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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________

FORM 10-K

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

For the fiscal year ended June 26, 2004

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)

9586 I-25 Frontage Road, Suite 200, Longmont, CO 80504
(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (303) 774-3200

Securities registered pursuant to Section 12(b) of the Act: None.

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

Common Stock, no par value
(Title of Class)

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

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

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

The aggregate market value of the common stock held by non-affiliates of the Registrant, based on a per-share price of $32.80 as of December 26, 2003, was $476,396,679. As of September 2, 2004, there were outstanding 14,838,859 shares of the Company’s Common Stock (no par value).

Documents Incorporated by Reference: Portions of the Company’s Proxy Statement for the 2004 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

PART I

ITEM 1: Business

The following discussion contains trend information and other forward looking statements (including statements regarding future operating results, future capital expenditures, new product introductions, technological developments and industry trends) that involve a number of risks and uncertainties. Our actual results could differ materially from our historical results of operations and those discussed in the forward looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in “ITEM 7: Management’s Discussion and Analysis of Financial Condition and Results of Operation” and the section entitled “Risk Factors.” All period references are to our fiscal periods ended June 26, 2004, June 28, 2003, or June 29, 2002, unless otherwise indicated.

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

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

ITEM 1(a): General Development of Business

Introduction

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

Our Markets

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

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

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

Consumer Products Packaging and Electronics.  Thin film deposition systems (“web coaters” or “roll coaters”) in the consumer products packaging and electronics, or web, market are used to deposit thin films on multi-layer flexible packaging for consumer food products and cigarettes and to produce capacitors and other electronic components. Thin films are applied to a thin plastic or metal foil substrate to create a barrier, extending shelf life in consumer food products. Thin films also provide the conductive and electronic elements critical to the manufacture of certain electronic products, such as capacitors and touch panel screens. The packaging market for web coaters is driven by demand for products packaged in bags and for decorative packaging. Demand for touch panel applications and capacitors is driving the electronics market for web coaters.

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We have sold over 110 FPD thin film deposition systems, 50 architectural glass and solar thin film deposition systems and 500 web thin film deposition systems. We have developed leading thin film process and equipment technologies to meet our customers’ needs for sophisticated, technologically advanced thin film deposition equipment. We have over 134 patents and patent applications related to thin film technologies, and we continue to invest in research and development. Our manufacturing operations in Germany and Taiwan, together with our international sales and support offices enable us to provide thin film deposition equipment solutions to customers throughout the world, including our core markets in Asia, Europe and North America.

Our Thin Film Technology Solutions

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

Our Strategy

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

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

Expand our Presence in our Existing Markets.  We have developed new technologies for existing markets that we serve. We have recently introduced our TRITON system using Physical Vapor Deposition or (PVD) to deposit thin films for the transistor or array side of the FPD which significantly expands our total available market for display coaters. We have developed the SmartWeb system which is a flexible clean room compatible coater that deposits thin films on flexible substrates in applications such as solar cell, flexible printed circuit board and flexible display applications thus expanding the total available market for web coaters. We believe our reputation as a high quality supplier of thin film deposition equipment allows us to partner with our customers to ensure our new and next generation technologies address the market requirements and to provide an alternative to competitive product offerings for the markets we serve.

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

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

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

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

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

ITEM 1(b): Financial Information about Industry Segments

Historically, we supplied thin film coated glass primarily to LCD manufacturers and thin film deposition equipment to several markets. However, following the sale of the Hong Kong glass operations our only business segment is the manufacture and sale of deposition equipment. For further discussion see “ITEM 8: Financial Statements and Supplementary Data — Note 3: Sale of Hong Kong Coatings Division – Discontinued Operations”.

ITEM 1(c): Narrative Description of Business

Products

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

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

Thin Film Deposition Equipment

Flat Panel Displays

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

TRITON.  Is a newly introduced advanced high throughput vertical deposition platform designed to accommodate larger than generation 6 substrate sizes. Specifically designed and built for the TFT array process, TRITON incorporates advanced designs that target demands of current and future TFT-LCD markets.

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

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

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

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

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

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

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

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

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

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

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

SMARTWEB.  This new web system is designed as a modular, clean room compatible sputter roll coater for small width (400 to 800 mm) R&D and production applications. The specific advantages of the SmartWeb are high modularity and flexibility, low height, small footprint, linear arrangement of chambers, no moving parts above the coating drum and special designed load locks. The SmartWeb system offers a very high cost/performance ratio for medium throughput applications.

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

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

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

Sales, Marketing and Customers

Our customer base is global and we have sales offices in the United States, Germany, Hong Kong, Belgium, Taiwan, Korea, Japan and China, and utilize sales representatives worldwide to supplement the marketing activities of our sales force. The sales cycle for thin film deposition equipment is long, involving multiple visits to and by the customer. We usually sell our thin film deposition equipment on a progress payment basis. We generally sell our spare parts on open account. Our customer payment history has been excellent.

In fiscal 2004, our ten largest customers accounted for approximately 65% of our net revenues. Revenues from our two largest customers in fiscal 2004, LG International and AFG Industries Inc., represented 13% and 12%, respectively, of our net revenues. Approximately 81% of our fiscal 2004 net revenues, 70% of our fiscal 2003 net revenues and 58% of our fiscal 2002 net revenues were derived from exports to customers outside of our manufacturing center in Europe, primarily to Asia.

