APPLIED FILMS CORP, S-1, 1997-09-10

APPLIED FILMS CORP
S-1, 1997-09-10

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<PAGE> 1

Filed with the Securities and Exchange Commission on September 10, 1997

Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

APPLIED FILMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

<TABLE>
<S> <C> <C>
COLORADO 3674 84-1311581
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
</TABLE>

6797 WINCHESTER CIRCLE
BOULDER, COLORADO 80301
(303) 530-1411
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

CECIL VAN ALSBURG
6797 WINCHESTER CIRCLE
BOULDER, COLORADO 80301
(303) 530-1411
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<C> <C>
WILLIAM J. LAWRENCE III JAMES C. T. LINFIELD
VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP COOLEY GODWARD LLP
333 BRIDGE ST., N.W. 2595 CANYON BLVD., SUITE 250
GRAND RAPIDS, MI 49504 BOULDER, CO 80302
(616) 336-6000 (303) 546-4000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
------------------------

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
======================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock..................... 2,185,000 $11.50 $25,127,500 $7,615
======================================================================================================================
</TABLE>

(1) Includes 285,000 shares which may be sold by the Company to cover
over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
1,900,000 Shares

APPLIED FILMS CORPORATION LOGO

Common Stock
------------------------

Of the 1,900,000 shares of Common Stock offered hereby, 500,000 are being
sold by Applied Films Corporation ("Applied Films" or the "Company") and
1,400,000 are being sold by Donnelly Corporation ("Donnelly" or the "Selling
Shareholder"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Shareholder.
Prior to this offering, there has been no public market for the Common Stock of
the Company. It is currently anticipated that the initial public offering price
will be between $9.50 and $11.50 per share. See "Underwriting" for information
relating to the determination of the initial public offering price. Application
has been made for quotation of the Common Stock on the Nasdaq National Market
under the symbol "AFCO."
------------------------

THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=========================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY SHAREHOLDER(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
- -------------------------------------------------------------------------------------------------------------------------
Total(3)..................... $ $ $ $
=========================================================================================================================
</TABLE>

(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."

(2) Before deducting expenses of the offering payable by the Selling Shareholder
estimated at $400,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 285,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to the Selling Shareholder
will be $ , $ , $ , and $ respectively.
------------------------

The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, subject to prior sale, when, as and if delivered to and
accepted by them, subject to the right of the Underwriters to reject any order
in whole or in part. It is expected that certificates for the shares of the
Common Stock will be available for delivery at the offices of Needham & Company,
Inc., 445 Park Avenue, New York, NY 10022, on or about , 1997.

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

NEEDHAM & COMPANY, INC. D. A. DAVIDSON & CO.

The date of this Prospectus is , 1997
<PAGE> 3

[Photos of sputtering line production control room and end products of
customers]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and financial statements, including notes
thereto, appearing elsewhere in this Prospectus.

THE COMPANY

Applied Films is a leader in thin film technology for the flat panel
display ("FPD") industry. The Company supplies thin film coated glass for use in
lower information content displays, primarily liquid crystal displays ("LCDs"),
and more recently began selling thin film coating equipment to manufacturers of
both lower and higher information content displays. Applied Films believes that
it is able to address a broad array of the FPD market through the combination of
its thin film coated glass business and its coating equipment business.

FPDs are found in a wide variety of consumer and industrial products,
including cellular telephones, calculators, laptop computers, pagers, scientific
instruments, televisions, video games, gasoline pumps, automotive instruments,
point-of-sale terminals and a number of other electronic devices. Stanford
Resources estimates that the worldwide market for FPDs will grow from
approximately $12.0 billion in 1996 to $26.9 billion in 2002.

The Company is the leading worldwide supplier of thin film coated glass for
TN LCDs and has a smaller but growing share of the market for thin film coated
glass for STN LCDs. TN LCDs are most commonly used for simple digital displays
such as those found on watches and calculators. STN LCDs permit larger displays
with higher information content and are used for applications such as displays
for cellular telephones and certain portable computers. Applied Films believes
its position as a leading supplier of thin film coated glass for LCDs provides
it with continued growth opportunities in that market. See "Business --
Strategy."

The coating of thin films onto glass for higher information content FPDs
involves a number of intermediate process steps, and is therefore more suitably
performed in-house by display manufacturers. To address this opportunity, the
Company has recently begun offering its thin film coating equipment to
manufacturers of higher-end FPDs such as plasma display panels ("PDPs"), as well
as manufacturers of LCDs. The Company believes its history of designing,
developing and improving its own thin film manufacturing systems and its
extensive operational experience provide it with competitive advantages in
selling thin film systems to others. Since entering the coating equipment
business in fiscal 1997, the Company has sold four systems with an aggregate
purchase price of approximately $17.5 million. As of September 1, 1997, the
Company's backlog from such system sales was approximately $13.9 million.

The Company believes that its technology and process know-how position it
to supply the emerging PDP market. The market for PDPs is expected to grow
rapidly. Stanford Resources' tabulation of announced investments indicates that
$4.0 billion to $8.0 billion will be invested in PDP manufacturing facilities
during the next five years. Applied Films has recently developed, and applied
for a patent on, a process for sputtering magnesium oxide ("MgO") which the
Company believes may represent a significant competitive advantage in the
emerging market for thin film coating equipment for PDPs.

The Company was originally incorporated in Colorado as Applied Films Lab,
Inc. on March 2, 1976. On May 1, 1992, the Company merged with Donnelly Coated
Corporation, a wholly owned subsidiary of Donnelly Corporation of Holland,
Michigan. During fiscal 1994, the Company's operations in Holland, Michigan were
discontinued and all of the Company's operations were consolidated in Boulder,
Colorado. Donnelly has made a strategic decision to focus on its core automotive
business and as a result has decided to divest its ownership position in the
Company. Applied Films believes that its spin-out from Donnelly will allow it to
more strongly establish its identity as a thin film technology company focused
on the FPD market.
3
<PAGE> 5

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company.................. 500,000

Common Stock Offered by the Selling Shareholder...... 1,400,000

Common Stock Outstanding after the Offering.......... 3,299,998(1)

Use of Proceeds to the Company....................... To repay indebtedness incurred for investment
in new production capacity and working capital

Nasdaq National Market Symbol........................ AFCO
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
JULY 3, JULY 2, JULY 1, JUNE 29, JUNE 28,
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales.................................. $42,650 $29,765 $30,990 $21,738 $34,050
Gross profit............................... 7,651 4,484 6,702 2,720 6,698
Operating income (loss).................... 1,370 (79) 2,190 (478) 2,953
Net income (loss).......................... 1,134 (201) 1,102 (1,078) 1,621
Primary and fully diluted net income (loss)
per common share........................ $ .40 $ (.07) $ .39 $ (.38) $ .56
Weighted average common shares
outstanding............................. 2,853 2,853 2,853 2,851 2,918
</TABLE>

<TABLE>
<CAPTION>
JUNE 28, 1997
------------------------
ACTUAL AS ADJUSTED(2)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA
Working capital........................................... $ 5,534 $ 5,534
Total assets.............................................. 21,541 21,541
Long term debt, net of current portion.................... 6,448 1,565
Total shareholders' equity................................ 6,740 11,623
</TABLE>

- -------------------------
(1) Based on the number of shares outstanding as of June 28, 1997. Excludes (i)
449,000 shares of Common Stock reserved for issuance under the Company's
1993 and 1997 Stock Option Plans, of which options to purchase 379,645
shares of Common Stock were outstanding as of September 8, 1997, at a
weighted average exercise price of $3.77 and (ii) 30,000 shares of Common
Stock reserved for issuance under the Company's Employee Stock Purchase
Plan, of which no shares were outstanding as of September 8, 1997.

(2) Adjusted to reflect the sale of 500,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $10.50 per
share and the application of the net proceeds therefrom.

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

Except as otherwise specified, all information in this Prospectus (i)
assumes no exercise of outstanding options to purchase Common Stock; (ii)
assumes no exercise of the Underwriters' over-allotment option; and (iii)
reflects a seven-for-one stock split of the Company's Common Stock to be
effected in the form of a stock dividend. See "Underwriting."

The Company's principal facilities and executive offices are located at
6797 Winchester Circle, Boulder, Colorado 80301, and its telephone number is
303-530-1411. All trademarks or other service marks appearing in this Prospectus
are trademarks or registered trademarks of the respective companies that utilize
them.
4
<PAGE> 6

RISK FACTORS

An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information in this Prospectus,
potential purchasers should consider carefully the following risk factors in
evaluating the Company, its business, and the shares of Common Stock offered
hereby. This Prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning
certain aspects of the business of the Company. When used in this Prospectus,
words such as "believe," "anticipate," "intend," "goal," "expects," and similar
expressions may identify forward-looking statements. Forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements,
including, without limitation, those set forth in the following risk factors and
elsewhere in this Prospectus. Prospective investors are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Prospectus. The Company undertakes no obligation to release
publicly any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors.

FLUCTUATIONS IN DEMAND AND ANNUAL AND QUARTERLY OPERATING RESULTS

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

HIGHLY COMPETITIVE MARKET ENVIRONMENT

Competition in the thin film coated glass for the LCD market is, and is
expected to remain, intense. Several of the Company's competitors have
substantially greater financial, technical, marketing and sales resources than
the Company. There can be no assurance that the Company's present or future
competitors will not exert increased competitive pressures on the Company. In
particular, the Company may in the future experience pricing pressures as a
result of a decline in industry demand, excess inventory levels, increases in
industry capacity or the introduction of new technologies, and such price
competition could adversely affect the Company's business, operating results,
financial condition and prospects. For example, prices for much of the Company's
TN thin film coated glass supplied to the LCD market declined by approximately
15% between January 1996 and June 1997. The Company is aware of plans by several
competitors to increase production capacity in 1998. Increases in industry
capacity may result in intensified pricing pressures on the Company's products.
The Company's competitive position also could be adversely affected by raw
material price increases, which the Company may not be able to pass on to its
customers but which certain of its vertically integrated current and potential
competitors may be able to better absorb. To remain competitive, the Company
must continue to invest in and focus upon research and development, product and
process

5
<PAGE> 7

innovation, as well as sales and customer support. There can be no assurance
that the Company will be successful in such efforts or that such factors will
not have a material adverse effect on the Company's business, operating results,
financial condition or prospects. The Company's suppliers and/or customers could
vertically integrate to manufacture the products produced by the Company. The
Company's suppliers of thin glass are large, well-capitalized companies which
could enter the LCD market by coating the glass they produce and supplying LCD
manufacturers directly. Because glass is by far the Company's largest material
cost, a manufacturer of glass desiring to enter this market could have a
significant cost advantage. The Company is aware of two manufacturers of thin
glass that also coat glass for the LCD market, Asahi Glass Company and Nippon
Sheet Glass. Further, companies that manufacture equipment for coating thin film
glass could begin producing thin film coated glass. One such equipment
manufacturer, Balzers Process Systems/Leybold AG, is an investor in a Chinese
joint venture which produces thin film coated glass. In addition, certain LCD
manufacturers have vertically integrated to coat glass for LCDs and further
vertical integration into certain areas of LCD manufacturing is expected. Any
such vertical integration could have a material adverse effect on the Company's
business, operating results, financial condition and prospects. See "Business --
Competition."

UNCERTAINTIES RELATED TO COATING EQUIPMENT BUSINESS

Until recently, the Company's business has been focused almost exclusively
on the sale of thin film coated glass. Although the Company expects to continue
to produce and sell thin film coated glass to the world FPD market, the
Company's future growth potential depends in part upon the Company's success in
the market for thin film systems. Sales of the Company's thin film systems
depend in large part upon a prospective customer's decision to increase
manufacturing capabilities and capacities or to respond to consumer demands for
greater cost efficiencies by upgrading or expanding existing manufacturing
facilities or constructing new manufacturing facilities, all of which typically
involve significant capital expenditures. Further, customers for the Company's
thin film coated glass could decide to purchase thin film systems to bring some
or all of their thin film coated glass requirements in-house, thus adversely
affecting sales of thin film coated glass by the Company to such customers. The
Company is currently building systems for two such customers. Systems sales also
may be affected by changes in the market for different types of displays and
customers' decisions to begin internal production of glass coatings rather than
rely on an outside supplier such as the Company. The sales cycle of the
Company's thin film coating systems is lengthy due to the customer's evaluation
of its ordered system and completion of any necessary upgrades, expansion or
construction of facilities. The Company may expend substantial funds and
management effort during the sales cycle. In addition, the cyclicality and rapid
technological change in the thin film coated glass industry may cause
prospective customers to postpone decisions regarding major capital
expenditures, such as the Company's systems. With respect to the development of
its systems business, the Company is subject to the risks inherent in the
operation or the development of a new business, including risks associated with
attracting and servicing a customer base, manufacturing products in a
cost-effective and profitable manner, managing the expansion of a business
operation and attracting and retaining qualified engineering, manufacturing and
marketing personnel. Because of rapid changes in the FPD market, which are
expected to continue, it is difficult to predict whether or where future growth
may occur, at what rate certain aspects will grow, if at all. Further, changes
in technology could render the Company's systems less attractive. If the market
for the Company's thin film systems fails to grow, or grows more slowly than
anticipated, the Company's business, operating results, financial condition and
prospects could be materially adversely affected. See "Business -- Competition."

INTERNATIONAL MARKETS

Sales to international customers represented approximately 80% of the
Company's gross sales in each of the last three fiscal years. The Company
believes that international sales will continue to represent a significant
portion of its gross sales, and that it will be subject to the normal risks of
conducting business internationally, including unexpected changes in regulatory
requirements, imposition of government controls, political and economic
instabilities, export license requirements, foreign exchange risks, tariffs and
other barriers, difficulties in staffing and managing foreign sales operations
and potentially adverse tax consequences. In addition, the laws of certain
foreign countries may not protect the Company's proprietary rights to the same
extent as do

6
<PAGE> 8

the laws of the United States. See "Business -- Proprietary Rights." Other risks
inherent in the Company's international business include greater difficulties in
accounts receivable collection, the potential of protective trade activities or
laws and the burdens of complying with a wide variety of foreign laws. See
"Business -- Sales, Marketing, and Customers." The Company's business, operating
results, financial condition or growth could be materially adversely affected by
these risks.

The Company's international sales are generally denominated in dollars,
although a portion of its sales to Japanese customers are denominated in yen.
Any strengthening of the dollar in relation to the currencies of the Company's
competitors or customers could adversely affect the Company's competitiveness.
Although a strengthening dollar may result in some offsetting cost reductions on
the raw materials imported by the Company, there can be no assurance that such
cost reductions would enable the Company to remain competitive. Moreover, a
strengthening of the dollar or other competitive factors could put pressure on
the Company to denominate a greater portion of its Japanese sales in yen,
thereby increasing the Company's exposure to fluctuations in the dollar-yen
exchange rate. There can be no assurance that fluctuations in exchange rates
will not adversely affect the Company's competitive position or result in
foreign exchange losses, either of which could materially adversely affect the
Company's business, operating results, financial conditions and prospects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."

LIMITED SOURCES OF SUPPLY

There are relatively few manufacturers of thin glass, which raw material
accounts for a majority of the Company's materials cost. The Company currently
relies primarily on four glass suppliers, all of which are located outside the
United States. In periods of short supply, the Company could have difficulty
obtaining the necessary quantities of glass at a competitive cost. Further, the
Company operates on a "just-in-time" inventory basis in ordering its glass and
other materials and therefore maintains only limited inventories, increasing the
operating risks associated with supply interruptions. Such interruptions could
occur for numerous reasons, including labor difficulties at some point in the
chain of manufacturing or distribution. In addition, the Company may not be able
to pass raw material price increases along to its customers, especially in
periods of soft demand for the Company's products or excess capacity. Current
and potential competitors of the Company that both manufacture and coat glass
could be able to better absorb such raw material cost increases due to their
vertical integration. If the Company were to experience significant delays,
interruptions, or shortages in its material supply or material supplier price
increases, the Company's business, operating results, financial condition and
prospects could be materially adversely affected. See "Business -- Suppliers."

RAPID TECHNOLOGICAL CHANGE

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

7
<PAGE> 9

of these factors will not have a material adverse effect on the Company's
business, operating results, financial condition or prospects. See "Business --
Products and Manufacturing."

EVOLVING FPD MARKET

The Company believes that much of the growth in the FPD market will be in
higher information content FPDs, such as STN LCDs, active matrix LCDs ("AM
LCDs"), and PDPs. See "Business -- Products and Manufacturing." During fiscal
1997 less than 10% of the Company's coated glass revenues were derived from the
sale of coated glass used in higher information content FPDs. Due in part to
strong customer demand for thin film coated glass for lower information content
displays, the Company has to date directed most of its production capacity to
the TN coated glass which is presently used in such displays. While the Company
has recently made and is making investments in additional production capacity
for STN coated glass, there can be no assurance that the Company will be able to
successfully expand its position in the market for thin film coated glass for
higher information content FPDs. A reduction in the market for thin film coated
glass for TN LCDs as a result of a shift in demand toward higher information
content displays could materially adversely affect the Company's results of
operations and could be to the advantage of competitors of the Company who may
currently have greater capacity to produce thin film coated glass for STN or AM
LCDs. This could affect the Company's operating results while it transfers
resources to the manufacture of thin film coated glass for STN LCDs. See
"Business -- Strategy" and "-- Products and Manufacturing." The Company's
business depends substantially on the purchasing requirements of manufacturers
of FPDs, which, in turn, depend upon the current and anticipated market demand
for FPDs. Sales of thin film coated glass to these manufacturers are expected to
continue to represent a significant portion of the Company's net sales. Although
the market for FPDs has experienced significant growth, there can be no
assurance that such growth will continue at current rates or at all, or that any
growth will have a positive impact on the Company's future business or results
of operations. The Company's business, operating results, financial condition
and prospects would be materially adversely affected by any future downturns in
the FPD market.

DEPENDENCE ON KEY CUSTOMERS; LIMITED NUMBER OF CUSTOMERS

The Company's ten largest customers accounted for, in the aggregate,
approximately 62%, 56% and 59% of the Company's gross sales in fiscal years
1995, 1996 and 1997, respectively. The loss of, or a significant reduction of
purchases by, one or more of these customers would materially adversely affect
the Company's business, operating results, financial condition and prospects.
The Company expects that sales of its products to relatively few customers,
particularly in the LCD market, will continue to account for a high percentage
of its revenue in the foreseeable future. In addition, in the LCD market, there
are a limited number of potential customers. The Company has not entered into
long-term agreements with its customers and none are obligated to continue to
buy their thin film coated glass from the Company. Moreover, in the event that
customers purchase thin film systems from the Company or one of its competitors
and begin coating the glass in-house, sales to those customers may decrease
sharply. If such lost sales are not replaced on a timely basis by new orders of
thin film coated glass or capital equipment from other customers, the Company's
business, operating results, financial condition and prospects could be
materially adversely affected. See "--Fluctuations in Demand and Annual and
Quarterly Operating Results" and "Business -- Sales, Marketing, and Customers."

MANAGEMENT OF GROWTH

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

8
<PAGE> 10

DECLINING AVERAGE SELLING PRICES; DEPENDENCE UPON PRODUCTIVITY IMPROVEMENTS

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

DEPENDENCE ON MANAGEMENT AND OTHER KEY EMPLOYEES

The Company's success during the foreseeable future will depend largely
upon the continued services of its executive officers, and certain other key
employees. The loss of the services of one or more of the executive officers or
other key employees could materially adversely affect the Company's business.
Cecil Van Alsburg, the Company's Chief Executive Officer, presently intends to
transition day-to-day management responsibility for the Company to Thomas Edman,
the Company's current Chief Operating Officer, over the next 18 months. The
Company does not have employment agreements or key-man life insurance on any of
its executive officers or other key employees. The Company's future success will
be dependent in part upon the Company's ability to attract and retain additional
qualified managers, engineers and other employees. The Company's business,
operating results, financial condition or growth could be materially adversely
affected if the Company were unable to attract, hire, assimilate, and train
these employees in a timely manner. See "Business -- Employees" and
"Management."

NEW FACILITY EXPANSION

The establishment of the Company's new manufacturing facility and the
development and implementation of additional production lines will entail risks
related to new production facilities and will require an investment of the
Company's capital. As part of its manufacturing expansion, the Company will need
to hire and train a substantial number of new manufacturing workers. The
availability of skilled and unskilled workers in the Denver metropolitan area,
the site of the Company's new manufacturing facility, is limited due to a
relatively low unemployment rate. There can be no assurance that the Company
will successfully develop improved processes, implement additional production
lines or successfully operate its new facility. There can be no assurance that
the Company will be able to successfully complete construction of its new
manufacturing facility on a timely basis or at all, or that such new facility
will result in greater manufacturing capacity or lower manufacturing costs than
those currently experienced by the Company. The Company will incur duplicate
facilities and operating costs during its transition from its existing
manufacturing facility to its new manufacturing facility. In addition, the
Company will incur certain start-up expenses at the new facility and may
experience interruptions in production during such transition. These factors
will adversely affect the Company's fiscal 1998 operating results, and may
adversely affect fiscal 1999 operating results. Failure to open its new
manufacturing facility and increase capacity on a timely basis could damage
customer relationships, cause lost opportunities and have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Use of Proceeds" and "Business -- Facilities."

SUBSTANTIAL CONTROL BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS

Upon completion of this offering, the Company's officers, directors and
their affiliates will retain voting control of approximately 42% of the
Company's Common Stock (39% if the underwriters' over-allotment option is
exercised in full). As a result, these shareholders, acting together, would be
able to influence the

9
<PAGE> 11

outcome of actions requiring shareholder approval, such as the election of
directors, amendments to the Company's articles of incorporation, mergers and
other actions by shareholders with respect to the business and affairs of the
Company. In addition, the voting power of these shareholders under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company. See "Management," "Principal and Selling Shareholders"
and "Description of Capital Stock."

LIMITED PROTECTION OF PROPRIETARY RIGHTS

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

ENVIRONMENTAL REGULATIONS

The Company uses hazardous chemicals in producing its products. As a
result, the Company is subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations.

GENERAL ECONOMIC CONDITIONS

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

ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE

Prior to this offering there has been no public market for the Company's
Common Stock and there can be no assurance that following this offering an
active trading market will develop or be maintained. The initial public offering
price will be determined by negotiations between the Company and the
representatives of the underwriters and may not be indicative of prices that
will prevail in the trading market following this offering. For a description of
the factors considered in determining the initial public offering price, see
"Underwriting." In addition, the stock market has historically experienced
volatility which has particularly affected the market prices of securities of
many technology-based companies and which sometimes has been unrelated to the
operating performances of such companies. Factors such as announcements of
technological developments for products by the Company or its competitors,
fluctuations in foreign exchange rates, variations in the Company's quarterly
operating results, or general, economic or stock market conditions may
significantly impact the market price of the Common Stock after this offering.
Furthermore, any adverse changes in the market price of common stock of other
similar companies may adversely affect the market price of the

10
<PAGE> 12

Company's Common Stock, irrespective of whether there has been any deterioration
in the Company's business, operating results, financial condition or prospects.

ANTITAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK

The Company's Articles of Incorporation and Bylaws will contain various
provisions, including without limitation, certain notice provisions, provisions
for staggered terms of office of the Board of Directors, fair price provisions,
and provisions authorizing the Company to issue preferred stock, that may make
it more difficult for a third-party to acquire, or may discourage acquisition
bids for, the Company and could limit the price that certain investors would be
willing to pay in the future for shares of the Company's Common Stock. The
ownership after this offering by the Company's officers, directors and their
affiliates of substantial shares of the Common Stock could also discourage such
bids. In addition, the rights of holders of Common Stock would be subject to,
and may be adversely affected by, the rights of any holders of preferred stock
that may be issued in the future and that may be senior to the rights of the
holders of the Common Stock. See "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the 1,900,000 shares of Common stock
offered hereby (2,185,000 shares of Common Stock if the underwriters'
over-allotment is exercised in full), will be freely tradable by persons other
than "affiliates" of the Company without restriction. All of the remaining
1,399,998 shares of Common Stock held by officers, directors and existing
shareholders of the Company are subject to "lockup" agreements under which the
holders of such shares have agreed not to sell or otherwise dispose of any
shares of Common Stock without the prior written consent of Needham & Company,
Inc., for a period of 180 days after the date of this prospectus. Such shares of
Common Stock will be eligible for resale after the expiration of the lockup
period, subject to the provisions of Rule 144 under the Securities Act of 1933,
as amended (the "Act"). In addition, the Company intends to file registration
statements under the Act covering the sale of 479,000 shares of Common Stock
reserved for issuance under the Company's 1993 Stock Option Plan, 1997 Stock
Option Plan and the 1997 Employee Stock Purchase Plan. Shares acquired through
the exercise of options by parties to lockup agreements will be subject to such
lockup agreements. Sales of substantial amounts of the Common Stock in the
public market, whether by purchasers in the offering or other shareholders of
the Company, or the perception that such sales could occur, may adversely affect
the market price of the Common Stock and may also adversely affect the Company's
ability to raise capital in the future. See "Shares Eligible for Future Sale"
and "Underwriting."

IMMEDIATE AND SUBSTANTIAL DILUTION

The initial public offering price is expected to be substantially higher
than the net tangible book value per share of the Common Stock. Investors
purchasing shares of Common Stock in this offering will, therefore, incur
immediate and substantial dilution in net tangible book value per share. To the
extent that stock options (currently outstanding or subsequently granted) to
purchase Common Stock are exercised, there will be further dilution. See
"Dilution."

11
<PAGE> 13

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 500,000 shares of
Common Stock offered hereby are estimated to be approximately $4.9 million ($7.7
million if the Underwriters' over-allotment option is exercised in full) at an
assumed initial public offering price of $10.50 per share and after deducting
underwriting discounts and commissions. The net proceeds to the Company will be
used to repay indebtedness incurred for investment in new production capacity
and working capital. As of June 28, 1997, $7.1 million was outstanding under the
Company's line of credit which matures on June 30, 2000 and bears interest at
variable rates indexed to LIBOR or the prime rate. Repayment of amounts
outstanding under the line of credit will not reduce the total amount available
for borrowing under the line of credit. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources" and Note 3 of the Notes to Consolidated Financial Statements.
The Company is currently evaluating the possibility of establishing a
manufacturing facility in Asia, and a portion of the proceeds could be used for
that purpose.

The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholder. See "Principal and Selling Shareholders." The
Selling Shareholder has agreed to pay the expenses of the offering estimated at
$400,000.

DIVIDEND POLICY

The Company currently intends to retain all future earnings for use in the
operation of its business and, therefore, it does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. In the future,
determinations to pay cash dividends will be at the discretion of the Company's
Board of Directors and will be dependent upon the Company's results of
operations and financial condition, credit, and loan agreements in effect at
that time, and other factors deemed relevant by the Board of Directors.

12
<PAGE> 14

CAPITALIZATION

The following table sets forth the actual total long-term debt and
capitalization of the Company as of June 28, 1997, and as adjusted to reflect
the sale by the Company of 500,000 shares of Common Stock at an assumed initial
public offering price of $10.50 per share and the application of net proceeds
therefrom:

<TABLE>
<CAPTION>
JUNE 28, 1997
-------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, net of current portion(1)................... $ 6,448 $ 1,565
Shareholders' equity:
Preferred Stock, no par value, 1,000,000 authorized; no
shares outstanding actual or as adjusted............... -- --
Common Stock, no par value, 10,000,000 shares authorized,
2,799,998 shares outstanding actual; 3,299,998 shares
outstanding as adjusted(2)............................. 4,245 9,128
Less common shares held by affiliate........................ (26) (26)
Deferred compensation(3).................................... (31) (31)
Retained earnings........................................... 2,552 2,552
------- -------
Total shareholders' equity................................ 6,740 11,623
------- -------
Total long-term debt and shareholders' equity............. $13,188 $13,188
======= =======
</TABLE>

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

(1) See Note 3 of Notes to Consolidated Financial Statements.

(2) Based on the number of shares outstanding as of June 28, 1997. Excludes (i)
449,000 shares of Common Stock reserved for issuance under the Company's
1993 and 1997 Stock Option Plans, of which options to purchase 379,645
shares of Common Stock were outstanding as of September 8, 1997, at a
weighted average exercise price of $3.77 and (ii) 30,000 shares of Common
Stock reserved for issuance under the Company's Employee Stock Purchase
Plan, of which no shares were outstanding as of September 8, 1997. See
"Management -- Executive Compensation" and Note 5 of Notes to Consolidated
Financial Statements.

(3) See Note 5 of Notes to Consolidated Financial Statements.

13
<PAGE> 15

DILUTION

The net tangible book value of the Company as of June 28, 1997, was $6.6
million, or $2.36 per share. Net tangible book value per share is determined by
dividing the net tangible book value of the Company by the number of shares of
Common Stock outstanding. After giving effect to the sale by the Company of
500,000 shares of Common Stock hereby at an assumed initial public offering
price of $10.50 per share and the application of the estimated net proceeds
therefrom, the net tangible book value of the Company as of June 28, 1997 would
have been $11.5 million, or $3.49 per share. This represents an immediate
increase in net tangible book value of $1.13 per share to existing shareholders
and an immediate dilution of $7.01 per share to new investors. The following
table illustrates this dilution on a per share basis:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.50
Net tangible book value per share before the offering..... $2.36
Increase attributable to new investors.................... 1.13
-----
Net tangible book value per share after the offering........ 3.49
------
Dilution per share to new investors......................... $ 7.01
======
</TABLE>

The following table summarizes as of June 28, 1997, the difference between
the existing shareholders and new investors with respect to the number of shares
purchased from the Company, the total consideration paid and the average price
paid per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing common shareholders(1)............ 2,799,998 85% $3,658,000 41% $ 1.31
New investors(1)........................... 500,000 15 5,250,000 59 10.50
--------- --- ---------- ---
Total.................................... 3,299,998 100% $8,908,000 100%
========= === ========== ===
</TABLE>

- -------------------------
(1) This table does not reflect the sale of Common Stock by the Selling
Shareholder. Sales by the Selling Shareholder in this offering will reduce
the number of shares held by existing shareholders to 1,399,998 shares, or
42% (39% if the Underwriters' over-allotment option is exercised in full) of
the total number of shares of Common Stock outstanding after the offering,
and will increase the number of shares held by new investors to 1,900,000
shares, or 58% (61% if the Underwriters' over-allotment option is exercised
in full) of the total number of shares of Common Stock outstanding after the
offering. See "Principal and Selling Shareholders."

The foregoing table assumes no exercise of outstanding stock options. As of
September 8, 1997, there were outstanding stock options to purchase an aggregate
of 379,645 shares of Common Stock at a weighted average exercise price of $3.77
per share. See "Management -- Stock Option and Purchase Plans."

14
<PAGE> 16

SELECTED FINANCIAL AND OPERATING DATA

The following selected consolidated financial data with respect to the
Company's balance sheet data as of June 29, 1996, and June 28, 1997, and, with
respect to the Company's consolidated statement of operations data, for each of
the three years in the period ended June 28, 1997, have been derived from the
Company's consolidated financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in its report
included elsewhere herein. The consolidated balance sheet data as of July 3,
1993, July 2, 1994 and July 1, 1995 and the consolidated statement of operations
data for the years ended July 3, 1993, and July 2, 1994 have been derived from
audited consolidated financial statements not included herein. The selected
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------------
JULY 3, 1993 JULY 2, 1994 JULY 1, 1995 JUNE 29, 1996 JUNE 28, 1997
------------ ------------ ------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales.......................... $ 42,650 $ 29,765 $ 30,990 $ 21,738 $ 34,050
Cost of goods sold................. 34,999 25,281 24,288 19,018 27,352
---------- ---------- ---------- ---------- ----------
Gross profit....................... 7,651 4,484 6,702 2,720 6,698
Operating expenses:
Selling, general and
administrative................ 5,381 3,487 3,502 2,233 2,996
Research and development......... 900 1,076 1,010 965 749
---------- ---------- ---------- ---------- ----------
Operating income (loss)............ 1,370 (79) 2,190 (478) 2,953
Interest income (expense).......... (333) (599) (816) (780) (822)
Other income (expense)............. 530 370 224 (244) 95
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes............................ 1,567 (308) 1,598 (1,502) 2,226
Income tax benefit (provision)..... (433) 107 (496) 424 (605)
---------- ---------- ---------- ---------- ----------
Net income (loss).................. $ 1,134 $ (201) $ 1,102 $ (1,078) $ 1,621
========== ========== ========== ========== ==========
Primary and fully diluted net
income (loss) per share(1)(2).... $ 0.40 $ (0.07) $ 0.39 $ (0.38) $ 0.56
========== ========== ========== ========== ==========
Weighted average number of common
and equivalent shares
outstanding(1)(2)................ 2,853 2,853 2,853 2,851 2,918

BALANCE SHEET DATA
Working capital.................... $ 5,905 $ 7,077 $ 5,312 $ 6,232 $ 5,534
Total assets....................... 20,872 21,891 20,128 18,198 21,541
Long-term debt, net of current
portion.......................... 9,797 9,992 7,464 8,501 6,448
Total shareholders' equity......... 4,766 4,565 6,020 5,058 6,740
</TABLE>

- -------------------------
(1) Net income (loss) per share and average number of common and equivalent
shares outstanding are adjusted herein to reflect a seven-for-one stock
split to be effected prior to the offering. The accompanying audited
consolidated financial statements do not reflect this stock dividend.

