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

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended July 3, 1999

                                       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                      (I.R.S. Employer
     incorporation or organization)                       Identification No.)

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

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

           Securities registered pursuant to Section 12(b) of the Act:

                                                    Name of Exchange
           Title of Each Class                     on Which Registered
             Common Stock                         Nasdaq National Market

        Securities registered pursuant to Section 12(g) of the Act: None
                                (Title of Class)
                      ------------------------------------


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

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

The  aggregate  market value of the common stock held by  non-affiliates  of the
Registrant,  based on a per share price of $3.625 as of September  1, 1999,  was
$12,633,568. As of September 1, 1999, there were outstanding 3,493,398 shares of
the Company's Common Stock (no par value).

Documents  Incorporated by Reference:  Portions of the Company's Proxy Statement
for  the  Annual  Meeting  of  Shareholders  to be held  October  26,  1999  are
incorporated by reference into Part III of this Report.
<PAGE>
                                     PART I

ITEM 1:  Business

     The   following   discussion   contains   trend   information   and   other
forward-looking  statements  (including  statements  regarding  future operating
results, future capital expenditures,  new product introductions,  technological
developments   and  industry   trends)  that  involve  a  number  of  risks  and
uncertainties.  The Company's  actual results could differ  materially  from the
Company's   historical   results  of  operations  and  those  discussed  in  the
forward-looking  statements.  Factors that could cause actual  results to differ
materially  include,  but are not  limited  to,  those  identified  in  "ITEM 7:
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations" and the section entitled  "Certain  Factors." All period  references
are to the Company's  fiscal  periods ended July 3, 1999,  June 27, 1998 or June
28, 1997, unless otherwise indicated.

ITEM 1(a):  General Development of Business

General

     Applied Films Corporation  ("Applied Films" or the "Company")  utilizes and
is a pioneer in  developing  thin film  technology  for the flat  panel  display
("FPD") industry.  The Company supplies thin film coated glass for use primarily
in liquid crystal  displays  ("LCDs") as well as other  applications.  In fiscal
1997, the Company began selling its proprietary  thin film coating  equipment to
FPD  manufacturers.  Applied  Films  believes that it is able to address a broad
array of the FPD market  through the  combination  of its thin film coated glass
business and its thin film coating equipment business.

     FPDs are found in a wide  variety  of  consumer  and  industrial  products,
including cellular telephones, calculators, laptop computers, pagers, scientific
instruments,  televisions,  video games, gasoline pumps, automotive instruments,
point-of-sale  terminals  and a number of other  electronic  devices.  Most FPDs
require  optically  transparent,  electrically  conductive  thin films coated on
glass substrates. These thin films transmit electrical power to picture elements
of the  displays and allow light to pass to the viewer.  As FPDs become  larger,
thinner, and more information intensive,  the thin film coated glass used in the
displays must meet more demanding performance standards.

     The Company primarily  supplies thin film coated glass for TN LCDs. Applied
Films also sells a smaller portion of thin film coated glass for black and white
STN LCDs.  Lower  information  content TN LCDs are most commonly used for simple
displays  such as those found on watches  and  calculators.  Higher  information
content STN LCDs are typically larger displays with higher  information  content
and are used for applications such as displays for cellular  telephones,  pagers
and  personal  digital  assistants.  Applied  Films  believes  its position as a
leading  supplier of thin film coated glass for lower  information  content LCDs
provides it with continued growth opportunities in the TN and STN LCD markets.

     The coating of thin films onto glass for certain higher information content
FPDs,  such as the  plasma  display  panels  ("PDPs")  used in  displaying  high
definition  television,  involves a number of intermediate process steps, and is
therefore more suitably  performed  in-house by certain  display  manufacturers.
Therefore,  the Company has begun  offering  its  proprietary  thin film coating
equipment to  manufacturers  of FPDs such as PDPs, as well as  manufacturers  of
LCDs.  Since entering the thin film coating  equipment  business in fiscal 1997,
the  Company  has  sold  seven   systems  with  an  aggregate   sales  price  of
approximately $21.3 million. As of July 3, 1999, the Company's backlog from such
equipment sales was approximately $423,000. Applied Films has also developed and
applied  for, a patent on a process for  sputtering  (a form of  physical  vapor
deposition)  magnesium oxide ("MgO") which the Company  believes may represent a
significant  competitive  advantage in the emerging market for thin film coating
equipment  for PDPs.  During  fiscal 1999,  Applied  Films  developed its latest
configuration  of coating  equipment,  the ATX-700  series,  featuring  vertical
sputtering of glass substrates,  minimized footprint,  lower particulate levels,
and reduced labor content.  Its unique  horseshoe design allows for easy loading
and  unloading  of  material  from the same side,  reducing  labor which in turn
reduces particulates if the process is in a clean room.

                                        1
<PAGE>
     The Company was originally  incorporated  in Colorado as Applied Films Lab,
Inc. on March 2, 1976. On May 1, 1992, the Company  merged with Donnelly  Coated
Corporation,  a wholly  owned  subsidiary  of Donnelly  Corporation  of Holland,
Michigan.  During  fiscal 1994,  the Company  ceased using  capacity in Holland,
Michigan and began operating solely in Boulder, Colorado. During fiscal 1998 and
1999,  the  Company  moved all of its office  and  manufacturing  facilities  to
Longmont, Colorado.

     During  fiscal  1999,  the  Company  expanded  its thin film  coated  glass
business to the far east by forming a joint  venture  with Nippon Sheet Glass in
Suzhou, China.

Strategy

     The Company's  objective is to continue its global leadership as a provider
of thin film solutions to the FPD industry  through both thin film coated glass,
as well as thin film  coating  equipment.  The Company  stands alone as the only
thin  film  coated  glass  manufacturer  that  develops,   uses  and  sells  its
proprietary  process  equipment  The following are key elements of the Company's
strategy to achieve this objective:

     Leverage Technology and Process Leadership. The Company intends to leverage
its thin film  technology  and  process  capabilities  to address  the  evolving
requirements   for   more   sophisticated,    technologically   advanced   FPDs.
Specifically,  the  Company  intends to  continue  to enhance  its own thin film
coating systems,  both in terms of the production  efficiency of the systems and
the technical  characteristics  obtained with certain coatings. The Company also
intends to  continue to develop and offer thin film  coating  equipment  that is
cost   effective,   capable  of  achieving  high   productivity   and  providing
technologically advanced thin film solutions.

     Expand Thin Film Coating Equipment Business.  Due to the anticipated growth
in demand for higher  information  content FPDs, Applied Films believes there is
opportunity  for  the  Company  to  sell  thin  film  coating  equipment  to FPD
manufacturers. Since entering the coating equipment business in fiscal 1997, the
Company has sold seven systems (at an average  selling price of $3.0 million per
system) for applications which include PDPs,  electrochromic  automotive mirrors
and LCDs. The Company believes its  technological  capabilities,  its history of
designing, developing and improving its own thin film manufacturing systems, and
its extensive operational  experience provide it with competitive  advantages in
selling thin film coating equipment to others.

     Applied  Films'  goal is to become a major  supplier  of thin film  coating
equipment to the emerging PDP market. The Company intends to address this market
by  offering  both pilot  systems  and full  scale  production  systems  for the
sputtering  of the three thin film  layers  required  by PDPs  (indium tin oxide
("ITO"),  MgO, and  chrome-copper-chrome  ("CrCuCr")) utilizing its new hardware
platform,  the ATX-700.  Currently the main production  method used for applying
the MgO layer is vacuum evaporation  which, as displays become larger,  presents
difficulties for film uniformity. A major drawback of the sputtering process for
MgO has been its very  slow  sputtering  rate.  However,  the  Company  recently
developed,  a patent  pending  process  which  allows MgO glass  coatings  to be
applied at lower cost, with increased  throughput,  and with greater  uniformity
than the current evaporation method. This process is incorporated in the ATX-700
series  platform.  The Company has  delivered  one pilot  system to a Korean PDP
manufacturer  for use in applying  CrCuCr and is  presently  providing  MgO film
samples  to  other   prospective   PDP  customers.   See  "Certain   Factors  --
Uncertainties Related to Coating Equipment Business."

     Capture  Increased  Share of Thin Film Coated Glass  Market.  Applied Films
believes  its  position as a leading  supplier of thin film coated glass for the
FPD market provides it with continued growth  opportunities in that market.  The
Company will pursue  continued  growth of its thin film coated glass business by
seeking to be a low cost  producer,  by  building  its own  coating  systems and
achieving  technology-based  manufacturing  efficiencies.  The Company will also
seek  continued  growth of its thin film coated glass business by leveraging the
Company's  long-standing   relationships  with  many  of  the  world's  key  FPD
customers, and pursuing strategic business relationships to expand the Company's
customer base and manufacturing  capacity. For instance, the Company has entered
into a joint venture with Nippon Sheet Glass Co., Ltd. ("NSG"), a major Japanese
glass  manufacturer to supply the TN and black and white STN coated glass market
from a production base in Suzhou,  China.  This joint venture,  Suzhou NSG - AFC
Thin Film  Electronics  LTD ("STEC"),  involved the transfer of thin film coated
glass manufacturing  capacity to China, closer to the Company's customer base in
Asia.  In its first three months of  operations,  STEC became cash flow positive
and  profitable.  The  Company  will be seeking  to  leverage  STEC's  strategic
position by expanding its manufacturing capacity in the future. The Company will
also continue to evaluate  business  opportunities  that strengthen our position
with our customers.

                                        2
<PAGE>
     Develop New  Coatings.  The growth of new large area coatings will build on
the Company's expertise in process control integrated with systems hardware. One
key area is  defined by the  expertise  gained in the  patent-pending,  reactive
deposition process of MgO. The Company's reactive process capability  provides a
good potential fit for such  applications.  In August 1999, the Company  entered
into  an  exclusive  agreement  with  Information  Products,  Inc.  whereby  the
companies agreed to work together to develop coatings for thin film coated glass
products in the touch screen market. Applied Films is currently evaluating other
markets and partners,  both FPD and non-FPD,  for the  development  of thin film
coatings as well.

     Strengthen Equipment Service and Support  Capabilities.  With seven coating
equipment  systems in the field,  the  Company  has been faced with  service and
support  challenges.  Although  the  Company's  customers  go through  extensive
training on the operation and maintenance of the equipment, the need for Company
support  technicians  has become  apparent and the Company is responding to this
need.  The Company is organizing  the equipment  service and support to meet the
needs of customers and does not expect material revenues from this group.

ITEM 1(b):  Financial Information About Industry Segments

     The Company supplies thin film coated glass and thin film coating equipment
primarily to LCD  manufacturers,  which are currently  considered to be separate
industry segments.  For further discussion see "ITEM 8: Financial Statements and
Supplementary Data -- Note 10: Segment Information."

ITEM 1(c):  Narrative Description of Business

Products and Manufacturing
     The  following  table sets forth the  Company's  gross sales by  (excluding
returns and allowances) its major product  categories and industry  segments for
its last three fiscal years:
<TABLE>
                                                                                 Fiscal Year Ended
                                                                July 3, 1999      June 27, 1998        June 28, 1997
                                                                                  (In thousands)
<S>                                                               <C>               <C>                   <C>
TN Glass..............................................            $19,963           $29,189               $24,366
STN Glass.............................................              4,703             4,844                 3,676
Other Coated Glass....................................              3,450             7,210                 4,257
                                                                  -------           -------               -------
Total Thin Film Coated Glass..........................             28,116            41,243                32,299
Thin Film Coating Equipment...........................              4,617            13,908                 2,784
</TABLE>
     Thin Film Coated Glass. The Company considers all thin film coated glass as
a segment  for  reporting  purposes  due to  factors  such as the  nature of the
products, the raw material,  the production process, the type of customers,  and
the distribution method.

     Thin Film Coated Glass used for TN LCDs. Thin film coated glass for TN LCDs
is  manufactured  by depositing  silicon  dioxide  ("SiO2") and indium tin oxide
("ITO") onto glass purchased  primarily in four  thicknesses,  1.1 millime ters,
0.7 millimeters,  0.55  millimeters,  and 0.4 millimeters.  The thin film coated
glass is sold in a variety of sizes ranging from roughly 300 millimeters  square
to 400 millimeters by 500 millimeters. TN LCDs are most commonly used for simple
displays such as those found on watches, calculators and electronic instruments.
They  offer good  contrast  and  acceptable  response  time for  simple  readout
operations,  are relatively inexpensive to produce and require very low power to
operate.  TN LCDs typically are not used for high  information  content displays
such as those used in laptop computers. However, TN LCDs are the best all around
choice for many  products,  and  current  advances in display  technologies  are
permitting this lower cost glass to be used for other, new applications  such as
in the automotive industry.

     Thin Film Coated  Glass used for Black and White STN LCDs.  This product is
more  complex and  expensive to  manufacture  than thin film coated glass for TN
LCDs. The STN LCD product in most instances,  requires that the Company purchase
higher quality,  flatter glass. In addition,  glass for many STN LCDs requires a
thicker  ITO  coating  to  improve  conductivity,  commonly  requiring  a longer
production  cycle  time.  The Company  has  converted  one of its TN LCD coating
systems to meet these needs and,  during fiscal 1998,  Applied  Films  commenced
production on a new

                                        3
<PAGE>
coating  system  capable of  manufacturing  thin film coated glass for black and
white STN LCDs.  During  fiscal  1999,  the Company  further  increased  its STN
capacity through its STEC joint venture in China.

     Other Thin Film Coated Glass.  The  Company's  other thin film coated glass
consists  primarily  of ITO thin film  coated  glass for  automatically  dimming
electrochromic automotive mirrors, chrome and rhodium thin film coated glass for
dental mirrors,  CrCuCr  coatings for PDPs, and gold,  silver and other coatings
for certain small orders and applications under  development.  Although sales of
other  coated  glass  were  down  52% in  fiscal  1999  versus  1998,  sales  of
electrochromic coated glass improved during the year.

     Thin Film Coating  Equipment.  The Company has  designed and built  several
generations  of high volume thin film coating  equipment  capable of meeting the
needs of customers  requiring  in-house  production  of thin film coated  glass,
primarily  in the FPD  industry.  The Company  has  supplied  thin film  coating
equipment   for   use   in   producing   LCDs,   PDPs,   automatically   dimming
(electrochromic)  automotive  mirrors and touch panel  displays.  The  Company's
present coating equipment product line includes two standard platforms:  (i) the
Venture Series in-line  vertical system which provides  reduced  particle defect
levels and high  throughput  for use in FPD and other high volume  applications,
and (ii) the ATX Series,  which is a new proprietary platform designed and built
by the  Company.  A  pre-production  version of each system can be upgraded to a
full production system as customer requirements  increase.  The ATX Series is an
advanced  concept  thin film coating  equipment  system  addressing  automation,
increasing display size and low-particulate  requirements of FPD and PDP display
manufacturers.  The  design  and  building  of the ATX  Series  accounted  for a
significant  portion  of the  Company's  capital  expenditures  in fiscal  1999.
Included  within each of the Company's  platforms is the Company's  proprietary,
user-friendly  software using  computer  touch screens.  The Company's thin film
coating  equipment  provides  for all  coating  and  heat  treating  within  the
equipment using  proprietary  processes  pioneered and developed by the Company.
The Company's thin film coating equipment average selling price is approximately
$3.0 million and can range up to $7.0 million..

     Production  Process  and  Quality  Control.  One of the  Company's  primary
process  elements and core  competencies  in the manufacture of thin film coated
glass is the preparation of the glass for coating in high volumes.  The cleaning
process,  the  lack  of  pinholes  in  the  coating,  and  the  absence  of  any
contamination on or under the coating are critical in the manufacturing process.
After  cleaning and  preparation,  the glass enters a HEPA  filtered  Class 1000
clean room where it is loaded  into the  coating  system.  After  removal of the
substrate  from the  system,  it must be  inspected  for  defects  and  optical,
electrical and thickness  properties.  This is done using various devices and in
some cases visually. The Company continually works to improve its glass cleaning
and product inspection capabilities.

Sales, Marketing, and Customers

     Most of the  Company's  thin film  coated  glass  sales are  handled  by an
internal  sales force of four  individuals  based in  Longmont  and one based in
China.  Sales in  Taiwan,  Japan and Korea are  handled  through  outside  sales
representatives  who are supported by the Company's  internal  personnel.  Other
Company  personnel,  including its Chief Executive  Officer and Vice President -
Sales &  Marketing,  make  regular  trips to visit  foreign  customers to ensure
proper customer service.  The Company generally sells its thin film coated glass
products on open  account or letter of credit and its customer  payment  history
has been excellent.

     Sales of the Company's  equipment  involve a broad-based  effort at various
levels  within the Company.  Much of the sales effort in the  equipment  area is
undertaken by the Company's  technical and  marketing  groups,  including  sales
offices in Japan and China.  The sales cycle for thin film coating  equipment is
long,  involving  multiple visits to and by the customer and up to twelve months
of  technical  sales  effort,  including  providing  product  samples  that meet
customer  specifications.  Equipment  sales efforts are assisted by  independent
sales and service  representatives in each region who have been selected with an
emphasis on their ability to provide post sales service and support. The Company
generally sells its thin film coating equipment on a progress payment basis.

     Approximately  85% of the  Company's  fiscal 1999 gross sales were  derived
from exports, primarily to Asia. See "Certain Factors -- International Markets."
In the same period, the Company served 122 customers in 16 countries.  In fiscal
1999, the Company's ten largest  customers  accounted for  approximately 62 % of
the Company's gross sales. The principal demand for thin film coated glass is in
Asia and the Company's  customers for thin film coating  equipment  have been in
Korea,  China,  Taiwan and the United States. The Company believes its potential
geographic market for

                                        4
<PAGE>
thin film coating equipment  includes all the major geographic  regions in which
FPD manufacturing takes place. See "Certain Factors -- Uncertainties  Related to
Coating Equipment Business" and "-- Dependence on Key Customers,  Limited Number
of  Customers."  Sales  to  two  customers,  NSG  and  Varitronix,   represented
approximately 15% and 11% of gross sales for fiscal 1999, respectively. Sales to
both  customers  for fiscal 1999  consisted  solely of sales of thin film coated
glass.

     The Company's  gross sales  (before  returns and  allowances)  of thin film
coated  glass by  geographic  region  during each of the last three fiscal years
were as set forth  below.  Sales are  assigned to a region  based upon where the
contract for purchase is formed.
<TABLE>
                                                                                    Fiscal Year Ended
                                                                        July 3,           June 27,          June 28,
                                                                         1999              1998              1997
                                                                        ------            ------            -----
                                                                                     (In thousands)
<S>                                                                    <C>               <C>               <C>
Asia (other than Japan).....................................           $15,391           $24,124           $17,059
Japan.......................................................            $7,645             7,824             6,611
United States...............................................            $3,817             6,991             5,688
Europe and Other............................................            $1,263             2,304             2,941
</TABLE>

     A key  aspect  to  serving  the  needs of its  international  customers  is
just-in-time delivery of its products.  The Company utilizes warehouses in Japan
and Hong Kong to meet this need.  The Company  has  entered  into the STEC joint
venture to produce  thin film  coated  glass in  Suzhou,  China,  for use in LCD
displays. The joint venture provides Applied Films with closer access to its key
customer  base in  Southeast  Asia and use of an existing  production  facility,
while reducing operating and transportation costs.

     Although  international markets provide the Company with significant growth
opportunities,  periodic  economic  downturns,  trade balance issues,  political
instability and fluctuations in interest and foreign currency exchange rates are
all risks that could affect global products and service demand. Many Pacific Rim
countries are currently experiencing banking and currency difficulties that have
led to economic recession in those countries.  These difficulties are continuing
to have a  material  adverse  effect on the  Company's  business.  See  "Certain
Factors -- International  Markets" and see "ITEM 7: Management's  Discussion and
Analysis of Financial Condition and Results of Operations."

     Sales and purchases are generally  denominated in U.S. dollars and Japanese
yen. The Company does not currently engage in currency hedging transactions.  To
the extent the  Company  must  transact  business in foreign  currencies  and is
unable to match revenue received in foreign currencies with expenses paid in the
same  currency,   it  is  exposed  to  possible   losses  in  foreign   currency
transactions.

Seasonality

     The Company's  business is not  especially  seasonal.  However,  production
output is affected by holidays,  vacations and available workdays. The Company's
business  is subject to  significant  quarterly  and  annual  fluctuations.  See
"Certain  Factors -- Fluctuations  in Demand and Annual and Quarterly  Operating
Results."

Working Capital

     The Company extends credit to its thin film coated glass customers,  either
through  open  accounts  or  through  letters  of credit.  The  majority  of the
Company's  foreign  accounts that are sold on open terms are insured.  Thin film
coating  equipment  customers  generally  make  a  significant  advance  deposit
followed by progress payments based upon milestones for equipment completion and
delivery.

                                        5
<PAGE>
Backlog of Orders

     The Company  generally  does not maintain a material  backlog of orders for
thin film coated glass sales.  Orders are generally shipped within 30 to 60 days
of order  receipt.  Backlog  of orders  are  maintained  for thin  film  coating
equipment  sales due to the longer  lead and  construction  times.  Backlog  for
equipment sales totaled $423,000 as of July 3, 1999,  versus $950,000 as of June
27, 1998.

Environmental Matters

     Like similar companies, the Company's operations and properties are subject
to a wide variety of increasingly  complex and stringent  federal,  state, local
and  international  laws and  regulations,  including  those  governing the use,
storage,  handling,  generation,  treatment,  emission,  release,  discharge and
disposal  of certain  materials,  substances  and  wastes,  the  remediation  of
contaminated  soil and  groundwater,  and the  health  and  safety of  employees
(collectively,  "Environmental  Laws").  As such,  the  nature of the  Company's
operations  exposes it to the risk of claims  with  respect to such  matters and
there  can be no  assurances  that  material  costs or  liabilities  will not be
incurred in connection with such claims.

     Certain  Environmental  Laws  regulate  air  emissions,  water  discharges,
hazardous  materials and wastes and require public disclosure related to the use
of various  hazardous or toxic  materials.  The  Company's  operations  are also
governed by  Environmental  Laws relating to workplace safety and worker health.
Compliance  with  Environmental  Laws may require the  acquisition of permits or
other   authorizations  for  certain  activities  and  compliance  with  various
standards or procedural requirements.

     Based upon its  experience  to date,  the Company  believes that the future
cost of compliance  with existing  Environmental  Laws,  and liability for known
environmental  claims  pursuant  to such  Environmental  Laws,  will  not have a
material  adverse  effect on the  Company's  financial  position  or  results of
operations  and cash flows.  However,  future events,  such as new  information,
changes  in  existing  Environmental  Laws or  their  interpretation,  and  more
vigorous  enforcement  policies  of  regulatory  authorities,  may give  rise to
additional expenditures or liabilities that could be material.

Suppliers

     Thin  Film  Coated  Glass.  The  raw  glass  used  by  the  Company  in its
manufacturing  process  represents  its  most  significant  material  cost.  The
required  quality,  in terms of thickness,  flatness and visible  imperfections,
limits the number of available  suppliers.  Five companies  worldwide  currently
manufacture to these quality  standards.  The Company currently  purchases glass
from four of these  suppliers.  The Company is vulnerable to increased  costs of
raw glass.  The Company  regularly  evaluates  methods of  reducing  its cost of
glass.  The Company's other primary raw materials for thin film coated glass are
SiO2 and ITO. The Company  currently  purchases SiO2 from two suppliers,  and it
believes  alternative  sources of supply could be developed  if  necessary.  The
Company purchases ITO from two suppliers, while at least one additional supplier
remains  qualified  and ready to supply the Company.  Other  coating  materials,
currently used to a lesser extent by the Company,  include  materials  which are
available  from few  suppliers.  See  "Certain  Factors  --  Limited  Sources of
Supply."

     Thin Film Coating Equipment.  In its thin film coating equipment  business,
the Company uses various suppliers of machined components,  pump systems,  logic
controllers and other commercially  available components and features. It has no
single source for any principal  components in this aspect of its business.  The
company  owns  and  controls  the  proprietary  parts  of the  process.  For the
proprietary  fabricated  parts  there  are  various  suppliers  who can  produce
components to the Company's specifications.

     To date, the Company has not experienced  any material  interruption in the
supply of its raw  materials  or  components;  however,  if the Company  were to
experience  significant delays,  interruptions,  reductions in the supply of raw
materials,  or  material  supplier  price  increases,  the  Company's  business,
operating  results,  or  financial  condition  could  be  materially   adversely
affected.

                                        6
<PAGE>
Competition

     Competition  in the market for thin film coated  glass for FPDs is intense.
Competition is based primarily on price, availability, and to a lesser extent on
quality,  delivery,  and customer service. In addition, the Company believes the
ability to  anticipate  shifts in the market  and  customer  needs for thin film
coated glass features are important competitive factors. Although certain of the
Company's potential  competitors have considerably greater financial,  research,
technical,  and sales and  marketing  resources  than the  Company,  the Company
believes that it competes  favorably with respect to each of these factors.  The
Company  is aware  of  approximately  ten thin  film  coated  glass  competitors
worldwide.  Certain of these  competitors are also  manufacturers  of thin glass
required  for thin film  components  and  several  are users of thin film coated
glass.  These are large  companies  with  significant  research and  development
funding and  extensive  thin film  technology  background.  All of the Company's
principal  thin film coated  glass  competitors  are located  outside the United
States,  primarily in Asia. The Company is aware of new capacity  brought online
by competitors and  manufacturers  of FPD's during calendar years 1998 and 1999.
This new capacity,  coupled with weakening demand and lower prices, is having an
adverse  effect  on  the  Company's   sales.  See  "Certain  Factors  --  Highly
Competitive Market Environment." The Company's primary competitors for thin film
coated  glass  are  Samsung/Corning,  Merck  Display  Technology,  Wellite,  and
Shenzhen Leybold.

     Both suppliers and customers of the Company could, conceivably, engage with
a coating  equipment  manufacturer  to vertically  integrate and manufacture the
products produced by the Company.

     In manufacturing thin film coating equipment,  the Company competes against
two established equipment  manufacturers which are much larger than the Company:
Ulvac Japan,  Ltd. in Japan and Balzers Process Systems in Germany.  Competition
is based on performance and process technology,  after-sales support and service
and price, and the Company  believes it competes  favorably with respect to each
of these  factors.  Key  performance  and technology  issues  include  technical
capability,  systems design, product uniformity,  yields, target utilization and
throughput.  The  Company  is also the only major  thin film  coating  equipment
manufacturer  that also  manufactures thin film coated glass for the FPD market.
The Company believes the experience,  expertise and synergy  resulting from this
provide it with a competitive advantage.

Research and Development

     The Company's  success can be attributed to its success of focused research
and development programs in thin film technology,  processes and equipment.  The
Company  will  continue to emphasize  improvements  in current  technology,  the
growth of new film deposition  capabilities,  and the  modification of thin film
material  properties.  The  foundations  of the  Company's  success are based on
engineering  solutions for efficient ITO deposition for the FPD industry.  These
solutions  included cost  effective  reactive  depositions,  simplified  process
control,  and innovative coater designs. The Company continues to build on these
traditions in the  development  of process  control and coater design which have
led to superior cost of machine ownership for the Company's customers.

     Research and development  efforts will continue to focus on providing large
area thin films and supporting the thin film equipment  production  required for
these films.  Through the continued  diversification of coating capabilities the
Company  intends to offer  large area  films  required  in the fields of optical
coatings,  AMLCDs,  electrochromics,  and  photovoltaics.  These  films  will be
focused on high technology  value-added  products  requiring  specific  material
properties.

     Continued  emphasis will be placed on growth through a combination of solid
fundamental  understanding  and  rapid  engineering   implementation.   Critical
resources  include manpower and equipment.  The research and development  effort
led by the  Advanced  Development  Group  will add  manpower  commensurate  with
improvements  in business  climate.  In addition to fully  utilizing  the newest
coating platform,  the ATX-700,  as its core development  platform,  the Company
will refurbish existing equipment for parallel development  programs.  In fiscal
1997, 1998 and 1999, research and development  expenditures were 2.2%, 2.3%, and
3.3% of the Company's net sales.

                                        7
<PAGE>
Proprietary Rights

     The Company's  proprietary  technology is principally related to the design
of its processes, its process control, and the transfer of this knowledge to the
design of new equipment. Historically, the Company has relied primarily on trade
secret  laws and  third-party  nondisclosure  agreements,  as  opposed to patent
protection,  to protect its proprietary  technology.  Nevertheless,  in specific
cases where the Company  believes that it has a decided  advantage  over current
technology,  patent  protection  is being sought.  For example,  the Company has
applied for patent  protection for a broad range of reactively  deposited  metal
oxide  films.  The use of  specific  hardware  configurations  allows the stable
deposition of films that are typically quite difficult to deposit. International
protection is expected after a positive  evaluation  given in the  International
Preliminary  Examination Report. Also, trade secret protection can be preferable
over patent  protection  in part due to the expense and  difficulty of obtaining
and  enforcing  foreign  patent  applications  and due to the fact that  patents
become part of the public  record.  The Company's  success is heavily  dependent
upon its proprietary processes.  The Company believes that due to the rapid pace
of innovation  within its industry,  factors such as technological  and creative
skilled  personnel,  the ability to develop and enhance  systems,  knowledge and
experience of management,  reputation,  product quality and customer service and
support are more  important  for  establishing  and  maintaining  a  competitive
position within the industry than are patent or other legal  protections for its
technology.  There can be no  assurance,  however,  that the steps  taken by the
Company  to  protect  its  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.

Employees

     As of fiscal year end 1999,  the Company  employed  161 people,  versus 296
people at the end of  fiscal  1998,  including  126 in thin  film  coated  glass
production,  7 in thin film coating equipment systems, 7 in marketing and sales,
9 in research and development and 12 in accounting,  human resources,  and other
administrative  personnel.  None of the  employees  are  unionized.  The Company
considers its relationship with its employees to be good.

     The Company focuses on enhancing sound  manufacturing  systems and applying
key  concepts of high  performance  work  systems to improve its ability to grow
rapidly,  excel at product cost, quality, and delivery, and encourage continuous
improvement  and  innovation.  The Company's  fundamental  work units are teams,
including  multi-skilled  production teams  responsible for  start-to-completion
manufacturing  and teams  focused on  technology  development,  and  innovation.
Coordination  and  direction  are  established   through  extensive  work  force
education,  participative  leadership and  management,  and shared goal setting,
communication, and performance feedback.

     The Company  operates  under a  participative  management  system which the
Company  believes  enhances  productivity  by  emphasizing  individual  employee
opportunity and participation  both in operating  decisions and in the Company's
profitability. The Company maintains a discretionary monthly profit sharing plan
for full-time nonexecutive employees. The Company believes this emphasis assists
with enhanced productivity, cost control, and product quality and has helped the
Company attract and retain capable employees.

One Time Charges

     The Company  restructured  its workforce twice during the 1999 fiscal year,
due to  reduced  customer  demand.  This  restructuring  along  with the cost to
complete the move of the company to its current  manufacturing  and headquarters
site generated one time charges to earnings totaling $433,000.

                                        8
<PAGE>
Executive Officers, Directors and Key Employees

     The executive  officers,  directors and key employees of the Company are as
follows:
<TABLE>
                     Name                       Age                     Position
<S>                                             <C>        <C>
Cecil Van Alsburg.............................. 62         Director, Chairman of the Board
Thomas T. Edman................................ 37         Director, President, Chief Executive Officer
John S. Chapin................................. 58         Director, Vice President - Research, Secretary
C. Richard Condon.............................. 54         Vice President - Engineering
Graeme Hennessey............................... 61         Vice President - Sales and Marketing
Lawrence D. Firestone.......................... 41         Chief Financial Officer and Treasurer
Chad D. Quist.................................. 37         Director
Richard P. Beck................................ 66         Director
Roger Smith.................................... 58         Director of Materials
Jim Scholhamer................................. 33         Director of Operations - Thin Film Coatings
Russell W. Black............................... 39         Director of Operations - Thin Films Systems
John J. Kester................................. 49         Director of Advanced Development
James A. Knister  ............................. 61         Director - Resigned his position effective October 26,
                                                           1999
Jeffrey K. Fergason............................ 40         Director - Resigned his position effective July 28, 1999
</TABLE>
     Cecil Van Alsburg  co-founded Applied Films Lab, Inc. in 1976 and served as
President and Chief Executive Officer from 1976 to May 1998. Mr. Van Alsburg has
also served as a director of Applied Films  Corporation  since its inception and
has been  Chairman  of the Board  since  January  1998.  Prior to 1976,  Mr. Van
Alsburg was employed in various capacities by Donnelly  Corporation for which he
had  worked  since  1957.  Mr. Van  Alsburg  majored  in civil  engineering  and
architecture at the University of Michigan.