Customer Service

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

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

Manufacturing and Facilities

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

Our Alzenau, Germany, manufacturing facility contains approximately 268,000 square feet and includes general offices, research and development facilities, and equipment manufacturing facilities. This facility is leased from an independent third party. We design and manufacture thin film deposition equipment and can concurrently build multiple thin film deposition systems at this facility.

Our Tainan, Taiwan, manufacturing facility contains approximately 41,000 square feet and includes general offices, research and development facilities, and equipment manufacturing facilities. This facility is leased from an independent third party. We manufacture thin film deposition equipment and can concurrently build multiple thin film deposition systems at this facility.

Our China JV glass coating facilities are incorporated into the glass production facilities owned by Nippon Sheet Glass Co., Ltd. (NSG) and contain approximately 91,000 square feet located in Suzhou, China. Our China JV manufactures thin film coated glass at these facilities.

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

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Competition

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

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

Flat Panel Display Deposition Equipment.  For the FPD market, we compete against Ulvac Technologies, Inc. of Japan in the color filter market for FPD’s, and Ulvac Technologies, Inc., Unaxis Corporation of Switzerland, and Anelva Ltd. of Japan in the TFT array market for FPD’s.

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

Consumer Products Packaging and Electronics Deposition Equipment.  Our most significant competitors in the packaging and electronics markets are Valmet General, a division of Metso Ltd. headquartered in the United Kingdom and Leybold Optics, AG of Germany.

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

Research and Development

We have approximately 150 engineers and scientists in our company of which 58 are involved in research and development and 20 hold PhD degrees. We will continue to emphasize improvements in current equipment technology, the development of new process technologies for thin film deposition, and the modification of thin film material properties. Our success is based on superior engineering solutions, extensive experience with vacuum technologies, and the depth of our commercial deposition experience and the high quality performance of our systems. Our customer oriented solutions include cost effective thin film deposition, simplified process control, and innovative deposition equipment designs. We continue to build on these traditions in the development of process control and deposition design, which lower the cost of ownership to the customer.

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

Our research and development expenditures were $9.2 million in fiscal 2002 and $12.2 million in fiscal 2003, and $16.8 million in fiscal 2004.

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Intellectual Property

We use a combination of patent, copyright, trademark and trade secret protection as well as non-disclosure agreements and licensing arrangements to establish and protect our proprietary rights. Steps taken by us to protect our proprietary rights may not be adequate to prevent misappropriation of such rights or third parties from independently developing a functionally equivalent or superior technology. Worldwide, we have over 134 patents and patent applications.

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

Strategic Relationship with The Coca-Cola Company

In July 1997, we entered into a strategic relationship with The Coca-Cola Company to develop and produce thin film deposition equipment to apply barrier coatings to the outside of plastic bottles. We then entered into a Commercialization Agreement with The Coca-Cola Company and Krones AG effective September 2000. In June 2004, we negotiated the termination of the Commercialization Agreement and we are no longer pursuing the technology or the market for barrier properties on plastic bottles. We retain certain intellectual property rights following the termination of the Commercialization Agreement.

The Helix Acquisition

Effective June 2, 2004, we acquired the in-line systems division of Helix Technology, Inc. in Taiwan (Helix) which established an Asian manufacturing base for us. Prior to the completion of this acquisition, all of our manufacturing capacity was in Germany. The Helix acquisition adds manufacturing capacity along with 32 people in Tainan, Taiwan, bringing us closer to our Asian customer base. Revenues to customers in Asia were 62% of our total revenues for fiscal 2004.

The LAC Acquisition

Effective December 31, 2000, we acquired the LAC business from Unaxis, which expanded our capabilities in the FPD market and enabled our entry into other markets that we currently serve. We also agreed to license certain intellectual property from Unaxis, and Unaxis agreed to license certain intellectual property from us. Since December 31, 2002, Unaxis has been free to compete with us in our markets with certain intellectual property related to our deposition technology.

China Joint Venture

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

Our strategy for our China JV has involved the transfer of the majority of our thin film coated glass manufacturing capacity to China. Our China JV facility produces coated glass immediately adjacent to its primary source of raw glass, NSG, and in close proximity to our China JV’s Asian customer base. During fiscal 2003, our China JV expanded into the color STN market by supplying thin film coating for color filter glass. We also continue to evaluate business opportunities that could strengthen our position with our China JV’s customers.

Employees

As of June 26, 2004, we employed a total of 589 people. Our United States and Asian workforce is non-union, and, like most companies in Germany our German workforce is represented by a workers’ council. We negotiate wages and benefits annually with our German workforce. We consider our relationship with our employees to be good.

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

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Environmental Regulations

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

Trademarks

ARGUS³, ARISTO, ATON, A-Series, ATX-700, BTX, DuoMag, EcoVeRa, ESCOSYS, HoloVap, MULTIMET, MULTIWEB, NEW ARISTO, OPTOPLEX, PatVap, SmartWeb, SOLARISTO, Terra-G, TOPBEAM, TOPMET, ToraMag, TreatMag, TriMag, TRITON, Twin-AR-Mag, TwinMag and VES400 are trademarks or registered trademarks of ours.

ITEM 1 (d): Information About Foreign Operations

See “ITEM 1(c): Narrative Description of Business – Sales, Marketing, and Customers” and “China Joint Venture”.

ITEM 2: Properties

See “ITEM 1(c): Narrative Description of Business – Manufacturing and Facilities”

ITEM 3: Legal Proceedings

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

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

No matters were submitted during the fourth quarter of fiscal 2004 to a vote of our shareholders.

