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

                   [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
                     15(d) OF THE SECURITIES EXCHANGE ACT OF
                     1934 For the fiscal year ended June 27,
                                      1998

                                       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. |_|

The  aggregate  market value of the common stock held by  non-affiliates  of the
Registrant,  based on a per share price of $3.25 as of  September  1, 1998,  was
$11,292,011. As of September 1, 1998, there were outstanding 3,474,465 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  27,  1998  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 June 27, 1998,  June 28, 1997 or June
29, 1996, unless otherwise indicated.

ITEM 1(a):  General Development of Business

General

     Applied Films Corporation  ("Applied Films" or the "Company")  utilizes and
develops 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. The Company more recently began
selling 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 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 involves a number of  intermediate  process  steps,  and is therefore  more
suitably performed in-house by display manufacturers. Therefore, the Company has
begun offering its thin film coating  equipment to manufacturers of FPDs such as
plasma display panels ("PDPs"), as well as manufacturers of LCDs. Since entering
the coating equipment business in fiscal 1997, the Company has sold four systems
with an aggregate purchase price of approximately  $17.5 million. As of June 27,
1998,  the  Company's  backlog  from  such  equipment  sales  was  approximately
$950,000.  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.

     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,
the Company moved the majority of its

                                       1
<PAGE>
manufacturing  facilities  to  Longmont,   Colorado.  The  remaining  production
capacity at the Boulder  facility is expected to be  relocated  to the  Longmont
facility by September 30, 1998.

Strategy

     The Company's  objective is to be a leading provider of thin film solutions
to the FPD industry. 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 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 four systems (at an average  purchase price of $4.4 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")).   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,   and  has  filed  a  patent
application  which the  Company  believes  may allow  MgO glass  coatings  to be
applied at lower cost,  with increased  speed and with greater  uniformity  than
evaporation.  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 coated glass business by (i) seeking
to be a low cost  producer,  by building its own coating  systems and  achieving
technology-based  manufacturing  efficiencies,  (ii)  leveraging  the  Company's
long-standing  relationships  with many of the  world's key FPD  customers,  and
(iii) pursuing strategic business relationships to expand the Company's customer
base and manufacturing  capacity.  For instance,  the Company has entered into a
relationship with Nippon Sheet Glass Co., Ltd.  ("NSG"),  a major Japanese glass
manufacturer to supply much of the TN and black and white STN coated glass needs
of NSG's customers.  This three-year agreement provides a framework for the sale
by the Company of its coated glass through NSG to NSG's customers. The agreement
can be terminated by either party on three months'  notice and does not obligate
NSG to purchase a minimum  amount of coated glass from the Company.  The Company
believes that pursuant to this agreement,  it will provide a significant portion
of NSG's  customers'  coated glass needs. In addition,  during fiscal year 1998,
the Company  announced its intent to enter into a 50/50 joint venture  agreement
with NSG to  produce  thin film  coated  glass in  Suzhou,  China for use in LCD
displays.  Under this joint  venture,  Applied Films  anticipates  having closer
access to its key customer base in Southeast Asia. Nevertheless,  the Company is
aware of new  capacity  being  brought  online  by  competitors  in Asia  during
calendar years 1998 and 1999. This new capacity,  coupled with weakening  demand
and prices,  will have an adverse  effect on the  Company's  sales and financial
performance. See "Certain Factors -- International Markets."

                                        2
<PAGE>
ITEM 1(b):  Financial Information About Industry Segments

     The Company supplies coated glass and glass coating equipment  primarily to
LCD manufacturers,  neither of which are currently  considered to be in separate
industry segments.  For further discussion see "ITEM 8: Financial Statements and
Supplementary Data -- Note 2: Significant Accounting Policies -- Recently Issued
Accounting Standards."

ITEM 1(c):  Narrative Description of Business

Products and Manufacturing

         The following  table sets forth the Company's  gross sales by its major
product categories  (excluding returns and allowances) for its last three fiscal
years:
<TABLE>

                                                                                     Fiscal Year Ended
                                                                    June 27, 1998      June 28, 1997        June 29, 1996
                                                                                        (In thousands)
<S>                                                                  <C>                  <C>                  <C>
TN Glass..................................................           $29,189              $24,366              $18,972
STN Glass.................................................             4,844                3,676                1,499
Other Coated Glass........................................             7,210                4,257                2,141
Thin Film Coating Equipment...............................            13,908                2,784                  ---
</TABLE>
     Thin Film Coated Glass used for TN LCDs. Thin film coated glass for TN LCDs
is  manufactured  by  depositing  silicon  dioxide  ("SiO2")  and ITO onto glass
purchased primarily in four thicknesses, 1.1 millimeters, 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.  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,  brought on line a new
coating  system  capable of  manufacturing  thin film coated glass for black and
white  STN  LCDs.  There is a wider  range of  information  density  on STN LCDs
ranging from low  information  displays such as personal  digital  assistants to
high information density displays.

     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,  chrome-copper-chrome  coatings for PDPs, and gold,  silver and
other coatings for certain small orders and applications under development.

     Thin Film Coating  Equipment.  The Company has  designed and built  several
generations of high volume thin film  production  systems 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  and   automatically   dimming
(electrochromic)  automotive  mirrors.  The Company's  present coating equipment
product line includes  three basic  platforms:  (i) the Venture  Series  in-line
vertical system which provides

                                       3
<PAGE>
reduced particle defect levels and high throughput for use in FPD and other high
volume  applications,  (ii) the Pilot Series,  a line of sputtering  systems for
research and development, and limited production, and (iii) the Alliance Series,
which is a new  platform  being  designed  and built by the  Company.  The Pilot
system can be upgraded to a Venture  system as customer  requirements  increase.
The Alliance Series is an advanced concept thin film equipment system addressing
automation,  increasing display size and low-particulate requirements of FPD and
PDP display  manufacturers.  The design and building of the Alliance Series will
account 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  systems  provide for all coating and heat treating within the
equipment using processes pioneered and developed by the Company.  The Company's
thin film coating systems range in selling price from approximately $2.0 million
for a simply  configured  system to  approximately  $6.0 million for the largest
system.

     Process  Flow.  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 clean room where it is loaded onto
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, Vice President - Sales
& Marketing and Quality Assurance  Manager,  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  systems  involve a  broad-based  effort at various
levels  within the  Company.  Much of the sales  effort in the  systems  area is
undertaken by the Company's  technical and marketing  groups,  including a sales
office in Japan. The sales process for coating equipment is long-term, involving
multiple  visits to and by the customer  and nine to twelve  months of technical
sales effort.  Systems sales are handled through  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 systems with progress payments.

     Approximately  78% of the  Company's  fiscal 1998 gross sales were  derived
from exports, primarily to Asia. See "Certain Factors -- International Markets."
In the same period, the Company served 131 customers in 15 countries.  In fiscal
1998, the Company's ten largest customers accounted for approximately 78% 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,  Taiwan  and the  United  States.  The  Company  believes  its  potential
geographic  market  for 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,  Wintek
Corporation and Gentex  Corporation,  represented  approximately  33% and 15% of
gross sales for fiscal 1998,  respectively.  Sales to both  customers for fiscal
1998 included  sales of thin film coating  equipment and thin film coated glass.
Sales to these two  customers  are expected to decline  significantly  in fiscal
1999.

     The Company's gross sales  (excluding  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.

                                        4
<PAGE>
<TABLE>
                                                                                           Fiscal Year Ended
                                                                             June 27,           June 28,          June 29,
                                                                              1998               1997              1996
                                                                             ------             ------            -----
                                                                                             (In thousands)
<S>                                                                        <C>                <C>               <C>
Asia (other than Japan)........................................            $24,124            $17,059           $12,776
Japan..........................................................              7,824              6,611             4,288
United States..................................................              6,991              5,688             4,049
Europe and Other...............................................              2,304              2,941             1,499
</TABLE>
     The Company believes the Japanese market represents a substantial  national
market for coated glass.  The Company has entered into an agreement  with NSG to
supply TN and black and white STN coated  glass which will assist the  Company's
effort to further penetrate the Japanese market.  The agreement,  however,  does
not  obligate  NSG to  purchase  any  minimum  amount of coated  glass  from the
Company. See "-- Strategy -- Expand Thin Film Coating Business."

     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  announced  its  intention  to
enter into a 50/50 joint venture  agreement with NSG to produce thin film coated
glass in  Suzhou,  China,  for use in LCD  displays.  Under  the  joint  venture
agreement,  Applied  Films will have closer  access to its key customer  base in
Southeast  Asia  and use of an  existing  production  facility,  while  reducing
operating and transportation  costs. The joint venture is in the start-up phase,
but the Company currently anticipates the joint venture will commence production
of products in calendar year 1999. NSG currently operates a production coater in
China which will be included in the joint  venture.  The joint venture will also
purchase a  production  coater  from the  Company.  Both the Company and NSG are
expected to contribute  equity  capital of $3.2 million each during fiscal 1999.
The  Company  expects  to fund  this  investment  in the joint  venture  through
additional  borrowings  under  its  revolving  credit  facility  and the sale of
coating equipment to the joint venture. See "ITEM 7: Management's Discussion and
Analysis of Financial  Condition  and Results of  Operations  --  Liquidity  and
Capital  Resources."  The  Company  has  established  direct  links  between the
Company's  quality  control  management  and  customers  to help assure  quality
product  performance.  The  Company  also has a product  support  laboratory  in
Longmont available for its customers. Using this program, customers can directly
contact  Company staff to help analyze  product  problems or questions  they may
have in their own manufacturing  process.  With its analytical  capability,  the
Company's  technical  sophistication  can be  brought  to bear  directly  on the
customers' applications.

     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 having 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 particularly  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."

                                        5
<PAGE>
Working Capital

     The Company  extends credit to its customers,  either through open accounts
or through letters of credit.  Equipment  customers generally make a significant
advance deposit  followed by progress  payments based upon equipment  completion
and delivery. The Company utilizes inventory warehouses in Hong Kong and Japan.

Backlog of Orders

     The Company  generally  does not maintain a material  backlog of orders for
coated glass sales.  Orders are generally  shipped within 30 to 60 days of order
receipt.  Backlog of orders are maintained for equipment sales due to the longer
lead and construction times.  Backlog for equipment sales totaled $950,000 as of
June 27, 1998, versus $5.3 million as of June 28, 1997.

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 Glass.  The thin glass used by the  Company in its  manufacturing
represents its most significant material cost. The required quality, in terms of
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 thin 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 one supplier, although it believes alternative sources of supply could
be developed if necessary.  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  equipment  business,  the
Company  uses various  suppliers of machined  components,  pump  systems,  logic
controllers and other  components and features.  It has no single source for any
principal components in this aspect of its business.

                                        6
<PAGE>
     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.

Competition

     Competition  in the market for thin film coated  glass for FPDs is intense.
Competition  is based  primarily  on price 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  being  brought  online by  competitors  during
calendar years 1998 and 1999. This new capacity,  coupled with weakening  demand
and prices,  is having an adverse  effect on the Company's  sales.  See "Certain
Factors -- Highly Competitive Market Environment."

     Both  Company  suppliers  and  customers  could,  conceivably,   vertically
integrate to 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  historical success has depended in large part on successful,
focused  research  and  development  in  thin  film  technology,  processes  and
equipment.  The  Company  believes  that its  continued  success  depends on the
development of new or improved technology,  processes,  products, and equipment.
In fiscal 1996, 1997 and 1998, research and development  expenditures were 4.4%,
2.2%, and 2.3% of the Company's net sales for those years.

Proprietary Rights

     The Company's  proprietary  technology is principally  related to 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, the Company has
recently applied for a patent with respect to certain  developments in thin film
process and device  technology.  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 

                                       7
<PAGE>
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 1998, the Company employed 296 people,  including 241
in thin film coated  glass  production,  21 in thin film coating  systems,  7 in
marketing and sales, 9 in research and development  and 18 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.

     The Company announced in August,  1998 a reduction in production output and
workforce  levels due to a slowdown in its Asian business.  One of the Company's
thin film production  coaters (System 7) was shut down effective August 3, 1998.
It is  uncertain  how long the Asian  slowdown  will  continue or if  additional
production output or workforce reductions will be necessary.

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.............................. 61               Director, Chairman of the Board
Thomas T. Edman................................ 36               Director, President, Chief Executive Officer
John S. Chapin................................. 57               Director, Vice President - Research, Secretary
C. Richard Condon.............................. 53               Vice President - Engineering
Graeme Hennessey............................... 60               Vice President - Sales and Marketing
Thomas D. Schmidt.............................. 43               Chief Financial Officer and Treasurer
James Knister.................................. 60               Director
Chad D. Quist.................................. 36               Director
Jeffrey K. Fergason............................ 39               Director
Richard P. Beck................................ 65               Director
Roger Smith.................................... 57               Director of Materials
Russell W. Black............................... 38               Director of Operations - Thin Films Systems
John J. Kester................................. 48               Advanced Development Manager
</TABLE>

                                       8
<PAGE>
     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  in
multinational management and marketing 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 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.

     Thomas D.  Schmidt has been  employed  by the Company  since March 1997 and
serves as Chief  Financial  Officer and,  since July 1998,  as  Treasurer.  From
October 1995 until he joined the Company,  Mr. Schmidt served as a consultant to
other  companies.  From 1992 to 1995,  Mr.  Schmidt  served  as Chief  Financial
Officer of Concord Resources Group, Inc., an environmental services company, and
from 1977 to 1992, in various financial positions with Conrail, Inc. Mr. Schmidt
obtained a bachelors of science degree in business/accounting  from West Chester
University and a masters degree in business from Villanova  University.  He is a
certified public accountant.

     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.

     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  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.

                                       9
<PAGE>
     Jeffrey K.  Fergason  has been a director  of the Company  since 1997.  Mr.
Fergason  has served as President  of i-o Display  Systems  LLC, an  electronics
company, since August 1997. Mr. Fergason also has served as President of Ilixco,
Inc., a company  which  integrates  liquid  crystal  displays,  electronics  and
advanced  optical  systems,  since October 1996. From 1990 to 1996, Mr. Fergason
served as President of OSD Envizion, Inc., an electronic welding safety products
company.  Mr. Fergason  obtained a bachelors of business  administration  degree
from Kent State University and a masters degree in business  administration from
Pace 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 bachelor's 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.

