |                                                                                    | (8,076 | )                          |        |               | (40,200 | )              |        |   | 16,823  |        
|Funds used for the acquisition of LAC                        |                                                 |                                                                                    |       |                            |        |               | (9,459  | )              |        |   | (60,857 | )      
|                                                             |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|                                                             | Net cash flows used in investing activities     |                                                                                    |        | (9,484                     | )      |               |         | (50,592        | )      |   |         | (45,450 | )     
|Cash Flows from Financing Activities:                        |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|Proceeds from borrowings of long-term debt                   |                                                 |                                                                                    |       |                            |        |               | 1,570   |                |        |   | 18,862  |        
|Repayment of long-term debt                                  |                                                 |                                                                                    |       |                            |        |               | (8,053  | )              |        |   | (12,379 | )      
|Restricted cash                                              |                                                 |                                                                                    | 2,000  |                            |        |               |        |                |        |   |        |        
|Stock issuance on stock purchase plan and stock options      |                                                 |                                                                                    | 1,075  |                            |        |               | 759     |                |        |   | 387     |        
|Proceeds from issuance of preferred stock and warrants, net  |                                                 |                                                                                    |       |                            |        |               |        |                |        |   | 9,304   |        
|Proceeds from secondary offering                             |                                                 |                                                                                    |       |                            |        |               | 67,754  |                |        |   |        |        
|Offering costs                                               |                                                 |                                                                                    |       |                            |        |               | (823    | )              |        |   |        |        
|Dividends paid on preferred stock                            |                                                 |                                                                                    |       |                            |        |               | (362    | )              |        |   | (322    | )      
|                                                             |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|                                                             | Net cash flows provided by financing activities |                                                                                    |        | 3,075                      |        |               |         | 60,845         |        |   |         | 15,852  |       
|Cash flows from discontinued operations                      |                                                 |                                                                                    | 4,677  |                            |        |               | (380    | )              |        |   | 5,733   |        
|Effect of exchange rate changes on cash and cash equivalents |                                                 |                                                                                    | (4,120 | )                          |        |               | 367     |                |        |   | 170     |        
|                                                             |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|Net (decrease) increase in cash                              |                                                 |                                                                                    | (8,317 | )                          |        |               | 8,573   |                |        |   | (9,497  | )      
|Cash and cash equivalents, beginning of period               |                                                 |                                                                                    | 31,134 |                            |        |               | 22,561  |                |        |   | 32,058  |        
|                                                             |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        
|Cash and cash equivalents, end of period                     |                                                 | $                                                                                  | 22,817 |                            |        | $             | 31,134  |                |        | $ | 22,561  |        
|                                                             |                                                 |                                                                                    |        |                            |        |               |         |                |        |   |         |        

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|                                                                 |  |   |    |                            |  |               |     |                |  |   |     |  |  | 
|---------------------------------------------------------------- |  | - | -- | -------------------------- |  | ------------- | --- | -------------- |  | - | --- |  |  | 
|                                                                 |  |   |    | For The Fiscal Years Ended
|                                                                 |  |   |    |                           
|                                                                 |  |   |    | June 28, 2003              |  | June 29, 2002 |     | June 30, 2001 
|                                                                 |  |   |    |                            |  |               |     |               
|                                                                 |  |   |    |                            |  |               |     | (in thousands) |  |   |     | 
|Supplemental cash flow information:                              |  |   |    |                            |  |               |     |                |  |   |     | 
|Cash paid for interest, net of amounts capitalized               |  | $ | 8  |                            |  | $             | 138 |                |  | $ | 489 | 
|                                                                 |  |   |    |                            |  |               |     |                |  |   |     |  |  | 
|Cash paid for income taxes, net                                  |  | $ |   |                            |  | $             |    |                |  | $ | 15  | 
|                                                                 |  |   |    |                            |  |               |     |                |  |   |     |  |  | 
|Noncash financing activity:                                      |  |   |    |                            |  |               |     |                |  |   |     | 
|Capital lease obligations incurred for the purchase of
equipment |  | $ | 21 |                            |  | $             | 77  |                |  | $ |    | 
|                                                                 |  |   |    |                            |  |               |     |                |  |   |     |  |  | 

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

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##### Table of Contents



Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements

June 28, 2003

NOTE 1. COMPANY ORGANIZATION AND OPERATIONS

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

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

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

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

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

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates

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

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

Fiscal Year

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

Cash and Cash Equivalents

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

Restricted Cash

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

Marketable Securities

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

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

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

Inventories

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

|                                    |  |                |       |               |  |   |       | 
|----------------------------------- |  | -------------- | ----- | ------------- |  | - | ----- | 
|                                    |  | June 28, 2003  |       | June 29, 2002
|                                    |  |                |       |              
|                                    |  | (in thousands)
|Materials for manufacturing systems |  | $              | 2,004 |               |  | $ | 2,621 | 
|Work-in-process                     |  |                | 4.743 |               |  |   | 3,369 | 
|Finished goods, net                 |  |                | 126   |               |  |   | 1,452 | 
|                                    |  |                |       |               |  |   |       | 
|                                    |  | $              | 6,873 |               |  | $ | 7,442 | 
|                                    |  |                |       |               |  |   |       | 

Property, Plant, and Equipment

Property, plant and equipment are stated at cost. Replacements, renewals and
improvements are capitalized and costs for repairs and maintenance are expensed
as incurred. Depreciation is computed using the straight-line method

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

over the following estimated useful lives. Leasehold improvements are
depreciated using the straight-line method over the lesser of the useful life
of the asset or lease term.

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

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

The composition of property, plant and equipment follows:

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

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

Goodwill and Other Intangible Assets

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

|                                                   |                               |                   |        |                |        |               |        |        |        | 
|-------------------------------------------------- | ----------------------------- | ----------------- | ------ | -------------- | ------ | ------------- | ------ | ------ | ------ | 
|                                                   |                               |                   |        | June 28, 2003  |        | June 29, 2002
|                                                   |                               |                   |        |                |        |              
|                                                   |                               |                   |        | (in thousands)
|Intangible Assets:                                 |                               |                   |        |                |        |               |        |       
|                                                   | Patents                       |                   | $      | 24,553         |        |               | $      | 17,895 |       
|                                                   | Customer lists                |                   |        | 3,070          |        |               |        | 2,240  |       
|                                                   |                               |                   |        |                |        |               |        |       
|                                                   |                               | Intangible assets |        |                | 27,623 |               |        |        | 20,135 | 
|                                                   | Less accumulated amortization |                   |        | (10,613        | )      |               |        | (5,034 | )     
|                                                   |                               |                   |        |                |        |               |        |       
|Intangible assets, net of accumulated amortization |                               | $                 | 17,010 |                |        | $             | 15,101 |       
|                                                   |                               |                   |        |                |        |               |        |        |       

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

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Other Intangible Assets, which
among other things requires that the Company discontinue the amortization of
goodwill, which includes certain

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

intangible assets related to assembled workforce. The remaining intangible
assets continue to be amortized over five to seven year periods.