(2) See Note 2 of Notes to Consolidated Financial Statements.

15
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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

This Prospectus, including the disclosures below, contains certain
forward-looking statements that involve substantial risks and uncertainties.
When used herein, the terms "believe," "anticipate," "intend," "goal,"
"expects," and similar expressions may identify forward-looking statements. The
Company's actual results, performance or achievements may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause or contribute to such material differences include those disclosed
in the "Risk Factors" section of this Prospectus, which prospective purchasers
of the Common Stock offered hereby should consider carefully.

OVERVIEW

The Company was founded in Colorado as Applied Films Lab, Inc. on March 2,
1976 and was involved in both applied thin films research and development and
limited thin films production. On May 1, 1992, the Company merged with Donnelly
Coated Corporation, a wholly owned subsidiary of Donnelly Corporation of
Holland, Michigan which was primarily involved in the manufacture and sale of
thin film coated glass for LCDs. The Company maintained manufacturing facilities
and production capacity in both Boulder, Colorado and Michigan, until the end of
1993 when the Michigan facility and production capacity were no longer utilized.
Since that time, the Company has maintained all of its manufacturing operations
in Boulder, Colorado. The significant decrease in net sales from fiscal 1993 to
fiscal 1994 was due primarily to the reduction in production capacity which
occurred with discontinuance of operations at the Michigan facility. In
addition, the Company's fiscal 1994 results were adversely affected by expenses
associated with the transition of business from Michigan to Colorado.

The Company's sales historically have been derived primarily from the sale
of thin film coated glass to manufacturers of LCDs. Sales and related costs of
coated glass sales are recognized when products are shipped. Historically, sales
have varied substantially from quarter to quarter, and the Company expects such
variations to continue. See "Risk Factors -- Fluctuations in Demand and Annual
and Quarterly Operating Results." Because a significant portion of the Company's
overhead is fixed in the short term, the Company's gross profit and results of
operations may be adversely affected by unexpected fluctuations in sales. The
Company is typically able to ship its thin film coated glass within 30 days of
receipt of the order and, therefore, does not customarily have a significant
long-term backlog of coated glass. The Company's ten largest customers for
coated glass accounted for, in the aggregate, approximately 62%, 56% and 59% of
gross sales in fiscal 1995, 1996 and 1997, respectively. Prices for much of the
Company's TN thin film coated glass supplied to the LCD market declined by
approximately 15% from January 1996 to June 1997. The Company expects continued
downward pressure on its selling prices, which will require continuing
improvements in manufacturing efficiencies and cost reductions.

The principal demand for thin film coated glass is by LCD manufacturers,
most of which are located in Asia. Sales to international customers represented
approximately 80% of the Company's gross sales in each of the last three fiscal
years. The Company expects international sales will continue to represent a
significant portion of its net sales. The Company sells most of its thin film
coated glass to foreign customers in U.S. dollars except for sales to certain
Japanese customers which are in yen. The Company does not currently engage in
international currency hedging transactions to mitigate its foreign exchange
exposure, however, the Company does purchase raw glass from Japan which
partially offsets foreign currency risks on thin film coated glass sales. In
addition, in the latter half of fiscal 1996 the Company instituted a policy
whereby it shortened payment terms on sales denominated in Japanese yen, thereby
reducing currency risk. See "Risk Factors -- International Markets."

During fiscal 1997, the Company began selling thin film coating equipment
to FPD manufacturers, which sales totaled $2.8 million. Net sales of thin film
coating systems are recognized on the percentage-of-

16
<PAGE> 18

completion method, measured by the percentage of the total costs incurred and
applied to date in relation to the estimated total costs to be incurred for each
contract. The lead time for the sale of thin film coating equipment is generally
six to twelve months. As of September 1, 1997, the Company's backlog from
systems sales was approximately $13.9 million. The Company believes that sales
of thin film coating equipment will increase in the foreseeable future. The
Company expects to achieve higher gross profit margins for coating equipment
sales compared to the sale of thin film coated glass. To date, the Company has
priced its coating equipment in U.S. dollars. See "Risk Factors -- Uncertainties
Related to Coating Equipment Business."

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................................. 100.0% 100.0% 100.0%
Cost of goods sold......................................... 78.4 87.5 80.3
----- ----- -----
Gross profit............................................... 21.6 12.5 19.7
Operating expenses:
Selling, general & administrative........................ 11.3 10.3 8.8
Research and development................................. 3.3 4.4 2.2
----- ----- -----
Operating income (loss).................................... 7.1 (2.2) 8.7
Interest income (expense).................................. (2.6) (3.6) (2.4)
Other income (expense)..................................... 0.7 (1.1) 0.3
----- ----- -----
Income (loss) before income taxes.......................... 5.2 (6.9) 6.5
Income tax benefit (provision)............................. (1.6) 2.0 (1.8)
----- ----- -----
Net income (loss).......................................... 3.6% (5.0)% 4.8%
===== ===== =====
</TABLE>

FISCAL 1997 COMPARED TO FISCAL 1996

Net Sales. Net sales increased 56.6% to $34.0 million in fiscal 1997 from
$21.7 million in fiscal 1996. This increase was primarily due to worldwide
recovery in demand for thin film coated glass in fiscal 1997 versus fiscal 1996.
The Company believes that the decline in volume in 1996 was due largely to
excessive inventory buildup by LCD manufacturers. Net unit sales of the
Company's thin film coated glass increased significantly, offset partially by
price decreases for LCD coated glass. In addition, the Company's net sales in
fiscal 1997 included sales of thin film coating systems of $2.8 million; no such
sales occurred in fiscal 1996. The Company believes that sales of thin film
coating equipment will increase in the foreseeable future.

Gross Profit. Gross profit increased to $6.7 million in fiscal 1997 from
$2.7 million in fiscal 1996. As a percentage of net sales, gross profit
increased to 19.7% in fiscal 1997 from 12.5% in fiscal 1996. This improvement in
fiscal 1997 was due primarily to increased operating efficiencies that resulted
from higher sales volume of thin film coated glass and process improvements. The
improvement in gross margin was also attributable to the sale of thin film
coating systems in fiscal 1997, which generally carry a higher gross profit
margin than thin film coated glass.

Selling, General and Administrative. Selling, general and administrative
expenses increased 34.2% to $3.0 million in fiscal 1997 from $2.2 million in
fiscal 1996, primarily due to higher overall selling costs including higher
commissions on systems sales and increased recruiting costs. As a percentage of
net sales, selling, general and administrative expenses decreased to 8.8% in
fiscal 1997 from 10.3% in fiscal 1996 due to the substantial increase in net
sales in fiscal 1997 compared with fiscal 1996.

17
<PAGE> 19

Research and Development. Research and development expenses decreased 22.4%
to $749,000 in fiscal 1997 from $965,000 in fiscal 1996. Research and
development expenditures consisted primarily of salaries, outside contractor
expenses and other expenses related to the Company's ongoing product development
efforts. As a percentage of net sales, research and development expenses
decreased to 2.2% in fiscal 1997 from 4.4% in fiscal 1996. The decrease was due
to a temporary reduction of research and development salaries and related
expenses, net of reimbursements for research contracts. The Company expects
research and development expenditures to increase in fiscal 1998.

Interest Income (Expense). Interest expense increased 6.5% to $822,000 in
fiscal 1997 from $780,000 in fiscal 1996. The increase was primarily
attributable to a $250,000 charge by Donnelly Corporation to guarantee $5.0
million of the Company's line of credit during fiscal 1997, offset partially by
lower debt levels; no similar charge was incurred in fiscal 1996.

Other Income (Expense). Other income (expense) increased to $95,000 in
fiscal 1997 from ($244,000) in fiscal 1996. This increase in other income
(expense) was due primarily to foreign exchange gains of approximately $96,000
in fiscal 1997 versus foreign exchange losses of ($286,000) in fiscal 1996. The
foreign exchange losses in fiscal 1996 were primarily due to differences in the
dollar/yen exchange rate between the dates of sale and the dates of related
payment.

Income Tax Benefit (Provision). The Company's effective federal income tax
rate for fiscal 1997 was 27.2% compared to a tax benefit of 28.3% in fiscal
1996. The Company's effective tax rate for fiscal 1997 differed from the federal
statutory rate primarily as a result of the use of a Foreign Sales Corporation
(see Note 6 of Notes to Consolidated Financial Statements) in 1997 and net
operating loss carryforwards. As of the end of fiscal 1997, the Company had no
remaining net operating loss carryforwards.

FISCAL 1996 COMPARED TO FISCAL 1995

Net Sales. Net sales decreased 30.0% to $21.7 million in fiscal 1996 from
$31.0 million in fiscal 1995. The decrease in fiscal 1996 versus fiscal 1995 was
due to an excessive inventory buildup by LCD manufacturers causing an overall
worldwide decline in demand for thin film coated glass. To a lesser extent, net
sales also were adversely affected by price decreases.

Gross Profit. Gross profit decreased to $2.7 million in fiscal 1996 from
$6.7 million in fiscal 1995. As a percentage of net sales, gross profit
decreased to 12.5% in fiscal 1996 from 21.6% in fiscal 1995. The decrease was
attributable to decreased thin film coated glass sales and the inability to
reduce fixed manufacturing costs at the same rate as the sales decline.

Selling, General and Administrative. Selling, general and administrative
expenses decreased 36.2% to $2.2 million in fiscal 1996 from $3.5 million in
fiscal 1995. As a percentage of net sales, selling, general and administrative
expenses decreased to 10.3% in fiscal 1996 from 11.3% in 1995. These decreases
were due primarily to the expiration of noncompete compensation expenses
($436,000 in fiscal 1995), and reductions in sales and commission expenses,
profit sharing and amortization of deferred compensation expenses during fiscal
1996 compared with fiscal 1995.

Research and Development. Research and development expenses decreased 4.5%
to $965,000 in fiscal 1996 from $1.0 million in fiscal 1995 due primarily to
salary and related cost reductions. As a percentage of net sales, research and
development expenses increased to 4.4% in fiscal 1996 from 3.3% in fiscal 1995
due primarily to the overall reduction in net sales.

Interest Income (Expense). Interest expense decreased 4.4% to $780,000 in
fiscal 1996 from $816,000 in fiscal 1995 due primarily to decreased interest
rates offset partially by increased long-term debt levels.

Other Income (Expense). Other income (expense) decreased to ($244,000) in
fiscal 1996 from $224,000 in fiscal 1995. The most significant change resulted
from a foreign exchange loss of ($286,000) in fiscal 1996 due to differences in
dollar/yen exchange rates.

Income Tax Benefit (Provision). The Company's effective tax rate in fiscal
1996 was a 28.2% benefit, compared to 31.0% in fiscal 1995. The Company's
effective income tax rate in fiscal 1996 differed from the federal statutory
rate primarily as a result of the Company's net operating losses. The 1995
effective tax rate

18
<PAGE> 20

differed from the federal statutory rates due primarily to the benefit of a
Foreign Sales Corporation. See Note 6 of Notes to Consolidated Financial
Statements.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth summary unaudited quarterly financial
information for the last eight fiscal quarters. In the opinion of management,
such information has been prepared on the same basis as the audited financial
statements appearing elsewhere in this Prospectus and reflects all necessary
adjustments (consisting of only normal, recurring adjustments) for a fair
presentation of such unaudited quarterly results when read in conjunction with
the audited financial statements and notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period and
there can be no assurance that any trends reflected in such results will
continue in the future. The Company's results of operations may be subject to
significant quarterly variations. See "Risk Factors -- Fluctuations in Demand
and Annual and Quarterly Operating Results."

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997
-------------------------------------- ---------------------------------------
SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- ----- ---- --------- -------- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $7,139 $4,656 $4,709 $5,234 $6,279 $7,806 $9,935 $10,030
Cost of goods sold.............. 5,966 4,173 4,334 4,545 5,235 6,593 7,768 7,756
------ ------ ------ ------ ------ ------ ------ -------
Gross profit.................... 1,173 483 375 689 1,044 1,213 2,167 2,274
Operating expenses:
Selling, general and
administrative............. 695 582 552 404 544 642 923 887
Research and development...... 288 276 231 170 192 115 181 261
------ ------ ------ ------ ------ ------ ------ -------
Operating income (loss)......... 190 (375) (408) 115 308 456 1,063 1,126
Interest income (expense)....... (177) (184) (235) (184) (251) (200) (191) (180)
Other income (expense).......... (142) 14 (113) (3) 7 34 10 44
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before income
taxes......................... (129) (545) (756) (72) 64 290 882 990
Income tax benefit
(provision)................... 37 154 214 19 (17) (79) (240) (269)
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss)............... $ (92) $ (391) $ (542) $ (53) $ 47 $ 211 $ 642 $ 721
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>

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

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997
----------------------------------------- -------------------------------------
SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- ----- ---- --------- -------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........... 83.6 89.6 92.0 86.8 83.4 84.5 78.2 77.3
----- ----- ----- ----- ----- ----- ----- -----
Gross profit................. 16.4 10.4 8.0 13.2 16.6 15.6 21.8 22.7
Operating expenses:
Selling, general and
administrative.......... 9.7 12.5 11.7 7.7 8.7 8.2 9.3 8.8
Research and development... 4.0 5.9 4.9 3.2 3.1 1.5 1.8 2.6
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)...... 2.7 (8.1) (8.7) 2.2 4.9 5.8 10.7 11.2
Interest income (expense).... (2.5) (4.0) (5.0) (3.5) (4.0) (2.6) (1.9) (1.8)
Other income (expense)....... (2.0) 0.3 (2.4) (0.0) 0.1 0.4 0.1 0.4
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes...................... (1.8) (11.7) (16.1) (1.4) 1.0 3.7 8.9 9.9
Income tax benefit
(provision)................ 0.5 3.3 4.5 0.4 (0.3) (1.0) (2.4) (2.7)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).......... (1.3)% (8.4)% (11.5)% (1.0)% 0.7% 2.7% 6.5% 7.2%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

19
<PAGE> 21

The variation in quarterly sales during fiscal 1996 and fiscal 1997 was due
primarily to the reduction in worldwide demand for thin film coated glass which
began in the second quarter of fiscal 1996. Unit demand began to improve in the
fourth quarter of fiscal 1996 and continued to improve through the end of fiscal
1997. In addition, during the first quarter of fiscal 1997, the Company began
recognizing revenue from its initial sales of thin film coating equipment. Sales
from coating equipment contributed $109,000 in the quarter ended September 1996,
$564,000 in the quarter ended December 1996, $1.6 million in the quarter ended
March 1997, and $554,000 in the quarter ended June 1997.

The Company began to experience significant gross profit erosion during the
second quarter of fiscal 1996 due to the decrease in thin film coated glass
sales and the Company's inability to reduce fixed manufacturing costs at the
same rate as the sales decline. In particular, the Company's gross profit margin
in the third quarter of fiscal 1996 was adversely affected by higher production
costs. Gross profit margin improved during fiscal 1997 due to increased
efficiencies that resulted from higher sales volume of thin film coated glass
and process improvements. In addition, gross profit margin improved as a result
of the initial recognition of equipment sales which generally carry higher gross
profit margins than thin film coated glass.

Sales, general and administrative expenses decreased in absolute dollars
during the industry downturn in fiscal 1996 as the Company adjusted its expenses
to minimize its net loss during these quarters. As sales improved during fiscal
1997, these expenses increased accordingly. During the third quarter of fiscal
1997, these expenses were particularly high in part due to the commissions
related to the $1.6 million in systems sales recognized during the period.
Research and development expenses decreased during the downturn in fiscal 1996
as the Company reduced salary and related costs. These reductions continued
until after the Company returned to profitability in fiscal 1997. Other income
(expense) included significant foreign exchange losses in the first and third
quarters of fiscal 1996 due to differences in the dollar/yen exchange rate
between the dates of sales and related payments.

Because a significant portion of the Company's overhead is fixed, at least
in the short term, the Company's quarterly results of operations may be
materially adversely affected if sales decline for any reason.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations to date primarily through cash
generated from operations and borrowings. Net cash flows from operating
activities were $3.9 million, ($793,000) and $4.0 million in fiscal 1995, 1996
and 1997, respectively. The Company used cash of $1.7 million, $899,000 and $1.3
million for purchases of machinery and equipment (including construction in
progress) in fiscal 1995, 1996 and 1997, respectively. The Company used cash of
$2.5 million and $2.3 million in fiscal 1995 and 1997 to decrease its long-term
debt, while borrowing an additional $759,000 in fiscal 1996.

As of June 28, 1997, the Company had cash and cash equivalents of
approximately $297,000 and working capital of $5.5 million. The Company has a
$11.5 million credit facility with a commercial bank which expires June 30,
2000. This facility includes a $3.0 million term note and an $8.5 million line
of credit. Borrowings under this facility accrue interest at variable rates
indexed to LIBOR or the prime rate. Of the Company's credit facility, $5.0
million is guaranteed by Donnelly Corporation, for which the Company paid
Donnelly an annual fee of $250,000 in fiscal 1997. As of August 30, 1997, the
Company had approximately $8.0 million outstanding on its credit facility.
Following completion of the offering, the Company anticipates the Donnelly
guaranty will be released and the borrowing terms will be renegotiated. However,
the Company anticipates no material change in its borrowing capacity. In
addition, the Company had a $366,000 secured note outstanding relating to its
new Weld County, Colorado facility. The Company expects to reduce a substantial
portion of its debt obligations with proceeds from this offering. The Company's
principal capital expenditures in recent years have consisted of improvements to
its equipment and facilities. These expenditures have been funded principally
from operations and through the credit facility. The Company expects its capital
expenditures for fiscal 1998 to include construction of a new thin film
production system as well as capital expenditures related to its new production
facility in Weld County, Colorado. Capital expenditures for fiscal 1998 are
budgeted at $3.7 million.

20
<PAGE> 22

The Company believes that the net proceeds from this offering, together
with funds generated from operations and borrowings available under its line of
credit and term loan will be sufficient to fund its operations and capital
expenditures for at least twelve months following completion of the offering.

RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS

The Company adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of ("SFAS 121") effective June 30, 1996. SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill. Implementation of SFAS 121 had no
material effect on the Company's financial position or results of operation. The
Company adopted Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123") effective June 30, 1996. SFAS 123
defines a fair value based method of accounting for employee stock compensation,
including stock options. However, companies may continue to account for stock
compensation using the intrinsic-value-based method as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
provide pro forma disclosures of net income and earnings per share assuming the
fair-value-based method had been applied. The Company elected to account for
stock compensation using the intrinsic-value-based method, and thus, SFAS 123
will not have any impact on reported operating results.

The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards 128 ("SFAS 128"), "Earnings Per Share." SFAS 128
is effective for fiscal years ending after December 15, 1997; early adoption is
not permitted. SFAS 128 replaces primary and fully diluted EPS with basic and
diluted earnings per share, respectively. Under SFAS 128, net income (loss) per
share for the periods presented would be as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Basic....................................................... $0.39 $(0.38) $0.57
Diluted..................................................... 0.39 (0.38) 0.56
</TABLE>

21
<PAGE> 23

BUSINESS

Applied Films is a leader in thin film technology for the flat panel
display ("FPD") industry. The Company supplies thin film coated glass for use in
lower information content displays, primarily liquid crystal displays ("LCDs")
and more recently began selling thin film coating equipment to manufacturers of
both lower and higher information content displays. Applied Films believes that
it is able to address a broad array of the FPD market through the combination of
its thin film coated glass business and its coating equipment business.

INDUSTRY BACKGROUND

FPDs are found in a wide variety of consumer and industrial products,
including cellular telephones, calculators, laptop computers, pagers, scientific
instruments, televisions, video games, gasoline pumps, automotive instruments,
point-of-sale terminals and a number of other electronic devices. Stanford
Resources estimates that the worldwide market of FPDs will grow from
approximately $12.0 billion in 1996 to $26.9 billion in 2002.

The FPD industry is driven by a number of technological and market forces,
including consumer demand for high performance, portable and power efficient
computers, the increasing volume of text, graphics and video information being
generated and displayed, and the growing amount of multimedia applications. In
response, FPDs are being made larger, thinner, and with greater display quality
and sophistication. In addition, FPD development cycles are becoming shorter and
competitive pressures to reduce costs are continuous.

Virtually all FPDs require optically transparent, electrically conductive
thin films coated on substrates. These thin films transmit electrical power to
picture elements of the displays and allow light to pass to the viewer. The FPD
trends described above are placing increasing performance and other demands on
the thin film coated glass used in FPDs, particularly with regard to
imperfections, which must be fewer and smaller. As FPDs become larger and more
information intensive, it becomes more crucial to maintain the lack of pinholes
in the film, the absence of contamination on or under the film and the physical,
chemical and electrical uniformity, as well as the micro flatness of the
substrate. In addition, the substrate cleaning process becomes more critical,
and handling of the glass through the system must be more carefully controlled
for quality.

APPLIED FILMS SOLUTION

Applied Films believes its thin film technological and process expertise
positions it to respond to the evolving demands of the FPD industry. The Company
supplies both thin film coated glass for use in lower information content
displays, as well as thin film coating equipment for manufacturers of both lower
and higher information content displays. Applied Films believes that through the
combination of its coated glass business and its coating equipment business, it
is able to address a broad array of the FPD market.

Thin Film Coated Glass. The Company is the leading worldwide supplier of
thin film coated glass for TN LCDs and has a smaller, but growing share of the
market for thin film coated glass for STN LCDs. TN LCDs are most commonly used
for simple digital displays such as those found in watches and calculators. STN
LCDs permit larger displays with higher information content and are used for
applications such as displays for cellular phones and certain portable
computers. STN coated glass technology is more complex and expensive than TN
primarily because of more stringent coating thickness and surface quality
specifications.

The Company's design, construction and operation of its own thin film
systems give it a significant cost advantage over its competitors, most of which
must purchase equipment from third parties. In addition, the Company's hands-on
operating experience enables it to make continuous process and system
improvements resulting in higher throughput, better yields, greater equipment up
time and more efficient target utilization. Further, Applied Films' expertise in
substrates, coating materials and glass preparation under cleanroom conditions,
as well as its development of reliable, cost effective conveyance systems
enabling movement of the glass at varied speeds in a controlled fashion, are
significant competitive factors for the Company. The Company has achieved
considerable improvements in manufacturing productivity over the last several
years

22
<PAGE> 24

and its new facility in Weld County, Colorado will enable it to add a new
in-line coating system to meet growing demand.

Thin Film Coating Equipment. The coating of thin films onto glass for
higher information content FPDs involves a number of intermediate process steps,
and is therefore more suitably performed in-house by display manufacturers. To
address this opportunity, the Company has recently begun offering its thin film
coating systems to manufacturers of higher-end FPDs such as plasma display
panels ("PDPs") as well as manufacturers of LCDs. Since entering the coating
equipment business in fiscal 1997, the Company has sold four systems with an
aggregate purchase price of approximately $17.5 million. As of September 1,
1997, the Company's backlog from such system sales was approximately $13.9
million.

The Company's technological expertise and experience in designing and
manufacturing several generations of coating systems for its own use is
particularly relevant to its systems business. The Company believes it possesses
proprietary technology and know-how which enable it to effectively address the
advanced technical requirements of certain FPDs. In particular, Applied Films
has recently developed (and applied for patent protection for) a process which
materially increases the reactive sputtering speed of magnesium oxide ("MgO").
The Company believes this process may represent a significant competitive
advantage in the emerging market for thin film coating equipment for PDPs. In
addition, the Company has designed its system platforms to offer technical,
processing, and operational advantages to system users. See "-- Products and
Manufacturing--Thin Film Coating Equipment." The Company believes its
technological expertise will be of increasing importance to its systems business
as the technical requirements of FPDs continue to evolve.

In addition to its technological leadership, Applied Films' extensive
experience in operating its own thin film systems provides it with particular
advantages in selling coating systems to others. By continually refining its own
systems in a real operating environment, the Company has achieved significant
processing efficiencies and quality improvements. Moreover, the Company's
operational experience enables it to better understand and respond to customer
specific needs in the design and construction of the customer's system. The
Company is also able to provide customers useful production, training and
performance data from the Company's own production systems.

STRATEGY

The Company's objective is to be a leading provider of thin film solutions
to the FPD industry. The following are key elements of the Company's strategy to
achieve this objective:

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

Expand Thin Film Coating Equipment Business. Due to the anticipated growth
in demand for higher information content FPDs, Applied Films believes there is
significant opportunity for the Company to sell thin film coating equipment to
FPD manufacturers. Since entering the coating equipment business in fiscal 1997,
the Company has sold four systems (at an average purchase price of $4.4 million
per system) for applications which include PDPs, electrochromic automotive
mirrors and STN LCDs. The Company believes its technological capabilities, its
history of designing, developing and improving its own thin film manufacturing
systems, and its extensive operational experience provide it with competitive
advantages in selling thin film coating equipment to others.

Capture Increased Share of Thin Film Coated Glass Market. Applied Films
believes its position as a leading supplier of thin film coated glass for the
FPD market provides it with continued growth opportunities in that market. The
Company will pursue continued growth of its coated glass business by (i) seeking
to be the low cost producer, by building its own coating systems and achieving
technology-based manufacturing efficiencies, (ii) leveraging the Company's
long-standing relationships with many of the world's key FPD

23
<PAGE> 25

customers, and (iii) pursuing strategic business relationships to expand the
Company's customer base and manufacturing capacity. For instance, the Company
recently entered into a relationship with a major Japanese glass manufacturer to
supply much of the TN and low to medium density STN coated glass needs of the
manufacturer's customers. In addition, the Company is considering the
possibility of entering into an alliance to establish manufacturing capacity in
southeast Asia to better serve the needs of existing and prospective Asian
customers.

Supply Emerging Plasma Display Market. Applied Films intends to become a
leading supplier of thin film coating equipment to the emerging PDP market. Many
industry analysts anticipate that PDPs will be the predominant display for high
definition TV. Stanford Resources' tabulation of announced investments indicates
that, as a result, approximately $4.0 to $8.0 billion is scheduled for
investment in PDP manufacturing facilities during the next five years. The
Company intends to address this market by offering both pilot systems and full
scale production systems for the sputtering of the three thin film layers
required by PDPs (indium tin oxide ("ITO"), MgO, and chrome-copper-chrome).
Currently, the MgO layer can be applied only through evaporation which, as
displays become larger, presents limitations for film uniformity. Applied Films
recently developed, and has filed a patent application on, a process which
materially increases the reactive sputtering speed of MgO, which the Company
believes may represent a cost-effective, improved-quality alternative to
evaporation. The Company has delivered one pilot system to a Korean PDP
manufacturer and is presently engaged in active discussions with other
prospective PDP customers.

TECHNOLOGY

The Company believes it is a leader in thin film technology. The Company's
thin film coating equipment enables the manufacturer of thin film coated glass,
whether the Company or an equipment customer, to apply very thin, transparent
layers of solid state, thin film coatings to extremely clean glass in vacuum
chambers loaded in clean room conditions. The coatings applied by the Company
are deposited in microscopic thicknesses by physically bombarding (sputtering) a
cathode source coating material (a chemical compound or element) with argon
ions. Individual atoms and molecules of the source material are separated from
the source by bombardment to form a vapor that condenses as a film onto the
glass. The Company's technology of applying a thin film coating to glass or
other substrate enables the display to function as a complex switch which
controls light emission or transmission from each of the thousands of segments
or pixels that comprise an FPD. The Company's primary thin film coated glass
product is made by applying a thin layer of silicon dioxide ("SiO(2)") to
prevent sodium in glass from leeching into conductive coatings. After this
coating is applied, ITO is applied to provide conductive properties, permitting
the glass to be used for various FPD applications. Particularly in FPDs,
optically transparent, electrically conductive films, such as those applied by
the Company, find common application in transferring electrical power to the
picture elements of the displays and allowing light to pass to the viewer.
Sputtering provides many advantages including material flexibility, thickness
consistency, adaptability to large substrates and high volume production, defect
and contamination control, adhesion and thin film density.

John S. Chapin, Vice President Research and Development and a founder of
the Company, invented the planar magnetron which first enabled manufacturers of
thin film coated glass (as well as of semiconductor chips) to economically
deposit sputtered thin film coatings. Another founder, Vice President
Engineering Richard Condon, was a pioneer in the development of the in-line
coating process which is currently used by much of the industry. The Company
believes it maintains a competitive advantage because it designs, builds and
operates its own thin film coating equipment for thin film coated glass.
Further, because its primary business is producing thin film coated glass, the
Company is able to effectively incorporate its production know-how into new
generation coating equipment and improvements in existing coating equipment. The
Company believes this provides it with a capital cost advantage over most of its
competitors. This also enables the Company to compete effectively in the market
for thin film coated glass manufacturing.

The quality of the coatings, the cycle time of the process, the utilization
of materials, and other factors are controlled by proprietary information and
technology of the Company. For example, the Company is currently engaged in a
development program to improve utilization of the cathode source material. The

24
<PAGE> 26

Company has also developed a method of reducing cathode voltage and is
developing the application of this method to ITO coatings. The Company believes
this will improve the conductivity of the ITO coating. The Company's glass
coating process has gone from approximately 11 hours in-process-time and nine
separate manual handling steps in 1985, to approximately 30 minutes and four
manual handling steps currently. All of the coating and heat treating steps now
occur within the equipment. The glass must be moved in a very controlled fashion
at high temperatures over a wide range of speeds through a vacuum system. The
Company has developed a simple, cost effective and reliable means of moving
glass with high yields. The Company is continually enhancing its technology to
improve the performance of its equipment, both in terms of the characteristics
of the coating obtained and the efficiency of the equipment. The Company
continues to work on the conductivity of its ITO coatings and the barrier
qualities of its SiO(2). The Company is also continuing to work on improving its
systems not only to obtain better quality coatings, but also to obtain better
utilization of coating materials.

The Company is continually seeking advances to thin film technology which
have commercial promise. The Company recently developed a process called
geometrically enhanced metal oxide sputtering ("GEMS"), which increases the
speed of reactive sputtering of certain materials such as MgO. The Company has
recently applied its knowledge of reactive sputtering to the problem of the low
sputtering rate of materials such as MgO needed in the growing PDP market. The
Company's process provides an advantage over conventional methods by providing
the necessary thicknesses and consistency of the MgO film. While significant
challenges lie ahead in successfully commercializing this technology, the
Company believes that in-line sputtered MgO has the potential advantage of being
more uniform than evaporated MgO, the current method of applying MgO coating,
especially as the size of plasma panels increases. The Company has filed a
patent application relating to this technology. See "Risk Factors -- Rapid
Technological Change."

25
<PAGE> 27

The following diagram illustrates a common construction of a plasma display
panel, including the three thin film layers: ITO, MgO and chrome-copper-chrome.

[Diagram]

PRODUCTS AND MANUFACTURING

The Company's principal products include various types of thin film coated
glass, which are a necessary component of LCDs and other FPDs. LCDs are used in
a wide variety of consumer and industrial products, including watches, cellular
telephones, calculators, scientific instruments, pagers, handheld video games,
laptop and notebook computers, point-of-sale terminals, wireless terminals, and
other electronic devices requiring displays. The Company also designs and
manufactures thin film coating equipment for its own use and that of customers
in the FPD and other industries.