     Thomas T. Edman has been  employed by the  Company  since June 1996 and has
served as its 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 also  served as a  director  of  Applied  Films
Corporation from July 1998 to the present.  From 1993 until joining the 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  obtained a  bachelors  of arts in East  Asian  studies
(Japan) from Yale and, in June 1993, a masters degree in business administration
from The Wharton School at the University of Pennsylvania.

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

     C.  Richard  Condon  co-founded  Applied  Films Lab,  Inc.  in 1976 and has
continuously served as its Vice President - Engineering since its inception. Mr.
Condon also served as a director of Applied  Films  Corporation  from 1976 until
July 1998. Mr. Condon is responsible for the Company's  advanced coating systems
design,  with over 25 years  experience  in the thin film  industry.  Mr. Condon
obtained  a  bachelors  of  science  degree in physics  from the  University  of
Colorado and an associates  degree in mechanical  engineering from the Wentworth
Institute.

     Graeme  Hennessey  has served as the Company's  Vice  President - Sales and
Marketing since April 1993. From 1980 until he joined the 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
obtained a bachelors of science  degree in physics from  Catholic  University of
America and a masters degree in physics from Fordham University.

     Lawrence D.  Firestone has been employed by the Company since July 1999 and
serves as Chief  Financial  Officer and  Treasurer.  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 CFO for  TechniStar
Corporation, a manufacturer

                                        9
<PAGE>
of robotic  automation  equipment.  From 1981 to 1988, Mr.  Firestone  served in
various   capacities   and  finally  as  Vice  President  and  CFO  at  Colorado
Manufacturing  Technology,  a contract manufacturer that specialized in PC board
and cable  assembly.  Mr.  Firestone  obtained a bachelors of science  degree in
business/accounting from Slippery Rock State College.

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

     Richard P. Beck has been a director  of the Company  since May 1998.  Since
1992,  Mr.  Beck has  served  as Chief  Financial  Officer  of  Advanced  Energy
Industries,  Inc., a manufacturer of power conversion and control systems. Since
1995, Mr. Beck has also served as a director of Advanced Energy Industries, Inc.
From  1987 to 1992,  Mr.  Beck  served as  Executive  Vice  President  and Chief
Financial Officer of Cimage Corporation,  a computer software company.  Mr. Beck
obtained a bachelors of science  degree in  accounting  and a masters  degree in
business administration in finance from Babson College.

     Roger  Smith has served the  Company  since  July 1998 as its  Director  of
Materials.  From May 1993  until  July 1998 Mr.  Smith  served as the  Company's
Treasurer.  Prior to joining the Company, Mr. Smith was employed for 33 years by
Donnelly  Corporation in various  capacities,  including  controller and project
manager.

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

     Russell W. Black has been  employed by the Company  since  December 1996 as
its Director of Operations -- Thin Film Systems. From 1994 until March 1996, Mr.
Black served as  Engineering  Manger at Applied  Komatsu  Technology,  a capital
equipment supplier to the FPD industry, and from 1990 to 1993, as an Engineering
Manager  at  Varian  Associates,  Inc.,  a  capital  equipment  supplier  to the
semiconductor  industry.  Mr. Black  obtained a bachelors  of science  degree in
engineering  technology from California State Polytechnic  University.  In 1995,
Mr. Black pleaded  guilty to one count of wire fraud in United  States  District
Court.  Mr. Black was sentenced to 18 months probation and 50 hours of community
service and was ordered to pay  approximately  $7,500 in fines and  restitution.
Mr. Black's probation was terminated by the court after 10 months.

     John J. Kester  Advanced  Development  Director,  has been  employed by the
Company  since June 1997.  From 1995 until he joined  the  company,  Dr.  Kester
served  as  Research  and  Development   Manager  for  the  photovoltaic  module
manufacturer,  Golden Photon Inc., a subsidiary of ACX Inc. From 1989 to 1995 he
was the Physics  Division Chief at the Seiler Research  Laboratory at the United
States Air Force  Academy.  From 1982 to 1989 he worked in the Central  Research
Laboratory of Dow Chemical Company.  Dr. Kester obtained a bachelors degree from
The Colorado  College and a masters and  doctorate  in physics  from  Washington
University in St. Louis, Missouri.

     James A.  Knister has been a director of the Company  since 1992 and served
as the Company's non-employee Chairman from 1996 until January 1998. Mr. Knister
has been the Group Managing  Director of Ventures at Donnelly  Corporation since
January 1997.  From 1967 until  December  1996,  Mr.  Knister  served in various
capacities at Donnelly Corporation including,  from 1981 to 1994, as Senior Vice
President and Chief  Financial  Officer and, from 1994 until December 1996, as a
Senior Vice  President.  Mr.  Knister  also serves on the Board of  Directors of
X-Rite,  Incorporated.  Mr.  Knister  obtained a bachelors of science  degree in
industrial engineering and a masters degree in business administra tion from the
University of Michigan.

                                       10
<PAGE>
     The Company's  Board of Directors is currently  composed of six  directors,
divided into three  classes.  Messrs.  Beck,  and Quist serve in the class whose
term expires in 1999;  Messrs.  Edman and Knister  serve in the class whose term
expires in 2000,  and Messrs.  Van  Alsburg and Chapin  serve in the class whose
term expires in 2001. Mr. Knister has resigned his position as a director of the
Company  effective as of October 26, 1999.  Upon the  expiration  of the term of
each class of directors,  directors  comprising that class will be elected for a
three-year term at the next succeeding annual meeting of shareholders.  Upon the
expiration of the term of a director appointed to fill a vacancy,  that director
will be elected to an appropriate term at the next succeeding  annual meeting of
shareholders.  Each director  holds office until that  director's  successor has
been duly  elected and  qualified.  Selection  of the  nominees for the Board of
Directors is made by the entire Board of Directors.

     Executive  officers of the Company are elected by the Board of Directors on
an annual  basis and serve until  their  successors  have been duly  elected and
qualified.

ITEM 1 (d):  Information About Foreign Operations

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

ITEM 2:  Properties

     The Company's headquarters and the majority of its manufacturing facilities
are located in Longmont, Colorado in approximately 127,000 square feet of leased
space.  The Company has sales offices in China and Japan and utilizes  inventory
warehouses in Japan and Hong Kong.

     The  Company  believes  its  facilities  are  modern,  well-maintained  and
adequately insured and are well-utilized.

ITEM 3:  Legal Proceedings

     The Company is not presently  involved in any legal  proceedings  which, if
not settled in favor of the Company, would individually or collectively,  have a
material adverse impact on its financial condition.

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

     No matters  were  submitted  during the fourth  quarter of fiscal 1999 to a
vote of the Company Shareholders.



            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

                                 CERTAIN FACTORS

Fluctuations in Demand and Annual and Quarterly Operating Results

     The Company has  experienced  and may  continue to  experience  significant
annual and  quarter-  to-quarter  fluctuations  in its  operating  results.  The
Company's annual and quarterly  operating results may fluctuate as a result of a
variety of factors  including:  (i) customer  demand,  such as general  economic
conditions  in the FPD  industry,  market  acceptance  of  products  of both the
Company and its customers, changes in product mix, and the timing, cancellation

                                       11
<PAGE>
or delay of customer orders and shipments; (ii) competition, such as competitive
pressures  on  prices  of the  Company's  products,  as  well  as  those  of its
customers,  and the introduction or announcement of new products by competitors;
and new  production  capacity  added by  competitors;  (iii)  manufacturing  and
operations,  such as fluctuations in availability  and cost of raw materials and
production  capacity,  the transfer of equipment  and personnel to the Company's
new manufacturing  facilities,  and the hiring and training of additional staff;
(iv)   fluctuations  in  foreign  currency   exchange  rates;  (v)  new  product
development, such as increased research, development and engineering, as well as
marketing expenses  associated with new product  introductions and the Company's
ability to introduce new products and technologies on a timely basis; (vi) sales
and  marketing,  such as  concentration  of customers and discounts  that may be
granted to  certain  customers;  and (vii) the  cyclical  nature of the  capital
equipment  market.  Because a significant  portion of the Company's  overhead is
fixed,  at least in the short-term,  the Company's  results of operations may be
materially  adversely  affected if net sales  decline  for any reason.  Further,
although the Company has achieved productivity  improvements in recent quarters,
there can be no assurance of any future productivity improvements.  See "ITEM 7:
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations -- Quarterly Results of Operations."

Highly Competitive Market Environment

     Competition  in the thin film  coated  glass for the LCD  market is, and is
expected  to  remain,  intense.   Several  of  the  Company's  competitors  have
substantially greater financial,  technical,  marketing and sales resources than
the Company.  There can be no  assurance  that the  Company's  present or future
competitors will not exert increased  competitive  pressures on the Company.  In
particular,  the Company 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,  and such  price
competition could adversely affect the Company's  business,  operating  results,
financial condition and prospects. Prices for much of the Company's TN thin film
coated glass  products  supplied to the LCD market have  declined in past years.
Although  prices  declined  29%  during  fiscal  1999,  the  Company  saw prices
stabilize  late in the fiscal  year.  It's too early to  determine  whether this
pricing stabilization will continue. The Company is aware of several competitors
who increased  production  capacity during 1998 and 1999.  Increases in industry
capacity may result in intensified  pricing pressures on the Company's products.
The  Company's  competitive  position  also could be  adversely  affected by raw
material  price  increases,  which the Company may not be able to pass on to its
customers but which certain of its vertically  integrated  current and potential
competitors  may be able to better absorb.  To remain  competitive,  the Company
must continue to invest in and focus upon research and development,  product and
process  innovation,  as well as sales  and  customer  support.  There can be no
assurance  that the  Company  will be  successful  in such  efforts or that such
factors  will not have a  material  adverse  effect on the  Company's  business,
operating results,  financial  condition or prospects.  The Company's  suppliers
and/or customers could vertically integrate to manufacture the products produced
by  the   Company.   The   Company's   suppliers   of  thin   glass  are  large,
well-capitalized companies which could enter the LCD market by coating the glass
they produce and supplying LCD manufacturers  directly.  Because glass is by far
the Company's  largest  material cost, a manufacturer of glass desiring to enter
this market could have a significant cost advantage. The Company is aware of two
manufacturers of thin glass that also coat glass for the LCD market, Asahi Glass
Company and Nippon Sheet Glass.  Further,  companies that manufacture  equipment
for coating thin film glass could begin  producing  thin film coated  glass.  In
addition, certain LCD manufacturers have vertically integrated to coat glass for
LCDs and further vertical integration into certain areas of LCD manufacturing is
expected.  Any such vertical integration could have a material adverse effect on
the Company's  business,  operating results,  financial condition and prospects.
See "ITEM 1(c): Narrative Description of Business -- Competition."

Uncertainties Related to Thin Film Coating Equipment Business

     Until fiscal 1997, the Company's business was focused almost exclusively on
the sale of thin film coated glass.  Although the Company expects to continue to
produce and sell thin film coated glass to the world FPD market,  the  Company's
future growth potential depends in part upon the Company's success in the market
for thin film  coating  equipment.  Sales of the  Company's  thin  film  coating
equipment  depend  in large  part  upon a  prospective  customer's  decision  to
increase  manufacturing  capabilities  and  capacities or to respond to consumer
demands for  greater  cost  efficiencies  by  upgrading  or  expanding  existing
manufacturing  facilities or constructing new manufacturing  facilities,  all of
which typically involve significant capital expenditures. Further, customers for
the Company's  thin film coated glass could decide to purchase thin film coating
equipment  to bring some or all of their  thin film  coated  glass  requirements
in-house,  thus  adversely  affecting  sales of thin  film  coated  glass by the
Company  to such  customers.  The  Company  has built  equipment  for seven such
customers.  Thin film coating equipment sales also may be affected by changes in
the market for  different  types of displays and  customers'  decisions to begin
internal production of glass

                                       12
<PAGE>
coatings rather than rely on an outside supplier such as the Company.  The sales
cycle of the  Company's  thin  film  coating  equipment  is  lengthy  due to the
customer's  evaluation  of its ordered  system and  completion  of any necessary
upgrades,  expansion  or  construction  of  facilities.  The  Company may expend
substantial funds and management effort during the sales cycle. In addition, the
cyclicality  and  rapid  technological  change  in the thin  film  coated  glass
industry may cause prospective  customers to postpone decisions  regarding major
capital expenditures,  such as the Company's coating equipment.  With respect to
the development of its equipment  business,  the Company is subject to the risks
inherent in the operation or the development of a new business,  including risks
associated with attracting and servicing a customer base, manufacturing products
in a cost-effective and profitable manner,  managing the expansion of a business
operation and  attracting  and retaining  qualified  engineering,  manufacturing
service,  and marketing  personnel.  Because of rapid changes in the FPD market,
which are  expected to continue,  it is  difficult  to predict  whether or where
future growth may occur,  or at what rate certain  aspects will grow, if at all.
Further,   changes  in  technology  could  render  the  Company's  systems  less
attractive. If the market for the Company's thin film coating equipment fails to
grow, or grows more slowly than anticipated,  the Company's business,  operating
results,  financial  condition  and  prospects  could  be  materially  adversely
affected. See "ITEM 1(c): Narrative Description of Business -- Competition." The
Company's  equipment  business  is subject to capital  spending  levels in Asia.
Certain plasma display manufacturers announced during fiscal 1999 plans to delay
capital  spending for new equipment.  This  announcement,  together with overall
economic conditions in Asia will negatively impact fiscal 2000 results.  Backlog
for equipment sales totaled  $423,000 as of July 3, 1999,  versus $950,000 as of
June 27, 1998.

International Markets

     Sales to international customers represented approximately 83%,78%, and 85%
of the Company's gross sales in fiscal 1997,1998,  and 1999,  respectively.  The
Company's  principal  international  markets  are China  (including  Hong Kong),
Korea, Japan,  Taiwan and Malaysia.  Recent banking and currency problems in the
Asian regions,  however, have had and will continue to have an adverse impact on
the Company's  revenue and operations.  The Company believes that  international
sales will continue to represent a significant  portion of its gross sales,  and
that, in addition to the aforementioned  banking and currency problems,  it will
be subject to the normal risks of conducting business internationally, including
unexpected  changes  in  regulatory   requirements,   imposition  of  government
controls,  political and economic  instabilities,  export license  requirements,
foreign exchange risks, tariffs and other barriers, difficulties in staffing and
managing foreign sales operations and potentially adverse tax consequences.  The
Company has taken steps to mitigate  some risk by insuring its foreign  accounts
receivables.  In addition, the laws of certain foreign countries may not protect
the Company's proprietary rights to the same extent as do the laws of the United
States.  See "ITEM  1(c):  Narrative  Description  of  Business  --  Proprietary
Rights." Other risks inherent in the Company's  international  business  include
greater  difficulties  in  accounts  receivable  collection,  the  potential  of
protective  trade  activities  or laws and the burdens of complying  with a wide
variety of foreign laws.  See "ITEM 1(c):  Narrative  Description of Business --
Sales,  Marketing,  and Customers." The Company's  business,  operating results,
financial  condition or growth could be materially  adversely  affected by these
risks.

     The Company's  international  sales are generally  denominated  in dollars,
although a portion of its sales to Japanese customers are denominated in yen. In
fiscal 1999,  approximately  21% and 79% of the Company's total gross sales were
denominated in yen and dollars, respectively. Any strengthening of the dollar in
relation to the  currencies  of the  Company's  competitors  or customers  could
adversely affect the Company's competitiveness.  Although a strengthening dollar
may result in some offsetting  cost reductions on the raw materials  imported by
the Company,  there can be no assurance that such cost  reductions  would enable
the Company to remain  competitive.  Moreover,  a strengthening of the dollar or
other  competitive  factors  could put  pressure on the Company to  denominate a
greater portion of its Japanese sales in yen,  thereby  increasing the Company's
exposure to  fluctuations  in the  dollar-yen  exchange  rate. In addition,  the
Company's  joint venture in China transacts much of its business in Chinese Yuan
Renminbi,  which has remained fairly constant in value, however, any devaluation
of the Chinese Yuan Renminbi  would  adversely  affect the  Company's  business,
operating results, financial conditions and prospects. There can be no assurance
that  fluctuations  in exchange  rates will not  adversely  affect the Company's
competitive position or result in foreign exchange losses, either of which could
materially adversely affect the Company's business, operating results, financial
conditions and prospects.  See "ITEM 7: Management's  Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."

                                       13
<PAGE>
Limited Sources of Supply

     There are relatively few  manufacturers  of thin glass,  which raw material
accounts for a majority of the Company's  materials cost. The Company  currently
relies primarily on four glass suppliers,  Pilkington Micronics, Ltd., Glaverbel
Societe Anonyme,  Central Glass Co., Ltd., and Nippon Sheet Glass Co., Ltd., all
of which are  located  outside  the United  States.  The  Company  does not have
long-term  supply  contracts  with  any of  these  suppliers,  and  thus  has no
contractual  assurance of a firm price, over an extended term, or of a long-term
commitment to supply product. In periods of short supply, the Company could have
difficulty  obtaining the necessary  quantities of glass at a competitive  cost.
Such   interruptions   could  occur  for  numerous   reasons,   including  labor
difficulties at some point in the chain of  manufacturing  or  distribution.  In
addition, the Company may not be able to pass raw material price increases along
to its  customers,  especially  in  periods  of soft  demand  for the  Company's
products or excess  capacity.  Current and potential  competitors of the Company
that both  manufacture  and coat glass  could be able to better  absorb such raw
material cost increases due to their vertical  integration.  If the Company were
to experience  significant delays,  interruptions,  or shortages in its material
supply or material supplier price increases,  the Company's business,  operating
results,  financial  condition  and  prospects  could  be  materially  adversely
affected. See "ITEM 1(c): Narrative Description of Business -- Suppliers."

Rapid Technological Change

     The market for thin film coated glass is characterized by rapid change. The
Company's  future  success  depends upon its ability to introduce  new products,
improve  existing  products and  processes to keep pace with  technological  and
market developments, and to address the increasingly sophisticated and demanding
needs of its customers. In order to remain competitive,  the Company believes it
must  continue to invest in research  and  development.  The Company  expects to
increase its research and  development  expenditures  in fiscal 2000 which could
adversely affect fiscal 2000 operating results.  Technological changes,  process
improvements, or operating improvements which could adversely affect the Company
include:  (i)  development  of  new  technologies  which  improve  manufacturing
efficiency of the Company's competitors; (ii) changes in product requirements of
the  Company's  customers;  (iii)  significant  changes in the way  coatings are
applied to glass for LCDs;  and (iv) other changes such as  improvements  in the
design  of  cathodes.  If  the  Company  does  not  adapt  to  such  changes  or
improvements, the Company's competitive position, operations and prospects would
be  materially,   adversely  affected.   In  addition,   there  are  alternative
technologies to sputtering  technology for three of the thin film coating layers
used in  PDPs.  Materials  applied  by the  Company  to thin  glass  to  provide
conductivity or other  properties are generally  available and are not patented.
Development of a new material which improves the performance of thin film coated
glass and better addresses  customer needs could, if not adopted by the Company,
have a material adverse effect on the Company's operations and prospects.  There
can be no assurance  that the Company will be  successful in meeting the demands
of the marketplace or that one or more of these factors will not have a material
adverse effect on the Company's business, operating results, financial condition
or prospects.  See "ITEM 1(c): Narrative Description of Business -- Products and
Manufacturing."

Evolving FPD Market

     The Company  believes  that much of the growth in the FPD market will be in
higher  information  content  FPDs,  such as STN LCDs,  active  matrix LCDs ("AM
LCDs"), and PDPs. See "ITEM 1(c): Narrative  Description of Business -- Products
and  Manufacturing."  During fiscal 1999,  17% of the Company's thin film coated
glass  revenues  were  derived  from the sale of thin film coated  glass used in
black and white STN  displays.  The  Company  has to date  directed  most of its
production  capacity to TN thin film coated glass which  represented  71% of the
Company's  thin film coated glass sales in 1999 and is  presently  used in lower
information   content   applications.   While  the  Company  has  recently  made
investments  in additional  production  capacity for STN thin film coated glass,
there can be no assurance that the Company will be able to  successfully  expand
its  position  in the market for thin film coated  glass for higher  information
content  FPDs.  A reduction in the market for thin film coated glass for TN LCDs
as a result of a shift in demand  toward  higher  information  content  displays
could materially  adversely affect the Company's results of operations and could
be to the advantage of competitors of the Company who may currently have greater
capacity to produce thin film coated glass for STN or AM LCDs. This could affect
the Company's  operating results while it transfers resources to the manufacture
of thin film coated glass for STN LCDs. See "ITEM 1(a):  General  Development of
Business --  Strategy"  and "ITEM  1(c):  Narrative  Description  of Business --
Products and Manufacturing." The Company's business depends substantially on the
purchasing  requirements of manufacturers of FPDs,  which, in turn,  depend upon
the current and  anticipated  market demand for FPDs.  Sales of thin film coated
glass to these manufacturers are expected to continue to represent a significant
portion of the Company's net sales. Although the market for FPDs has experienced
significant growth,  there can be no assurance that such growth will continue at
all,  or that any growth  will have a positive  impact on the  Company's  future
business or results of operations.  The Company's  business,  operating results,
financial condition and prospects would be materially  adversely affected by any
future downturns in the FPD market.

                                       14
<PAGE>
Dependence on Key Customers, Limited Number of Customers

     The  Company's  ten largest  customers  accounted  for,  in the  aggregate,
approximately  59%,  78% and 62% of the  Company's  gross sales in fiscal  years
1997, 1998 and 1999,  respectively.  In fiscal 1999, sales to NSG and Varitronix
represented  15% and 11% of gross sales,  respectively.  Sales to both customers
for fiscal 1999  consisted  solely of sales of thin film coated glass.  The loss
of, or a significant  reduction of purchases by, one or more of these  customers
would materially  adversely affect the Company's  business,  operating  results,
financial  condition  and  prospects.  The  Company  expects  that  sales of its
products to  relatively  few  customers,  particularly  in the LCD market,  will
continue to account  for a high  percentage  of its  revenue in the  foreseeable
future. In addition,  in the LCD market, there are a limited number of potential
customers.  The Company  has not  entered  into  long-term  agreements  with its
customers and none are obligated to continue to buy their thin film coated glass
from the  Company.  Moreover,  in the event that  customers  purchase  thin film
coating  equipment from the Company or one of its  competitors and begin coating
the glass in-house,  sales to those customers may decrease sharply. If such lost
sales are not replaced on a timely basis by new orders of thin film coated glass
or capital  equipment from other customers,  the Company's  business,  operating
results,  financial  condition  and  prospects  could  be  materially  adversely
affected.  See "--  Fluctuations  in Demand and Annual and  Quarterly  Operating
Results" and "ITEM 1(c): Narrative Description of Business -- Sales,  Marketing,
and Customers."

Management of Growth

     In order to support  potential  future  growth,  the  Company  will need to
improve its productivity, invest in additional research and development, enhance
its  management  information  systems and add additional  management  personnel.
There can be no assurance that the Company will continue to grow or be effective
in managing its future  growth,  expanding  its  facilities  and  operations  or
attracting  and  retaining  additional  qualified  personnel.   Any  failure  to
effectively manage growth, expand its operations or attract and retain personnel
could  have a  material  adverse  effect on the  Company's  business,  operating
results,  financial condition, and prospects. See "-- Fluctuations in Demand and
Annual and Quarterly  Operating Results," "-- Dependence on Management and Other
Key Personnel," and "ITEM 1(c):
Narrative Description of Business -- Employees."

Declining Average Selling Prices; Dependence upon Productivity Improvements

     Many of the  Company's  customers are under  continuous  pressure to reduce
prices and,  therefore,  the Company expects to continue to experience  downward
pricing  pressures  on its thin film  coated  glass  products.  The  Company  is
frequently  required to commit to price reductions before it has determined that
assumed cost  reductions  can be achieved.  To offset  declining  average  sales
prices, the Company must achieve manufacturing  efficiencies and cost reductions
and obtain orders for higher volume products. If the Company is unable to offset
declining  average sales prices,  the Company's gross margins will decline,  and
such decline will materially adversely affect the Company's business,  operating
results,  financial condition and prospects.  See "-- Fluctuations in Demand and
Annual and Quarterly Operating Results" and "ITEM 7: Management's Discussion and
Analysis of  Financial  Condition  and Results of  Operations."  The Company has
improved its  manufacturing  productivity  in recent years,  enabling  increased
capacity  and  sales.  The  continued  growth of the  Company  is  substantially
dependent upon the Company's  ability to continue to improve the productivity of
its  existing  manufacturing  assets.  The  inability  of the Company to improve
productivity  could have a material  adverse  effect on the Company's  business,
operating results, financial condition and prospects.

Dependence on Management and Other Key Employees

     The Company's  success  during the  foreseeable  future will depend largely
upon the  continued  services of its executive  officers,  and certain other key
employees.  These executive officers and key employees  include:;  President and
Chief Executive  Officer,  Thomas T. Edman; Vice President -- Research,  John S.
Chapin;  Vice President --  Engineering,  C. Richard  Condon;  Vice President --
Sales and Marketing,  Graeme  Hennessey;  Chief Financial Officer and Treasurer,
Lawrence  D.  Firestone;   Director  of  Materials,  Roger  Smith;  Director  of
Operations Thin Film Coatings,  Jim  Scholhamer;  Director of Operations -- Thin
Film  Systems,  Russell W. Black;  and  Advanced  Development  Manager,  John J.
Kester.  The loss of the  services of one or more of the  executive  officers or
other key employees could materially  adversely  affect the Company's  business.
The Company does not have employment agreements or key-man life insurance on any
of its executive  officers or other key employees.  The Company's future success
will be  dependent  in part upon the  Company's  ability to  attract  and retain
additional  qualified  managers,  engineers and other  employees.  The Company's
business,  operating results,  financial condition or growth could be materially
adversely affected if the Company were unable to attract, hire, assimilate,  and
train these employees in a timely manner. See "ITEM 1(c): Narrative  Description
of Business -- Employees" and "ITEM 1(c):  Narrative  Description of Business --
Executive Officers, Directors and Key Employees."

                                       15
<PAGE>
China  Expansion

     Much of the Company's  success in its fiscal  fourth  quarter ended July 3,
1999,  was largely  attributed  to its STEC joint  venture with NSG. The Company
relies on its joint venture partner, NSG, to house the STEC joint venture within
its  glass   fabrication   facility  that  includes  cutting,   polishing,   and
distribution.  Continued  adverse  economic  conditions  in Asia could result in
lower  revenues  from STEC which would have an adverse  effect on the  Company's
business and results of operations.  In pursuing the joint venture,  the Company
also relies on Management  personnel  from its joint venture  partner,  NSG. The
managing  director  of STEC is under the employ of the joint  venture as well as
NSG. The Company does not have employment  agreements with any of the management
at STEC.  STEC's  future  success  will be dependent in part upon its ability to
attract and retain additional qualified managers, engineers and other employees.
The joint venture's business,  operating results,  financial condition or growth
could be  materially  adversely  affected if the Company were unable to attract,
hire, assimilate,  and train these employees in a timely manner. See "ITEM 1(c):
Narrative  Description of Business",  and "ITEM 1(c):  Narrative  Description of
Business".

Limited Protection of Proprietary Rights

     The  Company  relies  primarily  upon trade  secret laws and  employee  and
third-party  nondisclosure  agreements  to protect its  proprietary  technology.
There can be no  assurance  that the steps  taken by the  Company to protect its
proprietary rights will be adequate to prevent  misappropriation  of such rights
or that third parties will not independently  develop a functional equivalent or
superior  technology.  The  Company  is not  aware  that its  products  or other
proprietary rights infringe the proprietary  rights of third parties.  There can
be no assurance, however, that third parties will not assert infringement claims
against  the  Company in the future or that any such claims will not require the
Company to enter into  license  agreements  or result in  protracted  and costly
litigation,  regardless of the merits of such claims. In addition,  there can be
no  assurance  that the  Company  will be able to obtain  licenses  to dispute a
third-party  technology or that such licenses, if available,  would be available
on commercially  reasonable terms.  There can be no assurance that these factors
will not adversely affect the Company's business,  operating results,  financial
condition  or growth.  See "ITEM  1(c):  Narrative  Description  of  Business --
Proprietary Rights."

General Economic Conditions

     A deterioration  in the level of consumer  confidence and general  economic
conditions  could  result  in a  decline  of  purchases  and  production  by the
Company's customers and thus have an adverse effect on the sale of the Company's
products.  A high percentage of the Company's products are used in LCDs for many
consumer electronic  products.  In addition,  the Company's products are used in
certain  displays  used for  commercial  and  industrial  purposes.  Unfavorable
economic conditions or factors that relate to these industries, particularly any
conditions  that  might  result in  reductions  in capital  expenditures  by end
customers,  could  have a material  adverse  effect on the  Company's  business,
operating results,  financial  conditions or growth.  See "ITEM 1(c):  Narrative
Description of Business -- Products and Manufacturing" and see "-- International
Markets."

                                     PART II

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

     Prior to November 21, 1997,  there was no public  market for the  Company's
Common Stock. The Common Stock was approved for quotation on the Nasdaq National
Market under the symbol AFCO, beginning November 21, 1997. At September 1, 1999,
the number of common Shareholders of record was 2,061.

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

                                       16
<PAGE>
<TABLE>
                                                              High Bid            Low Bid
Fiscal 1998                                                   --------            -------
<S>                                                           <C>                 <C>
     Second Quarter (since November 21, 1997)                 9 1/8               8 1/4
     Third Quarter                                            11 5/16             7 1/8
     Fourth Quarter                                           9 5/8               4 9/16

Fiscal 1999
     First Quarter                                            5 5/8               2 7/8
     Second Quarter                                           3 7/8               2 5/8
     Third Quarter                                            4 1/4               1 13/16
     Fourth Quarter                                           4 1/4               21/2
</TABLE>

     The Company  has not  declared  or paid any cash  dividends  on its capital
stock.  The Company  currently  intends to retain all future earnings to finance
its business.  Accordingly, the Company does not anticipate paying cash or other
dividends  on its  Common  Stock in the  foreseeable  future.  Furthermore,  the
Company's  revolving credit facility prohibits the declaration or payment of any
cash  dividends on the Common Stock.  See "ITEM 7:  Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations  --  Liquidity  and
Capital Resources."

ITEM 6: Selected Financial Data

     The  following  selected  consolidated   financial  data  is  qualified  by
reference to, and should be read in conjunction  with, the Company's fiscal 1999
Consolidated  Financial  Statements and notes thereto and the discussion thereof
included  elsewhere in this Form 10-K. The selected  consolidated  statements of
operations  for the fiscal  years  ended June  1997,1998,  and July 1999 and the
related balance sheet data as of the fiscal years ended June 1997,1998, and July
1999 derived from consolidated  financial statements have been audited by Arthur
Andersen LLP, independent public accountants,  whose report with respect thereto
is included elsewhere in this Form 10-K. The selected consolidated statements of
operations  data for the fiscal  year  ended June 1995 and 1996 and the  related
consolidated  balance sheet data as of June 1995 and 1996 have been derived from
audited  consolidated  financial  statements of the Company not included in this
Form 10-K.

                       Summary Consolidated Financial Data
                      (In thousands, except per share data)


<TABLE>
                                                                                  Fiscal Year Ended
                                                            July 3,      June 27,      June 28,      June 29,      July 1,
                                                             1999          1998          1997          1996         1995
<S>                                                         <C>           <C>           <C>          <C>           <C>
Statement of Operations Data
   Net sales........................................        $31,523       $53,041       $34,050      $21,738       $30,990
   Gross profit.....................................          4,453        10,891         6,698        2,720         6,702
   Operating income (loss)..........................           (351)        4,581         2,953         (478)        2,190
   Net income (loss)................................           (224)        2,857         1,621       (1,078)        1,102
   Diluted net income (loss) per common share.......      $   (.06)      $   0.85        $ 0.58     $ (0.39)        $ 0.39
   Weighted average common shares outstanding.......          3,478         3,375         2,814        2,798         2,800

Balance Sheet Data
   Working capital..................................        $11,955      $ 10,747       $ 5,534      $ 6,232       $ 5,312
   Total assets.....................................         30,195        28,697        21,541       18,198        20,128
   Long term debt, net of current portion...........          7,180         4,175         6,448        8,501         7,464
   Total shareholders' equity.......................         14,658        14,826         6,740        5,058         6,020
</TABLE>
                                       17
<PAGE>
ITEM 7:  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

     The following  discussion and analysis of the Company's financial condition
and  results of  operations  should be read in  conjunction  with the  Company's
consolidated financial statements and notes thereto included in this Report.