     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 has been  employed  by the  Company  since June 1997 as its
Advanced Development Manager.  From 1995 until he joined the Company, Dr. Kester
served as Research and  Development  Manager at Golden  Photon,  a subsidiary of
Golden  Technologies,  a manufacturer of photovoltaic  modules, and from 1989 to
1995,  as a Division  Chief in the  research  division of the United  States Air
Force where he managed the Basic  Research  Division  at the USAF  Academy.  Dr.
Kester  obtained a bachelors  degree from Colorado  College and a masters degree
and doctorate in physics from Washington University, St. Louis.

     The Company's Board of Directors is currently  composed of seven directors,
divided into three  classes.  Messrs.  Van Alsburg and Chapin serve in the class
whose term expires in 1998;  Mr. Quist serves in the class whose term expires in
1999, and Mr.  Knister serves in the class whose term expires in 2000.  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.  Messrs. Edman, Fergason and Beck were appointed to the
Board of Directors to fill  vacancies,  and their  terms,  therefore,  expire in
1998. 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."

                                       10
<PAGE>
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 also has production  capacity in its Boulder facility,  which
capacity is expected to be relocated to the Longmont  facility by September  30,
1998.  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 1998 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
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."

                                       11
<PAGE>
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  supplied to the LCD market have  declined in past years.  Although
prices were stable for much of fiscal 1998, the Company began experiencing price
declines late in the fiscal year. The Company expects  continuing price declines
for  fiscal  1999.  The  Company  is aware of plans by  several  competitors  to
increase  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 Coating Equipment Business

     Until recently,  the Company's business has been 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  systems.  Sales of the  Company's  thin film  systems
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 systems 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  systems  for two such  customers.  Systems  sales also may be
affected by changes in the market for different types of displays and customers'
decisions to begin internal  production of glass coatings rather than rely on an
outside supplier such as the Company. The sales cycle of the Company's thin film
coating  systems 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
systems. With respect to the development of its systems 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 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 systems fails
to grow,  or  grows  more  slowly  than  anticipated,  the  Company's  

                                       12
<PAGE>
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
1998 plans to delay  capital  spending  for new  equipment.  This  announcement,
together with overall economic  conditions in Asia will negatively impact fiscal
1999 results.  Backlog for equipment sales totaled $950,000 as of June 27, 1998,
versus $5.3 million as of June 28, 1997.

International Markets

     Sales to international customers represented approximately 82%, 83% and 78%
of the Company's  gross sales in fiscal 1996, 1997 and 1998,  respectively.  The
Company's  principal  international  markets  are China  (including  Hong Kong),
Korea,  Japan,  Taiwan and Malaysia.  Additionally,  the Company's joint venture
with NSG is  expected  to be  located  in China.  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. 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 1998,  approximately  11% and 89% 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  may  be  impacted  by  foreign   currency
fluctuations. 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."

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,

                                       13
<PAGE>
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 1999 which could
adversely affect fiscal 1999 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 1998 less than 12% of the  Company's  coated
glass  revenues  were  derived  from the sale of coated  glass used in black and
white STN  displays.  The Company has to date  directed  most of its  production
capacity to the TN coated  glass which is  presently  used in lower  information
content  applications.  While the  Company  has  recently  made  investments  in
additional  production  capacity for STN 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  56%,  59% and 78% of the  Company's  gross sales in fiscal  years
1996, 1997 and 1998,  respectively.  In fiscal 1998, sales to Wintek Corporation
and Gentex  Corporation  represented  33% and 15% of gross sales,  respectively.
Sales to both  customers  for fiscal 1998  included  sales of thin film  coating
equipment and thin film coated glass. The Company expects  significantly reduced
sales to these customers in fiscal 1999. 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 systems 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:  Chairman of the
Board,  Cecil Van Alsburg;  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, Thomas D. Schmidt; Director of
Materials,  Roger Smith; 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

                                       15
<PAGE>
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."

New Facility Expansion

     The  establishment  of the  Company's  new  manufacturing  facility and the
development and implementation of additional  production lines will entail risks
related to new  production  facilities  and will  require an  investment  of the
Company's capital.  During fiscal year 1998, the Company began relocation of its
production  facilities  from  Boulder  to  Longmont,  Colorado.  There can be no
assurance  that  the  Company  will  successfully  develop  improved  processes,
implement additional  production lines or successfully operate its new facility.
There  can be no  assurance  that  such new  facility  will  result  in  greater
manufacturing  capacity  or  lower  manufacturing  costs  than  those  currently
experienced by the Company.  The Company will incur  duplicate  facility  costs,
operating  expenses and lost  production  output during its transition  from its
existing manufacturing facility to its new manufacturing  facility. In addition,
the Company  will incur  certain  start-up  expenses at the new facility and may
experience  interruptions in production  during such  transition.  These factors
adversely  affected  the  Company's  fiscal  1998  operating  results,  and  may
adversely affect fiscal 1999 operating results.  Failure to complete  relocation
to  Longmont  facility  could have a material  adverse  effect on the  Company's
business, results of operations and financial condition. During fiscal 1999, the
Company expects to expand its international operations by means of its announced
joint venture in Suzhou, China with NSG. See "ITEM 1(c):  Narrative  Description
of Business -- Facilities."

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."

                                       16
<PAGE>
                                     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 4, 1998,
the number of common Shareholders of record was 52.

     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.
<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
</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 1998
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 1996,  1997 and 1998 and the related
balance  sheet  data as of and for the  fiscal  years  ended  June 1997 and 1998
derived  from  consolidated  financial  statements  have been  audited by Arthur
Andersen  LLP,  independent  accountants,  whose report with respect  thereto is
included  elsewhere in this Form 10-K. The selected  consolidated  statements of
operations  data for the fiscal  years  ended June 1994 and 1995 and the related
consolidated balance sheet data as of June 1994, 1995 and 1996 have been derived
from audited  consolidated  financial  statements of the Company not included in
this Form 10-K.


                                       17
<PAGE>
<TABLE>
                       Summary Consolidated Financial Data
                      (In thousands, except per share data)


                                                                                  Fiscal Year Ended
                                                           June 27,      June 28,      June 29,       July 1,      July 2,
                                                             1998          1997          1996          1995          1994
Statement of Operations Data
<S>                                                        <C>            <C>          <C>          <C>           <C>
   Net sales........................................        $53,041       $34,050       $21,738      $30,990       $29,765
   Gross profit.....................................         10,891         6,698         2,720        6,702         4,484
   Operating income (loss)..........................          4,581         2,953         (478)        2,190          (79)
   Net income (loss)................................          2,857         1,621       (1,078)        1,102         (201)
   Diluted net income (loss) per common share.......       $   0.85      $   0.58     $  (0.39)     $   0.39     $  (0.07)
   Weighted average common shares outstanding.......          3,375         2,814         2,798        2,800         2,800

Balance Sheet Data
   Working capital..................................        $10,747       $ 5,534       $ 6,232      $ 5,312       $ 7,077
   Total assets.....................................         28,697        21,541        18,198       20,128        21,891
   Long term debt, net of current portion...........          4,175         6,448         8,501        7,464         9,992
   Total shareholders' equity.......................         14,826         6,740         5,058        6,020         4,565
</TABLE>
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 year 1998,  the Company began  relocating its
Boulder operations to a new facility in Longmont, Colorado. The move is expected
to be completed by September 30, 1998.

     The Company's sales have  historically been derived primarily from the sale
of thin film coated glass to  manufacturers  of LCDs. Sales and related costs of
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 coated glass orders.  The Company's ten largest  customers for coated
glass accounted for, in the aggregate,  approximately  56%, 59% and 78% of gross
sales in fiscal 1996, 1997

                                       18
<PAGE>
and 1998,  respectively.  Prices for much of the  Company's  TN thin film coated
glass supplied to the LCD market have declined over the years,  although  prices
were  generally  stable during fiscal 1998.  During the fourth quarter of fiscal
1998,  the Company was affected by price  declines for certain Asian  customers.
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  82%,  83%  and  78% of the
Company's gross sales in fiscal 1996, 1997 and 1998,  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 $2.8 million, $4.4 million and
$6.0 million in fiscal 1996, 1997, and 1998, 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  $1.6 million,  $4.6 million and $8.9 million in fiscal 1996, 1997
and 1998, respectively. At June 27, 1998, accounts receivable denominated in yen
were approximately  $839,000 or approximately 11% of total accounts  receivable.
The Company is generally  paid by its  customers for its yen  denominated  sales
within  approximately 15 to 45 days of the date of sale. 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 1998,
sales of thin film coating  equipment  totaled $13.9 million.  Net sales of thin
film coating  systems 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. 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  are  currently  experiencing  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 during the year 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 June 27, 1998,  the  Company's  backlog
from systems sales was approximately $950,000 versus $5.3 million as of June 28,
1997.  The Company  expects sales of its thin film coating  equipment to be at a
substantially reduced level for fiscal 1999 versus fiscal year 1998.

     Sales  during the fourth  quarter  reflected  a weakening  demand,  reduced
prices and overall lower sales within the Company's  core thin film coated glass
business.  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
has  reduced  demand  and  prices  for  thin  film  coated  glass  used  by  LCD
manufacturers.  In  addition,  sales of thin  film  coated  glass  for  domestic
electrochromic  applications  declined  during the quarter.  The Company expects
sales of thin film coated glass for both LCD and electrochromic  applications to
be at substantially reduced levels for fiscal 1999 versus fiscal 1998. In August
1998, the Company  announced plans to reduce coated glass production  output and
workforce levels.

     During  fiscal  1998,  the Company  initiated  operation of a new thin film
coated  glass  production  coating  line at its new  facility in Longmont  (Weld
County),  Colorado. In addition, the Company is in the process of relocating its
remaining production  operations from its existing Boulder facilities to the new
facility  in  Longmont.  As  previously  disclosed,  the  Company  expects  this
relocation  will  negatively  impact thin film coated glass sales and  operating
results of the Company.  The relocation is expected to be completed by September
30, 1998.

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.

                                       19
<PAGE>
<TABLE>
                                                                                        Fiscal Year Ended
                                                                        June 27,              June 28,           June 29,
                                                                          1998                  1997               1996
                                                                       ----------            ----------         -------
<S>                                                                     <C>                    <C>               <C>
Statement of Operations Data:
   Net sales......................................                       100.0%                100.0%             100.0%
   Cost of goods sold.............................                        79.5                  80.3               87.5
                                                                        ---------             ---------          ------
Gross profit......................................                        20.5                  19.7               12.5
Operating expenses:
  Selling, general & administrative...............                         9.6                   8.8               10.3
  Research and development........................                         2.3                   2.2                4.4
                                                                       ----------             ---------         -------
Operating income (loss)...........................                         8.6                   8.7               (2.2)
Interest expense..................................                        (0.9)                 (2.4)              (3.6)
Other income (expense)............................                         0.5                   0.3               (1.2)
                                                                       ----------             ---------          -------
Income (loss) before income taxes.................                         8.2                   6.6               (7.0)
Income tax benefit (provision)....................                        (2.8)                 (1.8)               2.0
                                                                       ----------             ---------         -------
Net income (loss).................................                         5.4%                  4.8%              (5.0)%
                                                                       ========              ========            ========
</TABLE>
Sales

     Net sales were $21.7  million,  $34 million and $53 million in fiscal years
1996, 1997 and 1998, respectively. This represented an increase of 57% from 1996
to 1997 and 56% from 1997 to 1998.  Thin film coated glass sales  increased from
$21.7 million to $31.2 million from 1996 to 1997 and from $31.2 million to $39.1
million from 1997 to 1998.  The increase in coated glass sales from 1996 to 1997
was primarily due to the worldwide recovery in demand for thin film coated glass
during  this  period.  The  increase  in coated  glass  sales  from 1997 to 1998
resulted from increasing demand as well as new production  capacity added by the
Company during fiscal 1998. Sales of thin film coating equipment, which began in
fiscal  1997,  increased  from $2.8  million in fiscal 1997 to $13.9  million in
fiscal 1998.  Backlog for equipment sales totaled  $950,000 as of June 27, 1998,
versus $5.3 million as of June 28, 1997.  The Company  expects net sales of thin
film  coated  glass and thin film  coating  equipment  to decline in fiscal 1999
versus fiscal 1998.

Gross Profits

     The  Company's  gross  profits  were $2.7  million,  $6.7 million and $10.9
million in fiscal years 1996,  1997 and 1998,  respectively.  As a percentage of
net sales,  gross  profit  margins  were 12.5%,  19.7% and 20.5% in fiscal years
1996, 1997 and 1998, respectively. Gross profits increased from 1996 to 1997 and
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, and increased from fiscal 1997 to fiscal 1998.
Between 1997 and 1998,  gross profit margins as a percent of sales increased for
thin film  equipment  and  declined for thin film coated  glass.  The decline in
coated glass  margins was  attributable  primarily  to start-up  costs for a new
production  coater  installed  during  fiscal  1998 as  well as lost  production
output,  and duplicate  facility and other costs  associated  with relocation of
production facilities from Boulder to Longmont, Colorado. The Company expects to
complete its facility  relocation  by September  30, 1998.  The Company  expects
lower  gross  profits  for both thin  film  coated  glass and thin film  coating
equipment for fiscal 1999 versus fiscal 1998.

Selling, General and Administrative

     The Company's  selling,  general and  administrative  expenses totaled $2.2
million,  $3.0 million and $5.1  million for fiscal  years 1996,  1997 and 1998,
respectively.  Selling,  general and administrative expenses increased from 1996
to 1997 and 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.  As
a percentage of sales,  selling,  general and  administrative  costs were 10.3%,
8.8% and 9.6% for fiscal years 1996, 1997 and 1998, respectively.

                                       20
<PAGE>
Research and Development

     Research and development expenses totaled $965,000, $749,000 and $1,243,000
for fiscal years 1996,  1997 and 1998,  respectively.  In fiscal 1996 and 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 1996 to 1997 and
from 1997 to 1998  were  primarily  attributable  to  changes  in  staffing  and
material and supplies  expense related to advanced  development  projects.  As a
percentage of net sales,  research and development  expenses were 4.4%, 2.2% and
2.3% in fiscal  years 1996,  1997 and 1998,  respectively.  The Company  expects
research and  development  spending for fiscal 1999 to increase  slightly versus
spending for fiscal 1998.