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
JULY 1, 1995 JUNE 29, 1996 JUNE 28, 1997
------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Thin Film Coated Glass................................... $32,175 $22,500 $32,299
Thin Film Coating Equipment.............................. -- -- 2,784
</TABLE>

26
<PAGE> 28

Thin Film Coated Glass used for TN LCDs. Thin film coated glass
manufactured for TN LCDs is manufactured by depositing SiO(2) and ITO onto glass
purchased primarily in three thicknesses, 1.1 millimeters, 0.7 millimeters, and
0.55 millimeters. The thin film coated glass is sold in a variety of sizes
ranging from roughly 300 millimeters square to 400 millimeters by 500
millimeters. TN LCDs are most commonly used for simple digital displays such as
those found on watches, calculators and electronic instruments. They offer good
contrast and acceptable response time for simple readout operations, are
relatively inexpensive to produce and require very low power to operate. TN LCDs
typically are not used for high information content displays such as those used
in laptop computers. However, TN LCDs are the best all around choice for many
products and advances in technology are underway to make this lower cost glass
appropriate for uses for which they are not currently appropriate.

Thin Film Coated Glass used for STN LCDs. This product is more complex and
expensive to manufacture than thin film coated glass for TN LCDs. STN LCD
product in most instances, requires that the Company purchase higher quality,
flatter glass. In addition, glass for many STN LCDs requires thicker ITO coats
to improve conductivity, commonly requiring a longer cycle time. Production of
large quantities and higher quality thin film coated glass for STN LCDs requires
modified equipment and an automated inspection process. The Company has
converted one of its TN LCD coating systems to meet these needs and will bring a
new coating system capable of manufacturing thin film coated glass for STN LCDs
on line in late 1997. STN LCDs permit larger displays with higher information
content than TN LCDs. There is a wide range of information density on STN LCDs
ranging from low information displays such as personal information managers to
high information density displays such as laptop computer screens.

Other Thin Film Coated Glass. The Company's other thin film coated glass
consists primarily of ITO thin film coated glass for automatically dimming
electrochromic automotive mirrors, chrome and rhodium thin film coated glass for
dental mirrors, chrome-copper-chrome coatings for PDPs, and gold, silver and
other coatings for certain small orders and applications under development.

Thin Film Coating Equipment. The Company has designed and built several
generations of high volume thin film production systems capable of meeting the
needs of customers requiring in-house production of thin film coated glass,
primarily in the FPD industry. The Company has supplied or is currently
manufacturing thin film coating equipment for use in producing in TN LCDs, STN
LCDs, PDPs and automatically dimming (electrochromic) automotive mirrors. The
Company's present coating equipment product line includes two basic platforms:
(i) the Venture Series in-line vertical system which provides improved particle
defect levels and high throughput for use in FPD and other high volume
applications; and (ii) the Pilot Series, a line of sputtering systems for
research and development, and limited production. The Company has not yet sold a
Pilot Series system but is in active discussions with customers regarding this
product. The Pilot system can be upgraded to a Venture system as customer
requirements increase. The Company also is developing a third system, the
Centron Series, a highly automated, cassette loading system combining certain
advantages of cluster tool technology with the simplicity and higher throughput
of in-line technology, which the Company believes will be useful in color STN
and active matrix LCD applications. Included within each platform is the
Company's proprietary, user-friendly software using computer touch screens. The
Company's thin film coating systems provide for all coating and heat treating
within the equipment using processes pioneered and developed by the Company. The
Company's thin film coating systems range in cost from approximately $1.5
million for a simply configured system to approximately $8.0 million for the
largest system. See "Risk Factors -- Uncertainties Related to Coating Equipment
Business."

27
<PAGE> 29

Process Flow. The basic process flow for the Company's manufacture of thin
film coated glass is shown in the following diagram.

[Diagram]

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

SALES, MARKETING, AND CUSTOMERS

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

Sales of the Company's systems involve a broad based effort by various
levels within the Company. Much of the sales effort in the systems area is
undertaken by the Company's technical group. The Company has recently added one
individual to focus on systems sales. The sales process for coating equipment is
long-term, involving multiple visits to and by the customer and nine to twelve
months of technical sales effort. Systems sales are handled through independent
sales and service representatives in each region who have been selected with an
emphasis on their ability to provide after sales service and support. The
Company generally sells its thin film coating systems with progress payments.

Approximately 80% of the Company's fiscal 1997 gross sales were derived
from exports. In the same period, the Company served 155 customers in 19
countries. In fiscal 1997, the Company's ten largest customers accounted for
approximately 59% of the Company's gross sales. The principal demand for thin
film coated glass is in Asia. The Company's customers for thin film coating
equipment have been in Korea, Taiwan

28
<PAGE> 30

and the United States and the Company believes its potential geographic market
for systems includes all the major geographic regions in which FPD manufacturing
takes place. See "Risk Factors -- International Markets."

The Company's gross sales (excluding returns and allowances) of thin film
coated glass by geographic region during each of the last three fiscal years
were as set forth below. Sales are assigned to a region based upon where the
contract for purchase is formed.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Asia (other than Japan)..................................... $20,652 $12,801 $17,052
Japan....................................................... 5,114 4,219 6,606
United States............................................... 5,013 4,061 5,687
Europe and Other............................................ 1,391 1,531 2,954
</TABLE>

The Company believes the Japanese market represents a substantial national
market for coated glass. The Company's recent outsourcing agreement to supply
thin film coated glass for TN and STN thin film LCDs through a major Japanese
glass manufacturer will assist the Company's effort to further penetrate the
Japanese market.

The Company believes a key aspect to serving the needs of its customers is
just-in-time delivery of its products. The Company's warehouse operations in
Japan and Hong Kong assist the Company in meeting this need and the Company is
also currently evaluating the possibility of locating a manufacturing facility
in Asia.

Further, the Company has established direct links between the Company's
quality control management and customers to help assure quality product
performance. The Company also has a product support laboratory available for its
customers in Boulder. Using this program, customers can directly contact Company
staff to help analyze product problems or questions they may have in their own
manufacturing process. With its analytical capability, the Company's technical
sophistication can be brought to bear directly on the customers' applications.

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

SUPPLIERS

Thin Film Coated Glass. The thin glass used by the Company in its
manufacturing represents its most significant material cost. The required
quality, in terms of flatness and visible imperfections, limits the number of
available suppliers. Five companies worldwide currently manufacture to these
quality standards. The Company currently purchases glass from four of these
suppliers. The Company is vulnerable to increased costs of thin glass. The
Company regularly evaluates methods of reducing its cost of glass. The Company's
other primary raw materials for thin film coated glass are SiO(2) and ITO. The
Company currently purchases SiO(2) from one supplier, although it believes
alternative sources of supply could be developed if necessary. Other coating
materials, currently used to a lesser extent by the Company, include materials
which are available from few suppliers.

Thin Film Coating Equipment. In its thin film systems business, the Company
uses various suppliers of machined components, pump systems, logic controllers
and other components and features. It has no single source for any principal
components in this aspect of its business.

29
<PAGE> 31

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

COMPETITION

Competition in the market for thin film coated glass for FPDs is intense.
Competition is based primarily on price and to a lesser extent on quality,
delivery, and customer service. In addition, the Company believes the ability to
anticipate shifts in the market and unmet customer needs for thin film coated
glass features are important competitive factors. Although certain of the
Company's potential competitors have considerably greater financial, technical,
and sales and marketing resources than the Company, the Company believes that it
competes favorably with respect to each of these factors. The Company is aware
of approximately ten thin film coated glass competitors worldwide. Certain of
these competitors are also manufacturers of thin glass required for thin film
components and one is a user of thin film coated glass. These are large
companies with significant research and development funding and extensive thin
film technology background. All of the Company's principal thin film coated
glass competitors are located outside the United States, primarily in Asia.

Both Company suppliers and customers could, conceivably, vertically
integrate to manufacture the products produced by the Company. See "Risk Factors
- -- Highly Competitive Market Environment."

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

RESEARCH AND DEVELOPMENT

The Company's historical success has depended in large part on successful,
focused research and development in thin film technology, processes and
equipment. The Company believes that its continued success depends on the
development of new or improved technology, processes, products, and equipment.
In fiscal 1995, 1996 and 1997, research and development expenditures were
respectively 3.3%, 4.4%, and 2.2% of the Company's net sales for those years.
The Company intends to increase its level of research and development
expenditures in fiscal 1998.

PROPRIETARY RIGHTS

The Company's proprietary technology is principally related to controlling
the processes of its equipment and theoretical knowledge used in designing new
equipment. Historically, the Company has relied primarily on trade secret laws
and third-party nondisclosure agreements, as opposed to patent protection, to
protect its proprietary technology. Nevertheless, the Company has recently
applied for a patent with respect to certain developments in thin film process
technology. Trade secret protection can be preferable over patent protection in
part due to the expense and difficulty of obtaining and enforcing foreign patent
applications and due to the fact that patents become part of the public record.
The Company's success is heavily dependent upon its proprietary processes. The
Company believes that due to the rapid pace of innovation within its industry,
factors such as technological and creative skilled personnel, the ability to
develop and enhance systems, knowledge and experience of management, reputation,
and customer service and support are more important

30
<PAGE> 32

for establishing and maintaining a competitive position within the industry than
are patent or other legal protections for its technology. There can be no
assurance, however, that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of such rights
or that third parties will not independently develop a functionally equivalent
or superior technology. See "Risk Factors -- Limited Protection of Proprietary
Rights."

FACILITIES

The Company's general offices, research and development facilities, and
production lines are currently housed in three buildings totaling approximately
98,000 square feet located in Boulder, Colorado. One building is owned by the
Company, and the other two are leased, one from a partnership consisting of the
Company and three of the Company's officers. See "Certain Transactions." In
addition, the Company has leased warehouse space in Japan and Hong Kong from
which it supplies customers on a just-in-time basis. The Company also has a
sales office in Shenzhen, China. In June 1997, the Company signed a Lease for
approximately 127,000 square feet of production space in Weld County, Colorado.
The Company believes this location will enable it to draw from a larger employee
base. The Company recently commenced the construction of leasehold improvements
and anticipates the beginning of production at the Weld County facility during
calendar 1998. It is anticipated that all systems manufacturing will eventually
occur in the newly leased space. See "Risk Factors -- New Facility Expansion."
The Company currently operates four thin film coated glass production lines and
one smaller system used for a variety of other thin films. In addition, the
Company expects to commence production on a sixth thin film coating system in
the Weld County facility in fiscal 1998.

EMPLOYEES

As of June 28, 1997, the Company employed 232 people, including 188 in thin
film coated glass production, 16 in thin film coating systems, 5 in marketing
and sales, 6 in research and development and 17 in accounting, human resources,
and other administrative personnel. None of the employees is unionized. The
Company considers its relationship with its employees to be good.

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

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

LEGAL PROCEEDINGS

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

31
<PAGE> 33

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Cecil Van Alsburg............................. 60 Director, President, Chief Executive Officer
John S. Chapin................................ 56 Director, Vice President -- Research, Secretary
C. Richard Condon............................. 51 Director, Vice President -- Engineering
Mark Auble.................................... 50 Vice President-Operations -- Thin Film Coatings
Thomas Edman.................................. 35 Chief Operating Officer and Executive Vice
President
Graeme Hennessey.............................. 59 Vice President -- Sales and Marketing
Thomas D. Schmidt............................. 42 Chief Financial Officer
Roger Smith................................... 56 Treasurer
James A. Knister.............................. 59 Director, Chairman of the Board
J. Dwane Baumgardner.......................... 57 Director
Chad D. Quist................................. 35 Director
</TABLE>

Messrs. Baumgardner and Quist have expressed their intention to resign as
members of the Board of Directors within sixty days following the closing of
this offering. The Company intends to replace Messrs. Baumgardner and Quist with
two people who are not officers or employees of the Company.

Set forth below are descriptions of the backgrounds of the executive
officers and directors of the Company.

Cecil Van Alsburg co-founded Applied Films Lab, Inc. in 1976 and served as
its President and has continuously served as President, Chief Executive Officer
and a director of Applied Films Corporation since its inception. Prior to 1976,
Mr. Van Alsburg was employed in various capacities by Donnelly Corporation for
which he worked since 1957. Mr. Van Alsburg majored in civil engineering and
architecture at the University of Michigan.

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

C. Richard Condon co-founded Applied Films Lab, Inc. in 1976 and served as
its Vice President -- Engineering and has continuously served as Vice President
- -- Engineering and a director of Applied Films Corporation since its inception.
Mr. Condon is responsible for the Company's coating systems design and
construction, with over 25 years experience in the thin film industry. Mr.
Condon leads the Company's development of high volume in-line SiO(2) coating
process. Mr. Condon obtained a bachelors of science degree in physics from the
University of Colorado and an associates degree in mechanical engineering from
the Wentworth Institute.

Mark Auble has been employed by the Company since July 1993 and has served
as Vice President -- Operations since May 1994. From 1990 until joining the
Company, Mr. Auble served in various operations, management and organization
development capacities at Donnelly Corporation. Mr. Auble obtained a bachelors
of science degree in psychology and statistics from California State University.

Thomas Edman has been employed by the Company since June 1996 and is
currently Chief Operating Officer and Executive Vice President. From 1993 until
joining the Company, he served as General Manager of the Electric Materials
Division at Marubeni Specialty Chemicals, Inc., a major Japanese trading
corporation. Mr. Edman obtained a bachelors of arts in East Asian studies
(Japan) from Yale and, in June 1993, a masters

32
<PAGE> 34

degree in business in multinational management and marketing from The Wharton
School at the University of Pennsylvania.

Graeme Hennessey has served as the Company's Vice President -- Sales and
Marketing since April 1993. From 1980 until he joined the Company, Mr. Hennessey
was employed by Donnelly Corporation as a product line manager where he was
responsible for sales and marketing as well as manufacturing. Mr. Hennessey
obtained a bachelors of science degree in physics from Catholic University of
America and a masters degree in physics from Fordham University.

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

Roger Smith has been employed by the Company since May 1993 as the
Company's Treasurer. Prior to joining the Company, Mr. Smith was employed for 33
years by Donnelly Corporation in various capacities, including controller and
project manager.

James A. Knister has been a director of the Company since 1992 and has
served as Chairman since 1996. Mr. Knister has been the Group Managing Director
of Ventures at Donnelly Corporation since January 1997. From 1981 until December
1996, Mr. Knister served in various capacities at Donnelly Corporation
including, from 1981 to 1994, as its Chief Financial Officer and, from 1988
until December 1996, as a Senior Vice President. Mr. Knister also serves on the
Board of Directors of X-Rite, Inc.

J. Dwane Baumgardner has been a director of the Company since 1992. Mr.
Baumgardner has been the Chief Executive Officer of Donnelly Corporation since
1983. Dr. Baumgardner also serves on the Board of Directors of Donnelly
Corporation and SL Industries, Inc.

Chad D. Quist has been a director of the Company since April 1997. Mr.
Quist is the President of Information Products, Inc., a wholly-owned subsidiary
of Donnelly Corporation, and has been employed by Donnelly since 1995.
Information Products, Inc. is a leading supplier of glass components for the
touch screen industry. From 1989 to 1995, Mr. Quist served as Vice President of
Fisher-Rosemont, Inc., an industrial instrumentation company. Mr. Quist obtained
a bachelors degree in engineering from Stanford University in 1984 and a masters
in business administration from the Kellogg Graduate School of Business at
Northwestern in 1993.

The Company's Board of Directors is currently composed of six directors.
Prior to the offering, the Company's Board of Directors will be divided into
three classes. Messrs. Condon and Knister will serve in the class whose term
will expire in 1997; Messrs. Van Alsburg and Chapin will serve in the class
whose term will expire in 1998; and Messrs. Baumgardner and Quist will serve in
the class whose term will expire in 1999. Upon the expiration of the term of
each class of directors, directors comprising that class will be elected for a
three-year term at the next succeeding annual meeting of shareholders. Each
director holds office until that director's successor has been duly elected and
qualified. Upon the resignations of Messrs. Baumgardner and Quist as discussed
above, the new directors shall be appointed to the class whose term will expire
in 1999.

COMPENSATION OF DIRECTORS

It is anticipated that directors who are not officers or employees of, or
consultants to, the Company will receive cash compensation and/or stock options
to purchase Common Stock of the Company as determined by resolution of the Board
of Directors for their services as directors. Such directors shall be reimbursed
for their expenses for each meeting attended.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors has recently established an Audit
Committee and a Compensation Committee. Selection of the nominees for the Board
of Directors is made by the entire Board of Directors. Executive officers of the
Company are elected by the Board of Directors on an annual basis and serve until
their successors have been duly elected and qualified.

33
<PAGE> 35

The Audit Committee makes recommendations regarding the firm to be
appointed as independent accountants, approves the scope of the audit, reviews
the results of the audit with the independent accountants and approves the audit
fee payable to the Company's independent accountants. The Audit Committee will
be comprised of Mr. Knister and the new directors who will replace Messrs.
Baumgardner and Quist.

The Compensation Committee makes recommendations regarding the compensation
arrangements for top management and key employees of the Company, including
salaries and bonuses. The Compensation Committee also administers the Stock
Option Plans and the Employee Stock Purchase Plan discussed below. The members
of the Compensation Committee will be the comprised of Mr. Knister and the new
directors who will replace Messrs. Baumgardner and Quist.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION COMPENSATION
DECISIONS

Prior to this offering, all executive officer compensation decisions were made
by the entire Board of Directors of the Company, including Messrs. Van Alsburg,
Chapin, and Condon. After completion of the offering, all executive compensation
decisions will be made by the Board of Directors based upon recommendations by
the Compensation Committee.

EXECUTIVE COMPENSATION

The following table sets forth the salary, bonus payments and other
compensation paid by the Company to each of the five most highly compensated
executives of the Company (the "Named Executive Officers") for fiscal years
1997, 1996 and 1995.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) COMPENSATION($) OPTIONS(#)
--------------------------- ----------- --------- --------------- ----------
<S> <C> <C> <C> <C>
Cecil Van Alsburg............................ 1997 $174,658 -- --
President, Chief 1996 $166,310 -- --
Executive Officer 1995 $124,482 $148,250(1) 17,955
C. Richard Condon............................ 1997 $109,157 -- --
Vice President -- Engineering 1996 $108,050 -- --
1995 $107,306 $148,250(1) 17,955
Mark Auble................................... 1997 $114,635 -- --
Vice President -- Operations -- 1996 $113,075 -- --
Thin Film Coatings 1995 $108,973 -- 24,591
Thomas Edman................................. 1997 $120,197 -- 34,545
Chief Operating Officer 1996 $ 9,242 -- --
and Executive Vice 1995 -- -- --
President
Graeme Hennessey............................. 1997 $126,384 -- --
Vice President -- Sales 1996 $125,589 -- --
and Marketing 1995 $126,150 -- 11,319
</TABLE>

- -------------------------
(1) Payments made pursuant to a non-competition agreement which expired in
fiscal 1995.

STOCK OPTION AND PURCHASE PLANS

1993 Stock Option Plan. In May 1993, the Company's Board of Directors
approved the Donnelly Applied Films Corporation Stock Option Plan (the "1993
Plan"). A total of 276,500 shares of Common Stock are reserved for issuance upon
exercise of options to be granted under the 1993 Plan. The 1993 Plan is
administered by the Board of Directors of the Company. Subject to the provisions
of the 1993 Plan, the administrator of the 1993 Plan has the discretion to
determine the optionees and the terms of the option

34
<PAGE> 36

grants. The exercise price of an option granted under the 1993 Plan may not be
less than the fair market value per share of the Common Stock on the date of
grant. Shares obtained upon the exercise of options granted pursuant to the 1993
Plan may not be sold until the expiration of a one year period commencing on the
exercise date of such options. The options terminate not more than 10 years from
the date of grant, subject to earlier termination on the optionee's death,
disability or termination of employment with the Company. Options are not
assignable or otherwise transferable except by will or the laws of descent and
distribution. The options granted pursuant to the 1993 Plan vest equally over a
four-year period and, under the 1993 Plan's original terms, were not exercisable
until after an initial public offering of Common Stock by the Company. On May
12, 1993, options were granted pursuant to the 1993 Plan covering 155,946 shares
at an exercise price equal to $2.32 per share. On January 20, 1995, options were
granted pursuant to the 1993 Plan covering 143,745 shares at an exercise price
equal to $3.29 per share. On June 27, 1997, options were granted pursuant to the
1993 Plan covering 15,827 shares at an exercise price equal to $5.26 per share.
Options for 39,508 shares have been forfeited pursuant to the terms of those
option agreements since granting. On June 30, 1995, the Company's Board of
Directors declared that the options then outstanding were exercisable. The
Company has recorded approximately $597,000 of deferred compensation related to
all vested options, of which $31,000 has not been amortized as of June 28, 1997.
The remaining $31,000 will be expensed in fiscal 1998 and fiscal 1999. Options
for the purchase of 490 shares remain to be granted under the 1993 Plan.

1997 Stock Option Plan. On April 29, 1997, the Board of Directors of the
Company adopted, and the shareholders approved, the 1997 Stock Option Plan, as
amended September 5, 1997 (the "1997 Plan"). The 1997 Plan has 172,500 shares of
Common Stock reserved for issuance upon the exercise of options granted under
the 1997 Plan. Options may be granted under the 1997 Plan to officers and other
employees of the Company.

The purpose of the 1997 Plan is to encourage stock ownership by certain
officers and employees of the Company instrumental to the success of the Company
and to give them a greater personal interest in the success of the Company. The
1997 Plan will be administered by the Board of Directors or the Compensation
Committee thereof. The Board, or the Compensation Committee, within the
limitations of the 1997 Plan, determines the persons to whom options will be
granted; the number of shares to be covered by each option; the option purchase
price per share; the manner of exercise; the time, manner and form of payment
upon exercise of an option; and restrictions such as repurchase rights or
obligations of the Company. Options granted under the 1997 Plan may not be
granted at a price less than fair market value of the Common Stock on the date
of grant. Options granted under the 1997 Plan will expire not more than 10 years
from the date of grant. Options granted under the 1997 Plan are generally not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution. On April 29, 1997, options were
granted pursuant to the 1997 Plan covering 69,090 shares at an exercise price
equal to $5.26 per share. On September 5, 1997, options were granted pursuant to
the 1997 Plan covering 34,545 shares at an exercise price equal to $7.20 per
share.

Employee Stock Purchase Plan. On September 5, 1997, the Board of Directors
of the Company adopted the Applied Films Corporation Employee Stock Purchase
Plan (the "Purchase Plan"). The Purchase Plan, which will become effective upon
shareholder approval, will permit eligible employees of the Company to purchase
shares of Common Stock through payroll deductions. Shares will be purchased at
90% of the fair market value of the Common Stock on the last trading day in each
quarterly purchase period. Up to 30,000 shares of Common Stock may be sold under
the Purchase Plan. Shares sold under the Purchase Plan may be newly issued
shares or shares acquired by the Company in the open market. Unless terminated
earlier by the Board of Directors, the Purchase Plan will terminate when all
shares reserved for issuance have been sold thereunder. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended, and will be administered in
accordance with the limitations set forth in Section 423 and the rules and
regulations thereunder.

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<PAGE> 37

STOCK OPTION GRANTS

The following table sets forth information concerning individual grants of
stock options made to Named Executive Officers during the Company's fiscal year
ended June 28, 1997:

OPTION GRANTS IN FISCAL 1997

<TABLE>
<CAPTION>
POTENTIAL VALUE AT
ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTION/ EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM
OPTIONS EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME GRANTED(#) IN FISCAL YEAR SHARE DATE 5% 10%
---- ---------- -------------- --------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Thomas Edman................. 34,545 40.7% $5.26 June 1, 2007 $295,981 $471,300
Chief Operating Officer &
Executive Vice President
</TABLE>

OPTION EXERCISES AND HOLDINGS

The following table sets forth information covering the exercise of stock
options by Named Executive Officers during the Company's fiscal year ended June
28, 1997:

AGGREGATED OPTION EXERCISES IN FISCAL 1997

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
ACQUIRED ON REALIZED YEAR-END (#) YEAR-END($)
NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Thomas Edman.................... -- -- 8,636/25,908 --/--
Chief Operating Officer &
Executive Vice President
</TABLE>

OTHER PLANS

In August 1992, the Company's Board of Directors adopted a profit sharing
plan for all full-time, non-executive employees. Historically, the amount
contributed to the profit sharing pool, subject to the approval of the Company's
Board of Directors, has been approximately 10% of the pretax income before
royalty and profit sharing expense. Profit sharing has been paid to employees
monthly based on their employee pay level and length of service with the
Company. The Company expended approximately $204,000, $7,000, $217,000, $29,000,
and $247,000 in fiscal years 1993, 1994, 1995, 1996, and 1997, respectively,
related to this plan.

CERTAIN TRANSACTIONS

During fiscal 1993, the Company acquired a 25% general partner interest in
a partnership (the "Partnership") from an unrelated party; the remaining 75%
general partner interest in the Partnership is owned equally by Messrs. Van
Alsburg, Condon and Chapin. The Partnership owns and leases certain Boulder,
Colorado office and manufacturing facilities to the Company under a
non-cancellable lease. The Company currently pays the Partnership $20,100 as
monthly rent and pays all property taxes and insurance costs. The Company paid
rent of approximately $241,000 under this agreement during fiscal years 1993,
1994, and 1995. The Company believes that the occupancy costs payable to the
Partnership by the Company under such lease are no higher than those which would
be charged by an unrelated third party under similar circumstances. See
"Business -- Facilities" and Note 4 of Notes to Consolidated Financial
Statements.

In fiscal 1995, the Partnership acquired approximately 15,000 shares of the
Company's Common Stock for an aggregate purchase price of $104,526. Accordingly,
the Company has reduced its investment by approximately $26,000 in the
Partnership. See Note 4 of Notes to Consolidated Financial Statements.

36
<PAGE> 38

The Company had employment agreements with Messrs. Van Alsburg, Condon and
Chapin which expired in fiscal 1995. These agreements contained provisions
designed to protect the technology, customer base and business operations of the
Company. In addition to their other compensation, Messrs. Van Alsburg, Condon
and Chapin were each paid a total of $533,000, which was paid between fiscal
1992 and fiscal 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fiscal 1996 Compared with Fiscal 1995"
and Note 4 of Notes to Consolidated Financial Statements.

In fiscal 1997, the Company paid Donnelly Corporation a charge of $250,000
to guarantee $5.0 million of the Company's line of credit. Following completion
of the offering, the Company anticipates the Donnelly guaranty will be released.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 4 of Notes to
Consolidated Financial Statements.

37
<PAGE> 39

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth, as of September 8, 1997, and as adjusted to
reflect the sale of the shares offered hereby, certain information regarding
beneficial ownership of the Company's stock by: (i) each person known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) all directors and officers as a
group, and (iv) each Selling Shareholder.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES
OWNED PRIOR TO THE SHARES BEING BENEFICIALLY OWNED
OFFERING(2) OFFERED AFTER OFFERING(2)(3)
------------------- ------------ ---------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
--------------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Donnelly Corporation........................ 1,400,000 46.5% 1,400,000 -- --
Cecil Van Alsburg(4)(5)..................... 584,986 19.4% -- 584,986 16.7%
John S. Chapin(4)(5)(6)..................... 584,853 19.4% -- 584,853 16.7%
C. Richard Condon(4)(5)..................... 176,752 5.9% -- 176,752 5.0%
Graeme Hennessey(7)......................... 28,886 1.0% -- 28,886 *
Mark Auble(8)............................... 22,250 * -- 22,250 *
Thomas Edman(9)............................. 12,136 * -- 12,136 *
J. Dwane Baumgardner(10).................... -- -- -- -- --
James A. Knister............................ -- -- -- -- --
Chad D. Quist............................... -- -- -- -- --
Executive Officers and Directors as a group
(11 persons)(11).......................... 1,435,431 47.7% -- 1,435,431 40.9%
</TABLE>

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

* Represents beneficial ownership of less than one percent of outstanding
Common Stock.

(1) All addresses are c/o Applied Films Corporation, 6797 Winchester Circle,
Boulder, Colorado 80301 except for Donnelly Corporation which is 414 East
Fortieth Street, Holland, Michigan 49423.

(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting power and
investment power with respect to shares. Shares issuable upon the exercise
of outstanding stock options that are currently exercisable or become
exercisable within 60 days from September 1, 1997 are considered
outstanding for the purpose of calculating the percentage of Common Stock
owned by such person but not for the purpose of calculating the percentage
of Common Stock owned by any other person.

(3) The number of shares of Common Stock deemed outstanding after this offering
includes the 500,000 shares of Common Stock of the Company which are being
offered for sale by the Company in this offering, but does not include any
of the up to 285,000 additional shares of Common Stock to be purchased from
the Company if the underwriters' over-allotment option is exercised in
full.

(4) Excludes 8,978 shares of Common Stock issuable upon exercise of outstanding
stock options issued pursuant to the 1993 Plan and not exercisable within
60 days of the offering.

(5) Includes 25,567 shares of Common Stock issuable upon exercise of
outstanding stock option issued pursuant to the 1993 Plan and exercisable
within 60 days of the offering and includes 3,748 shares of Common Stock
representing 25% of the shares of Common Stock owned by Winchester 44
Associates (the "Partnership"). Messrs. Van Alsburg, Chapin and Condon and
the Company are general partners of the Partnership and, accordingly, may
be deemed to beneficially own 14,993 shares held by the Partnership. Each
of Messrs. Van Alsburg, Chapin and Condon disclaims beneficial ownership of
the shares owned by the Partnership except to the extent of their
respective pecuniary interests therein.

38
<PAGE> 40

(6) Of these shares, 21,000 are held of record by the Louis Chapin Trust of
which Mr. Chapin is the sole trustee and 170,714 shares are held of record
in the John Chapin Family Trust of which Mr. Chapin is the sole trustee.
Mr. Chapin disclaims beneficial ownership of the shares held by each of the
Louise Chapin Trust and the John Chapin Family Trust.

(7) Excludes 5,660 shares of Common Stock issuable upon exercise of outstanding
stock options issued pursuant to the 1993 Plan and not exercisable within
60 days of the offering.

(8) Excludes 12,296 shares of Common Stock issuable upon exercise of
outstanding stock options issued pursuant to the 1993 Plan and not
exercisable within 60 days of the offering.

(9) Excludes 25,909 shares of Common Stock issuable upon exercise of
outstanding stock options issued pursuant to the 1993 Plan and not
exercisable within 60 days of the offering.

(10) Mr. Baumgardner is the Chairman of the Board of Directors of Donnelly
Corporation. Although by reason of his membership on the Board of Directors
of Donnelly Mr. Baumgardner may share investment and voting power with the
respect to the shares of the Company beneficially owned by Donnelly
Corporation, Mr. Baumgardner disclaims beneficial ownership of these
shares.

(11) Includes 162,041 shares subject to options exercisable within 60 days of
this Prospectus and excludes 114,319 shares of Common Stock issuable upon
exercise of outstanding stock options issued pursuant to the 1993 and the
1997 Plan and not exercisable within 60 days of the offering.

DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, the authorized capital stock of the
Company will consist of 10,000,000 shares of Common Stock and 1,000,000 shares
of Preferred Stock, all without par value.

COMMON STOCK

As of September 5, 1997, 2,799,998 shares of Common Stock were outstanding
and held of record by 14 shareholders. In addition, there were options
outstanding to purchase 379,645 shares as of the date of preparation of this
Prospectus. Holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders. Holders of Common Stock will
not have the right to cumulate votes with respect to election of directors.
Accordingly, holders of a majority of the shares of Common Stock voting in any
election of directors will have the ability to elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors of legally
available funds, subject to any preferences that may be awarded to any
outstanding Preferred Stock. In the event of a liquidation, dissolution and
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding Preferred Stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. All of the
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of this offering will be, when issued and paid for,
fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority to issue 1,000,000 shares of
Preferred Stock in one or more series and to fix the relative rights and
preferences thereof, including dividend rights, conversion rights, voting
rights, redemption rights, liquidation preferences and numbers of shares
constituting any series, without any further vote or action by the Company's
shareholders. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the rights of holders of Common Stock. Issuances of
Preferred Stock in certain circumstances may have the effect of delaying,
deferring or preventing a change of control of the

39
<PAGE> 41

Company, may discourage bids for the Company's stock at a premium over the
market price, and may adversely affect the market price, and the voting and
other rights of the holders, of the Common Stock. Upon completion of this
offering, the Company will have no shares of Preferred Stock outstanding. The
Company has no current plans to issue any Preferred Stock.

CERTAIN ARTICLE AND BYLAW PROVISIONS AND PROVISIONS OF COLORADO LAW

The Company's Amended and Restated Articles of Incorporation (the
"Articles"), to be filed prior to the offering, will contain provisions that may
have the effect of delaying, deferring or preventing a hostile takeover or
change of control of the Company.