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ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers and Directors

Our executive officers and directors are as follows:

⁽¹⁾ Member of the Audit, Compensation and Nominating and Governance Committees.
⁽²⁾ Executive Officer
⁽³⁾ Chairman of Audit Committee
⁽⁴⁾ Chairman of Compensation Committee
⁽⁵⁾ Chairman of Nominating and Governance Committee
⁽⁶⁾ Member of the Audit Committee

Thomas T. Edman has been employed by our company since June 1996 and has served as our President and Chief Executive Officer since May 1998. From June 1996 until May 1998, Mr. Edman served as Chief Operating Officer and Executive Vice President. Mr. Edman has served as a director of our company since July 1998. From 1993 until joining our company, he served as General Manager of the High Performance Materials Division of Marubeni Specialty Chemicals, Inc., a subsidiary of a major Japanese trading corporation. Mr. Edman also serves on the national board of directors of the American Electronics Association, a professional trade organization, and is chairman of its audit committee. He also serves on the Governing Board of the USDC (United States Display Consortium). Mr. Edman has a Bachelor of Arts degree in East Asian studies (Japan) from Yale University and a Master’s degree in business administration from The Wharton School at the University of Pennsylvania.

Lawrence D. Firestone has served as our Chief Financial Officer, Treasurer and Secretary since July 1999 and as our Senior Vice President as of July 2003. From 1996 until 1999, Mr. Firestone served as Vice President and Chief Operating Officer of Avalanche Industries, Inc., a contract manufacturer of custom cables and harnesses. From 1993 to 1996, Mr. Firestone served as Director of Finance and Operations for the Woolson Spice and Coffee Company, a gourmet coffee roasting and distribution company, and from 1988 to 1993, as Vice President and Chief Financial Officer for TechniStar Corporation, a manufacturer of robotic automation equipment. From 1981 to 1988, Mr. Firestone served in various capacities and finally as Vice President and Chief Financial Officer at Colorado Manufacturing Technology, a contract manufacturer that specialized in printed circuit board and cable assembly. Additionally, Mr. Firestone serves on the board of directors of HyperSpace Communications, Inc, and he serves as chairman of their audit and governance committees. Mr. Firestone has a Bachelor of Science degree in business administration with a concentration in accounting from Slippery Rock State College.

J.H. Bae has served as our Vice President of Asia Pacific since January 1, 2004 and President of Applied Films Korea, Ltd since July 2003. Mr. Bae joined Applied Films in July 1, 2003 from IPS Ltd., a Korean manufacturer of vacuum deposition equipment for the semiconductor and flat panel display markets where he was the CEO & Executive Director. Mr. Bae was employed by IPS Ltd. from May 1996, through February 2003. Prior to his experience at IPS, he was the Executive Director of Varian Korea Ltd, a manufacturer of vacuum deposition equipment & ion implanters for the semiconductor industry, and before Varian Korea, Mr. Bae was employed by Samsung Electronics and other companies in various capacities first as an Equipment Engineer in 1975 and finally as the Sales & Service Director of JaeLim Engineering Ltd.

Joachim Nell has served as our Executive Vice President of Worldwide Sales and Marketing since January 1, 2004. Mr. Nell joined Applied Films from Jusung Engineering Company, a Korean manufacturer of vacuum deposition equipment for the flat panel display and semiconductor markets where he was the President of its subsidiary Jusung Europe GmbH and the Corporate Vice President, International Markets & Corporate Strategies. Mr. Nell was employed by Jusung Engineering Company from January 2000 through December 2003. Prior to his experience at Jusung, he was the Managing Director of STEAG Electronic Systems a capital equipment supplier to the Semiconductor industry, and before STEAG, Mr. Nell was employed by IBM in various capacities first as an engineer in 1985 and finally as the Marketing & Sales Director of the Electro-Ceramics division. Mr. Nell graduated from the University of Karlsruhe with a degree in electrical engineering (Dipl.-Ing.)

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James P. Scholhamer has served as our Senior Vice President of Worldwide Operations, R&D and Design since July 2003. From January 2001 to July 2003, Mr. Scholhamer was the Vice President — Operations and from August 1997 to January 2001 he was the Director of Operations for Thin Film Coatings. From 1992 until he joined the company, Mr. Scholhamer held the titles of Manufacturing Manager and Process Engineer at Viratec Thin Films, Inc. From 1989 to 1992, Mr. Scholhamer served as Production Manager and Process Engineer at Ovonic Synthetic Materials, Inc., a division of Energy Conversion Devices. Mr. Scholhamer has a Bachelor of Science degree in engineering from The University of Michigan.

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

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

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

Gerald J. Laber has been a director of our company since July 2004. Mr. Laber spent 33 years with Arthur Andersen, LLP, from June 1965 through August 2000, including over 20 years as an audit partner with extensive experience in auditing public companies and dealing with financial statement disclosure and accounting matters. Mr. Laber currently serves on several boards of directors including: Spectralink Corporation (NASDAW:SLNK); Healthetech, Inc (NASDAQ:HETC); Centennial Specialty Foods (NASDAQ:SmallCap Market: CHLE); QualMark Corporation (OTBB:QMRK); and Scott’s LiquidGold, Inc. (OTC:SLGD), and he serves as the chairman of their audit committees. Mr. Laber is a member of the American Institute of Certified Public Accountants and the Colorado Society of Certified Public Accountants. Mr. Laber has a Bachelor of Science degree in Business Administration with a major in accounting from the University of South Dakota.