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

The following table summarizes the reported net losses for the fiscal year
ended 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:

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

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

|                                     |                |                |                    |       |         |   |         |       |          |   |          |       |  |   |       |       |  |   |       |       | 
|------------------------------------ | -------------- | -------------- | ------------------ | ----- | ------- | - | ------- | ----- | -------- | - | -------- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                     |                |                | Fiscal Years Ended
|                                     |                |                |                   
|                                     |                |                | June 26,           |       | July 2, |   | July 1, |       | June 30, |   | June 29,
|                                     |                |                | 2004               |       | 2005    |   | 2006    |       | 2007     |   | 2008    
|                                     |                |                |                    |       |         |   |         |       |          |   |         
|                                     |                | (in thousands)
|Intangible Assets:                   |                |                |                    |       |         |   |         |       |          |   |          |       |  |   |       |       |  |   |       |      
|                                     | Patents        |                | $                  | 3,200 |         |   | $       | 3,200 |          |   | $        | 3,200 |  |   | $     | 3,200 |  |   | $     | 3,200 | 
|                                     | Customer Lists |                |                    | 565   |         |   |         | 565   |          |   |          | 565   |  |   |       |      |  |   |       |      | 
|                                     |                |                |                    |       |         |   |         |       |          |   |          |       |  |   |       |       |  |   |       |      
|Total estimated amortization expense |                | $              | 3,765              |       |         | $ | 3,765   |       |          | $ | 3,765    |       |  | $ | 3,200 |       |  | $ | 3,200 |      
|                                     |                |                |                    |       |         |   |         |       |          |   |          |       |  |   |       |       |  |   |       |      

Long-Lived Assets and Impairment of Long Lived Assets

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

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

The Company believes no circumstances exist indicating an impairment exists in
any of its other long-lived assets.

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

Accrued Expenses:

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

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

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

Income Taxes

The Company accounts for income taxes in accordance with SFAS 109, Accounting
for Income Taxes. SFAS 109 requires deferred tax assets and liabilities to be
recognized for temporary differences between the tax basis and financial
reporting basis of assets and liabilities, computed at current tax rates. Also,
the Companys deferred income tax assets include certain future tax benefits.
The Company records a valuation allowance against any portion of those deferred
income tax assets, which it believes, it will more likely than not fail to
realize.

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

Deferred Gain

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

Coated Glass and Spare Parts Revenue Recognition

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

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

Equipment Sales Revenue Recognition

The percentage of completion method of accounting is used for products valued
at greater than $1 million and a construction time of greater than six months.
In accordance with the American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Pursuant to SOP 81-1,
revenues are measured by the percentage of the total costs incurred and applied
to date in relation to the estimated total costs to be incurred for each
contract. Management considers costs incurred to be the best available measure
of progress on these contracts. Contract costs include all direct material and
labor costs and those indirect costs related to contract performance. General
and administrative costs are expensed as incurred. Changes in performance,
contract conditions and estimated profitability, including those arising from
contract penalty provisions and final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Our contracts under the percentage of completion
method do not provide for the right of a customer to return the machine once
the title has been transferred.

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

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

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

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

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

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

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

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

Deferred Gross Profit

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

Research and Development Expenses

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

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

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

Foreign Currency Transactions

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

Foreign Currency Translation

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

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

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

Other Cumulative Comprehensive Loss

SFAS 130, Reporting Comprehensive Income, establishes a standard for
reporting and displaying comprehensive income and its components within the
financial statements. Comprehensive income includes charges and credits to
equity that are not the result of transactions with shareholders. Other
cumulative comprehensive income for the Company represents foreign currency
items associated with the translation of the Companys investment in its
foreign subsidiaries and the Joint Venture and the unrealized gain on foreign
currency hedge activities.

Net Income (Loss) Per Common Share

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

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

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

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

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

Statement of Financial Accounting Standards 123

SFAS 123, Accounting for Stock-Based Compensation, defines a fair value based
method of accounting for employee stock options or similar equity instruments.
However, SFAS 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 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 123 had
been applied. The Company has elected to account for its stock-based
compensation plans for employees and directors under APB 25.

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

Accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted during fiscal 2003,
2002 and 2001 using the Black-Scholes pricing model and the following weighted
average assumptions:

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

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

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

If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, including the effect of the Employee Stock Purchase
Plan, the Companys net income (loss) would have been reported as follows:

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

Derivative Instruments and Hedging Activities

In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 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 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 133, as amended by SFAS 137 and SFAS 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 133. Accordingly, the fair value of the derivative instruments is recorded
on the balance sheet and is offset by changes in the fair value of the related
firm commitments. The ineffective portion of the derivative instruments are
recorded currently in income. At June 28, 2003, the unrealized gain on hedged
transactions was $480,000.

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

Recent Accounting Standards

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

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

In January 2003, the FASB issued Interpretation 46 (FIN 46), Consolidation of
Variable Interest Entities. FIN 46 requires an investor with a majority of
the variable interests in a variable interest entity to consolidate the entity
and also requires majority and significant variable interest investors to
provide certain disclosures. A variable interest entity is an entity in which
the equity investors do not have a controlling interest or the equity
investment at risk is insufficient to finance the entitys activities without
receiving additional subordinated financial support from the other parties. FIN
46 was effective for variable interest entities created after January 31, 2003,
and for older entities in the first reporting period beginning after June 15,
2003. The Company has not created any variable interest entities since January
31, 2003. The Company is currently reviewing its investment portfolio to
determine whether any of its investee companies are variable interest entities.
The Company does not expect to identify any new variable interest entities that
must be consolidated, but may be required to make additional disclosures.

In December 2002, FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS 148 also requires that disclosures
of the pro forma effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently and in a
tabular format. Additionally, SFAS 148 requires disclosure of the pro forma
effect in interim financial statements. The transition requirements of SFAS 148
are effective for the Companys 2003 fiscal year. The Company currently does
not plan to transition to a fair value method of accounting for stock-based
employee compensation.

In June 2002, the FASB issued SFAS 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 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 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized as incurred, whereas EIFT Issue 94-3 required such a
liability to be recognized at the time that an entity committed to an exit
plan. SFAS 146 was effective for exit or disposal activities that are
initiated after December 31, 2002 and had no impact on the Company.

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

In April 2002, FASB issued SFAS 145, Rescission of FASB Statement 4, 44 and
64, Amendment of FASB Statement 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 145 was effective for fiscal 2003 and did not have a
material impact on the Company.

In June 2001, FASB issued SFAS 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 143 did
not have a material effect on the Companys financial position or results of
operations in fiscal 2003.