The Company's Articles will provide for the division of the Board of
Directors into three classes with staggered three year terms. See
"Management -- Executive Officers and Directors." The Articles will also
prohibit cumulative voting in the election of directors.

The Articles will prohibit, subject to certain exceptions, certain
transactions involving an "Interested Shareholder" (defined as a person who owns
beneficially 10% or more of the Company's voting securities) including, but not
limited to, a merger or consolidation, the sale, lease, exchange, pledge or
other transfer of the Company's assets or the dissolution and liquidation of the
Company unless the transaction is determined to be at a "fair price" or
otherwise approved by a majority of the Company's disinterested directors or is
approved by holders of 80% of the Company's outstanding voting securities,
including 50% of all outstanding voting securities not owned by an Interested
Shareholder.

The Articles will empower the Board of Directors, when considering a tender
offer or a merger acquisition proposal, to take into account factors in addition
to potential financial benefits to shareholders. Such factors may include (i)
the adequacy and fairness of the consideration to be received by the Company
and/or its shareholders under the offer considering historical trading prices of
the Company's stock, the price that might be achieved in a negotiated sale of
the Company as a whole, premiums over trading prices which have been proposed or
offered with respect to the securities of other companies in the past in
connection with similar offers and the future prospects for the Company and its
business; (ii) the potential social and economic impact of the offer and its
consummation on the Company, its employees and vendors; and (iii) the potential
social and economic impact of the offer and its consummation on the communities
in which the Company and any of its subsidiaries operate or are located.

The Articles will prohibit a merger or consolidation of the Company with
another corporation, other than a wholly owned subsidiary, or the sale, lease,
exchange, pledge or other disposal of all or substantially all of the assets of
the Company, other than in the usual and regular course of business, or the
voluntary dissolution and liquidation of the Company's its assets without the
affirmative vote of not less than two-thirds of the voting power of the then
issued and outstanding shares of the class or classes of stock entitled to vote
thereon.

The Colorado Business Corporation Act provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's Articles or Bylaws, unless a corporation's
Articles or Bylaws, as the case may be, require a greater percentage. The
Articles of the Company will require the affirmative vote of holders of at least
two-thirds of the outstanding voting stock of the Company to amend or repeal any
of the foregoing provisions of the Articles. Such shareholder vote would be in
addition to any separate class vote that might in the future be required
pursuant to the terms of any Preferred Stock that might be outstanding at the
time any such amendments are submitted to the shareholders.

The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
control of the Company.

INDEMNIFICATION; LIMITATION OF LIABILITY

Pursuant to provisions of the Colorado Business Corporation Act, the
Company will adopt provisions in its Articles and enter into Director and
Officer Indemnity Agreements ("Indemnity Agreements") which permit the Company
to indemnify its directors to the fullest extent permitted by Colorado law,
except that the

40
<PAGE> 42

Company shall not indemnify any such director (i) in connection with a
proceeding by or in the right of the corporation in which the director was
adjudged liable to the corporation; or (ii) in connection with any other
proceedings charging that the director derived an improper personal benefit,
whether or not involving action in an official capacity, in which proceeding the
director was judged liable on the basis that he/she derived an improper personal
benefit. The Company will also enter into Indemnity Agreements with certain of
its officers providing for similar indemnification. In addition, the Articles
will eliminate the personal liability of the Company's directors to the Company
or its shareholders for the monetary damages for breach of their duty of due
care, except that there shall be no elimination or limitation of liability for
any breach of a director's duty of loyalty to the Company or to its
shareholders, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, acts providing for an unlawful
distribution of the Company's assets, or any transaction from which the director
directly or indirectly derived an improper personal benefit. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors and officers of the Company, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 3,299,998 shares of
Common Stock outstanding (3,584,998 if the Underwriters' over-allotment option
is exercised in full). Of these shares, the 1,900,000 shares sold in this
offering (2,185,000 if the underwriters' over-allotment option is exercised in
full) will be freely tradable without restriction or further registration under
the Act, except that any shares purchased by "Affiliates" of the Company, as
that term is defined by Rule 144 ("Rule 144") under the Act (the "Affiliates"),
may generally only be sold in compliance with the limitations of Rule 144
described below.

All of the remaining 1,399,998 shares of Common Stock outstanding are
deemed "Restricted Shares" under Rule 144 because they were originally issued
and sold by the Company in private transactions in reliance upon exemptions from
the Act. These remaining Restricted Shares will not be eligible for resale under
Rule 144 until after the expiration of a one year holding period beginning on
the date such Restricted Shares were acquired from the Company or from an
Affiliate and may be resold in the public market prior to such date only in
compliance with the registration requirements of the Act or pursuant to a valid
exemption therefrom. In addition, all of the Company's shareholders have entered
into lockup agreements providing that such holders will not, without the prior
written consent of Needham & Company, Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock beneficially owned by them for a
period of 180 days after the date of this prospectus, except pursuant to bona
fide gifts to persons who agree in writing to be bound by provisions in the
lockup agreements.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
restricted shares for at least one year is entitled to sell within any three
month period, a number of such shares that does not exceed the greater of (i)
one percent of the then outstanding shares of Common Stock (approximately 33,000
shares immediately after this Offering (35,850 if the underwriter's
over-allotment option is exercised in full)) or (ii) the average weekly trading
volume in the Common Stock in the over-the-counter market during the four
calendar weeks preceding the date on which notice of such sale is filed. In
addition, under Rule 144(k), a person who is not an Affiliate and who has not
been an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least two years may resell such
shares without compliance with the foregoing requirements. In meeting the one
and two year holding periods described above, a holder of Restricted Shares can
include the holding periods of a prior owner who is not an Affiliate. The
holding period will include the period during which the person held convertible
securities of the Company or stock of the Company.

The Company intends to file registration statements under the Securities
Act to register shares of Common Stock reserved for issuance under certain stock
plans of the Company, thus permitting the resale of such shares by nonaffiliates
upon issuance in the public market without restriction under the Securities
Acts. Such registration statements will automatically become effective
immediately upon filing. As of June 28,

41
<PAGE> 43

1997, there were a total of 379,645 shares of Common Stock subject to
outstanding stock options, 122,138 of which were vested and exercisable. Such
vested shares could be resold; however, all shares issuable upon the exercise of
such options also are subject to Lockup Agreements. "Management -- Stock Option
and Purchase Plans."

Prior to this offering, there has been no public market for the Common
Stock, and no predictions can be made as to the effect, if any, that sale of
shares of Common Stock under Rule 144 will have on the market price of the
Common Stock. Sales of substantial amounts of such shares in the public market
could adversely affect the market price of the Common Stock or the ability of
the Company to raise capital through a public offering of its equity securities.

UNDERWRITING

Under the terms and subject to the conditions of the Underwriting
Agreement, the Underwriters named below, for whom Needham & Company, Inc. and
D. A. Davidson & Co. are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company and the Selling Shareholder, and
the Company and Selling Shareholder have agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite their respective
names in the table below. The Underwriting Agreement provides that the
obligations of the Underwriters to pay for and accept delivery of the shares of
Common Stock are subject to certain conditions precedent, and that the
Underwriters are committed to purchase and pay for all shares if any shares are
purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Needham & Company, Inc. ....................................
D. A. Davidson & Co. .......................................

---------
Total.................................................. 1,900,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering price
set forth on the cover page of this prospectus and to certain dealers (who may
include the Underwriters) at such price less a commission not in excess of
$ per share, of which $ may be reallowed to other dealers. After the
offering to the public, the offering price and other selling terms may be
changed by the Representatives. No such reduction shall change the amount of
proceeds to be received by the Company and the Selling Shareholder as set forth
on the cover page of this prospectus. The Common Stock will be offered on the
NASDAQ National Market.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this prospectus, to purchase up to 285,000
shares of Common Stock at the same price per share as the Company and the
Selling Shareholder receive for the 1,900,000 shares that the Underwriters have
agreed to purchase from them. To the extent the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Common Stock to be purchased by such
Underwriter as shown in the above table bears to the total shown. If purchased,
such additional shares will be sold by the Underwriters on the same terms as
those on which the 1,900,000 shares are being sold.

The Underwriting Agreement contains covenants of indemnity and contribution
between the Company and the Underwriters and the Selling Shareholder against
certain civil liabilities that may be incurred in connection with this offering,
including liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers or persons controlling the Registrant pursuant to the
foregoing provisions, the Registrant has been informed that in the opinion of
the

42
<PAGE> 44

Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is therefore unenforceable.

Pursuant to the terms of lock up agreements, all of the Company's
shareholders holding an aggregate of 1,399,998 shares of the Company's Common
Stock have agreed with the Representatives not to sell, otherwise dispose of,
contract to sell, grant any option to sell, transfer or otherwise dispose of,
directly or indirectly, shares of Common Stock for a period of 180 days after
the date of this prospectus, without the prior written consent of Needham &
Company, Inc. The Company has agreed not to sell, contract to sell, grant any
option to sell, transfer or otherwise dispose of, directly or indirectly, shares
of Common Stock, other than the Company's sales of shares in this offering, the
issuance of shares of Common Stock upon the exercise of outstanding options, the
grant of options to purchase shares or the issuance of shares of Common Stock
under the Company's 1993 Plan, 1997 Plan and Purchase Plan, for a period of 180
days after the date of this prospectus, without the prior written consent of
Needham & Company, Inc.

The Underwriters will not make sales to accounts over which they exercise
discretionary authority in excess of 5% of the number of shares of Common Stock
offered hereby, and unless they obtain specific written consent of the customer.

In connection with the offering, the Underwriters and other persons
participating in the offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock. Specifically, the
Underwriters may over-allot in connection with the offering, creating a short
position in the Common Stock for their own account. To cover over-allotments or
to stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, Common Stock in the open market. The Underwriters may also impose a
penalty bid whereby they may reclaim selling concessions allowed to an
underwriter or a dealer for distributing Common Stock in the offering if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise. Finally,
the Underwriters may bid for, and purchase, shares of Common Stock in market
making transactions. These activities may stabilize or maintain the market price
of the Common Stock above market levels that might otherwise prevail. The
Underwriters are not required to engage in these activities and may end these
activities at any time.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price will be
determined through negotiations among the Company, the Selling Shareholder and
the Representatives. Among the factors to be considered in such negotiations
will be prevailing market conditions; the net sales and results of operations of
the Company in recent periods, market valuations of publicly traded companies
that the Company, the Selling Shareholder and the Representatives believe to be
comparable to the Company; estimates of the business potential of the Company;
the present state of the Company's development; the current state of the
industry and the economy as a whole; and other factors deemed relevant.

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed
upon for the Company and the Selling Shareholder by Varnum, Riddering, Schmidt &
Howlett LLP, Grand Rapids, Michigan. Cooley Godward LLP, Boulder, Colorado, is
acting as counsel for the Underwriters in connection with certain legal matters
relating to the Common Stock offered hereby.

EXPERTS

The consolidated financial statements of the Company included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto and are included in reliance upon the authority of
said firm, as experts in giving said reports.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission
("Commission") a Registration Statement on Form S-1 (herein, together with all
amendments and exhibits thereto, referred to as the "Registration Statement")
under the Securities Act of 1933, as amended. This Prospectus does not contain
all

43
<PAGE> 45

of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. The statements contained in this Prospectus concerning the contents
of any contract or other document referred to are not necessarily complete.
Where such contract or other document is an exhibit to the Registration
Statement, each statement is qualified in all respects by the provisions of such
exhibit, to which reference is hereby made for a full statement of the
provisions thereof. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement. A
copy of the Registration Statement can be inspected by anyone without charge at
the Public Reference Section of the Commission, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located
at 7 World Trade Center, Suite 1300, New York, New York 10048, and 500 West
Madison Street, Chicago, Illinois 60601. Copies of such materials can be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site (which can be found at http://www.sec.gov) that contains
information regarding registrants that file electronically with the Commission.

44
<PAGE> 46

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of June 29, 1996 and June 28,
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
July 1, 1995, June 29, 1996, and June 28, 1997............ F-5
Consolidated Statements of Shareholders' Equity for the
years ended July 1, 1995, June 29, 1996, and June 28,
1997...................................................... F-6
Consolidated Statements of cash flows for the years ended
July 1, 1995, June 29, 1996, and June 28, 1997............ F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>

F-1
<PAGE> 47

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of Applied
Films Corporation:

We have audited the accompanying consolidated balance sheets of APPLIED
FILMS CORPORATION (a Colorado corporation) and subsidiary as of June 29, 1996
and June 28, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the fiscal periods ended July 1,
1995, June 29, 1996 and June 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Applied Films Corporation and subsidiary, as of June 29, 1996 and June 28, 1997,
and the consolidated results of their operations and their cash flows for each
of the fiscal periods ended July 1, 1995, June 29, 1996 and June 28, 1997, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Denver, Colorado,
July 22, 1997

F-2
<PAGE> 48

APPLIED FILMS CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 260 $ 297
Accounts and trade notes receivable, net.................. 2,805 6,461
Inventories, net (Note 2)................................. 6,814 6,160
Income taxes receivable................................... 332 --
Prepaid expenses and other................................ 38 423
Notes receivable from officers (Note 4)................... 25 5
Deferred tax asset, net (Note 6).......................... 222 250
------- -------
Total current assets................................. 10,496 13,596
------- -------
PROPERTY, PLANT AND EQUIPMENT (NOTE 2):
Land...................................................... 464 733
Building.................................................. 2,477 2,747
Machinery and equipment................................... 11,526 11,587
Office furniture and equipment............................ 409 452
Leasehold improvements.................................... 421 425
Construction-in-progress.................................. 239 1,209
------- -------
15,536 17,153
Accumulated depreciation.................................. (7,973) (9,330)
------- -------
7,563 7,823
------- -------
Other assets................................................ 24 --
Investment in affiliate..................................... 115 122
------- -------
$18,198 $21,541
======= =======
</TABLE>

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

F-3
<PAGE> 49

APPLIED FILMS CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................... $ 2,401 $ 3,802
Accrued expenses.......................................... 474 1,272
Income received but not yet earned........................ -- 1,500
Income taxes payable...................................... -- 352
Current portion of long-term debt (Note 6)................ 1,389 1,136
------- -------
Total current liabilities............................ 4,264 8,062
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion (Note 3)........... 8,501 6,448
Deferred tax liability, net (Note 6)...................... 375 291
------- -------
Total liabilities.................................... 13,140 14,801
------- -------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 1,200,000 shares authorized,
400,000 shares issued and outstanding.................. 4,245 4,245
Less common shares held by affiliate...................... (26) (26)
Deferred compensation (Note 5)............................ (92) (31)
Retained earnings......................................... 931 2,552
------- -------
Total stockholders' equity........................... 5,058 6,740
------- -------
$18,198 $21,541
======= =======
</TABLE>

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

F-4
<PAGE> 50

APPLIED FILMS CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE PERIODS ENDED
-------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net Sales................................................... $30,990 $21,738 $34,050
Cost of Goods Sold.......................................... 24,288 19,018 27,352
------- ------- -------
Gross Profit................................................ 6,702 2,720 6,698
Selling, General and Administrative Expenses................ 3,502 2,233 2,996
Research and Development Expenses........................... 1,010 965 749
------- ------- -------
Income (Loss) from Operations............................... 2,190 (478) 2,953
------- ------- -------
Other (Expense) Income:
Gain (loss) on foreign currency exchange (Note 2)......... 223 (286) 96
Other (loss) income, net.................................. (13) 30 (20)
Interest income........................................... 14 12 19
Interest expense.......................................... (816) (780) (822)
------- ------- -------
(592) (1,024) (727)
------- ------- -------
Income (loss) before income taxes........................... 1,598 (1,502) 2,226
Income tax provision (benefit).............................. 496 (424) 605
------- ------- -------
Net income (loss)........................................... $ 1,102 $(1,078) $ 1,621
======= ======= =======
Primary and Fully Diluted Net Income (Loss) Per Share....... $2.70 $(2.65) $3.89
======= ======= =======
Weighted Average Common Shares Outstanding.................. 408 407 417
======= ======= =======
</TABLE>

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

F-5
<PAGE> 51

APPLIED FILMS CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIODS ENDED JULY 1, 1995, JUNE 29, 1996 AND JUNE 28, 1997

<TABLE>
<CAPTION>
COMMON STOCK HELD BY AFFILIATE TOTAL
---------------- ----------------- DEFERRED RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION EARNINGS EQUITY
------ ------ ------ ------ ------------ -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JULY 2, 1994...... 400,000 $3,658 -- $ -- $ -- $ 907 $ 4,565
Net income................ -- -- -- -- -- 1,102 1,102
Deferred compensation
related to options..... -- 597 -- -- (597) -- --
Amortization of deferred
compensation........... -- -- -- -- 353 -- 353
------- ------ ---- ---- ----- ------- -------
BALANCES, JULY 1, 1995...... 400,000 4,255 -- -- (244) 2,009 6,020
Net loss.................. -- -- -- -- -- (1,078) (1,078)
Forfeiture of options..... -- (10) -- -- 10 -- --
Amortization of deferred
compensation........... -- -- -- -- 142 -- 142
Acquisition of shares by
affiliate.............. -- -- (535) (26) -- -- (26)
------- ------ ---- ---- ----- ------- -------
BALANCES, JUNE 29, 1996..... 400,000 4,245 (535) (26) (92) 931 5,058
Net income................ -- -- -- -- -- 1,621 1,621
Amortization of deferred
compensation........... -- -- -- -- 61 -- 61
------- ------ ---- ---- ----- ------- -------
BALANCES, JUNE 28, 1997..... 400,000 $4,245 (535) $(26) $ (31) $ 2,552 $ 6,740
======= ====== ==== ==== ===== ======= =======
</TABLE>

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

F-6
<PAGE> 52

APPLIED FILMS CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE PERIODS ENDED
-----------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,102 $ (1,078) $ 1,621
Adjustments to reconcile net income (loss) to net cash
flows from operating activities --
Depreciation and amortization.......................... 1,391 1,405 1,473
Amortization of deferred compensation.................. 353 142 61
Loss on disposals of property, plant and equipment..... 17 2 6
Undistributed earnings of affiliate.................... (17) (12) (7)
Changes in --
Accounts and trade notes receivable.................. (441) 2,361 (3,656)
Inventories.......................................... 1,975 (1,960) 654
Income taxes receivable.............................. 90 (332) 332
Prepaid expenses and other........................... (114) 461 (385)
Accounts payable-trade............................... (511) (1,037) 1,401
Due to Donnelly Corporation.......................... (337) -- --
Income received not yet earned....................... -- -- 1,500
Accrued expenses..................................... 211 (445) 798
Income taxes payable................................. 130 (130) 352
Deferred income taxes, net........................... 38 (170) (112)
------- -------- --------
Net cash flows from operating activities............. 3,887 (793) 4,038
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of land.......................................... $ -- $ -- $ (269)
Purchase of building...................................... -- -- (270)
Purchases of machinery and equipment...................... (1,688) (899) (1,320)
Reimbursement of equipment costs.......................... 351 387 161
Purchases of office furniture and equipment............... (23) (34) (73)
Proceeds from sale of equipment........................... -- 85 60
Purchases of leasehold improvements....................... (32) -- (4)
Cash paid for note receivable from officer................ -- (15) --
Cash received from note receivable from officer........... 50 3 20
------- -------- --------
Net cash flows from investing activities............. (1,342) (473) (1,695)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 3,995 12,444 8,128
Repayment of long-term debt............................... (6,524) (11,685) (10,434)
------- -------- --------
Net cash flows from financing activities............. (2,529) 759 (2,306)
------- -------- --------
Net Increase (Decrease) in Cash............................. 16 (507) 37
Cash and Cash Equivalents, beginning of period.............. 751 767 260
------- -------- --------
Cash and Cash Equivalents, end of period.................... $ 767 $ 260 $ 297
======= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized........ $ 873 $ 783 $ 593
======= ======== ========
Cash paid for income taxes, net of amounts refunded....... $ 237 $ 208 $ 376
======= ======== ========
</TABLE>

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

F-7
<PAGE> 53

APPLIED FILMS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JULY 1, 1995, JUNE 29, 1996 AND JUNE 28, 1997

(1) COMPANY ORGANIZATION AND OPERATIONS

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

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

(2) SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

BASIS OF PRESENTATION

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

FISCAL YEAR

The Company has adopted a fiscal year ending on the Saturday nearest June
30 which will result in fiscal years composed of 52 or 53 weeks. Fiscal years,
1995, 1996 and 1997 include 52 weeks.

CASH AND CASH EQUIVALENTS

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

CONCENTRATION OF CREDIT RISK

The Company provides credit, in the normal course of business, to large
electronics manufacturers, located primarily in Asia. To limit the Company's
credit risk, management performs ongoing credit evaluations of its customers and
requires letters of credit from certain of its foreign customers prior to
shipment. Although the Company is directly impacted by economic conditions in
the electronics industry, management does not believe significant credit risk
exists at June 28, 1997.

F-8
<PAGE> 54

APPLIED FILMS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(2) SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories at June 29, 1996, and June 28, 1997 consist of the
following:

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
<S> <C> <C>
Raw materials, net.......................................... $2,935,000 $3,840,000
Work-in-process............................................. 10,000 9,000
Materials for manufacturing systems......................... -- 158,000
Finished goods.............................................. 3,869,000 2,153,000
---------- ----------
$6,814,000 $6,160,000
========== ==========
</TABLE>

PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C>
Building.................................................... 30 years
Machinery and equipment..................................... 3-10 years
Office furniture and equipment.............................. 3-5 years
Leasehold improvements...................................... 5-10 years
</TABLE>

REVENUE RECOGNITION

Coated glass revenues are recognized upon shipment.

SYSTEM SALES

Revenues relating to the sales of thin film coating systems are recognized
on the percentage-of-completion method, measured by the percentage of the total
costs incurred and applied to date in relation to the estimated total costs to
be incurred for each contract. Management considers costs incurred and applied
to be the best available measure of progress on these contracts. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance. General and administrative costs are charged to expense as
incurred. Changes in performance, contract conditions and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Income received
but not yet earned, which totaled $1,500,000 at June 28, 1997, represents
amounts received pursuant to the contract terms which occur prior to the
Company's recognition of revenues on the contract for financial reporting
purposes.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred and consist
primarily of salaries and supplies. The Company incurred approximately
$1,010,000, $965,000 and $749,000 of research and development costs

F-9
<PAGE> 55

APPLIED FILMS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(2) SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED

for the years ended July 1, 1995, June 29, 1996 and June 28, 1997, respectively,
net of reimbursements received from a contracting research organization.

FOREIGN CURRENCY TRANSACTIONS

The Company generates approximately 80% of its revenues from sales to
foreign corporations. In addition, many of their raw materials are purchased
from foreign corporations. The majority of the Company's sales and purchases are
denominated in U.S. dollars, with the remainder denominated in Japanese Yen. For
those transactions denominated in Japanese Yen, the Company records the sale or
purchase at the spot exchange rate in effect on the date of sale. Receivables
from such sales or payments for such purchases are translated to U.S. dollars
using the end of the period spot exchange rate. Transaction gains and losses are
charged or credited to income during the year.

NET INCOME (LOSS) PER SHARE

Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding for each period. Common
equivalent shares include stock options to purchase the Company's common stock.
Pursuant to Securities and Exchange Commission Accounting Staff Bulletin No. 83,
common and common equivalent shares issued during the twelve months immediately
preceding the Company's initial public offering filing date have been included
in the calculation of common and common equivalent shares, regardless of whether
their inclusion is dilutive, using the treasury stock method and the anticipated
public offering price as if they were outstanding for all periods. Common stock
equivalents, excluding those issued within twelve months immediately preceding
the Company's initial public offering filing date, are excluded for loss periods
because their inclusion would be anti-dilutive.

The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards 128 ("SFAS 128") entitled, "Earnings per Share."
SFAS 128 is effective for fiscal years ending after December 15, 1997; early
adoption is not permitted. SFAS 128 replaces primary and fully diluted earnings
per share with basic and diluted earnings per share, respectively. Under SFAS
128, net income (loss) per share for the periods reported would be as follows:

<TABLE>
<CAPTION>
YEARS ENDED
------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Basic.................................................... $2.70 $(2.65) $3.98
Diluted.................................................. $2.70 $(2.65) $3.88
</TABLE>

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" ("SFAS 121"), which
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill. The Company adopted SFAS 121
effective June 30, 1996. Implementation of SFAS 121 had no material effect on
the Company's financial position or results of operations.

F-10
<PAGE> 56

APPLIED FILMS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(2) SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED

RECLASSIFICATIONS

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

(3) LONG-TERM DEBT

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
<S> <C> <C>
Line of credit with a bank, due June 30, 1997, (see amended
terms discussed below); cross collateralized with the
note payable to a bank................................... $ 8,426,000 $ 7,138,000
Note payable to a bank..................................... 1,389,000 --
Note payable secured by a deed of trust on land, due
January 12, 1998; payments of interest only due monthly;
interest accruing at 9.0% at June 28, 1997............... 75,000 75,000
Note payable secured by a deed of trust on land and
buildings, payable in 60 monthly installments of
principal and interest of $7,692 (final payment due June
27, 2002); with interest accruing at 8.790%.............. -- 371,000
----------- -----------
9,890,000 7,584,000
Less -- Current portion, amended...................... (1,389,000) (1,136,000)
----------- -----------
Total long-term debt.................................. $ 8,501,000 $ 6,448,000
=========== ===========
</TABLE>

SUBSEQUENT EVENT

On June 30, 1997, the Company entered into an Amended and Restated Credit
Agreement (the "Agreement"), which includes a term note in the amount of
$3,000,000, payable in 36 monthly installments of $83,333, commencing on July
31, 1997, as well as a revolving credit facility with maximum availability of
$8,500,000, due on June 30, 2000. Both facilities are secured by eligible
accounts receivable, inventory, equipment and fixtures, as defined in the
Agreement. In addition, Donnelly has guaranteed $5,000,000 of the term note and
the revolving credit facility, so long as such amounts are outstanding. Interest
is payable quarterly on the aggregate balance, based on the prime or federal
funds rate, whichever is greater, plus a factor varying based on earnings before
interest, taxes, depreciation and amortization, as defined by the Agreement. The
Company must maintain certain financial ratios to remain in compliance with the
Agreement, including a ratio of debt to earnings before interest, taxes,
depreciation and amortization; a ratio of total liabilities to tangible net
worth and maintain a certain amount of tangible net worth, all as defined in the
Agreement.

Maturities of debt at June 28, 1997, giving effect to the subsequent event
discussed above, are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1998...................................................... $1,136,000
1999...................................................... 1,067,000
2000...................................................... 5,212,000
2001...................................................... 81,000
2002...................................................... 88,000
Thereafter................................................ --
----------
Total.................................................. $7,584,000
==========
</TABLE>

F-11
<PAGE> 57

APPLIED FILMS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(4) RELATED PARTY TRANSACTIONS

In fiscal 1993, the Company acquired a 25% general partner interest in a
partnership from an unrelated party; the remaining 75% general partner interest
in the partnership is owned by stockholders of the Company. The Company accounts
for this investment under the equity method of accounting, and the undistributed
earnings are included in other income in the accompanying consolidated
statements of operations. This partnership owns and leases certain Boulder
office and manufacturing facilities to the Company under a noncancelable lease
(see Note 9). The Company currently pays the partnership monthly rent and pays
all property taxes and insurance costs. The Company paid rent of approximately
$241,000 under this agreement during each of the years ended July 1, 1995, June
29, 1996 and June 28, 1997, respectively. In November 1995, the partnership
acquired approximately 2,142 shares of the Company's common stock. Accordingly,
the Company has reduced its investment in the affiliate for its 25% share of the
partnership's investment in the Company.

The Company had employment agreements with three of its officers and
stockholders which contained certain clauses designed to protect the technology,
customer base and business operations of the Company. The agreements expired
April 30, 1995. In addition to salary compensation, each of the three employees
was paid $533,000 in thirty-six monthly installments beginning May 31, 1992, and
ending April 30, 1995. The Company expensed $436,000 in payments to the
stockholders related to these agreements during the year ended July 1, 1995.

As of June 28, 1997, the Company had a note receivable of approximately
$5,000 due from an officer for advances made by the Company. The note is secured
by the officer's residence, and is payable in $100 weekly installments and
accrues interest at prime plus .5%.

During 1996, the Company executed a note receivable to an officer of the
Company in connection with his relocation to Boulder in the amount of $15,000.
Interest accrued at a fixed rate of 8.75%. The note is secured by the
executive's residence in New York and is payable in full upon the sale of this
home. During 1997, this balance was repaid in full.

In fiscal 1997, the Company paid Donnelly $250,000 as consideration for
Donnelly's guarantee of $5 million of the Company's debt.

(5) STOCKHOLDERS' EQUITY

STOCK OPTIONS

In May 1993, the board of directors approved the Company's 1993 Stock
Option Plan ("the 1993 Plan") covering 39,500 shares of common stock. The
exercise price of these options is determined by the board of directors. The
options granted in fiscal years 1994 and 1995 vested, one-quarter per year, over
a four year period and, under its original terms, were not exercisable until
after an initial public offering of common stock was completed by the Company.
Accordingly, the Company accounted for the 1993 Plan as a variable plan until
June 30, 1995, at which time the board of directors declared that the options
then outstanding were exercisable, subject to their vesting terms. The Company
has recorded approximately $597,000 of deferred compensation related to all
options, which is equal to the excess of the estimated fair market value of the
common stock as of July 1, 1995 over the exercise price. Through June 28, 1997,
the Company has expensed $556,000, and the balance of such deferred compensation
is being expensed over the remaining estimated service period, which is
consistent with the vesting period.

In April 1997, the Company adopted the 1997 Stock Option Plan ("the 1997
Plan") covering 17,500 shares of common stock. The exercise price of options
granted under the 1997 Plan is determined by the board of directors based upon
estimated fair market value. The options granted are to vest ratably over four
years. In April 1997, the Company granted options to purchase 9,870 shares of
common stock with an exercise price of

F-12
<PAGE> 58

APPLIED FILMS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(5) STOCKHOLDERS' EQUITY -- CONTINUED
$36.81 per share. In June 1997, the Company issued an additional 2,261 options
out of the 1993 Plan, with an exercise price of $36.81 per share. The remaining
shares must be granted with an exercise price equal to estimated fair market
value.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")

SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost in the financial statements for such plans using the intrinsic value based
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), provided that pro forma disclosures are made of net
income or loss, assuming the fair value based method of SFAS 123 had been
applied. The Company has elected to account for its stock-based compensation
plans for employees and directors under APB 25. As the Company did not grant
options to purchase common stock during the year ended June 29, 1996, no pro
forma compensation expense was required for fiscal 1996 under the provisions of
SFAS 123.

For 1997, the Company has elected to account for its stock-based
compensation plans under APB 25; accordingly, for purposes of the pro forma
disclosures presented below, the Company has computed the fair values of all
options granted during fiscal 1997 using the Black-Scholes pricing model and the
following weighted average assumptions:

<TABLE>
<CAPTION>
1997
----
<S> <C>
Risk-free interest rate..................................... 6.32%
Expected lives.............................................. 5.0 years
Expected volatility......................................... 51%
Expected dividend yield..................................... 0%
</TABLE>

To estimate expected lives of options for this valuation, it was assumed
options will be exercised at varying schedules after becoming fully vested. All
options are initially assumed to vest. Cumulative compensation cost recognized
in pro forma net income or loss with respect to options that are forfeited prior
to vesting is adjusted as a reduction of pro forma compensation expense in the
period of forfeiture. Because the Company's common stock is not yet publicly
traded, the expected market volatility was estimated using the estimated average
volatility of three publicly held companies which the Company believes to be
similar with respect to the markets in which they compete. Actual volatility of
the Company's stock may vary. Fair value computations are highly sensitive to
the volatility factor assumed; the greater the volatility, the higher the
computed fair value of the options granted.

The total fair value of options granted during fiscal 1997 was computed to
be approximately $230,000 for the year ended June 28, 1997. The amount is
amortized ratably over the vesting period of the options. Pro forma stock-based
compensation, net of the effect of forfeitures, was $5,000 for 1997.