Interest Expense

     The  Company's  interest  expense was  $780,000,  $822,000 and $496,000 for
fiscal years 1996, 1997 and 1998,  respectively.  This overall  decrease was due
primarily to the decrease in long-term borrowings by the Company. Total debt was
$9.9 million, $7.6 million and $4.3 million as of fiscal year end 1996, 1997 and
1998,  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.  The Company  expects higher debt levels and interest  expense for
fiscal 1999 versus fiscal 1998.

Other Income (Expense)

     Other income (expense) was ($244,000), $95,000 and $252,000 in fiscal years
1996,  1997 and 1998,  respectively.  This  fluctuation was due primarily to the
fact that the  Company  had a foreign  exchange  loss in fiscal 1996 and foreign
exchange gains in fiscal 1997 and 1998. It is uncertain whether foreign exchange
gains or losses will be incurred in the future.

Income Tax Benefit (Provision)

     The Company had an income tax benefit for fiscal 1996 of $424,000  due to a
net  operating  loss for the fiscal year.  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.

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."

                                       21
<PAGE>
<TABLE>
                                                 Quarter Ended                                      Quarter Ended
                                 ---------------------------------------------     --------------------------------------------
                                                  Fiscal 1997                                        Fiscal 1998
                                 ---------------------------------------------     --------------------------------------------
                                    Sept.       Dec.       March       June         Sept.       Dec.        March       June
                                    1996        1996       1997        1997         1997        1997        1998        1998
                                   ------      ------     ------      ------       ------      ------      ------      -----
<S>                                <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Net sales ......................   $  6,279    $  7,806    $  9,935    $ 10,030    $ 11,251    $ 13,173    $ 15,312    $ 13,305
Cost of goods sold .............      5,235       6,593       7,768       7,756       8,801      10,588      12,355      10,406
                                   --------    --------    --------    --------    --------    --------    --------    --------
Gross profit ...................      1,044       1,213       2,167       2,274       2,450       2,585       2,957       2,899
Operating expenses:
  Selling, general and
administrative .................        544         642         923         887         986       1,109       1,336       1,636
  Research and development .....        192         115         181         261         330         287         324         302
                                   --------    --------    --------    --------    --------    --------    --------    --------
Operating income (loss) ........        308         456       1,063       1,126       1,134       1,189       1,297         961
Interest expense ...............       (251)       (200)       (191)       (180)       (171)        (87)       (103)       (135)
Other income (expense) .........          7          34          10          44          24          29          86         113
                                   --------    --------    --------    --------    --------    --------    --------    --------
Income (loss) before income
 taxes .........................         64         290         882         990         987       1,131       1,280         939
Income tax benefit (provision) .        (17)        (79)       (240)       (269)       (328)       (385)       (435)       (332)
                                   --------    --------    --------    --------    --------    --------    --------    --------
Net income (loss) ..............   $     47    $    211    $    642    $    721    $    659    $    746    $    845    $    607
                                   ========    ========    ========    ========    ========    ========    ========    ========
</TABLE>

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

                                            Quarter Ended                           Quarter Ended
                                             Fiscal 1997                             Fiscal 1998
                                Sept.     Dec.      March      June     Sept.      Dec.     March      June
                                1996      1996       1997      1997     1997       1997      1998      1998
                                ------    ------    -------   ------    -----     ------    -----     -----
<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 ........      83.4      84.4      78.2      77.3      78.2      80.4      80.7      78.2
                                -----      -----    -----     -----     -----     -----     -----     -----
Gross profit ..............      16.6      15.6      21.8      22.7      21.8      19.6      19.3      21.8
Operating Expenses:
  Selling, general and
    administrative ........       8.7       8.2       9.3       8.8       8.8       8.4       8.7      12.3
  Research and development        3.1       1.5       1.8       2.6       2.9       2.2       2.1       2.3
                                -----      -----    -----     -----     -----     -----     -----     -----
Operating income (loss) ...       4.8       5.9      10.7      11.3      10.1       9.0       8.5       7.2
Interest expense ..........      (3.9)     (2.6)     (1.9)     (1.8)     (1.5)     (0.7)     (0.7)     (1.0)

Other income (expense) ....       0.1       0.4       0.1       0.4       0.2       0.3       0.6       0.9
                                -----      -----    -----     -----     -----     -----     -----     -----
Income (loss) before income
 taxes ....................       1.0       3.7       8.9       9.9       8.8       8.6       8.4       7.1
Income tax benefit
  (provision) .............      (0.3)     (1.0)     (2.4)     (2.7)     (2.9)     (2.9)     (2.9)     (2.5)
                                -----      -----    -----     -----     -----     -----     -----     -----
Net income (loss) .........       0.7%      2.7%      6.5%      7.2%      5.9%      5.7%      5.5%      4.6%
                                =====      =====    =====     =====     =====     =====     =====     =====
</TABLE>
     The variation in quarterly sales during fiscal 1997 and fiscal 1998 was due
to  increasing  sales of thin film coated glass as well as  increasing  sales of
thin film coating equipment. Net sales of thin film coated glass for fiscal 1998
totaled $39.1 million  versus $31.2 million  during fiscal year 1997.  Sales and
related costs of coated glass products are recognized when products are shipped.
Sales of thin film coating equipment totaled $13.9 million in fiscal 1998 versus
$2.8  million in fiscal  1997.  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 1998,
quarterly  sales of thin film coating  equipment were $2.1 million for the first
fiscal  quarter,  $3.3 million  during the second fiscal  quarter,  $5.1 million
during the third  fiscal  quarter  and $3.4  million  during  the fourth  fiscal
quarter. In comparison, sales of thin film coating equipment totaled $109,000 in
the first  quarter of fiscal  1997,  $564,000 in second  quarter of fiscal 1997,
$1.6  million in the third  quarter of fiscal  1997 and  $554,000  in the fourth
quarter of fiscal 1997.

                                       22
<PAGE>
     Total gross profits increased quarter to quarter from fiscal 1997 to fiscal
1998, except for the fourth fiscal quarter 1998. As a percentage of sales, gross
profits  increased  in the first and second  quarters  of fiscal 1998 versus the
first and second  quarters of fiscal 1997.  Gross profit margins as a percentage
of sales  declined  in the third and fourth  quarters  of fiscal 1998 versus the
third and fourth  quarters of fiscal 1997.  This  decrease was due  primarily to
start-up costs and ramp-up of the new production  coater installed during fiscal
1998 as well as  costs  associated  with  relocating  the  Company's  production
facilities to Longmont,  Colorado which adversely  affected our thin film coated
glass production and operating costs.  Also, during the fourth quarter of fiscal
1998,  the Asian  situation  impacted  the  Company's  sales  levels,  adversely
impacting the Company's gross profit margins.

     Selling,  general and administrative expenses increased during the quarters
of fiscal 1998 due to higher sales  commissions  for thin film equipment  sales,
higher  staffing  expenses,  and  increased  profit  sharing  for the  Company's
employees.  In addition, the Company incurred expenses for the relocation of our
facilities  and  equipment to Longmont  during the third and fourth  quarters of
fiscal 1998.

     Interest  expense  was lower  during  fiscal  1998  versus  fiscal 1997 due
primarily  to reduced debt levels in fiscal 1998.  Other  income  increased  for
fiscal 1998 due primarily to higher foreign exchange gains.

     Because a significant  portion of the Company's overhead is fixed, at least
in the  short  term,  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 1999  quarterly
sales, gross profits, operating income and net income to be at levels lower than
comparable quarters of fiscal 1998.

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 1998 were $208,000 compared to $4.0 million for the corresponding period in
fiscal 1997 due primarily to changes in working capital In November and December
1997, the Company  received net proceeds of $5.2 million in connection  with its
initial public  offering.  The proceeds were used to pay down long-term debt and
for  working  capital.  As of June  27,  1998,  the  Company  had  cash and cash
equivalents of approximately $81,000 and working capital of $10.7 million. As of
June 27, 1998, accounts receivable were approximately $7.4 million.

     The Company has an $11.5 million  credit  facility  with a commercial  bank
which expires June 30, 2000 which  originally  included a $3.0 million term loan
and an $8.5  million line of credit.  On March 27, 1998 the credit  facility was
amended  to  convert  the term  loan and  increase  the line of  credit to $11.5
million.  As of June 27,  1998,  the  Company  had  approximately  $3.9  million
outstanding on its credit facility.

     Capital  expenditures  for the fiscal  year  ended June 27,  1998 were $5.4
million,  compared to $1.9 million for the fiscal year ended June 28, 1997.  The
increase in capital  spending for fiscal 1998 was due  primarily to the addition
of a new production coater as well as capital  improvements to the Company's new
Longmont,  Colorado  facility.  Capital  expenditures  for fiscal  year 1999 are
expected to be  approximately  $3.0  million.  Those capital  expenditures  will
consist primarily of expenditures to design and build the new Alliance equipment
system as well as to complete  improvements  at the  Company's  new  facility in
Longmont,  Colorado.  During fiscal 1998, the Company began operation of its new
thin film  production  coating  line and is  continuing  to move its  production
operations from Boulder to Longmont,  Colorado.  The Company expects to complete
the  relocation to Longmont by September 30, 1998.  During the fourth quarter of
fiscal 1998, the Company completed the sale of its Boulder facility.  During the
third quarter,  the Company  completed the transfer of a purchase option for its
Longmont,  Colorado  facility.  Total net proceeds from these  transactions were
approximately $3.0 million.

     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.  Due to
business  conditions,  the Company expects cash flow from operations to decrease
in fiscal year 1999 versus  fiscal  year 1998 and expects  increased  borrowings
under its credit facility. In addition,  during fiscal 1999,

                                       23
<PAGE>
the Company expects to contribute  approximately  $3.2 million of equity capital
to the new  joint  venture  in  China  with  Nippon  Sheet  Glass.  This  equity
contribution  is  expected  to be  funded  by  additional  borrowings  under the
Company's  credit  facility  and the  sale of  coating  equipment  to the  joint
venture.

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 its initial  assessment  of all  currently  used
computer  systems as well as production  and coating  equipment  systems and has
developed  a plan to correct  those areas that will be affected by the year 2000
issue.  The Company has  undertaken  a  corrective  action  plan  including  the
replacement  or upgrade of certain  software  and  hardware.  The  Company  will
utilize outside vendors to assist in the upgrade of certain systems. The Company
estimates  that the  implementation  phase is  approximately  50% complete  with
respect  to its major  systems.  The  Company's  goal is to have  these  systems
substantially year 2000 compliant by the end of fiscal 1999.

     The Company began in fiscal 1998 evaluating  personal computer hardware and
software  outside  of  the  Company's  IT  systems.  With  respect  to  personal
computers,  the Company has completed the audit phase,  and the  assessment  and
scope phases are  approximately  80%  complete.  The Company is presently in the
process of testing and  implementation,  and is upgrading its personal  computer
hardware and software to become Year 2000  compliant.  The Company's  goal is to
complete the remediation of personal computer systems by the end of fiscal 1999.

     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.  Present  estimated  cost for
remediation are $40,000.

     The  Company  presently  anticipates  that it will  complete  its Year 2000
assessment and remediation by the end of fiscal 1999.  However,  there can be no
assurance  that the Company will be  successful  in  implementing  its Year 2000
remediation plan according to the anticipated schedule. In addition, the Company
may be adversely  affected by the  inability of other  companies  whose  systems
interact  with the  Company  to become  Year  2000  compliant  and by  potential
interruptions of utility, communication or transportation systems as a result of
Year 2000 issues.

     Although the Company expects its internal systems to be Year 2000 compliant
as described  above, the Company intends to prepare a contingency plan that will
specify what it plans to do if it or important  external  companies are not Year
2000  compliant  in  a  timely  manner.  The  Company  expects  to  prepare  its
contingency plan during calendar year 1999.

Recent Financial Accounting Standards Board Statement

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

                                       24
<PAGE>
     In June 1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement  of  Financial   Accounting  Standards  ("SFAS")  Statement  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 has not
yet  determined  the  segments,  if any, that will be required to be reported in
connection  with  adoption of SFAS No.  131.  For  further  discussion  of these
accounting  standards,  see "ITEM 8: Financial Statements and Supplementary Data
-- Note 2: Significant Accounting Policies."

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  $3.9 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  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.

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 June 27, 1998,  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."


ITEM 8:  Financial Statements and Supplementary Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                            Page
Report of Independent Public Accountants..................................    26
Consolidated Balance Sheets as of June 27, 1998, 
   June 28, 1997 and June 29, 1996........................................    27
Consolidated Statements of Operations for the fiscal 
   years ended June 27, 1998, June 28, 1997 and June 29, 1996.............    29
Consolidated Statements of Stockholders' Equity for the fiscal
   years ended June 27, 1998, June 28, 1997 and June 29, 1996.............    30
Consolidated Statements of Cash Flows for the fiscal years
   ended June 27, 1998, June 28, 1997 and June 29, 1996...................    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 June 27, 1998 and June
28, 1997 and the related  consolidated  statements of operations,  stockholders'
equity and cash flows for the fiscal  years ended June 27,  1998,  June 28, 1997
and June 29, 1996.  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 June 27, 1998 and June 28, 1997, and the
consolidated  results  of their  operations  and their cash flows for the fiscal
years ended June 27, 1998,  June 28, 1997 and June 29, 1996, in conformity  with
generally accepted accounting principles.


ARTHUR ANDERSEN LLP


Denver, Colorado,
    July 21, 1998.