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Vincent Sollitto, Jr. has been a director of our company since October 1999. Since June 2003, Mr. Sollitto has been the President and Chief Executive Officer and member of the board of Brillian Corporation. From July 1996 to February 2003, Mr. Sollitto was President and Chief Executive Officer and a member of the Board of Directors of Photon Dynamics, Inc. From August 1993 to 1996, Mr. Sollitto was the General Manager of Business Unit Operations for Fujitsu Microelectronics, Inc. From April 1991 to August 1993, he was the Executive Vice President of Technical Operations at Supercomputer Systems, Incorporated. Prior to 1991, Mr. Sollitto spent 21 years in various management positions at IBM, including Director of Technology and Process. Mr. Sollitto serves as a director on the board of Ultratech Inc. (NASDAQ:UTEK), and Brillian Corporation (NASDAQ:BRLC). Mr. Sollitto holds a Bachelor of Science degree in electrical engineering from Tufts College.

Executive Officers

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

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ADDITIONAL ITEM: RISK FACTORS

You should carefully consider the following risk factors and other information contained or incorporated by reference in this report before deciding to invest in our common stock. Investing in our common stock involves a high degree of risk. The risks and uncertainties described below may not be the only ones we face. If any of the following risks actually occurs, our business could be harmed and the market price of our common stock could decline, and you may lose all or part of your investment. Please see “Forward Looking Statements” on page 35 of this report.

Risks Related to our Business

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

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

        These factors are difficult or impossible to forecast.

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

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

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

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The FPD market experiences downturns, and there can be no assurance as to future demand for active matrix LCDs, thin film transistors, or TFTs, or plasma display panels. Unfavorable economic conditions that relate to the consumer electronics or other industries in which we operate, or that result in reductions in capital expenditures by our customers, could have a material adverse effect on our business, operating results, financial condition and prospects.

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

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

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

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

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

As a result of the intense competition in our industry, the failure to invest sufficiently in strategic product development could adversely affect us. We have limited resources to allocate to research and development and must allocate our resources among a variety of projects. We may not have sufficient funds to devote to research and development, or our research and development efforts may not be successful in developing products in the time, or with the characteristics, necessary to meet customer needs. If we do not adapt to such changes or improvements, our competitive position, operations and prospects would be materially adversely affected.

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

We derive a substantial portion of our net revenues from complex, customized products that are a major capital expenditure for our customers and typically require long lead times. Because of the significance of the product purchase decision, prior to placing an order, prospective customers generally commit resources to test and evaluate our products and often require a number of product presentations and demonstrations before reaching a sufficient level of confidence in the product’s performance and compatibility with the customer’s specific requirements. The sales cycle of our products is protracted, requiring us to invest significant marketing and engineering resources in attempting to make sales and delaying the generation of revenue. Following periods of economic downturn during which the sales process may have been suspended, the long sales cycle will lengthen the period following economic recovery before we will begin to receive revenues. Long sales cycles also subject us to other risks, including customers’ budgetary constraints, internal acceptance reviews and cancellations. The time required for our customers to incorporate our products into their systems can also be lengthy and require significant on-site engineering support. Because our customers’ final payment obligations are not triggered until ultimate product acceptance, any delay in acceptance could postpone our receipt of the final 10-20% of the purchase price.

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

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

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

Some of our competitors may be willing to reduce their profit margins or even sell at a loss to win market share, which could result in fewer sales for us and reduced profit margins on the equipment we sell.

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

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

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

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

Effective December 31, 2000 we acquired the LAC business from Unaxis Holding AG, or Unaxis. We also agreed to license certain intellectual property from Unaxis, and Unaxis agreed to license certain intellectual property from us. Since December 31, 2002, Unaxis has been free to compete with us in our markets with certain intellectual property related to our deposition technology. Competition by Unaxis may impair sales of our products.

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

Export revenues to customers outside of our manufacturing center in Europe represented approximately 58% of our net revenues in fiscal 2002, 70% of our net revenues in fiscal 2003 and 81% of our net revenues in fiscal 2004. The principal international markets into which we and our China JV sell our products include China (including Hong Kong), Korea, Japan and Taiwan. Banking and currency problems in Asia have had and may continue to have an adverse impact on our revenues and operations. Our operations in China will be subject to the economic and political uncertainties affecting that country. For example, the Chinese economy has experienced significant growth in the past decade, but such growth has been uneven across geographic and economic sectors. This growth may continue to be uneven and any slowdown may have a negative effect on our business. We believe international sales will continue to represent a significant portion of our sales, and that we will continue to be subject to the normal risks of conducting business internationally. Such risks include:

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

In fiscal 2004, approximately 95% of our net revenues were denominated in Euros and approximately 1% were denominated in U.S. dollars. Any strengthening or weakening of the Euro or U.S. dollar in relation to other currencies in which our customers or competitors do business, could adversely affect our competitiveness, as our products will become more expensive to customers outside Europe and less competitive with products produced by competitors outside Europe. Our China JV transacts much of its business in Chinese Yuan Renminbi. While this currency has remained fairly constant in value, any devaluation of the Chinese Yuan Renminbi would adversely affect our business, operating results, financial conditions and prospects. Foreign sales also expose us to collection risks in the event it becomes more expensive for our foreign customers to convert their local currencies into Euro. Fluctuations in exchange rates could adversely affect our competitive position or result in foreign exchange losses, either of which could materially adversely affect our business, operating results, financial conditions and prospects.