F-13
<PAGE> 59

APPLIED FILMS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(5) STOCKHOLDERS' EQUITY -- CONTINUED

If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income would have been reported as
follows (in thousands):

<TABLE>
<CAPTION>
1997
----
<S> <C>
Net income:
As reported............................................... $1,621
======
Pro forma (unaudited)..................................... $1,616
======
Net income per share:
As reported............................................... $ 3.89
======
Pro forma (unaudited)..................................... $ 3.88
======
</TABLE>

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

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------------------------------------------
JULY 1, 1995 JUNE 29, 1996 JUNE 28, 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 18,960 $16.25 39,086 $19.73 37,169 $19.82
Granted........................ 20,535 $23.00 -- -- 12,131 $36.81
Canceled....................... (409) $23.00 (1,917) $17.99 -- --
------ ------ ------
Outstanding at end of year....... 39,086 $19.73 37,169 $19.82 49,300 $24.00
====== ====== ====== ====== ====== ======
Exercisable at end of year....... 9,480 $16.25 18,061 $18.08 28,588 $19.45
====== ====== ====== ====== ====== ======
Weighted average fair value of
options granted................ $18.96
======
</TABLE>

The following table summarizes information about employee stock options
outstanding and exercisable at June 28, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
NUMBER OF WEIGHTED -------------------------
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF JUNE 28, CONTRACTUAL EXERCISE JUNE 28, EXERCISE
EXERCISE PRICES 1997 LIFE IN YEARS PRICE 1997 PRICE
- --------------- -------------- ------------- -------- -------------- --------
<C> <C> <C> <C> <C> <C>
$16.25 17,538 5.9 $16.25 17,538 $16.25
$23.00 19,631 8.6 $23.00 9,816 $23.00
$36.81 12,131 9.3 $36.81 1,234 $36.81
------ ------ ------ ------
49,300 $24.00 28,588 $19.45
====== ====== ====== ======
</TABLE>

(6) INCOME TAXES

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

F-14
<PAGE> 60

APPLIED FILMS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(6) INCOME TAXES -- CONTINUED

The net deferred tax liability is comprised of the following:

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
<S> <C> <C>
Alternative minimum tax credit.............................. $ 217,000 $ --
Net operating loss carryforward, state...................... 61,000 --
Inventories................................................. (26,000) 85,000
Accrued expenses............................................ 55,000 215,000
Foreign currency gain....................................... (24,000) --
Valuation allowance......................................... (61,000) (50,000)
--------- ---------
Total current deferred tax asset, net................ 222,000 250,000
--------- ---------
Property, plant and equipment............................... (453,000) (442,000)
Deferred compensation....................................... 185,000 208,000
Other....................................................... (107,000) (57,000)
--------- ---------
Total non-current deferred tax liability, net.......... (375,000) (291,000)
--------- ---------
Total deferred tax liability, net...................... $(153,000) $ (41,000)
========= =========
</TABLE>

Income tax (benefit) provision for the years ended July 1, 1995, June 29,
1996 and June 28, 1997 consist of the following:

<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Current federal and state income taxes.............. $458,000 $(254,000) $ 717,000
Deferred federal and state income taxes............. 38,000 (170,000) (112,000)
-------- --------- ---------
Total income tax (benefit) provision........... $496,000 $(424,000) $ 605,000
======== ========= =========
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit) rate......... 34.0% (34.0)% 34.0%
State income taxes.......................................... 3.3% (3.3)% 3.3%
Increase (decrease) in valuation allowance.................. -- 4.1% (0.5)%
Effect of FSC............................................... (6.8)% -- (5.8)%
Other....................................................... .5% 5.0% (3.8)%
---- ----- ----
Effective income tax expense (benefit) rate................. 31.0% (28.2)% 27.2%
==== ===== ====
</TABLE>

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

(7) PROFIT SHARING PLAN

In August 1992, the board of directors adopted a profit sharing plan for
all non-executive employees. The amount to be contributed to the profit sharing
pool, subject to the approval of the Company's board of directors, is generally
10% of pre-tax income before royalty income and profit sharing expense. Profit
sharing is

F-15
<PAGE> 61

APPLIED FILMS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(7) PROFIT SHARING PLAN -- CONTINUED

paid to employees monthly based on their employee pay level and length of
service with the Company. The Company expensed approximately $217,000, $29,000
and $247,000 in fiscal years 1995, 1996 and 1997, respectively, related to this
plan.

(8) SIGNIFICANT CUSTOMERS

During fiscal years 1995, 1996 and 1997, approximately 80% of the Company's
sales were to overseas customers. A single customer accounted for approximately
13% of the Company's sales in fiscal year 1995. The Company's ten largest
customers accounted for, in the aggregate, approximately 62%, 56% and 59% of the
Company's gross sales in fiscal 1995, 1996 and 1997, respectively. The loss of,
or a significant reduction or purchases by, one or more of these customers would
have a material adverse effect on the Company's operating results.

The Company's sales are typically denominated in U.S. dollars. However,
certain customers of the Company currently pay in Japanese Yen. As a result, the
Company recognized approximately $223,000, $(286,000), and $96,000 of foreign
currency exchange rate gain (loss) on foreign currency exchange rate
fluctuations for the years ended July 1, 1995, June 29, 1996 and June 28, 1997,
respectively. The Company currently has approximately $896,000 of its accounts
receivable and $376,000 of its accounts payable denominated in Japanese Yen as
of June 28, 1997.

(9) COMMITMENTS

The Company is obligated under certain noncancelable operating leases for
office, manufacturing and warehouse facilities. In addition, during 1997, the
Company entered into an agreement to lease land and a building which will be
used as the Company's primary manufacturing location and administrative
facility. Lease payments commence January 1, 1998, and are fixed until the third
anniversary of this payment, at which time payments increase annually based on
the Consumer Price Index. The initial lease term is 15 years, with two
additional 5 year options to extend. Commencement of payments is contingent upon
certain construction completion deadlines by the lessor, as defined in the
agreement.

The future minimum rental payments under the leases are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1998...................................................... $ 789,000
1999...................................................... 1,061,000
2000...................................................... 1,024,000
2001...................................................... 816,000
2002...................................................... 841,000
Thereafter................................................ 10,499,000
-----------
$15,030,000
===========
</TABLE>

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

F-16
<PAGE> 62

================================================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY AND SELLING
SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES
OF COMMON STOCK TO WHICH THIS PROSPECTUS RELATES, OR AN OFFER IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 5
Use of Proceeds.......................... 12
Dividend Policy.......................... 12
Capitalization........................... 13
Dilution................................. 14
Selected Financial and Operating Data.... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operation.............................. 16
Business................................. 22
Management............................... 32
Certain Transactions..................... 36
Principal and Selling Shareholders....... 38
Description of Capital Stock............. 39
Shares Eligible for Future Sale.......... 41
Underwriting............................. 42
Legal Matters............................ 43
Experts.................................. 43
Additional Information................... 43
Index to Combined Consolidated Financial
Statements............................. F-1
</TABLE>

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

UNTIL , (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

================================================================================

1,900,000 Shares
APPLIED FILMS CORPORATION LOGO
Common Stock

------------------------
PROSPECTUS
------------------------

NEEDHAM & COMPANY, INC.

D. A. DAVIDSON & CO.

, 1997

================================================================================
<PAGE> 63

PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the various expenses in connection with the
sale and distribution of the Common Stock being registered, other than
underwriting discounts and commission. All amounts shown are estimates, except
the SEC registration fee and the NASD filing fee, and assume sale of 1,900,000
shares in the offering. All expenses shown will be paid by Donnelly Corporation,
a Selling Shareholder.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 7,414
NASD filing fee............................................. 3,013
Printing and mailing expenses............................... 150,000
Fees and expenses of counsel................................ 130,000
Accounting and related expenses............................. 75,000
Blue Sky fees and expenses.................................. *
Registrar and Transfer Agent fees........................... 2,500
Miscellaneous............................................... 5,000
--------
Total.................................................. $
========
</TABLE>

- -------------------------
* To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Sections 7-109-102 through 7-109-110 of the Colorado Business Corporation
Act (the "Act") grant the Registrant broad powers to indemnify any person in
connection with legal proceedings brought against him by reason of his present
or past status as an officer or director of the Registrant, provided with
respect to conduct in an official capacity with the Registrant, the person acted
in good faith and in a manner he reasonably believed to be in the best interests
of the Registrant, with respect to all other conduct, the person believed the
conduct to be in or not opposed to the best interests of the Registrant, and
with respect to any criminal action or proceeding, the person had no reasonable
cause to believe his conduct was unlawful. Indemnification is limited to
reasonable expenses incurred in connection with the proceeding. No
indemnification may be made (i) in connection with a proceeding by or in the
right of the Registrant in which the person was adjudged liable to the
Registrant; or (ii) in connection with any other proceedings charging that the
person derived an improper personal benefit, whether or not involving action in
an official capacity, in which proceeding the person was judged liable on the
basis that he derived an improper personal benefit, unless and only to the
extent the court in which such action was brought or another court of competent
jurisdiction determines upon application that, despite such adjudication, but in
view of all relevant circumstances, the person is fairly and reasonably entitled
to indemnity for reasonable expenses as the court deems proper. In addition, to
the extent that any such person is successful in the defense of any such legal
proceeding, the Registrant is required by the Act to indemnify him against
reasonable expenses.

The Registrant's Amended and Restated Articles of Incorporation will
contain provisions which permit the Registrant to indemnify its officers and
directors to the fullest extent permitted by the Colorado Business Corporation
Act. The Registrant will enter into indemnification agreements with each of its
directors and certain of its officers providing for similar indemnification. See
Exhibit 10.4 to this Registration Statement. In addition to the available
indemnification, the Registrant's Amended and Restated Articles of Incorporation
will limit the personal liability of the members of its Board of Directors,
subject to certain exceptions, for monetary damages with respect to claims by
the Registrant or its shareholders.

The Registrant's Amended and Restated Bylaws will provide that the
Registrant may purchase and maintain insurance on behalf of its directors,
officers, employees, fiduciaries and agents against liability asserted against
or incurred by such persons in any such capacity.

II-1
<PAGE> 64

The Registrant has agreed to indemnify the Underwriters, and the
Underwriters have agreed to indemnify the Registrant against certain civil
liabilities, including liabilities under the Securities Act, as amended.
Reference is made to the Underwriting Agreement filed as Exhibit 1 herewith.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On January 20, 1995, the Registrant granted options on 143,745 shares of
its Common Stock at an exercise price of $3.29 per share pursuant to the
Donnelly Applied Films Corporation Stock Option Plan (the "1993 Plan"). The
options were granted to directors, officers and employees of the Registrant.

On April 29, 1997, the Registrant granted options on 69,090 shares of its
Common Stock at an exercise price of $5.26 per share pursuant to the 1997 Stock
Option Plan (the "1997 Plan"). The options were granted to directors, officers
and employees of the Registrant.

On June 27, 1997, the Registrant granted options on 15,827 shares of its
Common Stock at an exercise price of $5.26 per share pursuant to the 1993 Plan.
The options were granted to directors, officers and employees of the Registrant.

On September 5, 1997, the Registrant granted options on 34,545 shares of
its Common Stock at an exercise price of $7.20 per share pursuant to the 1997
Plan. The options were granted to directors, officers and employees of the
Registrant.

No underwriter was engaged in connection with the foregoing sales of
securities. The grants of options were made in reliance upon Section 4(2) of the
Securities Act of 1933 as transactions not involving any public offering. The
Registrant has reason to believe that all of the foregoing purchasers were
familiar with or had access to information concerning the operations and
financial condition of the Registrant, and all of those individuals acquired the
options and related shares for investment and not with a view to the
distribution thereof.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

Reference is made to the Exhibit Index which appears at page II-4 of the
Registration Statement.

ITEM 17. UNDERTAKINGS.

The Registrant hereby undertakes as follows:

The Registrant will provide to the underwriter at the closing specified in
the underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission such indemnification is against the public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective; and (2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

II-2
<PAGE> 65

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder, State of
Colorado on September 10, 1997.

APPLIED FILMS CORPORATION

By: /s/ CECIL VAN ALSBURG

------------------------------------
Cecil Van Alsburg, President

Each of the undersigned whose signature appears below hereby constitutes
and appoints Cecil Van Alsburg and Thomas Schmidt, and each of them acting
alone, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, under the Securities Act of 1933.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
indicated on September 10, 1997.

<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ Cecil Van Alsburg President, Chief Executive Officer and Director
- --------------------------------------------------- (principal executive officer)
Cecil Van Alsburg

/s/ Thomas D. Schmidt Chief Financial Officer (principal financial
- --------------------------------------------------- officer)
Thomas D. Schmidt

/s/ Roger Smith Treasurer (principal accounting officer)
- ---------------------------------------------------
Roger Smith

/s/ John S. Chapin Vice President -- Research, Secretary and
- --------------------------------------------------- Director
John S. Chapin

/s/ C. Richard Condon Vice President -- Engineering and Director
- ---------------------------------------------------
C. Richard Condon

Director
- ---------------------------------------------------
J. Dwane Baumgardner

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

/s/ Chad D. Quist Director
- ---------------------------------------------------
Chad D. Quist
</TABLE>

II-3
<PAGE> 66

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>

1 * Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of Applied
Films Corporation
3.2 Amended and Restated Bylaws of Applied Films Corporation
4.1* Specimen common stock certificate
5.1* Opinion of Varnum, Riddering, Schmidt & Howlett LLP
10.1 1993 Stock Option Plan
10.2 1997 Stock Option Plan
10.3 Employee Stock Purchase Plan
10.4 Form of Indemnity Agreement between Registrant and each of
its Directors
10.5 Amended and Restated Credit Agreement, dated as of June 30,
1997, together with Security Agreement, dated June 30, 1994,
each between Registrant and NBD Bank
10.6 Partnership Agreement, dated January 1, 1981, by and among
James R. Loftus, Cecil W. Van Alsburg, Charles Richard
Condon and John S. Chapin, as amended by the Amendment to
Partnership Agreement of Winchester 44 Associates, dated as
of April 14, 1993, by and among James R. Loftus, Cecil W.
Van Alsburg, Charles Richard Condon, John S. Chapin and
Registrant
10.7 Agreement of Lease, dated July 1, 1993, between Randal
Bjerke and Registrant
10.8 Lease Agreement, dated April 27, 1995, between Winchester 44
Associates and Registrant
10.9 Lease, dated June 26, 1997, between Registrant and CFA LLC
11.1 Statement re: computation of per share earnings
21 Subsidiary of Applied Films Corporation
23.1* Consent of Varnum, Riddering, Schmidt & Howlett LLP
(included in opinion filed as Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney (included on page II-3)
27 Financial Data Schedule (EDGAR filing only)
</TABLE>

- -------------------------
* To be filed by amendment

II-4

<PAGE> 1
EXHIBIT 3.1

AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
APPLIED FILMS CORPORATION

The following Amended and Restated Articles of Incorporation are
executed by the undersigned corporation pursuant to the provisions of the
Colorado Business Corporation Act.

1. The name of the corporation is Applied Films Corporation.

2. The original Articles of Incorporation were filed effective
July 1, 1994, and were amended and restated effective July 3, 1995, and were
further amended on November 18, 1996.

3. The following Amended and Restated Articles of Incorporation
supersede the original Articles of Incorporation, as amended and restated
effective July 3, 1995, and as further amended on November 18, 1996, and shall
be the Articles of Incorporation of the corporation.

4. These Amended and Restated Articles of Incorporation were
adopted by a vote of the directors and shareholders in accordance with the
provisions of the Colorado Business Corporation Act.

5. The number of votes cast for the amendment by each voting
group was sufficient for approval by such voting group.

ARTICLE I

The name of the corporation is Applied Films Corporation.

ARTICLE II.

The purpose for which the corporation is formed is to engage in any
lawful business or businesses. The corporation shall have and may exercise all
powers and rights granted or otherwise provided by the Colorado Business
Corporation Act as in effect from time to time and any successor law.

<PAGE> 2

ARTICLE III.

The total number of shares of all classes of stock which the
corporation shall have authority to issue is eleven million (11,000,000)
shares, of which ten million (10,000,000) shares shall be common stock without
par value and one million (1,000,000) shares shall be preferred stock, without
par value. The shares of preferred stock may be divided into one or more
series.

The authorized shares of common stock are all of one class with
unlimited voting rights, and each such share shall be equal to every other such
share.

The corporation's Board of Directors shall have the authority without
shareholder action, to determine the preferences, limitations and relative
rights of any preferred stock (whether in a series or as a class), including
without limitation the following: (i) the designation of any series of
preferred stock; (ii) unlimited, special, conditional, or limited voting
rights, or no right to vote; except that no condition, limitation, or
prohibition on voting shall eliminate any right to vote provided by the
Colorado Business Corporation Act; (iii) redemption rights; (iv) conversion
rights; (v) distribution or dividend rights, including the determination of
whether such rights are cumulative, noncumulative or partially cumulative; and
(vi) preference rights over any other class or series of shares with respect to
distributions, including dividends and distributions upon the dissolution of
the corporation.

ARTICLE IV.

The address of the registered office, which is the same as the mailing
address, is 6797 Winchester Circle, Boulder, Colorado 80301. The name of the
registered agent is Cecil Van Alsburg.

ARTICLE V.

The address of the corporation's principal office is 6797 Winchester
Circle, Boulder, Colorado 80301.

ARTICLE VI.

Cumulative voting shall not be permitted in the election of directors.

<PAGE> 3

ARTICLE VII.

A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for a breach of fiduciary
duty as a director, except for liability: (a) for any breach of the director's
duty of loyalty to the corporation or its shareholders; (b) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (c) resulting from a violation of section 7-108-403
of the Colorado Business Corporation Act; (d) for any transaction from which
the director derived an improper personal benefit; or (e) for any act or
omission occurring prior to the date of the approval of this Article. In the
event the Colorado Business Corporation Act is amended after the approval of
this Article to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
corporation shall be eliminated or limited to the fullest extent permitted by
the Colorado Business Corporation Act. Any repeal, modification or adoption of
any provision in these Articles of Incorporation inconsistent with this Article
shall not adversely affect any right or protection of a director of the
corporation existing at the time of such repeal, modification or adoption. Any
limitations on liability in effect prior to the date of these Amended and
Restated Articles shall remain in full force and effect.

ARTICLE VIII.

The corporation shall indemnify all officers and directors of the
corporation to the fullest extent permitted by the Colorado Business
Corporation Act, as amended from time to time, subject to any expansion (but
not limitation) of such indemnification as may be set forth in the Bylaws of
the corporation or any shareholders' or directors' resolution or by any
indemnification or similar agreement between the Company and any officer or
director, to the fullest extent permitted by the Colorado Business Corporation
Act.

ARTICLE IX.

The corporation shall not merge or consolidate with another
corporation (except a corporation of which all outstanding stock is
beneficially owned by this corporation "Subsidiary"), or sell, lease, exchange,
pledge or otherwise dispose of all or substantially all of the assets of the
entire corporation other than in the usual and regular course of its business,
or voluntarily dissolve and liquidate its assets without the affirmative vote
of not less than two-thirds (2/3) of the voting power of the then issued and
outstanding shares entitled to vote thereon, voting together as a single voting
group (unless as otherwise provided by the Colorado Business Corporation Act;
or unless as otherwise provided in any articles of amendment filed with the
Colorado Secretary of State providing for the issuance of preferred shares).

<PAGE> 4

Notwithstanding any other provision of these Articles of Incorporation
or the Bylaws of this corporation (and notwithstanding the fact that a lesser
percentage may be specified by law, these Articles of Incorporation or the
Bylaws of the corporation), the affirmative vote of the holders of two-thirds
(2/3) or more of shares the voting power of the shares entitled to vote
thereon, voting together as a single voting group, (unless as otherwise
required by the Colorado Business Corporation Act; or unless as otherwise
provided in any articles of amendment filed with the Colorado Secretary of
State providing for the issuance of preferred shares), shall be required to
amend or repeal, or adopt any provisions inconsistent with, this Article IX of
these Articles of Incorporation.

ARTICLE X.

The Board of Directors of this corporation shall not approve, adopt or
recommend any offer of any person or entity, other than the corporation, to
make a tender or exchange offer for any capital stock of the corporation, to
merge or consolidate the corporation with any other entity or to purchase or
otherwise acquire all or substantially all of the assets or business of the
corporation (i) known by the Board of Directors to be a possible violation of
any applicable laws; and (ii) unless and until the Board of Directors shall
have first evaluated the offer and determined that the offer is in the best
interests of the corporation and its shareholders. The Board of Directors may
seek and rely upon an opinion of legal counsel independent from the offeror as
to the legality of an offer and it may test the legality of an offer in any
state or federal court or before any state or federal administrative agency
which may have appropriate jurisdiction. In connection with its evaluation as
to the best interests of the corporation and its shareholders, the Board of
Directors may consider all factors which it deems relevant, including without
limitation: (i) the adequacy and fairness of the consideration to be received
by the corporation and/or its shareholders under the offer considering
historical trading prices of the corporation's stock, the price that might be
achieved in a negotiated sale of the corporation as a whole, premiums over
trading prices which have been proposed or offered with respect to the
securities of other companies in the past in connection with similar offers and
the future prospects for the corporation and its business; (ii) the potential
social and economic impact of the offer and its consummation on this
corporation, its employees and vendors; and (iii) the potential, social and
economic impact of the offer and its consummation on the communities in which
the corporation and any subsidiaries operate or are located.

Notwithstanding any other provision of these Articles of Incorporation
or the Bylaws of the corporation to the contrary (and notwithstanding the fact
that a lesser percentage may be specified by law, these Articles of
Incorporation or the Bylaws of the corporation), the affirmative vote of the
holders of two-thirds (2/3) or more of the voting power of the then issued and
outstanding shares entitled to vote for the election of directors, voting
together as a single voting group (unless or as otherwise required by the
Colorado Business

<PAGE> 5

Corporation Act; or unless as otherwise provided in any articles of amendment
filed with the Colorado Secretary of State providing for the issuance of
preferred shares), shall be required to amend, repeal, or adopt any provision
inconsistent with this Article X.

ARTICLE XI.

The business and affairs of the corporation shall be managed by or
under the direction of the Board of Directors. The Board shall consist of not
less than five (5) members nor more than nine (9) members. Directors shall be
elected annually at each annual shareholders meeting and shall hold office for
a term of three (3) years and until their successors are elected and qualified,
or until their earlier resignation or removal.

The Board of Directors shall be divided into three (3) classes, as
nearly equal in number as practicable, the term of office of those of the first
class to expire at the first annual meeting of shareholders after their
election, the term of office of those of the second class to expire at the
second annual meeting of shareholders after their election, and the term of
office of those of the third class to expire at the third annual meeting of
shareholders after their election. Upon expiration of the terms of office of
the directors as classified above, their successors shall be elected for the
term of three (3) years each, so that one-third of the number of directors of
the corporation shall be elected annually.

ARTICLE XII.

The shareholder vote required to approve Business Combinations
(hereinafter defined) shall be as set forth in this Article XII.

Section 1. Higher Vote for Business Combinations. In addition
to any affirmative vote required by law or these Articles of Incorporation, and
except as otherwise expressly provided in Section 3 of this Article XII:

A. any merger or consolidation of the corporation or any
Subsidiary (as hereinafter defined) with (i) any Interested Shareholder (as
hereinafter defined) or (ii) any other corporation (whether or not itself
an Interested Shareholder) which is, or after such merger or consolidation
would be, an Affiliate (as hereinafter defined) of an Interested
Shareholder; or

B. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Shareholder or any Affiliate of any Interested Shareholder of
any assets of the corporation or any Subsidiary having an aggregate Fair
Market Value of $5,000,000 or more; or

<PAGE> 6

C. the issuance or transfer by the corporation or any Subsidiary
(in one transaction or a series of transactions) of any securities of the
corporation or any Subsidiary to any Interested Shareholder or any
Affiliate of any Interested Shareholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate Fair Market
Value of $5,000,000 or more; or

D. the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by or on behalf of any Interested
Shareholder or any Affiliate of any Interested Shareholder; or

E. any reclassification of securities (including any reverse stock
split), or recapitalization of the corporation, or any merger or
consolidation of the corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Shareholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class
of equity or convertible securities of the corporation or any Subsidiary
which is directly or indirectly owned by any Interested Shareholder or any
Affiliate of any Interested Shareholder;

shall require the affirmative vote of the holders of at least eighty percent
(80%) of the voting power of the then outstanding shares of capital stock of
the corporation entitled to vote generally in the election of directors (the
"Voting Stock"), voting together as a single voting group (unless as otherwise
required by the Colorado Business Corporation Act; or unless as otherwise
provided in any articles of amendment filed with the Colorado Secretary of
State providing for the issuance of preferred shares), including the
affirmative vote of the holders of not less than fifty percent (50%) of the
outstanding Voting Stock not owned directly or indirectly by any Interested
Shareholder. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage may be specified, by
law, in any other Article of these Articles of Incorporation or in any
agreement with any national securities exchange or otherwise.

Section 2. Definition of "Business Combination". The term
"Business Combination" as used in this Article XII shall mean any transaction
which is referred to in any one or more of paragraphs A through E of Section 1.

Section 3. When Higher Vote Is Not Required. The provisions of
Section 1 of this Article XII shall not be applicable to any particular
Business Combination, and such Business Combination shall require only such
affirmative vote as is required by law and any other provision of these
Articles of Incorporation if in the case of a Business Combination that does
not involve any cash or other consideration being received by the shareholders
of

<PAGE> 7

the corporation, solely in their capacities as shareholders, the condition
specified in the following paragraph A is met, or if in the case of any other
Business Combination, the conditions specified in either of the following
paragraphs A or B are met:

A. Approval by Continuing Directors. The Business Combination
shall have been approved by a majority of the Continuing Directors (as
hereinafter defined).

B. Price and Procedure Requirements. All of the following
conditions shall have been met:

(i) The aggregate amount of the cash and the Fair Market
Value (as hereinafter defined) as of the date of the consummation of
the Business Combination (the "Consummation Date") of the
consideration other than cash to be received per share by holders of
Common Stock in such Business Combination shall be an amount at least
equal to the higher of the following (it being intended that the
requirements of this paragraph B(i) shall be required to be met with
respect to all shares of Common Stock outstanding, whether or not the
Interested Shareholder has previously acquired any shares of the
Common Stock):

(a) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Shareholder for any shares of Common Stock
acquired by it (1) within the two-year period immediately prior
to the first public announcement of the proposal of the Business
Combination (the "Announcement Date") or (2) in the transaction
in which it became an Interested Shareholder, whichever is
higher, plus interest compounded annually from the date on which
the Interested Shareholder became an Interested Shareholder
through the Consummation Date at the prime rate of interest of
Citibank, N.A. (or other major bank headquartered in New York
City selected by a majority of the Continuing Directors) from
time to time in effect in New York City, less the aggregate
amount of any cash dividends paid, and the Fair Market Value of
any dividends paid in other than cash, per share of Common Stock
from the date on which the Interested Shareholder became an
Interested Shareholder through the Consummation Date in an amount
up to but not exceeding the amount of such interest payable per
share of Common Stock; or

<PAGE> 8

(b) the Fair Market Value per share of Common Stock on the
Announcement Date.

(ii) The aggregate amount of the cash and the Fair Market
Value as of the Consummation Date of the consideration other than cash
to be received per share by holders of shares of any class of
outstanding Voting Stock, other than the Common Stock, in such
Business Combination shall be an amount at least equal to the highest
of the following (it being intended that the requirements of this
paragraph B(ii) shall be required to be met with respect to all shares
of every such other class of outstanding Voting Stock, whether or not
the Interested Shareholder has previously acquired any shares of a
particular class of Voting Stock):

(a) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Shareholder for any shares of such class of Voting
Stock acquired by it (1) within the two-year period immediately
prior to the Announcement Date or (2) in the transaction in which
it became an Interested Shareholder, whichever is higher, plus
interest compounded annually from the date on which the
Interested Shareholder became an Interested Shareholder through
the Consummation Date at the prime rate of interest of Citibank,
N.A. (or other major bank headquartered in New York City selected
by a majority of the Continuing Directors) from time to time in
effect in New York City, less the aggregate amount of any cash
dividends paid, and the Fair Market Value of any dividends paid
in other than cash, per share of such class of Voting Stock from
the date on which the Interested Shareholder became an Interested
Shareholder through the Consummation Date in an amount up to but
not exceeding the amount of such interest payable per share of
such class of Voting Stock;

(b) the Fair Market Value per share of such class of Voting
Stock on the Announcement Date; or

(c) the highest preferential amount per share, if any, to
which the holders of shares of such class of Voting Stock are
entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation.

(iii) The consideration to be received by holders of a
particular class of outstanding Voting Stock (including Common Stock)
shall be in cash or in

<PAGE> 9

the same form as the Interested Shareholder has previously paid
for shares of such class of Voting Stock. If the Interested
Shareholder has paid for shares of any class of Voting Stock with
varying forms of consideration, the form of consideration for such
class of Voting Stock shall be either cash or the form used to acquire
the largest number of shares of such class of Voting Stock previously
acquired by it.

(iv) After such Interested Shareholder has become an
Interested Shareholder and prior to the consummation of such Business
Combination: (a) except as approved by a majority of the Continuing
Directors, there shall have been no failure to declare and pay at the
regular date therefor any full quarterly dividends (whether or not
cumulative) on any outstanding Preferred Stock; (b) there shall have
been (1) no reduction in the annual rate of dividends paid on the
Common Stock (except as necessary to reflect any subdivision of the
Common Stock), except as approved by a majority of the Continuing
Directors, and (2) an increase in such annual rate of dividends as
necessary to reflect any reclassification (including any reverse stock
split), recapitalization, reorganization or any similar transaction
which has the effect of reducing the number of outstanding shares of
the Common Stock, unless the failure so to increase such annual rate
is approved by a majority of the Continuing Directors; and (c) such
Interested Shareholder shall have not become the beneficial owner of
any additional shares of Voting Stock except as part of the
transaction which results in such Interested Shareholder becoming an
Interested Shareholder.

(v) After such Interested Shareholder has become an
Interested Shareholder, such Interested Shareholder shall not have
received the benefit, directly or indirectly (except proportionately
as a shareholder), of any loans, advances, guarantees, pledges or
other financial assistance or any tax credits or other tax advantages
provided by the corporation.

(vi) A proxy or information statement describing the
proposed Business Combination and complying with the requirements of
the Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provision replacing such Act, rules or
regulations) shall be mailed to all stockholders of the corporation at
least 30 days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be
mailed pursuant to such Act or subsequent provisions).

Section 4. Certain Definitions. For the purposes of this Article XII:

<PAGE> 10

A. A "person" shall mean any individual, firm, corporation or
other entity.

B. "Interested Shareholder" shall mean any person (other than the
corporation, any Subsidiary or any existing shareholder at the time these
Amended and Restated Articles of Incorporation become effective who would
otherwise meet the definition herein of Interested Shareholder as of such
date) who or which:

(i) is the beneficial owner, directly or indirectly, of
more than 10% of the voting power of the outstanding Voting Stock; or

(ii) is an Affiliate of the corporation and at any time
within the two- year period immediately prior to the date in question
was the beneficial owner, directly or indirectly, of 10% or more of
the voting power of the then outstanding Voting Stock;

(iii) is an assignee of or has otherwise succeeded to any
shares of Voting Stock which were at any time within the two-year
period immediately prior to the date in question beneficially owned by
any Interested Shareholder, if such assignment or succession shall
have occurred in the course of a transaction or series of transactions
not involving a public offering within the meaning of the Securities
Act of 1933.

C. A person shall be a "beneficial owner" of any Voting Stock:

(i) which such person or any of its Affiliates or
Associates (as hereinafter defined) beneficially owns, directly or
indirectly; or

(ii) which such person of any of its Affiliates or
Associates has (a) the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant
to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise,
or (b) the right to vote pursuant to any agreement, arrangement or
understanding; or

(iii) which are beneficially owned, directly or indirectly,
by any other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock.

D. For the purposes of determining whether a person is an
Interested Shareholder pursuant to paragraph B of this Section 4, the
number of shares of Voting

<PAGE> 11

Stock deemed to be outstanding shall include shares deemed owned
through application of paragraph C of this Section 4 but shall not include
any other shares of Voting Stock which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.

E. "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934.

F. "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the
corporation; provided, however, that for the purposes of the definition of
Interested Shareholder set forth in paragraph B of this Section 4, the term
"Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the
corporation.