                                       26
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>

                                                June 27,          June 28,
                     ASSETS                      1998              1997
                     ------                     ------            -----
<S>                                             <C>         <C>
CURRENT ASSETS:
    Cash and cash equivalents                   $     81    $    297
    Accounts and trade notes receivable, net-
       Coated glass and other                      6,010       6,316
       Income earned, not yet billed (Note 2)      1,436         145
    Inventories, net (Note 2)                     10,055       6,160
    Prepaid expenses and other                       948         428
    Deferred tax asset, net (Note 6)                 837         250
                                                --------    --------
              Total current assets                19,367      13,596
                                                --------    --------
PROPERTY, PLANT AND EQUIPMENT (Note 2):
    Land                                             270         733
    Building                                         240       2,747
    Machinery and equipment                       16,477      11,587
    Office furniture and equipment                   502         452
    Leasehold improvements                         1,022         425
    Construction-in-progress                         877       1,209
                                                --------    --------
                                                  19,388      17,153
    Accumulated depreciation                     (10,129)     (9,330)
                                                --------    --------
                                                   9,259       7,823
                                                --------    --------
INVESTMENT IN AFFILIATE (Notes 4 and 9)               71         122
                                                --------    --------
                                                $ 28,697    $ 21,541
                                                ========    ========
</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>

                                                             June 27,    June 28,
         LIABILITIES AND STOCKHOLDERS' EQUITY                 1998        1997
<S>                                                         <C>         <C>
CURRENT LIABILITIES:
    Trade accounts payable                                  $  5,241    $  3,802
    Accrued expenses                                           2,955       1,272
    Income received but not yet earned (Note 2)                   --       1,500
    Income taxes payable                                         291         352
    Current portion of deferred gain (Note 2)                     56        --
    Current portion of long-term debt (Note 3)                    77       1,136
                                                            --------    --------
              Total current liabilities                        8,620       8,062

NON-CURRENT LIABILITIES:
    Long-term debt, net of current portion (Note 3)            4,175       6,448
    Deferred gain, net of current portion (Note 2)               756        --
    Deferred tax liability, net (Note 6)                         320         291
                                                            --------    --------
              Total liabilities                               13,871      14,801
                                                            --------    --------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)

STOCKHOLDERS' EQUITY:
    Common stock, no par value, 10,000,000
       shares authorized; 3,472,688 and 2,799,998
       shares issued and outstanding at June 27, 1998 and
       June 28, 1997, respectively                             9,424       4,245
    Less: common shares held by affiliate (Note 4)              --           (26)
    Deferred compensation (Note 5)                                (7)        (31)
    Retained earnings                                          5,409       2,552
                                                            --------    --------
              Total stockholders' equity                      14,826       6,740
                                                            --------    --------
                                                            $ 28,697    $ 21,541
                                                            ========    ========
</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
                                     June 27,      June 28,     June 29,
                                       1998          1997         1996
<S>                                   <C>         <C>         <C>
NET SALES                             $ 53,041    $ 34,050    $ 21,738

COST OF GOODS SOLD                      42,150      27,352      19,018
                                      --------    --------    --------
GROSS PROFIT                            10,891       6,698       2,720

SELLING, GENERAL AND
    ADMINISTRATIVE EXPENSES              5,067       2,996       2,233

RESEARCH AND DEVELOPMENT
    EXPENSES                             1,243         749         965
                                      --------    --------    --------
INCOME (LOSS) FROM OPERATIONS            4,581       2,953        (478)
                                      --------    --------    --------
OTHER (EXPENSE) INCOME:
    Gain (loss) on foreign currency
       exchange (Note 2)                   174          96        (286)
    Other income (loss), net                23         (20)         30
    Interest income                         55          19          12
    Interest expense                      (496)       (822)       (780)
                                      --------    --------    --------
                                          (244)       (727)     (1,024)
                                      --------    --------    --------
INCOME (LOSS) BEFORE INCOME
    TAXES                                4,337       2,226      (1,502)

INCOME TAX PROVISION (BENEFIT)           1,480         605        (424)
                                      --------    --------    --------
NET INCOME (LOSS)                     $  2,857    $  1,621    $ (1,078)
                                      ========    ========    ========

NET INCOME (LOSS) PER SHARE:
    Basic                                $0.90       $0.58      $(0.39)
                                          ====        ====       =====
    Diluted                              $0.85       $0.58      $(0.39)
                                          ====        ====       =====

WEIGHTED AVERAGE COMMON SHARES
    OUTSTANDING:
       Basic                             3,181       2,796       2,798
                                         =====       =====       =====
       Diluted                           3,375       2,814       2,798
                                         =====       =====       =====
</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 JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
                       (In thousands, except share data)
<TABLE>

                                                                                                                Total
                                                                                                                Stock-
                                 Common Stock          Held by Affiliate         Deferred        Retained      holders'
                             Shares       Amount      Shares      Amount       Compensation      Earnings       Equity
<S>                         <C>          <C>          <C>         <C>          <C>               <C>          <C>
BALANCES, July 1, 1995      2,799,998    $ 4,255            -    $      -        $   (244)       $ 2,009      $ 6,020

    Net loss                        -          -            -           -               -         (1,078)      (1,078)
    Forfeiture of options           -        (10)           -           -              10              -            -
    Amortization of
       deferred
       compensation                 -          -            -           -             142              -          142
    Acquisition of shares 
       by affiliate                 -          -       (3,749)        (26)              -              -          (26)
                           ----------    -------     --------     -------         -------        -------      -------
BALANCES, June 29, 1996     2,799,998      4,245       (3,749)        (26)            (92)           931        5,058

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

    Issuance of shares in
       connection with IPO
       (net of underwriters'
       commissions of
       $297,500)              676,439      5,205           -            -               -              -        5,205
    Liquidation of affiliate   (3,749)       (26)      3,749           26               -              -            -
    Net income                      -          -           -            -               -          2,857        2,857
    Amortization of deferred
       compensation                 -          -           -            -              24              -           24
                           ----------    -------      -------     -------        --------        -------      -------
BALANCES, June 27, 1998     3,472,688     $9,424           -      $     -         $    (7)       $ 5,409      $14,826
                           ==========     ======      =======     =======        ========        =======      =======
</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
                                                                  June 27,      June 28,   June 29,
                                                                    1998          1997      1996
CASH FLOWS FROM OPERATING
    ACTIVITIES:
<S>                                                                <C>        <C>        <C>
Net income (loss)                                                  $ 2,857    $ 1,621    $(1,078)
Adjustments to reconcile net
   income (loss) to net cash flows
   from operating activities-
       Depreciation and amortization                                 1,800      1,473      1,405
       Amortization of deferred compensation                            24         61        142
       Amortization of deferred gain                                   (22)      --         --
       Deferred income tax provision (benefit)                        (558)      (112)      (170)
       (Gain) loss on disposals of property, plant and equipment        (4)         6          2
       Undistributed earnings of affiliate                             (50)        (7)       (12)
       Changes in-
           Accounts and trade notes receivable, net                   (985)    (3,656)     2,361
           Inventories                                              (3,895)       654     (1,960)
           Income taxes receivable                                    --          332       (332)
           Prepaid expenses and other                                 (520)      (385)       461
           Accounts payable-trade                                    1,439      1,401     (1,037)
           Income received not yet earned                           (1,500)     1,500       --
           Accrued expenses                                          1,683        798       (445)
           Income taxes payable                                        (61)       352       (130)
                                                                   -------    -------    -------
           Net cash flows from operating activities                    208      4,038       (793)
                                                                   -------    -------    -------
</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
                                                              June 27,      June 28,    June 29,
                                                                1998          1997       1996
CASH FLOWS FROM INVESTING ACTIVITIES:
<S>                                                           <C>         <C>         <C>
    Purchase of property, plant and equipment                 $ (5,415)   $ (1,936)   $   (933)
    Reimbursement of equipment costs                              --           161         387
    Proceeds from sale of property, plant and equipment          3,018          60          85
    Investment in joint venture                                    (71)       --          --
    Proceeds from liquidation of investment in affiliate           172        --          --
    Other                                                         --           (20)        (12)
                                                              --------    --------    --------
              Net cash flows from investing activities          (2,296)     (1,695)       (473)
                                                              --------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from long-term debt                                16,715       8,128      12,444
    Repayment of long-term debt                                (20,048)    (10,434)    (11,685)
    Proceeds from sale of common stock, net of underwriting
       commissions of $297,500                                   5,205        --          --
                                                              --------    --------    --------
              Net cash flows from financing activities           1,872      (2,306)        759
                                                              --------    --------    --------
NET (DECREASE) INCREASE IN CASH                                   (216)         37        (507)

CASH AND CASH EQUIVALENTS,
    beginning of period                                            297         260         767
                                                              --------    --------    --------
CASH AND CASH EQUIVALENTS,
    end of period                                             $     81    $    297    $    260
                                                              ========    ========    ========
SUPPLEMENTAL CASH FLOW INFORMATION:
    Cash paid for interest, net of
       amounts capitalized                                    $    767    $    593    $    783
                                                              ========    ========    ========
    Cash paid for income taxes, net of
       amounts refunded                                       $  2,109    $    123    $    208
                                                              =======     ========    ========
</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 coated glass  manufacturing  systems 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.

         Stock Split

Effective  September  30,  1997,  the  Company  issued a stock  dividend  to all
shareholders  of six shares for every one held.  All share and per share amounts
have been retroactively restated to reflect this event.

         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.

(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.

         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 1998,
1997 and 1996 include 52 weeks.

         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.

                                       33
<PAGE>
         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 has  experienced a slowdown in orders in the fourth
quarter,  continuing  subsequent  to  year  end.  As a  result,  management  has
developed a restructuring plan, subsequent to year end, designed to reduce costs
and  improve  operating  efficiencies.  To  limit  the  Company's  credit  risk,
management  performs  ongoing  credit  evaluations of its customers and requires
letters of credit from certain foreign customers prior to shipment. Sales within
Asia totaled approximately $40,624,000, $26,145,000 and $17,064,000 in the years
ended June 27, 1998, June 28, 1997 and June 29, 1996, respectively.  At June 27,
1998,  approximately  $4,853,000  of  the  Company's  coated  glass  sales  were
receivable  from Asian  companies and all of the income earned,  not yet billed,
was from  contracts  with 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 June 27, 1998.

         Inventories

Inventories  are stated at the lower of cost  (first-in,  first-out)  or market.
Inventories at June 27, 1998 and June 28, 1997, consist of the following:
<TABLE>
                                                                            June 27,              June 28,
                                                                              1998                  1997
         <S>                                                               <C>                <C>
         Raw materials, net                                                $  6,555,000          $3,840,000
         Work-in-process                                                         11,000               9,000
         Materials for manufacturing systems                                    302,000             158,000
         Finished goods                                                       3,187,000           2,153,000
                                                                            ------------      -------------
                                                                            $10,055,000          $6,160,000
                                                                             ==========           =========
</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.  Interest of  approximately  $85,000,  $9,000 and $0 was capitalized
during fiscal years 1998, 1997 and 1996, respectively.  Depreciation is computed
on  straight-line  or accelerated  methods over the following  estimated  useful
lives:
<TABLE>
                                                                            Estimated
                                                                           Useful Lives
                  <S>                                                       <C>
                  Building                                                     30 years
                  Machinery and equipment                                    3-10 years
                  Office furniture and equipment                              3-5 years
                  Leasehold improvements                                     4-15 years
</TABLE>

       Deferred Gain

The  Company  has entered  into a lease  transaction  with a third party for the
Company's new manufacturing and  administrative  facility in Longmont,  Colorado
(Note 9). The Company originally held a purchase option for this facility, which
was subsequently sold. The gain recognized from the sale of this purchase option
is being deferred and amortized over the term of the lease of 15 years.

                                       34
<PAGE>
       Revenue Recognition

Coated glass revenues are recognized upon shipment.

       System Sales

Revenues  relating to the sales of thin film coating  systems 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 and administrative costs are charged to expense as
incurred.   Changes  in   performance,   contract   conditions   and   estimated
profitability,  including those arising from contract  penalty  provisions,  and
final contract  settlements  may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.  Income received
but not yet earned,  which  totaled $0 and  $1,500,000 at June 27, 1998 and June
28, 1997,  respectively,  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   $1,436,000   and  $145,000  at  June  27,  1998  and  June  28,  1997,
respectively, represents revenues earned prior to billing.

       Research and Development Costs

Research and development costs are expensed as incurred and consist primarily of
salaries and supplies. The Company incurred approximately  $1,243,000,  $749,000
and  $965,000 of  research  and  development  costs for the years ended June 27,
1998,  June 28,  1997 and June 29,  1996,  respectively,  net of  reimbursements
received from a contracting research organization.

       Foreign Currency Transactions

The Company generated  approximately 78% and 83% of its revenues in fiscal years
1998 and 1997,  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.

       Net Income (Loss) Per Share

Net income  (loss) per share is computed  using the weighted  average  number of
common  and  common  equivalent  shares  outstanding  for  each  period.  Common
equivalent shares include stock options to purchase the Company's common stock.

       Adoption of New Accounting Standards

The Financial  Accounting  Standards Board ("FASB") recently issued Statement of
Financial Accounting Standards ("SFAS") No. 128 entitled,  "Earnings per Share."
SFAS No. 128 replaces  primary and fully  diluted  earnings per share with basic
and diluted earnings per share,  respectively.  Under SFAS No. 128, basic shares
are calculated as shares  outstanding in the market,  less any treasury  shares,
and diluted  shares are  calculated  using basic shares and  including  dilutive
common  equivalent  shares such as stock  options.  The Company has applied this
accounting  principle  retroactively.  The effect of this  accounting  change on
previously reported earnings per share was as follows:

                                       35
<PAGE>
<TABLE>
                                                    1998                      1997                   1996
                                                         Fully                     Fully                 Fully
                                             Primary     Diluted      Primary      Diluted    Primary    Diluted
<S>                                          <C>         <C>           <C>         <C>        <C>        <C>
Primary earnings per share (as reported
    under the prior method)                  $ 0.84                    $0.56                  $(0.39)

Effect of removal of options issued within
    12 months of IPO in connection with
       adoption of SFAS No. 128                0.06                     0.02                       -

                                             ------                  -------                 --------
Basic earnings per share                       0.90                     0.58                   (0.39)


Fully diluted earnings per share (as reported
    under the prior method)                               $0.86                   $0.56                 $(0.39)
Effect of stock options                       (0.05)                       -                       -
Effect of use of average market price for
    options as opposed to end of year price
    used under previous method                            (0.01)                   0.02                      -
                                             ------      ------       ------     ------       ------    ------

Diluted earnings per share                   $ 0.85      $ 0.85        $0.58      $0.58       $(0.39)   $(0.39)
                                              =====      ======         ====       ====        =====     =====
</TABLE>
A  reconciliation  between  the  number of shares  used to  calculate  basic and
diluted earnings per share is as follows (in thousands of shares):
<TABLE>
                                                                  1998          1997       1996
       <S>                                                       <C>          <C>         <C>
       Weighted average number of common
                 shares outstanding (shares used in
          basic earnings per share computation)                   3,181        2,796        2,798
       Effect of stock options (treasury stock
          method)                                                   194           18           -
                                                                 ------       ------       ------
       Shares used in diluted earnings per share
          computation                                             3,375        2,814        2,798
                                                                  =====        =====        =====
</TABLE>
The Company  adopted SFAS No. 130,  "Reporting  Comprehensive  Income" in fiscal
year 1998. 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. In fiscal years
1998  and 1997  there  were no  material  differences  between  net  income  and
comprehensive income.