Related Parties

In addition to the Companys Joint Venture investment described in Note 5, the
Company has engaged in certain related party transactions. During fiscal 2003
the Company purchased $648,000 of spare parts for the Companys equipment
customers, received building rent payments under the sublease agreement of
$194,000, and in September 2002, the Company recorded $5.2 million from the
sale of its Longmont Coatings Division (see Note 3) with a company and its
affiliates of which a member of the Companys board of directors is an officer.
During fiscal 2003, 2002 and 2001, the Company had $3.4 million, $3.0 million,
and $1.3 million, respectively, of purchases from a company of which another
member of the Companys board of directors is a member of the board of
directors and a former officer.

Reclassifications

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

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

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

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

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

The Company accounted for the sale of the Longmont Coatings Division as a
discontinuance of the business. As a result, certain financial information of
the Longmont Coatings Division has been restated to give effect to the
classification of the Longmont Coatings Division as a discontinued operation.
The net revenues of the discontinued

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

operation was $1.9 million and $16.4 million for the fiscal years ended June
29, 2002 and June 28, 2001, respectively.

NOTE 4. LONG-TERM DEBT

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

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

NOTE 5. INVESTMENT IN JOINT VENTURE

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

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

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

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

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

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

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

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

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

NOTE 6. STOCKHOLDERS EQUITY

Series A Convertible Preferred Stock

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

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

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

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

|                        |  |           |      |  
|----------------------- |  | --------- | ---- | -
|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.

Stock Options

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

In April 1997, the Company adopted the 1997 Stock Option Plan (the 1997 Plan)
covering 272,500 shares of common stock, as amended. The exercise price of
options granted under the 1997 Plan is determined by the board of directors
based upon estimated fair market value. The options granted are to vest ratably
over four years. In October 1999, the shareholders of the Company approved an
increase of 100,000 shares to the 1997 Plan, increasing the shares available
for granting to 372,500 shares. In October 2000, the shareholders of the
Company approved an increase of 650,000 shares to the 1997 Stock Option Plan,
increasing the shares available to 1,022,500 shares. Options vest 25% one year
after the grant date of the option, and 25% every year after for three years,
and expire no later than ten years after the grant date of the option.

In July 2003, the Companys Board of Directors approved and recommended for
shareholder approval at the annual meeting of the shareholders on October 22,
2003, the adoption of the Long Term Incentive Plan that will include an
additional 1.2 million shares available for issuance under the plan.

Outside Directors Options

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

Employee Stock Purchase Plan

On September 5, 1997, the Board of Directors adopted, and the stockholders
subsequently approved, the Applied Films Corporation Employee Stock Purchase
Plan (Purchase Plan) as amended in October 2000. The Purchase Plan was
amended April 17, 2002 to institute two six-month Option Periods each year
commencing on the first business day of May and November, respectively. The
Purchase Plan permits eligible employees to purchase shares of common stock
through payroll deductions. Shares are purchased at 85% of the fair market
value of the common stock on the Purchase Date. Purchases are priced on the
last business day of April and October, respectively, for the purchases of as
many full shares, but not less than one (1) full share, as may be purchased
with the funds in his or her Purchase Account. Up to 100,000 shares of common
stock may be sold under the Purchase Plan. Shares sold under the Purchase Plan
may be newly issued shares or shares acquired by the Company in the open
market. Unless terminated earlier by the Board of Directors, the Purchase Plan
will terminate on September 5, 2007. The Purchase

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

Plan is intended to qualify as an employee stock purchase plan under Section
423 of the Internal Revenue Code of 1986, as amended, and will be administered
in accordance with the limitations set forth in Section 423 and the rules and
regulations thereunder.

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

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

|                                               |           |  |                            |          |               |   |               |       |       |  |         |          |          |   |       |       |  |  |          |          |   |   |       |       | 
|---------------------------------------------- | --------- |  | -------------------------- | -------- | ------------- | - | ------------- | ----- | ----- |  | ------- | -------- | -------- | - | ----- | ----- |  |  | -------- | -------- | - | - | ----- | ----- | 
|                                               |           |  | For The Fiscal Years Ended
|                                               |           |  |                           
|                                               |           |  | June 28, 3003              |          | June 29, 2002 |   | June 30, 2001
|                                               |           |  |                            |          |               |   |              
|                                               |           |  |                            |          |               |   | Weighted      |       |       |  |         |          | Weighted |   |       |       |  |  | Weighted
|                                               |           |  |                            |          |               |   | Average       |       |       |  |         |          | Average  |   |       |       |  |  | Average 
|                                               |           |  |                            |          |               |   | Exercise      |       |       |  |         |          | Exercise |   |       |       |  |  | Exercise
|                                               |           |  | Options                    |          | Price         |   | Options       |       | Price |  | Options |          | Price   
|                                               |           |  |                            |          |               |   |               |       |       |  |         |          |         
|Outstanding at beginning
of year               |           |  | 737,157                    |          |               | $ | 14.92         |       |       |  | 561,836 |          |          |   | 9.88  |       |  |  | 455,076  |          |   | $ | 4.22  |      
|                                               | Granted   |  |                            | 285,425  |               |   |               | 13.59 |       |  |         | 290,575  |          |   |       | 21.84 |  |  |          | 230,236  |   |   |       | 18.31 | 
|                                               | Forfeited |  |                            | (56,000  | )             |   |               | 24.25 |       |  |         | (9,262   | )        |   |       | 31.59 |  |  |          | (8,900   | ) |   |       | 29.73 | 
|                                               | Exercised |  |                            | (118,928 | )             |   |               | 5.95  |       |  |         | (105,992 | )        |   |       | 5.79  |  |  |          | (114,576 | ) |   |       | 2.94  | 
|                                               |           |  |                            |          |               |   |               |       |       |  |         |          |          |   |       |       |  |  |          |          |   |   |       |      
|Outstanding at end of year                     |           |  | 847,654                    |          |               |   | 15.11         |       |       |  | 737,157 |          |          |   | 14.92 |       |  |  | 561,836  |          |   |   | 9.88  |      
|                                               |           |  |                            |          |               |   |               |       |       |  |         |          |          |   |       |       |  |  |          |          |   |   |       |      
|Exercisable at end of year                     |           |  | 298,440                    |          |               |   | 7.96          |       |       |  | 228,924 |          |          |   | 6.94  |       |  |  | 228,778  |          |   |   | 4.16  |      
|                                               |           |  |                            |          |               |   |               |       |       |  |         |          |          |   |       |       |  |  |          |          |   |   |       |      
|Weighted average fair
value of options granted |           |  |                            |          |               | $ | 12.63         |       |       |  |         |          |          | $ | 20.31 |       |  |  |          |          |   | $ | 11.87 |      
|                                               |           |  |                            |          |               |   |               |       |       |  |         |          |          |   |       |       |  |  |          |          |   |   |       |      