     This  Report,   including   the   disclosures   below,   contains   certain
forward-looking  statements that involve  substantial  risks and  uncertainties.
When used herein, the terms "believe,"  "anticipate," "intend," "goal," "expect"
and similar expressions may identify forward-looking  statements.  The Company's
actual  results,  performance or achievements  may differ  materially from those
expressed  or implied by such  forward-looking  statements.  Factors  that could
cause or contribute to such material  differences include those disclosed in the
"Certain Factors" section of this Report.

Overview

     The Company was founded in Colorado as Applied Films Labs, Inc. on March 2,
1976 and was involved in both applied thin films  research and  development  and
limited thin films production.  On May 1, 1992, the Company merged with Donnelly
Coated  Corporation,  a wholly  owned  subsidiary  of  Donnelly  Corporation  of
Holland,  Michigan which was primarily  involved in the  manufacture and sale of
thin film coated glass for LCDs. The Company maintained manufacturing facilities
and production capacity in both Boulder, Colorado and Michigan, until the end of
1993 when the Michigan facility and production capacity were no longer utilized.
Since 1994, the Company had maintained  all of its  manufacturing  operations in
Boulder,  Colorado. During fiscal years 1998 and 1999, the Company relocated its
Boulder operations to a new Headquarters and Manufacturing facility in Longmont,
Colorado.  During fiscal 1999,  the Company  expanded its thin film coated glass
business to the far east by forming a joint  venture  with Nippon Sheet Glass in
Suzhou, China.

     The Company's sales have been derived  primarily from the sale of thin film
coated  glass to  manufacturers  of LCDs.  Sales and related  costs of thin film
coated glass sales are recognized when products are shipped. Historically, sales
have varied  substantially from quarter to quarter, and the Company expects such
variations to continue.  Because a significant portion of the Company's overhead
is fixed in the short term, the Company's gross profit and results of operations
may be adversely  affected by unexpected  fluctuations in sales.  The Company is
typically  able to ship its thin film coated  glass within 30 days of receipt of
the order and,  therefore,  does not  customarily  have a significant  long-term
backlog of thin film coated glass orders.  The  Company's ten largest  customers
for thin film coated glass accounted for, in the aggregate,  approximately  59%,
78% and 62% of gross sales in fiscal 1997,  1998 and 1999  respectively.  Prices
for much of the  Company's TN thin film coated glass  supplied to the LCD market
have  declined  over the years,  and the  decline in prices  slowed in the third
quarter of fiscal 1999. The Company expects  continued  downward pressure on its
selling prices, which will negatively impact sales, gross profit and net income.

     The  principal  demand for the  Company's  thin film coated glass is by LCD
manufacturers,  most of  which  are  located  in  Asia.  Total  gross  sales  to
international  customers  represented  approximately  83%,  78%  and  85% of the
Company's gross sales in fiscal 1997, 1998 and 1999,  respectively.  The Company
expects  international sales will continue to represent a significant portion of
its net sales.  The Company  sells most of its thin film coated glass to foreign
customers in U.S. dollars except for sales to certain  Japanese  customers which
are in yen. Gross sales in yen were approximately$4.4  million, $6.0 million and
$6.7 million in fiscal 1997, 1998 and 1999,  respectively.  The Company does not
currently engage in international  currency hedging transactions to mitigate its
foreign exchange exposure,  however,  the Company does purchase raw glass in yen
from Japan which partially  offsets  foreign  currency risks on thin film coated
glass sales.  The Company's  purchases of raw material  denominated  in yen were
approximately$4.6  million,  $8.9 million and $5.8 million in fiscal 1997,  1998
and 1999, respectively.  At July 3, 1999, accounts receivable denominated in yen
were  approximately  $605,000 or approximately 9% of total accounts  receivables
versus  $839,000 and 11% for fiscal year end 1998. The Company is generally paid
by its customers for its yen  denominated  sales within  approximately  15 to 45
days of the date of sale. The Company does occasionally offer cash discounts for
early payment and pre-payment. See "Certain Factors -- International Markets."

     During fiscal 1997,  the Company began selling thin film coating  equipment
to FPD  manufacturers,  which sales  totaled $2.8  million.  During fiscal 1999,
sales of thin film coating  equipment  totaled $4.6 million versus $13.9 million
for 1998. Net sales of thin film coating systems are recognized primarily on the
percentage-of-completion  method,  measured by the percentage of the total costs
incurred  and  applied to date in relation  to the  estimated  total costs to be
incurred  for each  contract.  The lead time for the sale of thin  film  coating
equipment is generally six to twelve months. To date, the Company has priced its
coating equipment in U.S. dollars. Many Pacific Rim countries continue to

                                       18
<PAGE>
experience banking and currency difficulties that have led to economic recession
in those countries.  The Asian financial situation has affected capital spending
plans  by  LCD  and  plasma  display   manufacturers.   Certain  plasma  display
manufacturers  in Japan and Korea announced plans in fiscal 1999 to delay, by up
to a year,  commercialization  of plasma displays which may impact their capital
equipment  purchases and resulting sale of equipment by the Company.  As of July
3, 1999,  the Company's  backlog from systems sales was  approximately  $423,000
versus $950,000 as of June 27, 1998.

     Sales of thin film coated glass were derived  primarily  from demand by LCD
manufacturers for low information  content displays used in applications such as
games,  watches,  calculators,  cell phones etc. The Asian  financial  situation
reduced  demand and prices for thin film coated glass used by LCD  manufacturers
in fiscal 1999.

Results of Operations

     The following table sets forth  information  derived from the  consolidated
statements of  operations of the Company  expressed as a percentage of net sales
for the periods indicated.
<TABLE>

                                                                              Fiscal Year Ended
                                                                July 3,         June 27,        June 28,
                                                                 1999            1998            1997
                                                                ------         --------        -------
<S>                                                              <C>            <C>            <C>
Statement of Operations Data:
   Net sales..............................................       100.0%         100.0%          100.0%
   Cost of goods sold.....................................        85.9           79.5            80.3
                                                                -------        -------         -------
Gross profit..............................................        14.1           20.5            19.7
Operating expenses:
  Selling, general & administrative.......................        11.9            9.6             8.8
  Research and development................................         3.3            2.3             2.2
                                                                -------        -------         -------
Operating income (loss)...................................        (1.1)           8.6             8.7
Interest expense..........................................        (1.8)          (0.9)           (2.4)
Other income (expense)....................................          .0            0.5             0.3
Income from joint venture                                          1.4             -                -
                                                                -------        ------          -------
Income (loss) before income taxes.........................        (1.5)           8.2             6.6
Income tax benefit (provision)............................          .8           (2.8)           (1.8)
                                                                -------        ------          -------
Net income (loss).........................................         (.7)%          5.4%            4.8%
                                                                =======        ======          =======
</TABLE>

Sales

     Net sales were $34 million,  $53 million and $31.5  million in fiscal years
1997, 1998 and 1999, respectively. This represented an increase of 56% from 1997
to 1998 and a 41%  decrease  from 1998 to 1999.  Thin film  coated  glass  sales
increased from $31.2 million to $39.1 million from 1997 to 1998 and dropped from
$39.1  million to $26.9  million  from 1998 to 1999.  The  increase in thin film
coated glass sales from 1997 to 1998 resulted from increasing  demand as well as
new  production  capacity  added by the  Company  during  fiscal  1998.  The 31%
decrease  from  1998 to 1999  was  caused  by a  softening  in  demand  from the
Company's customers and industry-wide,  which caused surplus of inventory at the
Company and in the industry.  This condition fueled a price war and the industry
experienced a drop in thin film coated glass prices of up to 29%.  Sales of thin
film coating equipment,  which began in fiscal 1997, increased from $2.8 million
in 1997 to $13.9  million in 1998,  and decreased 67% from $13.9 million in 1998
to $4.6  million in fiscal  1999 due to the Asian  economic  crisis.  The crisis
caused a postponement in a number of customers in capital equipment spending.

Gross Profits

     The  Company's  gross  profits were $6.7  million,  $10.9  million and $4.4
million in fiscal years 1997,  1998 and 1999,  respectively.  As a percentage of
net sales,  gross  profit  margins  were 19.7%,  20.5% and 14.1% in fiscal years
1997, 1998 and 1999, respectively. Gross profits increased from 1997 to 1998 due
primarily to increasing  sales levels of thin film coated glass as well as gross
profit  contribution  from thin film  coating  equipment  sales,  which began in
fiscal  1997.  Between 1997 and 1998,  gross profit  margins as a percent of net
sales increased for thin film equipment

                                       19
<PAGE>
and  declined  for thin film coated  glass.  The drop in thin film coated  glass
margins  was  primarily  due to  the  price  decline  of 29%  that  the  Company
experienced in fiscal 1999.

Selling, General and Administrative

     The Company's  selling,  general and  administrative  expenses totaled $3.0
million,  $5.1 million and $3.8  million for fiscal  years 1997,  1998 and 1999,
respectively.  Selling,  general and administrative  expenses ("SG&A") increased
from 1997 to 1998 due to  higher  salaries,  additional  personnel  and  related
expenses,  sales  commissions,  including  commissions  on  increased  thin film
equipment  sales, as well as increased  employee profit sharing  expenses.  SG&A
decreased  26% from $5.1  million in fiscal 1998 to $3.8  million in fiscal 1999
due to a concentrated cost reduction effort.  Commissions from system sales were
lower as well due to the  reduced  sales  level in the  systems  business.  As a
percentage of sales,  selling,  general and administrative costs were 8.8%, 9.6%
and 11.9% for fiscal years 1997, 1998 and 1999, respectively.

Research and Development

     Research and development  expenses  totaled $0.7 million,  $1.2 million and
$1.0 million for fiscal years 1997, 1998 and 1999, respectively. In fiscal 1997,
research  and  development  costs  were  net  of  reimbursements   for  research
contracts.   Research  and  development   expenditures  consisted  primarily  of
salaries,  outside  contractor  expenses  and  other  expenses  related  to  the
Company's ongoing product development efforts. The changes from 1997 to 1998 and
from 1998 to 1999  were  primarily  attributable  to  changes  in  staffing  and
material and supplies  expense  related to advanced  development  projects.  The
advanced development team completed the design, fabrication, process proving and
debugging of the Company's  latest ATX-700  technology  during fiscal 1999. As a
percentage of net sales,  research and development  expenses were 2.2%, 2.3% and
3.3% in fiscal years 1997,1998 and 1999, respectively.

Interest Expense

     The  Company's  interest  expense was  $822,000,  $496,000 and $572,000 for
fiscal  years 1997,  1998 and 1999,  respectively.  The  increase  in  long-term
borrowings  by the  Company  in 1999  funded the $3.2  million up front  capital
infusion of the STEC joint  venture in China.  Total bank debt was $9.9 million,
$7.6  million,$4.3  million and $7.0  million as of fiscal year end 1996,  1997,
1998 and 1999,  respectively.  In addition,  the Company incurred debt guarantee
fees paid to Donnelly Corporation of $250,000 and $103,000 for fiscal years 1997
and 1998, respectively.

Other Income (Expense)

     Other income  (expense)  was  $95,000,  $252,000 and $8,000 in fiscal years
1997,  1998 and 1999,  respectively.  This  fluctuation was due primarily to the
fact that the Company had foreign  exchange  gains in fiscal 1997 and 1998 and a
small foreign  exchange loss in 1999. It is uncertain  whether foreign  exchange
gains or losses will be incurred in the future.

Income Tax Benefit (Provision)

     The income tax provision was $605,000 and  $1,480,000 for fiscal years 1997
and 1998,  respectively.  The  effective tax rate for fiscal 1998 was 34% versus
27% for fiscal 1997 due to  utilization  of net operating loss carry forwards in
fiscal  1997.  The Company  recorded a $258,000 tax benefit  during  fiscal year
1999.  Applied Films anticipates  receiving a refund of $744,000 for fiscal 1999
estimated  payments and from applying the tax loss carryback to previous  fiscal
years.

Quarterly Results of Operations

     The  following  table  sets forth  summary  unaudited  quarterly  financial
information  for the last eight fiscal  quarters.  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)  for a fair
presentation of such 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
there  can be no  assurance  that any  trends  reflected  in such  results  will
continue in the future.  The Company's  results of operations  may be subject to
significant quarterly variations. See "Certain Factors -- Fluctuations in Demand
and Annual and Quarterly Operating Results."

                                       20
<PAGE>
<TABLE>
                                               Quarter Ended                                         Quarter Ended
                              ------------------------------------------------     -------------------------------------------------
                                                Fiscal 1998                                           Fiscal 1999
                              ------------------------------------------------     -------------------------------------------------
                                  Sept.        Dec.        March        June           Sept.        Dec.        March        July
                                  1997         1997        1998         1998           1998         1998        1999         1999
                                 ------       ------      ------       ------         ------       ------      ------       -----
<S>                              <C>          <C>         <C>         <C>              <C>          <C>         <C>          <C>
Net sales....................    $11,251      $13,173     $15,312     $13,305          $9,351       $6,176      $8,216       $7,779

Cost of goods sold...........      8,801       10,588      12,355      10,406           8,158        5,493       6,622        6,798
                               ---------    ---------    --------    --------        --------     --------    --------     --------
Gross profit.................      2,450        2,585       2,957       2,899           1,193          683       1,594          981
Operating expenses:
  Selling, general and
   administrative............        986        1,109       1,336       1,636           1,304          794         911          750
  Research and development...        330          287         324         302             260          212         274          297
                               ---------    ---------   ---------  ----------       ---------    ---------   ---------     --------
Operating income (loss)......      1,134        1,189       1,297         961            (371)        (323)        409          (66)
Interest expense.............       (171)         (87)       (103)       (135)           (112)        (140)       (167)        (147)
Other income (expense).......         24           29          86         113             136         (135)        (27)          27

Other income from Joint
Venture......................                                                               0            0           0          433
                               ---------    ---------   ---------  ----------     -----------  ----------- -----------   ----------
Income (loss) before income
      taxes..................        987        1,131       1,280         939            (347)        (598)        215          247
Income tax benefit
(provision)..................       (328)        (385)       (435)       (332)            130          286         (72)         (86)
                               ---------   ----------   ---------   ---------       ---------     --------   ---------  -----------
Net income (loss)............  $     659   $      746   $     845   $     607       $    (217)       $(312)    $   143      $   161
                               =========   ==========   =========   =========       =========     ========   =========  ===========
</TABLE>

The following table sets forth the above  unaudited  information as a percentage
of total net sales.
<TABLE>
                                                Quarter Ended                                         Quarter Ended
                                                 Fiscal 1998                                           Fiscal 1999
                                  Sept.       Dec.       March      June             Sept.       Dec.          March       July
                                  1997        1997       1998       1998             1998        1998          1999        1999
                                 ------      ------     -------    ------           ------      ------        --------    -----
<S>                             <C>         <C>         <C>         <C>              <C>         <C>           <C>         <C>
Net sales.....................  100.0%      100.0%      100.0%      100.0%           100.0%      100.0%        100.0%      100.0%
Cost of goods sold............   78.2        80.4        80.7        78.2             87.2        88.9          80.6        87.4
                               ------      ------      ------      ------           ------      -------       -------     -------
Gross profit..................   21.8        19.6        19.3        21.8             12.8        11.1          19.4        12.6
Operating Expenses:
  Selling, general and
    administrative............    8.8         8.4         8.7        12.3             13.9        12.9          11.1         9.6
  Research and development....    2.9         2.2         2.1         2.3              2.8         3.4           3.3         3.8
                               -------     -------     -------     -------          -------     -------       -------      ------
Operating income (loss).......   10.1         9.0         8.5         7.2             (4.0)       (5.2)          0.6        (0.08)
Interest expense..............   (1.5)       (0.7)       (0.7)       (1.0)            (1.2)       (2.3)         (2.0)       (1.9)
                                                                                                                           -------
Other income (expense)........    0.2         0.3         0.6         0.9              1.5        (2.2)         (0.3)        0.3
Other income from Joint
Venture.......................                                                           0            0            0         5.6
                               --------    ---------   ---------   -------          -------     -------      --------      ------
Income (loss) before income
 taxes........................    8.8         8.6         8.4         7.1             (3.7)       (9.7)          2.6         3.2
Income tax benefit
  (provision).................   (2.9)       (2.9)       (2.9)       (2.5)             1.4         4.6          (0.9)       (1.1)
                               --------    --------    --------    --------         --------    -------        ------      -------
Net income (loss).............    5.9 %       5.7%        5.5%        4.6%            (2.3)%      (5.1)%         1.7%        2.1%
                               ========    ========    ========    ========         =========   ========       ======      =======
</TABLE>
     The variation in quarterly sales during fiscal 1998 and fiscal 1999 was due
to reduced  demand from  customers  for thin film coated glass and the resulting
excess  inventories  of thin film coated glass as well as a reduction in capital
spending and  equipment  purchases in the thin film coated glass  industry.  Net
sales of thin film coated glass for fiscal 1999  totaled  $26.9  million  versus
$39.1  million  during  fiscal year 1998.  Sales and related  costs of thin film
coated glass  products are recognized  when products are shipped.  Sales of thin
film coating  equipment totaled $4.6 million in fiscal 1999 versus $13.9 million
in fiscal  1998.  During the first  quarter of fiscal  1997,  the Company  began
recognizing  revenue  from the sale thin film  coating  equipment.  The  Company
utilizes the percentage of completion accounting method for recognizing sales of
equipment.  See "ITEM 8: Financial  Statements and Supplementary Data -- Note 2:
Significant  Accounting  Policies  --  System  Sales."  For  fiscal  year  1999,
quarterly  sales of thin film coating  equipment were $1.2 million for the first
fiscal  quarter,  $.5 million  during the second  fiscal  quarter,  $2.5 million
during the third  fiscal  quarter  and $.4  million  during  the  fourth  fiscal
quarter. In comparison, sales of thin film coating equipment for

                                       21
<PAGE>
fiscal year 1998 totaled $2.1 million in the first fiscal quarter,  $3.3 million
in the second fiscal quarter,  $5.1 million in the third fiscal quarter and $3.4
million in the fourth fiscal quarter.

     Total gross  profits  decreased  quarter  over  quarter from fiscal 1998 to
fiscal 1999. As a percentage of sales,  gross profits decreased in the first and
second  quarters of fiscal  1999 versus the first and second  quarters of fiscal
1998.  Gross profits as a percentage of sales increased in the third quarter and
decreased again in the fourth quarter of fiscal 1999 versus the third and fourth
quarters of fiscal 1998. As a percent of sales,  gross profits declined 31% from
20.5% in 1998 to 14.1% in 1999. This drop corresponds to the 29% overall drop in
selling  prices for the thin film coated  glass  industry as well as the reduced
revenues in the thin film coating equipment business.

     Selling,  general  and  administrative  expenses  decreased  26% during the
quarters  of  fiscal  1999 due to a  concentrated  cost  reduction  effort  that
included  controls  on  overhead  spending  during  the year as well as  reduced
commissions for thin film equipment sales. Included in the SG&A expenses are one
time charges  totaling  $433,000 for the  completion  of the  relocation  of its
facilities to Longmont and severance charges during fiscal 1999.

     Interest  expense was higher  during  fiscal  1999  versus  fiscal 1998 due
primarily to increased  debt levels in fiscal 1999.  Other income  increased for
fiscal 1998 due primarily to higher foreign exchange gains.

     Income  from Joint  Venture  was a new  addition  to Applied  Films  profit
picture.  The STEC joint venture was funded in January 1999, began production in
April  1999,  and closed  its first  quarter  of  operations  as of July 3, 1999
profitably, contributing $433,000 to Applied Films bottom line.

     Because  a  significant  portion  of the  Company's  overhead  is fixed the
Company's quarterly results of operations may be materially affected if sales of
thin film coated  glass or thin film coating  equipment  decline for any reason.
The Company expects fiscal 2000 quarterly sales, gross profits, operating income
and net income to be at levels  slightly  ahead of the  comparable  quarters  of
fiscal 1999.

Liquidity and Capital Resources

     The Company has primarily  funded its  operations  with cash generated from
operations,  proceeds from an initial  public  offering of the Company's  Common
Stock,  and with  borrowings.  Cash provided by operating  activities for fiscal
year 1999 was $3.9 million compared to $.2 million for the corresponding  period
in fiscal 1998 due  primarily to the  reduction in inventory  and proceeds  from
sale to the joint venture. The Company borrowed $3.2 million against its line of
credit to fund the initial capital requirements of its STEC joint venture. As of
July 3, 1999, the Company had cash and cash  equivalents of  approximately  $1.2
million  and  working  capital of $12.0  million.  As of July 3, 1999,  accounts
receivable were approximately $7.1 million.

     The Company has recently  extended its $11.5 million credit facility with a
commercial  bank.  The credit  facility will expire on September 17, 2002. As of
July 3, 1999,  the Company had  approximately  $7.0 million  outstanding  on its
credit facility.

     Capital  expenditures  for the  fiscal  year  ended  July 3, 1999 were $1.9
million,  compared to $5.4 million for the fiscal year ended June 27, 1998.  The
majority  of  capital  spending  in  fiscal  1999  went to the  development  and
construction  of the new  ATX-700  platform  which was built and is  located  in
Applied Films Longmont facility.  Capital expenditures of $1.0 million in fiscal
2000 will consist  primarily of expenditures to complete the new ATX-700 coating
system as well as other thin film coating test equipment and support equipment.

     The Company  believes that its working  capital and capital  resource needs
will continue to be met by operations and borrowings  under the existing  credit
facility.  The credit facility generally restricts the Company's ability to make
capital expenditures,  incur additional indebtedness,  enter into capital leases
or  guarantee  such  obligations.  To  remain  in  compliance  with  the  credit
agreement,  the Company must also maintain certain financial ratios. The Company
expects cash flow from  operations  to improve in fiscal year 2000 versus fiscal
year 1999 and  expects  its  borrowings  to  remain  constant  under its  credit
facility.

                                       22
<PAGE>
Year 2000 Compliance

     The Year 2000 issue is the result of computer  systems  that use two digits
rather than four to define the applicable  year,  which may prevent such systems
from accurately  processing dates ending in the year 2000 and after.  This could
result  in  system  failures  or  in   miscalculations   causing  disruption  of
operations, including, but not limited to, an inability to process transactions,
to send and receive electronic data, or to engage in routine business activities
and operations.

     The Company has completed a full  assessment of all currently used computer
systems as well as production  and coating  equipment  systems and has corrected
those  areas that will be  affected  by the year 2000  issue.  The  Company  did
utilize  outside  vendors  to assist  in the  upgrade  of  certain  systems  and
estimates  that the Company is  approximately  95% complete  with respect to its
systems.  The  Company's  goal is to have tested each of these  systems for year
2000 compliance by the end of the first quarter of fiscal 2000.

     In addition to reviewing its internal systems, the Company has begun formal
communications  with its significant  vendors  concerning Year 2000  compliance.
There can be no assurance that the systems of other companies that interact with
the Company will be  sufficiently  Year 2000 compliant so as to avoid an adverse
impact  on  the  Company's  operations,   financial  condition  and  results  of
operations.  The Company does not believe that its products and services involve
any material Year 2000 risks.

     The Company  does not  presently  anticipate  that the costs to address the
Year 2000 issue will have a material  adverse effect on the Company's  financial
condition, results of operations or liquidity.

     Although the Company expects its internal systems to be Year 2000 compliant
as described  above,  the Company intends to prepare a contingency plan early in
the  calendar  fourth  quarter  addressing  the  steps to be taken if  important
external  companies  such as suppliers  are not Year 2000  compliant in a timely
manner.

Recent Financial Accounting Standards Board Statement

     Several new  accounting  standards have been issued in fiscal 1997 and 1998
that have  impacted  the Company in fiscal year 1999 and will impact the Company
going forward. Management believes that these accounting standards will not have
a material impact on the operating results of the Company when implemented.

ITEM 7A:  Quantitative and Qualitative Disclosures About Market Risk

Market Risk Exposure

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

     Approximately  $7.0 million of the  Company's  borrowed  debt is subject to
changes in interest  rates;  however,  the Company does not use  derivatives  to
manage this risk. This exposure is linked  primarily to the Eurodollar rate, and
secondarily to the prime rate. The Company has historically locked in Eurodollar
rates on 30-60 day intervals,  and has not  experienced  major  fluctuations  in
rate. The Company  believes that a moderate change in either the Eurodollar rate
or the prime rate would not  materially  affect  operating  results or financial
condition of the Company.

                                       23
<PAGE>
Foreign Exchange Exposure

     The  Company  is  exposed  to foreign  exchange  risk  associated  with its
accounts receivable and payable denominated in foreign currencies,  primarily in
Japanese  yen. At July 3, 1999,  the Company had  approximately  $605,000 of its
accounts  receivable and $1.1 million of its accounts payable denominated in yen
versus  June 27,  1998,  when the  Company  had  approximately  $839,000  of its
accounts  receivable and $2,027,000 of its accounts payable  denominated in yen.
The Company  believes  that a moderate  change in the Japanese  yen/U.S.  dollar
exchange  rate  would not  materially  affect  operating  results  or  financial
condition of the Company.

     Notwithstanding  the above,  actual  changes in interest  rates and foreign
exchange  rates  could  adversely  affect  the  Company's  operating  results or
financial  condition.  The  potential  impact is likely  greater the greater the
magnitude  of the rate  change.  See  also  "ITEM 8:  Financial  Statements  and
Supplementary Data -- Note 10: Significant  Accounting Policies -- Fair Value of
Financial Instruments."


                                       24
<PAGE>
ITEM 8:  Financial Statements and Supplementary Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                            Page
Report of Independent Public Accountants....................................  26
Consolidated Balance Sheets as of July 3, 1999 and June 27, 1998............  27
Consolidated Statements of Operations for the fiscal years ended
   July 3, 1999, June 27, 1998 and June 28, 1997............................  29
Consolidated Statements of Stockholders' Equity for the fiscal
   years ended July 3, 1999, June 27, 1998 and June 28, 1997................  30
Consolidated Statements of Cash Flows for the fiscal years ended
   July 3, 1999, June 27, 1998, and June 28, 1997...........................  31
Notes to Consolidated Financial Statements..................................  33



                                       25
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Stockholders of Applied
      Films Corporation:


We have audited the  accompanying  consolidated  balance sheets of APPLIED FILMS
CORPORATION (a Colorado  corporation) and subsidiary as of July 3, 1999 and June
27, 1998 and the related  consolidated  statements of operations,  stockholders'
equity and cash flows for the fiscal years ended July 3, 1999, June 27, 1998 and
June  28,  1997.  These  financial  statements  are  the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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 subsidiary,  as of July 3, 1999 and June 27, 1998, and the
consolidated  results  of their  operations  and their cash flows for the fiscal
years ended July 3, 1999,  June 27, 1998 and June 28, 1997, in  conformity  with
generally accepted accounting principles.






Denver, Colorado,
  July 27, 1999.


                                       26
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>

                                                                                  July 3,        June 27,
                        ASSETS                                                     1999            1998
                        ------                                                   ---------       --------
<S>                                                                             <C>            <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                   $  1,163       $      81
    Accounts and trade notes receivable, net-
       Coated glass and other                                                      5,501           6,010
       Income earned, not yet billed                                               1,560            1,436
    Inventories, net                                                               8,152          10,055
    Prepaid expenses and other                                                       675             948
    Income tax receivable                                                            711               -
    Deferred tax asset, net                                                          169             837
                                                                                --------       ---------
              Total current assets                                                17,931          19,367
                                                                                --------       ---------
PROPERTY, PLANT AND EQUIPMENT:
    Land                                                                             270             270
    Building                                                                         226             240
    Machinery and equipment                                                       15,211          16,477
    Office furniture and equipment                                                   444             502
    Leasehold improvements                                                         1,340           1,022
    Construction-in-progress                                                         280             877
                                                                                --------       ---------
                                                                                  17,771          19,388
    Accumulated depreciation                                                      (9,144)        (10,129)
                                                                                --------       ---------
                                                                                   8,627           9,259
                                                                                --------       ---------
INVESTMENT IN AFFILIATE                                                            3,637              71
                                                                                --------       ---------
                                                                                 $30,195        $ 28,697
                                                                                ========       =========
</TABLE>

     The accompanying notes are an integral part of these  consolidated  balance
sheets.

                                       27
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)
<TABLE>

                                                                                 July 3,        June 27,
     LIABILITIES AND STOCKHOLDERS' EQUITY                                         1999           1998
     ------------------------------------                                       ---------      --------
<S>                                                                             <C>            <C>
CURRENT LIABILITIES:
    Trade accounts payable                                                      $  3,950       $  5,241
    Accrued expenses                                                               1,712          2,955
    Income taxes payable                                                               -            291
    Current portion of-
       Deferred revenue                                                               37              -
       Deferred gain                                                                  56             56
       Long-term debt                                                                221             77
                                                                                --------        -------
              Total current liabilities                                            5,976          8,620

NON-CURRENT LIABILITIES:
    Long-term debt, net of current portion                                         7,180          4,175
    Deferred revenue, net of current portion                                       1,499              -
    Deferred gain, net of current portion                                            700            756
    Deferred tax liability, net                                                      182            320
                                                                                --------        -------
              Total liabilities                                                   15,537         13,871
                                                                                --------        -------
COMMITMENTS

STOCKHOLDERS' EQUITY:
    Common stock,  no par value,  10,000,000  shares  authorized;  3,487,058 and
       3,472,688 shares issued and outstanding at July 3, 1999 and
       June 27, 1998, respectively                                                 9,471          9,424
    Accumulated comprehensive income (loss)                                            2             (7)
    Retained earnings                                                              5,185          5,409
                                                                                --------        -------
              Total stockholders' equity                                          14,658         14,826
                                                                                --------        -------
                                                                                 $30,195        $28,697
                                                                                ========        =======
</TABLE>
     The accompanying notes are an integral part of these  consolidated  balance
sheets.

                                       28
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
<TABLE>
                                                                                        For The Fiscal Years Ended
                                                                                -----------------------------------------
                                                                                   July 3,       June 27,        June 28,
                                                                                   1999           1998            1997
                                                                                ------------  --------------  -----------
<S>                                                                             <C>            <C>            <C>
NET SALES:
    Non-affiliated                                                              $28,582         $53,041         $34,050
    Joint venture                                                                 2,941               -               -

COST OF GOODS SOLD                                                               27,070          42,150          27,352
                                                                                -------        --------        --------
GROSS PROFIT                                                                      4,453          10,891           6,698

SELLING, GENERAL AND ADMINISTRATIVE
    EXPENSES                                                                      3,760           5,067           2,996

RESEARCH AND DEVELOPMENT EXPENSES                                                 1,044           1,243             749
                                                                                -------        --------        --------
 (LOSS) INCOME FROM OPERATIONS                                                     (351)          4,581           2,953
                                                                                -------        --------        --------
OTHER (EXPENSE) INCOME:
    Gain on foreign currency exchange                                                24             174              96
    Equity earnings in affiliate                                                    433               -               -
    Other (loss) income, net                                                        (35)             23             (20)
    Interest income                                                                  19              55              19
    Interest expense                                                               (572)           (496)           (822)
                                                                                -------        --------        --------
                                                                                   (131)           (244)           (727)
                                                                                -------           -----           -----
(LOSS) INCOME BEFORE INCOME TAXES                                                  (482)          4,337           2,226

INCOME TAX (BENEFIT) PROVISION                                                     (258)          1,480             605
                                                                                --------        -------        --------
NET (LOSS) INCOME                                                               $  (224)       $  2,857        $  1,621

NET (LOSS) INCOME PER SHARE:
    Basic                                                                       $ (0.06)         $ 0.90          $ 0.58
                                                                                ========         ======          ======
    Diluted                                                                     $ (0.06)         $ 0.85          $ 0.58
                                                                                ========         ======          ======

WEIGHTED AVERAGE COMMON SHARES
    OUTSTANDING:
       Basic                                                                      3,478           3,181           2,796
                                                                                =======           =====           =====
       Diluted                                                                    3,478           3,375           2,814
                                                                                =======           =====           =====
</TABLE>

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

                                       29
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

    FOR THE FISCAL YEARS ENDED JULY 3, 1999, JUNE 27, 1998 AND JUNE 28, 1997
                       (In thousands, except share data)
<TABLE>

                                                                                               Accumu-
                                                                                                lated                    Total
                                                                                                Other                    Stock-
                                      Common Stock           Held by Affiliate     Compre-     Compre-                  holders'
                                 -----------------------   ---------------------   hensive     hensive    Retained       Equity
                                   Shares        Amount      Shares     Amount     Income      Income     Earnings       Equity
                                 ----------    ---------   ---------   ---------   ---------  ----------  ----------   ---------
<S>                               <C>          <C>          <C>        <C>         <C>         <C>        <C>           <C>
BALANCES, June 29, 1996           2,799,998       $4,245     (3,749)      $(26)      $  --       $(92)     $   931      $ 5,058

    Comprehensive income-
       Net income                        --           --         --         --       1,621         --        1,621        1,621
       Amortization of
       deferred
       compensation                      --           --         --         --          61         61           --           61
                                 ----------     --------   ---------   -------     -------    -------      -------
BALANCES, June 28, 1997           2,799,998        4,245     (3,749)       (26)      1,682        (31)       2,552        6,740
                                                                                   =======

    Issuance of shares in
       connection with IPO
       net of underwriters'
       commissions of $297)         676,439        5,205         --         --                     --           --        5,205
    Liquidation of affiliate         (3,749)         (26)     3,749         26                     --           --           --
    Comprehensive income-
       Net income                        --           --         --         --       2,857         --        2,857        2,857
       Amortization of deferred
        compensation                    --           --         --          --          24         24           --           24
                                 ----------     --------   --------    -------     -------    -------      -------   ----------
BALANCES, June 27, 1998           3,472,688        9,424         --         --       2,881         (7)       5,409       14,826
                                                                                   =======

    Net (loss)                           --           --         --         --        (224)                   (224)        (224)
    ESPP stock issuance              10,564           33         --         --                                               33
    Exercise of stock option          3,806           14         --         --                                  --           14
    Comprehensive income-
       Amortization of
         deferred
         compensation                    --           --         --         --           7          7           --            7
       Unrealized gain on
         foreign currency
           translation                   --           --         --         --           2          2           --            2
                                                           --------   --------     -------    -------      -------   ----------
BALANCES, July 3, 1999            3,487,058       $9,471         --       $ --       $(215)      $  2      $ 5,185      $14,658
                                 ==========     ========   ========   ========     =======    =======      =======   ==========
</TABLE>
     The  accompanying   notes  are  an  integral  part  of  these  consolidated
statements.