       Recently Issued Accounting Standards

In June 1997,  the 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 131 is  effective  for fiscal years  beginning  after
December 15, 1997.  Management has not yet determined the segments, if any, that
will be reported in connection with adoption of SFAS No. 131.

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, services 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.

                                       36
<PAGE>
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 (Note 9). 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  effect  will be  reflected  as a  cumulative  effect  of a change in
accounting principle at the time of adoption.

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, 1999 and may be implemented as of the beginning
of any fiscal  quarter after June 15, 1998.  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>
                                                                                    June 27,           June 28,
                                                                                      1998               1997
<S>                                                                                  <C>                 <C>
Revolving  credit  facility,  due June 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 (8% and 7.406%,
respectively, at June 27, 1998)                                                        $3,910,000        $     -

Line of credit with a bank, due June 30, 1997, (see amended terms discussed
below)                                                                                 -                  7,138,000


Note payable secured by a deed of trust on land, due January 12, 1998;  payments
of interest only due monthly; interest accruing at 9.0% at
June 28, 1997                                                                          -                     75,000
</TABLE>

                                       37
<PAGE>
<TABLE>
                                                                                       June 27,           June 28,
                                                                                         1998               1997
<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 8.790%                                          310,000           371,000

Other capital leases of equipment                                                          32,000                 -
                                                                                      -----------        ----------
                                                                                        4,252,000         7,584,000
       Less-current portion                                                              (77,000)        (1,136,000)
                                                                                     ------------        ----------
       Total long-term debt                                                            $4,175,000        $6,448,000
                                                                                        =========         =========
</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.  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;  a ratio of total liabilities to
tangible net worth and maintain a certain  amount of tangible net worth,  all as
defined in the Agreement. As of June 27, 1998, 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 June 27, 1998,  the Company had  $3,000,000  of  borrowings  at the
Eurodollar rate.

Maturities of debt at June 27, 1998, are as follows:
<TABLE>
                  Fiscal Year-
                     <S>                                                                 <C>
                     1999                                                                $     77,000
                     2000                                                                   3,994,000
                     2001                                                                      92,000
                     2002                                                                      89,000
                     2003                                                                           -
                     Thereafter                                                                     -
                                                                                         ------------
                           Total                                                           $4,252,000
                                                                                         ============
</TABLE>
(4)     RELATED PARTY TRANSACTIONS

In fiscal  1993,  the  Company  acquired a 25%  general  partner  interest  in a
partnership  (the  "Partnership")  from an unrelated  party;  the  remaining 75%
general partner  interest in the Partnership was owned by founding  stockholders
of the Company. The Company accounts for this investment under the equity method
of accounting,  and the  undistributed  earnings are included in other income in
the accompanying  consolidated statements of operations.  This Partnership owned
and leased certain  Boulder office and  manufacturing  facilities to the Company
under a noncancelable  lease (see Note 9) until they were sold in June 1998. The
Company  paid the  Partnership  monthly  rent and paid all  property  taxes  and
insurance  costs.  The Company paid rent of  approximately  $241,000  under this
agreement  during each of the years ended June 29, 1996 and June 28,  1997,  and
$248,000 in the year ended June 27,  1998.  In November  1995,  the  Partnership
acquired approximately 15,000 shares of the Company's common stock. Accordingly,
the Company  reduced its  investment  in the  affiliate for its 25% share of the
Partnership's investment in the Company.

In  connection  with the sale of the Boulder  facilities,  the  Partnership  was
dissolved and liquidated. As a result, the Company received 25% of the shares of
the Company's stock owned by the Partnership.

In  fiscal  1997,  the  Company   accrued   $250,000  as  interest   expense  as
consideration for Donnelly's guarantee of $5 million of the Company's debt. This
amount  was paid in  August  1997.  On July 22,  1997,  Donnelly  extended  this
guarantee  for the  duration  of the  Agreement  with  the same  maximum  amount
guaranteed of $5 million. During fiscal

                                       38
<PAGE>
1998,  approximately  $103,000 of additional interest was accrued and paid. This
guarantee expired in connection with the Offering.

(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.  Through June 27, 1998,
the Company has expensed $590,000, and the balance of such deferred compensation
is  being  expensed  over  the  remaining  estimated  service  period,  which is
consistent with the vesting period.

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 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 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 123 had
been  applied.   The  Company  has  elected  to  account  for  its   stock-based
compensation  plans for employees and directors under APB 25. As the Company did
not grant options to purchase  common stock during the year ended June 29, 1996,
no pro forma  compensation  expense  was  required  for  fiscal  1996  under the
provisions of SFAS 123.

Accordingly,  for purposes of the pro forma  disclosures  presented  below,  the
Company has computed the fair values of all options  granted  during fiscal 1998
and 1997  using  the  Black-Scholes  pricing  model and the  following  weighted
average assumptions:
<TABLE>

                                                                             1998           1997
              <S>                                                          <C>            <C>
              Risk-free interest rate                                        5.66%          6.32%
              Expected lives                                               5 years        5 years
              Expected volatility                                              64%            51%
              Expected dividend yield                                           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.  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.

                                       39
<PAGE>
The total  fair  value of  options  granted  was  computed  to be  approximately
$147,000  and  $230,000  for the years  ended June 27,  1998 and June 28,  1997,
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  $89,000  and $5,000 for the fiscal  years  ended June 27, 1998 and June 28,
1997, 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>
                                                                             1998           1997
                  <S>                                                       <C>            <C>
                  Net income:
                      As reported                                           $2,857         $1,621
                                                                             =====          =====
                      Pro forma (unaudited)                                 $2,768         $1,616
                                                                             =====          =====

                  Basic earnings per share:
                      As reported                                          $  0.90        $  0.58
                                                                            ======         ======
                      Pro forma                                            $  0.87        $  0.58
                                                                            ======         ======
</TABLE>

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

                          For the Fiscal Years Ended


      June 27, 1998               June 28, 1997              June 29, 1996
     ---------------             ---------------            --------------

                                                           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              345,100        $3.43       260,183      $2.83       273,602      $2.82
    Granted                                    34,545        $7.20        84,917      $5.26             -          -
    Canceled                                        -            -             -          -       (13,419)     $2.57
                                           ----------      -------    ----------    -------    ----------     ------
Outstanding at end of year                    379,645        $3.77       345,100      $3.43       260,183      $2.83
                                              =======         ====       =======       ====       =======       ====
Exercisable at end of year                    255,695        $3.05       200,111      $2.78       126,427      $2.58
                                              =======         ====       =======       ====       =======       ====

Weighted average fair value of
   options granted                                           $2.89
                                                             =====
</TABLE>
The  following  table  summarizes   information  about  employee  stock  options
outstanding and exercisable at June 27, 1998:
<TABLE>
                                                  Options Outstanding                          Options Exercisable

                                      Number of           Weighted
                                       Options             Average           Weighted           Number            Weighted
                                   Outstanding at         Remaining          Average        Exercisable at        Average
           Range of                   June 27,           Contractual         Exercise          June 27,           Exercise
        Exercise Prices                 1998            Life in Years         Price              1998              Price
       -----------------               ------          ---------------       -------            ------            ------
           <S>                          <C>                <C>               <C>                <C>             <C>
           $2.32                        122,766             4.90              $2.32            122,766            $2.32
           $3.29                        137,417             7.60               3.29            103,063             3.29
           $5.26                         84,917             8.90               5.26             29,866             5.26
           $7.20                         34,545             9.25               7.20                 -               -
                                       --------                             -------           --------           ------
                                        379,645                               $3.77            255,695            $3.05
                                        =======                             =======            =======           ======
</TABLE>

                                       40
<PAGE>
       Employee Stock Purchase Plan

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

On June 27, 1998, the Company  granted 1,777 shares to employees under this plan
at a grant price of $4.84 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 asset (liability) is comprised of the following:
<TABLE>

                                                               June 27,        June 28,
                                                                 1998           1997
<S>                                                             <C>          <C>
Inventories                                                     $ 118,000    $  85,000
Accrued expenses                                                  771,000      215,000
Partnership income                                                (24,000)        --
Foreign currency gain                                             (28,000)        --
Valuation allowance                                                  --        (50,000)
                                                                ---------    ---------
                Total current deferred tax asset, net             837,000      250,000
                                                                ---------    ---------

Property, plant and equipment                                    (670,000)    (442,000)
Deferred compensation                                             216,000      208,000
Deferred gain                                                     303,000         --
Other                                                            (169,000)     (57,000)
                                                                ---------    ---------
                Total non-current deferred tax liability, net    (320,000)    (291,000)
                                                                ---------    ---------
                Total deferred tax asset (liability), net       $ 517,000    $ (41,000)
                                                                =========    =========
</TABLE>

                                       41
<PAGE>
Income tax provision  (benefit) for the years ended June 27, 1998, June 28, 1997
and June 29, 1996 consist of the following:
<TABLE>
                                                Fiscal Years Ended
                                     June 27,       June 28,         June 29,
                                      1998           1997             1996
<S>                                <C>            <C>            <C>
Taxes currently payable:
     Federal                       $ 1,858,000    $   695,000    $  (232,000)
     State                             180,000         22,000        (22,000)
                                   -----------    -----------    -----------
          Total current portion      2,038,000        717,000       (254,000)

Taxes deferred:
     Federal                          (509,000)      (143,000)      (155,000)
     State                             (49,000)        31,000        (15,000)
                                   -----------    -----------    -----------
          Total deferred portion      (558,000)      (112,000)      (170,000)
                                   -----------    -----------    -----------
          Total tax provision      $ 1,480,000    $   605,000    $  (424,000)
                                   ===========    ===========    ===========
</TABLE>
Reconciliations  between  the  effective  statutory  federal  income tax expense
(benefit) rate and the Company's  effective income tax provision  (benefit) rate
as a percentage of net income (loss) before taxes were as follows:
<TABLE>
                                                                                           Fiscal Years Ended
                                                                             June 27,            June 28,             June 29,
                                                                              1998                 1997                 1996
<S>                                                                           <C>                <C>                   <C>
Statutory federal income tax expense (benefit) rate                           34.0%               34.0%                (34.0)%
State income taxes                                                             3.3%                3.3%                 (3.3)%
(Decrease) increase in valuation allowance                                    (1.1)%              (0.5)%                 4.1%
Effect of FSC                                                                 (4.4)%              (5.8)%                  -
Other                                                                          2.3%               (3.8)%                 5.0%
                                                                           --------            --------              --------
                                                                              34.1%               27.2%                (28.2)%
</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 expensed approximately $482,000,
$247,000 and $29,000 in fiscal years 1998, 1997 and 1996, respectively,  related
to this plan.

(8)    SIGNIFICANT CUSTOMERS

During  fiscal  years  1998,  1997 and  1996,  approximately  78%,  83% and 82%,
respectively,  of the  Company's  gross  sales were to overseas  customers.  The
Company's ten largest  customers  accounted for in the aggregate,  approximately
78%, 59% and 56% of the  Company's  gross sales in fiscal  1998,  1997 and 1996,
respectively.  In addition,  two individual customers represented 33% and 15% of
sales, respectively, in 1998. These customers were not individually 

                                       42
<PAGE>
significant  in 1997 or  1996.  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
                                                          June 27,         June 28,            June 29,
                                                            1998            1997                1996
        <S>                                              <C>             <C>               <C>
        Asia (other than Japan)                          $32,800,000     $19,534,000       $12,776,000
        Japan                                              7,824,000       6,611,000         4,288,000
        United States                                     12,224,000       5,997,000         4,049,000
        Europe and Other                                   2,304,000       2,941,000         1,499,000
                                                      --------------  --------------    --------------
        Gross sales                                       55,152,000      35,083,000        22,612,000
        Less: sales returns and
           allowances                                     (2,111,000)     (1,033,000)         (874,000)
                                                      --------------  --------------    --------------
        Net sales                                        $53,041,000     $34,050,000       $21,738,000
                                                          ==========      ==========        ==========
</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  $174,000,  $96,000 and $(286,000) of foreign currency
exchange rate gain (loss) on foreign currency exchange rate fluctuations for the
fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996, respectively.
The Company currently has approximately  $839,000 of its accounts receivable and
$2,028,000 of its accounts  payable  denominated  in Japanese Yen as of June 27,
1998.

(9)    COMMITMENTS

The  Company is  obligated  under  certain  noncancelable  operating  leases for
office,  manufacturing and warehouse facilities.  The Company entered into a new
lease for the Company's  manufacturing and administrative  location in Longmont,
Colorado,  which is accounted  for as an  operating  lease.  The lease  payments
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  terminate  August 31, 1998,  to  facilitate
moving to the Company's new location.  Lease payments for both of the short-term
leases are fixed for the term of the leases.

The future minimum rental payments under the leases are as follows:
<TABLE>
                           Fiscal year-
                             <S>                                                 <C>
                             1999                                                   $ 929,000
                             2000                                                     821,000
                             2001                                                     834,000
                             2002                                                     846,000
                             2003                                                     859,000
                             Thereafter                                             8,909,000
                                                                                -------------
                                                                                  $13,198,000
                                                                                =============
</TABLE>
The Company  announced  its intent to enter into a joint venture with one of its
suppliers of glass to produce coated glass. In connection with its investment in
this joint  venture,  the Company is expected to invest  $3,200,000 of equity in
the form of cash as well as sell coating  equipment to the joint venture.  As of
June 27, 1998, the Company has 

                                       43
<PAGE>
invested  approximately $71,000 in organizational costs in the formation of this
venture  which are  included in  Investment  in  Affiliate  in the  accompanying
consolidated balance sheets.

(10)   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.

(11)   YEAR 2000 (Unaudited)

The Company  utilizes  software  and related  technologies  within its  business
processes  that may be  impacted  by the year 2000  issue.  The year 2000  issue
exists because many computer  systems and  applications  currently use two digit
date fields to designate a year.  Date sensitive  systems may recognize the year
2000 as 1900,  or not at all.  This  inability  to properly  treat the year 2000
could cause systems to process  critical  financial and operational  information
incorrectly.