G. "Continuing Director" means any member of the Board of
Directors of the corporation (the "Board") who is unaffiliated with the
Interested Shareholder and was a member of the Board prior to the time that
the Interested Shareholder became an Interested Shareholder, and any
successor of a Continuing Director who is unaffiliated with the Interested
Shareholder and is recommended to succeed a Continuing Director by a
majority of Continuing Directors then on the Board.

H. "Fair Market Value" means: (i) in the case of stock, the
highest closing sale price during the 30-day period immediately preceding
the date in question of a share of such stock on the Composite Tape for New
York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the
Composite Tape, on the New York Stock Exchange, or, if such stock is not
listed on such Exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the
30-day period preceding the date in question on the National Association of
Securities Dealers, Inc., Automated Quotations System or any system then in
use, or if no such quotations are available, the fair market value on the
date in question of a share of such stock as determined by a majority of
the Continuing Directors in good faith; and (ii) in the case of property
other than cash or stock, the fair market value of such property on the
date in question as determined by a majority of the Continuing Directors in
good faith.

<PAGE> 12

I. In the event of any Business Combination in which the
corporation survives, the phrase "consideration other than cash to be
received" as used in paragraphs B(i) and (ii) of Section 3 of this Article
XII shall include the shares of Common Stock and/or the shares of any other
class of outstanding Voting Stock retained by the holders of such shares.

Section 5. Powers of Continuing Directors. A majority of the
Continuing Directors of the corporation shall have the power and duty to
determine, on the basis of information known to them after reasonable inquiry,
all facts necessary to determine compliance with this Article XII, including
without limitations (A) whether a person is an Interested Shareholder, (B) the
number of shares of Voting Stock beneficially owned by any person, (C) whether
a person is an Affiliate or Associate of another, (D) whether the requirements
of paragraph B of Section 3 have been met with respect to any Business
Combination, and (E) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $5,000,000 or more; and the
good faith determination of a majority of the Continuing Directors on such
matters shall be conclusive and binding for all the purposes of this Article
XII.

Section 6. No Effect on Fiduciary Obligations of Interested
Stockholders. Nothing contained in this Article XII shall be construed to
relieve the Board of Directors or any Interested Shareholder from any fiduciary
obligation imposed by law.

Section 7. Amendment, Repeal, etc. Notwithstanding any other
provisions of these Articles of Incorporation or the Bylaws of the corporation
(and notwithstanding the fact that a lesser percentage may be specified by law,
these Articles of Incorporation or the Bylaws of the corporation), the
affirmative vote of the holders of eighty percent (80%) or more of the voting
power of the shares of the then outstanding Voting Stock, voting together as a
single voting group (unless as otherwise required by the Colorado Business
Corporation Act; or unless as otherwise provided in any articles of amendment
filed with the Colorado Secretary of State providing for the issuance of
preferred shares), including the affirmative vote of the holders of not less
than fifty percent (50%) of the Voting Stock not owned directly or indirectly
by any Interested Shareholder, shall be required to amend or repeal, or adopt
any provisions inconsistent with, this Article XII of these Articles of
Incorporation; provided, however, that the preceding provisions of this Section
7 shall not be applicable to any amendment to this Article XII of these
Articles of Incorporation, and such amendment shall require only such
affirmative vote as is required by law and any other provisions of these
Articles of Incorporation, if such amendment shall have been approved by a
majority of the Continuing Directors.

Dated: _________________________________, 1997.

<PAGE> 13

APPLIED FILMS CORPORATION

By
---------------------------------------
Cecil Van Alsburg
Its: President & Registered Agent

<PAGE> 1
EXHIBIT 3.2

AMENDED AND RESTATED BYLAWS
OF
APPLIED FILMS CORPORATION

(A COLORADO CORPORATION)

ARTICLE I.
OFFICES

1. BUSINESS OFFICES. The Corporation may have one or more
offices at such place or places within or without the state of Colorado as the
Board of Directors may from time to time determine or as the business of the
Corporation may require.

2. PRINCIPAL OFFICE. The initial principal office of the
Corporation shall be as set forth in the Articles of Incorporation. The Board
of Directors, from time to time, may change the principal office of the
Corporation.

3. REGISTERED OFFICE. The registered office of the Corporation
shall be as set forth in the Articles of Incorporation, unless changed as
provided by the provisions of the Colorado Business Corporation Act, as it may
be amended from time to time, or any successor law (the "Act").

ARTICLE II.
SHAREHOLDERS' MEETINGS

1. ANNUAL MEETINGS. The annual meetings of shareholders for the
election of directors to succeed those directors whose terms expire and for the
transaction of such other business as may come before the meeting shall be held
each year at such date, time and place, either within or without the state of
Colorado, as may be designated by resolution of the Board of Directors from
time to time; provided, however, that an annual meeting of shareholders shall
be held each year on a date that is within the earlier of six months after the
close of the last fiscal year or fifteen months after the last annual meeting.
If the day so fixed for such annual meeting shall be a legal holiday at the
place of the meeting, then such meeting shall be held on the next succeeding
business day at the same hour.

2. SPECIAL MEETINGS. Special meetings of shareholders for any
purpose or purposes, unless otherwise prescribed by statute or by the Articles
of Incorporation, may be called at any time by the President or by the Board of
Directors and shall be called by the President or the Secretary upon one or
more written demands (which shall state the purpose or purposes therefor)
signed and dated by the holders of shares representing not less than ten
percent of all votes entitled to be cast on any issue proposed to be considered
at the meeting.
<PAGE> 2

The record date for determining the shareholders entitled to demand a special
meeting is the date of the earliest of any of the demands pursuant to which the
meeting is called, or the date that is 60 days before the date on which the
first of such demands is received, whichever is later. Business transacted at
any special meeting of shareholders shall be limited to the purpose or purposes
stated in the notice of such meeting.

3. PLACE OF SPECIAL MEETINGS. Special meetings of shareholders
shall be held at such place or places, within or without the state of Colorado,
as may be determined by the Board of Directors and designated in the notice of
the meeting, or, if no place is so determined and designated in the notice,
special meetings of shareholders shall be held at the principal office of the
Corporation.

4. NOTICE OF MEETINGS. Not less than 10 nor more than 60 days
prior to each annual or special meeting of shareholders, written notice of the
date, time and place of each annual and special shareholders' meeting shall be
given to each shareholder entitled to vote at such meeting; provided, however,
that if the authorized shares of the Corporation are proposed to be increased,
at least 30 days' notice in like manner shall be given; and provided, further,
that if the Act prescribes notice requirements for particular circumstances (as
in the case of the sale, lease or exchange of the Corporation's assets other
than in the usual and regular course of business, or the merger or dissolution
of the Corporation), the provisions of the Act shall govern. Notice may be
given in person; by telephone, telegraph, teletype, electronically transmitted
facsimile, or other form of wire or wireless communication; and, if so given,
shall be effective when received by the shareholder. Notice may also be given
by deposit in the United States mail, postage prepaid, if addressed to the
shareholder at the address of such shareholder shown in the Corporation's
current record of shareholders, and, if so given, shall be effective when
mailed. If three successive notices mailed to any shareholder in accordance
with the provisions of this Section 4 are returned as undeliverable, no further
notices to such shareholder shall be necessary until another address for such
shareholder is made known to the Corporation. The notice of a special meeting
shall, in addition, state the meeting's purposes.

5. SHAREHOLDERS' LIST. A complete record of the shareholders
entitled to notice of any shareholders' meeting (or an adjourned meeting
described in Section 9 of this Article II) shall be prepared by the Secretary
of the Corporation. Such shareholders' list shall be arranged by voting groups
and, within each voting group by class or series of shares, shall be
alphabetical within each class or series and shall show the address of, and the
number of shares of each such class and series that are held by, each
shareholder. (When used in these Bylaws, the term "voting group" or "voting
groups" shall have the meaning assigned by the Act.) The shareholders' list
shall be available for inspection by any shareholder beginning on the earlier
of ten days before the meeting for which the list was prepared or two business

2
<PAGE> 3

days after notice is given and continuing through the meeting and any
adjournment thereof at the Corporation's principal office or at a place
identified in the notice of the meeting in the city where the meeting will be
held. A shareholder or his agent or attorney is entitled on written demand to
inspect and, subject to the requirements of the Act, to copy the list during
regular business hours and during the period it is available for inspection.

6. ORGANIZATION. The Chairman of the Board, or, in the Chairman
of the Board's absence, the Chief Executive Officer shall call meetings of
shareholders to order and act as chairperson of such meetings. In the absence
of said officers, any shareholder entitled to vote at the meeting, or any proxy
of any such shareholder, may call the meeting to order and a chairperson shall
be elected by a majority of the votes present and entitled to be cast at the
meeting. The Secretary or any Assistant Secretary of the Corporation or any
person appointed by the chairperson may act as secretary of such meetings.

7. AGENDA AND PROCEDURE. The Board of Directors shall have the
responsibility of establishing an agenda for each meeting of shareholders,
subject to the rights of shareholders to raise matters, if any, which may
properly be brought before the meeting although not included within the agenda.
The chairperson shall be charged with the orderly conduct of all meetings of
shareholders.

8. QUORUM. Shares entitled to vote as a separate voting group
may take action on a matter at a meeting only if a quorum of those shares
exists with respect to that matter. Unless otherwise provided in the Act or in
the Corporation's Articles of Incorporation, a majority of the votes entitled
to be cast on a matter by a voting group constitutes a quorum of that voting
group for action on that matter. In the absence of a quorum at any
shareholders' meeting, a majority of the votes present in person or represented
by proxy and entitled to vote on any matter at the meeting may adjourn the
meeting from time to time for a period not to exceed 120 days from the original
date of the meeting without further notice (except as provided in Section 9 of
this Article II) until a quorum shall be present or represented.

9. ADJOURNMENT. When a meeting is for any reason adjourned to
another date, time or place, notice need not be given of the adjourned meeting
if the date, time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, any business may be transacted
which might have been transacted at the original meeting. If the adjournment
is for more than 120 days from the date of the original meeting, or if, after
the adjournment, a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each shareholder as of the new
record date.

10. VOTING.

3
<PAGE> 4

(a) Except as provided by law or in the Articles of
Incorporation, at every meeting of shareholders, or with respect to
corporate action which may be taken without a meeting, each
outstanding share having voting power is entitled to one vote, and
each fractional share, if any is outstanding, is entitled to a
corresponding fractional vote, on each matter voted on at a
shareholders' meeting.

(b) A shareholder may vote the shareholder's shares in
person or by proxy. A shareholder may appoint a proxy by signing an
appointment form, either personally or by the shareholder's
attorney-in-fact. A shareholder may appoint a proxy by transmitting
or authorizing the transmission of a telegram, teletype or other
electronic transmission providing a written statement of the
appointment to the proxy, to a proxy solicitor, proxy support service
organization, or other person duly authorized by the proxy to receive
appointments as agent for the proxy, or to the Corporation; except
that the transmitted appointment shall set forth or be transmitted
with written evidence from which it can be determined that the
shareholder transmitted or authorized the transmission of the
appointment. An appointment of a proxy is not effective against the
Corporation until the appointment is received by the Corporation. The
appointment is effective for eleven months unless a different period
is expressly provided in the appointment form. An appointment of a
proxy shall be revocable by the shareholder except as may be permitted
or provided by law.

(c) When a quorum is present at any meeting of
shareholders, action on a matter, other than the election of
directors, by a voting group is approved if the votes cast within the
voting group favoring the action exceed the votes cast within the
voting group opposing the action, unless the matter is on upon which a
different vote is required by express provision of a statute, or the
Articles of Incorporation, or these Bylaws, in which case such express
provision shall govern and control the decision on such matter.

11. INSPECTORS. The chairperson of the meeting may at any time
appoint two or more inspectors to serve at a meeting of the shareholders. Such
inspectors shall decide upon the qualifications of voters, including the
validity or proxies, accept and count the votes for and against the matters
presented, report the results of such votes, and subscribe and deliver to the
secretary of the meeting a certificate stating the number of shares of stock
within each voting group that is issued and outstanding and entitled to vote
thereon and the number of shares within each voting group that voted for and
against the matters presented. The voting inspectors need not be shareholders
of the Corporation, and any director or officer of the Corporation may be an
inspector on any matter other than a vote for or against such director's

4
<PAGE> 5

or officer's election to any position with the Corporation or on any other
matter in which such officer or director may be directly interested.

12. NO MEETINGS BY TELECOMMUNICATION. Neither the participation
of shareholders in an annual or special shareholders' meeting by means of
telecommunication nor the conducting of meetings by means of telecommunication,
as provided in Section 7-107-108 of the Act, shall be permitted.

ARTICLE III.
BOARD OF DIRECTORS

1. AUTHORITY, ELECTION AND TENURE. Subject to any provision in
the Articles of Incorporation, all corporate power shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall
be managed by, a Board of Directors. The Board of Directors shall be elected
at each annual meeting of shareholders. In an election of directors, that
number of candidates equaling the number of directors to be elected having the
highest number of votes cast in favor of their election shall be elected to the
Board of Directors. The directors shall serve for staggered terms as provided
in the Corporation's Articles of Incorporation; provided, however, that a
director shall continue to serve, despite the expiration of his or her term,
until such director's successor shall be elected and shall qualify, or until
such director's earlier death, resignation or removal.

2. NUMBER AND QUALIFICATION. The number of directors shall be at
least five (5) and not more than nine (9). Within that range, the number of
directors shall be as stated by resolution of the Board of Directors from time
to time, but no decrease in the number of directors shall have the effect of
shortening the term of any incumbent director. Directors must be natural
persons at least eighteen years of age but need not be shareholders or
residents of the state of Colorado.

3. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such dates, times and places as may be determined by the Board
of Directors. Regular meetings of the Board of Directors may be held without
notice of the date, time, place or purpose of the meeting.

4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chief Executive Officer at any time and shall be called by
the President or the Secretary on the written request of any two directors.

5. PLACE OF MEETINGS. Any meeting of the Board of Directors may
be held at such place or places either within or without the state of Colorado
as shall from time to time be

5
<PAGE> 6

determined by the Board of Directors and as shall be designated in the
resolution of the Board of Directors fixing the date, time and place of the
regular meetings of the Board of Directors or in the notice of special meeting.

6. NOTICE OF MEETINGS. Notice of the date, time and place of
each special meeting of directors shall be given to each director at least two
days prior to such meeting. The notice of a special meeting of the Board of
Directors need not state the purposes of the meeting. Notice to each director
of any special meeting may be given in person; by telephone, telegraph,
teletype, electronically transmitted facsimile, or other form of wire or
wireless communication; or by mail or private carrier. Oral notice to a
director of any special meeting is effective when communicated. Written notice
to a director of any special meeting, including without limitation notice sent
by electronic mail, is effective at the earliest of: (a) the date received;
(b) five days after it is deposited in the United States mail, properly
addressed to the last address for the director shown on the records of the
Corporation, first class postage prepaid; (c) the date shown on the return
receipt if mailed by registered or certified mail, return receipt requested,
postage prepaid, in the United States mail and if the return receipt is signed
by or on behalf of the director to whom the notice is addressed.

7. QUORUM AND VOTING. A majority of the number of directors
fixed by or in accordance with Section 2 of this Article III shall constitute a
quorum at all meetings of the Board of Directors. The vote of a majority of
the directors present at a meeting at which a quorum is present shall be the
act of the Board of Directors, except as otherwise required by the Act.

8. ORGANIZATION, AGENDA AND PROCEDURE. The Chairman of the Board
or, in the absence of the Chairman of the Board, the Chief Executive Officer
shall act as chairperson of the meetings of the Board of Directors. The
Secretary, any Assistant Secretary, or any other person appointed by the
chairperson shall act as secretary of each meeting of the Board of Directors.
The agenda of any procedure for such meetings shall be as determined by the
Board of Directors.

9. RESIGNATION. Any director of the Corporation may resign at
any time by giving written resignation notice to the Corporation or the
Secretary of the Corporation at the Corporation's principal office. Such
resignation shall take effect at the date of receipt of such notice or at any
later time specified therein and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective,
unless it so provides. A director who resigns may deliver to the Secretary of
State for filing a statement to that effect.

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10. REMOVAL. Any director may be removed, either with or without
cause, at any time, at a special meeting of the shareholders called and held
for such purpose if the number of votes cast in favor of removal exceeds the
number of votes cast against removal; provided, however, that if a director is
elected by a voting group of shareholders, only the shareholders of that voting
group may participate in the vote to remove that director. A vacancy in the
Board of Directors caused by any such removal may be filled by the
Corporation's shareholders at such meeting or, if the shareholders at such
meeting shall fail to fill such vacancy, by the Board of Directors as provided
in Section 11 of this Article III.

11. VACANCIES. If a vacancy occurs on the Board of Directors,
including a vacancy resulting from an increase in the number of directors: (a)
the shareholders may fill the vacancy at the next annual meeting or at a
special meeting called for that purpose; or (b) the Board of Directors may fill
the vacancy; or (c) if the directors remaining in office constitute fewer than
a quorum of the Board of Directors, they may fill the vacancy by the
affirmative vote of a majority of all the directors remaining in office. The
term of a director elected to fill a vacancy pursuant to subparagraph (b) or
(c) of the foregoing sentence expires at the next annual shareholders' meeting.
The term of a director elected to fill a vacancy pursuant to subparagraph (b)
or (c) of this Section 11 shall be the unexpired term of such director's
predecessor in office; except that, if the director's predecessor had been
elected to fill a vacancy pursuant to Subparagraph (b) or (c) of this Section
11, the term of a director elected pursuant to Section (a) of this Section 11
shall be the unexpired term of the last predecessor elected by the
shareholders. If the vacant directorship was held by a director elected by a
voting group of shareholders and one or more of the remaining directors were
elected by the same voting group, only such directors are entitled to vote to
fill the vacancy if it is filled by directors, and they may do so by the
affirmative vote of a majority of such directors remaining in office; and only
the holders of shares of that voting group are entitled to vote to fill such
vacancy if it is filled by the shareholders.

12. EXECUTIVE AND OTHER COMMITTEES. Except as otherwise required
by the Act, the Board of Directors, by resolution adopted by the greater of a
majority of the number of directors fixed by or in accordance with Section 2 of
this Article III or the number of directors required to take action pursuant to
Section 7 of this Article III, may designate from among its members an
executive committee and one or more other committees each of which, to the
extent provided in the resolution and except as otherwise prescribed by the
Act, shall have and may exercise all of the authority of the Board of Directors
in the management of the Corporation, except that no committee shall: (a)
authorize distributions; (b) approve or propose to shareholders action that the
Act requires to be approved by shareholders; (c) fill vacancies on the Board of
Directors or on any of its committees; (d) amend the Articles of Incorporation;
(e) adopt, amend, or repeal these Bylaws; (f) approve a plan of merger not
requiring shareholder approval; (g) authorize or approve reacquisition of
shares, except

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according to a formula or method prescribed by the Board of Directors; or (h)
authorize or approve the issuance or sale of shares, or a contract for the sale
of shares, or determine the designation and relative rights, preferences, and
limitations of a class or series of shares, except that with respect to this
clause (h) the Board of Directors may authorize a committee to do so within
limits specifically prescribed by the Board of Directors. The provision of
these Bylaws governing meetings, action without meeting, notice, waiver of
notice, and quorum and voting requirements of the Board of Directors shall
apply to committees and the members thereof.

13. COMPENSATION OF DIRECTORS. Each director may be paid such
compensation as fixed from time to time by resolution of the Board of
Directors, together with reimbursement for the reasonable and necessary
expenses incurred by such director in connection with the performance of such
director's duties. Nothing herein contained shall be construed to preclude any
director from serving the Corporation in any other capacity or any of its
subsidiaries in any other capacity and receiving proper compensation therefor.

14. MEETING BY TELECOMMUNICATION. One or more members of the
Board of Directors or any committee designated by the Board of Directors may
hold or participate in a meeting of the Board of Directors or such committee
through the use of any means of communication by which all persons
participating can hear each other at the same time.

15. NOTIFICATION OF NOMINATIONS. Nominations for the election of
directors may be made by the Board of Directors or by a shareholder entitled to
vote in the election of directors generally. However, any shareholder entitled
to vote in the election of directors generally may nominate one or more persons
for election as directors at a meeting only if written notice of such
shareholder's intent to make such nomination or nominations has been given,
either by personal delivery or by United States mail, postage prepaid, to the
Secretary not later than (i) with respect to an election to be held at an
annual meeting of shareholders, 30 days in advance of such meeting, and (ii)
with respect to an election to be held at a special meeting of shareholders for
the election of directors, the close of business on the seventh day following
the date on which notice of such meeting is first given to shareholders. Each
such notice shall set forth: (a) the name and address of the shareholder who
intends to make the nomination and of the person or persons to be nominated;
(b) a representation that the shareholder is a holder of record of stock of the
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(c) a description of all arrangements or understandings between the shareholder
and each nominee and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be made by the
shareholder; (d) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the

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Securities and Exchange Commission, had the nominee been nominated, or intended
to be nominated, by the Board of Directors; and (e) the consent of each nominee
to serve as a director of the Company if so elected. The chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.

ARTICLE IV.

WAIVER OF NOTICE BY SHAREHOLDERS AND DIRECTORS AND ACTION
OF SHAREHOLDERS AND DIRECTORS BY CONSENT

1. WAIVER OF NOTICE. A shareholder may waive any notice required
by the Act or by the Articles of Incorporation or these Bylaws, and a director
may waive any notice of a directors' meeting, whether before or after the date
or time stated in the notice as the date or time when any action will occur or
has occurred. The waiver shall be in writing, be signed by the shareholder or
director entitled to the notice, and be delivered to the Corporation for
inclusion in the minutes or filing with the corporate records, but such
delivery and filing shall not be conditions of the effectiveness of the waiver.
Attendance of a shareholder at a meeting waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting
because of lack of notice or defective notice, and waives objection to
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice unless the shareholder
objects to considering the matter when it is presented. A director's
attendance at or participation in a meeting waives any required notice to him
or her of the meeting unless the director, at the beginning of the meeting or
promptly upon his or her later arrival, objects to holding the meeting or
transacting business at the meeting because of lack of notice or defective
notice and does not thereafter vote for or assent to action taken at the
meeting, or if special notice was required of a particular purpose pursuant to
the Act, the director objects to transacting business with respect to the
purpose for which such special notice was required and does not thereafter vote
for or assent to action taken at the meeting, or if special notice was required
of a particular purpose pursuant to the Act, the director objects to
transacting business with respect to the purpose for which such special notice
was required and does not thereafter vote for or assent to action taken at the
meeting with respect to such purpose.

2. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken at a meeting of the shareholders, directors or members of an executive
or other committee, as applicable, may be taken without a meeting if all
shareholders entitled to vote with respect to such action, or all directors or
all members of an executive or other committee, as the case may be, give
written consent to such action in writing. The record date for determining

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<PAGE> 10

shareholders entitled to take action without a meeting is the date a writing
upon which the action is taken, pursuant to this Section 2 of Article IV, is
first received by the Corporation. Any shareholder who has signed a writing
describing and consenting to action taken pursuant to this Section 2 of this
Article IV may revoke such consent by a writing signed by such shareholder
describing the action and stating that the shareholder's prior consent thereto
is revoked, if such writing is received by the Corporation before the
effectiveness of the action. Action taken without a meeting shall be
effective: in the case of an action of shareholders, as of the date the last
writing necessary to effect the action is received by the Corporation unless
all of the writings necessary to effect the action specify another date, which
may be before or after the date the writings are received by the Corporation;
and in the case of director's action, action is taken when the last director
signs a writing describing the action taken unless before such time the
Secretary has received a written revocation of the consent of any other
director, and any action so taken shall be effective at the time taken unless
the directors specify a different effective date.

ARTICLE V.
OFFICERS

1. ELECTION AND TENURE. The officers of the Corporation shall
consist of a Chairman of the Board, a Vice Chairman, a Chief Executive Officer,
a President, a Secretary, and a Treasurer, each of whom shall be appointed
annually by the Board of Directors. The Board of Directors may also designate
and appoint such other officers and assistant officers as may be deemed
necessary. The Board of Directors may delegate to any such officer the power
to appoint or remove subordinate officers, agents or employees. Any two or
more offices may be held by the same person. Each officer so appointed shall
continue in office until a successor shall be appointed and shall qualify, or
until the officer's earlier death, resignation or removal. Each officer shall
be a natural person who is eighteen years of age or older.

2. RESIGNATION, REMOVAL AND VACANCIES. Any officer may resign at
any time by giving written notice of resignation to the Board of Directors or
the Chief Executive Officer. Such resignation shall take effect when the
notice is received by the Corporation unless the notice specifies a later
effective date, and acceptance of the resignation shall not be necessary to
render such resignation effective. Any officer may at any time be removed by
the Board of Directors. An officer appointed to fill a vacancy shall be
appointed for the unexpired term of such officer's predecessor in office and
shall continue in office until a successor shall be elected or appointed and
shall qualify, or until such officer's earlier death, resignation or removal.
The appointment of an officer shall not itself create contract rights in favor
of the officer, and the removal of an officer does not affect the officer's
contract

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rights, if any, with the Corporation and the resignation of an officer does not
affect the Corporation's contract rights, if any, with the officer.

3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at meetings of the Board of Directors and of the shareholders at which
he or she is present, and shall give counsel and advice to the Board of
Directors and the officers of the Corporation on all subjects concerning the
welfare of the Corporation and the conduct of its business. The Chairman of
the Board of Directors shall perform such other duties as the Board may from
time to time determine.

4. VICE CHAIRMAN. If the Chairman dies or is unable to perform
the duties of the Chairman for any other reason, the Vice Chairman, if any,
shall preside at all meetings of the shareholders and at all meetings of the
Board of Directors, and may call special meetings of the shareholders and
regular and special meetings of the Board of Directors. The Vice Chairman, if
any, shall not succeed to any of the other rights, powers or duties of the
Chairman. He or she shall perform such other duties as from time to time may
be assigned to him or her by the Board of Directors.

5. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
have general supervision, direction and control of the business of the
Corporation and shall have the general powers and duties of management usually
vested in or incident to the office of the Chief Executive Officer of a
corporation. The Chief Executive Officer shall see that all orders and
resolutions of the Board of Directors are carried into effect. In the absence
of the Chairman of the Board, or if authorized by the Chairman of the Board,
the Chief Executive Officer shall preside at meetings of the shareholders. He
or she shall be a member of the executive committee, if such a committee is
designated by the Board of Directors. Except as the Board of Directors shall
authorize the execution thereof in some other manner, he or she shall executive
bonds, mortgages and other contracts on behalf of the Corporation and shall
cause the seal to be affixed to any instrument requiring it. If the Chief
Executive Officer dies or becomes unable to perform the duties of the Chief
Executive Officer, the Board of Directors shall elect a successor to be Chief
Executive Officer of the corporation.

6. PRESIDENT. The President shall perform all duties as may from
time to time be assigned by the Board of Directors or the Chief Executive
Officer. In the absence of the Chief Executive Officer or in the event of the
inability or refusal of the Chief Executive Officer to act, the President shall
perform the duties of the Chief Executive Officer and when so performing shall
have all powers of and be subject to all the restrictions upon the Chief
Executive Officer.

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7. VICE PRESIDENTS. The Vice Presidents, if any, shall perform
such duties and possess such powers as from time to time may be assigned to
them by the Board of Directors or the Chief Executive Officer.

8. SECRETARY. The Secretary shall perform such duties and shall
have such powers as may from time to time be assigned by the Board of Directors
or the Chief Executive Officer. In addition, the Secretary shall perform such
duties and have such powers as are incident to the office of Secretary
including, without limitation, the duty and power to give notice of all
meetings of shareholders and the Board of Directors, the preparation and
maintenance of minutes of the directors' and shareholders' meetings and other
records and information required to be kept by the Corporation under Article XI
and for authenticating records of the Corporation, and to be custodian of the
corporate seal and to affix and attest to the same on documents, the execution
of which on behalf of the Corporation is authorized by these Bylaws or by the
action of the Board of Directors.

9. TREASURER. The Treasurer shall perform such duties and shall
have such powers as may from time to time be assigned by the Board of Directors
or the Chief Executive Officer. In addition, the Treasurer shall perform such
duties and have such powers as are incident to the office of Treasurer
including, without limitation, the duty and power to keep and be responsible
for all funds and securities of the Corporation, to deposit funds of the
Corporation in depositories selected in accordance with these Bylaws, to
disburse such funds as ordered by the Board of Directors, making proper
accounts thereof, and to render as required by the Board of Directors
statements of all these transactions taken as Treasurer and of the financial
condition of the Corporation.

10. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Assistant
Secretaries and Assistant Treasurers, if any, shall perform such duties as
shall be assigned to them by the Secretary or the Treasurer, respectively, or
by the Chief Executive Officer or the Board of Directors. In the absence,
inability or refusal to act of the Secretary or the Treasurer, the Assistant
Secretaries or Assistant Treasurers, respectively, in the order designated by
the Board of Directors, or in the absence of any designation, then in the order
of their election or appointment, shall perform the duties and exercise the
powers of the Secretary or Treasurer, as the case may be.

11. BOND OF OFFICERS. The Board of Directors may require any
officer to give the Corporation a bond in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors for such terms and
conditions as the Board of Directors may specify, including without limitation
for the faithful performance of such officer's duties and for the restoration
to the Corporation of any property belonging to the Corporation in such
officer's possession or under the control of such officer.

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12. COMPENSATION. Officers of the Corporation shall be entitled
to such salaries, emoluments, compensation or reimbursement as shall be fixed
or authorized from time to time by the Board of Directors.

ARTICLE VI.
INDEMNIFICATION

1. INDEMNIFICATION. To the extent permitted or required by the
Act and any other applicable law, if any director or officer of the Corporation
is made a party to or is involved in any proceeding because such person is or
was a director or officer of the Corporation, the Corporation shall (a)
indemnify such person from and against any liability, including but not limited
to expenses of investigation and preparation, expenses in connection with
appearance as a witness, and fees and disbursements of counsel, accountants or
other experts, incurred by such person in such proceeding, and (b) advance to
such person expenses incurred in such proceeding. The Corporation may in its
discretion, but is not obligated in any way to, indemnify and advance expenses
to an employee or agent of the Corporation to the same extent as to a director
or officer, and the Corporation may indemnify an employee, fiduciary, or agent
of the Corporation to a greater extent than expressly permitted herein for
officers and directors if not inconsistent with public policy.

2. PROVISIONS NOT EXCLUSIVE. The foregoing provisions for
indemnification and advancement of expenses are not exclusive, and the
Corporation may at its discretion provide for indemnification or advancement of
expenses in a resolution of its shareholders or directors, in a contract or in
its Articles of Incorporation.

3. EFFECT OF MODIFICATION OF ACT. Any repeal or modification of
the foregoing provisions of this Article for indemnification or advancement of
expenses shall not affect adversely any right or protection stated in such
provisions with respect to any act or omission occurring prior to the time of
such repeal or modification. If any provision of this Article or any part
thereof shall be held to be prohibited by or invalid under applicable law, such
provision or part thereof shall be deemed amended to accomplish the objectives
of the provision or part thereof as originally written to the fullest extent
permitted by law, and all other provisions or parts shall remain in full force
and effect.

4. DEFINITIONS. As used in this Article, the following terms
have the following meanings:

(a) ACT. When used with reference to an act or omission
occurring prior to the effectiveness of any amendment to the Act which
occurs after the effectiveness of the adoption of this Article, the
term "Act" shall include such

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amendment only to the extent that the amendment permits a corporation
to provide broader indemnification rights than the Act permitted prior
to the amendment.

(b) CORPORATION. The term "Corporation" includes any
domestic or foreign entity that is a predecessor of the Corporation by
reason of a merger or other transaction in which the predecessor's
existence ceased upon consummation of the transaction.

(c) DIRECTOR OR OFFICER. A "director" or "officer" is an
individual who is or was a director or officer of the Corporation or
an individual who, while a director or officer of the Corporation, is
or was serving at the Corporation's request as director, officer,
partner, trustee, employee, fiduciary, or agent of another domestic or
foreign corporation or other person or entity or of an employee
benefit plan. A director or officer is considered to be serving an
employee benefit plan at the Corporation's request if his or her
duties to the Corporation also impose duties on, or otherwise involve
services by, the director or officer to the plan or to participants in
or beneficiaries of the plan. The terms "director" and "officer"
include, unless the context requires otherwise, the estate or personal
representative of a director or officer.

(d) LIABILITY. The term "liability" means the obligation
incurred with respect to a proceeding to pay a judgment, settlement,
penalty, fine (including any excise tax assessed with respect to an
employee benefit plan), or reasonable expenses.