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

|                  |  |                     |         |                     |  |          |      |             |  |          |       |  |  |  |         |  |  |   |       | 
|----------------- |  | ------------------- | ------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                  |  | Options Outstanding |         | Options Exercisable
|                  |  |                     |         |                    
|                  |  |                     |         |                     |  | Weighted |      |             |  |          |       |  |  |  |         |  |  |  
|                  |  | Number              |         | Average             |  | Weighted |      | Number      |  | Weighted
|                  |  | Outstanding         |         | Remaining           |  | Average  |      | Exercisable |  | Average 
|Range of          |  | at June 28,         |         | Contractual         |  | Exercise |      | at June 28, |  | Exercise
|Exercise Prices   |  | 2003                |         | Life in Years       |  | Price    |      | 2003        |  | Price   
|                  |  |                     |         |                     |  |          |      |             |  |         
|$  2.75 - $  9.51 |  |                     | 250,087 |                     |  |          | 6.76 |             |  | $        | 5.99  |  |  |  | 134,644 |  |  | $ | 3.65  | 
|$10.53 - $18.00   |  |                     | 258,535 |                     |  |          | 8.36 |             |  |          | 14.16 |  |  |  | 57,460  |  |  |   | 14.15 | 
|$18.36 - $24-75   |  |                     | 260,818 |                     |  |          | 8.68 |             |  |          | 20.73 |  |  |  | 79,778  |  |  |   | 20.70 | 
|$25.15 - $38.50   |  |                     | 78,241  |                     |  |          | 8.12 |             |  |          | 28.65 |  |  |  | 26,558  |  |  |   | 30.62 | 
|                  |  |                     |         |                     |  |          |      |             |  |          |       |  |  |  |         |  |  |   |       | 
|                  |  |                     | 847,654 |                     |  |          |      |             |  |          |       |  |  |  | 298,440 |  |  |   |       | 
|                  |  |                     |         |                     |  |          |      |             |  |          |       |  |  |  |         |  |  |   |       | 

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

NOTE 7. INCOME TAXES

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

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

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

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

|                                                               |                                                            |                                    |     |                |       |               |      |               |      |   |        |        |        |  
|-------------------------------------------------------------- | ---------------------------------------------------------- | ---------------------------------- | --- | -------------- | ----- | ------------- | ---- | ------------- | ---- | - | ------ | ------ | ------ | -
|                                                               |                                                            |                                    |     |                |       |               |      | Years Ended   |      |   |        |       
|                                                               |                                                            |                                    |     |                |       |               |      |               |      |   |        |       
|                                                               |                                                            |                                    |     | June 28, 2003  |       | June 29, 2002 |      | June 30, 2001
|                                                               |                                                            |                                    |     |                |       |               |      |              
|                                                               |                                                            |                                    |     | (in thousands)
|Current provision (benefit):                                   |                                                            |                                    |     |                |       |               |      |               |      |   |        |       
|                                                               | Federal                                                    |                                    | $   | (1,452         | )     |               | $    |              |      |   | $      | (95    | )     
|                                                               | State                                                      |                                    |     |               |       |               |      |              |      |   |        | (9     | )     
|                                                               | Foreign                                                    |                                    |     | 491            |       |               |      | (227          | )    |   |        | (1,147 | )     
|                                                               |                                                            |                                    |     |                |       |               |      |               |      |   |        |       
|                                                               |                                                            | Total current provision (benefit)  |     |                | (961  | )             |      |               | (227 | ) |        |        | (1,251 | )
|Deferred provision (benefit):                                  |                                                            |                                    |     |                |       |               |      |               |      |   |        |       
|                                                               | Federal                                                    |                                    |     | 2,019          |       |               |      | (567          | )    |   |        | (1,848 | )     
|                                                               | State                                                      |                                    |     | 106            |       |               |      | 50            |      |   |        | (180   | )     
|                                                               | Foreign                                                    |                                    |     | (627           | )     |               |      | 517           |      |   |        | (2,481 | )     
|                                                               |                                                            |                                    |     |                |       |               |      |               |      |   |        |       
|                                                               |                                                            | Total deferred provision (benefit) |     |                | 1,498 |               |      |               |     |   |        |        | (4,509 | )
|                                                               |                                                            |                                    |     |                |       |               |      |               |      |   |        |       
|Total tax provision (benefit)                                  |                                                            |                                    | 537 |                |       |               | (227 | )             |      |   | (5,760 | )     
|                                                               | Tax provision (benefit) related to discontinued operations |                                    |     | 46             |       |               |      | 318           |      |   |        | (181   | )     
|                                                               |                                                            |                                    |     |                |       |               |      |               |      |   |        |       
|Total tax provision (benefit) related to continuing operations |                                                            | $                                  | 491 |                |       | $             | 91   |               |      | $ | (5,941 | )     
|                                                               |                                                            |                                    |     |                |       |               |      |               |      |   |        |        |       

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

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

|                                                      |                                          |  |               |      |               |  |               |       |    |  |       |       |   
|----------------------------------------------------- | ---------------------------------------- |  | ------------- | ---- | ------------- |  | ------------- | ----- | -- |  | ----- | ----- | --
|                                                      |                                          |  | June 28, 2003 |      | June 29, 2002 |  | June 30, 2001
|                                                      |                                          |  |               |      |               |  |              
|Statutory federal income tax (benefit) provision rate |                                          |  | 34.0          | %    |               |  | (34.0         | )%    |    |  | (34.0 | )%   
|State income taxes                                    |                                          |  | 3.3           |      |               |  | (3.3          | )     |    |  | (3.3  | )    
|Foreign income taxes and other                        |                                          |  | (16.4         | )    |               |  |              |       |    |  | (1.8  | )    
|Equity earnings in Joint Venture                      |                                          |  | (34.4         | )    |               |  | (12.7         | )     |    |  | (14.3 | )    
|Tax exempt interest income                            |                                          |  |              |      |               |  |              |       |    |  | (3.7  | )    
|Foreign tax exempt interest                           |                                          |  | (80.9         | )    |               |  | (20.7         | )     |    |  |      |      
|Valuation allowance                                   |                                          |  | 116.7         |      |               |  | 52.6          |       |    |  |      |      
|                                                      |                                          |  |               |      |               |  |               |       |    |  |       |      
|                                                      | Effective income tax (benefit) provision |  |               | 22.3 | %             |  |               | (18.1 | )% |  |       | (57.1 | )%
|                                                      |                                          |  |               |      |               |  |               |       |    |  |       |      

As of June 28, 2003, the Company had net operating losses available to offset
future taxable income of approximately $12.6 million in the United States and
$20 million in Germany which expire through 2024. Under the
provisions of the Internal Revenue Code, as amended, the Companys foreign
sales corporation may exempt a portion of its export related taxable income
from U.S. federal and state income taxes.