The Company has completed its initial  assessment of all currently used computer
systems,  as well as production  equipment used and coating  equipment sold, and
developed  a plan to correct  the  systems  that will be  affected.  The Company
continues to evaluate  appropriate  courses of corrective action,  including the
replacement  of certain  systems.  The Company  began in fiscal 1998  evaluating
personal  computer  hardware and software  outside of the  Company's IT systems.
With respect to personal  computers,  the Company has completed the audit phase,
and the assessment and scope phases are approximately 80% complete.  The Company
is presently in the process of testing and implementation,  and is upgrading its
personal  computer  hardware  and  software to become Year 2000  compliant.  The
Company's goal is to complete the  remediation of personal  computer  systems by
the end of fiscal 1999. The Company estimates that the  implementation  stage is
approximately  50% complete for its major systems.  In addition,  the Company is
relying on outside  vendors to provide new system  upgrades to mitigate the year
2000 issue.

The Company presently anticipates that it will complete its Year 2000 assessment
and  remediation by the end of fiscal 1999.  However,  there can be no assurance
that the Company will be successful in  implementing  its Year 2000  remediation
plan  according to the  anticipated  schedule.  In addition,  the Company may be
adversely  affected by the inability of other companies  whose systems  interact
with the Company to become Year 2000 compliant and by potential interruptions of
utility,  communication  or  transportation  systems  as a result  of Year  2000
issues.

Although the Company  expects its internal  systems to be Year 2000 compliant as
described  above,  the Company  intends to prepare a contingency  plan that will
specify what it plans to do if it or important  external  companies are not Year
2000  compliant  in  a  timely  manner.  The  Company  expects  to  prepare  its
contingency plan during calendar year 1999.

If such  modifications and conversions are not completed  timely,  the year 2000
issue may have a material  impact on the  operations of the Company.  Management
does not anticipate  these activities will have a material adverse impact on the
financial position,  results of operations or cash flows of the Company. Present
estimated costs for remediation are approximately $40,000.

                                       44
<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 17, 1998, 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 17, 1998, 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  17,  1998,  and is
incorporated herein by reference.

ITEM 13:  Certain Relationships and Related Transactions

     Information  relating to certain  relationships and related transactions is
contained  on  page  12,  under  the  caption  "Certain   Transactions"  in  the
Registrant's  definitive  Proxy  Statement  dated  September  17,  1998,  and is
incorporated herein by reference.


                                     PART IV

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

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

     1. Financial Statements.

     The Registrant's consolidated financial statements, for the year ended June
27, 1998,  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.

                                       45
<PAGE>
     (b) Reports on Form 8-K

     The Registrant did not file any reports on Form 8-K during the last quarter
of the fiscal year ended June 27, 1998.

     (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.





                                       46
<PAGE>
                                   SIGNATURES

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

                            APPLIED FILMS CORPORATION


                            By:   /s/ Thomas T. Edman
                                  Thomas T. Edman, President
                                  September 17, 1998

     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 17, 1998.  The persons named below each hereby appoint Thomas T. Edman
and Thomas D. Schmidt,  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/ Thomas D. Schmidt           accounting and financial officer)
    Thomas D. Schmidt

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

/s/ Cecil Van Alsburg           Director
Cecil Van Alsburg

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

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

/s/ Jeffrey K. Fergason         Director
Jeffrey K. Fergason

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


                                       47
<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     Amended and Restated Credit Agreement, dated as of June 30, 1997,
               together  with  Security  Agreement,  dated June 30,  1994,  each
               between  Registrant and NBD Bank is  incorporated by reference to
               Exhibit 10.5 of Registrant's  Registration Statement on Form S-1,
               as amended (Reg. No. 333-35331).
      10.6     First Amendment to Amended and Restated Credit  Agreement,  dated
               as of March 27, 1998, between Registrant and NBD Bank.
      10.7     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.
      10.8     Agreement,  dated as of November 18, 1997,  between  Nippon Sheet
               Glass Co., Ltd., NSG Fine Glass Co., Ltd. and Registrant.
      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 47)
      27.1     Financial Data Schedule (EDGAR filing only)
<PAGE>
Exhibit 10.6
                               FIRST AMENDMENT TO
                      AMENDED AND RESTATED CREDIT AGREEMENT

         THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as
of March 27, 1998 (this  "Amendment"),  between  APPLIED  FILMS  CORPORATION,  a
Colorado  corporation  (the  "Company"),   and  NBD  BANK,  a  Michigan  banking
corporation, of Detroit, Michigan (the "Bank").

     A. The parties  hereto have  entered  into an Amended and  Restated  Credit
Agreement, dated as of June 30, 1997 (the "Credit Agreement"),  which is in full
force and  effect.  A  requirement  of the Credit  Agreement  was that  Donnelly
Corporation  provide a guaranty of the  Company's  obligations  under the Credit
Agreement.  The Bank has now released Donnelly  Corporation from its obligations
under its guaranty.

     B. The Company desires to amend the Credit  Agreement as herein provided to
reflect the  guaranty's  release,  to increase  the amount  available  under the
Commitment,  and to make certain other amendments, and the Bank is willing to so
amend the Credit Agreement.

     Based upon these recitals, the parties agree as follows:

     1.  Amendment.  Upon the Company  satisfying  the  conditions  set forth in
paragraph 4 (the date that this occurs being called the "effective  date"),  the
Credit Agreement shall be amended as follows:

          (A)  The  terms  "Available   Guaranty   Amount",   "Comfort  Letter",
     "Guarantor",  "Guaranty",  and "Guaranty  Amount" are each deleted from the
     Credit Agreement.

          (B) The term "Borrowing  Base" is amended in its entirety,  to read as
     follows:

               "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."

          (C) The term  "Commitment"  is  amended  in its  entirety,  to read as
     follows:

               "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
          Letters of Credit shall not exceed $3,000,000.

          (D) The term  "Eligible  Fixed Assets" is amended in its entirety,  to
     read as follows:

               "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
<PAGE>
          first-priority  perfected  security  interest pursuant to the Security
          Agreement  and which are either (i) listed and valued in an  appraisal
          dated April 21, 1997,  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
          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.

          (E) The term "Eurodollar Rate" is amended in its entirety,  to read as
     follows:

               "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 (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 am. 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

                                        2
<PAGE>
          (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                       1.75%
                        1.5 to 1.0

               (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                 2.25%
                        less 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%

          (F) The term  "Security  Documents"  is amended by deleting the phrase
     "the Guaranty, the Comfort Letter,".

          (G) The first  sentence of Section  2.4(a) is amended by deleting  the
     following phrase:

               ",  provided,  however,  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"

          (H) The first  paragraph of Section  2.5(e) is amended in its entirety
     to read as follows:

               "(e) Security Documents. A confirmation of the Security Agreement
          duly  executed on behalf of the Company  substantially  in the form of
          Exhibit  F  granting  or  confirming  to the Bank the  collateral  and
          security  intended to be provided  pursuant to Section 2. 10, together
          with:"

          (I) Section 2. 10 is amended in its entirety to read as follows:

               "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

                                        3
<PAGE>
          granting or  confirming  security  interests in all present and future
          accounts, inventory, equipment, and fixtures of the Company, provided,
          however, the Company need not grant to the Bank a security interest in
          fixed assets which are not Eligible Fixed Assets."

          (J) Each reference in Sections 5.  1(d)(ii),  (iv), and (v) to 10 days
     after the end of each month is amended to read "20 days".

          (K) Section 5.2(d) is amended in its entirety to read as follows:

               "Make any  capital  expenditures  during any  fiscal  year of the
          Company, the aggregate amount of which exceeds $5,500,000."

          (L)  Section  6.1(b)  is  amended  by  deleting  the  phrase  "or  the
     Guarantor" each time it appears therein.

          (M)  Section  6.1(e)  is  amended  by  deleting  the  phrase  "or  the
     Guarantor" each time it appears therein and adding the word "or" before the
     phrase "any of its Subsidiaries" each time it appears therein.

          (N)  Section  6.1(h)  is  amended  by  deleting  the  phrase  "or  the
     Guarantor" each time it appears therein and adding the word "or" before the
     phrase "any of its Subsidiaries"  each time it appears therein,  and adding
     the word "or" before the phrase "any  Subsidiary"  in the last full line of
     that subsection.

          (O) Section 7.4 is amended by deleting  the phrase "or the  Guarantor"
     each time it appears therein.

          (P) Exhibit A,  Revolving  Credit Note,  is amended in its entirety by
     substituting  therefor  the  Amended  and  Restated  Revolving  Credit Note
     attached as Exhibit A (the "Amended Note").

          (Q) Exhibit C,  Request  for  Advance,  is amended in its  entirety by
     substituting therefor the Request for Advance attached as Exhibit C.

          (R) Exhibit D, Request for  Continuation  or  Conversion  of Loan,  is
     amended  in  its  entirety  by   substituting   therefor  the  Request  for
     Continuation or Conversion of Loan attached as Exhibit D.


          (S) Exhibit E, Borrowing Base Certificate,  is amended in its entirety
     by substituting therefor the Borrowing Base Certificate attached as Exhibit
     E.

          (T) Exhibit G, Confirmation of Guaranty,  Subordination Agreement, and
     Comfort Letter, is deleted.


                                        4
<PAGE>
     2. References to Credit Agreement; Confirmation of Security Agreement. From
and  after  the  effective  date of this  Amendment,  references  to the  Credit
Agreement in the Credit  Agreement and all other documents  issued under or with
respect thereto (as each of the foregoing is amended hereby or pursuant  hereto)
shall be deemed to be references to the Credit Agreement as amended hereby.  The
Company  further  confirms the  continuing  effect of the Security  Agreement 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 as amended hereby and the Amended Note.

     3.  Representations and Warranties.  The Company represents and warrants to
the Bank that:

          (a) (i) The execution,  delivery and performance of this Amendment and
     all agreements and documents  delivered pursuant hereto by the Company have
     been duly authorized by all necessary  corporate action and do not and will
     not violate any provision of any law, rule,  regulation,  order,  judgment,
     injunction, or award presently in effect applying to it, or of its articles
     of  incorporation  or  by-laws,  or result in a breach of or  constitute  a
     default  under any material  agreement,  lease,  or instrument to which the
     Company  is a party  or by  which  it or its  properties  may be  bound  or
     affected; (ii) no authorization,  consent, approval,  license, exemption or
     filing of a registration with any court or governmental department, agency,
     or  instrumentality  is or  will  be  necessary  to  the  valid  execution,
     delivery,  or  performance  by  the  Company  of  this  Amendment  and  all
     agreements  and  documents   delivered  pursuant  hereto;  and  (iii)  this
     Amendment and all agreements and documents delivered pursuant hereto by the
     Company are the legal,  valid,  and  binding,  obligations  of the Company,
     enforceable against it in accordance with the terms thereof.

          (b)  After  giving  effect to the  amendments  contained  herein,  the
     representations and warranties  contained in Article IV (other than Section
     4.6)  of  the  Credit  Agreement  are  true  and  correct  on and as of the
     effective  date  hereof with the same force and effect as if made on and as
     of such effective date.

          (c) No Event of Default has occurred and is  continuing  or will exist
     under the Credit Agreement as of the effective date hereof

     4. Conditions to Effectiveness.  This Amendment and the amendments provided
for herein shall become effective on and as of the date first above written (the
"Effective Date"), provided that all of the following conditions precedent shall
have been satisfied:

          (a) This  Amendment and the Amended Note shall have been duly executed
     and delivered by the Company.

          (b) The Bank shall have received a certified  copy of  resolutions  of
     the  Board of  Directors  of the  Company  authorizing  the  execution  and
     delivery of this Amendment by the Company.


                                        5
<PAGE>
          (c) No  Default  or  Event  of  Default  shall  have  occurred  and be
     continuing.

          (d) The Company shall have paid the  principal of and all  outstanding
     interest due under the Term Loan.

     5.  Miscellaneous.  The terms used but not  defined  herein  shall have the
respective  meanings  ascribed  thereto  in  the  Credit  Agreement.  Except  as
expressly  amended hereby,  the Credit  Agreement and all other documents issued
under or with respect  thereto are  ratified  and  confirmed by the Bank and the
company and shall remain in full force and effect, and the Company  acknowledges
that it has no defense, off-set, or counterclaim with respect thereto.

     6.  Counterparts.   This  Amendment  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 Amendment by signing
any such counterpart.

     7.  Expenses.  The Company  agrees to pay and save the Bank  harmless  from
liability  for all costs and  expenses  of the Bank  arising  in respect of this
Amendment,  including the reasonable fees and expenses of Dickinson Wright PLLC,
counsel to the Bank, in connection  with  preparing and reviewing this Amendment
and any related documents.

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

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Amendment to be
duly executed and delivered as of the date first written above.

APPLIED FILMS CORPORATION                         NBD BANK


By:     /s/ Thomas D. Schmidt                     By:     /s/ William C. Goodhue
        Thomas D. Schmidt                                 William C. Goodhue
        Its: Chief Financial Officer                      Its:   Vice President


199136.1
<PAGE>
                              AMENDED AND RESTATED
                              REVOLVING CREDIT NOTE

$11,500,000                                                       March 27, 1998
                                                               Detroit, Michigan

     FOR VALUE RECEIVED, the undersigned,  APPLIED FILMS CORPORATION, a Colorado
corporation  (the  "Company"),  promises  to pay to the  order  of NBD  BANK,  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  (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
June 30, 1997, in the principal amount of $8,500,000,  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  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:      /s/ Thomas D. Schmidt
                                                Thomas D. Schmidt
                                                Its:   Chief Financial Officer
<PAGE>
                                    EXHIBIT C
                              (Revised March, 1998)

                               REQUEST FOR ADVANCE

                                     (date)
NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226

Attention:________________

     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 June  30,  1997 (as
amended,  the "Credit  Agreement"),  between  the  Company and the Bank,  in the
amount of $ ________,  to be issued on _________,  19___, 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 or Floating Rate Loan) and the initial Eurodollar  Interest Period, if
the  requested  Advance is a Eurodollar  Rate Loan,  shall be [insert  permitted
Eurodollar 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
_________________,  19____,  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).