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Our consolidated financial statements are expressed in U.S. dollars. However, the assets, liabilities and results of operations of our German operations are reported in Euros. The translation exposures that result from the inclusion of financial statements that are expressed in functional currencies other than U.S. dollars are reported in the “other cumulative comprehensive income (loss)” line in stockholders’ equity. As of June 26, 2004, the unrealized translation adjustment in “other cumulative comprehensive income (loss)” was $12.6 million, which was primarily attributable to the goodwill and other intangible assets from the LAC acquisition that are denominated in Euros and intercompany debt denominated in the functional currency of the country in which our subsidiary that received the loan is organized.

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

Our ten largest customers accounted for approximately 65% of our net revenues in fiscal 2004. Revenues from our two largest customers in fiscal 2004, LG International and AFG Industries, Inc. represented 13% and 12%, respectively, of our net revenues. Revenues from our largest customers have varied significantly from year to year and we expect that this condition will continue in the future. We may not be able to retain our key customers, or these customers may cancel purchase orders or reschedule or decrease their level of purchases from us. If a large order were delayed or cancelled, our revenues would significantly decline, and the loss of, or a significant reduction of purchases by, one or more of our significant customers would materially adversely affect our business, operating results, financial condition and prospects. In addition, any difficulty in collecting amounts due from one or more key customers could harm our financial results. There are a limited number of potential customers in each of our markets, and we expect that sales to a relatively small number of customers will continue to account for a high percentage of our revenues in those markets in the foreseeable future.

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

The success of our strategy to develop emerging high growth market opportunities depends on the level of product development support we receive from our strategic partners. For example, we have been working with a strategic partner in the OLED market who has purchased one of our systems and is working with us as we develop the thin film and process technologies to shorten our development time for a high volume production solution for color OLEDs. If our partner were to halt or otherwise modify their development plans this could have a materially adverse effect on our product development time table.

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

We believe our future growth depends significantly upon our ability to successfully introduce new products, such as our TRITON, SmartWeb, SOLARISTO, ECOVERA, ATON, A-650, and our VES 400 deposition systems. We are subject to the risks inherent in the development of new products, including risks associated with attracting and servicing a customer base, manufacturing products in a cost-effective and profitable manner, and training qualified engineering, manufacturing, service and marketing personnel. Some of our competitors have experience manufacturing and selling products that compete with products we introduce, and have existing customers for these products. Product development is based on our expectations regarding future growth of target markets, but it is difficult to anticipate the direction of future growth and to design equipment to meet the needs of a changing market. Changes in technology could render our products less attractive. If the market for our new products fails to grow, or grows more slowly than anticipated, we may be unable to realize the expected return on our investment in product development, and our business, operating results, financial condition and prospects could be materially adversely affected.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In fiscal 2004, 81% of our revenue was derived from sales in foreign countries outside of our manufacturing center in Europe, including certain countries in Asia such as Taiwan, Korea, China and Japan. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of Europe and the United States, and many companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries. For example, Taiwan is not a signatory of the Patent Cooperation Treaty, which is designed to specify rules and methods for protecting intellectual property internationally. In many instances, the publication of a patent prior to the filing of a patent application in Taiwan would invalidate the ability of a company to obtain a patent in Taiwan. Similarly, in contrast to the United States where the contents of patents remain confidential for at least 18 months after first filing, in Taiwan, the contents of a patent are published upon filing, which provides competitors an advance view of the contents of a patent application prior to the establishment of the patent rights. There is a risk that our means of protecting our proprietary rights may not be adequate in these countries. For example, our competitors in these countries may independently develop similar technology or duplicate our systems. If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to develop competing technology and sell competing products.

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

We prepare our financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP. U.S. GAAP requires us to annually evaluate whether certain assets have been impaired. Annually, and more frequently if a triggering event occurs, the Company is required to test the carrying value of goodwill for impairment using a fair-value-based approach. In addition, U.S. GAAP also requires us to evaluate the carrying value of all long-lived intangible assets other than goodwill whenever events or circumstances indicate that the carrying value of assets may exceed their recoverable amounts. An impairment loss on long-lived intangible assets other than goodwill is recognized when the undiscounted estimated future cash flows expected to result from the use of an asset are less than the carrying amount of the asset. One or more impairment losses could adversely affect our financial condition and results of operations.

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In accordance with the Financial Accounting Standards Board, or FASB, pronouncements under FASB 142 regarding goodwill and intangible assets and under FASB 144 long-lived assets, we have $79.9 million in goodwill and other intangible assets on our balance sheet of which $64.1 million is goodwill, which we do not amortize related to the LAC and Helix acquisitions. We undergo an impairment test each year. As a result of the significance of this goodwill amount, our results of operations and financial position in future periods could be negatively impacted should one or more impairments of goodwill occur.

We record our portion of the earnings from our China JV in the Investment in Joint Venture line item of the balance sheet. This item is a long-lived asset, and we evaluate it annually or more frequently as conditions demand to evaluate for impairment. This asset could become impaired and our financial statements would need to be adjusted to reflect this impairment. This could negatively impact our financial results.

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to our Common Stock

Our stock price may fluctuate significantly.

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

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

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

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

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

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

We may issue additional shares and dilute your ownership percentage.

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

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

PART II

ITEM 5: Market for Registrant’s Common Stock Related Stockholder Matters and Issuer Purchases of Equity Securities.