NOTE 8. EMPLOYEE BENEFIT PLANS

Profit Sharing Plan

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

Pension Plan

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

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

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:

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

NOTE 9. SIGNIFICANT CUSTOMERS

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

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

The breakdown of net revenues by geographic region is as follows:

|                        |  |                   |         |               |  |                |         |  |  |   |        | 
|----------------------- |  | ----------------- | ------- | ------------- |  | -------------- | ------- |  |  | - | ------ | 
|                        |  | Fiscal Year Ended
|                        |  |                  
|                        |  | June 28, 2003     |         | June 29, 2002 |  | June 30, 2001 
|                        |  |                   |         |               |  |               
|                        |  |                   |         |               |  | (in thousands) |         |  |  |  
|Asia (other than Japan) |  | $                 | 85,952  |               |  | $              | 42,229  |  |  | $ | 41,154 | 
|Japan                   |  |                   | 12,809  |               |  |                | 11,332  |  |  |   | 23,616 | 
|United States           |  |                   | 10,576  |               |  |                | 28,385  |  |  |   | 11,796 | 
|Europe and other        |  |                   | 44,896  |               |  |                | 55,196  |  |  |   | 19,750 | 
|                        |  |                   |         |               |  |                |         |  |  |   |        | 
|Net revenues            |  | $                 | 154,233 |               |  | $              | 137,142 |  |  | $ | 96,316 | 
|                        |  |                   |         |               |  |                |         |  |  |   |        | 

The Companys sales are typically denominated in Euros. However, certain
customers of the Company currently pay in Japanese yen and U.S. dollars. As a
result, the Company recognized approximately $823,000, $(15,000), and $19,000,
of foreign currency exchange rate gain (loss) on foreign currency exchange rate
fluctuations for the fiscal years ended June 28, 2003, June 29, 2002, and June
30, 2001, respectively. The Company has $8.4 million and $4.8 million of its
accounts receivable denominated in Euros, and $9.9 million and $7.5 million of
its accounts payable denominated in Euros as of June 28, 2003, and June 29,
2002, respectively. The Company has approximately $1.1 million and $2.0
million of its accounts receivable and $360,000 and $421,000 of its accounts
payable denominated in Japanese yen as of June 28, 2003 and June 29, 2002,
respectively.

NOTE 10. LEASES

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

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

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

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

The future minimum payments under the operating and capital leases are as
follows:

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

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

NOTE 11. SEGMENT INFORMATION

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

|                         |                                                      |                      |   |                    |         |               |   |                |         |   |   |         |         |  
|------------------------ | ---------------------------------------------------- | -------------------- | - | ------------------ | ------- | ------------- | - | -------------- | ------- | - | - | ------- | ------- | -
|                         |                                                      |                      |   | Fiscal Years Ended
|                         |                                                      |                      |   |                   
|                         |                                                      |                      |   | June 28, 2003      |         | June 29, 2002 |   | June 30, 2001 
|                         |                                                      |                      |   |                    |         |               |   |               
|                         |                                                      |                      |   |                    |         |               |   | (in thousands) |         |   |   |        
|Net revenues:            |                                                      |                      |   |                    |         |               |   |                |         |   |   |        
|                         | Thin film coated glass                               |                      | $ | 6,159              |         |               | $ | 6,085          |         |   | $ | 11,124  |        
|                         | Thin film deposition equipment                       |                      |   | 148,074            |         |               |   | 131,057        |         |   |   | 85,192  |        
|                         |                                                      |                      |   |                    |         |               |   |                |         |   |   |        
|                         |                                                      | Total net revenues   |   | $                  | 154,233 |               |   | $              | 137,142 |   |   | $       | 96,316  |  
|                         |                                                      |                      |   |                    |         |               |   |                |         |   |   |        
|Operating (loss) income: |                                                      |                      |   |                    |         |               |   |                |         |   |   |        
|                         | Thin film coated glass                               |                      | $ | 528                |         |               | $ | (4,139         | )       |   | $ | (2,316  | )      
|                         | Thin film deposition equipment                       |                      |   | (404               | )       |               |   | 3,740          |         |   |   | 1,981   |        
|                         | Amortization of goodwill and other intangible assets |                      |   | (3,779             | )       |               |   | (3,356         | )       |   |   | (16,536 | )      
|                         |                                                      |                      |   |                    |         |               |   |                |         |   |   |        
|                         |                                                      | Total operating loss |   | $                  | (3,655  | )             |   | $              | (3,755  | ) |   | $       | (16,871 | )
|                         |                                                      |                      |   |                    |         |               |   |                |         |   |   |         |        

|                                            |                                |                                                  |   |               |       |               |   |       |       | 
|------------------------------------------- | ------------------------------ | ------------------------------------------------ | - | ------------- | ----- | ------------- | - | ----- | ----- | 
|                                            |                                |                                                  |   | June 28, 2003 |       | June 29, 2002
|                                            |                                |                                                  |   |               |       |              
|Identifiable property, plant and equipment: |                                |                                                  |   |               |       |               |   |      
|                                            | Thin film coated glass         |                                                  | $ | 109           |       |               | $ | 640   |      
|                                            | Thin film deposition equipment |                                                  |   | 3,286         |       |               |   | 4,875 |      
|                                            | Corporate and other            |                                                  |   | 2,563         |       |               |   | 724   |      
|                                            |                                |                                                  |   |               |       |               |   |      
|                                            |                                | Total identifiable property, plant and equipment |   | $             | 5,958 |               |   | $     | 6,239 | 
|                                            |                                |                                                  |   |               |       |               |   |      

NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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Applied Films Corporation and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

NOTE 13. QUARTERLY INFORMATION (unaudited)