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:___________________________________
<PAGE>
                                    EXHIBIT D
                              (Revised March, 1998)

                 REQUEST FOR CONTINUATION OR CONVERSION OF LOAN

                                     (date)

NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226

Attention:

     The  undersigned  (the  "Company")  requests  that  $  ___________  of  the
principal  amount of the Revolving  Credit Loan  originally  made on __________,
19___ , which Loan is currently a [insert type of Loan based on type of interest
rate  applicable],  to 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
__________,  19___ . 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 June 30, 1997 (as amended,
the "Credit Agreement"), between the Company and NBD Bank.

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:______________________________
<PAGE>
                                    EXHIBIT E
                              (Revised March, 1998)

                           BORROWING BASE CERTIFICATE

                                     (date)

NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226

Attention: _______________

     Reference is made to the Amended and Restated Credit Agreement, dated as of
June 30,  1997 (as  amended,  the "Credit  Agreement"),  between  Applied  Films
Corporation,  a Colorado corporation (the "Borrower"),  and NBD Bank, a Michigan
banking  corporation of Detroit,  Michigan (the "Bank").  Capitalized terms used
but not defined  herein shall have the respective  meanings  assigned to them in
the Credit Agreement.

     The  Borrower  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.............................$_________

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......................$_________
<PAGE>


     The  Borrower  further  represents  and warrants to the Bank that as of the
close of business on ___________, 19___:

     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:___________________________
<PAGE>
Exhibit 10.8
                                    AGREEMENT




                                     between



                          NIPPON SHEET GLASS CO., LTD.



                                       and



                            NSG FINE GLASS CO., LTD.



                                       and




                            APPLIED FILMS CORPORATION







                     DATED AS OF 18TH DAY OF NOVEMBER, 1997
<PAGE>
                                    AGREEMENT

                                TABLE OF CONTENTS

Clause No.        Title                                                     Page

Clause I          Definitions..................................................2
Clause 2          Sales of Products............................................2
Clause 3          Sales of Substrate Glass.....................................4
Clause 4          Market Information...........................................5
Clause 5          Technical Assistance.........................................5
Clause 6          Technology and Confidentiality...............................5
Clause 7          Force Majeure................................................7
Clause 8          Term.........................................................7
Clause 9          Termination..................................................8
Clause 10         Arbitration..................................................8
Clause 11         Notice.......................................................8
Clause 12         Miscellaneous................................................9

EXHIBIT-A         Terms and Conditions of Sale...............................A-1



                                        i
<PAGE>




                                    AGREEMENT

This Agreement, made as of this 18th day of November, 1997, by and among:

NIPPON SHEET GLASS CO., LTD.
a corporation duly organized and existing under the laws of Japan and having its
principal office of business at 8-1  Nishi-Hashimoto  5-chome,  Sagamihara City,
Kanagawa Pref. 229-11 Japan (hereinafter called "NSG")

and:

NSG FINE GLASS CO., LTD.
a corporation duly organized and existing under the laws of Japan and having its
principal  office of business at 8-1  Nishi-Hshimoto  5-chome,  Sagamihara City,
Kanagawa  Pref.  229-11  Japan  and a wholly  owned  subsidiary  company  of NSG
(hereinafter called "NFN")

and:

APPLIED FILMS CORPORATION
a  corporation  duly  organized  and  existing  under  the laws of the  state of
Colorado,  U.S.A. and having its principal office of business at 6797 Winchester
Circle, Boulder, CO 80301 U.S.A. (hereinafter called "AFC")

WITNESSETH THAT:

WHEREAS, NSG is engaged in the sale of substrate glass and ITO coated glass, and
NFN is engaged in the  manufacture  of substrate  glass and ITO coated glass for
supply to NSG,  and AFC is  engaged  in the  manufacture  and sale of ITO coated
glass.

WHEREAS,  NSG  desires  to sell  ITO  coated  glass  manufactured  by AFC to its
customers, and AFC desires to penetrate into Japanese market through NSG's sales
channel.

WHEREAS,  NSG desires to sell substrate glass to AFC and AFC desires to purchase
substrate glass from NSG to meet certain of its requirement for ITO glass.

NOW, THEREFORE, it is mutually agreed between the parties as follows:
<PAGE>
1.       DEFINITIONS

For the purpose of this Agreement,  the following terms shall have the following
meanings:

(1)      "Products"  shall  mean  ITO  coated  glass   manufactured  by  AFC  in
         accordance with such specifications as may be mutually agreed among the
         parties hereto from time to time.
(2)      "Substrate  Glass" shall mean polished or unpolished glass which is cut
         to size and seamed for further process of ITO coating.
(3)      "Customers"  shall mean NSG's  existing  customers and other  customers
         which will, from time to time, be designated by AFC and agreed by NSG.


2.       SALES OF PRODUCTS

(1)      Grant
AFC  hereby  grants  to NSG and NSG  accepts  from  AFC  the  non-exclusive  and
non-transferable  right to sell the Products to the Customers during the term of
this  Agreement,  pursuant  to  those  purchase  orders  issued  by NFN that are
accepted  by AFC from  time to  time;  provided,  however,  that AFC is under no
obligation  to accept any or all purchase  orders  issued by NFN and/or NSG. The
sale and purchase of the Products  shall be subject to the terms and  conditions
set forth on attached Exhibit A.

(2)      Sales Channel
The Products shall be purchased from AFC by NFN and then supplied to NSG for the
sale to the Customers.

(3)      Sales Forecast
NSG shall  prepare and provide AFC with a sales  forecast of the  Products  from
time to time.  Upon receipt of the sales forecast from NSG, AFC shall advise NSG
of its  prospect of the  delivery,  and shall use its best efforts to meet NSG's
requirement.  AFC shall notify NSG in writing of any  significant  change in the
prospect of the delivery as soon as possible after the change is made.

(4)      Individual Purchase Order
NFN shall issue an individual  purchase  order to AFC  specifying the details of
each purchase agreed upon among the parties hereto such as specifications of the
Products and packing,  delivery date, destination,  and etc. (hereinafter called
"Individual Purchase Order").  Such Individual Purchase Order shall become valid
only after receipt by NFN of order acceptance and confirmation from AFC.

(5)      Prices and Terms
From October 1, 1997 to September  30, 1998,  the price to be charged by AFC for
the Products delivered in accordance with the Individual Purchase Order shall be
the amount equal to  ninety-five  percent  (95%) of the selling price of NSG for
the  Products  to the  Customers.  Commencing  October 1, 1998,  the price to be
charged by AFC for the Products  delivered  in  accordance  with the  Individual
Purchase Order shall be the amount equal to ninety-six percent

                                        2
<PAGE>
(96%) of the selling price of NSG for the Products to the Customers.
Provided,  however,  that in case the Products are sold to NANOX CO.,  LTD., the
rate applicable shall be ninety-six percent (96%) of the selling price.

(6)      Costs and expenses
The  Products  shall be in the  custody of AFC until they are  delivered  to the
Customers.  AFC  shall  bear all costs and  expenses  incurred  in and until the
delivery to the  Customers,  including  without  limitation,  freight,  storage,
transportation, insurance premium, duties, landing charges and local taxes.

(7)      Payment
All payment of NFN to AFC hereunder  shall be made by remittance in Japanese Yen
within  thirty (30) days after the end of the month in which the shipment of the
Products  out of a  warehouse  is  made by AFC on the  corresponding  Individual
Purchase Order.

(8)      Warranty
AFC warrants that the Products meet the  specifications  as mutually agreed upon
among the parties  hereto and are free from  defects in  workmanship  as well as
materials  during  a period  of six (6)  months  from the date of each  delivery
hereunder.  THERE ARE NO OTHER WARRANTIES (EXCEPT AS EXPRESSLY SET FORTH IN THIS
PARAGRAPH  OR IN ANY  WRITTEN  WARRANTIES  SUPPLIED BY AFC TO NFN OR NSG) EITHER
EXPRESS OR IMPLIED,  INCLUDING ANY WARRANTY OF  MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.

(9)      Quality Claims against Defective Products
Any claim by NFN or NSG in regard to any latent defect in the Products  shall be
sent in writing within the warranty  period  stipulated in Paragraph (8) of this
Article 2., except that claim relating to other than latent defect shall be sent
within  sixty  (60)  days  after  the  delivery  to the  Customers,  and must be
dispatched with full particulars certifying such defect. In case a claim is laid
against  NSG by one or  more  of its  Customers  ("Claiming  Customer(s)")  with
respect to the Products,  AFC shall assist NSG with  reasonable  assistance  and
have direct  consultation with that Customer so that NSG can amicably settle the
claim with the Claiming Customer(s).  In case any of these claims is objectively
judged reasonable after  consultation  between the parties hereto and such claim
results  solely  from any act or  omission or  negligent  work of AFC,  then AFC
shall,  at NFN's or NSG's  option:  
i)       replace the defective Products free of charge within sixty (60) days
         following receipt of such claim;
ii)      accept  cancellation  of  the  corresponding  part  of  the  Individual
         Purchase Order; or


                                        3
<PAGE>
iii)     take  responsibility  for the losses and damages incurred by such claim
         of  the  Claiming  Customer(s)  if  the  claim  is  objectively  judged
         reasonable after direct consultation with that Customer.

(10)     Infringement
AFC shall  indemnify and hold each of NFN, NSG and the  Customers  harmless from
all cost, expense and liability,  including  attorney's fees, arising out of any
claim or action  based on  infringement  by the  Products of any patent or other
intellectual  property rights other than an infringement inhering in any written
direction by NFN, to the extent that the foregoing costs, expenses, claims, etc.
result from a final  unappealable  judgment against AF C. Upon the occurrence of
such a claim or action,  then NFN and/or NSG shall  promptly  notify AFC thereof
and AFC,  at its  option,  may,  but is not  obligated  to,  assume the  defense
thereof.

(11)     Dead Stock
In the event that any of the  Customers  rescind,  change or cancel any order of
the  Products  after  the  Products  have  been  shipped  by AFC,  NSG shall use
reasonable  efforts  to assist  AFC in the sale of all such  Products  that were
subject to such order rescission, change or cancellation.


3.       SALES OF SUBSTRATE GLASS

(1)      Supply of Substrate Glass
NSG shall sell to AFC and AFC shall  purchase from NSG the  Substrate  Glass for
the  manufacture  of the ITO  coated  glass  under the terms and  conditions  as
mutually  agreed upon between NSG and AFC. AFC shall use  reasonable  efforts to
purchase the  Substrate  Glass from NSG up to fifty  percent  (50%) of its total
requirement,  as far as the Substrate  Glass  supplied by NSG is  competitive in
respect of price, quality and/or terms of delivery.

(2)      Processing
The  processing  of the  Substrate  Glass  shall  be made by NFN or  SUZHOU  NSG
ELECTRONICS CO., LTD. a wholly owned subsidiary  company of NSG or MJM CO., LTD.
an  15%  owned  affiliate  company  of  NSG  (hereinafter   collectively  called
"Affiliates").  In case the  processing is made by a party other than NSG or its
Affiliates, NSG shall obtain a prior written approval of AFC.

(3)      Prices, Terms and Conditions for Sales
The sales price of the Substrate  Glass and other terms and  conditions for sale
shall be mutually agreed upon in writing by the parties  hereto.  Such terms and
conditions shall be reviewed when necessary. The delivery of the Substrate Glass
shall be made on the  conditions of Ex Works.  All orders placed by AFC shall be
executed by NSG only after they have been confirmed in writing.

(4)      Payment
Each payment shall be made by AFC by telegraphic transfer in Japanese Yen within
ninety (90) days

                                        4
<PAGE>
after Bill of Lading date.

(5)      Warranty
NSG  warrants  that the  Substrate  Glass meets the  specifications  as mutually
agreed upon between AFC and NSG and is free from defects in  workmanship as well
as  materials  during a period of six (6) months from the date of each  delivery
hereunder.  THERE ARE NO OTHER WARRANTIES (EXCEPT AS EXPRESSLY SET FORTH IN THIS
PARAGRAPH  OR IN ANY  WRITTEN  WARRANTIES  SUPPLIED BY AFC TO NFN OR NSG) EITHER
EXPRESS OR IMPLIED,  INCLUDING ANY WARRANTY OF  MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.

(6)      Quality Claims against Defective Glass Substrate
Any claim by AFC in regard to any latent defect in the Substrate  Glass shall be
sent in writing within the warranty  period  stipulated in Paragraph (5) of this
Article 3., except that claim relating to other than latent defect shall be sent
within sixty (60) days after the delivery to AFC,  and must be  dispatched  with
full  particulars  certifying  such  defect.  In case  any of  these  claims  is
objectively  judged  reasonable  and such claim  results  solely from any act or
omission or negligent work of NSG, then NSG shall,  at AFC's option:  
i)       replace the defective Substrate  Glass free of charge within sixty (60)
         days following receipt of such claim;
ii)      accept cancellation of the corresponding part of the orders; or
iii)     take  responsibility  for the losses and damages incurred by such claim
         if the claim is objectively judged reasonable.


4.       MARKET INFORMATION

NSG shall, at regular intervals,  report to AFC any market information collected
and acquired by NSG in relation to the Products.


5.       TECHNICAL ASSISTANCE

In case AFC and NFN agree that AFC is in need of NFN's technical  assistance for
the manufacture of the Products,  NFN shall,  at AFC's cost,  render to AFC such
technical assistance on the terms and conditions as mutually agreed upon between
AFC and NFN.


6.       TECHNOLOGY AND CONFIDENTIALITY

During the term of this Agreement, AFC and NSG may disclose or make available to
each  other's  representatives  from time to time,  orally,  visually  and/or in
writing,  as each party at its sole discretion  deems  necessary,  certain trade
secrets,  know-how,  designs,  and  proprietary,   commercial,   financial,  and
technical information relating to their respective present or future design,

                                        5
<PAGE>
development,  or  business  activities  which is either  provided  in written or
graphic form (or in materials otherwise embodied within electronic media) and is
clearly marked "Confidential",  or is verbally or visually disclosed (whether in
sample or  prototype  or relating  to methods and  process)  and  identified  as
Confidential  at the  time  of  disclosure  and  is set  forth  in  writing  and
transmitted  from  the  disclosing  party  to the  receiving  party  and  marked
"Confidential"  within  thirty  (30) days after the verbal or visual  disclosure
("Proprietary Information").