(e) PROCEEDING. The term "proceeding" means any
threatened, pending or completed action, suit, or proceeding whether
civil, criminal, administrative or investigative, and whether formal
or informal.

5. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of a person who is or was a director, officer, employee,
fiduciary, or agent of the Corporation, or who, while a director, officer,
employee, fiduciary, or agent of the Corporation, is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee,
fiduciary, or agent of another domestic or foreign corporation or other person
or entity or of any employee benefit plan, against liability asserted against
or incurred by the person in that capacity or arising from his or her status as
a director, officer, employee, fiduciary, or agent, whether or not the
Corporation would have power to indemnify the person against the same liability
under the Act. Any such insurance may be procured from any insurance company
designated by the Board of Directors, whether such

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insurance company is formed under the laws of this state or any other
jurisdiction of the United States or elsewhere, including any insurance company
in which the Corporation has an equity or any other interest through stock
ownership or otherwise.

6. EXPENSES AS A WITNESS. The Corporation may pay or reimburse
expenses incurred by a director, officer, employee, fiduciary, or agent in
connection with an appearance as a witness in a proceeding at a time when he or
she has not been made a named defendant or respondent in the proceeding.

7. NOTICE TO SHAREHOLDERS. If the Corporation indemnifies or
advances expenses to a director under this Article in connection with a
proceeding by or in the right of the Corporation, the Corporation shall give
written notice of the indemnification or advance to the shareholders with or
before the notice of the next shareholders' meeting. If the next shareholder
action is taken without meeting at the instigation of the Board of Directors,
such notice shall be given to the shareholders at or before the time the first
shareholder signs a writing consenting to such action.

ARTICLE VII.
EXECUTION OF INSTRUMENTS; LOANS; CHECKS AND ENDORSEMENTS;
DEPOSITS; PROXIES

1. EXECUTION OF INSTRUMENTS. The Chief Executive Officer, or the
President or any Vice President shall have the power to execute and deliver on
behalf of and in the name of the Corporation any instrument requiring the
signature of an officer of the Corporation, except as otherwise provided in
these Bylaws or when the execution and delivery of the instrument shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation. Unless authorized to do so by these Bylaws or by the Board of
Directors, no officer, agent or employee shall have any power or authority to
bind the Corporation in any way, to pledge its credit or to render it liable
pecuniarily for any purpose or in any amount.

2. BORROWING. No loan shall be contracted on behalf of the
Corporation, and no evidence of indebtedness shall be issued, endorsed or
accepted in its name, unless authorized by the Board of Directors or a
committee designated by the Board of Directors so to act. Such authority may
be general or confined to specific instances. When so authorized, an officer
may (a) effect loans at any time for the Corporation from any bank or other
entity and for such loans may execute and deliver promissory notes or other
evidences of indebtedness of the Corporation; and (b) mortgage, pledge or
otherwise encumber any real or personal property, or any interest therein,
owned or held by the Corporation as security for the payment of any loans or
obligation of the Corporation, and to that end may execute and

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deliver for the Corporation such instruments as may be necessary or proper in
connection with such transaction.

3. LOANS TO DIRECTORS, OFFICERS AND EMPLOYEES. The Corporation
may lend money to, guarantee the obligations of and otherwise assist directors,
officers and employees of the Corporation, or directors of another corporation
of which the Corporation owns a majority of the voting stock, only upon
compliance with the requirements of the Act.

4. CHECKS AND ENDORSEMENTS. All checks, drafts or other orders
for the payment of money, obligations, notes or other evidences of
indebtedness, bills of lading, warehouse receipts, trade acceptances and other
such instruments shall be signed or endorsed for the Corporation by such
officers or agents of the Corporation as shall from time to time be determined
by resolution of the Board of Directors, which resolution may provide for the
use of facsimile signatures.

5. DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the Corporation's credit in such banks
or other depositories as shall from time to time be determined by resolution of
the Board of Directors, which resolution may specify the officers or agents of
the Corporation who shall have the power, and the manner in which such power
shall be exercised, to make such deposits and to endorse, assign and deliver
for collection and deposit checks, drafts and other orders for the payment of
money payable to the Corporation or its order.

6. PROXIES. Unless otherwise provided by resolution adopted by
the Board of Directors, the Chief Executive Officer, or the President or any
Vice President: (a) may from time to time appoint one or more agents of the
Corporation, in the name and on behalf of the Corporation, (i) to cast the
votes which the Corporation may be entitled to cast as the holder of stock or
other securities in any other corporation, association or other entity whose
stock or other securities may be held by the Corporation, at meetings of the
holders of the stock or other securities of such other corporation, association
or other entity, or (ii) to consent in writing to any action by such other
corporation, association or other entity; (b) may instruct the person so
appointed as to the manner of casting such votes or giving such consent; and
(c) may execute or cause to be executed in the name and on behalf of the
Corporation and under its corporate seal, or otherwise, all such written
proxies or other instruments as may be deemed necessary or proper.

ARTICLE VIII.
SHARES OF STOCK

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1. CERTIFICATES OF STOCK. The shares of the Corporation may but
need not be represented by certificates. Unless the Act or another law
expressly provides otherwise, the fact that the shares are not represented by
certificates shall have no effect on the rights and obligations of
shareholders. If the shares are represented by certificates, such certificates
shall be signed either manually or in facsimile by the President and the
Secretary or such other representatives of the Corporation as are designated by
the Board of Directors. If the person who signed, either manually or in
facsimile, a share certificate, no longer holds office when the certificate is
issued, the certificate is nevertheless valid. Every certificate representing
shares issued by the Corporation shall state the number and class of shares and
the designation of the series, if any, the certificate represents, and shall
otherwise be in such form as is required by law and as the Board of Directors
shall prescribe.

2. SHARES WITHOUT CERTIFICATES. The Board of Directors may
authorize the issuance of any class or series of shares of the Corporation
without certificates. Such authorization shall not affect shares already
represented by certificates until they are surrendered to the Corporation.
Within a reasonable time following the issue or transfer of shares without
certificates, the Corporation shall send the shareholder a complete written
statement of the information required on certificates by the Act.

3. RECORD. A record shall be kept of the names and addresses of
the Corporation's shareholders, in a form that permits preparation of a list of
shareholders that is arranged by voting group and within each voting group by
class or series of shares, that is alphabetical within each class or series,
and that shows the addresses of, and the number of shares of each class and
series and the date of issuance of the shares (and in case of cancellation, the
date of cancellation) held by, each shareholder. The person or other entity in
whose name shares of stock stand on the books of the Corporation shall be
deemed the owner thereof, and thus a holder of record of such shares of stock,
for all purposes as regards the Corporation.

4. TRANSFER OF STOCK. Transfers of shares of the stock of the
Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by such registered holder's attorney thereunto
authorized, and on the surrender of the certificate or certificates for such
shares properly endorsed.

5. TRANSFER AGENTS AND REGISTRARS; REGULATIONS. The Board of
Directors may appoint one or more transfer agents or registrars with respect to
shares of the stock of the Corporation. The Board of Directors may make such
rules and regulations as it may deem expedient and as are not inconsistent with
these Bylaws, concerning the issue, transfer and registration of certificates
for shares of the stock of the Corporation.

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6. LOST, DESTROYED OR MUTILATED CERTIFICATES. In case of the
alleged loss, destruction or mutilation of a certificate representing stock of
the Corporation, a new certificate may be issued in place thereof, in such
manner and upon such terms and conditions as the Board of Directors may
prescribe, and shall be issued in such situations as required by the Act.

ARTICLE IX.
CORPORATE SEAL

The corporate seal shall be in the form approved by resolution of the
Board of Directors. Said sale may be used by causing it or a facsimile thereof
to be impressed or affixed or in any other manner reproduced. The impression
of the seal may be made and attested by either the Secretary or any Assistant
Secretary for the authentication of contracts or other papers requiring the
seal.

ARTICLE X.
FISCAL YEAR

The fiscal year of the Corporation shall be the year established by
the Board of Directors.

ARTICLE XI.
CORPORATE RECORDS

1. CORPORATE RECORDS. The Corporation shall comply with the
provisions of the Act regarding maintenance of records and shall keep such
records at such place as the Act may designate or, if the Act does not
designate the place for such records, then at such place or places as may be
from time to time designated by the Board of Directors.

2. ADDRESSES OF SHAREHOLDERS. Each shareholder shall furnish to
the Secretary of the Corporation or the Corporation's transfer agent an address
to which notices from the Corporation, including notices of meetings, may be
directed and if any shareholder shall fail so to designate such an address, it
shall be sufficient for any such notice to be directed to such shareholder at
such shareholder's address last known to the Secretary or transfer agent.

3. FIXING RECORD DATE. The Board of Directors may fix in advance
a date as a record date for the determination of the shareholders entitled to a
notice of or to vote at any meeting of shareholders or entitled to receive
payment of any dividend or other distribution or allotment of rights in respect
of any change, conversion or exchange of stock, or for the

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purpose of any other lawful action. Such record date shall not be more than 70
days before the meeting or action requiring a determination of shareholders,
except that the record date for determining shareholders entitled to take
action without a meeting or entitled to be given notice of action so taken is
the date upon which a writing upon which such action is first received by the
Corporation. Only such shareholders as shall be shareholders of record on the
date so fixed shall be so entitled with respect to the matter to which the same
relates. If the Board of Directors shall not fix a record date as above
provided, then the record date shall be determined in accordance with the Act.

4. INSPECTION OF CORPORATE RECORDS. Shareholders shall have
those rights to inspect and copy the Corporation's records as provided in the
Act.

5. DISTRIBUTION OF FINANCIAL STATEMENTS. Upon the written
request of any shareholder of the Corporation, the Corporation shall mail to
such shareholder its last annual and most recently published financial
statement, if any.

6. AUDITS OF BOOKS AND ACCOUNTS. The Corporation's books and
accounts may be audited at such times and by such auditors as shall be
specified and designated by resolution of the Board of Directors.

ARTICLE XII.
EMERGENCY BYLAWS AND ACTIONS

Subject to repeal or change by action of the shareholders, the Board
of Directors may adopt emergency bylaws and exercise other powers in accordance
with and pursuant to the provisions of the Act.

ARTICLE XIII.
AMENDMENTS

Unless the Act, the Articles of Incorporation or a particular Bylaw
reserves the right to amend the Bylaws exclusively to the shareholders, the
Board of Directors may amend or repeal these Bylaws or adopt new bylaws. The
shareholders may also amend or repeal these Bylaws or adopt new bylaws.

<PAGE> 1
EXHIBIT 10.1

DONNELLY APPLIED FILMS CORPORATION

STOCK OPTION PLAN

1. Purpose of Plan

The purpose of this Stock Option Plan (the "Plan") is to provide
certain key employees of Donnelly Applied Films Corporation (the "Company") with
options to acquire and own shares of the Company's common stock (the "shares"),
and to strengthen the mutuality of interests between those employees and the
Company's shareholders.

2. Term of Plan

The Plan shall become effective on the date the Plan is approved by the
shareholders of the Company (the "Effective Date") and continue until exactly
ten (10) years after the Effective Date (the "Plan Termination Date"); provided,
however, that all options outstanding as of the Plan Termination Date shall
remain or become exercisable pursuant to their terms and the terms of the Plan.

3. Administration

The Plan shall be administered by the Company's Board of Directors (the
"Board"), provided, however, that the Board may appoint a committee comprised
of not less than three (3) members of the Board (the "Committee") to administer
the Plan if deemed necessary or advisable in order to comply with any
securities rules or regulations.

The Board and any such Committee shall have full power and authority to
interpret the provisions of the Plan, to supervise the administration of the
Plan, and to adopt forms, regulations and procedures for the administration of
the Plan. All interpretations and constructions by the Board and/or the
Committee of or relating to any provision of the Plan or any option, policy or
procedure arising thereunder shall be final and binding.

No member of the Board or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any option
granted under it. Each person who is or shall have been a member of the Board
or the Committee shall be indemnified and held harmless by the Company from and
against any cost, liability or expense imposed or incurred in connection with
such person's or the Board's or the Committee's taking or failing to take any
action under the Plan. Each such person may rely on information furnished in
connection with the Plan's administration by any appropriate person or persons.

The proceeds received by the Company from the sale of shares pursuant
to options may be used for the Company's general corporate purposes.

4. Eligibility

The persons eligible to receive options shall be those employees of the
Company that the Board or the Committee administering the Plan may select
from time to time.
<PAGE> 2
The granting of any option pursuant to the Plan shall be entirely
within the discretion of the Board or the Committee. Nothing herein contained
shall be construed to give any person any right to participate under the Plan.

An optionee may hold more than one option.

5. Stock Available for Options

Subject to adjustments as provided in section 7, the aggregate number
of shares reserved for purposes of the Plan shall be 39,500 shares, which shall
be authorized but unissued shares after the authorized capital has been
increased to 1,200,000 shares. If any outstanding option under the Plan for
any reason expires or is terminated before the Plan Termination Date, the
shares allocable to the unexercised portion of such option may again be
subjected to an option under the Plan.

6. Terms and Conditions of Options

Each option granted pursuant to the Plan shall be authorized by the
Board or the Committee and shall be evidenced by a written agreement (an
"Option Agreement") containing such terms and conditions as are set by the
Board or the Committee, including without limitation the following:

(a) Number of Shares. Each Option Agreement shall state the number
of shares with respect to which it pertains.

(b) Exercise Price. Each Option Agreement shall state the exercise
price, which shall be not less than the fair market value of the shares on the
date the option is granted. For purposes of this Plan, the fair market value of
every share shall be deemed to be the amount determined by an appraiser selected
by the Board or the Committee. The Company shall pay all costs and fees of the
appraiser. Notwithstanding anything to the contrary, there shall be no
obligation to obtain any appraisal on an interim basis or at any other time
other than the time at which an option is granted or there is a bona fide and
permissible exercise of an option or an SAR as granted under the Plan. Each
appraisal shall be based on the same or substantially similar methodology used
for the appraisal on which the option price for the relevant shares was based.

(c) Payment for Shares. The exercise price for each share purchased
pursuant to an option granted under the Plan shall be payable in full upon
exercise in United States dollars in cash or by check, bank draft or money order
payable to the order of the Company. Except as otherwise provided herein,
promptly after the exercise of an option and the payment in full of the exercise
price, the optionholder shall be entitled to the issuance of a stock certificate
evidencing ownership of the shares so purchased. However, an optionholder shall
have none of the rights of a shareholder with respect to any optioned shares
until a certificate representing those shares has been issued to the
optionholder and the optionholder has become a shareholder of record; no
adjustment shall be made for dividends or other rights for which the record date
is before the date such stock certificate is issued, except as provided in
section 7.

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<PAGE> 3
(d) Vesting and Term of Exercise of Options. Each option shall vest
and be exercisable in whole or in part in such amounts and during such times as
may be specified in the Option Agreement. In no event, however, shall any
option be exercisable less than one (1) year or more than ten (10) years from
the date the option is granted.

(e) Tax Withholding. The exercise of any option under the Plan is
subject to the condition that if at any time the Board or the Committee shall
determine, in its discretion, that the satisfaction of withholding tax or other
withholding liabilities under any federal or state law is necessary or desirable
as a condition of, or in connection with, such exercise or the delivery or
purchase of shares pursuant thereto, then, in such event, the exercise of the
option shall not be effective unless such withholding shall have been effected
or obtained in a manner acceptable to the Board or the Committee.

(f) Securities Matters. Notwithstanding anything to the contrary, the
Company may postpone the issuance and/or delivery of shares upon any exercise
of an option until completion of such stock exchange listing, or registration,
or other qualification of such shares under any federal and/or state law, rule
or regulation as the Company may consider appropriate, and may require any
person exercising an option to make such representations, including a
representation that it is the optionee's intention to acquire shares for
investment and not with a view to distribution thereof, and furnish such
information as the Company may consider appropriate in connection with the
issuance or delivery of the shares in compliance with applicable laws, rules and
regulations. In such event, no shares shall be issued to such holder unless and
until the Company is satisfied with the correctness of all such representations.

(g) Stock Appreciation Rights. The Board or the Committee may
grant to an optionee a stock appreciation right ("SAR"). An SAR shall, in
general, be subject to the same terms and conditions as the related option,
except as otherwise specified in the Option Agreement, and shall be exercisable
only to the extent that the option is exercisable, provided that an SAR may be
exercised only when the fair market value of the shares subject to the option
exceeds the exercise price of the option. An SAR shall entitle the participant
to surrender to the Company unexercised any portion of the related option to the
extent that the same is then exercisable, and to receive from the Company in
exchange therefor an amount (payable in cash, less tax withholding and required
deductions) equal to the difference between the then fair market value of the
shares issuable upon the exercise of the option (or portion thereof) surrendered
and the option or price payable for such shares upon the exercise of the
option or the portion of the option which is surrendered. The fair market value
per share of such stock shall be determined as of the date of the Company's
receipt of the participant's written notice of intention to exercise an SAR.

(h) Miscellaneous. The amounts received on surrender of options or
SARs under the Plan are not to be taken into account under any pension,
retirement, deferred profit sharing or any employee benefit program of any kind.

Any Option Agreement authorized under the Plan shall contain such other
provisions, including, without limitation, restrictions upon the exercise of the
option, as the Board and the Committee shall deem advisable.

-3-
<PAGE> 4
The Board or the Committee may, in its discretion, vary among optionees and
among options granted to the same optionee any and all of the terms and
conditions of options granted under the Plan, including the term during which
and the amounts in which and dates at or after which such options may be
exercised.

Except as otherwise provided in this Plan or in an Option Agreement, if the
employment of a participant terminated for any reason, all outstanding options
(and any accompanying SAR) granted to the participant shall immediately be
forfeited and be null and void at the commencement of business on the date of
such termination.

7. Adjustment in Shares

The number of shares covered by each outstanding option, and the exercise
price for each optioned share, shall be proportionately adjusted for any
increase or decrease in the number of issued shares resulting from a split in or
combination of shares or the payment of a stock dividend on the shares or any
other increase or decrease in the number of such shares effected without
receipt of consideration by the Company.

If the Company shall be the surviving corporation in any merger or
consolidation, or if the Company is merged into a wholly-owned subsidiary solely
for purposes of changing the Company's state of incorporation, each outstanding
option shall pertain to and apply to the securities to which a holder of the
number of shares subject to the option would have been entitled. A sale of all
or substantially all of the Company's assets, or a dissolution or liquidation
of the Company or a merger or consolidation in which the Company is not the
surviving corporation, except as provided above or as otherwise provided in the
optionee's Option Agreement, shall cause each outstanding option to terminate.

In the event of a change in the shares as presently constituted that is
limited to a change of all of its authorized shares with par value into the same
number of shares with a different par value or without par value, the shares
resulting from any such change shall be deemed to be the shares subject to the
Plan and to any options granted pursuant to the Plan.

To the extent that the foregoing adjustments relate to stock or securities
of the Company, such adjustments shall be made by the Committee. Any such
adjustment may provide for the elimination of any fractional share that might
otherwise become subject to an option.

Except as expressly provided herein, an optionee shall have no rights by
reason of any subdivision or combination of shares of stock of any class or the
payment of any stock dividend or any other increase or decrease in the number of
shares of stock of any class or by reason of any sale of assets, dissolution,
liquidation, merger or consolidation or spinoff of assets or stock of another
corporation, and any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number or
price of shares of stock subject to the option.

The grant of an option pursuant to the Plan shall not affect in any way the
right or power of the Company to make adjustments, reclassifications,
reorganizations or changes

-4-
<PAGE> 5
of its capital or business structure or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or any part of its business or
assets.

The adjustments in number and kind of shares and the substitution of shares
affecting outstanding options in accordance with the foregoing shall also apply
to the number and kind of shares reserved for issuance pursuant to the Plan but
not yet covered by options.

8. Transferability of Options and Shares

Options under the Plan may not be transferred except as permitted in the
Option Agreement by will or according to the laws of descent and distribution.
An option may be exercised only by that optionee or his or her guardian or legal
representative. The Company may, if it deems desirable to assure compliance
with applicable federal and state securities laws, legend any certificate
representing shares issued pursuant to the exercise of an option with an
appropriate restrictive legend, and may also issue appropriate stop transfer
instructions to its transfer agent with respect to such shares.

9. Modification, Etc. and Termination of Options

Subject to the terms and conditions and within the limitations of the Plan,
the Board or the Committee may modify, extend or renew outstanding options
granted under the Plan, or accept the surrender of outstanding options and
authorize the granting of new options in substitution therefor. Notwithstanding
the foregoing, no modification of an option shall, without the consent of the
optionholder, alter or impair any rights or obligations under any option
theretofore granted under the Plan.

Each Option Agreement shall contain such provisions as the Company may deem
advisable (a) for termination of the option in the event of, and/or (b)
exercise of the option after, any of the following: the optionee's death,
disability, or termination of service as an employee with the Company.

Any Option Agreement may also contain provisions for termination of options
and/or acceleration of exercise rights in the event of any merger or
consolidation of the Company with, or acquisition of the Company or
substantially all of its assets by, any other corporation.

Nothing in the Plan or in any option shall be deemed to confer upon any
optionee any right to continue in any position whatsoever with the Company or
any affiliate.

10. Amendment and Termination of Plan

The Board may, with respect to any shares at the time not subject to
options, suspend or terminate the Plan or revise or amend it in any respect
whatsoever, except that, without approval of the shareholders of the Company, no
such revision or amendment shall (a) increase the aggregate number of shares
that may be issued under the Plan, (b) decrease the price at which options may
be granted, (c) modify the eligibility requirements set forth in section 4, (d)
materially increase the benefits accruing to optionholders under the Plan, or
(e) permit the granting of options under the Plan after the Plan Termination

-5-
<PAGE> 6
Date. Unless earlier terminated by the Board, the Plan shall terminate on the
Plan Termination Date, after which date no options may be granted under the
Plan.

***

CERTIFICATION

The foregoing Plan was duly adopted by the Company's Board of Directors as of
May 12, 1993 and was approved by the Company's shareholders on May 13, 1993.

DONNELLY APPLIED FILMS CORPORATION

By Cecil VanAlsburg
----------------------------
Cecil VanAlsburg, President

-6-

<PAGE> 1
EXHIBIT 10.2

APPLIED FILMS CORPORATION
1997 STOCK OPTION PLAN

1. NAME AND PURPOSE

This plan shall be called the Applied Films Corporation 1997 Stock Option
Plan (the "Plan"). The Plan is intended to encourage stock ownership by
certain key employees of Applied Films Corporation (the "Company") and to
provide them with an additional incentive to contribute to the success of the
Company.

2. EFFECTIVE DATE AND TERM OF PLAN

The effective date of the Plan shall be the date the Plan is approved by
the shareholders of the Company. Options may not be granted under the Plan
after April 29, 2007; provided, however, that all options outstanding as of
that date shall remain or become exercisable pursuant to their terms and the
terms of the Plan.

3. ADMINISTRATION

The Plan shall be administered by the Board of Directors of the Company or
by a committee appointed by the Company's Board of Directors (the "Committee").
The administrating body shall be referred to as the "Administrator". The
Committee, if appointed, shall consist of not less than one (1) member. The
Board of Directors may from time to time remove members from, or add members
to, the Committee. Vacancies on the Committee, however caused, shall be filled
by the Board of Directors.

The Administrator may establish such regulations, provisions and
procedures, within the terms of the Plan, as in the opinion of its members may
be advisable in the administration of the Plan. The Administrator shall keep
minutes of its meetings. A majority of the Administrator shall constitute a
quorum, and the acts of a majority of a quorum at any meeting, or acts approved
in writing by a majority of the members of the Administrator, shall be the
valid acts of the Administrator.

The Administrator shall determine the persons to whom options are to be
granted and the number of shares subject to each such option. The
Administrator shall also determine such other matters with respect to the
options as may be specified in the Plan.

The interpretation and construction by the Administrator of any provisions
of the Plan or of any option granted under it shall be final and binding upon
the Company, the Board of Directors and optionees. No member of the Board of
Directors or the Administrator shall be liable for any action or determination
made in good faith with respect to the Plan or any option granted under it.

1
<PAGE> 2

4. ELIGIBILITY

Subject to the limitations contained in this paragraph, the persons who
shall be eligible to receive options shall be such key employees (including
employee officers and directors) of the Company, as the Administrator shall
select. In making such selections, the Administrator may consider the
recommendations of the Company's chief executive officer, the nature of the
services rendered by the respective employees, their present and potential
contributions to the Company's success and the success of the particular
subsidiary or division of the Company by which they are employed and such other
factors as the Administrator shall deem relevant. An optionee may hold more
than one option, but only on the terms and subject to the restrictions
hereafter set forth. Subject to adjustments consistent with the provisions of
Paragraph 6(g), no one optionee may be granted options covering more than a
total of fifty percent (50%) of the Common Stock originally reserved for
issuance under this Plan, as defined in Paragraph 5 hereof, plus such increases
as may from time to time be approved by the Company's shareholders.

5. STOCK AVAILABLE FOR OPTIONS

Subject to adjustments as provided in Paragraph 6(g), the aggregate number
of shares reserved for purposes of the Plan shall be Seventeen Thousand Five
Hundred (17,500) shares of the Company's Common Stock, no par value per share
(" Common Stock"), either authorized but unissued shares or shares held in
treasury. If any outstanding option under the Plan for any reason expires or
is terminated for any reason before April 29, 2007, the shares allocable to the
unexercised portion of such option may again be subjected to an option under
the Plan.

6. DATE OF GRANT; TERMS AND CONDITIONS OF OPTIONS

Stock options granted pursuant to the Plan shall be authorized by the
Board of Directors. The date on which an option shall be granted shall be the
date of the Board's authorization of the option or such later date as shall be
determined by the Board at the time the option is authorized. All stock
options granted pursuant to the Plan shall be incentive stock options intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). Options granted under this Plan shall be evidenced by agreements
in such form as the Administrator shall approve, which agreements shall comply
with and be subject to the following terms and conditions:

(a) NUMBER AND MAXIMUM VALUE OF SHARES. Each option shall state the
number of shares to which it pertains. The aggregate fair market value
(determined as of the time the option is granted) of shares with respect
to which the option is exercisable for the first time by any employee
during any calendar year shall not exceed $100,000.

<PAGE> 3

(b) OPTION PRICE. Each option shall state the option price. The
option price will be established by the Administrator and must be equal
to or greater than the fair market value of the shares on the date the
option is granted; provided, however, if the optionee owns shares
representing more than ten percent (10%) of the total voting power of the
Company's Common Stock at the time an option is granted, the option
price will be determined by the Administrator and must be equal to or
greater than one hundred ten percent (110%) of the fair market value of
the shares on the date the option is granted. If the shares are listed
on an established stock exchange or exchanges, the fair market value per
share shall be the closing sale price on such exchange or exchanges or,
if no sale of the shares shall have been made on any stock exchange on
that day, on the next preceding day on which there was a sale of shares.
If the shares are not listed on such a stock exchange or exchanges but
are instead reported on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), then the fair market value per
share shall be the closing sale price as reported on NASDAQ on the day
the option is granted or, if there are no sales reported by the NASDAQ on
that date, the next preceding day on which there was a sale reported by
NASDAQ. The fair market value of shares for options granted prior to any
listing or designation of the Company's securities on an exchange or on
NASDAQ and prior to any initial public offering of the Company's
securities shall be determined in good faith by the Administrator.

(c) MEDIUM OF PAYMENT. The option price shall be payable to the
Company in United States dollars in cash or by check, bank draft or money
order payable to the order of the Company.

(d) TERM AND EXERCISE OF OPTIONS. The term of each option granted
under the Plan shall be not more than ten (10) years from the date on
which the option is granted; provided, however, that in the case of an
employee who owns shares representing more than ten percent (10%) of the
total voting power of the Company's Common Stock at the time the option
is granted, the term of such option shall be not more than five (5) years
from the date of grant. An option may be exercised at any time or from
time to time during the term of the option upon written notice to the
Company of the optionee's intention to exercise the option as to any or
all full shares covered by the option. Notwithstanding the foregoing, an
option shall not be exercisable with respect to less than 100 shares
unless the remaining shares covered by an option are fewer than 100
shares. The purchase price of the shares shall be paid in full upon
delivery to the optionee of certificates for such shares. Excluding
non-employee directors, and except as provided in Paragraph 6(f), an
option may be exercised by the optionee only while the optionee is
employed by the Company and only during his lifetime. Options granted
under the Plan may be exercised in any order, regardless of the date of
grant or the existence of any other outstanding stock option of the
Company.

<PAGE> 4

(e) OPTIONS NOT TRANSFERABLE. Options may not be sold, pledged,
assigned or transferred in any manner otherwise than by will or the laws
of descent or distribution to the extent provided in Paragraph 6(f) (ii).
During the lifetime of an optionee, the options shall be exercisable
only by the optionee. Following the death of an optionee, the options
shall be exercisable only to the extent provided in Paragraphs 6(g) (ii).

(f) TERMINATING OF EMPLOYMENT WITH RESPECT TO AN EMPLOYEE/OPTIONEE.

(i) TERMINATION OF EMPLOYMENT FOR REASONS OTHER THAN
RETIREMENT, DISABILITY OR DEATH. In the event an employee/
optionee shall cease to be employed by the Company for any reason
other than on account of retirement, disability or death, no option
shall be exercisable by the optionee more than thirty (30) days
after termination; provided, if an optionee accepts employment with
or otherwise aids or assists any competitor of the Company, all
options shall be void upon the date such employment was accepted or
such assistance was provided; and provided further that if an
optionee's employment is terminated due to malfeasance, no option
shall be exercisable by the optionee. Whether an optionee has
accepted employment with or otherwise aided or assisted a
competitor of the Company shall be the sole determination of the
Administrator. Whether an authorized leave of absence or absence
because of military or governmental service shall constitute
termination of employment for such purposes shall be determined by
the Administrator, which determination shall be final and
conclusive.

(ii) TERMINATION OF EMPLOYMENT FOR DEATH OR DISABILITY. In
the event an employee/optionee ceases to be employed by the Company
on account of death or physical disability, as determined by the
Company, each option held by such optionee shall, to the extent
exercisable on the date of death or disability, remain exercisable,
in whole or in part, for a period of ninety (90) days following the
optionee's termination of employment; subject, however, to prior
expiration according to its terms and other limitations imposed by
the Plan. Notwithstanding the foregoing, if any disabled optionee
during the foregoing exercise period accepts employment with or
otherwise aids or assists a competitor of the Company (as
determined by the Administrator), all options shall be void on the
date such employment was accepted or such assistance was provided.

(iii) TERMINATION OF EMPLOYMENT FOR RETIREMENT. In the event
an employee/optionee ceases to be employed by the Company on
account of retirement (as determined by the Company), each option
held by such optionee shall, to the extent exercisable on the date
of such retirement, remain
4

<PAGE> 5

exercisable in whole or in part, for a period of ninety (90) days
following the optionee's termination of employment; subject,
however, to prior expiration according to its terms and other
limitations imposed by the Plan. If a retired employee ceases to
be retired (as determined by the Company), all rights of the
optionee must be exercised within thirty (30) days of the date on
which the retired employee ceases to be retired; provided, however,
that if any retired employee accepts employment with or otherwise
aids or assists a competitor of the Company (as determined by the
Administrator) all options shall be void on the date such
employment was accepted or such assistance was provided.

In any case, the foregoing is subject to the prior expiration
of the term of the option or options and any other limitation on
the exercise of such option or options in effect at the date of
exercise. No option shall be transferable by the optionee
otherwise then by will, or if he or she dies intestate, by the laws
of descent and distribution of the state of his or her domicile.

(iv) TERMINATION OF OPTIONS. Any option that is not
exercised within whichever of the exercise periods specified in
this paragraph 6(f) is applicable shall terminate upon expiration
of such exercise period.

(g) ADJUSTMENT IN SHARES COVERED BY OPTION. The number of shares
covered by each outstanding option, and the price per share thereof,
shall be proportionately adjusted for any increase or decrease in the
number of issued shares resulting from a split in or combination of
shares or the payment of a stock dividend on the shares or any other
increase or decrease in the number of such shares effected without
receipt of consideration by the Company.