                                       30
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY


                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
                                                                                        For The Fiscal Years Ended
                                                                                 -------------------------------------
                                                                                   July 3,       June 27,     June 28,
                                                                                    1999          1998         1997
                                                                                 -----------  -----------  -----------
<S>                                                                              <C>          <C>          <C>
CASH FLOWS FROM OPERATING
    ACTIVITIES:
       Net (loss) income                                                          $  (224)    $   2,857    $   1,621
       Adjustments to reconcile net (loss) income
          to net cash flows from operating activities-
              Depreciation                                                          1,759         1,800        1,473
              Amortization of deferred compensation                                     7            24           61
              Amortization of deferred gain on lease                                  (56)          (22)           -
              Amortization of deferred revenue on sale
                 to joint venture                                                     (52)            -            -
              Deferred income tax provision (benefit)                                 530          (558)        (112)
              (Gain) loss on disposals of property,
                 plant and equipment                                                  (20)           (4)           6
              Equity in earnings of affiliate                                        (330)          (50)          (7)
              Deferred revenue on equipment sale to joint venture                   1,588             -            -
              Proceeds from sale to Joint Venture                                   1,695             -            -
              Changes in-
                 Accounts and trade notes  receivable, net                            385          (985)      (3,656)
                 Inventories                                                        1,903        (3,895)         654
                 Prepaid expenses and other                                           273          (520)        (385)
                 Accounts payable-trade                                            (1,291)        1,439        1,401
                 Deferred revenue                                                       -        (1,500)       1,500
                 Accrued expenses                                                  (1,243)        1,683          798
                 Income taxes payable (receivable)                                 (1,002)          (61)         684
                                                                                 --------     ---------     --------
                 Net cash flows from operating activities                           3,922           208        4,038
                                                                                 --------     ---------     --------
</TABLE>

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

                                       31

<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
                                                                                         For The Fiscal Years Ended
                                                                                  ----------------------------------------
                                                                                    July 3,       June 27,       June 28,
                                                                                     1999          1998           1997
                                                                                  -----------  -------------  -----------
<S>                                                                               <C>          <C>            <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of land                                                              $     -      $      -       $  (269)
    Purchase of building                                                                -             -          (270)
    Purchases of machinery and equipment                                             (671)       (4,007)       (1,320)
    Reimbursement of equipment costs                                                    -             -           161
    Purchases of office furniture and equipment                                       (25)          (53)          (73)
    Purchases of leasehold improvements                                              (198)       (1,023)           (4)
    Cost incurred for construction in progress                                     (2,065)         (332)            -
    Proceeds from sale of equipment                                                   159            12            60
    Proceeds from sale of building                                                      -         2,172             -
    Investment in joint venture                                                    (3,236)          (71)            -
    Proceeds from liquidation of investment in affiliate                                -           172             -
    Proceeds from sale of lease purchase option                                         -           834             -
    Other                                                                               -             -            20
                                                                                ---------     ---------     ---------
              Net cash flows from investing activities                             (6,036)       (2,296)       (1,695)
                                                                                ---------     ---------     ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from the extension of long-term debt                                  12,747        16,715         8,128
    Repayment of long-term debt                                                    (9,598)      (20,048)      (10,434)
    Issuance of common stock                                                           47         5,205             -
                                                                                ---------     ---------     ---------
              Net cash flows from financing activities                              3,196         1,872        (2,306)
                                                                                ---------     ---------     ---------
NET INCREASE (DECREASE) IN CASH                                                     1,082          (216)           37

CASH AND CASH EQUIVALENTS, beginning of period                                         81           297           260
                                                                                ---------     ---------     ---------
CASH AND CASH EQUIVALENTS, end of period                                        $   1,163   $        81    $      297
                                                                                 ========    ==========     =========

SUPPLEMENTAL CASH FLOW INFORMATION:
    Cash paid for interest, net of amounts capitalized                          $     735    $      767    $      593
                                                                                 ========     =========     =========
    Cash paid (received) for income taxes, net                                  $    (100)    $   2,109    $      123
                                                                                 ========      ========     =========
</TABLE>

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

                                       32
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)    COMPANY ORGANIZATION AND OPERATIONS

Applied Films Corporation,  (the "Company"), was originally incorporated in 1992
as a Michigan corporation. In June 1995, the Company reincorporated in Colorado.
The Company's  principal  line of business is the  manufacture  and sale of thin
film glass for use in flat panel and liquid crystal  displays.  During 1997, the
Company  began selling its thin film coating  glass  manufacturing  equipment to
flat panel  display  manufacturers.  The  Company  experiences  risks  common to
technology companies,  including highly competitive and evolving markets for its
products.

The  Company  was formed in May 1992 as the result of a merger  between  Applied
Films,  Inc.  ("AFI") and a wholly  owned  subsidiary  of  Donnelly  Corporation
("Donnelly"),  Donnelly Coated Corporation  ("DCC").  As a result of the merger,
Donnelly  owned 50% of the  outstanding  common stock of the  Company,  with the
remaining 50% owned by the former shareholders of AFI.

       Initial Public Offering

In  November  1997,  the  Company  completed  an initial  public  offering  (the
"Offering") of 1,900,000 shares. In connection with this offering, Donnelly sold
its 50% interest in the Company,  consisting of 1,400,000  shares. An additional
500,000  shares  were  newly  issued  in the  Offering.  In  December  1997,  an
additional  176,439 shares were issued to the  underwriters  in connection  with
completion  of the  Offering.  Donnelly  paid  substantially  all  costs of this
underwriting, other than commissions related to the 500,000 new shares.

       Joint Venture

In June of 1998, the Company formed a 50/50 Joint Venture (the "Joint  Venture")
in China with  Nippon  Sheet  Glass Co.  ("NSG"),  to  process,  sell and export
certain types of thin film coated glass (Note 4).

(2)    SIGNIFICANT ACCOUNTING POLICIES

       Principles of Consolidation

The accompanying  consolidated financial statements include the Company's wholly
owned subsidiary,  DAF Export  Corporation,  which is treated as a Foreign Sales
Corporation  ("FSC")  for  federal  income tax  purposes.  The  accounts  of the
subsidiary  have been  consolidated  with the  accounts  of the  Company  in the
accompanying  financial  statements.  All intercompany accounts and transactions
have been eliminated in the consolidation.

                                       33
<PAGE>
       Fiscal Year

The Company has adopted a fiscal year ending on the  Saturday  nearest  June 30,
which will result in fiscal years composed of 52 or 53 weeks. Fiscal years 1999,
1998 and 1997 include 53, 52 and 52 weeks, respectively.

       Cash and Cash Equivalents

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

       Concentration of Credit Risk

The  Company  provides  credit,  in the  normal  course  of  business,  to large
electronics manufacturers, located primarily in Asia. Due to the recent monetary
crisis in Asia, the Company  experienced a slowdown in orders during fiscal 1998
and  continuing  through  most of 1999.  To limit  the  Company's  credit  risk,
management  performs  ongoing  credit  evaluations of its customers and requires
letters of credit from certain of its foreign customers prior to shipment. Sales
within Asia totaled  approximately  $26,545,000,  $40,624,000 and $26,145,000 in
the years ended July 3, 1999, June 27, 1998 and June 28, 1997, respectively.  At
July 3, 1999,  approximately $5,215,824 of the Company's coated glass sales were
receivable from Asian  companies.  Although the Company is directly  impacted by
economic conditions in Asia and in the electronics industry, management does not
believe significant credit risk exists at July 3, 1999.

       Inventories

Inventories  are stated at the lower of cost  (first-in,  first-out)  or market.
Inventories at July 3, 1999 and June 27, 1998, consist of the following:
<TABLE>
                                                                             July 3,             June 27,
                                                                              1999                1998
         <S>                                                              <C>                <C>
         Raw materials, net                                                  $4,195,000        $  6,555,000
         Work-in-process                                                         23,000              11,000
         Materials for manufacturing systems                                    192,000             302,000
         Finished goods                                                       3,742,000           3,187,000
                                                                          -------------      --------------
                                                                             $8,152,000         $10,055,000
                                                                          =============      ==============
</TABLE>
       Property, Plant and Equipment

Property,  plant and  equipment are stated at cost.  Replacements,  renewals and
improvements  are capitalized and costs for repairs and maintenance are expensed
as incurred.  For  construction-in-progress,  the Company  capitalizes  interest
based  on its  weighted  average  borrowing  rate on the  amount  of  additional
investment.  Depreciation is computed on  straight-line  or accelerated  methods
over the following estimated useful lives.

                                       34
<PAGE>
<TABLE>
                                                                     Estimated
                                                                   Useful Lives
        <S>                                                         <C>
        Building                                                      30 years
        Machinery and equipment                                     3-10 years
        Office furniture and equipment                               3-5 years
        Leasehold improvements                                      5-10 years
</TABLE>

       Deferred Gain

During June 1997,  the Company  entered  into a lease  transaction  with a third
party  for the  Company's  new  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  facilities  (see Note 9). The Company  received  $834,000 for this purchase
option,  which is being  deferred and amortized over the term of the lease of 15
years.

       Coated Glass Revenue Recognition

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

       Equipment Sales Revenue Recognition

Revenues  relating to the sales of thin film coating equipment are recognized on
the  percentage-of-completion  method,  measured by the  percentage of the total
costs  incurred and applied to date in relation to the estimated  total costs to
be incurred for each contract.  Management  considers costs incurred and applied
to be the best available measure of progress on these contracts.  Contract costs
include all direct  material and labor costs and those indirect costs related to
contract performance.  General an 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.  Income received
but not yet earned,  represents  amounts received pursuant to the contract terms
which occur prior to the Company's  recognition  of revenues on the contract for
financial reporting purposes.  Income earned, but not yet billed,  which totaled
$1,560,000  and  $1,436,000  at July 3,  1999 and June 27,  1998,  respectively,
represents revenues earned prior to billing.  The entire balance at July 3, 1999
relates to the Joint Venture. The Company offers warranty coverage for equipment
sales for a period  ranging  from 3 to 12 months  after  final  acceptance.  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.  Provisions for anticipated  losses on contracts,  if
any, are made in the period they become evident.

                                       35
<PAGE>
       Deferred Revenue

During fiscal 1999, the Company sold refurbished thin film coating  equipment to
a 50% owned Joint  Venture  (see Note 4).  Because  the Company  owns 50% of the
Joint Venture,  the Company  recorded 50% of the revenue and related cost of the
sale and has  deferred  50% of the gross  margin,  approximately  $1.4  million,
(representing  the  Company's  intercompany  profit due to its  ownership of the
Joint  Venture),  which will be  recognized  over  seven  years,  the  estimated
depreciable life of the equipment.

       Research and Development Costs

Research and development costs are expensed as incurred and consist primarily of
salaries and supplies. The Company incurred approximately $1,044,000, $1,243,000
and $749,000 of research and development costs for the years ended July 3, 1999,
June 27, 1998 and June 28, 1997, respectively, net of reimbursements received in
1997 from a contracting research organization.

       Foreign Currency Transactions

The Company generated 85% and 78% of its revenues in fiscal years 1999 and 1998,
respectively,  from sales to foreign corporations.  In addition, many of its raw
materials are purchased from foreign corporations. The majority of the Company's
sales  and  purchases  are  denominated  in U.S.  dollars,  with  the  remainder
denominated in Japanese Yen. For those transactions denominated in Japanese Yen,
the Company  records the sale or purchase at the spot exchange rate in effect on
the date of sale. Receivables from such sales or payables for such purchases are
translated  to U.S.  dollars  using the end of the period  spot  exchange  rate.
Transaction  gains and losses are charged or credited to income during the year,
and any unrealized gains or losses are recorded as other comprehensive income.

       Net (Loss) Income Per Share

The Company follows  Statement of Financial  Accounting  Standards  ("SFAS") No.
128, "Earnings per Share", SFAS No. 128 establishes  standards for computing and
presenting  basic and diluted  earnings per share (EPS).  Under this  statement,
basic earnings (loss) per share is computed by dividing the net earnings or loss
by the weighted  average number of shares of common stock  outstanding.  Diluted
earnings  (loss) per share is determined by dividing the net earnings or loss by
the sum of (1) the weighted average number of common shares  outstanding and (2)
if not  anti-dilutive,  the effect of  outstanding  warrants  and stock  options
determined utilizing the treasury stock method.

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

                                       36
<PAGE>
<TABLE>
                                                        1999       1998       1997
<S>                                                    <C>        <C>        <C>
Weighted average number of
   common shares outstanding
   (shares used in basic earnings per
   share computation)                                  3,478      3,181      2,796
Effect of stock options (treasury
   stock method)                                         -          194         18
                                                       -----      -----      -----
Shares used in diluted earnings per
   share computation                                   3,478      3,375      2,814
                                                       =====      =====      =====
</TABLE>

       Adoption of New Accounting Standards

The Company  adopted SFAS No. 130,  "Reporting  Comprehensive  Income" in fiscal
year 1999. Under SFAS No. 130, the Company reports  comprehensive  income, which
in addition to net income, includes all changes in equity during a period except
those resulting from investments by and distributions to owners. The Company has
adopted this statement retroactively.

In June 1997, the Financial  Accounting Standard Boards ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 requires that public companies report  information about their operating
segments based on the financial information used by the chief operating decision
maker in their  annual  financial  statements  and requires  those  companies to
report  selected  information  in their  interim  statements.  SFAS  No.  131 is
effective  for fiscal  years  beginning  after  December  15,  1997.  Management
evaluates the business of the Company  through  analysis of the coated glass and
thin films coating equipment lines of business (see Note 11).

In March 1998, the Accounting  Standards  Executive  Committee  ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 98-1 "Accounting for the Costs of Computer  Software  Developed
or Obtained for Internal Use." SOP 98-1 provides  guidance on accounting for the
costs of computer  software  developed or obtained for  internal  use.  Once the
capitalization criteria of SOP 98-1 have been met, certain internal and external
direct costs of materials,  service and interest should be capitalized. SOP 98-1
is effective for financial  statements for fiscal years beginning after December
15, 1998,  which is fiscal year 2000 for the Company.  The Company believes that
the  application  of SOP 98-1 will not have a material  impact on its  financial
statements.

In April 1998,  the AcSEC  issued SOP 98-5  "Reporting  on the Costs of Start-up
Activities." SOP 98-5 provides  guidance on the financial  reporting of start-up
costs and organization costs and requires such costs to be expensed as incurred.
Generally,  initial application of SOP 98-5 should be reported as the cumulative
effect of a change in accounting principle.  SOP 98-5 is effective for financial
statements for fiscal years  beginning after December 15, 1998.  Presently,  the
Company is deferring  certain  start-up  costs  related to the Joint  Venture in
China (see Note 4). The Company  expects that the effect of the  application  of
SOP 98-5 in the first quarter of fiscal 2000 to be approximately  $100,000,  net
of tax.  This item will be recorded as a change in  accounting  principle at the
time of adoption.

                                       37
<PAGE>
In  June  1998,  the  FASB  issued  SFAS  No.  133  "Accounting  for  Derivative
Instruments and Hedging  Activities."  SFAS No. 133  establishes  accounting and
reporting  standards  requiring  that  every  derivative  instrument  (including
certain derivative  instruments  embedded in other contracts) be recorded in the
balance sheet as either an asset or liability  measured at its fair value.  SFAS
No. 133  requires  that  changes in the  derivative's  fair value be  recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting  for  qualifying  hedges  allows a  derivative's  gains and losses to
offset related results on the hedged item in the income statement,  and requires
that a company must formally document,  designate,  and assess the effectiveness
of  transactions  that receive hedge  accounting.  SFAS No. 133 is effective for
years  beginning  after June 15, 2000.  The Company has not yet  quantified  the
impact  of  adopting  SFAS  No.  133 on its  financial  statements  and  has not
determined  the timing of or method of its  adoption of SFAS No.  133.  However,
SFAS No. 133 could  increase  volatility  in  earnings  and other  comprehensive
income.

       Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  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.

       Reclassifications

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

(3)    LONG-TERM DEBT
<TABLE>
                                                                         July 3,       June 27,
                                                                          1999           1998
<S>                                                                   <C>            <C>
Revolving credit facility, due September 30, 2000, secured
by eligible accounts receivable, inventory, equipment and
fixtures, as defined in the agreement; interest payable
quarterly and accruing based on the Prime rate and/or the
Eurodollar rate, at the election of the Company at the
beginning of each month, plus a factor varying based on
earnings before interest, taxes, depreciation and
amortization, as defined by the agreement (7.71% and 8%, at
July 3, 1999 and June 27, 1998, respectively)                         $7,000,000     $3,910,000
</TABLE>

                                       38
<PAGE>
<TABLE>
                                                                        July 3,            June 27,
                                                                         1999               1998
<S>                                                                   <C>               <C>
Note payable secured by a deed of trust on land and
  buildings, payable in 60 monthly installments of principal
  and interest of $7,692 (final payment due June 27, 2002);
  with interest accruing at 8.79%                                     $   241,000       $   310,000


Note payable for insurance policy secured by any insurance
  proceeds and dividends, payable in 17 monthly installments
  of principal and interest of $13,984 (final payment due
  April 18, 2000); with interest accruing at 7.17%                        137,000                 -


Other capital leases of equipment                                          23,000            32,000
                                                                       ----------        ----------
                                                                        7,401,000         4,252,000
Less-current portion                                                     (221,000)          (77,000)
                                                                       ----------        ----------
Total long-term debt                                                   $7,180,000        $4,175,000
                                                                       ==========        ==========
</TABLE>

On March 27,  1998,  the Company  entered  into an Amended and  Restated  Credit
Agreement (the  "Agreement"),  which  consolidated  all outstanding  debt into a
revolving credit facility with maximum availability of $11,500,000,  due on June
30, 2000.  Effective July 1999, the maturity Agreement was extended to September
30,  2000.  The Company  must  maintain  certain  financial  ratios to remain in
compliance  with the  Agreement,  including a ratio of debt to  earnings  before
interest,  taxes,  depreciation  and  amortization  EBITDA");  a ratio  of total
liabilities  to tangible net worth and maintain a certain amount of tangible net
worth,  all as defined in the  Agreement.  At  yearend,  the  Company was not in
compliance  with the ratio of debt to EBITDA.  However,  the Company  obtained a
waiver on the covenant  from the bank.  An amendment  fee of $5,000 was paid for
the waiver.  As such, as of July 3, 1999,  the entire  facility was available to
the Company in accordance with these provisions. At the beginning of each month,
the Company may elect to have a portion of the  borrowings  bear interest at the
Eurodollar  rate and any additional  borrowings bear interest at the Prime rate.
As of July 3, 1999, all of the borrowings on the revolving  credit  facility are
held at the Eurodollar rate.

Maturities of debt at July 3, 1999, are as follows:
<TABLE>
                  Fiscal Year-
                     <S>                <C>
                     2000               $   221,000
                     2001                 7,092,000
                     2002                    88,000
                                        -----------
                          Total         $ 7,401,000
                                        ===========
</TABLE>

                                       39
<PAGE>
(4)    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 the
third quarter 1999, the Company sold refurbished  equipment to the Joint Venture
for use in the  process  of thin  film  coating  of glass.  The  sales  price of
approximately  $5.1 million,  is payable in February,  June and August 1999. The
company  received  the first two  payments  in  February  and June of 1999.  The
balance  sheet  reflects a receivable of $1.5 million from the Joint Venture for
the final payment due in August.

The Joint Venture began operations during the fourth quarter of fiscal 1999. The
Company  recorded  50% of income or loss from  operations  of the Joint  Venture
after  elimination  of the impact of  interentity  transactions.  The functional
currency for the Joint Venture is the applicable  local  currency.  The earnings
recorded by the Company from the Joint  Venture are  translated at average rates
prevailing during the period.

During the fourth quarter,  the Company purchased coated glass totaling $847,000
from the Joint Venture,  of which $398,000 remained in inventory at yearend.  In
addition,  the Company  received  royalties  totaling $44,000 for the year ended
July 3, 1999.

(5)    STOCKHOLDERS' EQUITY

       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,  one-quarter per year, 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  172,500  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.

       Statement of Financial Accounting Standards No. 123

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

                                       40
<PAGE>
Accordingly,  for purposes of the pro forma  disclosures  presented  below,  the
Company has computed the fair values of all options  granted  during fiscal 1999
and 1998  using  the  Black-Scholes  pricing  model and the  following  weighted
average assumptions:
<TABLE>
                                                                               1999             1998           1997
                                                                              -------         -------        -------
              <S>                                                             <C>             <C>            <C>
              Risk-free interest rate                                           5.21%           5.66%          6.32%
              Expected lives                                                  7 years         5 years        5 years
              Expected volatility                                                 77%             64%            51%
              Expected dividend yield                                              0%              0%             0%
</TABLE>
To estimate expected lives of options for this valuation, it was assumed options
will be exercised at varying schedules after becoming fully vested.  All options
are initially assumed to vest. Because of the exercise trend related to both the
1993 and 1995 option grants,  the expected life of the options has been extended
to seven years in 1999. Cumulative compensation cost recognized in pro forma net
income or loss with  respect to options that are  forfeited  prior to vesting is
adjusted  as a  reduction  of pro forma  compensation  expense  in the period of
forfeiture.  Until the Company's common stock was publicly traded,  the expected
market volatility was estimated using the estimated average  volatility of three
publicly held companies which the Company believes to be similar with respect to
the markets in which they compete.  Actual volatility of the Company's stock may
vary.  Fair value  computations  are highly  sensitive to the volatility  factor
assumed;  the greater the volatility,  the higher the computed fair value of the
options granted.

The total fair value of options granted was computed to be approximately $51,000
and $147,000  for the years ended July 3, 1999 and June 27, 1998,  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 $88,000
and  $82,000  for the  fiscal  years  ended  July 3,  1999 and  June  27,  1998,
respectively.

If  the  Company  had  accounted  for  its  stock-based  compensation  plans  in
accordance  with SFAS 123, the  Company's net income would have been reported as
follows (in thousands, except share data):
<TABLE>
                                                                       1999            1998         1997
                                                                      ------          ------       ------
                  <S>                                                  <C>             <C>          <C>
                  Net income (loss):
                      As reported                                      $(224)          $2,857       $1,621
                                                                        ====            =====        =====
                      Pro forma                                        $(313)          $2,768       $1,616
                                                                        ====            =====        =====

                  Basic earnings (loss) per share:
                      As reported                                     $(0.06)         $  0.90        $0.58
                                                                       =====           ======         ====
                      Pro forma                                       $(0.09)         $  0.87        $0.58
                                                                       =====           ======         ====
</TABLE>

                                       41
<PAGE>
A summary of the 1993 and 1997 Plans is as follows:
<TABLE>
                                                                      For the Fiscal Years Ended
                                             ----------------------------------------------------------------------------
                                                    July 3, 1999               June 27, 1998              June 28, 1997
                                             ------------------------    ----------------------    ----------------------
                                                            Weighted                   Weighted                  Weighted
                                                            Average                    Average                   Average
                                                            Exercise                   Exercise                  Exercise
                                             Options        Price        Options       Price       Options       Price
                                             -------       --------      -------       --------    -------       -------
<S>                                          <C>           <C>           <C>           <C>         <C>           <C>
Outstanding at beginning of year              379,645      $  3.77       345,100       $3.43       260,183       $2.83
    Granted                                    25,000         2.75        34,545        7.20        84,917        5.26
    Forfeited                                 (23,746)       (6.61)            -           -             -           -
    Exercised                                  (3,806)       (2.87)
                                              -------       ------       -------       ------      -------      ------
Outstanding at end of year                    377,093       $ 3.53       379,645       $3.77       345,100       $3.43
                                              =======        =====       =======        ====       =======        ====
Exercisable at end of year                    306,756       $ 3.29       255,695       $3.05       200,111       $2.78
                                              =======        =====       =======        ====       =======        ====
Weighted average fair value of
    options granted                                          $2.05                     $4.26
                                                              ====                      ====
</TABLE>

The  following  table  summarizes   information  about  employee  stock  options
outstanding and exercisable at July 3, 1999:
<TABLE>

                                                  Options Outstanding                             Options Exercisable
                                    ---------------------------------------------------    ---------------------------------
                                      Number of           Weighted
                                       Options             Average           Weighted           Number            Weighted
                                   Outstanding at         Remaining          Average        Exercisable at        Average
           Range of                    July 3,           Contractual         Exercise          July 3,            Exercise
        Exercise Prices                 1999            Life in Years         Price              1999              Price
       --------------------------   --------------     ----------------     -----------    ---------------      ------------
           <S>                        <S>                  <C>               <C>              <C>                  <C>
           $2.32                      121,107              3.90              $2.32            121,107              $2.32
           $3.29                      134,554              6.60               3.29            134,554               3.29
           $5.26                       79,160              8.90               5.26             42,459               5.26
           $7.20                       17,272              8.25               7.20              8,636               7.20
           $2.75                       25,000              9.90               2.75                  -                  -
                                     --------                               ------           --------              -----
                                      377,093                                $3.53            306,756              $3.29
                                      =======                                =====            =======              =====
</TABLE>

Subsequent  to yearend,  an  additional  17,273  options were granted to the new
Chief Financial  Officer of the Company at an exercise price of $3.50 per share.
The options vest 25% per year beginning July 12, 2000 for the next four years.

       Employee Stock Purchase Plan

On September 5, 1997,  the board of  directors of the Company  adopted,  and the
shareholders subsequently approved, the Applied Films Corporation Employee Stock
Purchase Plan (the  "Purchase  Plan").  The Purchase  Plan will permit  eligible
employees  of the Company to purchase  shares of common  stock  through  payroll
deductions.  Shares

                                       42
<PAGE>
are  purchased  at 90% of the fair market  value of the common stock on the last
trading day in each  quarterly  purchase  period.  Up to 30,000 shares of common
stock may be sold under the Purchase  Plan.  Shares sold under the Purchase Plan
may be newly issued shares or shares acquired by the Company in the open market.
Unless  terminated  earlier by the board of  directors,  the Purchase  Plan will
terminate when all shares reserved for issuance have been sold  thereunder.  The
Purchase Plan is intended to qualify as an "employee  stock purchase plan" under
Section  423 of the  Internal  Revenue  Code of 1986,  as  amended,  and will be
administered in accordance with the limitations set forth in Section 423 and the
rules and regulations thereunder.

During 1999, the Company  issued shares to employees  under this plan at a grant
price ranging from $2.42 to $4.84 per share.  A total of 10,564 shares have been
issued under the plan.  Subsequent  to yearend 1999 an  additional  1,818 shares
were granted, at a price of $3.13 per share.

(6)    INCOME TAXES

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

The net deferred tax (liability) asset is comprised of the following:
<TABLE>
                                                                                               July 3,          June 27,
                                                                                                1999             1998
<S>                                                                                          <C>              <C>
Inventories                                                                                  $   54,000       $ 118,000
Accrued expenses                                                                                281,000         771,000
Equity earnings in affiliate                                                                   (135,000)        (24,000)
Foreign currency                                                                                (31,000)        (28,000)
                                                                                             ----------      ----------
                Total current deferred tax asset, net                                           169,000         837,000
                                                                                             ----------      ----------

Property, plant and equipment                                                                  (748,000)       (670,000)
Deferred compensation                                                                           219,000         216,000
Deferred gain                                                                                   261,000         303,000
Deferred revenue                                                                                 86,000               -
Other                                                                                                 -        (169,000)
                                                                                             ----------      ----------
       Total non-current deferred tax liability, net                                           (182,000)       (320,000)
                                                                                             ----------      ----------
       Total deferred tax (liability) asset, net                                               $(13,000)      $ 517,000
                                                                                             ==========      ==========
</TABLE>

                                       43
<PAGE>
Income tax (benefit)  provision for the years ended July 3, 1999,  June 27, 1998
and June 28, 1997 consist of the following:
<TABLE>

                                                                                         Fiscal Years Ended
                                                                           ----------------------------------------------
                                                                             July 3,           June 27,         June 28,
                                                                              1999              1998             1997
                                                                           -------------    ------------    -------------
<S>                                                                        <C>               <C>             <C>
Taxes currently payable/(receivable):
     Federal                                                                $(718,000)       $1,858,000      $ 695,000
     State                                                                    (70,000)          180,000         22,000
                                                                           ----------        ----------      ---------
          Total current (benefit) provision                                  (788,000)        2,038,000        717,000

Taxes deferred:
     Federal                                                                  483,000          (509,000)      (143,000)
     State                                                                     47,000           (49,000)        31,000
                                                                           ----------        ----------      ---------
          Total deferred provision (benefit)                                  530,000          (558,000)      (112,000)
                                                                           ----------        ----------      ---------
          Total tax (benefit) provision                                     $(258,000)       $1,480,000      $ 605,000
                                                                           ==========         =========       ========
</TABLE>

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

<TABLE>
               Fiscal Years Ended

    July 3,           June 27,           June 28,
      1999              1998               1997
<S>                                                                             <C>            <C>            <C>
Statutory federal income tax (benefit) expense rate                             (34.0)%        34.0%          34.0%
State income taxes                                                               (3.3)%         3.3%           3.3%
Decrease in valuation allowance                                                     - %        (1.1)%         (0.5)%
Effect of FSC                                                                   (18.1)%        (4.4)%         (5.8)%
Other                                                                             2.0 %         2.3%          (3.8)%
                                                                                ------        ------          ------
                                                                                (53.4)%        34.1%           27.2%
                                                                                ======        ======          ======
</TABLE>

Under the  provisions of the Internal  Revenue  Code, as amended,  the Company's
Foreign Sales  Corporation  may exempt a portion of its export  related  taxable
income from federal and state income taxes.

(7)    PROFIT SHARING PLAN

In August  1992,  the board of directors  adopted a profit  sharing plan for all
non-executive  employees.  The amount to be  contributed  to the profit  sharing
pool, subject to the approval of the Company's board of directors,  is generally
10% of pre-tax income before royalty income and profit sharing  expense.  Profit
sharing  is paid to  employees  monthly  based on their  employee  pay level and
length of service with the Company. The Company

                                       44
<PAGE>
expensed  approximately $0, $482,000 and $247,000 in fiscal years 1999, 1998 and
1997, respectively, related to this plan.

(8)    SIGNIFICANT CUSTOMERS

During  fiscal  years  1999,  1998 and  1997,  approximately  85%,  78% and 83%,
respectively,  of the  Company's  gross  sales were to overseas  customers.  The
Company's ten largest  customers  accounted for in the aggregate,  approximately
62%, 78% and 59% of the  Company's  gross sales in fiscal  1999,  1998 and 1997,
respectively.  In addition,  two individual customers represented 15% and 11% of
sales, respectively,  in 1999, and 33% and 15% of sales, respectively,  in 1998.
These  customers  were not  individually  significant in 1997. The loss of, or a
significant reduction or purchases by, one or more of these customers would have
a material adverse effect on the Company's operating results.