The parties agree as follows:
A.       Each party acknowledges that all Proprietary Information disclosed to a
         representative  of the  receiving  party  hereunder is deemed to be and
         shall remain the property of the disclosing party.
B.       For a  period  of five (5)  years  from  the  date of  disclosure,  the
         receiving party will keep all Proprietary Information of the disclosing
         party confidential and will not, directly or indirectly  disclose,  use
         or exploit such  information  for any purpose  other than to pursue the
         goals and objectives of this  Agreement,  if such Agreement is still in
         effect. This paragraph shall survive termination of this Agreement.
C.       In  consideration  for disclosure of the Proprietary  Information,  the
         receiving  party  also  agrees  to the  following  conditions:  
         (i)      The receiving party shall not reproduce or permit reproduction
                  of any Proprietary Information in any form or embodied within
                  any media, without the prior  express written  consent of  the
                  disclosing party.
         (ii)     The receiving party will disclose the Proprietary  Information
                  to only  those of its  employees,  or agents of the  receiving
                  party who need the  information  to  perform  their  duties in
                  connection  with  the  evaluation  or use  of the  Proprietary
                  Information.  Such  employees or agents shall be instructed as
                  to the  obligations of  confidentiality  of this Agreement and
                  shall be bound by such obligations.
         (iii)    The  receiving  party  shall not  provide  or  otherwise  make
                  available,  nor permit or otherwise allow any of its employees
                  to provide or  otherwise  make  available  to the whole or any
                  portion of the  Proprietary  Information,  in any form, to any
                  third party.
         (iv)     The receiving party shall take all actions necessary to ensure
                  that no third party entity or individual affiliated with it or
                  its  employees  in any way  obtains  or uses  the  Proprietary
                  Information  without the prior express  written consent of the
                  disclosing party.
D.       Each party  understands  that the  disclosing  party does not grant any
         license or right to know-how,  patents,  copyrights,  or  trademarks or
         other rights or property of the  disclosing  party,  by  implication or
         otherwise, relating to the Proprietary Information.


                                        6
<PAGE>
E.       The  receiving   party's   obligations  to  maintain  the   Proprietary
         Information  in confidence and not to use the  Proprietary  Information
         shall not apply with respect to any of the  following  embodied  within
         the Proprietary Information: 
         (i)      Information  which  is  disclosed  through  public  use  or in
                  printed publications, but only to the extent that  the  public
                  disclosure is through no fault of the receiving party.
         (ii)     Information  which the receiving party can show, by clear and
                  convincing evidence embodied  within  written  documents,  was
                  in  the receiving party's possession at the time of disclosure
                  by the disclosing party.
         (iii)    Information  disclosed to the receiving party by a third party
                  having  no  obligations  of  confidentiality  or nonuse to the
                  disclosing  party or any other third  parties  with respect to
                  such information.
         (iv)     Information ordered to be disclosed by a court or governmental
                  agency. Provided,  however, that if receiving party receives a
                  subpoena or other  order  relating  to the  disclosure  of the
                  Proprietary   Information,   it  will   promptly   notify  the
                  disclosing  party and cooperate with the  disclosing  party in
                  opposing such action if the disclosing party requests.
F.       Any and all  written or graphic  materials  provided  to the  receiving
         party by the  disclosing  party  (including any copies thereof or notes
         relating  thereto made by the  receiving  party),  in whatever form and
         embodied  within  whatever  media,  and any other  notes,  memoranda or
         documents  prepared by the  receiving  party or its employees or agents
         relating to any of the  Proprietary  Information,  shall be returned to
         the disclosing party upon request.


7.       FORCE MAJEURE

Neither  party hereto shall be liable to any of the other parties for failure to
perform its  obligation  hereunder due to the occurrence of any event beyond the
reasonable  control  of such  party and  affecting  its  performance  including,
without limitation,  act of god, act of government,  earthquakes,  labor strike,
traffic accident,  fire, war or shortage of law materials.  Notwithstanding  the
foregoing,  the  occurrence  of any of the above events shall not relieve any of
the parties of its obligation to make payment required hereunder.


8.       TERM

This  Agreement  shall  become  effective  on the date first above  written and,
unless earlier terminated,  remain in force for a period of three (3) years, and
shall be automatically  renewed and continued thereafter on a year to year basis
unless  either  party gives the other  parties at least  three (3) months  prior
written  notices  to  terminate  this  Agreement  before the  expiration  of the
original term or any such extension of this Agreement.



                                        7
<PAGE>
9.       TERMINATION

(1)      In the  event  that  either  party  fails  to  perform  any  obligation
         hereunder or otherwise commits any breach of this Agreement, any of the
         other  parties may terminate  this  Agreement by giving to the party in
         default a written  notice,  a copy of which  shall be sent to the other
         party.  Such termination  shall become effective thirty (30) days after
         the said notice has duly been delivered to the party in default, unless
         the failure or breach is corrected within said thirty (30) days period.
(2)      In the event  that any  proceeding  for  insolvency  or  bankruptcy  is
         instituted  by or against any of the parties or a receiver is appointed
         for any of the parties,  the other party may forthwith  terminate  this
         Agreement.
(3)      Termination of this Agreement for any reason shall be without prejudice
         to all  liabilities  and  obligations of any party accrued prior to the
         date of  termination,  provided,  however,  that all payment to be made
         under this Agreement shall become due when such termination  occurs due
         to the causes as provided in this Article 9.
(4)      In the event of termination of this Agreement, the parties hereto shall
         cooperate  and make  reasonable  efforts  to  dispose  any stock of the
         Products which AFC possesses on the date of termination.


10.      ARBITRATION

(1)      All dispute,  controversies  or  differences  which may arise among the
         parties  hereto,  out of, in  relation  to or in  connection  with this
         Agreement,  shall be settled  through  friendly  negotiations  with the
         spirit  of  mutual  benefits,  and  if an  amicable  settlement  is not
         reached, then they shall be finally settled by arbitration in Singapore
         in accordance with the arbitration rules of the Singapore International
         Arbitration  Centre  ("SIAC")  under  auspices  of the SIAC.  The award
         rendered by arbitrator(s) shall be final and binding upon both parties.
         The arbitration proceedings shall be conducted in the English language.

(2)      This Agreement shall be governed as to all matters, including validity,
         construction and performance, by and under the laws of the State of New
         York, U.S.A..


11.      NOTICE

All notices,  demands or other communications  required or permitted to be given
hereunder shall be in writing and, unless the context  otherwise  requires,  be;
(i)  personally  delivered;  (ii)  delivered by courier;  (iii)  transmitted  by
facsimile  followed  immediately by a confirmation  letter by a postage  prepaid
mail to the  following  address or such other  address as the parties may notify
from time to time:


                                        8
<PAGE>
If to NSG:
Mail address:     8-1 Nishi-Hashimoto 5-chome, Sagamihara City, Kanagawa Pref.
                  229-11 Japan
Facsimile:        0427-75-1596
Attention:        Mr. Kazuyuki Izumi, General Manager


If to NFN:
Mail address:     8-1 Nishi-Hashimoto 5-chome, Sagamihara City, Kanagawa Pref.
                  229-11 Japan
Facsimile:        0427-75-1596
Attention:        Mr. Kazuyuki Izumi, General Manager


If to AFC:
Mail address:     6797 Winchester Circle, Boulder, CO 80301
Facsimile:        (303) 530-3214
Attention:        Mr. Tom Edman


With a Copy to:
Mail address:     Varnum, Riddering, Schmidt & HowlettLLP
                  Bridgewater Place, P.O. Box 352, Grand Rapids, MI 49501-0352
Facsimile:        (616) 336-7000
Attention:        Mr. William Lawrence III


Except  as  otherwise  specified  herein,  all such  notices,  demands  or other
communications  shall be deemed to have been given and received (i) upon receipt
if  personally  delivered,  or (ii) if delivered by courier on the seventh (7th)
day following the date of consignment,  or (iii) if by facsimile on the day when
it is transmitted.


12.      MISCELLANEOUS

(1)      The  rights and  obligations  of this  Agreement  are  personal  to the
         parties and shall not be assigned  without the prior written consent of
         the other parties.
(2)      If any term or clause of this  Agreement  shall be judged to be invalid
         for any  reason  whatsoever,  such  invalidity  shall  not  affect  the
         validity of the  remainder of this  Agreement  and such invalid term or
         clause shall be replaced  with such other term or clause which is valid
         in all  respects and has an effect as close as possible to that of such
         replaced one.
(3)      No  failure  to  exercise  and no delay in  exercising,  on the part of
         either party, any right,  power, remedy or privilege granted thereunder
         shall  operate  as a waiver  thereof,  nor shall any  single or partial
         exercise of any right, power, remedy or privilege preclude any other or
         future  exercise  thereof or the  exercise of any other  right,  power,
         remedy or  privilege.  The  rights and  remedies  herein  provided  are
         cumulative and inclusive of any rights or remedies

                                        9
<PAGE>
         provided by law.
(4)      This Agreement  constitutes  the entire  agreement  between the parties
         hereto with  reference  to the subject  matter  hereof and there are no
         understanding,  representation  or  warranty  of any kind except as set
         forth  herein and shall not be amended or modified  in any  manner,  or
         released,  discharged,  abandoned,  or otherwise  terminated  except as
         expressly provided herein or by an instrument in writing signed by duly
         authorized officers or representatives of the parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly  authorized  officers or  representatives  on the date first above
written.

                                       NIPPON SHEET GLASS CO., LTD.


                                            /s/ Yozo Izuhara
                                       By:      Yozo Izuhara
                                       Title:   Managing Director




                                       NSG FINE GLASS CO., LTD.


                                            /s/ Masakiyo Tachibana
                                       By:      Masakiyo Tachibana
                                       Title:   President




                                        APPLIED FILMS CORPORATION


                                             /s/ Cecil Van Alsburg
                                        By:      Cecil Van Alsburg
                                        Title:   President


#199122/1



                                       10
<PAGE>
                                    EXHIBIT-A

                          TERMS AND CONDITIONS OF SALE

1.       Terms of Contract
Seller agrees to sell to Buyer the goods  identified  on the Agreement  dated 18
Nov.  1997 (the  "Agreement")  pursuant  to the  terms  set forth  below and any
documents or specifications expressly incorporated herein. Seller's agreement to
sell the goods to Buyer is conditional on Buyer's  agreement to these terms, and
no  additional  or  different  terms  stated in any  purchase  order  other form
utilized by Buyer shall become part of the contract for sale unless agreed to by
Seller in a writing signed by its authorized representative. In the event of any
inconsistency  between the terms of this Exhibit-A and the Agreement,  the terms
and conditions of the Agreement shall control.

2.       Authority of Seller's Representative
No  affirmation,  representation  or  warranty  concerning  the goods made by an
agent,  employee or representative of Seller shall be binding on Seller,  unless
the  affirmation,  representation  or warranty is  specifically  included in the
Agreement.

3.       Force Majeure
Seller  shall not be  responsible  or liable for any delay or failure to deliver
which  directly or  indirectly  results from or is  contributed  to by any fire,
flood,  explosion,  strike,  foreign or domestic embargo,  seizure,  act of God,
insurrection, war, the adoption or enactment of any law, ordinance,  regulation,
ruling or order  directly  or  indirectly  interfering  with the  production  or
delivery hereunder, or the lack of usual means of transportation beyond Seller's
control.  In the event that any one or more deliveries pursuant to the Agreement
is suspended or delayed be reason of any of the foregoing events, Seller may, at
its option,  terminate the Agreement or delay delivery  until such  disabilities
have ceased to exist.

In the event Seller's supply of product is insufficient to meet current shipping
requirements  due to any  disability  described  above,  Seller may allocate its
supply  of  product  for its own use and among its  customers  on such  basis as
Seller in the exercise of its discretion may determine, and in such event Seller
shall  not be  liable to Buyer for  failure  to  deliver  all or any part of the
quantities sold hereunder.

4.        Installment Deliveries as Separate Sales
Each  installment  of goods to be delivered  pursuant to the  Agreement is to be
considered  as a separate sale and Buyer shall be liable to pay the agreed price
for each  such  installment  without  regard to any  failure  to  deliver  other
installments,  and Seller's breach or default in the delivery of any installment
shall not give Buyer the right to refuse to receive any other installments.

5.       Packaging
Seller shall package the goods in a manner it deems reasonable  unless otherwise
specified in the Agreement.


                                       A-1
<PAGE>
6.       Buyer's Failure to Make Payment
All amounts not paid when due shall incur a late charge of one percent  (1%) per
month to the extent allowed by law.  Buyer's  failure to pay any amount when due
shall also entitle Seller to suspend  performance  of any other purchase  orders
from Buyer.

7.       Waiver
No claim or right  arising out of breach of the  Agreement  can be waived unless
the  waiver  is  supported  by  consideration  and is in  writing  signed by the
aggrieved party.

8.       Time for Bringing Action
Any  arbitration  action by Buyer for breach of the Agreement  must be commenced
within one (1) year after the cause of action has accrued.






                                       A-2
<PAGE>
                                                                    EXHIBIT 11.1


                            APPLIED FILMS CORPORATION
                    COMPUTATION OF EARNINGS PER COMMON SHARE
                    (in thousands, except per share amounts)
<TABLE>
                                                  June 27,                      June 28,                     June 29,
                                                   1998                          1997                         1996
<S>                                               <C>                           <C>                         <C>
BASIC EARNINGS PER SHARE

Net income (loss)                                 $ 2,857                       $ 1,621                     $ (1,078)

Weighted average number of common shares 
     outstanding                                    3,181                         2,796                        2,798

Basic earnings per share                           $ 0.90                        $ 0.58                      $ (0.39)
                                                  =======                       =======                      ========
DILUTED EARNINGS PER SHARE

Net income (loss)                                 $ 2,857                       $ 1,621                     $ (1,078)

Shares outstanding:
Weighted average number of common shares
    outstanding                                     3,181                         2,796                        2,798

Assuming exercise of stock options                    380                           345                          274
Assuming repurchase of treasury stock                (186)                         (327)                        (274)
         Net incremental shares                       194                            18                            -

Weighted average number of common shares
     outstanding, as adjusted                       3,375                         2,814                        2,798

Diluted earnings per share                         $ 0.85                        $ 0.58                      $ (0.39)
                                                  =======                       =======                       ======
</TABLE>
<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 17, 1998.