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

On September 2, 2004, the last reported sale price of our common stock on the NASDAQ National Market was $19.78 per share, and there were approximately 40 stockholders of record of the common stock. We estimate that there are approximately 6,654 beneficial owners of the common stock.

On June 1, 2004, we issued 80,826 unregistered shares of our common stock to Helix Technology, Inc. as part of the purchase price for the In-line Systems division of Helix Technology, Inc., Taiwan. We relied on Section 4(2) of the Securities Act of 1933, as amended, for transactions by an issuer not involving any public offering.

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

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ITEM 6: Selected Consolidated Financial Data

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report on Form 10-K. The consolidated statement of operations data for the years ended June 26, 2004, June 28, 2003, and June 29, 2002, and the consolidated balance sheet data as of June 26, 2004 and June 28, 2003, have been derived from audited consolidated financial statements included elsewhere in this annual report on Form 10-K. The consolidated statement of operations data for the years ended June 30, 2001 and July 1, 2000, and the consolidated balance sheet data as of June 29, 2002, June 30, 2001, and July 1, 2000, have been derived from audited consolidated financial statements not included in this annual report on Form 10-K. The historical results presented below are not necessarily indicative of future results.

The amounts below have been adjusted to show the operating results of our Longmont coatings division, which was sold on September 24, 2002, and the Hong Kong Coated Glass division which was sold on September 26, 2003, as discontinued operations.

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			Fiscal Year Ended
			July 1, 2000			June 30, 2001			June 29, 2002			June 28, 2003			June 26, 2004
			(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities .			$	52,225		$	25,905		$	74,679		$	74,437		$	150,583
Restricted cash(1)				-			331			7,971			19,064			2,095
Working capital				63,785			17,025			81,128			88,684			189,303
Total assets				79,673			167,042			215,655			255,642			378,598
Long-term debt, net of current portion				-			6,483			-			-			-
Total stockholders' equity			$	73,197		$	89,192		$	154,570		$	177,198		$	298,527

1)	Restricted cash represents cash that is pledged to provide bank guaranty’s on cash deposits for contracts with certain customers.

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

Overview

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

We have exited the contract coated glass business over the last six years. Beginning in fiscal 1999, we moved the majority of our production of coated glass from Longmont to our China JV. Because of the 50%-50% ownership structure of our China JV, the revenues and expenses of our China JV are not consolidated and do not appear as revenues and expenses in our financial statements. Our 50% portion of the China JV net income is reported as “Equity earnings of joint venture” in our consolidated statements of operations. In September 2002, we sold our Longmont coatings division, which included certain assets related to our contract glass coating business, to Optera, Inc. In September 2003, we sold our coated glass sales business located in Hong Kong to NSG. The financial statements for the prior periods have been restated to reflect the effect of the sale of those businesses and the results have been included as discontinued operations.

Over the last four years we have enhanced our position as a market leading manufacturer of thin film deposition equipment. In December 2000, we completed the acquisition of the LAC business of Unaxis which improved our position in FPD and enabled our entry into additional markets.

In June 2004, we completed the acquisition of the In-Line Systems division of Helix Technology, Inc. in Taiwan. The acquisition provided us with an additional 32 people who are familiar with our products, as well as a facility that will serve as our Asian manufacturing base, where we expect to manufacture some of our display systems beginning late in fiscal 2005. We believe manufacturing in Taiwan will allow us to reduce our manufacturing and shipping costs and reduce the transit time for systems sold to our customers in Asia. The addition of technical personnel in Asia will also enhance our customer service.

Revenues for our thin film deposition equipment are generally recognized using the percentage-of-completion method of accounting, measured by the percentage of the total costs incurred in relation to the estimated total costs to be incurred for each contract. We operate with a certain amount of unrecognized revenue, which we refer to as backlog, on our contracts in progress. Customers usually make progress payments during the term of the contract. We usually receive approximately 80% to 85% of the purchase price in cash or letter of credit prior to shipment. Our average manufacturing lead-time is between nine and twelve months.

Backlog was $41.1 million at the end of fiscal 2002, $100.6 million at the end of fiscal 2003 and $73.6 million at the end of fiscal 2004.

Export revenues generated from customers outside of Europe were 70% in fiscal 2003 compared to 81% for fiscal 2004. Since the Helix acquisition closed in June 2004, no revenues were generated from our facility in Taiwan. Sales of our systems and backlog are denominated in Euros and, unless hedged, are subject to fluctuation changes in the valuation of the foreign currencies against the dollar. Should we engage in a sales contract other than denominated in Euros, we will usually enter into currency hedging transactions to mitigate our foreign exchange exposure for the duration of the contract. The effects of foreign exchange rate changes on non-Euro denominated contracts have not been significant to date.

Net revenues in Euros reported in equivalent U.S. dollars were approximately $138.4 million for fiscal 2003 and $216.7 million for fiscal 2004. As of June 26, 2004, the U.S. dollar equivalent of accounts receivable denominated in Euros was approximately $14.0 million, or approximately 79%, of total accounts receivable. As of June 26, 2004, the U.S. dollar equivalent of accounts payable denominated in Euros was approximately $22.2 million, or approximately 95%, of total accounts payable.

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Results of Operations

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

The amounts below have been adjusted to show the operating results of our coated glass divisions in Longmont and Hong Kong that were sold as discontinued operations.

Year Ended June 28, 2003 Compared to Year Ended June 26, 2004

The following table presents certain key highlights and the percentage change from the results of operations for the fiscal years ended June 28, 2003 and June 26, 2004.