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

|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |        |      |      | 
|------------------------------------------------------------ | ----------------------------------------------------------- | ------------------------------------------ | --------------------------------- | ----- | ------------------------------------- | ---- | -------------------------- | ----- | ------ | ---- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ----- | ----- | ------ | ------ | ----- | ----- | ------ | ------ | ---- | ---- | ------ | ------ | ---- | ---- | 
|                                                             |                                                             |                                            |                                   |       | Fiscal 2002 Quarters Ended            |      | Fiscal 2003 Quarters Ended
|                                                             |                                                             |                                            |                                   |       |                                       |      |                           
|                                                             |                                                             |                                            |                                   |       | 29-Sep                                |      | 29-Dec                     |       | 30-Mar |      | 29-Jun |        | 28-Sep |       | 28-Dec |        | 29-Mar |       | 28-Jun
|                                                             |                                                             |                                            |                                   |       | 2001                                  |      | 2001                       |       | 2002   |      | 2002   |        | 2002   |       | 2002   |        | 2003   |       | 2003  
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |       
|                                                             |                                                             |                                            |                                   |       | (in thousands, except per share data)
|Net revenues                                                 |                                                             | $                                          | 39,273                            |       |                                       | $    | 37,885                     |       |        | $    | 30,827 |        |        | $     | 29,157 |        |        | $     | 26,875 |        |       | $     | 30,483 |        |       | $     | 45,651 |        |      | $    | 51,224 |       
|Cost of goods sold                                           |                                                             |                                            | 29,198                            |       |                                       |      | 27,977                     |       |        |      | 23,525 |        |        |       | 23,874 |        |        |       | 20,007 |        |       |       | 24,033 |        |       |       | 35,551 |        |      |      | 38,028 |       
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|Gross profit                                                 |                                                             |                                            | 10,075                            |       |                                       |      | 9,908                      |       |        |      | 7,302  |        |        |       | 5,283  |        |        |       | 6,868  |        |       |       | 6,450  |        |       |       | 10,100 |        |      |      | 13,196 |       
|Operating expenses:                                          |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|                                                             | Selling, general and administrative                         |                                            |                                   | 6,510 |                                       |      |                            | 6,609 |        |      |        | 5,827  |        |       |        | 4,801  |        |       |        | 6,028  |       |       |        | 5,884  |       |       |        | 5,819  |      |      |        | 6,581  |     
|                                                             | Research and development                                    |                                            |                                   | 2,034 |                                       |      |                            | 1,933 |        |      |        | 2,298  |        |       |        | 2,955  |        |       |        | 2,262  |       |       |        | 2,570  |       |       |        | 3,603  |      |      |        | 3,743  |     
|                                                             | Amortization of other intangible assets                     |                                            |                                   | 839   |                                       |      |                            | 839   |        |      |        | 839    |        |       |        | 839    |        |       |        | 889    |       |       |        | 901    |       |       |        | 967    |      |      |        | 1,022  |     
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|Operating income (loss)                                      |                                                             |                                            | 692                               |       |                                       |      | 527                        |       |        |      | (1,662 | )      |        |       | (3,312 | )      |        |       | (2,311 | )      |       |       | (2,905 | )      |       |       | (289   | )      |      |      | 1,850  |       
|Other (expense) income, net:                                 |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|                                                             | Interest income (expense), net                              |                                            |                                   | (53   | )                                     |      |                            | 36    |        |      |        | 212    |        |       |        | 506    |        |       |        | 693    |       |       |        | 624    |       |       |        | 433    |      |      |        | 275    |     
|                                                             | Other income, net                                           |                                            |                                   | 309   |                                       |      |                            | 286   |        |      |        | 7      |        |       |        | 1,647  |        |       |        | 133    |       |       |        | 240    |       |       |        | 544    |      |      |        | 683    |     
|                                                             | Equity earnings of Joint Venture                            |                                            |                                   | 110   |                                       |      |                            | 153   |        |      |        | 150    |        |       |        | 52     |        |       |        | 365    |       |       |        | 864    |       |       |        | 432    |      |      |        | 570    |     
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|Income (loss) from continuing operations before
income taxes |                                                             |                                            | 1,058                             |       |                                       |      | 1,002                      |       |        |      | (1,293 | )      |        |       | (1,107 | )      |        |       | (1,120 | )      |       |       | (1,177 | )      |       |       | 1,120  |        |      |      | 3,378  |       
|Income tax benefit (expense)                                 |                                                             |                                            | (378                              | )     |                                       |      | (271                       | )     |        |      | 418    |        |        |       | 140    |        |        |       | 431    |        |       |       | 671    |        |       |       | (551   | )      |      |      | (1,042 | )     
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|Income (loss) from continuing operations                     |                                                             | $                                          | 680                               |       |                                       | $    | 731                        |       |        | $    | (875   | )      |        | $     | (967   | )      |        | $     | (689   | )      |       | $     | (506   | )      |       | $     | 569    |        |      | $    | 2,336  |       
|Discontinued operations:                                     |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|                                                             | Income (loss) from discontinued operations,
net of tax      |                                            |                                   | (124  | )                                     |      |                            | 20    |        |      |        | (371   | )      |       |        | (116   | )      |       |        | (85    | )     |       |        |       |       |       |        |       |      |      |        |       |     
|                                                             | Gain on the disposal of discontinued
operations, net of tax |                                            |                                   |      |                                       |      |                            |      |        |      |        |       |        |       |        |       |        |       |        | 429    |       |       |        |       |       |       |        |       |      |      |        |       |     
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|Discontinued operations, net of tax                          |                                                             |                                            | (124                              | )     |                                       |      | 20                         |       |        |      | (371   | )      |        |       | (116   | )      |        |       | 344    |        |       |       |       |        |       |       |       |        |      |      |       |       
|                                                             | Net income (loss)                                           |                                            |                                   | 556   |                                       |      |                            | 751   |        |      |        | (1,246 | )      |       |        | (1,083 | )      |       |        | (345   | )     |       |        | (506   | )     |       |        | 569    |      |      |        | 2,336  |     
|Preferred stock dividends                                    |                                                             |                                            | (203                              | )     |                                       |      | (112                       | )     |        |      |       |        |        |       |       |        |        |       |       |        |       |       |       |        |       |       |       |        |      |      |       |       
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|Net income (loss) applicable to common
shareholders          |                                                             | $                                          | 353                               |       |                                       | $    | 639                        |       |        | $    | (1,246 | )      |        | $     | (1,083 | )      |        | $     | (345   | )      |       | $     | (506   | )      |       | $     | 569    |        |      | $    | 2,336  |       
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|Net income (loss) per share:                                 |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|                                                             | Basic                                                       |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |        |     
|                                                             |                                                             | Earnings (loss) from continuing operations |                                   | $     | 0.10                                  |      |                            | $     | 0.08   |      |        | $      | (0.08  | )     |        | $      | (0.09  | )     |        | $      | (0.06 | )     |        | $      | (0.05 | )     |        | $      | 0.05 |      |        | $      | 0.21 |     
|                                                             |                                                             | Loss from discontinued operations          |                                   |       | (0.02                                 | )    |                            |       | 0.00   |      |        |        | (0.03  | )     |        |        | (0.01  | )     |        |        | (0.01 | )     |        |        |      |       |        |        |     |      |        |        |     |     
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|                                                             |                                                             |                                            | Basic earnings (loss) per share   |       | $                                     | 0.08 |                            |       | $      | 0.08 |        |        | $      | (0.11 | )      |        | $      | (0.10 | )      |        | $     | (0.07 | )      |        | $     | (0.05 | )      |        | $    | 0.05 |        |        | $    | 0.21 | 
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|                                                             | Diluted                                                     |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |        |     
|                                                             |                                                             | Earnings (loss) from continuing operations |                                   | $     | 0.10                                  |      |                            | $     | 0.08   |      |        | $      | (0.08  | )     |        | $      | (0.09  | )     |        | $      | (0.06 | )     |        | $      | (0.05 | )     |        | $      | 0.05 |      |        | $      | 0.21 |     
|                                                             |                                                             | Loss from discontinued operations          |                                   |       | (0.02                                 | )    |                            |       | 0.00   |      |        |        | (0.03  | )     |        |        | (0.01  | )     |        |        | (0.01 | )     |        |        |      |       |        |        |     |      |        |        |     |     
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|                                                             |                                                             |                                            | Diluted earnings (loss) per share |       | $                                     | 0.08 |                            |       | $      | 0.08 |        |        | $      | (0.11 | )      |        | $      | (0.10 | )      |        | $     | (0.07 | )      |        | $     | (0.05 | )      |        | $    | 0.05 |        |        | $    | 0.21 | 
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|Weighted average common shares outstanding:                  |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|                                                             | Basic                                                       |                                            |                                   | 6,798 |                                       |      |                            | 9,086 |        |      |        | 10,998 |        |       |        | 11,022 |        |       |        | 11,035 |       |       |        | 11,086 |       |       |        | 11,115 |      |      |        | 11,146 |     
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       
|                                                             | Diluted                                                     |                                            |                                   | 6,987 |                                       |      |                            | 9,353 |        |      |        | 10,998 |        |       |        | 11,022 |        |       |        | 11,035 |       |       |        | 11,086 |       |       |        | 11,145 |      |      |        | 11,373 |     
|                                                             |                                                             |                                            |                                   |       |                                       |      |                            |       |        |      |        |        |        |       |        |        |        |       |        |        |       |       |        |        |       |       |        |        |      |      |        |       