The breakdown of sales by geographic region is as follows:
<TABLE>
                                                                   Fiscal Years Ended
                                                  -------------------------------------------------
                                                    July 3,             June 27,           June 28,
                                                     1999                1998               1997
                                                  --------------     ------------     -------------
<S>                                                <C>               <C>              <C>
Asia (other than Japan)                              $18,900,000       $32,800,000      $19,534,000
Japan                                                  7,645,000         7,824,000        6,611,000
United States                                          4,924,000        12,224,000        5,997,000
Europe and Other                                       1,263,000         2,304,000        2,941,000
                                                  --------------    --------------   --------------
Gross sales                                           32,732,000        55,152,000       35,083,000
Less: sales returns and
    allowances                                        (1,209,000)       (2,111,000)      (1,033,000)
                                                  --------------    --------------   --------------
Net sales                                            $31,523,000       $53,041,000      $34,050,000
                                                      ==========        ==========       ==========
</TABLE>

The Company's sales are typically denominated in U.S. dollars.  However, certain
customers of the Company currently pay in Japanese Yen. As a result, the Company
recognized  approximately  $24,000,  $174,000  and  $96,000 of foreign  currency
exchange rate (loss) gain on foreign currency exchange rate fluctuations for the
fiscal years ended July 3, 1999, June 27, 1998 and June 28, 1997,  respectively.
The Company currently has approximately  $605,000 of its accounts receivable and
$1,007,000  of its accounts  payable  denominated  in Japanese Yen as of July 3,
1999.

(9)    COMMITMENTS

The  Company is  obligated  under  certain  noncancelable  operating  leases for
office,  manufacturing and warehouse  facilities.  During June 1997, the Company
entered  into a new lease for the  Company's  manufacturing  and  administrative
location in  Longmont,  Colorado,  which will be  accounted  for as an operating
lease. The lease commenced on January 30, 1998, and payments are fixed until the
first day of the second lease year, at which time payments increase annually one
and one-half  percent plus one-half of the increase in the Consumer  Price Index
per annum.  Lease payments have been normalized over the term of the lease.  The
initial  lease term is 15 years,  with two  additional 5 year options to extend.
Additionally,  on June 12, 1998, the Company entered into two short-term  leases
for the Boulder  facilities,  which  terminated  August 31, 1998,  to facilitate
moving to the Company's new location.

                                       45
<PAGE>
The future minimum rental payments under the leases are as follows:
<TABLE>
                 Fiscal year-
                   <S>                                   <C>
                   2000                                  $     861,000
                   2001                                        873,000
                   2002                                        886,000
                   2003                                        899,000
                   2004                                        882,000
                   Thereafter                                8,039,000
                                                         -------------
                                                           $12,440,000
                                                         =============
</TABLE>

(10)   SEGMENT INFORMATION

The Company  manages its business and has  segregated  its  activities  into two
business  segments,  the sale of "Thin Film Coated  Glass" for use  primarily in
liquid crystal displays ("LCDs"), and the sales of "Thin Film Coating Equipment"
to Flat Panel Display ("FPD") manufacturers. The Company adopted SFAS No. 131 at
fiscal yearend 1999. Certain financial  information for each segment is provided
below:
<TABLE>
                                                            1999            1998           1997
                                                            ----            ----           ----
        <S>                                               <C>            <C>            <C>
        Net sales:
           Thin film coated glass                           $26,906      $39,133         $31,266
           Thin film coating equipment                        4,617       13,908           2,784
                                                           --------     --------        --------
                 Total net sales                            $31,523      $53,041         $34,050


        Operating (loss) income:
           Thin film coated glass                         $    (148)   $  3,657         $  4,325
           Thin film coating equipment                         (203)         924          (1,372)
                                                           --------     --------        --------
                 Total operating (loss) income            $    (351)    $  4,581        $  2,953
                                                           ========      =======         =======

        Identifiable assets:
           Thin film coated glass                          $  6,634    $   7,927         $ 5,777
           Thin film coating equipment                           38           28             432
                                                           --------     --------        --------
                 Total identifiable assets                 $  6,672     $  7,955        $  6,209
                                                           ========     ========        ========
</TABLE>

(11)   FAIR VALUE OF FINANCIAL INSTRUMENTS

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

                                       46
<PAGE>
(12)   YEAR 2000 (Unaudited)

The Year 2000 issue is the result of computer systems that use two digits rather
than four to define the  applicable  year,  which may prevent  such systems from
accurately processing dates ending in the year 2000 and after. This could result
in system  failures or in  miscalculations  causing  disruption  of  operations,
including,  but not limited to, an inability to process transactions to send and
receive  electronic  data,  or to  engage in  routine  business  activities  and
operations.

The Company has  completed a full  assessment  of all  currently  used  computer
systems as well as production  and coating  equipment  systems and has corrected
those  areas that will be  affected  by the year 2000  issue.  The  Company  did
utilize  outside  vendors  to assist  in the  upgrade  of  certain  systems  and
estimates  that the Company is  approximately  95% complete  with respect to its
systems.  The  Company's  goal is to have tested each of these  systems for year
2000 compliance by the end of the first quarter of fiscal 2000.

In addition to  reviewing  its  internal  systems,  the Company has begun formal
communications  with its significant  vendors  concerning Year 2000  compliance.
There can be no assurance that the systems of other companies that interact with
the Company will be  sufficiently  Year 2000 compliant so as to avoid an adverse
impact  on  the  Company's  operations,   financial  condition  and  results  of
operations.  The Company does not believe that its products and services involve
any material Year 2000 risks.

The Company  does not  presently  anticipate  that the costs to address the Year
2000  issue  will have a  material  adverse  effect on the  Company's  financial
condition, results of operations or liquidity.

Although the Company  expects its internal  systems to be Year 2000 compliant as
described  above,  the Company intends to prepare a contingency  plan during the
fourth  quarter of  calendar  year 1999  addressing  supply  chain and the Joint
Venture  in China  that  will  specify  what it  plans to do if it or  important
external companies are not Year 2000 compliant in a timely manner.

                                       47
<PAGE>
ITEM 9:  Changes in and Disagreements With Accountants and Financial Disclosure

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


                                    PART III

ITEM 10:  Directors and Executive Officers of the Registrant

     The  information  set forth on page 4,  under  the  caption  "Nominees  for
Election as Directors" of the  Registrant's  definitive  Proxy  Statement  dated
September 24, 1999, is hereby incorporated by reference.

ITEM 11:  Executive Compensation

     Information relating to compensation of the Registrant's executive officers
and  directors  is  contained  on page 7, under the  captions  "Compensation  of
Directors"  and  "Compensation  of  Executive  Officers,"  in  the  Registrant's
definitive Proxy Statement dated September 24, 1999 , and is incorporated herein
by reference.

ITEM 12:  Security Ownership of Certain Beneficial Owners and Management

     Information relating to security ownership of certain beneficial owners and
management is contained on page 9, under the caption  "Compensation of Executive
Officers -- Executive  Compensation -- Security  Ownership of Management" in the
Registrant's  definitive  Proxy  Statement  dated  September  24,  1999 , and is
incorporated herein by reference.

ITEM 13:  Certain Relationships and Related Transactions

     There were no related transactions to report in fiscal 1999.


                                     PART IV

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

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

     1. Financial Statements.

     The Registrant's consolidated financial statements, for the year ended July
3, 1999 , together with the Report of Independent  Certified Public  Accountants
are filed as part of this Form 10-K report.  See "ITEM 8:  Financial  Statements
and  Supplementary  Data." The  supplemental  financial  information  listed and
appearing hereafter should be read in conjunction with the financial  statements
included in this report.

          2. Financial Statement Schedules.

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

         3.  Exhibits.

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

     (b) Reports on Form 8-K

     The Registrant did not file any reports on Form 8-K during the last quarter
of the fiscal year ended July 3, 1999.

                                       48
<PAGE>
     (c) Exhibits

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

     (d) Financial Statement Schedules

     The response to this section of Item 14 is submitted as a separate  section
of this report.


                                   SIGNATURES

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

                                 APPLIED FILMS CORPORATION


                                 By:      /s/ Thomas T. Edman
                                          Thomas T. Edman, President
                                          September 24, 1999

     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 24, 1999 The persons named below each hereby  appoint  Thomas T. Edman
and Lawrence D. Firestone,  and each of them severally, as his attorney in fact,
to  sign  in his  name  and on his  behalf,  as a  director  or  officer  of the
Registrant,  and to file  with the  Commission  any and all  amendments  to this
report on Form 10-K.


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

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

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

   /s/ Cecil Van Alsburg        Director
     Cecil Van Alsburg

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

   /s/ James A. Knister         Director
      James A. Knister

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

                                       49
<PAGE>
                                  EXHIBIT INDEX

Exhibit No.       Description

     3.1       Amended and Restated  Articles of  Incorporation of Applied Films
               Corporation  are  incorporated  by  reference  to Exhibit  3.1 of
               Registrant's Registration Statement on Form S-1, as amended (Reg.
               No. 333-35331).
     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 is  incorporated  by reference to Exhibit
               10.2 of  Registrant's  Registration  Statement  on Form  S-1,  as
               amended (Reg. No. 333-35331).
    10.3       Employee  Stock  Purchase  Plan is  incorporated  by reference to
               Exhibit 10.3 of Registrant's  Registration Statement on Form S-1,
               as amended (Reg. No. 333-35331).
    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 as of November 18, 1997,  between  Nippon Sheet
               Glass Co.,  Ltd.,  NSG Fine Glass Co.,  Ltd.  and  Registrant  is
               incorporated by reference to Exhibit 10.8 of Registrant's  Annual
               Report on Form 10-K for the fiscal year ended June 27, 1998.
    10.7       Amended and Restated Credit Agreement,  dated as of September 17,
               1999, between Registrant and Bank One, Michigan.
    10.8       Security  Agreement dated June 30, 1994,  between  Registrant and
               Bank  One,  Michigan,  formerly  NBD  Bank,  is  incorporated  by
               reference to Exhibit 10.5 of Registrant's  Registration Statement
               on Form S-1, as amended (Reg. 333-35331).
    11.1       Statement re: computation of per share earnings.
    21.1       Subsidiary  of  Applied  Films  Corporation  is  incorporated  by
               reference to Exhibit 21 of Registrant's Registration Statement on
               Form S-1, as amended (Reg. No. 333-35331).
    23.1       Consent of Arthur Andersen LLP.
    24.1       Power of Attorney (included on page 48).
    27.1       Financial Data Schedule (EDGAR filing only).
<PAGE>
EXHIBIT 10.7

                            APPLIED FILMS CORPORATION

                   ------------------------------------------


                                   $11,500,000




                              AMENDED AND RESTATED
                                CREDIT AGREEMENT

                         dated as of September 17, 1999

                   ------------------------------------------

                               BANK ONE, MICHIGAN
<PAGE>
                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----
ARTICLE 1
         DEFINITIONS...........................................................1
         Certain Definitions...................................................1
         Other Definitions; Rules of Construction.............................11

ARTICLE 2
         THE COMMITMENT.......................................................12
         Commitment of the Bank...............................................12
         Termination and Reduction of Commitment..............................12
         Fees.................................................................13
         Disbursement of Loans................................................13
         Conditions for First Disbursement....................................14
         Further Conditions for Disbursement..................................15
         Subsequent Elections as to Loans.....................................16
         Limitation of Requests and Elections.................................16
         Minimum Amounts......................................................17
         Security and Collateral..............................................17

ARTICLE 3
         PAYMENTS AND PREPAYMENTS OF LOANS....................................17
         Principal Payments...................................................17
         Interest Payments....................................................17
         Payment Method.......................................................18
         No Setoff or Deduction...............................................18
         Payment on Non-Business Day; Payment Computations....................18
         Additional Costs.....................................................19
         Illegality and Impossibility.........................................20
         Indemnification......................................................20
         Letter of Credit Reimbursement Payments..............................20

ARTICLE 4
         REPRESENTATIONS AND WARRANTIES.......................................22
         Corporate Existence and Power........................................22
         Corporate Authority..................................................22
         Binding Effect.......................................................22
         Subsidiaries.........................................................22
         Litigation...........................................................23
         Financial Condition..................................................23
         Use of Loans.........................................................23
         Consents, Etc........................................................23

                                       ii
<PAGE>
         Taxes    ............................................................24
         Title to Properties..................................................24
         ERISA    ............................................................24
         Disclosure...........................................................24

ARTICLE 5
         COVENANTS............................................................25
         Affirmative Covenants................................................25
         Negative Covenants...................................................27

ARTICLE 6
         DEFAULT..............................................................30
         Events of Default....................................................30
         Remedies ............................................................33

ARTICLE 7
         MISCELLANEOUS........................................................34
         Amendments, Etc......................................................34
         Notices  ............................................................34
         No Waiver By Conduct; Remedies Cumulative............................34
         Reliance on and Survival of Various Provisions.......................35
         Expenses; Indemnification............................................35
         Successors and Assigns...............................................36
         Counterparts.........................................................36
         Governing Law........................................................36
         Table of Contents and Headings.......................................36
         Construction of Certain Provisions...................................36
         Integration and Severability.........................................37
         Interest Rate Limitation.............................................37
         Waiver of Jury Trial.................................................37

EXHIBIT A         Revolving Credit Note......................................A-1

EXHIBIT B         Request for Advance........................................B-1

EXHIBIT C         Request for Continuation or Conversion of Loan.............C-1

EXHIBIT D         Borrowing Base Certificate.................................D-1

EXHIBIT E         Confirmation of Security Agreement.........................E-1


                                       iii
<PAGE>
     THIS AMENDED AND RESTATED CREDIT AGREEMENT,  dated as of September 17, 1999
(this "Agreement"), is between Applied Films Corporation, a Colorado corporation
(the  "Company"),  and Bank  One,  Michigan,  a  Michigan  banking  corporation,
formerly NBD Bank (the "Bank").

                                  INTRODUCTION

     The Company, successor by merger to Donnelly Applied Films Corporation, and
the Bank have previously  entered into an Amended and Restated  Revolving Credit
and Term Loan Agreement dated June 30, 1994 (the "1994 Credit  Agreement"),  and
an Amended and Restated  Revolving Credit and Term Loan Agreement dated June 30,
1997, as amended by the First Amendment to Amended and Restated Credit Agreement
dated as of March 27, 1998  (collectively,  the "1997  Credit  Agreement").  The
Company desires to obtain a revolving credit facility in the aggregate principal
amount of $11,500,000,  including S/L/Cs not to exceed $1,000,000 and C/L/Cs not
to exceed  $2,000,000,  in substitution for the facility provided under the 1997
Credit  Agreement,  as  amended,  and in order to provide  funds for its general
corporate  purposes,  and to provide and confirm certain security for the Bank's
benefit, and the Bank is willing to establish such a credit facility in favor of
the Company on the terms herein set forth.

                                    ARTICLE 1
                                   DEFINITIONS

     1.1 Certain Definitions.  As used herein the following terms shall have the
following respective meanings:

          "Advance"  means any  Revolving  Credit  Loan and any Letter of Credit
     Advance.

          "Agreed  Currency"  means so long as such  currencies  remain Eligible
     Currencies, (i) Japanese Yen and (ii) any other Eligible Currency which the
     Company  requests the Bank to include as an Agreed  Currency  hereunder and
     which is acceptable to the Bank.

          "Applicable  Lending  Installation"  shall mean,  with  respect to the
     Bank, any office(s), agency(is), branch(es), Subsdiary(ies) or Affiliate(s)
     of the  Bank  selected  by the  Bank  and  notice  of which is given to the
     Company from time to time.

          "Automatic Termination Date" means the date which is three years after
     the Effective Date.

          "Borrowing Base" means, as of any date, the sum of (a) an amount equal
     to 85% of the value of  Eligible  Accounts  Receivable,  plus (b) an amount
     equal to the lesser of (i) 40% of the value of Eligible  Inventory and (ii)
     $4,000,000,  plus (c) an amount equal to 60% of the value of Eligible Fixed
     Assets.

                                        1
<PAGE>
          "Borrowing  Base  Certificate"  for any date  means  an  appropriately
     completed  report as of such date in  substantially  the form of Exhibit D,
     certified  as true  and  correct  as of such  date by the  chief  financial
     officer of the Company.

          "Business Day" means a day other than a Saturday, Sunday, or other day
     on  which  (a)  the  Bank  is  not  open  to the  public  for  carrying  on
     substantially all of its banking functions or (b) if such reference relates
     to the date for  payment  or  purchase  of any  amount  denominated  in any
     currency other than Dollars, banks are not generally open to the public for
     carrying on substantially  all of their banking  functions in the principal
     financial center of the country issuing such currency.

          "C/L/C"  shall have the meaning  ascribed to it in the  definition  of
     "Letter of Credit".

          "Capital  Lease" of any person  means any lease which,  in  accordance
     with generally accepted accounting principles,  is or should be capitalized
     on the books of such person.

          "Code" means the Internal  Revenue Code of 1986,  as amended from time
     to time, and the regulations thereunder.

          "Consolidated"  or  "consolidated"  means, when used with reference to
     any financial term in this Agreement, the aggregate for two or more persons
     of the amounts signified by such term for all such persons  determined on a
     consolidated  basis  in  accordance  with  generally  accepted   accounting
     principles.

          "Commitment"  means the Bank's  commitment to make Loans and Letter of
     Credit  Advances  pursuant  to Section  2.1 in  amounts  not  exceeding  an
     aggregate  principal amount  outstanding at any time of $11,500,000 as such
     amount may be reduced from time to time pursuant to Section 2.2,  provided,
     that the aggregate  principal  amount of all  outstanding  S/L/Cs shall not
     exceed  $1,000,000 and the aggregate  principal  amount of all C/L/Cs shall
     not exceed $2,000,000.

          "Cumulative  Net Income" of any person means,  as of any date, the net
     income  (after  deduction  for  income  and  other  taxes  of  such  person
     determined by reference to income or profits of such person) for the period
     commencing  on the  specified  date  through  the end of the most  recently
     completed  fiscal year of such person (but  without  reduction  for any net
     loss  incurred  for any  fiscal  year  during  such  period),  taken as one
     accounting  period, all as determined in accordance with generally accepted
     accounting principles.

          "Default"  means any of the events or conditions  described in Section
     6.1 which might  become an Event of Default with notice or lapse of time or
     both.

          "Dollars"  and "$"  means the  lawful  money of the  United  States of
     America.

                                        2
<PAGE>
          "EBITDA" means, for any period,  the sum of (i) net income  determined
     in accordance with generally accepted accounting principles (without taking
     into account any  extraordinary  gains or non-cash  extraordinary  losses),
     (ii) interest  expense  determined in accordance  with  generally  accepted
     accounting principles,  (iii) depreciation and amortization,  (iv) federal,
     state and local income taxes,  in each case  determined in accordance  with
     generally accepted accounting principles.

          "Effective  Date" means the date  specified in the final  paragraph of
     this Agreement.

          "Eligible  Accounts  Receivable"  means,  as of any date,  those trade
     accounts  receivable  owned by the Company which are payable in Dollars and
     in which the  Company has  granted to the Bank a  first-priority  perfected
     security  interest pursuant to the Security  Agreement,  valued at the face
     amount  thereof but shall not include any such account  receivable (a) that
     is more than 90 days past due or that remains outstanding more than 90 days
     after the earlier of the date of the invoice or the shipment of the related
     inventory,  goods  or  other  property  or the  furnishing  of the  related
     services  or other  consideration,  (b)  that is  subject  to any  dispute,
     contra-account,  defense,  offset  or  counterclaim  or  any  Lien,  or the
     inventory,  goods, property,  services or other consideration of which such
     account receivable constitutes proceeds is subject to any such Lien (except
     those in favor of the Bank under the Security  Documents or other Permitted
     Liens), (c) in respect of which the inventory, goods, property, services or
     other  consideration  have been  rejected or the amount is in dispute,  (d)
     that has been classified by the Company as doubtful or has otherwise failed
     to meet established or customary credit standards of the Company,  (e) that
     is payable by any person located outside the United States (which shall not
     be deemed to include  any  territories  of the United  States)  except such
     trade  accounts  receivable  which are supported by trade letters of credit
     issued for the Company's benefit,  (f) that is payable by the United States
     or any of its departments, agencies or instrumentalities or by any state or
     other governmental  entity, or (g) that for any other reason is at any time
     reasonably deemed by the Bank to be ineligible; provided, however, that any
     trade accounts receivable which are insured in a manner satisfactory to the
     Bank will be considered as eligible.

          "Eligible  Currency" means any currency other than Dollars (i) that is
     readily available,  (ii) that is freely traded, (iii) in which deposits are
     customarily  offered to banks in the London interbank market, (iv) which is
     convertible into Dollars in the international  interbank market,  (v) as to
     which an  Equivalent  Amount  may be readily  calculated,  and (vi) that is
     agreed to by the Bank in its  discretion.  If, after the designation by the
     Bank of any currency as an Agreed  Currency,  (x) currency control or other
     exchange  regulations  are imposed in the country in which such currency is
     issued  with  the  result  that  different   types  of  such  currency  are
     introduced,  (y) such  currency is, in the  determination  of the Bank,  no
     longer readily  available or freely traded or (z) in the  determination  of
     the Bank, an Equivalent Amount of such currency is not readily  calculable,
     the Bank shall  promptly  notify the Company,  and such  currency  shall no
     longer  be an  Agreed  Currency  until  such  time as the  Bank  agrees  to
     reinstate  such currency as an Agreed  Currency,  and promptly,  but in any
     event  within five  Business  Days of receipt of such notice from the bank,
     the Company shall

                                        3
<PAGE>
     repay all Loans in such affected  currency or convert such Loans into Loans
     in Dollars or another  Eligible  Currency,  subject to the other  terms set
     forth in Article 2.

          "Eligible  Fixed Assets" means,  as of any date,  those tangible fixed
     assets  owned by the Company in which the Company has granted to the Bank a
     first-priority   perfected  security  interest  pursuant  to  the  Security
     Agreement and which are either (i) listed and valued in an appraisal  dated
     December 21, 1998, performed by Norman Levy and Associates,  which has been
     furnished to the Bank,  valued at the fair market value  established in the
     appraisal,  as up-dated at the Bank's  request  from time to time,  or (ii)
     acquired by the Company after the appraisal identified above, valued at the
     acquired  cost until such time as the Bank  requests  an  appraisal,  after
     which  they shall be valued at the fair  market  value  established  in the
     appraisal, but not including any such fixed asset (a) that is not usable in
     the business of the Company,  (b) that is located outside the United States
     (which  shall  not be deemed  to  include  any  territories  of the  United
     States),  (c)  that is  subject  to,  or any  accounts  or  other  proceeds
     resulting from the sale or other  disposition  thereof could be subject to,
     any Lien (except those in favor of the Bank under the Security  Documents),
     (d) that is not in the possession of the Company, (e) that is held for sale
     or  lease or is the  subject  of any  lease,  (f)  that is  subject  to any
     trademark,  trade  name  or  licensing  arrangement,  or any  law,  rule or
     regulation,  that could limit or impair the ability of the Bank to promptly
     exercise all rights of the Bank under the Security  Documents,  (g) if such
     fixed  asset is located on  premises  not owned by the  Company  unless the
     landlord or other owner of the premises has waived its distraint, lien, and
     similar rights with respect to the fixed asset and has agreed to permit the
     Bank to enter the premises after an Event of Default has occurred  pursuant
     to a waiver and agreement of the owner in favor of and  satisfactory to the
     Bank,  (h) with respect to which any insurance  proceeds are not payable to
     the Bank as a loss payee or are  payable  to any loss payee  other than the
     Bank or the  Company,  or (i)  that  for any  other  reason  is at any time
     reasonably deemed by the Bank to be ineligible.

          "Eligible  Inventory"  means,  as of any date,  that raw  material and
     finished  goods  inventory  owned by the  Company in which the  Company has
     granted to the Bank a first- priority  perfected security interest pursuant
     to the Security Agreement, valued at the lower of cost or market, but shall
     not include any such inventory (a) that is work-in-process or otherwise not
     readily  salable  or usable in the  business  of the  Company,  (b) that is
     located outside the United States (which shall not be deemed to include any
     territories of the United States),  (c) that is subject to, or any accounts
     or other  proceeds  resulting  from the sale or other  disposition  thereof
     could be subject to, any Lien (except  those in favor of the Bank under the
     Security  Documents  or  other  Permitted  Liens),  including  any  sale on
     approval or sale or return transaction or any consignment,  (d) that is not
     in the  possession of the Company,  and (e) that for any other reason is at
     any time reasonably deemed by the Bank to be ineligible.

          "Environmental Laws" means all provisions of law, statute, ordinances,
     rules, regulations,  judgments, writs, injunctions, decrees, orders, awards
     and standards promulgated by the government of the United States of America
     or any foreign government or by any

                                        4
<PAGE>
     state,  province,  municipality or other political  subdivision  thereof or
     therein or by any court, agency, or instrumentality,  regulatory authority,
     or commission  of any of the foregoing  concerning  the  protection  of, or
     regulating the discharge of substances into, the environment.

          "ERISA" means the Employee  Retirement Income Security Act of 1974, as
     amended from time to time, and the regulations thereunder.

          "ERISA  Affiliate"  means,  with  respect to any person,  any trade or
     business (whether or not incorporated) which,  together with such person or
     any Subsidiary of such person,  would be treated as a single employer under
     Section 414 of the Code.

          "Equivalent  Amount"  of any  currency  with  respect to any amount of
     Dollars at any date  shall mean the  equivalent  in such  currency  of such
     amount of Dollars,  calculated on the basis of the arithmetical mean of the
     buy and sell spot rates of exchange of the Bank for such other  currency at
     11:00 a.m., London time, on the date on or as of which such amount is to be
     determined.

          "Eurodollar  Business Day" means,  with respect to any Eurodollar Rate
     Loan,  a day which is both a Business  Day and a day on which  dealings  in
     Dollar  deposits are carried out in the  interbank  market  selected by the
     Bank with respect to such Eurodollar Rate Loan.

          "Eurodollar  Interest  Period"  means,  with respect to any Eurodollar
     Rate Loan, the period  commencing on the day such  Eurodollar  Rate Loan is
     made or  converted  to a  Eurodollar  Rate Loan and ending on the date one,
     two,  three,  or six months  thereafter,  as the  Company  may elect  under
     Section 2.4 or 2.7, and each subsequent  period  commencing on the last day
     of the immediately  preceding  Eurodollar Interest Period and ending on the
     date one,  two,  three or six months  thereafter,  as the Company may elect
     under  Section  2.4 or 2.7,  provided,  however,  that  (a) any  Eurodollar
     Interest Period which  commences on the last  Eurodollar  Business Day of a
     calendar   month  (or  on  any  day  for  which  there  is  no  numerically
     corresponding day in the appropriate  subsequent  calendar month) shall end
     on the last Eurodollar Business Day of the appropriate  subsequent calendar
     month,  (b) each Eurodollar  Interest Period which would otherwise end on a
     day which is not a Eurodollar Business Day shall end on the next succeeding
     Eurodollar Business Day or, if such next succeeding Eurodollar Business Day
     falls  in  the  next  succeeding  calendar  month,  on the  next  preceding
     Eurodollar  Business Day, and (c) no Eurodollar Interest Period which would
     end after the Termination Date shall be permitted.

          "Eurodollar  Rate" means, with respect to any Eurodollar Rate Loan and
     the related Eurodollar Interest Period, the per annum rate that is equal to
     the sum of:

               (a) the per annum margin  amount  determined  by reference to the
          chart  set  forth  below,  determined  quarterly  by the Bank from the
          financial statements submitted by the Company under Section 5.1(d)(ii)
          for the months of March, June, September and December, plus

                                        5
<PAGE>
               (b) the rate per annum  obtained  by  dividing  (i) the per annum
          rate of  interest at which  deposits  in Dollars  for such  Eurodollar
          Interest Period and in an aggregate amount comparable to the amount of
          such Eurodollar Rate Loan are offered to the Bank by other prime banks
          in the  London or Nassau  interbank  market,  selected  in the  Bank's
          discretion,  at approximately 11:00 a.m. London or Nassau time, as the
          case may be, on the second Eurodollar  Business Day prior to the first
          day of such Eurodollar  Interest Period by (ii) an amount equal to one
          minus the stated maximum rate  (expressed as a decimal) of all reserve
          requirements (including,  without limitation, any marginal, emergency,
          supplemental,  special or other  reserves)  that is  specified  on the
          first day of such Eurodollar Interest Period by the Board of Governors
          of the Federal  Reserve System (or any successor  agency  thereto) for
          determining   the  maximum   reserve   requirement   with  respect  to
          eurocurrency   funding   (currently   referred  to  as   "Eurocurrency
          liabilities"  in  Regulation D of such Board)  maintained  by a member
          bank of such System, all as conclusively  determined by the Bank, such
          sum to be rounded up, if necessary,  to the nearest whole  multiple of
          one-hundredth of one percent (1/100 of 1%).

          Ratio calculated
          under Section 5.2(a)                                 Margin
          --------------------                                 ------

          (i)      Less than or equal to 1.5 to 1.0            1.75%
          (ii)     Greater than 1.5 to 1.0 but                 2.00%
                   less than or equal to 2.0 to 1.0
          (iii)    Greater than 2.0 to 1.0 but less            2.25%
                   than or equal to 2.5 to 1.0
          (iv)     Greater than 2.5 to 1.0 but                 2.50%
                   less than or equal to 3.0 to 1.0
          (v)      Greater than 3.0 to 1.0                     2.75%

         all as conclusively  determined by the Bank, such sum to be rounded up,
         if necessary,  to the nearest whole  multiple of  one-hundredth  of one
         percent (1/100 of 1%).

          "Eurodollar  Rate Loan"  means any Loan which  bears  interest  at the
     Eurodollar Rate.

          "Event of Default" means any of the events or conditions  described in
     Section 6.1.

          "Federal Funds Rate" means the per annum rate that is equal to the per
     annum rate  established  and announced by the Bank from time to time as the
     opening  federal funds rate paid by the Bank in its regional  federal funds
     market for  overnight  borrowings  from other  banks,  all as  conclusively
     determined  by the Bank,  such sum to be rounded up, if  necessary,  to the
     nearest whole multiple of one-hundredth of one percent (1/100 of 1%), which
     Federal  Funds Rate  shall  change  simultaneously  with any change in such
     announced rates.

                                        6
<PAGE>
          "Fixed   Charge   Ratio"  means  the  ratio  of  EBITDA  less  capital
     expenditures, plus operating lease rentals, to total interest expense, plus
     operating lease rentals plus all scheduled principal reductions,  plus cash
     taxes,  in each case  determined  in  accordance  with  generally  accepted
     accounting principles.

          "Fixed Rate Loan" means a Eurodollar  Rate Loan or a  Negotiated  Rate
     Loan.

          "Floating  Rate"  means the per annum rate equal to the sum of (a) the
     per annum  margin  amount  determined  by  reference to the chart set forth
     below,  determined  quarterly  by the Bank  from the  financial  statements
     submitted by the Company under Section  5.1(d)(ii) for the months of March,
     June, September,  and December,  plus (b) the greater of (i) the Prime Rate
     in effect  from time to time,  and (ii) the sum of  one-half of one percent
     (1/2%) per annum plus the  Federal  Funds Rate in effect from time to time.
     The Floating Rate shall change  simultaneously with any change in the Prime
     Rate or Federal  Funds Rate, as the case may be, and shall change as of the
     earlier of (x) the date when the  Company's  financial  statements  are due
     under Section  5.1(d)(ii)  for such months,  and (y) the date the financial
     statements are delivered to the Bank.

          Ratio calculated
          under Section 5.2(a)                          Margin
          --------------------                          ------

          (i)      Less than or equal to
                   1.5 to 1.0                           -.50%
          (ii)     Greater than 1.5 to 1.0 but
                   less than or equal to 2.0 to 1.0     -.25%
          (iii)    Greater than 2.0 to 1.0 but
                   less than or equal to 2.5 to 1.0     0.0%
          (iv)     Greater than 2.5 to 1.0 but
                   less than or equal to 3.0 to 1.0     +.25%
          (v)      Greater than 3.0 to 1.0              +.50%

          "Floating  Rate  Loan"  means any Loan  which  bears  interest  at the
     Floating Rate.

          "generally  accepted  accounting  principles" means generally accepted
     accounting  principles applied on a basis consistent with that reflected in
     the financial statements referred to in Section 4.6.

          "Hazardous  Materials"  means any  flammable  explosives,  radioactive
     materials,  hazardous  materials,  hazardous  wastes,  hazardous  or  toxic
     substances or related materials defined in the comprehensive  Environmental
     Response,  Compensation  and  Liability  Act of 1980, as amended (42 U.S.C.
     Sections 9601, et seq.),  the Hazardous  Materials  Transportation  Act, as
     amended (49 U.S.C.  Sections 1801, et seq.), the Resource  Conservation and
     Recovery Act, as amended (42 U.S.C.  Sections  6901,  et seq.),  and in the
     regulations adopted

                                        7
<PAGE>
     and publications promulgated pursuant thereto, or any other federal, state,
     or local government law, ordinance, rule, or regulation.