Net Revenues. The 54.2% increase in net revenues reflects revenue from record levels of FPD related order activity including equipment orders for Generation 4, 5, 6 and 7 substrate sizes during fiscal 2004 compared with strong equipment order activity for Generation 4 and 5 substrate sizes from FPD customers during fiscal 2003. We began fiscal year 2004 with a strong backlog of our architectural glass deposition equipment. Our backlog of $73.6 million at the end of fiscal 2004 was down compared to our $100.6 million in backlog at the end of fiscal 2003 primarily due to fewer orders in the fourth quarter of fiscal 2004 for our display equipment.

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Gross Profit. The 69.1% increase in gross profits in fiscal 2004 compared to fiscal 2003 was due primarily to the growth in revenues and the ability for better fixed cost absorption. Gross margins increased from 24.2% in fiscal 2003 to 26.5% in fiscal 2004 driven by our product mix and by the implementation of our cost reduction strategies throughout all of our products.

In Process Research and Development.  During the fiscal year ended June 26, 2004, we recorded a $2.2 million non-recurring charge to write-off in-process research and development (IPR&D) costs attributed to the acquisition of the In-Line Systems division of Helix Technology, Inc., Taiwan (“the In-line Division”). Several projects were included, of which the principal projects were based on the following technologies: transparent conductive coating on glass substrate for touch panel displays, a display machine for application in glass using 1100 x 1200 mm substrates, an anti-reflective coating system for display, and a high precision plate with low thermal expansion and high compression resistance.

The allocation of the purchase price, including the valuation of the IPR&D, will undergo an independent assessment to validate the carrying value and to assess the reasonableness of the IPR&D charge of $2.2 million that was taken in the fourth quarter of fiscal 2004. The Company anticipates this assessment to be completed by the end of fiscal year 2005.

The following table discloses the complete IPR&D percentage, the estimated value and the estimated completion date of each project at the June 2, 2004 acquisition date (dollars in thousands):

The estimates used in valuing IPR&D were based upon assumptions we believe to be reasonable, but are inherently uncertain and unpredictable. Risks and uncertainties associated with completing development within a reasonable period of time include the completion of all planning, designing and testing activities that are necessary to create a product that provides the functions, features and technical performance requirements suited for the market and requested by our customers. Actual results may vary from potential results. In analyzing the IPR&D acquired, we will explore the technologies listed above for further development and potential integration in our current product offerings. However, it is unlikely that we would continue to market the Helix products as they are either not compatible with our current market focus or they are products similar to those we currently market.

Research and Development. Research and development expenses grew 38.2% in fiscal 2004 compared to fiscal 2003. Our research and development efforts were concentrated during the fiscal year on FPD related products targeted towards larger glass sizes, including Generation 6 and 7 glass sizes and the development of our recently introduced TRITON system. Research and development expenses consist primarily of salaries, outside contractors, lab, and other expenses related to our ongoing product and technology initiatives. As a percentage of net revenues and due to the growth in revenues, research and development expenses declined to 7.3% in fiscal 2004 from 8.2% in fiscal 2003.

Selling, General and Administrative. Selling, general and administrative expenses increased 15.8% in fiscal 2004, as we experienced cost increases related to directors & officers insurance, compensation costs, professional fees related to compliance with the Sarbanes-Oxley Act, as well as, additional costs absorbed for the Taiwan employees while they are in their initial training period. However, as a result of the increased sales revenue, selling, general and administrative expenses as a percentage of net revenues declined from 16.2% in fiscal 2003 to 12.2% in fiscal 2004.

Amortization of Other Intangible Assets. In the fiscal year ended June 26, 2004, amortization of other intangible assets related to our acquisitions was $4.3 million compared to $3.8 million in the prior fiscal year. The majority of this increase was currency related due to the strength of the Euro compared to the U.S. dollar. The intangible assets are carried on the balance sheets of our German and Taiwan subsidiaries and the ongoing amortization will fluctuate based on the strength of the Euro and the New Taiwan dollar compared to the U.S. dollar. In June 2004, we completed the Helix acquisition in Taiwan. As a result of that acquisition we have increased our intangible asset balances related to the patents and customer lists that were acquired in the transaction. The patents will be amortized over seven years and the customer lists will be amortized over five years. We expect the amortization of other intangible assets to increase in the future to include these charges.

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Interest Income, Net. At the end of fiscal 2004, our average annual investment yield was 1.7% compared to 2.4% at the end of fiscal 2003. We earned a net $2.1 million on our invested cash in fiscal 2004 compared to $2.0 million in fiscal 2003. The $2.1 million in fiscal 2004 includes a negative mark-to-market adjustment of $434,000 through April 20, 2004. In the fourth quarter of fiscal 2004, we changed the accounting designation for our investment securities from “trading securities” to “securities held for sale”. We had an unrealized loss, net of tax, of $429,000, that was recorded in other comprehensive income for fiscal year 2004. In the future in accordance with SFAS 115, only realized income from investments will be reported in the statement of operations and all unrealized gains and losses will be reported in other comprehensive income in the equity section of the balance sheet. Although the annual yield was significantly reduced, net interest income increased as a result of the investment of cash that was raised during a follow-on offering of additional common stock in October 2003.