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

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

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




ITEM 9A: Controls And Procedures

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

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

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




PART III




ITEM 10: Directors and Executive Officers of the Registrant

Information required to be furnished by Items 401 and 405 of Regulation S-K is
included in our definitive Proxy Statement for our 2003 annual meeting of
shareholders to be filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year to which this report relates (the 2003
Proxy Statement) and is incorporated herein by reference.




ITEM 11: Executive Compensation

Information required to be furnished by Item 402 of Regulation S-K is included
in our 2003 Proxy Statement and is incorporated herein by reference.

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ITEM 12: Security Ownership of Certain Beneficial Owners and Management

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




ITEM 13: Certain Relationships and Related Transactions

Information required to be furnished by Item 404 of Regulation S-K is included
in our 2003 Proxy Statement and is incorporated herein by reference.




ITEM 14: Principal Accountant Fees And Services

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

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PART IV




ITEM 15: Exhibits, Financial Statements, Schedules, and Reports on Form 8-K

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

1.     Financial Statements



| |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Registrants consolidated financial statements, for the year ended June 28,
2003, together with the Report of Independent Certified Public Accountants are
filed as part of this Form 10-K/A report. See ITEM 8: Financial Statements and
Supplementary Data. The supplemental financial information listed and
appearing hereafter should be read in conjunction with the financial statements
included in this report.

2.     Financial Statement Schedules



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Except for Schedule II set forth below, financial statement schedules are not submitted because they
are not applicable or because the required information is included in the consolidated financial
statements or notes thereto.

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

3.     Exhibits



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

(b) Reports on Form 8-K



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

(c) Exhibits

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

(d) Financial Statement Schedules

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

71



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SIGNATURES

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

| |  |                                                                 
| |  | ----------------------------------------------------------------
| |  | APPLIED FILMS CORPORATION                                       
| |  |                                                                 
| |  | By: /s/ Thomas T. Edman                                         
| |  |                                                                 
| |  | Thomas
T. Edman            Chief
Executive Officer and President

September 12, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
September 12, 2003.

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

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

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EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3.1         |  | Amended and Restated Articles of Incorporation of Applied Films Corporation, as amended, are incorporated
by reference to Exhibit 3.1 of Registrants Current Report on Form 8-K dated January 16, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3.2         |  | Amended and Restated Bylaws of Applied Films Corporation are incorporated by reference to Exhibit 3.2 of
Registrants Registration Statement on Form S-1, as amended (Reg. No. 333-35331).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.1         |  | Specimen common stock certificate is incorporated by reference to Exhibit 4.1 of Registrants Registration Statement on Form S-1, as amended (Reg. No. 333-35331).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.1        |  | 1993 Stock Option Plan is incorporated by reference to Exhibit 4 of Registrants Registration Statement on
Form S-8 (Reg. No. 333-51175).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.2        |  | 1997 Stock Option Plan, as amended, is incorporated by reference to Exhibit 10-2 of Registrants
Registration Statement on Form S-1, as amended (Reg. No. 333-35331), by reference to Exhibit 4.2 of
Registrants Registration Statement on Form S-8 (Reg. No. 333-47967) to reference to Exhibit 4.2 of
Registrants Registration Statement on Form S-8 (Reg. No. 333-38426) any by reference to Exhibit 4.2 and
4.3 of Registrants Registration Statement on Form S-8 (Reg. No. 333-56376) and the Fifth Amendment to
the 1997 Stock Option Plan is incorporated by reference to Exhibit 10.2 to the Registrants Annual Report
on Form 10-K/A for the fiscal year ended June 29, 2002.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.3        |  | Employee Stock Purchase Plan, as amended, is incorporated by reference to Exhibit 10.3 of Registrants
Registration Statement on Form S-1, as amended (Reg. No. 333-35331), by reference to Exhibit 4 to the
Registrants Registration Statement on Form S-8 (Reg. No. 333-47951) and by reference to Exhibit 4.2 on
Registrants Registration Statement on Form S-8 (Reg. No. 333-56378) and the Fourth Amendment to the
Employee Stock Purchase Plan is incorporated by reference to Exhibit 10.3 to the Registrants Annual
Report on Form 10-K/A for the fiscal year ended June 29, 2002.                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.4        |  | Form of Indemnity Agreement between Registrant and each of its Directors and Executive Officers is
incorporated by reference to Exhibit 10.4 of Registrants Registration Statement on Form S-1, as amended
(Reg. No. 333-35331).                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.5        |  | Lease Agreement dated January 30, 1998, between 9586 East Frontage Road, Longmont, CO 80504 LLC and
Registrant is incorporated by reference to Exhibit 10.9 of Registrants Quarterly Report on form 10-Q for
the fiscal quarter ended December 27, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.6        |  | Agreement, dated November 18, 1997, between Nippon Sheet Glass Co., Ltd., NSG Fine Glass Co., Ltd. and
Registrant is incorporated by reference to Exhibit 10.8 of Registrants Annual Report on Form 10-K for
the fiscal year ended June 27, 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.7        |  | Outside Director Stock Option Plan is incorporated by reference to Exhibit 4.1 of Registrants
Registration Statement on Form S-8 (Reg. No. 333-95367), and by reference to Exhibits 4.2 and 4.3 of
Registrants Registration Statement on Form S-8 (Reg. No. 333-75164).                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.8        |  | Share Purchase and Exchange Agreement dated October 18, 2000, between Registrant, AFCO GmbH & Co. KG,
Balzers Process Systems GmbH and Unaxis Holding AG is incorporated by reference to Exhibit 2.1 of
Registrants Current Report on Form 8-K dated December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.9        |  | Amendment Agreement dated December 29, 2000, between Registrant, AFCO GmbH & Co. KG, Balzers Process
Systems GmbH and Unaxis Holding AG is incorporated by reference to Exhibit 2.2 of Registrants Current
report on Form 8-K dated December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                   