          "Indebtedness"   of  any  person  means,  as  of  any  date,  (a)  all
     obligations of such person for borrowed money,  (b) all obligations of such
     person as lessee under any Capital Lease, and (c) all obligations of others
     similar in  character  to those  described  in clauses  (a) and (b) of this
     definition  for which  such  person is  contingently  liable,  as  obligor,
     guarantor,  surety  or in  any  other  capacity,  or in  respect  of  which
     obligations  such person assures a creditor  against loss or agrees to take
     any action to prevent any such loss (other than  endorsements of negotiable
     instruments for collection in the ordinary  course of business),  including
     without limitation all reimbursement  obligations of such person in respect
     of  letters  of  credit,  surety  bonds  or  similar  obligations  and  all
     obligations  of such  person to advance  funds to, or to  purchase  assets,
     property  or  services  from,  any other  person in order to  maintain  the
     financial condition of such other person.

          "Interest  Payment  Date" means (a) with  respect to any Loan  bearing
     interest at the Eurodollar  Rate, the last day of each Eurodollar  Interest
     Period  with  respect  to such  Loan  and,  in the  case of any  Eurodollar
     Interest Period  exceeding three months,  those days that occur during such
     Eurodollar Interest Period at intervals of three months after the first day
     of such Eurodollar  Interest  Period,  and (b) in all other cases, the last
     Business Day of each March, June,  September,  and December occurring after
     the date hereof, commencing with the first such date hereafter.

          "Letter of Credit"  means any standby  letter of credit  ("S/L/C")  or
     commercial  letter  of credit  ("C/L/C")  having a stated  expiry  date not
     earlier  than ninety days after the date of issuance and not later than the
     earlier of one year after the date of issuance or the Termination Date, and
     which may be issued by the Bank for the account of the Company  pursuant to
     Section 2.1 under an application  and related  documentation  acceptable to
     the Bank  requiring,  among other things,  immediate  reimbursement  by the
     Company to the Bank in respect  of all drafts or other  demand for  payment
     honored  thereunder  and all expenses paid or incurred by the Bank relative
     thereto.

          "Letter of Credit  Advance"  means any  issuance of a Letter of Credit
     under Section 2.4 made pursuant to Section 2.1.

          "Letter of Credit  Documents"  shall have the meaning ascribed thereto
     in Section 3.9.

          "Lien" means any pledge, assignment, hypothecation, mortgage, security
     interest, deposit arrangement,  option, conditional sale or title retaining
     contract,  sale and  leaseback  transaction,  financing  statement  filing,
     lessor's or lessee's  interest under any lease,  subordination of any claim
     or right,  or any other  type of lien,  charge,  encumbrance,  preferential
     arrangement, or other claim or right.

                                        8
<PAGE>
          "Loan" means the Revolving  Credit Loan.  Any Loan or portion  thereof
     may also be denominated as a Floating Rate Loan, a Eurodollar  Rate Loan or
     a Negotiated Rate Loan and such Floating Rate Loans, Eurodollar Rate Loans,
     and Negotiated Rate Loans are referred to herein as "types" of Loans.

          "Multiemployer  Plan"  means any  "multiemployer  plan" as  defined in
     Section 4001(a)(3) of ERISA or Section 414(f) of the Code.

          "Negotiated  Interest  Period"  means,  with respect to any Negotiated
     Rate Loan, the period  commencing on the day such  Negotiated  Rate Loan is
     made or converted  to a Negotiated  Rate Loan and ending on the date agreed
     upon  by the  Company  and  the  Bank,  provided,  however,  that  (a)  any
     Negotiated  Interest  Period which  commences on the last Business Day of a
     calendar   month  (or  on  any  day  for  which  there  is  no  numerically
     corresponding day in the appropriate  subsequent  calendar month) shall end
     on the last Business Day of the appropriate  subsequent calendar month, (b)
     each Negotiated Interest Period which would otherwise end on a day which is
     not a Business  Day shall end on the next  succeeding  Business  Day or, if
     such next  succeeding  Business Day falls in the next  succeeding  calendar
     month, on the next preceding  Business Day, and (c) no Negotiated  Interest
     Period which would end after the Termination Date shall be permitted.

          "Negotiated  Rate" means the rate which is  determined by the Bank, in
     its  discretion,  which is adjusted  for  reserves  and costs and  expenses
     associated with the currency.

          "Negotiated  Rate Loan"  means any Loan which  bears  interest  at the
     Negotiated Rate.

          "Note" means the Revolving Credit Note.

          "Overdue  Rate" means (a) in respect of  principal  of  Floating  Rate
     Loans,  a rate per annum that is equal to the sum of three percent (3%) per
     annum plus the Floating  Rate,  (b) in respect of  principal of  Eurodollar
     Rate Loans, a rate per annum that is equal to the sum of three percent (3%)
     per annum  plus the per annum rate in effect  thereon  until the end of the
     then current Eurodollar  Interest Period for such Loan and,  thereafter,  a
     rate per  annum  that is equal to the sum of three  percent  (3%) per annum
     plus the Floating Rate, (c) in respect of Negotiated Rate Loans, a rate per
     annum that is equal to the sum of three percent (3%) per annum plus the per
     annum rate in effect  thereon until the end of the then current  Negotiated
     Interest Period for such Loan, and, thereafter, at a rate per annum that is
     equal to the sum of three  percent (3%) per annum plus the  Floating  Rate,
     and (c) in respect of other amounts payable by the Company hereunder (other
     than interest),  a per annum rate that is equal to the sum of three percent
     (3%) per annum plus the Floating Rate.

          "PBGC" means the Pension Benefit  Guaranty  Corporation and any entity
     succeeding to any or all of its functions under ERISA.

          "Permitted Liens" means Liens permitted by Section 5.2(f) hereof.

                                        9
<PAGE>
          "Person" or "person"  shall include an individual,  a corporation,  an
     association,  a partnership,  a trust or estate, a joint stock company,  an
     unincorporated  organization, a joint venture, a trade or business (whether
     or not incorporated),  a government (foreign or domestic) and any agency or
     political subdivision thereof, or any other entity.

          "Plan" means, with respect to any person, any pension plan (other than
     a  Multiemployer  Plan)  subject  to Title  IV of  ERISA or to the  minimum
     funding  standards of Section 412 of the Code which has been established or
     maintained  by such  person,  any  Subsidiary  of such  person or any ERISA
     Affiliate,  or by any other person if such person,  any  Subsidiary of such
     person or any ERISA  Affiliate  could have  liability  with respect to such
     pension plan.

          "Prime Rate" means the per annum rate  announced by the Bank from time
     to time as its "prime rate" (it being acknowledged that such announced rate
     may not  necessarily  be the lowest rate  charged by the Bank to any of its
     customers), which Prime Rate shall change simultaneously with any change in
     such announced rate.

          "Prohibited  Transaction"  means any  transaction  involving  any Plan
     which is proscribed by Section 406 of ERISA or Section 4975 of the Code.

          "Reportable  Event" means a  reportable  event as described in Section
     4043(b) of ERISA  including  those  events as to which the thirty  (30) day
     notice period is waived under Part 2615 of the  regulations  promulgated by
     the PBGC under ERISA.

          "Revolving  Credit  Loans"  means the  borrowings  under  Section  2.4
     evidenced by the Revolving Credit Note and made pursuant to Section 2.1 and
     "Revolving Credit Loan" means any of the Revolving Credit Loans.

          "Revolving  Credit  Note"  means any  promissory  note of the  Company
     evidencing the Revolving Credit Loans, in substantially the form of Exhibit
     A, as  amended  or  modified  from  time  to time  and  together  with  any
     promissory note or notes issued in exchange or replacement therefor.

          "S/L/C"  shall have the meaning  ascribed to it in the  definition  of
     "Letter of Credit".

          "Security Agreement" means the Security Agreement dated June 30, 1994,
     entered  into by the Company  for the  benefit of the Bank  pursuant to the
     1994 Credit Agreement, as confirmed by a Confirmation of Security Agreement
     entered into by the Company in substantially  the form of Exhibit E, and as
     amended, modified, and confirmed from time to time.

          "Security Documents" means, collectively,  the Security Agreement, and
     all other related agreements and documents,  including financing statements
     and similar documents,

                                       10
<PAGE>
     delivered  pursuant to this  Agreement  or  otherwise  entered  into by any
     person to secure the Loans.

          "Subsidiary"  of any  person  means  any  other  person  (whether  now
     existing or hereafter organized or acquired) in which (other than directors
     qualifying shares required by law) at least a majority of the securities or
     other  ownership  interests of each class having  ordinary  voting power or
     analogous right (other than  securities or other ownership  interests which
     have such power or right only by reason of the happening of a contingency),
     at the  time as of  which  any  determination  is being  made,  are  owned,
     beneficially  and of record,  by such person or by one or more of the other
     Subsidiaries of such person or by any combination thereof. Unless otherwise
     specified, reference to "Subsidiary" means a Subsidiary of the Company.

          "Tangible  Net Worth" of any  person  means,  as of any date,  (a) the
     amount of any capital stock,  paid-in  capital and similar equity  accounts
     plus (or minus in the case of a deficit)  the capital  surplus and retained
     earnings of such person and the amount of any foreign currency  translation
     adjustment account shown as a capital account of such person,  less (b) the
     net book value of all items of the following  character  which are included
     in the assets of such person: (i) goodwill,  including without  limitation,
     the  excess of cost over book  value of any  asset,  (ii)  organization  or
     experimental  expenses,  (iii) unamortized debt discount and expense,  (iv)
     patents,  trademarks,  trade names and copyrights, (v) treasury stock, (vi)
     deferred  taxes (but only to the extent that the deferred taxes shown as an
     asset on the Company's  balance sheet exceeds the deferred taxes shown as a
     liability  on the  Company's  balance  sheet) and deferred  charges,  (vii)
     franchises,  licenses and permits, and (viii) other assets which are deemed
     intangible assets under generally accepted accounting principles.

          "Termination  Date"  means the  earlier to occur of (a) the  Automatic
     Termination  Date,  and (b) the  date on  which  the  Commitment  shall  be
     terminated pursuant to Section 2.2 or 6.2.

          "Total  Liabilities"  of  any  person  means,  as  of  any  date,  all
     obligations  which,  in  accordance  with  generally  accepted   accounting
     principles,  are or should be classified as  liabilities on a balance sheet
     of such person.

          "Unfunded Benefit  Liabilities"  means, with respect to any Plan as of
     any date,  the amount of the unfunded  benefit  liabilities  determined  in
     accordance with Section 4001(a)(18) or ERISA.

     1.2 Other  Definitions;  Rules of Construction.  As used herein,  the terms
"Bank", "Company",  "1994 Credit Agreement",  "1997 Credit Agreement", and "this
Agreement"  shall  have  the  respective   meanings   ascribed  thereto  in  the
introductory  paragraph of this Agreement.  Such terms,  together with the other
terms  defined in Section  1.1,  shall  include both the singular and the plural
forms  thereof and shall be construed  accordingly.  All  computations  required
hereunder  and all  financial  terms used herein  shall be made or  construed in
accordance with generally accepted

                                       11

<PAGE>
accounting  principles  unless such principles are inconsistent with the express
requirements  of  this  Agreement.  Use of the  terms  "herein",  "hereof",  and
"hereunder" shall be deemed references to this Agreement in its entirety and not
to the Section or clause in which such term appears.  References to  "Sections",
"subsections"  and "Exhibits"  shall be to Sections,  subsections  and Exhibits,
respectively, of this Agreement unless otherwise specifically provided.

                                    ARTICLE 2
                                 THE COMMITMENT

     2.1 Commitment of the Bank.  The Bank agrees,  subject to the terms of this
Agreement,  to make Revolving Credit Loans  denominated in Dollars or any Agreed
Currency to the Company  pursuant  to Section 2.4 and Section  3.9,  and to make
Letter of Credit Advances denominated in Dollars only to the Company pursuant to
Section 2.4,  from time to time from and  including  the  Effective  Date to but
excluding the Termination  Date, not to exceed in aggregate  principal amount at
any time  outstanding  the lesser of (i) the amount of the Borrowing  Base as of
the close of business on the last day of the month next  preceding  the date any
such  Advance is made and (ii) the amount of the  Commitment  as of the date any
such Advance is made,  provided,  that the aggregate  principal  amount of S/L/C
Advances  outstanding  at any time shall not exceed  $1,000,000,  the  aggregate
amount  of  C/L/C  Advances  shall  not  exceed  $2,000,000,  and the  aggregate
principal amount of Loans made in Agreed Currency  outstanding at any time shall
not exceed the Equivalent Amount of $5,000,000.

     2.2 Termination and Reduction of Commitment. (a) The Company shall have the
right to terminate or reduce the  Commitment  at any time and from time to time,
provided that (i) the Company shall give notice of such termination or reduction
to the Bank specifying the amount and effective date thereof,  (ii) each partial
reduction of the  Commitment  shall be in a minimum amount of $500,000 and in an
integral  multiple of $500,000,  (iii) no such termination or reduction shall be
permitted  with respect to any portion of the  Commitment  as to which a request
for a Loan or a  Letter  of  Credit  Advance  pursuant  to  Section  2.4 is then
pending,  and (iv) the  Commitment may not be terminated if any Loans or Letters
of Credit are then outstanding and may not be reduced below the principal amount
of Loans and Letters of Credit then  outstanding.  The Commitment or any portion
thereof  terminated or reduced pursuant to this Section 2.2, whether optional or
mandatory, may not be reinstated.

          (b) For  purposes of this  Agreement,  a Letter of Credit (i) shall be
     deemed  outstanding  in an amount  equal to the sum of the  maximum  amount
     available  to be drawn under the  related  Letter of Credit on or after the
     date of  determination  and on or before the stated  expiry  date  thereof,
     which shall not exceed  twelve (12) months from the date of issuance,  plus
     the  amount of any draws  under  such  Letter of Credit  that have not been
     reimbursed as provided in Section 3.9, and (ii) shall be deemed outstanding
     at all times on and before such stated  expiry date or such earlier date on
     which all  amounts  available  to be drawn under such Letter of Credit have
     been  fully  drawn,   and  thereafter   until  all  related   reimbursement
     obligations have been paid pursuant to Section 3.9.

                                       12
<PAGE>
     2.3 Fees.

          (a) The  Company  agrees  to pay to the Bank a  commitment  fee on the
     daily  average  unused  amount of the  Commitment,  for the period from the
     Effective  Date to but excluding the  Termination  Date, at a rate equal to
     one-quarter of one percent (1/4 of 1%) per annum.  Accrued  commitment fees
     shall be  payable  quarterly  in  arrears on each  Interest  Payment  Date,
     commencing  on the  first  such  day  occurring  after  the  date  of  this
     Agreement,  and on the  Termination  Date. For purposes of calculating  the
     commitment fee, S/L/Cs shall be considered  usage,  but C/L/Cs shall not be
     considered usage.

          (b) In addition to the  commitment  fees  payable  pursuant to Section
     2.3(a),  the Company  agrees to pay to the Bank an  arrangement  fee in the
     amount of $25,000, payable on or prior to the Effective Date.

          (c) On or before the date of  issuance  of any  Letter of Credit,  the
     Company  agrees to pay to the Bank (i) a fee computed at the rate per annum
     set forth in the chart below of the maximum  amount  available  to be drawn
     from time to time under any S/L/C for the  period  from and  including  its
     issuance date to and including its stated expiry date,  (ii) a fee computed
     at the rate to be agreed upon by the Company and the Bank from time to time
     under any  C/L/C,  and (iii)  such  other  customary  administrative  fees,
     charges and expenses of the Bank in respect of the  issuance,  negotiation,
     acceptance,  amendment,  transfer  and  payment  of any Letter of Credit or
     otherwise  payable  pursuant to the application  and related  documentation
     under which any Letter of Credit is issued. Such fees are nonrefundable and
     the Company  shall not be entitled to any rebate of any portion  thereof if
     such Letter of Credit does not remain outstanding through its stated expiry
     date or for any other reason.

                    Ratio calculated
                    under Section 5.2(a)                       Rate
                    --------------------                       ----

               (i)      Less than or equal to
                        1.5 to 1.0                             1.75%
               (ii)     Greater than 1.5 to 1.0 but
                        less than or equal to 2.0 to 1.0       2.0 %
               (iii)    Greater than 2.0 to 1.0 but
                        less than or equal to 2.5 to 1.0       2.25%
               (iv)     Greater than 2.5 to 1.0 but
                        less than or equal to 3.0 to 1.0       2.50%
               (v)      Greater than 3.0 to 1.0                2.75%

     2.4 Disbursement of Loans.

          (a) The  Company  shall give the Bank  notice of its  request for each
     Revolving Credit Loan or Letter of Credit Advance in substantially the form
     of Exhibit B not later than 10:00  a.m.  Detroit  time or 10:00 a.m.  local
     time of the Applicable Lending Installation if

                                       13
<PAGE>
     such request is for a Negotiated  Rate Loan (i) three  Eurodollar  Business
     Days prior to the date a Revolving Credit Loan is requested to be made if a
     Revolving  Credit Loan is to be made as a Eurodollar Rate Loan, (ii) on the
     date  such  Loan is  requested  to be  made  if  such  Loan to be made is a
     Floating  Rate  Loan,  (iii)  three  Business  Days  prior  to  the  date a
     Negotiated Rate Loan is requested to be made if a Revolving  Credit Loan is
     to be made as a Negotiated  Rate Loan, and (iv) five Business Days prior to
     the date any Letter of Credit Advance is requested to be made, which notice
     shall  specify  whether a  Eurodollar  Rate Loan,  Floating  Rate  Loan,  a
     Negotiated Rate Loan or a Letter of Credit Advance is requested and, in the
     case of each requested Eurodollar Rate Loan, the Eurodollar Interest Period
     to be  initially  applicable  to such  Loan.  Subject  to the terms of this
     Agreement, the proceeds of each such requested Loan shall be made available
     to the Company by depositing the proceeds thereof, in immediately available
     funds, in an account maintained and designated by the Company at the Bank.

          (b)  Subject to the terms of this  Agreement,  the  Company may borrow
     Revolving  Credit  Loans under this Section 2.4,  prepay  Revolving  Credit
     Loans under  Section 3.1, and  reborrow  Revolving  Credit Loans under this
     Section 2.4.

     2.5 Conditions for First  Disbursement.  The obligation of the Bank to make
the first Loan  hereunder  is  subject  to receipt by the Bank of the  following
documents  and  completion  of the  following  matters,  in form  and  substance
satisfactory to the Bank:

          (a) Charter Documents.  Certificates of recent date of the appropriate
     authority or official of the Company's state of incorporation certifying as
     to the  Company's  good  standing and  corporate  existence,  together with
     copies of the Company's Articles of Incorporation, certified as of a recent
     date by such  authority or official and certified as true and correct as of
     the Effective Date by a duly authorized officer of the Company;

          (b) By-Laws and Corporate Authorizations. Copies of the by-laws of the
     Company,  together with all  authorizing  resolutions and evidence of other
     corporate action taken by the Company to authorize the execution, delivery,
     and  performance  by the  Company of this  Agreement,  the  Notes,  and the
     Security  Documents  to which  it is a party  and the  consummation  by the
     Company of the  transactions  contemplated  hereby,  certified  as true and
     correct  as of the  Effective  Date  by a duly  authorized  officer  of the
     Company;

          (c) Incumbency Certificate.  Certificates of incumbency of the Company
     containing,  and attesting to the  genuineness  of, the signatures of those
     officers authorized to act on behalf of the Company in connection with this
     Agreement, the Notes, and the Security Documents to which it is a party and
     the  consummation by the Company of the transactions  contemplated  hereby,
     certified as true and correct as of the Effective Date by a duly authorized
     officer of the Company;

          (d) Note.  The  Revolving  Credit Note duly  executed on behalf of the
     Company;

                                       14
<PAGE>
          (e) Security Documents.  A confirmation of the Security Agreement duly
     executed  on behalf of the Company  substantially  in the form of Exhibit E
     granting or confirming to the Bank the collateral and security  intended to
     be provided pursuant to Section 2.10, together with:

               (i) Recording,  Filing, Etc. Evidence of the recordation,  filing
          and other action  (including  payment of any applicable taxes or fees)
          in such  jurisdictions  as the Bank may deem  necessary or appropriate
          with  respect  to the  Security  Documents,  including  the  filing of
          financing  statements  and similar  documents  which the Bank may deem
          necessary or  appropriate to create,  preserve,  or perfect the liens,
          security  interests,  and other  rights  intended to be granted to the
          Bank thereunder, together with Uniform Commercial Code record searches
          in such offices as the Bank may request; and

               (ii) Casualty and Other Insurance. Evidence that the casualty and
          other insurance  required  pursuant to Section  5.1(c),  and paragraph
          1(e) of the Security Agreement, is in full force and effect.

          (f) Legal Opinions.  The favorable  written opinion of counsel for the
     Company  with respect to each of the matters set forth in Article IV (other
     than Section 4.6) and as to such other  matters as the Bank may  reasonably
     request; and

          (g) Fees. The arrangement fee described in Section 2.3(b).

     2.6 Further Conditions for Disbursement. The obligation of the Bank to make
any Advance  (including  the first  Advance) or any  continuation  or conversion
under  Section  2.7, is further  subject to the  satisfaction  of the  following
conditions precedent:

          (a) The representations and warranties  contained in Article IV hereof
     and in the  Security  Documents  shall be true and correct on and as of the
     date such  Advance is made (both  before and after such Advance is made) as
     if such representations and warranties were made on and as of such date;

          (b) No Event of Default,  and no event or condition which might become
     an Event of Default with notice or lapse of time,  or both,  shall exist or
     shall have  occurred  and be  continuing  on the date such  Advance is made
     (whether before or after such Advance is made); and

          (c) The Bank  shall  have  received  the  Borrowing  Base  Certificate
     required  pursuant to Section  5.1(d)(v) as of the close of business on the
     last day of the month next preceding the date such Advance is made.

          (d) In the case of any Letter of Credit  Advance,  the  Company  shall
     have delivered to the Bank an application  for the related Letter of Credit
     and other related documentation

                                       15
<PAGE>
     requested by and acceptable to the Bank,  appropriately  completed and duly
     executed on behalf of the Company.

The Company  shall be deemed to have made a  representation  and warranty to the
Bank at the  time  of the  making  of each  Advance,  and  the  continuation  or
conversion  of each Loan, to the effect set forth in clauses (a) and (b) of this
Section 3.3.

     2.7 Subsequent Elections as to Loans. The Company may elect (a) to continue
a Eurodollar Rate Loan, or a portion  thereof,  as a Eurodollar Rate Loan or (b)
may elect to convert a Eurodollar Rate Loan, or a portion thereof, to a Floating
Rate Loan or (c) elect to convert a Floating Rate Loan, or a portion thereof, to
a Eurodollar  Rate Loan,  in each case by giving  notice  thereof to the Bank in
substantially  the form of Exhibit C not later than 10:00 a.m.  Detroit time (i)
three  Eurodollar  Business Days prior to the date any such  continuation  of or
conversion to a Eurodollar  Rate Loan is to be  effective,  and (ii) on the date
such continuation or conversion is to be effective in all other cases,  provided
that an outstanding  Eurodollar  Rate Loan may only be converted on the last day
of the  then-current  Eurodollar  Interest Period with respect to such Loan, and
provided, further, if a continuation of a Loan as, or a conversion of a Loan to,
a  Eurodollar  Rate Loan is  requested,  such  notice  shall  also  specify  the
Eurodollar  Interest Period to be applicable  thereto upon such  continuation or
conversion, and, provided, further, that a Eurodollar Rate Loan may be requested
only if the aggregate  outstanding principal amount of the Eurodollar Rate Loans
(including  the  requested  Loan) plus the Letter of Credit  Advances  would not
exceed the  Guaranty  Amount.  If the Company  shall not timely  deliver  such a
notice with respect to any  outstanding  Eurodollar Rate Loan, the Company shall
be deemed to have  elected to convert  such  Eurodollar  Rate Loan to a Floating
Rate Loan on the last day of the  then-current  Eurodollar  Interest Period with
respect to such Loan.

     2.8  Limitation  of  Requests  and  Elections.  Notwithstanding  any  other
provision of this Agreement to the contrary,  if, upon receiving a request for a
Eurodollar Rate Loan pursuant to Section 2.4, or a request for a continuation of
a Eurodollar Rate Loan as a Eurodollar Rate Loan of the then-existing type, or a
request  for a  conversion  of a Floating  Rate Loan to a  Eurodollar  Rate Loan
pursuant to Section 2.7, (a) in the case of any Eurodollar  Rate Loan,  deposits
in Dollars for periods  comparable to the Eurodollar  Interest Period elected by
the Company are not available to the Bank in the relevant interbank or secondary
market,  or (b) the  Eurodollar  Rate will not adequately and fairly reflect the
cost to the Bank of making,  funding or maintaining the related  Eurodollar Rate
Loan, or (c) by reason of national or  international  financial,  political,  or
economic  conditions  or by reason  of any  applicable  law,  treaty,  rule,  or
regulation  (whether  domestic or foreign) now or  hereafter  in effect,  or the
interpretation or administration  thereof by any governmental  authority charged
with the  interpretation  or administration  thereof,  or compliance by the Bank
with any  guideline,  request,  or directive of such  authority  (whether or not
having the force of law), including without limitation exchange controls,  it is
impracticable,  unlawful  or  impossible  for the  Bank  (i) to make or fund the
relevant  Eurodollar Rate Loan, or (ii) to continue such Eurodollar Rate Loan as
a Eurodollar  Rate Loan,  or (iii) to convert a Loan to a Eurodollar  Rate Loan,
then the Company shall not be entitled, so long as such circumstances  continue,
to request a Eurodollar  Rate Loan pursuant to Section 2.4 or a continuation  of
or conversion to a Eurodollar Rate

                                       16
<PAGE>
Loan  pursuant to Section  2.7. In the event that such  circumstances  no longer
exist, the Bank shall again consider requests for Eurodollar Rate Loans pursuant
to Section 2.4, and requests for  continuations of and conversions to Eurodollar
Rate Loans of the affected type pursuant to Section 2.7.

     2.9 Minimum  Amounts.  Except for (a) Loans and  conversions  thereof which
exhaust the entire  remaining  amount of the Commitment,  and (b) conversions or
payments  required pursuant to Section 3.1(c) or Section 3.7, each Loan and each
continuation or conversion  pursuant to Section 2.7 and each prepayment  thereof
shall be in a minimum  amount of $100,000  with respect to Floating  Rate Loans,
with respect to Eurodollar  Rate Loans, a minimum  amount of $500,000,  and with
respect to  Negotiated  Rate Loans,  such  minimum  amount as agreed upon by the
Bank.

     2.10  Security  and  Collateral.  To  secure  the  payment  when due of the
Revolving  Credit  Note,  and all other  obligations  of the Company  under this
Agreement to the Bank,  the Company shall  execute and deliver,  to the Bank the
Security Documents granting or confirming  security interests in all present and
future  accounts,  chattel  paper,  inventory,  equipment,  and  fixtures of the
Company  provided,  however,  that  the  Company  need  not  grant to the Bank a
security interest in fixed assets which are not Eligible Fixed Assets.

                                    ARTICLE 3
                        PAYMENTS AND PREPAYMENTS OF LOANS

     3.1 Principal Payments.

          (a) Revolving  Credit Loans.  Unless earlier payment is required under
     this Agreement,  the Company shall pay to the Bank on the Termination  Date
     the entire outstanding principal amount of the Revolving Credit Loans.

          (b) Prepayment of Loans.  The Company may at any time and from time to
     time  prepay  all or a portion of the Loans,  without  premium or  penalty,
     provided  that (i) the Company may not prepay any portion of any Loan as to
     which an election for a  continuation  of or a  conversion  to a Fixed Rate
     Loan is pending pursuant to Section 2.7, and (ii) unless earlier payment is
     required under this  Agreement,  any Fixed Rate Loan may only be prepaid on
     the last day of the then-current  Eurodollar  Interest Period or Negotiated
     Interest Period, as the case may be, with respect to such Loan.

          (c) Exceeding Borrowing Base. If at any time the aggregate outstanding
     principal  amount of the  Revolving  Credit Loans plus the Letter of Credit
     Advances shall exceed the  then-existing  Borrowing Base, the Company shall
     forthwith pay to the Bank an amount not less than the amount of such excess
     for application to the outstanding principal amount of the Revolving Credit
     Loans.

     3.2 Interest  Payments.  The Company  shall pay interest to the Bank on the
unpaid principal amount of each Loan, for the period commencing on the date such
Loan is made until such

                                       17
<PAGE>
Loan is paid in full, on each Interest Payment Date and at maturity  (whether at
stated maturity, by acceleration or otherwise), and thereafter on demand, at the
following rates per annum:

          (a) With respect to Loans denominated in Dollars:

               (i) During such periods  that such Loan is a Floating  Rate Loan,
          the Floating Rate; and

               (ii)  During such  periods  that such Loan is a  Eurodollar  Rate
          Loan,  the  Eurodollar  Rate  applicable to such Loan for each related
          Eurodollar Interest Period.

          (b) With  respect to Loans  denominated  in any Agreed  Currency,  the
     Negotiated Rate.

Notwithstanding  the  foregoing  paragraphs  (a) and (b), the Company  shall pay
interest on demand at the Overdue Rate on the  outstanding  principal  amount of
any Loan and any other  amount  payable by the  Company  hereunder  (other  than
interest)  which is not paid in full when due  (whether at stated  maturity,  by
acceleration,  or otherwise)  for the period  commencing on the due date thereof
until the same is paid in full.

     3.3 Payment Method.  All payments to be made by the Company  hereunder will
be made in Dollars and in immediately available funds to the Bank at its address
set forth in Section  7.2 not later than 1:00 p.m.  Detroit  time on the date on
which such payment shall become due.  Payments  received after 1:00 p.m. Detroit
time shall be deemed to be payments made prior to 1:00 p.m.  Detroit time on the
next succeeding Business Day.

     3.4 No Setoff or  Deduction.  All payments of principal and interest on the
Loans and other amounts  payable by the Company  hereunder  shall be made by the
Company  without  setoff or  counterclaim,  and free and clear of,  and  without
deduction  or  withholding  for, or on account of, any present or future  taxes,
levies, imposts, duties, fees, assessments, or other charges of whatever nature,
imposed by any governmental  authority,  or by any department,  agency, or other
political subdivision or taxing authority.

     3.5 Payment on Non-Business Day; Payment Computations.  Except as otherwise
provided  in  this  Agreement  to the  contrary,  whenever  any  installment  of
principal of, or interest on, any Loan or any other amount due hereunder becomes
due and payable on a day which is not a Business Day, the maturity thereof shall
be  extended  to the  next  succeeding  Business  Day  and,  in the  case of any
installment  of  principal,  interest  shall be payable  thereon at the rate per
annum  determined  in  accordance  with this  Agreement  during such  extension.
Computations  of interest and other  amounts due under this  Agreement  shall be
made on the basis of a year of 360 days for the actual  number of days  elapsed,
including the first day but excluding the last day of the relevant period.

                                       18
<PAGE>
     3.6 Additional Costs.

          (a) In the event that any applicable law, treaty,  rule, or regulation
     (whether domestic or foreign) now or hereafter in effect and whether or not
     presently  applicable to the Bank, or any  interpretation or administration
     thereof by any governmental  authority  charged with the  interpretation or
     administration  thereof,  or  compliance  by the Bank  with any  guideline,
     request or directive of any such authority (whether or not having the force
     of law),  shall (i) affect the basis of taxation of payments to the Bank of
     any amounts  payable by the Company under this Agreement  (other than taxes
     imposed on the overall net income of the Bank, by the  jurisdiction,  or by
     any political subdivision or taxing authority of any such jurisdiction,  in
     which the Bank has its principal office),  or (ii) shall impose,  modify or
     deem applicable any reserve, special deposit or similar requirement against
     assets of,  deposits with or for the account of, or credit  extended by the
     Bank,  or (iii)  shall  impose  any other  condition  with  respect to this
     Agreement,  the Commitment,  the Notes, or the Loans, and the result of any
     of the foregoing is to increase the cost to the Bank of making, funding, or
     maintaining  any  Fixed  Rate  Loan  or to  reduce  the  amount  of any sum
     receivable  by the Bank  thereon,  then the Company  shall pay to the Bank,
     from time to time, upon request by the Bank,  additional amounts sufficient
     to compensate the Bank for such increased cost or reduced sum receivable to
     the extent, in the case of any Fixed Rate Loan, the Bank is not compensated
     therefor in the  computation of the interest rate  applicable to such Fixed
     Rate Loan. A statement as to the amount of such  increased  cost or reduced
     sum receivable, prepared in good faith and in reasonable detail by the Bank
     and submitted by the Bank to the Company,  shall be conclusive  and binding
     for all purposes absent manifest error in computation.