Other Income, Net. Net other income includes items such as realized foreign currency transaction adjustments and an approximate 1.0% royalty on our China JV sales. The majority of the increase was related to an increase in realized foreign currency translation gains compared to the prior year. During the fiscal year, the China JV renegotiated the terms of their line of credit, after which our corporate guaranty was no longer required. The cash balance in Euros that was used to secure the guaranty was released, and was repatriated to the U.S. We realized a gain on the transaction.

Equity earnings of Joint Venture. The 59.7% increase in equity earnings was primarily due to the increase in the demand for color STN glass supplied by the China JV to the market for cellular telephones with color displays.

Income Tax Expense. The income tax expense reflects the tax effect of the earnings of each operating subsidiary and their respective tax rates. The income tax expense for fiscal 2004 increased as we reported record net income during the fiscal year. Additionally, we recorded a valuation allowance against a portion of the deferred tax asset because we believe it is more likely than not that a portion of the deferred tax asset will not be realized. There are several items which lower our effective tax rates in some of the countries in which we operate, such as the tax effect of the amortization of goodwill and other intangible assets in Germany, tax-free investment and interest income in the U.S., and equity earnings of our China JV which are reported as tax free because the earnings will be permanently reinvested in our China JV. We are also applying for a tax holiday status in Taiwan related to our subsidiary corporation that was formed to complete the Helix acquisition. Our effective tax rate for fiscal 2004 was 37.0% compared to 55.0% for fiscal 2003.

Discontinued Operations.  On September 26, 2003, we sold our Hong Kong coated glass business to NSG for $1.35 million in cash and a note receivable. We accounted for the sale as a discontinuance of business and our financial statements have been restated to reflect our business without the results of our Hong Kong coated glass business. The $418,000 loss from discontinued operations reflected the operating results of that discontinued business of $4,000 from June 29, 2003 through September 26, 2003 combined with the settlement paid to Optera, Inc. of $650,000 net of $228,000 for taxes. The $783,000 gain was the after tax gain on the sale of assets related to discontinued operations.

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

The following table presents certain key highlights from the results of operations for the fiscal years ended June 29, 2002 and June 28, 2003.

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

Gross Profit. The increase in gross profits was due primarily to the revenue growth as gross margins were 23.7% in both fiscal 2002 and fiscal 2003.

Research and Development. In fiscal 2003, growth in research and development for FPD related products was driven by the development efforts targeted towards larger glass sizes, including generation 6 and 7 glass sizes. Research and development expenses consist primarily of salaries, outside contractor, lab, and other expenses related to our ongoing product and technology development for FPD, OLED, solar, and plastic bottle processes and other research and development programs. As a percentage of net revenues, research and development expenses were 7.1% in fiscal 2002 and 8.2% in fiscal 2003.

Selling, General and Administrative. As a result of cost management initiatives introduced in fiscal 2003, selling, general and administrative expenses increased only 2.4% in fiscal 2003. As a percentage of net revenues, selling, general and administrative expenses declined from 18.1% in fiscal 2002 to 16.2% in fiscal 2003.

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

Interest Income, Net. At the end of fiscal 2002, our average investment yield was 2.6% compared to 2.4% at the end of fiscal 2003. The increase in net interest income resulted from excess cash that was invested after the equity offering which closed in November 2001. This excess cash was invested for only part of the fiscal 2002 year as compared to a full year of investment in fiscal 2003.

Other Income, Net. Net other income includes items such as realized foreign currency transaction adjustments and royalties earned from our China JV. We receive an approximate 1.0% royalty on all sales by our China JV, payable quarterly. In fiscal 2002, $762,000 was reported for the reversal of unused reserves for the completion of the building in Alzenau, Germany. In fiscal 2003, net other income resulted primarily from realized currency translation.

Equity earnings of Joint Venture. The increase in equity earnings was primarily due to increased demand for cellular telephones with color displays.

Income Tax Expense. The income tax expense reflects the tax effect of the earnings of each operating subsidiary and their respective tax rates. The income tax expense for fiscal 2003 was increased by a valuation allowance against a portion of the deferred tax asset because we believe it is more likely than not that a portion of the deferred tax asset will not be realized. There are several items which lower our effective tax rates in some of the countries in which we operate, such as the tax effect of the amortization of goodwill and other intangible assets in Germany, tax-free investment and interest income in the U.S., and equity earnings of our China JV which are reported as tax free because the earnings will be permanently reinvested in our China JV as a permanent investment.

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Discontinued Operations.  On September 24, 2002, we sold our Longmont coatings division to Optera, Inc. for $5.2 million in cash. We accounted for the sale as a discontinuance of business and our financial statements have been restated to reflect our business without the results of our Longmont coatings division. The $85,000 loss reflected the operating results of that business for June 30, 2002 through September 24, 2002. The $429,000 gain reflected the after tax gain on the sale of assets related to discontinued operations.

Quarterly Results of Operations

The following table sets forth summary unaudited quarterly financial information for the eight fiscal quarters ended June 26, 2004. In the opinion of management, such information has been prepared on the same basis as the audited financial statements appearing elsewhere in this report and reflects all necessary adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of unaudited quarterly results when read in conjunction with the audited financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period and any trends reflected in such results may not continue in the future. Our results of operations may be subject to significant quarterly variations.

The amounts below have been adjusted to show the operating results of our Longmont and Hong Kong coated glass divisions, which were sold on September 24, 2002 and September 26, 2003, respectively, as discontinued operations.

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

The amounts below have been adjusted to show the operating results of our Longmont and Hong Kong coated glass division, which was sold on September 24, 2002 and September 26, 2003 respectively, as discontinued operations.