---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                             
|10.10       |  | Second Amendment Agreement dated February 27, 2002, between Applied
Films Corporation, Applied Films GmbH & Co. KG, Balzers Process
Systems GmbH and Unaxis Holding AG is incorporated by reference to
Exhibit 2.7 of Registrants Current Report on Form 8-K/A dated
December 31, 2000.                                
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.11       |  | Contribution Agreement dated December 29, 2000, between Balzers
Process Systems GmbH and Leybold Coating GmbH & Co. KG is
incorporated by reference to Exhibit 2.3 of Registrants Current
Report on Form 8-K dated December 31, 2000.                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.12       |  | Bravo Intellectual Property License Agreement dated December 31,
2000, between Balzers Process Systems GmbH and Leybold Coating GmbH
& Co. KG is incorporated by reference to Exhibit 2.4 of Registrants
Current Report on Form 8-K dated December 31, 2000.                                                           
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.13       |  | Newco Intellectual Property License Agreement dated December 31,
2000, between Balzers Process Systems GmbH and Leybold Coating GmbH
& Co. KG is incorporated by reference to Exhibits 2.5 of
Registrants Current Report on form 8-K dated December 31, 2000.                                                          
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.14       |  | Securities Purchase Agreement dated January 16, 2001, between
Registrant and the purchasers identified on the signature pages
thereto is incorporated by reference to Exhibit 10.1 of Registrants
Current Report on Form 8-K dated January 16, 2001.                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.15       |  | Registration Rights Agreement dated January 16, 2001, between
Registrant and the investors identified on the signature pages
thereto is incorporated by reference to Exhibit 10.2 of Registrants
Current Report on Form 8-K dated January 16, 2001.                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.16       |  | Common Stock Warrant No. 1 dated January 16, 2001 is incorporated by
reference to Exhibit 10.3 of Registrants Current Report on Form 8-K
dated January 16, 2001.                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.17       |  | Common Stock Warrant No. 2 dated January 16, 2001 is incorporated by
reference to Exhibit 10.4 of Registrants Current Report on Form 8-K
dated January 16, 2001.                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.18       |  | Common Stock Warrant No. 3 dated January 16, 2001 is incorporated by
reference to Exhibit 10.5 of Registrants Current Report on Form 8-K
dated January 16, 2001.                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.19       |  | Common Stock Warrant No. 4 dated January 16, 2001 is incorporated by
reference to Exhibit 10.6 of Registrants Current Report on Form 8-K
dated January 16, 2001.                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.20       |  | Lease Agreement between RWE Systems Immobilren GmbH & Co.
KG/Lahmeyer Grandbesitz GmbH & Co. KG and Applied Films GmbH & Co.
KG dated January 31, 2001 for the Alzenau, Germany facility,
incorporated by reference to Exhibit 10.22 of Registrants Annual
Report on Form 10-K for the fiscal year ended June 30, 2001.
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.21       |  | Commercialization Agreement between The Coca-Cola Company, KRONES AG
and Applied Films GmbH & Co. KG (as assignee of Balzers Process
Systems GmbH) effective September 1, 2000, incorporated by reference
to Exhibit 10.23 of the Registrants Annual Report on Form 10-K/A
for the fiscal year ended June 30, 2001.    
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.22       |  | Non-Employee, Non-Director Officer and Consultant Non-Qualified
Stock Option Plan dated October 24, 2001 is incorporated by
reference to Exhibit 10.3 of Registrants Quarterly Report on Form
10-Q for the fiscal quarter ended December 29, 2001.                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.23       |  | Equity Joint Venture Agreement between Applied Films Corporation and
Nippon Sheet Glass Co., Ltd., dated February 17, 1999, is
incorporated by reference to Exhibit 10.25 to the Registrants
Annual Report on Form 10-K for the fiscal year ended June 29, 2002.                                                       
|            |  |                                                                                                                                                                                                                                                                                                                         
|10.24       |  | Asset Purchase Agreement dated September 24, 2002, by and among
Applied Films Corporation and Information Products Longmont, Inc. is
incorporated by reference to Exhibit 2.1 of Registrants Current
Report                                                                                                            





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##### Table of Contents



|            |  |                                                                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                       
|            |  | on Form 8-K dated September 24, 2002.                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                   
|10.25       |  | License Agreement dated September 24, 2002, by and among Applied
Films Corporation and Information Products Longmont, Inc. is
incorporated by reference to Exhibit 2.2 of Registrants Current
Report on Form 8-K dated September 24, 2002.       
|            |  |                                                                                                                                                                                                                                                   
|10.26       |  | Sublease dated September 24, 2002, by and among Applied Films
Corporation and Information Products Longmont, Inc. is incorporated
by reference to Exhibit 2.3 of Registrants Current Report on Form
8-K dated September 24, 2002.                
|            |  |                                                                                                                                                                                                                                                   
|10.27       |  | Services Agreement dated September 24, 2002, by and among Applied
Films Corporation and Information Products Longmont, Inc. is
incorporated by reference to Exhibit 2.4 of Registrants Current
Report on Form 8-K dated September 24, 2002.      
|            |  |                                                                                                                                                                                                                                                   
|10.28       |  | Noncompetition Agreement dated September 24, 2002, by and among
Applied Films Corporation and Information Products Longmont, Inc. is
incorporated by reference to Exhibit 2.5 of Registrants Current
Report on Form 8-K dated September 24, 2002.
|            |  |                                                                                                                                                                                                                                                   
|10.29       |  | Supply Agreement dated September 24, 2002, by and among Applied
Films Corporation and Information Products Longmont, Inc. is
incorporated by reference to Exhibit 2.6 of Registrants Current
Report on Form 8-K dated September 24, 2002.        
|            |  |                                                                                                                                                                                                                                                   
|11.1        |  | Statement re: computation of per share earnings.                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                   
|13.1        |  | Annual Report to Shareholders for the year ended June 28, 2003.
This exhibit is furnished for the information of the Securities and
Exchange Commission and is not deemed filed as part of this
filing.                                         
|            |  |                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                   
|31.1        |  | Certificate of the Chief Executive Officer and President of Applied
Films Corporation pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.                                                                                                  
|            |  |                                                                                                                                                                                                                                                   
|31.2        |  | Certificate of the Chief Financial Officer of Applied Films
Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                                                                                                
|            |  |                                                                                                                                                                                                                                                   
|32.1        |  | Certificate of the Chief Executive Officer and President and of the
Chief Financial Officer of Applied Films Corporation pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.                                                               

*Previously filed