          (b) In the event that any applicable law, treaty,  rule, or regulation
     (whether domestic or foreign) now or hereafter in effect and whether or not
     presently  applicable to the Bank, or any  interpretation or administration
     thereof by any governmental  authority  charged with the  interpretation or
     administration  thereof,  or  compliance  by the Bank  with any  guideline,
     request,  or  directive  of any such  authority  (whether or not having the
     force of law),  including any  risk-based  capital  guidelines,  affects or
     would affect the amount of capital required or expected to be maintained by
     the Bank (or any corporation  controlling the Bank) and the Bank determines
     that the amount of such capital is increased by or based upon the existence
     of the Bank's  obligations  hereunder  and such  increase has the effect of
     reducing   the  rate  of  return  on  the  Bank's   (or  such   controlling
     corporation's)  capital as a consequence of such obligations hereunder to a
     level  below that which the Bank (or such  controlling  corporation)  could
     have achieved but for such  circumstances  (taking into  consideration  its
     policies with respect to capital  adequacy) by an amount deemed by the Bank
     to be material,  then the Company shall pay to the Bank, from time to time,
     upon request by the Bank,  additional  amounts sufficient to compensate the
     Bank (or such  controlling  corporation)  for any increase in the amount of
     capital and reduced rate of return which the Bank reasonably  determines to
     be  allocable  to the  existence  of the Bank's  obligations  hereunder.  A
     statement as to the amount of such compensation, prepared in good faith and
     in reasonable  detail by the Bank and submitted by the Bank to the Company,
     shall be conclusive and binding for all purposes  absent  manifest error in
     computation.

                                       19
<PAGE>
     3.7 Illegality  and  Impossibility.  In the event that any applicable  law,
treaty,  rule, or regulation  (whether  domestic or foreign) now or hereafter in
effect  and  whether  or  not   presently   applicable   to  the  Bank,  or  any
interpretation or administration  thereof by any governmental  authority charged
with the  interpretation  or administration  thereof,  or compliance by the Bank
with any  guideline,  request,  or directive of such  authority  (whether or not
having the force of law), including without limitation exchange controls,  shall
make it unlawful  or  impossible  for the Bank to  maintain  any Fixed Rate Loan
under this Agreement,  the Company shall upon receipt of notice thereof from the
Bank,  repay in full the  then-outstanding  principal  amount of each Fixed Rate
Loan so  affected,  together  with all accrued  interest  thereon to the date of
payment and all amounts owing to the Bank under Section 3.8, (a) on the last day
of the then-current Eurodollar Interest Period or Negotiated Interest Period, as
the case may be,  applicable  to such Loan if the Bank may lawfully  continue to
maintain such Loan to such day, or (b)  immediately if the Bank may not continue
to maintain such Loan to such day.

     3.8  Indemnification.  If the Company  makes any payment of principal  with
respect  to any  Fixed  Rate  Loan on any  other  date  than  the  last day of a
Eurodollar  Interest Period or Negotiated  Interest Period,  as the case may be,
applicable  thereto  (whether  pursuant to Section 3.1(c),  Section 3.7, Section
6.2, or otherwise),  or if the Company fails to borrow any Fixed Rate Loan after
notice has been given to the Bank in  accordance  with  Section  2.4,  or if the
Company fails to make any payment of principal or interest in respect of a Fixed
Rate Loan when due,  the  Company  shall  reimburse  the Bank on demand  for any
resulting loss or expense incurred by the Bank, including without limitation any
loss  incurred in  obtaining,  liquidating,  or  employing  deposits  from third
parties,  whether or not the Bank shall have  funded or  committed  to fund such
Loan.  A statement  as to the amount of such loss or  expense,  prepared in good
faith  and in  reasonable  detail by the Bank and  submitted  by the Bank to the
Company,  shall be conclusive and binding for all purposes absent manifest error
in  computation.  Calculation  of all  amounts  payable  to the Bank  under this
Section  3.8 shall be made as though  the Bank  shall  have  actually  funded or
committed  to fund the  relevant  Fixed Rate Loan  through  the  purchase  of an
underlying  deposit  in an amount  equal to the amount of such Loan and having a
maturity  comparable  to the related  Eurodollar  Interest  Period or Negotiated
Interest Period, as the case may be; provided,  however,  that the Bank may fund
any Fixed Rate Loan in any manner it sees fit and the foregoing assumption shall
be  utilized  only for the purpose of  calculating  amounts  payable  under this
Section 3.8.

     3.9 Letter of Credit Reimbursement Payments.

          (a) The  Company  agrees to pay to the  Bank,  on the day on which the
     Bank shall  honor a draft or other  demand for  payment  presented  or made
     under any Letter of Credit,  an amount equal to the amount paid by the Bank
     in respect of such draft or other  demand  under such  Letter of Credit and
     all  expenses  paid or incurred by the Bank  relative  thereto.  Unless the
     Company  shall have made such  payment  to the Bank on such day,  upon each
     such payment by the Bank, the Bank shall be deemed to have disbursed to the
     Company,  and the  Company  shall be deemed to have  elected to satisfy its
     reimbursement  obligation by, a Revolving  Credit Loan bearing  interest at
     the  Floating  Rate in an amount equal to the amount so paid by the Bank in
     respect of such draft or other demand under such Letter of Credit.

                                       20
<PAGE>
     Such Revolving Credit Loan shall be disbursed  notwithstanding  any failure
     to satisfy any conditions for disbursement of any Loan set forth in Article
     II and,  to the  extent of the  Revolving  Credit  Loan so  disbursed,  the
     reimbursement  obligation  of the Company  under this  Section 3.9 shall be
     deemed satisfied.

          (b) The reimbursement obligation of the Company under this Section 3.9
     shall be absolute,  unconditional, and irrevocable and shall remain in full
     force and effect until all obligations of the Company to the Bank hereunder
     shall have been satisfied, and such obligations of the Company shall not be
     affected,  modified, or impaired upon the happening of any event, including
     without limitation any of the following,  whether or not with notice to, or
     the consent of, the Company:

               (i) Any lack of  validity  or  enforceability  of any  Letter  of
          Credit or any documentation relating to any Letter of Credit or to any
          transaction  related in any way to such Letter of Credit (the  "Letter
          of Credit Documents");

               (ii)  Any  amendment,   modification,  waiver,  consent,  or  any
          substitution,  exchange  or  release  of or  failure  to  perfect  any
          interest in collateral or security,  with respect to any of the Letter
          of Credit Documents;

               (iii) The existence of any claim, setoff,  defense or other right
          which the Company may have at any time against any  beneficiary or any
          transferee  of any Letter of Credit (or any  persons or  entities  for
          whom any such  beneficiary or any such transferee may be acting),  the
          Bank or any other person or entity,  whether in connection with any of
          the Letter of Credit Documents,  the transactions  contemplated herein
          or therein or any unrelated transactions.

               (iv) Any draft or other statement or document presented under any
          Letter  of  Credit  proving  to be  forged,  fraudulent,  invalid,  or
          insufficient  in any respect or any statement  therein being untrue or
          inaccurate in any respect;

               (v)  Payment by the Bank to the  beneficiary  under any Letter of
          Credit against  presentation of documents which do not comply with the
          terms of the Letter of Credit,  including  failure of any documents to
          bear any reference or adequate reference to such Letter of Credit;

               (vi) Any  failure,  omission,  delay,  or lack on the part of the
          Bank or any party to any of the Letter of Credit Documents to enforce,
          assert,  or exercise any right,  power,  or remedy  conferred upon the
          Bank or any such party  under this  Agreement  or any of the Letter of
          Credit  Documents,  or any other acts or  omissions on the part of the
          Bank or any such party;

               (vii) Any other event or circumstance  that would, in the absence
          of this clause, result in the release or discharge by operation of law
          or otherwise of the

                                       21
<PAGE>
          Company from the performance or observance of any obligation, covenant
          or agreement contained in this Section 3.9.

     No setoff, counterclaim,  reduction, or diminution of any obligation or any
defense of any kind or nature  which the  Company  has or may have  against  the
beneficiary of any Letter of Credit shall be available  hereunder to the Company
against the Bank.  Nothing in this  Section  3.9 shall  impair the rights of the
Company set forth in Section 7.5(b).

                                    ARTICLE 4
                         REPRESENTATIONS AND WARRANTIES

     The Company represents and warrants that:

     4.1 Corporate Existence and Power. Each of the Company and the Guarantor is
a corporation  duly organized,  validly  existing and in good standing under the
laws of its state of incorporation, and is duly qualified to do business, and is
in good standing,  in all additional  jurisdictions  where such qualification is
necessary  under  applicable  law. Each of the Company and the Guarantor has all
requisite  corporate  power to own or lease the properties  used in its business
and to carry on its  business  as now  being  conducted  and as  proposed  to be
conducted,  and to execute  and  deliver  this  Agreement,  the  Notes,  and the
Security  Documents  to which it is a party and to  engage  in the  transactions
contemplated by this Agreement.

     4.2 Corporate Authority.  The execution,  delivery,  and performance by the
Company  and the  Guarantor  of this  Agreement,  the  Notes,  and the  Security
Documents  to which it is a party  have been duly  authorized  by all  necessary
corporate  action and are not in  contravention of any law, rule, or regulation,
or any judgment,  decree,  writ,  injunction,  order or award of any arbitrator,
court,  or  governmental  authority,  or of the  terms of the  Company's  or the
Guarantor's  respective articles of incorporation or by-laws, or of any contract
or  undertaking to which the Company or the Guarantor is a party or by which the
Company or the Guarantor or their respective  property may be bound or affected,
or result in the  imposition  of any Lien on the Company or its property  except
for Permitted Liens.

     4.3  Binding  Effect.  This  Agreement  is, and the Notes and the  Security
Documents  to which the  Company  or the  Guarantor  is a party  when  delivered
hereunder will be, legal,  valid, and binding obligations of the Company and the
Guarantor,  respectively,  enforceable  against the  Company and the  Guarantor,
respectively, in accordance with their respective terms.

     4.4  Subsidiaries.  The Company has no  Subsidiaries  as of the date hereof
except for DAF Export Corporation, a Barbados corporation.  Each such Subsidiary
and each corporation  becoming a Subsidiary of the Company after the date hereof
is and will be a  corporation  duly  organized,  validly  existing,  and in good
standing under the laws of its jurisdiction of incorporation  and is and will be
duly  qualified  to do  business  in each  additional  jurisdiction  where  such
qualification  is or may be necessary  under  applicable law. Each Subsidiary of
the Company has and will have all requisite  corporate power to own or lease the
properties used in its business and to carry on its

                                       22
<PAGE>
business as now being conducted and as proposed to be conducted. All outstanding
shares of capital  stock of each class of each  Subsidiary  of the Company  have
been and will be validly issued and are and will be fully paid and nonassessable
and are and will be owned, beneficially and of record, by the Company or another
Subsidiary of the Company, free and clear of any Liens.

     4.5 Litigation.  There is no action, suit, or proceeding pending or, to the
best of the  Company's  knowledge,  threatened  against or affecting the Company
before  or by  any  court,  governmental  authority,  or  arbitrator,  which  if
adversely  decided might result,  either  individually or  collectively,  in any
material adverse change in the business,  properties,  operations, or condition,
financial or otherwise,  of the Company or in any material adverse effect on the
legality,  validity,  or  enforceability  of this  Agreement,  any Note,  or any
Security Document and, to the best of the Company's knowledge, there is no basis
for any such action, suit, or proceeding.

     4.6 Financial Condition.  The consolidated balance sheet of the Company and
its Subsidiaries  and the related  consolidated  statements of income,  retained
earnings and changes in financial  position of the Company and its  Subsidiaries
for the fiscal year ended July 3, 1999,  and  reported  on by Arthur  Andersen &
Co.,  independent  certified public  accountants,  and the interim  consolidated
balance sheet and related interim  consolidated  statements of income,  retained
earnings and changes in financial  position of the Company and its Subsidiaries,
as of or for the 1-month  period  ended on July 31,  1999,  copies of which have
been furnished to the Bank, fairly present,  and the financial statements of the
Company  delivered   pursuant  to  Section  5.1(d)  will  fairly  present,   the
consolidated  financial  position of the Company and its  Subsidiaries as at the
respective  dates thereof,  and the results of operations of the Company and its
Subsidiaries  for the  respective  periods  indicated,  all in  accordance  with
generally accepted accounting  principles  consistently applied (subject, in the
case of said interim statements, to year-end audit adjustments).  There has been
no material adverse change in the business, properties, operations or condition,
financial or otherwise,  of the Company and its Subsidiaries since July 3, 1999.
There is no material  Contingent  Liability of the Company that is not reflected
in such financial statements or in the notes thereto.

     4.7 Use of Loans. The Company will use the Loans for its general  corporate
purposes.  Neither the Company nor any Subsidiary  extends or maintains,  in the
ordinary  course  of  business,  credit  for  the  purpose,  whether  immediate,
incidental,  or ultimate, of buying or carrying margin stock (within the meaning
of Regulation U of the Board of Governors of the Federal Reserve System), and no
part  of the  proceeds  of any  Loan  will  be used  for  the  purpose,  whether
immediate,  incidental, or ultimate, of buying or carrying any such margin stock
or  maintaining or extending  credit to others for such purpose.  After applying
the proceeds of each Loan,  such margin stock will not constitute  more than 25%
of the value of the assets  (either of the  Company  alone or of the Company and
its Subsidiaries on a consolidated  basis) that are subject to any provisions of
this  Agreement or any Security  Document  that may cause the Loans to be deemed
secured, directly or indirectly, by margin stock.

     4.8 Consents, Etc. No consent, approval or authorization of or declaration,
registration or filing with any  governmental  authority or any  nongovernmental
person  or  entity,  including  without  limitation  any  creditor,  lessor,  or
stockholder of the Company, is required on the part of the

                                       23
<PAGE>
Company in  connection  with the  execution,  delivery and  performance  of this
Agreement,  the Notes, the Security Documents, or the transactions  contemplated
hereby or as a condition to the  legality,  validity or  enforceability  of this
Agreement, the Notes, or any of the Security Documents.

     4.9 Taxes.  The  Company  and its  Subsidiaries  have filed all tax returns
(federal,  state and local)  required  to be filed and have paid all taxes shown
thereon  to be due,  including  interest  and  penalties,  or  have  established
adequate  financial  reserves on their  respective books and records for payment
thereof.  Neither the Company nor any Subsidiary knows of any actual or proposed
tax  assessment  or any  basis  therefor,  and no  extension  of  time  for  the
assessment of  deficiencies  in any federal or state tax has been granted by the
Company or any Subsidiary.

     4.10  Title to  Properties.  Except as  otherwise  disclosed  in the latest
balance sheet delivered pursuant to Section 4.6 or 5.1(d) of this Agreement, the
Company or one of its  Subsidiaries  has good and marketable fee simple title to
all of the real property, and a valid and indefeasible ownership interest in all
of the other properties and assets (including  without limitation the collateral
subject  to  the  Security  Agreement)   reflected  in  said  balance  sheet  or
subsequently  acquired by the Company or any Subsidiary.  All of such properties
and assets are free and clear of any Lien, except for Permitted Liens.

     4.11 ERISA. The Company,  its  Subsidiaries,  their ERISA  Affiliates,  and
their  respective  Plans are in compliance  in all material  respects with those
provisions  of ERISA and of the Code which are  applicable  with  respect to any
Plan.  No  Prohibited  Transaction  and no  Reportable  Event has occurred  with
respect to any such Plan. None of the Company,  any of its Subsidiaries,  or any
of their ERISA Affiliates is an employer with respect to any Multiemployer Plan.
The Company,  its Subsidiaries,  and their ERISA Affiliates have met the minimum
funding  requirements  under  ERISA and the Code with  respect  to each of their
respective Plans, if any, and have not incurred any liability to the PBGC or any
Plan. The execution,  delivery and performance of this Agreement, the Notes, and
the Security Documents does not constitute a Prohibited Transaction. There is no
material  unfunded  benefit  liability,  determined in  accordance  with Section
4001(a)(18) of ERISA, with respect to any Plan of the Company, its Subsidiaries,
or their ERISA Affiliates.

     4.12 Disclosure.  No report or other information furnished in writing or on
behalf  of the  Company  or the  Guarantor  to the Bank in  connection  with the
negotiation  or   administration   of  this  Agreement   contains  any  material
misstatement  of fact or omits to state any material fact or any fact  necessary
to make the statements contained therein not misleading. Neither this Agreement,
the Notes,  the Security  Documents,  nor any other  document,  certificate,  or
report or statement or other  information  furnished to the Bank by or on behalf
of the Company in connection with the transactions  contemplated hereby contains
any untrue  statement  of a material  fact or omits to state a material  fact in
order to make the statements contained herein and therein not misleading.

                                       24
<PAGE>
                                    ARTICLE 5
                                    COVENANTS

     5.1 Affirmative Covenants. The Company covenants and agrees that, until the
Termination  Date and  thereafter  until payment in full of the principal of and
accrued  interest on the Notes and the  performance of all other  obligations of
the Company under this  Agreement,  unless the Bank shall  otherwise  consent in
writing, it shall, and shall cause each of its Subsidiaries to:

          (a) Preservation of Corporate  Existence,  Etc. Do or cause to be done
     all things  necessary to preserve,  renew and keep in full force and effect
     its legal existence, and its qualification as a foreign corporation in good
     standing in each  jurisdiction  in which such  qualification  is  necessary
     under  applicable  law,  and the  rights,  licenses,  permits,  franchises,
     patents, copyrights, trademarks, and trade names material to the conduct of
     its  businesses;  and  defend  all of the  foregoing  against  all  claims,
     actions, demands, suits, or proceedings at law or in equity or by or before
     any governmental instrumentality or other agency or regulatory authority.

          (b) Compliance with Laws,  Etc.  Comply in all material  respects with
     all applicable  laws,  rules,  regulations,  and orders of any governmental
     authority, whether federal, state, local or foreign, in effect from time to
     time; and pay and discharge promptly when due all taxes,  assessments,  and
     governmental  charges  or  levies  imposed  upon  it or  upon  its  income,
     revenues,  or  property,  before the same  shall  become  delinquent  or in
     default,  except to the extent that payment of any of the foregoing is then
     being  contested in good faith by appropriate  legal  proceedings  and with
     respect to which adequate  financial  reserves have been established on the
     books and records of the Company or the appropriate Subsidiary.

          (c)  Maintenance of Properties;  Insurance.  Maintain,  preserve,  and
     protect all property that is material to the conduct of the business of the
     Company or any of its  Subsidiaries  and keep such property in good repair,
     working order and condition;  and, in addition to that  insurance  required
     under the Security  Documents,  maintain in full force and effect insurance
     with responsible and reputable  insurance companies or associations in such
     amounts,  on such terms, and covering such risks,  including fire and other
     risks insured against by extended coverage and public liability  insurance,
     as is usually carried by companies engaged in similar businesses and owning
     similar properties similarly situated.

          (d) Reporting Requirements. Furnish to the Bank the following:

               (i) Promptly and in any event  within three  calendar  days after
          becoming  aware of the occurrence of any Event of Default or any event
          or  condition  which,  with  notice or lapse of time,  or both,  would
          constitute an Event of Default, together with a statement of the chief
          financial  officer of the Company  setting forth details of such Event
          of Default or such event or condition and the action which the Company

                                       25
<PAGE>
          or the  appropriate  Subsidiary,  as the case may be,  has  taken  and
          proposes to take with respect thereto;

               (ii) As soon as  available  and in any event within 20 days after
          the end of each month, the  consolidated  balance sheet of the Company
          and its  Subsidiaries  as of the end of such  month,  and the  related
          consolidated statements of income, retained earnings and cash flow for
          the  period  commencing  at the end of the  previous  fiscal  year and
          ending  with the end of such  month,  setting  forth  in each  case in
          comparative form the corresponding  figures for the corresponding date
          or period of the preceding  fiscal year, all in reasonable  detail and
          duly certified  (subject to year-end audit  adjustments)  by the chief
          financial officer of the Company as having been prepared in accordance
          with  generally  accepted  accounting  principles,   together  with  a
          certificate of the chief financial  officer of the Company stating (A)
          that no Event of Default or event or condition  which,  with notice or
          lapse of time,  or both,  would  constitute  an Event of Default,  has
          occurred and is continuing or, if an Event of Default or such an event
          or condition has occurred and is continuing, a statement setting forth
          the  details  thereof  and the action  which the Company has taken and
          proposes  to take with  respect  thereto,  and (B) that a  computation
          (which  computation  shall accompany such  certificate and shall be in
          reasonable detail) showing compliance with Sections 5.2(a),  (b), (c),
          and (d) hereof is in conformity with the terms of this Agreement;

               (iii) As soon as available  and in any event within 90 days after
          the end of each fiscal year of the Company, a copy of the consolidated
          balance  sheet of the  Company and its  Subsidiaries  as of the end of
          such fiscal year and the related  consolidated  statements  of income,
          retained earnings and changes in financial position of the Company and
          its  Subsidiaries  for such fiscal year, with a customary audit report
          of  Arthur  Andersen  & Co.,  or other  independent  certified  public
          accountants  selected  by the  Company  and  acceptable  to the  Bank,
          without  qualifications  unacceptable  to the  Bank,  together  with a
          certificate  of such  accountants  stating (A) that they have reviewed
          this  Agreement and stating  further  whether,  in the course of their
          review of such  financial  statements,  they have become  aware of any
          Event of Default or any event or condition which, with notice or lapse
          of time, or both, would  constitute an Event of Default,  and, if such
          an Event of Default or such an event or  condition  then exists and is
          continuing,  a statement  setting forth the nature and status thereof,
          and (B) that a computation  by the Company  (which  computation  shall
          accompany such certificate and shall be in reasonable  detail) showing
          compliance  with  Sections  5.2 (a),  (b),  (c),  and (d) hereof is in
          conformity with the terms of this Agreement;

               (iv) As soon as  available  and in any event within 20 days after
          the  end of  each  month,  a list of all  accounts  receivable  of the
          Company,  aged from the date of invoice,  and a list of inventory then
          held by the Company,  categorized as raw  materials,  work-in-process,
          and finished goods, and valued at the lower of cost or

                                       26
<PAGE>
          market,  each  certified  as true and  correct by the chief  financial
          officer of the Company;

               (v) As soon as  available  and in any event no later than 20 days
          after  the  last  day of each  month,  a  Borrowing  Base  Certificate
          prepared  as of the close of  business  on the last day of such month,
          together with supporting schedules, in form and detail satisfactory to
          the Bank,  setting forth such information as the Bank may request with
          respect to the aging, value,  location and other information  relating
          to the  computation of the Borrowing  Base and the  eligibility of any
          property or assets included in such computation, certified as true and
          correct by the chief financial officer of the Company;

               (vi) Promptly,  such other  information  respecting the business,
          properties,  operations or condition,  financial or otherwise,  of the
          Company  or any of it  Subsidiaries  as the Bank may from time to time
          reasonably request.

          (e) Accounting;  Access to Records,  Books,  Etc. Maintain a system of
     accounting  established and  administered in accordance with sound business
     practices to permit preparation of financial  statements in accordance with
     generally   accepted   accounting   principles   and  to  comply  with  the
     requirements of this Agreement and, at any reasonable time and from time to
     time; and

          (f)  Further  Assurances.  Execute  and  deliver,  and will  cause the
     Guarantor to, execute and deliver within 30 days after request  therefor by
     the Bank, all further instruments and documents and take all further action
     that may be necessary or desirable,  or that the Bank may request, in order
     to give effect to, and to aid in the exercise and enforcement of the rights
     and remedies of the Bank under, this Agreement, the Notes, and the Security
     Documents.

     5.2 Negative  Covenants.  Until the Termination  Date and thereafter  until
payment in full of the  principal  of and accrued  interest on the Notes and the
performance of all other  obligations of the Company under this  Agreement,  the
Company  agrees that,  unless the Bank shall  otherwise  consent in writing,  it
shall not, and shall not permit any of its Subsidiaries to:

          (a)  Debt  to  EBITDA  Ratio.  Permit  or  suffer  the  ratio  of  (i)
     consolidated Indebtedness of the Company and its Subsidiaries as of the end
     of each fiscal quarter to (ii)  consolidated  EBITDA of the Company and its
     Subsidiaries  for the  preceding  four  fiscal  quarters  then  ended to be
     greater than 4.0 to 1.0 at any time from and including  the Effective  Date
     until June 30, 2000,  after which time, it shall not be greater than 3.5 to
     1.0.

          (b) Tangible Net Worth. Permit or suffer the consolidated Tangible Net
     Worth of the  Company and its  Subsidiaries  to be less than the sum of (i)
     $13,000,000  plus (ii) 75% of  consolidated  Cumulative  Net  Income of the
     Company and its  Subsidiaries  for each  fiscal year of the Company  ending
     after the Effective Date.

                                       27
<PAGE>
          (c) Fixed Charge Ratio.  Permit or suffer the Fixed Charge Ratio to be
     greater than 1.5 to 1.0 at any time from and including the Effective Date.

          (d) Capital  Expenditures.  Make any capital  expenditures  during any
     fiscal  year  of  the  Company,  the  aggregate  amount  of  which  exceeds
     $2,000,000.

          (e)  Indebtedness.  Create,  incur,  assume,  or in any manner  become
     liable in respect of, or suffer to exist, any Indebtedness other than:

               (i) The Loans;

               (ii)   Indebtedness  to   shareholders  of  the  Company,   which
          Indebtedness shall be subordinated to the Indebtedness of the Bank and
          shall be unsecured;

               (iii)  A  lease  of  the  Company's   headquarters   facility  on
          Winchester Circle in Boulder,  Colorado,  under terms disclosed to the
          Bank,  or  other   Indebtedness   directly  relating  to  the  Company
          purchasing such facility under terms disclosed to the Bank;

               (iv) A lease of the  Company's  additional  facility  on Frontage
          Road in Weld County,  Colorado,  under terms disclosed to the Bank, or
          other  Indebtedness  directly relating to the Company  purchasing such
          facility under terms disclosed to the Bank;

               (v)  Indebtedness  directly  related to the Company  purchasing a
          former residence located adjacent to the Company's additional facility
          on Frontage Road in Weld County,  Colorado,  under terms  disclosed to
          the Bank;

               (vi)  Indebtedness in the form of guaranties to third parties not
          to exceed the  maximum  amount of  $3,000,000  outstanding  at any one
          time; and

               (vii)  Indebtedness  secured by fixed assets other than  Eligible
          Fixed Assets, not to exceed $50,000.

          (f)  Liens.  Create,  incur or  suffer to exist any Lien on any of the
     assets, rights, revenues or property,  real, personal or mixed, tangible or
     intangible,  whether now owned or hereafter acquired, of the Company or any
     of its Subsidiaries, other than:

               (i) Liens for taxes not  delinquent or for taxes being  contested
          in good  faith by  appropriate  proceedings  and as to which  adequate
          financial reserves have been established on its books and records;

               (ii) Liens  (other  than any Lien  imposed by ERISA)  created and
          maintained in the ordinary  course of business  which would not have a
          material

                                       28
<PAGE>
          adverse  effect on the business or operations of the Company or any of
          its  Subsidiaries  and which  constitute (A) pledges or deposits under
          worker's  compensation  laws,  unemployment  insurance laws or similar
          legislation, (B) good faith deposits in connection with bids, tenders,
          contracts or leases to which the Company or any of its Subsidiaries is
          a party for a purpose other than borrowing money or obtaining  credit,
          including  rent security  deposits,  (C) liens imposed by law, such as
          those of  carriers,  warehousemen  and  mechanics,  if  payment of the
          obligation  secured  thereby  is not yet due,  and (D) Liens  securing
          taxes,  assessments,  or other governmental  charges or levies not yet
          subject to penalties for nonpayment;

               (iii) Liens created pursuant to the Security  Documents and Liens
          expressly permitted by the Security Documents;

               (iv) Each Lien disclosed to the Bank in writing prior to the date
          hereof may be suffered to exist upon the same terms as those  existing
          on the date  hereof,  but no  extension  or renewal  thereof  shall be
          permitted;

               (v) Any Lien  created  to  secure  payment  of a  portion  of the
          purchase  price of, or  existing  at the time of  acquisition  of, the
          Company's  headquarters  facility on I-25  Frontage  Road in Longmont,
          Colorado,  may be created or  suffered  to exist on such fixed  asset,
          provided, that such Lien does not encumber any other asset at any time
          owned by the Company,  and provided,  further,  that not more than one
          Lien shall encumber such facility at any one time;

               (vi) Any Lien  created  to secure  payment  of a  portion  of the
          purchase price of the Company's  additional  facility on Frontage Road
          in Weld County,  Colorado, may be created or suffered to exist on such
          fixed  asset,  provided,  that such Lien does not  encumber  any other
          asset at any time owned by the Company,  and provided,  further,  that
          not more than one Lien shall encumber such facility at any one time;

               (vii) Any Lien  created  to secure  payment  of a portion  of the
          purchase  price  of a  former  residence  adjacent  to  the  Company's
          additional facility on Frontage Road in Weld County,  Colorado, may be
          created or suffered to exist on such fixed asset, provided,  that such
          Lien  does not  encumber  any  other  asset  at any time  owned by the
          Company,  and  provided,  further,  that not more than one Lien  shall
          encumber such facility at any one time;

               (viii) Any Lien on  tangible  fixed  assets  other than  Eligible
          Fixed Assets securing  Indebtedness  permitted by Section  5.2(e)(vi);
          and

               (ix) Any Lien  created  to secure  payment  of a  portion  of the
          purchase  price of, or  existing  at the time of  acquisition  of, any
          other  tangible  fixed  asset  acquired  by the  Company  (other  than
          inventory  and supplies) may be created or suffered to exist upon such
          fixed  asset if the  aggregate  principal  amount of all  Indebtedness
          secured

                                       29
<PAGE>
          by such Liens does not exceed $50,000,  provided,  that such Lien does
          not  encumber  any other asset at any time owned by the  Company,  and
          provided,  further,  that not more than one Lien shall  encumber  such
          fixed asset at any one time.

          (g)  Merger;  Purchase  of  Assets;  Acquisitions;  Etc.  Purchase  or
     otherwise  acquire,  whether in one or a series of  transactions,  all or a
     substantial portion of the business assets, rights,  revenues, or property,
     real, personal, or mixed, tangible or intangible,  of any person, or all or
     a substantial  portion of the capital stock of or other ownership  interest
     in any other person;  nor merge or consolidate or amalgamate with any other
     person or take any other action having a similar effect, provided, however,
     that this  Section  shall not  prohibit  any merger or  acquisition  if the
     Company  shall be the  surviving  or  continuing  corporation  thereof and,
     immediately  after such merger or  acquisition,  no Event of Default  shall
     exist or shall have occurred and be continuing.

          (h)  Disposition  of Assets;  Etc.  Sell,  lease,  license,  transfer,
     assign,  or  otherwise  dispose  of all  or a  substantial  portion  of its
     business,  assets, rights, revenues, or property, real, personal, or mixed,
     tangible or intangible,  whether in one or a series of transactions,  other
     than  inventory  sold in the  ordinary  course of business  upon  customary
     credit terms,  sales of scrap or obsolete material or equipment,  and other
     sales of assets in the ordinary  course of business not to exceed  $100,000
     during any calendar year.

          (i) Investments.  Make,  permit,  or suffer to exist any investment in
     the stock or securities of, make loans or advances to, or make,  permit, or
     suffer to exist a liability to exist as  guarantor,  surety,  or indemnitor
     with respect to any  indebtedness or other  obligation of, any entity which
     is not  consolidated  with the Company  for  financial  reporting  purposes
     except  for (i)  loans  to  employees  of the  Company,  provided  that the
     aggregate amount of such employee loans shall not exceed $75,000,  and (ii)
     investments  in  the  stock  or  securities  of  any  entity  which  is not
     consolidated  with the  Company  for  financial  reporting  purposes  which
     investments are made solely with intangible assets of the Company.

                                    ARTICLE 6
                                     DEFAULT

     6.1 Events of Default. The occurrence of any one of the following events or
conditions shall be deemed an "Event of Default"  hereunder unless waived by the
Bank pursuant to Section 7.1:

          (a) Nonpayment. The Company fails to pay when due any principal of any
     of the Notes or fails to pay within five (5) days of when due any  interest
     due on any of the Notes or any fees or any other amount payable  hereunder;
     or

          (b)  Misrepresentation.  Any  representation  or warranty  made by the
     Company in  Article 4 or by the  Company in any  Security  Document  or any
     other certificate, report, financial statement, or other document furnished
     by or on behalf of the Company in

                                       30
<PAGE>
     connection  with this  Agreement  shall have been incorrect in any material
     respect when made or deemed made; or

          (c) Certain  Covenants.  The Company  shall fail to perform or observe
     any term, covenant or agreement contained in Article 5; or

          (d) Other  Defaults.  The Company shall fail to perform or observe any
     other term, covenant or agreement contained in this Agreement, and any such
     failure shall remain  unremedied  for 20 calendar days after notice thereof
     shall have been given to the Company by the Bank; or

          (e) Cross Default.  The Company or any of its Subsidiaries  shall fail
     to pay any part of the principal  of, the premium,  if any, or the interest
     on, or any other payment of money due under, any of its Indebtedness (other
     than  Indebtedness  hereunder),  beyond any period of grace  provided  with
     respect  thereto,  or if the  Company or any of its  Subsidiaries  fails to
     perform or observe any other term, covenant,  or agreement contained in any
     agreement,   document,  or  instrument  evidencing  or  securing  any  such
     Indebtedness,  or under which any such  Indebtedness was issued or created,
     beyond any period of grace  provided with respect  thereto if the effect of
     such failure is to cause, or permit the holders of such  Indebtedness (or a
     trustee on behalf of such holders) to cause, any payment in respect of such
     Indebtedness to become due prior to its due date; or

          (f)  Judgments.  One or more  judgments  or orders for the  payment of
     money shall be rendered against the Company or any of its Subsidiaries,  or
     any other judgment or order (whether or not for the payment of money) shall
     be rendered against or shall affect the Company which causes or could cause
     a  material  adverse  change in the  business,  properties,  operations  or
     condition,   financial  or  otherwise,   of  the  Company  or  any  of  its
     Subsidiaries  or which does or could have a material  adverse effect on the
     legality,  validity, or enforceability of this Agreement, the Notes, or any
     Security  Document,  and  either  (i) such  judgment  or order  shall  have
     remained unsatisfied and the Company or the Subsidiary shall not have taken
     action necessary to stay enforcement thereof by reason of pending appeal or
     otherwise,  prior to the expiration of the applicable period of limitations
     for taking such action or, if such  action  shall have been taken,  a final
     order  denying  such stay shall  have been  rendered,  or (ii)  enforcement
     proceedings  shall  have  been  commenced  by any  creditor  upon  any such
     judgment or order; or

          (g) ERISA.  The  occurrence  of a Reportable  Event that results in or
     could result in liability of the Company,  any of its Subsidiaries or their
     ERISA  Affiliates to the PBGC or to any Plan and such  Reportable  Event is
     not corrected within thirty (30) days after the occurrence  thereof; or the
     occurrence  of any  Reportable  Event  which could  constitute  grounds for
     termination of any Plan of the Company,  any of its Subsidiaries,  or their
     ERISA  Affiliates  by the PBGC or for the  appointment  by the  appropriate
     United States  District  Court of a trustee to administer any such Plan and
     such  Reportable  Event is not corrected  within thirty (30) days after the
     occurrence thereof; or the filing by the Company, any of its

                                       31
<PAGE>
     Subsidiaries,  or any of their  ERISA  Affiliates  of a notice of intent to
     terminate a Plan or the  institution  of other  proceedings  to terminate a
     Plan;  or the  Company,  any of its  Subsidiaries,  or any of  their  ERISA
     Affiliates  shall  fail to pay when due any  liability  to the PBGC or to a
     Plan; or the PBGC shall have  instituted  proceedings  to terminate,  or to
     cause a trustee to be appointed to administer, any Plan of the Company, any
     of its Subsidiaries,  or their ERISA Affiliates; or any person engages in a
     Prohibited  Transaction  with respect to any Plan which results in or could
     result in liability of the Company,  any of its Subsidiaries,  any of their
     ERISA  Affiliates,  any Plan of the Company,  any of its  Subsidiaries,  or
     their ERISA  Affiliates  or fiduciary  of any such Plan;  or failure by the
     Company, any of its Subsidiaries,  or any of their ERISA Affiliates to make
     a required  installment  or other payment to any Plan within the meaning of
     Section  302(f) of ERISA or Section  412(n) of the Code that  results in or
     could result in liability of the Company,  any of its Subsidiaries,  or any
     of their ERISA Affiliates to the PBGC or any Plan; or the withdrawal of the
     Company,  any of its Subsidiaries,  or any of their ERISA Affiliates from a
     Plan during a plan year in which it was a "substantial employer" as defined
     in Section  4001(9a)(2) of ERISA; or the Company,  any of its Subsidiaries,
     or any of their ERISA  Affiliates  becomes an employer  with respect to any
     Multiemployer Plan without the Bank's prior written consent.

          (h) Insolvency,  Etc. The Company or any of its Subsidiaries  shall be
     dissolved or liquidated (or any judgment, order or decree therefor shall be
     entered), or shall generally not pay its debts as they become due, or shall
     admit in writing its inability to pay its debts generally,  or shall make a
     general  assignment for the benefit of creditors,  or shall  institute,  or
     there shall be  instituted  against the Company or any of its  Subsidiaries
     any  proceeding or case seeking to adjudicate it a bankrupt or insolvent or
     seeking liquidation, winding up, reorganization,  arrangement,  adjustment,
     protection,  relief,  or  composition  of it or its  debts  under  any  law
     relating  to  bankruptcy,   insolvency,  or  reorganization  or  relief  or
     protection of debtors,  or seeking the entry of an order for relief, or the
     appointment of a receiver,  trustee,  custodian,  or other similar official
     for it or for any  substantial  part of its assets,  rights,  revenues,  or
     property,  and, if such proceeding is instituted against the Company or any
     Subsidiary and is being  contested by the Company or the Subsidiary in good
     faith by appropriate proceedings,  such proceeding shall remain undismissed
     or unstayed for a period of 60 days; or the Company or any Subsidiary shall
     take any action  (corporate  or other) to  authorize  or further any of the
     actions described above in this subsection; or

          (i) Security  Documents.  A default described in any Security Document
     shall have occurred and be continuing  beyond the period of grace,  if any,
     therein  provided with respect  thereto,  or any material  provision of any
     Security  Document  shall  at any time for any  reason  cease to be  valid,
     binding,  and enforceable against any obligor thereunder,  or the validity,
     binding effect, or enforceability thereof shall be contested by any person,
     or any  obligor  shall  deny  that  it  has  any or  further  liability  or
     obligation thereunder; or

          (j) Change of  Control.  There  occurs any  significant  change in the
     ownership of the Company.

                                       32
<PAGE>
     6.2 Remedies.

          (a) Upon the  occurrence  and during the  continuance  of any Event of
     Default,  the  Bank  may  by  notice  to  the  Company  (i)  terminate  the
     Commitment, (ii) declare the outstanding principal of, and accrued interest
     on,  the Notes and all other  amounts  owing  under  this  Agreement  to be
     immediately  due and payable,  whereupon  the  Commitment  shall  terminate
     forthwith  and all such amounts shall become  immediately  due and payable,
     and (iii) demand  immediate  delivery of cash  collateral,  and the Company
     agrees to deliver such cash collateral  upon demand,  in an amount equal to
     the maximum  amount that may be  available to be drawn at any time prior to
     the stated expiry of all  outstanding  Letters of Credit,  provided that in
     the case of any event or condition described in Section 6.1(h) with respect
     to the Company, the Commitment shall automatically  terminate forthwith and
     all such amounts shall  automatically  become  immediately  due and payable
     without  notice;  in  all  cases  without  demand,  presentment,   protest,
     diligence,  notice  of  dishonor,  or other  formality,  all of  which  are
     expressly waived.

          (b) The Bank may,  in  addition  to the  remedies  provided in Section
     6.2(a),  exercise  and  enforce  any  and all  other  rights  and  remedies
     available to it, whether  arising under this  Agreement,  the Notes, or any
     Security Document or under applicable law, in any manner deemed appropriate
     by the Bank, including suit in equity,  action at law, or other appropriate
     proceedings,  whether for the specific performance (to the extent permitted
     by law) of any covenant or agreement  contained in this Agreement or in the
     Notes,  or any Security  Document or in aid of exercising any power granted
     in this Agreement, the Notes, or any Security Document.

          (c) Upon the  occurrence  and during the  continuance  of any Event of
     Default,  the Bank may at any time and from time to time, without notice to
     the Company (any  requirement for such notice being expressly waived by the
     Company) set off and apply  against any and all of the  obligations  of the
     Company now or hereafter existing under this Agreement any and all deposits
     (general or special, time or demand, provisional or final) at any time held
     and other  indebtedness  at any time owing by the Bank to or for the credit
     or the account of the Company and any  property of the Company from time to
     time in  possession  of the Bank,  irrespective  of whether or not the Bank
     shall have made any demand  hereunder and although such  obligations may be
     contingent  and  unmatured.  The  Company  grants to the Bank a lien on and
     security  interest  in all such  deposits,  indebtedness,  and  property as
     collateral  security  for the  payment  and  performance  of the  Company's
     obligations  under this  Agreement.  The Bank's  rights  under this Section
     6.2(c) are in  addition to other  rights and  remedies  (including  without
     limitation other rights of setoff) which the Bank may have.

                                       33
<PAGE>
                                    ARTICLE 7
                                  MISCELLANEOUS

     7.1 Amendments, Etc. No amendment, modification,  termination, or waiver of
any provision of this Agreement nor any consent to any departure therefrom shall
be  effective  unless the same shall be in writing  and signed by the Bank.  Any
such  amendment,  waiver,  or consent  shall be  effective  only in the specific
instance and for the specific purpose for which given.

     7.2 Notices.

          (a) Except as otherwise  provided in Section  7.2(c),  all notices and
     other  communications  hereunder shall be in writing and shall be delivered
     or sent to the Company at 9586 I-25 Frontage Rd., Longmont, Colorado 80504,
     Attention:  Treasurer,  and to the Bank at 611  Woodward  Avenue,  Detroit,
     Michigan  48226,  Attention:  Manager,  Commercial  Loans,  or to any other
     address as may be  designated  by the  Company or the Bank by notice to the
     other party. All notices and other  communications  shall be deemed to have
     been given at the time of actual  delivery  thereof to such address,  or if
     sent by certified or registered mail, postage prepaid,  to such address, on
     the third day after the date of mailing,  or, if sent by Federal Express or
     other recognized  overnight delivery service,  prepaid, to such address, on
     the Business Day following  the date of deposit with such delivery  service
     prior to such service's next-day delivery deadline, provided, however, that
     notices to the Bank shall not be effective until received.

          (b) Notices by the Company to the Bank with respect to terminations or
     reductions of the  Commitment  pursuant to Section 2.2,  requests for Loans
     and Letter of Credit  Advances  pursuant to Section  2.4,  and requests for
     continuations  or  conversions  of Loans  pursuant  to Section 2.7 shall be
     irrevocable and binding on the Company.

          (c) Any  notice to be given by the  Company  to the Bank  pursuant  to
     Sections 2.4 or 2.7, and any notice to be given by the Bank hereunder,  may
     be given by  telephone,  and all such notices  given by the Company must be
     immediately  confirmed in writing in the manner provided in Section 7.2(a).
     Any such  notice  given by  telephone  shall be deemed  effective  upon its
     receipt by the party to whom such notice is to be given.

     7.3 No Waiver By Conduct;  Remedies Cumulative. No course of dealing on the
part of the Bank, nor any delay or failure on the part of the Bank in exercising
any right,  power,  or  privilege  hereunder  shall  operate as a waiver of such
right, power, or privilege or otherwise prejudice the Bank's rights and remedies
hereunder; nor shall any single or partial exercise thereof preclude any further
exercise  thereof or the exercise of any other right,  power,  or privilege.  No
right or remedy conferred upon or reserved to the Bank under this Agreement, the
Notes,  or any Security  Document is intended to be exclusive of any other right
or remedy,  and every right and remedy  shall be  cumulative  and in addition to
every other right or remedy  granted  thereunder  or now or  hereafter  existing
under any applicable law. Every right and remedy granted by this Agreement,  the
Notes,  or any  Security  Document  or by  applicable  law to  the  Bank  may be
exercised from time to time and

                                       34
<PAGE>
as often as may be deemed  expedient  by the Bank and,  unless  contrary  to the
express  provisions  of this  Agreement,  the Notes,  or any Security  Document,
irrespective  of the  occurrence  or  continuance  of any  Default  or  Event of
Default.

     7.4 Reliance on and Survival of Various Provisions.  All terms,  covenants,
agreements, representations, and warranties of the Company made herein or in any
Security Document or in any certificate,  report,  financial statement, or other
document  furnished  by or on  behalf of the  Company  in  connection  with this
Agreement  shall be deemed to be  material  and to have been  relied upon by the
Bank, notwithstanding any investigation heretofore or hereafter made by the Bank
or on the Bank's behalf,  and those  covenants and agreements of the Company set
forth in Sections  3.6,  3.8, and 7.5 shall survive the repayment in full of the
Loans and the termination of the Commitment.

     7.5 Expenses; Indemnification.

          (a) The Company  agrees to pay, or reimburse  the Bank for the payment
     of, on demand,  the  reasonable  fees and  expenses of counsel to the Bank,
     including  without  limitation  the fees and expenses of Messrs.  Dickinson
     Wright  PLLC in  connection  with  preparing,  executing,  delivering,  and
     administrating this Agreement, the Note, and the Security Documents and the
     consummation of the transactions  contemplated  hereby,  in connection with
     advising  the  Bank as to its  rights  and  responsibilities  with  respect
     thereto,  and in  connection  with any  Default  or Event of Default or any
     amendments,   waivers,  or  consents  in  connection  therewith,   and  all
     reasonable  costs and expenses of the Bank  (including  reasonable fees and
     expenses of counsel) in connection  with any action or proceeding  relating
     to a court order,  injunction,  or other process or decree  restraining  or
     seeking to restrain  the Bank from paying any amount  under,  or  otherwise
     relating  in any way to, any  Letter of  Credit,  and any and all costs and
     expenses  which any of them may incur  relative  to any  payment  under any
     Letter of Credit.

          (b) The  Company  indemnifies  and  agrees  to hold  the  Bank and its
     respective officers,  directors,  employees,  and agents, harmless from and
     against  any  and all  claims,  damages,  losses,  liabilities,  costs,  or
     expenses of any kind whatsoever which the Bank or any such person may incur
     or which may be claimed  against any of them by reason of or in  connection
     with any Letter of Credit,  and neither  the Bank or any of its  respective
     officers,  directors,  employees,  or agents shall be liable or responsible
     for:  (i) the use which may be made of any Letter of Credit or for any acts
     or omissions of any beneficiary in connection therewith; (ii) the validity,
     sufficiency,  or  genuineness of documents or of any  endorsement  thereon,
     even if such  documents  should in fact prove to be in any or all  respects
     invalid, insufficient,  fraudulent, or forged; (iii) payment by the Bank to
     the  beneficiary  under  any  Letter  of  Credit  against  presentation  of
     documents  which do not  comply  with the terms of any  Letter  of  Credit,
     including  failure  of any  documents  to bear any  reference  or  adequate
     reference to such Letter of Credit; (iv) any error, omission, interruption,
     or delay in transmission,  dispatch,  or delivery of any message or advice,
     however  transmitted,  in connection with any Letter of Credit;  or (v) any
     other  event or  circumstance  whatsoever  arising in  connection  with any
     Letter of Credit; provided, however, that the Company shall

                                       35
<PAGE>
     not be required to indemnify the Bank and such other persons,  and the Bank
     shall be liable to the  Company to the extent,  but only to the extent,  of
     any direct, as opposed to consequential or incidental,  damages suffered by
     the Company  which were caused by (A) the Bank's  wrongful  dishonor of any
     Letter of Credit after the presentation to it by the beneficiary thereunder
     of a draft or other  demand for  payment and other  documentation  strictly
     complying  with the  terms of such  Letter  of  Credit,  or (B) the  Bank's
     payment to the beneficiary under any Letter of Credit against  presentation
     of documents  which do not comply with the terms of the Letter of Credit to
     the extent,  but only to the extent,  that such payment  constitutes  gross
     negligence or willful  misconduct  of the Bank.  It is understood  that, in
     making  any  payment  under a  Letter  of  Credit,  the Bank  will  rely on
     documents  presented  to it under  such  Letter of Credit as to any and all
     matters set forth therein without further  investigation  and regardless of
     any notice or  information  to the contrary,  and such reliance and payment
     against  documents  presented  under  a  Letter  of  Credit   substantially
     complying  with the terms thereof  shall not be deemed gross  negligence or
     willful  misconduct  of the Bank in  connection  with such  payment.  It is
     further  acknowledged  and agreed that the Company may have rights  against
     the  beneficiary  or others in  connection  with any Letter of Credit  with
     respect  to  which  the  Bank is  alleged  to be  liable  and it shall be a
     precondition of asserting any liability of the Bank under this Section that
     the  Company  shall  first have  exhausted  all  remedies in respect of the
     alleged loss against such  beneficiary  and any other parties  obligated or
     liable  in   connection   with  such  Letter  of  Credit  and  any  related
     transactions.

     7.6 Successors and Assigns.  This Agreement shall be binding upon and inure
to the  benefit  of the  parties  hereto  and their  respective  successors  and
assigns,  provided  that the Company may not,  without the prior  consent of the
Bank,  assign  its  rights  or  obligations  hereunder  or under any Note or any
Security Document and the Bank shall not be obligated to make any Loan hereunder
to any entity other than the Company.

     7.7  Counterparts.  This  Agreement  may  be  executed  in  any  number  of
counterparts,  all of which taken  together  shall  constitute  one and the same
instrument  and any of the parties  hereto may execute this Agreement by signing
any such counterpart.

     7.8 Governing  Law. This  Agreement is a contract made under,  and shall be
governed by and construed in accordance  with,  the law of the State of Michigan
applicable to contracts made and to be performed  entirely within such State and
without giving effect to choice of law principles of such State.

     7.9 Table of Contents and Headings.  The table of contents and the headings
of the various subdivisions hereof are for the convenience of reference only and
shall in no way modify any of the terms or provisions hereof.

     7.10 Construction of Certain Provisions. If any provision of this Agreement
refers  to any  action  to be  taken by any  person,  or which  such  person  is
prohibited from taking, such provision

                                       36
<PAGE>
shall be applicable  whether such action is taken directly or indirectly by such
person, whether or not expressly specified in such provision.

     7.11  Integration  and  Severability.  This  Agreement  embodies the entire
agreement and understanding between the Company and the Bank, and supersedes all
prior agreements and  understandings,  relating to the subject matter hereof. In
case any one or more of the obligations of the Company under this Agreement, any
Note, or any Security Document shall be invalid, illegal or unenforceable in any
jurisdiction,  the  validity,  legality  and  enforceability  of  the  remaining
obligations of the Company shall not in any way be affected or impaired thereby,
and such invalidity,  illegality,  or unenforceability in one jurisdiction shall
not  affect  the  validity,   legality,   or  enforceability  of  the  Company's
obligations  under this Agreement,  the Notes,  or any Security  Document in any
other jurisdiction.

     7.12  Interest  Rate  Limitation.  Notwithstanding  any  provisions of this
Agreement,  any Note, or any Security Document,  in no event shall the amount of
interest paid or agreed to be paid by the Company  exceed an amount  computed at
the highest  rate of interest  permissible  under  applicable  law. If, from any
circumstances  whatsoever,  fulfillment of any provision of this Agreement,  any
Note, or any Security  Document at the time  performance of such provision shall
be due, shall involve exceeding the interest rate limitation  validly prescribed
by law which a court of competent jurisdiction may deem applicable hereto, then,
ipso  facto,  the  obligations  to be  fulfilled  shall be  reduced to an amount
computed at the highest rate of interest  permissible  under  applicable law. If
for any reason  whatsoever  the Bank shall ever  receive as  interest  an amount
which would be deemed  unlawful  under  applicable  law, such interest  shall be
automatically  applied to the  payment  of  principal  of the Loans  outstanding
hereunder  (whether  or not  then due and  payable)  and not to the  payment  of
interest,  or shall be refunded to the Company if such  principal  and all other
obligations of the Company to the Bank have been paid in full.

     7.13 Waiver of Jury Trial.  The Bank and the Company,  after  consulting or
having had the opportunity to consult with counsel, knowingly,  voluntarily, and
intentionally  waive any right either of them may have to a trial by jury in any
litigation based upon or arising out of this Agreement or any related instrument
or agreement or any of the  transactions  contemplated  by this Agreement or any
course of conduct, dealing,  statements (whether oral or written), or actions of
either of them.  Neither the Bank nor the Company shall seek to consolidate,  by
counterclaim or otherwise, any such action in which a jury trial has been waived
with any other  action in which a jury trial  cannot be or has not been  waived.
These  provisions  shall not be deemed to have been  modified  in any respect or
relinquished  by either the Bank or the Company  except by a written  instrument
executed by both of them.

                                       37
<PAGE>
     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
executed as of the day and year first above written (the "Effective Date").


                                                     APPLIED FILMS CORPORATION



                                                     By:  /s/ Larry D. Firestone
                                                          Its:  Treasurer

                                                     BANK ONE, MICHIGAN


                                                     By:  /s/ William C. Goodhue
                                                          William C. Goodhue
                                                          Its:   Vice President


::ODMA\PCDOCS\GRR\345476\1
                                       38

<PAGE>
                                    EXHIBIT A


                              REVOLVING CREDIT NOTE

$11,500,000                                                  September ___, 1999
                                                               Detroit, Michigan

     FOR VALUE RECEIVED, the undersigned,  APPLIED FILMS CORPORATION, a Colorado
corporation (the "Company"), promises to pay to the order of BANK ONE, MICHIGAN,
a Michigan  banking  corporation,  of Detroit,  Michigan  (the  "Bank"),  at the
principal  banking  office of the Bank in lawful  money of the United  States of
America and in immediately  available funds, the principal sum of Eleven Million
Five Hundred Thousand Dollars  ($11,500,000),  or such lesser amount as is noted
in the books  and  records  of the Bank,  on the  Termination  Date;  and to pay
interest on the unpaid principal  balance hereof from time to time  outstanding,
in like money and funds, for the period from the date hereof until the Revolving
Credit Loans shall be paid in full, at the rates per annum and on dates provided
in the Credit Agreement referred to below.

     This Note  evidences  one or more  Revolving  Credit  Loans  made  under an
Amended and Restated Credit Agreement dated as of even date herewith (as amended
or modified from time to time, the "Credit Agreement"),  between the Company and
the Bank, to which reference is made for a statement of the circumstances  under
which  this Note is subject to  prepayment  and under  which its due date may be
accelerated.  Capitalized terms used but not defined in this Note shall have the
respective meanings assigned to them in the Credit Agreement.

     The Bank is  authorized  by the  Company to note in its  records  the date,
amount and type of each Loan,  the  interest  rate and  duration  of the related
Eurodollar  Interest Period or Negotiated  Interest Period (if applicable),  the
amount  of each  payment  or  prepayment  of  principal  thereon,  and the other
information  provided for in such records,  which records shall constitute prima
facie evidence of the information so noted,  provided that the Bank's failure to
make any such notation  shall not relieve the Company of its obligation to repay
the outstanding  principal amount of this Note, all accrued interest hereon, and
any amount  payable with respect  thereto in  accordance  with this Note and the
Credit Agreement.

     This Note is issued in  substitution  for the  Revolving  Credit Note dated
March 27, 1998, in the principal amount of $11,500,000, previously issued by the
Company to the Bank  pursuant to the  Agreement  (the "Prior  Note").  This Note
shall  evidence,  and the Company  promises to pay, in addition to the principal
amount outstanding  hereunder and all interest thereon accrued,  all accrued and
unpaid interest on the Prior Note.

     The  Company  and  each  endorser  or  guarantor   hereof  waives   demand,
presentment,  protest,  diligence, notice of dishonor and any other formality in
connection with this Note. Should the indebtedness evidenced by this Note or any
part thereof be collected in any proceeding or be placed

                                       A-1
<PAGE>
in the hands of attorneys for collection, the Company agrees to pay, in addition
to the principal and interest payable hereon, all costs of collecting this Note,
including attorneys' fees and expenses.

                                               APPLIED FILMS CORPORATION


                                                By:  ________________________

                                                        Its: ___________________


                                       A-2

<PAGE>
                                    EXHIBIT B


                               REQUEST FOR ADVANCE

                                     (date)



Bank One, Michigan
611 Woodward Avenue
Detroit, Michigan  48226

Attention:  William C. Goodhue

     Applied Films Corporation, a Colorado corporation (the "Company"), requests
a [Letter of Credit Advance]  [Revolving Credit Loan] pursuant to Section 2.4 of
the Amended and Restated  Credit  Agreement,  dated as of September __, 1999 (as
amended,  the "Credit  Agreement"),  between  the  Company and the Bank,  in the
amount of [$__________/______  Agreed Currency],  to be issued on _____________,
and to be evidenced by the Company's  Revolving Credit Note.  Capitalized  terms
used but not defined herein shall have the respective  meanings assigned to them
in the Credit Agreement.

     Such  Revolving  Credit Loan shall be made as a [insert  either  Eurodollar
Rate Loan, a Floating  Rate Loan,  or a  Negotiated  Rate Loan] [and the initial
Interest  Period,  if  the  requested  Advance  is a  [Eurodollar  Rate  Loan  /
Negotiated Rate Loan], shall be [insert permitted  Eurodollar  Interest Period /
Negotiated Interest Period]].

     Such Letter of Credit  Advance shall be made by the Bank issuing its Letter
of  Credit  for  the  account  of  the   Company  in  the   maximum   amount  of
$_______________  to and for the  benefit of  ___________________  with a stated
expiry  date  of  _________________,   and  containing  the  further  terms  and
conditions set forth in the attached letter of credit application to the Bank.

     In support of this request, the Company represents and warrants to the Bank
that:

     A. The representations and warranties contained in Article IV of the Credit
Agreement  are true and correct on and as of the date  hereof,  and will be true
and correct on the date such Advance is made (both before and after such Advance
is made), as if such  representations and warranties were made on and as of such
dates.

     B. No Event of Default,  and no event or condition  which might become such
an Event of Default with notice or with lapse of time, or both, has occurred and
is continuing or will exist on the date of such Advance is made (whether  before
or after such Advance is made).

                                       B-1
<PAGE>
     Accepting  the  proceeds of the Advance by the Company  shall  constitute a
further representation and warranty that the representations and warranties made
herein are true and correct at the time the proceeds are disbursed.

                                             APPLIED FILMS CORPORATION


                                             By:  ______________________________

                                               Its:  ___________________________


                                       B-2

<PAGE>
                                    EXHIBIT C


                 REQUEST FOR CONTINUATION OR CONVERSION OF LOAN

                                     (date)

Bank One, Michigan
611 Woodward Avenue
Detroit, Michigan  48226

Attention:  _________________

     The undersigned  (the  "Company")  requests that  [$_______/_______  Agreed
Currency] of the principal  amount of the Revolving  Credit Loan originally made
on  _______________,  which Loan is currently a [Floating Rate Loan / Eurodollar
Rate Loan / Negotiated  Rate Loan], be continued as or converted to, as the case
may be, a [insert type of Loan requested based on type of interest rate desired]
on  ______________.  [If such Loan is  requested to be converted to a Eurodollar
Rate Loan,  the Company  elects a  Eurodollar  Interest  Period for such Loan of
[insert permitted  Eurodollar Interest Period].]  Capitalized terms used but not
defined  herein  shall  have the  respective  meanings  assigned  to them in the
Amended and  Restated  Credit  Agreement  dated as of  September  ___,  1999 (as
amended, the "Credit Agreement"), between the Company and Bank One, Michigan.

     In support of this request, the Company certifies that:

     A. The representations and warranties contained in Article IV of the Credit
Agreement  are true and correct on and as of the date  hereof,  and will be true
and correct on the date of the  continuation  or  conversion of such Loan, as if
such representations and warranties were made on and as of such dates.

     B. No Event of Default has occurred and is  continuing or will exist on the
date of the continuation or conversion of such Loan.

     C. Acceptance of the continuation or conversion of such Loan by the Company
shall be deemed to be a further  representation  that the  representations  made
herein are true and correct at the time such proceeds are disbursed.

                                            APPLIED FILMS CORPORATION


                                            By:  _______________________________


                                                 Its:  _________________________

                                       C-1
<PAGE>
                                    EXHIBIT D


                           BORROWING BASE CERTIFICATE

                                     (date)



Bank One, Michigan
611 Woodward Avenue
Detroit, Michigan  48226

Attention:  William C. Goodhue

     Reference is made to the Amended and Restated Credit Agreement, dated as of
September ___, 1999 (as amended, the "Credit Agreement"),  between Applied Films
Corporation,  a Colorado corporation (the "Company"),  and Bank One, Michigan, a
Michigan  banking  corporation  (the  "Bank").  Capitalized  terms  used but not
defined herein shall have the respective meanings assigned to them in the Credit
Agreement.

     The  Company  represents  and  warrants  to the  Bank  that  the  following
computations  of the  Borrowing  Base,  and  the  related  supporting  schedules
attached  hereto,  are  true  and  correct  as  of  the  close  of  business  on
_____________, 19___, and conform with the terms of the Credit Agreement:

                                 Borrowing Base

1.       (1)      Eligible Accounts Receivable.........................$________

         (b)      85% of Eligible Accounts Receivable..................$________


2.       (a)      Value of Eligible Inventory..........................$________

         (b)      40% of Value of Eligible Inventory...................$________

         (c)      Maximum Eligible Inventory Value....................$4,000,000


3.       (a)      Fair Market Value of Eligible Fixed Assets...........$________

         (b)      60% of Eligible Fixed Assets.........................$________



                                       D-1
<PAGE>
4.       Borrowing Base - (1(b), plus the lesser of 2(b) and 2(c),
         plus 3(b))....................................................$________


5.       Aggregate outstanding principal amount of Revolving Credit
         Loans plus Letter of Credit Advances..........................$________


6.       4 minus 5 - if negative, remit difference to the Bank
         under Section 3.1(c) of the Credit Agreement..................$________

          The Company further represents and warrants to the Bank that as of the
     close of business on _________________:

          1. The representations  and warranties  contained in Article IV of the
     Credit Agreement and in the Security  Agreement are true and correct on and
     as of such date, as if such representations and warranties were made on and
     as of such date. For purposes of this certificate,  the representations and
     warranties contained in Section 4.6 of the Credit Agreement shall be deemed
     made with respect to both the financial  statements referred to therein and
     the most recent financial  statements  delivered pursuant to Section 5.1(d)
     of the Credit Agreement.

          2. No Event of Default or event or  condition  which  might  become an
     Event of Default with notice or lapse of time, or both, has occurred and is
     continuing.


                                               APPLIED FILMS CORPORATION


                                               By:  ____________________________

                                                  Its:  ________________________

                                       D-2

<PAGE>
                                    EXHIBIT E


                       CONFIRMATION OF SECURITY AGREEMENT


     In connection  with the Amended and Restated  Credit  Agreement dated as of
September  __,  1999 (as it may be amended or  modified  from time to time,  the
"Credit Agreement"),  between Applied Films Corporation,  a Colorado corporation
(the "Company"),  and Bank One,  Michigan,  a Michigan banking  corporation (the
"Bank"),  the Company confirms to the Bank the continuing effect of the Security
Agreement,  dated June 30, 1994,  as security for the payment of all debt now or
hereafter  owing by the Company to the Bank,  including  without  limitation the
debt arising under the Credit Agreement.

     IN WITNESS WHEREOF,  the undersigned has duly executed this Confirmation on
___________________, 1999.


                                                APPLIED FILMS CORPORATION


                                                By:  ___________________________

                                                   Its:  _______________________


                                       E-1

<PAGE>
                                                                    Exhibit 11.1


                            APPLIED FILMS CORPORATION
                    COMPUTATION OF EARNINGS PER COMMON SHARE
                    (in thousands, except per share amounts)


                                  July 3, 1999

<TABLE>
BASIC EARNINGS PER SHARE
<S>                                                                       <C>
Net income (loss)                                                          $(224)
Weighted average number of common shares outstanding                       3,478
Basic earnings per share                                                  $(0.06)

DILUTED EARNINGS PER SHARE

Net income (loss)                                                          $(224)
Shares Outstanding:
Weighted average number of common shares outstanding                       3,478
Assuming exercise of stock options                                           441
Assuming repurchase of treasury stock                                       (441)
Net incremental shares                                                         0
Weighted average number of common shares outstanding, as adjusted          3,478
Diluted earnings per share                                                $(0.06)
</TABLE>


::ODMA\PCDOCS\GRR\346310\1
<PAGE>
                                                                    Exhibit 23.1


                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent  public  accountants,  we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this Form 10-K
and to the  incorporation  of our report  into the  Company's  previously  filed
Registration Statement File Numbers 333-47951, 333-47967 and 333-51175.


                                                /s/ Arthur Andersen LLP
                                                ARTHUR ANDERSEN LLP



Denver, Colorado
September 24, 1999


::ODMA\PCDOCS\GRR\346312\1