If the Company shall be the surviving corporation in any merger or
consolidation or if the Company is merged into a wholly-owned subsidiary
solely for purposes of changing the Company's state of incorporation,
each outstanding option shall pertain to and apply to the securities to
which a holder of the number of shares of stock subject to the option
would have been entitled. A sale of all or substantially all of the
Company's assets or a dissolution or liquidation of the Company or a
merger or consolidation in which the Company is not the surviving
corporation, except as above provided, shall cause each outstanding
option to terminate; provided, that each optionee shall, in such event,
have the right immediately prior to such sale of assets, dissolution or
liquidation, or merger or consolidation in which the Company is not the
surviving corporation, to exercise his or her option in whole or in part.

In the event of a change in the shares as presently constituted,
which is limited to a change of all of its authorized shares with par
value into the same number of shares with a different par value or
without par value, the shares resulting from any such change shall be
deemed to be the shares within the meaning of the Plan.

<PAGE> 6

To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the
Administrator, whose determination in that respect shall be final,
binding and conclusive. Any such adjustment may provide for the
elimination of any fractional share which might otherwise become subject
to an option.

Except as hereinbefore expressly provided in this Paragraph 6(g) the
optionee shall have no rights by reason of any subdivision or combination
of shares of stock of any class or the payment of any stock dividend or
any other increase or decrease in the number of shares of stock of any
class or by reason of any sale of assets, dissolution, liquidation,
merger or consolidation or spinoff of assets or stock of another
corporation, and any issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
not affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of stock subject to the option.

The grant of an option pursuant to the Plan shall not affect in any
way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or
sell, or transfer all or any part of its business or assets.

(h) RIGHTS OF A SHAREHOLDER. An optionee shall have no rights as a
shareholder with respect to any shares covered by his or her option until
the date he or she becomes the holder of record of such shares. No
adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date on which he or she shall have
become the holder of record thereof, except as provided in Paragraph 6(g)
hereof. With respect to an employee/optionee, the Plan and any agreement
executed hereunder shall not impose upon the Company any obligation to
retain the optionee in its employ for any period.

(i) MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to the
terms and conditions and within the limitations of the Plan, the
Administrator, subject to approval of the Board of Directors, may modify
or renew outstanding options granted under the Plan, or accept the
surrender of outstanding options (to the extent not theretofore
exercised) and authorize the granting of new options in substitution
therefor (to the extent not theretofore exercised). Notwithstanding the
foregoing, no modification of an option shall, without the consent of the
optionee, alter or impair any rights or obligations under any option
theretofore granted under the Plan.

(j) POSTPONEMENT OF DELIVERY OF SHARES AND REPRESENTATIONS. The
Company may postpone the issuance and/or delivery of shares upon any
exercise of an option until completion of such stock exchange listing, or
registration, or other qualification of such shares under any state
and/or federal law, rule or regulation as the

<PAGE> 7

Company may consider appropriate, and may require any person exercising
an option to make such representations, including a representation that
it is the optionee's intention to acquire shares for investment and not
with a view to distribution thereof, and furnish such information as it
may consider appropriate in connection with the issuance or delivery of
the shares in compliance with applicable laws, rules and regulations. In
such event no shares shall be issued to such holder unless and until the
Company is satisfied with the correctness of any such representations.

(k) OTHER PROVISIONS. The option agreements authorized under the
Plan shall contain such other provisions, including, without limitation,
restrictions upon the exercise of the option, as the Administrator and
the Board of Directors shall deem advisable.

7. ADJUSTMENTS IN SHARES AVAILABLE FOR OPTIONS

The adjustments in number and kind of shares and the substitution of
shares, affecting outstanding options in accordance with Paragraph 6(g), shall
also apply to the number and kind of shares reserved for issuance pursuant to
the Plan but not yet covered by options.

8. AMENDMENT OF THE PLAN

The Board of Directors of the Company, insofar as permitted by law, shall
have the right from time to time, with respect to any shares at the time not
subject to options, to suspend or discontinue the Plan or revise or amend it in
any respect whatsoever except that, without approval of the shareholders of the
Company, no such revision or amendment shall: (a) increase the maximum number
of shares which may be subject to the Plan; (b) increase the maximum number of
shares which may be optioned to any one employee; (c) change the designation of
the class of employees eligible to receive options; (d) materially increase the
benefits accruing to option holders under the Plan; (e) decrease the price at
which options may be granted; (f) remove the administration of the Plan from
the Administrator; (g) render any member of the Administrator eligible to
receive an option under the Plan while serving thereon; or (h) permit the
granting of options under the Plan after April 29, 2007.

9. APPLICATION OF FUNDS

The proceeds received by the Company from the sale of shares pursuant to
options will be used for general corporate purposes.

10. NO OBLIGATION TO EXERCISE OPTION

The granting of an option shall impose no obligation upon the optionee to
exercise such option.

7
<PAGE> 8

11. TAX WITHHOLDING

The exercise of any option under the Plan is subject to the condition that
if at any time the Administrator shall determine, in its discretion, that the
satisfaction of withholding tax or other withholding liabilities under any
state or federal law is necessary or desirable as a condition of, or in
connection with, such exercise or the delivery or purchase of shares pursuant
thereto, then, in such event, the exercise of the option right shall not be
effective unless such withholding shall have been effected or obtained in a
manner acceptable to the Administrator.

12. CONSTRUCTION

This Plan shall be construed under the laws of the State of Colorado,
United States of America.

Adopted by the Board of Directors of the Company effective as of April 29,
1997.

John S. Chapin
-------------------------
Secretary
Applied Films Corporation

Approved by the Shareholders of the Company effective as of April 29,
1997.

John S. Chapin
-------------------------
Secretary
Applied Films Corporation

8
<PAGE> 9
FIRST AMENDMENT TO THE
APPLIED FILMS CORPORATION
1997 STOCK OPTION PLAN

BACKGROUND

1. Effective April 29, 1997, Applied Films Corporation (the "Company")
adopted and approved the Applied Films Corporation 1997 Stock Option Plan (the
"Plan").

2. The Plan provided for the reservation, for purposes of the Plan, of
seventeen thousand five hundred (17,500) shares of the Company's common stock,
no par value per share (the "April Shares").

3. The Company is considering an initial public offering of its stock and
desires to amend the Plan to provide for an increased number of shares to be
authorized under the Plan.

4. Donnelly Corporation, a fifty percent (50%) shareholder of the Company,
desires to place conditions upon the issuance of options pursuant to the Plan
with respect to shares authorized for issuance hereunder other than the April
Shares, providing specifically that the exercise of any options issued for the
purchase of shares other than April Shares are expressly conditioned on the
completion of the public offering referred to above.

AGREEMENT

1. The third sentence of the first paragraph of Section 3 of the Plan is
deleted in its entirety and shall henceforth read as follows:

The Committee, if appointed, shall consist of not less than
two (2) members, all of whom shall be directors of the Company who
are not employed by the Company.

2. The provisions of Section 5 are deleted in their entirety and are
replaced as follows:

Subject to the adjustments as provided in paragraph 6(g), the
aggregate number of shares reserved for purposes of the Plan shall be One
Hundred Seventy-Two Thousand Five Hundred (172,500) shares of the
Company's Common Stock, no par value per share ("Common Stock"). The
shares of Common Stock reserved hereunder shall be classified in two (2)
blocks. The first block shall be referred to herein as the "April Shares"
and shall be composed of the originally reserved One Hundred Twenty-two
Thousand Five Hundred (122,500) shares. The remaining Fifty Thousand
(50,000) shares of Common Stock reserved hereunder shall be referred to as
the "September

<PAGE> 10

Shares". If any outstanding option under the Plan for
any reason expires or is terminated for any reason before April
29, 2007, the shares allocable to the unexercised portion of such
option may again be subjected to an option under the Plan.

3. The provisions of Section 6(k) shall be deleted in their entirety and
replaced with the following Section 6(k) and (l):

(k) SEPTEMBER SHARES OPTIONS. No option shall be granted
hereunder on a date more than fourteen (14) days before the
commencement of the initial public offering of the Company's stock
which provides for the purchase of September Shares. In the event
options are granted during such fourteen (14) day period with
respect to the September Shares, such options shall provide that
they are exercisable solely on a contemporaneous basis with the
commencement of the public offering and solely at an exercise
price not less than the original offering price for which shares
of Common Stock are being offered in the public offering.

(l) OTHER PROVISIONS. The option agreements authorized under
the Plan shall contain such other provisions, including, without
limitation, restrictions upon the exercise of the option, as the
Administrator and the Board of Directors shall deem advisable.

4. Except as otherwise set forth herein, the terms of the Plan are hereby
ratified and shall continue in full force and effect.

Approved by the Board of Directors of the Company on September 5, 1997.

APPLIED FILMS CORPORATION

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

, Secretary
-----------------------------

Approved by the Shareholders of the Company on , 1997.
---------------------

APPLIED FILMS CORPORATION

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

, Secretary
-----------------------------

<PAGE> 1
EXHIBIT 10.3

APPLIED FILMS CORPORATION
EMPLOYEE STOCK PURCHASE PLAN

1. PURPOSE. The purpose of the Applied Films Corporation
Employee Stock Purchase Plan (the "Plan") is to provide employees of Applied
Films Corporation (the "Company") with a further inducement to continue their
employment with the Company and to encourage its employees to increase their
efforts to promote the best interests of the Company by permitting them to
purchase shares of common stock of the Company (the "Shares"), under such
circumstances that the purchase qualifies as the exercise of an option granted
under an employee stock purchase plan, as defined by Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code").

2. ADMINISTRATION. The Plan shall be administered by the
Compensation Committee of the Board of Directors of the Company (the
"Committee"). The Committee shall consist of not less than two members who are
not eligible to participate in the Plan. The Board of Directors may from time
to time remove members from, or add members to, the Committee. Vacancies on
the Committee shall be filled by the Board of Directors. The Committee may
establish from time to time such regulations, provisions and procedures, within
the terms of the Plan, as in the opinion of its members may be advisable in the
administration of the Plan. The Committee shall keep minutes of its meetings.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts reduced to or approved in writing by a majority of the members of the
Committee, shall be the valid acts of the Committee. The interpretation and
construction by the Committee of any provisions of the Plan shall be final and
conclusive. Each person who is or shall have been a member of the Committee
shall be indemnified and held harmless by the Company from and against any
cost, liability, or expense imposed or incurred in connection with such
person's or the Committee's taking or failing to take any action under the
Plan. Each such person may rely on information furnished in connection with
the Plan's administration by any appropriate person or persons.

3. ELIGIBILITY. Participation under the Plan shall be open to
all active employees (the "Eligible Employees") of the Company except: (a)
employees who have not been continuously employed by the Company on a full-time
basis for at least 12 months at the beginning of an Option Period (as
hereinafter defined); (b) employees whose customary employment by the Company
is for less than 20 hours per week; and (c) employees whose customary
employment by the Company is for not more than 6 months in a calendar year. No
option rights shall be granted under the Plan to any person who is not an
Eligible Employee, and no Eligible Employee shall be granted option rights
under the Plan: (x) if such employee, immediately after receiving the grant of
such option rights under the Plan, owns (under the rules of Section 423(b)(3)
and 424(d) of the Code) stock possessing five
<PAGE> 2

percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company; or (b) which permit such employee to purchase Shares
under this Plan and any other employee stock purchase plan of the Company at
option prices aggregating more than Twenty-Five Thousand Dollars ($25,000) of
fair market value of such Shares in any one calendar year, and in no event may
such option rights accrue at a rate which exceeds that permitted by Section
423(b)(8) of the Code.

4. SHARES AVAILABLE FOR PURCHASE UNDER THE PLAN. Purchases of
Shares pursuant to this Plan may be made out of the Company's presently or
hereafter authorized but unissued Shares, or from outstanding Shares, or part
out of each, as determined by the Board of Directors. The aggregate maximum
number of Shares which may be purchased under the Plan is Thirty Thousand
(30,000) Shares; subject, however, to adjustment as hereinafter set forth. In
the event the Company shall, at any time after the effective date of the Plan,
change its issued Shares into an increased number of Shares, with or without par
value, through a stock dividend or stock split, or into a decreased number of
Shares, with or without par value, through a combination of Shares, then
effective with the record date for such change, the maximum number of Shares
which thereafter may be purchased under the Plan shall be the maximum number of
Shares which, immediately prior to such record date, remained available for
purchase under the Plan, proportionately increased, in the case of such stock
dividend or split, or proportionately decreased, in the case of such combination
of Shares. In the event of any other change affecting Shares, such adjustment
shall be made as may be deemed equitable by the Board of Directors to give
proper effect to such event.

5. EFFECTIVE DATES. This Plan shall become effective on
September 5, 1997, provided that the Plan has been properly approved by the
shareholders of the Company. The first Option Period under the Plan shall
commence on January 1, 1998, and end on March 31, 1998. Thereafter, so long as
the Plan remains in effect, a new Option Period shall commence on the first day
of each fiscal quarter year of the Company and end on the last day of such
fiscal quarter year.

6. PARTICIPATION. An employee of the Company who is an Eligible
Employee at or prior to the first day of any Option Period may become a
Participant as of such date by: (a) at least ten (10) days prior to such date,
completing and delivering a payroll deduction Authorization Form (the
"Authorization") to the Company's payroll department; and/or (b) at least
thirty (30) days prior to the last day of the Option Period, completing and
delivering to the Company a lump sum payment form furnished by the Company,
accompanied by payment to the Company in the amount of the lump sum to be
credited to the Eligible Employee's Purchase Account (defined in Section 7).
The Authorization will direct a regular

2
<PAGE> 3

payroll deduction from the Participant's compensation to be made on each of the
Participant's pay dates occurring during each Option Period in which he or she
is a Participant.

7. PAYROLL DEDUCTIONS AND LUMP SUM PAYMENTS. The Company will
maintain payroll deduction accounts for all employees who are Participants and
who have filed Authorizations. Payments made by Participants, whether by
payroll deduction or lump sum payment, shall be credited to the Participant's
Stock Purchase Account (the "Purchase Account"). No amounts other than payroll
deductions and lump sum payments authorized under this Plan may be credited to
a Participant's Purchase Account. A Participant may authorize a payroll
deduction in any amount not less than Five Hundred Dollars ($500) in any
calendar year, provided, however, in no event shall payment of any kind for
credit to a Purchase Account by or on behalf of any Participant aggregate more
than Ten Thousand Dollars ($10,000) in any calendar year.

8. CHANGES IN PAYROLL DEDUCTION. Payroll deductions shall be
made for each Participant in accordance with the Participant's Authorization
and shall continue until the Participant's participation terminates, the
Authorization is revised or revoked, or the Plan terminates. A Participant
may, as of the beginning of any Option Period, increase or decrease the
Participant's payroll deduction within the limits specified in Section 7 by
filing a new Authorization at least ten (10) days prior to the beginning of
such Option Period.

9. TERMINATION OF PARTICIPATION-WITHDRAWAL OF FUNDS. A
Participant may for any reason and at any time, on written notice given to the
Company prior to the Participant's last pay date in any Option Period, elect to
terminate his or her participation in the Plan and permanently draw out the
balance accumulated in his or her Purchase Account. Upon any such termination
by a Participant, he or she shall cease to be a Participant, his or her
Authorization shall be revoked effective upon receipt, and the amount to his or
her credit in his or her Purchase Account (exclusive of accounts payable in
respect of the exercise of any option to purchase Shares theretofore granted
under the Plan), as well as any unauthorized payroll deductions made after such
revocation, without interest, shall be promptly refunded in cash to the
Employee. An Eligible Employee who has thus terminated participation in the
Plan may thereafter begin participation in the Plan again only after the
expiration of three (3) of the Company's full fiscal quarters after such
termination and withdrawal of funds occurred. Partial withdrawals of funds
shall not be permitted.

10. PURCHASE OF SHARES. During each Option Period while this Plan
remains in effect, each Participant shall be granted an option as of the last
business day of that Option Period ("Purchase Date") for the purchase of as
many full Shares, but not less than one (1) full share, as may be purchased
with the funds in his or her Purchase Account. This election shall be
automatically made as provided in this Section unless the Participant
terminates

3
<PAGE> 4

participation as provided in Section 9. The purchase price for each Share
purchased shall be eighty-five percent (85%) of the fair market value of a
Share on the Purchase Date where fair market value means the closing sale price
reported on the NASDAQ National Market System on the Purchase Date. If no
closing sale price is reported on the NASDAQ National Market System on the
Purchase Date, the purchase price shall be the closing sale price on the next
preceding day on which such price is reported. If such percentage results in a
fraction of a cent, the purchase price shall be increased to the next higher
full cent. If, as of each Purchase Date, the Participant's Purchase Account
contains sufficient funds to purchase at least one (1) or more full Shares, the
Participant shall be deemed to have exercised an option to purchase all such
Shares at the purchase price; the Participant's Purchase Account shall be
charged for the amount of the purchase; and a stock certificate shall be issued
to the Participant. As of each subsequent Purchase Date when sufficient funds
have again accrued in the Participant's Purchase Account to purchase one (1) or
more Shares, Shares will be purchased in the same manner. Any balance
remaining in a Participant's Purchase Account after a Purchase Date will be
carried forward into the following Option Period. Notwithstanding the
foregoing, any balance remaining in a Purchase Account at the termination of
the Plan will be automatically refunded to the Participant in accordance with
Section 17.

11. REGISTRATION OF CERTIFICATES. Certificates may be registered
only in the name of the Participant.

12. RIGHTS AS A SHAREHOLDER. None of the rights or privileges of
a shareholder of the Company shall exist with respect to Shares purchased under
this Plan unless and until certificates representing such Shares shall have
been issued.

13. RIGHTS ON RETIREMENT, DEATH OR TERMINATION OF EMPLOYMENT. In
the event of a Participant's retirement, death or termination of employment, no
payroll deduction shall be taken from any pay due and owing to a Participant at
such time, and the balance in the Participant's Purchase Account shall be paid
to the Participant or, in the event of the Participant's death, to the
Participant's estate.

14. RIGHTS NOT TRANSFERABLE. Rights under this Plan are not
transferable by a Participant and are exercisable only by the Participant
during his or her lifetime.

15. APPLICATION OF FUNDS. All funds received or held by the
Company under this Plan may be commingled with other funds and may be used by
the Company for any corporate purpose.

4
<PAGE> 5

16. AMENDMENT OF THE PLAN. The Board of Directors of the Company
may at any time, or from time to time, amend this Plan in any respect, except
that, without the approval of the Company's shareholders, no amendment shall be
made: (a) increasing the number of Shares approved for purchase under this
Plan (other than as provided in Section 4); (b) decreasing the Purchase Price
per Share; or (c) changing the eligibility requirements for participation in
this Plan.

17. TERMINATION OF THE PLAN. Unless sooner terminated as
hereinafter provided, this Plan shall terminate on September 5, 2007.
The Company may, by action of its Board of Directors, terminate the Plan at
any time. Notice of termination shall be given to all then Participants, but
any failure to give such notice shall not impair the termination. Upon
termination of the Plan, all amounts in Purchase Accounts of Participants
shall be promptly refunded to the applicable participants.

18. GOVERNMENTAL REGULATIONS. The Company's obligation to sell
and deliver Shares under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance,
or sale of such Shares. If, at any time, Shares deliverable hereunder are
required to be registered or qualified under any applicable law, or delivery of
such Shares is required to be accompanied or preceded by a prospectus or
similar circular, delivery of certificates for such Shares may be deferred for
a reasonable time until such registrations or qualifications are effected or
such prospectus or similar circular is available.

CERTIFICATION

The foregoing Plan was duly adopted by the Board of Directors on the
5th day of September, 1997, subject to approval by the Company's shareholders.

________________________________________
SECRETARY
APPLIED FILMS CORPORATION

<PAGE> 1
EXHIBIT 10.4

DIRECTOR AND OFFICER INDEMNITY AGREEMENT

AGREEMENT made as of the ______ day of ____________________, 199__, by and
among APPLIED FILMS CORPORATION, a Colorado corporation (the "Corporation"),
and ________________________ (the "Indemnitee") with respect to the following:

W I T N E S S E T H:

WHEREAS, the Board of Directors of the Corporation has recognized that the
present trend in litigation against corporate directors and officers has
created a reluctance in persons to serve in such a capacity and that such
effect is likely to result in less effective direction and supervision of the
Corporation's business affairs;

WHEREAS, the Board of Directors of the Corporation has determined that
such consequences are so detrimental to the best interests of the Corporation
and its shareholders that its directors and officers should be provided with
protection against inordinate risks in order to insure that the most capable
persons available will be attracted to such a position;

WHEREAS, in light of the rising costs of and reduced coverage of director
and officer liability insurance and amendments to Colorado Business Corporation
Act, which permits an increase in the scope of indemnification of directors and
officers, it is reasonable and necessary for the Corporation to contractually
obligate itself to indemnify its directors and officers for certain costs and
expenses; and

WHEREAS, in order to induce Indemnitee to serve or continue to serve the
Corporation, the Corporation has agreed to indemnify Indemnitee for certain
costs and expenses set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties agree as follows:

1. DEFINITIONS. As used herein, the following terms are defined as
follows:

(a) CLAIM. Any threatened, pending or completed action, suit
or proceeding, or any inquiry or investigation, whether civil,
criminal, administrative or investigative, by reason of or arising
in whole or in part by reason of the fact that the Indemnitee is
or was a director, officer, employee or agent of the Corporation.

(b) EXPENSES. Attorneys' fees and all other costs, expenses and
obligations paid or incurred in connection with investigating, defending,

<PAGE> 2

participating or being a witness in, or preparing to defend, participate
or be a witness in any Claim or appeal therefrom.

2. AGREEMENT TO SERVE. Indemnitee will serve and/or continue to serve, at
the will of the Corporation as a director and/or officer of the Corporation to
the best of his ability so long as he is duly elected and qualified or
appointed, as applicable, in accordance with the Certificate of Incorporation
and Bylaws of the Corporation.

3. INDEMNIFICATION. Subject to the terms and conditions of this
Agreement, the Corporation hereby agrees to indemnify Indemnitee as follows:

(a) In the event Indemnitee was, is or becomes a party to or
witness or other participant in or is subject to, or is threatened
to be made a party to or witness or other participant in or
subject to a Claim, the Corporation shall indemnify Indemnitee to
the fullest extent permitted by law, pursuant to the authorization
of Sections 7-109-101 et. seq. of the Colorado Business
Corporation Act, against any and all Expenses, judgments, fines,
penalties and amounts paid in settlement of such Claim.

(b) The Corporation shall indemnify Indemnitee as soon as
practicable, but in any event not later than thirty (30) days
after written demand is presented to the Corporation.

4. CONDITION PRECEDENT TO INDEMNIFICATION. Indemnitee, as a condition
precedent to the indemnification under this Agreement, shall tender written
notice to the Corporation as soon as practicable of any Claim made against him
for which indemnification will or likely will be sought under the terms of this
Agreement. Notice to the Corporation shall be directed to Applied Films
Corporation, 6797 Winchester Circle, Boulder, Colorado 80301, Attn: President.
In addition, Indemnitee shall give the Corporation such information and
cooperation as may be reasonably necessary and requested by the Corporation.

5. CONSENT OF CORPORATION. No Expenses, judgments, fines, penalties,
amounts paid in settlement or other costs for which indemnity shall be sought
hereunder shall be incurred without the Corporation's written consent, which
consent shall not be unreasonably withheld.

6. LIMITATIONS ON INDEMNITY.

(a) The Corporation shall not be liable under this Agreement
to make any payment in connection with any Claim made against
Indemnitee:

2
<PAGE> 3

(1) For which payment is made to Indemnitee under
a valid and collectible insurance policy, except for
any excess beyond the amount of payment under such
insurance policy;

(2) Based upon or attributable to any transaction:
(i) involving intentional misconduct or a knowing
violation of law; (ii) which is in violation of
the Colorado Business Corporation Act; or (iii) from
which Indemnitee derived an improper personal benefit;

(3) For an accounting of profits made from the
purchase or sale by Indemnitee of securities of the
Corporation, within the meaning of Section 16(b) of
the Securities Exchange Act of 1934 and amendments
thereto, or similar provisions of any state law; or

(4) For which payment of indemnification by the
Corporation is otherwise prohibited by applicable law.

(b) Except as provided in Paragraph 8 hereof, the Corporation
shall not be liable under this Agreement to make any payment in
connection with any action initiated by Indemnitee against the
Corporation or any director of the Corporation, unless the
Corporation has joined in or consented to the initiation of such
action.

7. PAYMENT OF COSTS AND EXPENSES IN ADVANCE. If requested by Indemnitee,
the Corporation shall pay (within ten (10) days of such written request) any
and all costs and Expenses incurred by Indemnitee in defending or investigating
any Claim, in advance of the final disposition of such Claim, upon the receipt
of a written undertaking by Indemnitee to repay any such amounts if it is
ultimately determined that Indemnitee is not entitled to indemnification by the
Corporation.

8. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Corporation shall
indemnify Indemnitee against any and all expenses, including attorneys' fees,
incurred by Indemnitee in connection with any action, including expenses of
preparation for such action, brought by Indemnitee for: (a) indemnification or
advance payment of Expenses by the Corporation under this Agreement; or (b)
recovery under any directors' liability insurance policy or policies maintained
by the Corporation; provided, however, that indemnification under this
Paragraph 8 shall be limited to those circumstances where the Indemnitee is
successful in obtaining a recovery of, or a determination that he is entitled
to such indemnification, advance expense payment or insurance recovery.

<PAGE> 4

9. PARTIAL INDEMNIFICATION. In the event Indemnitee is entitled to
indemnification hereunder for a portion of the Expenses, judgments, fines,
penalties and amounts paid in settlement actually and reasonably incurred by
him in the investigation, defense, appeal or settlement of any Claim but not,
however, for all of the total amount thereof, the Corporation shall indemnify
Indemnitee for the portion thereof to which Indemnitee is entitled.

10. SUBROGATION. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Corporation effectively to
bring suit or enforce such rights.

11. NO PRESUMPTION. For purposes of this Agreement, the termination of
any action, suit or proceeding by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court
has determined that indemnification is not permitted by applicable law.

12. SPECIFIC DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. Except to
the extent that the Indemnitee has been successful on the merits or otherwise
in defense of any action, suit, or proceeding referred to in subsection (a) or
(b) of Section 145 of the Delaware General Corporation Law, or defense of any
claim, issue or matter therein, any indemnification, other than advances under
Section 7 of this Agreement or unless ordered by a court, shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in subsections (a) and (b) of Section 145 of the Delaware General Corporation
Law. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.

13. LIABILITY INSURANCE. To the extent the Corporation maintains an
insurance policy or policies providing liability insurance for directors,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage extended to any other
director of the Corporation.

<PAGE> 5

14. SCOPE OF AGREEMENT. The rights of Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under any provision of the
Corporation's Certificate of Incorporation, Bylaws or laws of the State of
Delaware.

15. AMENDMENT, TERMINATION AND WAIVER. This Agreement may be amended,
modified or terminated and any of the terms and conditions herein may be waived
only by the written consent of the parties hereto. The failure of any party at
any time or times to require performance of any provisions contained herein
shall in no event affect the right of such party at any later time to enforce
the same.

16. BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the Indemnitee and his personal representatives,
heirs and assigns, and the Corporation and its successors and assigns,
including any direct or indirect successor of the Corporation by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Corporation; provided, however, that no assignment of any
rights or delegation of obligations provided for herein may be made by either
party without the express written consent of the other party. This Agreement
shall continue in effect while Indemnitee is a director of the Corporation and
for the period immediately thereafter, terminating two (2) years subsequent to
the duration of any applicable period of limitations for commencing any Claims
and subsequent to the conclusion of any Claims brought within such period.

17. GOVERNING LAW. The parties hereto acknowledge and agree that this
Agreement shall be governed by, construed and enforced in accordance with the
laws, and in the courts, of the State of Delaware.

18. SEVERABILITY. Any provision of this Agreement which may be prohibited
by law, or otherwise held invalid by a court of competent jurisdiction, shall
be ineffective only to the extent of such prohibition or invalidity and shall
not invalidate or otherwise render ineffective the remaining provisions of this
Agreement.

<PAGE> 6

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.

CORPORATION:

APPLIED FILMS CORPORATION

By:
----------------------

Its:
----------------------

INDEMNITEE:

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

<PAGE> 1

EXHIBIT 10.5

APPLIED FILMS CORPORATION

__________________________________________

$11,500,000

AMENDED AND RESTATED
CREDIT AGREEMENT

dated as of June 30, 1997

__________________________________________

NBD BANK

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Article Page
- ------- -----
<S> <C> <C> <C>
1. DEFINITIONS ................................................. 1

1.1 Certain Definitions ................................... 1
1.2 Other Definitions;
Rules of Construction ................................ 10

2. THE COMMITMENT .............................................. 10

2.1. Commitment of the Bank ................................ 10
2.2 Termination and Reduction of Commitment ............... 10
2.3 Fees.... .............................................. 11
2.4 Disbursement of Loans ................................. 12
2.5 Conditions of First Disbursement ...................... 12
2.6 Further Conditions for Disbursement ................... 13
2.7 Subsequent Elections as to Loans ...................... 14
2.8 Limitation of Requests and Elections .................. 14
2.9 Minimum Amounts ....................................... 15
2.10 Security and Collateral ............................... 15

3. PAYMENTS AND PREPAYMENTS OF LOANS ........................... 15

3.1. Principal Payments .................................... 15
3.2 Interest Payments ..................................... 16
3.3 Payment Method ........................................ 16
3.4 No Setoff or Deduction ................................ 16
3.5 Payment on Non-Business Day
Payment Computations ................................. 16
3.6 Additional Costs ...................................... 17
3.7 Illegality and Impossibility .......................... 18
3.8 Indemnification ....................................... 18
3.9 Letter of Credit Reimbursement
Payments ............................................. 18

</TABLE>

<PAGE> 3
<TABLE>
<S><C>
4. REPRESENTATIONS AND WARRANTIES ................................................. 20

4.1 Corporate Existence and Power ............................................ 20
4.2 Corporate Authority ...................................................... 20
4.3 Binding Effect ........................................................... 20
4.4 Subsidiaries ............................................................. 20
4.5 Litigation ............................................................... 21
4.6 Financial Condition ...................................................... 21
4.7 Use of Loans ............................................................. 21
4.8 Consents, Etc. ........................................................... 22
4.9 Taxes .................................................................... 22
4.10 Title to Properties ...................................................... 22
4.11 ERISA .................................................................... 22
4.12 Disclosure ............................................................... 22

5. COVENANTS....................................................................... 23

5.1. Affirmative Covenants .................................................... 23

(a) Preservation of Corporate
Existence, Etc. ..................................................... 23
(b) Compliance with Laws, Etc. .......................................... 23
(c) Maintenance of Properties;
Insurance ........................................................... 23
(d) Reporting Requirements .............................................. 23
(e) Accounting; Access to
Records, Books, Etc. ................................................ 25
(f) Further Assurances ................................................... 25

5.2 Negative Covenants ........................................................ 25

(a) Debt to EBITDA Ratio ................................................. 25
(b) Tangible Net Worth ................................................... 25
(c) Total Liabilities to Tangible Net Worth .............................. 25
(d) Capital Expenditures ................................................. 25
(e) Indebtedness ......................................................... 25
(f) Liens ................................................................ 26
(g) Merger; Purchase of Assets; Etc. ..................................... 27
(h) Disposition of Assets, Etc. .......................................... 27
(i) Investments .......................................................... 28

</TABLE>

ii
<PAGE> 4
<TABLE>
<S><C>
6. DEFAULT .............................................................. 28

6.1 Events of Default ............................................... 28
6.2 Remedies ........................................................ 30

7. MISCELLANEOUS ........................................................ 31

7.1. Amendments, Etc. ................................................ 31
7.2 Notices.......................................................... 31
7.3 No Waiver by Conduct;
Remedies Cumulative............................................. 32
7.4 Reliance on and Survival of
Various Provisions.............................................. 32
7.5 Expenses; Indemnification........................................ 32
7.6 Successors and Assigns........................................... 33
7.7 Counterparts .................................................... 33
7.8 Governing Law ................................................... 33
7.9 Table of Contents and Headings .................................. 33
7.10 Construction of Certain Provisions............................... 33
7.11 Integration and Severability..................................... 34
7.12 Interest Rate Limitation......................................... 34
7.13 Waiver of Jury Trial............................................. 34

EXHIBITS

Exhibit A ................... Revolving Credit Note
Exhibit B ................... Term Note
Exhibit C ................... Request for Advance
Exhibit D ................... Request for Continuation or Conversion of Loan
Exhibit E ................... Borrowing Base Certificate
Exhibit F ................... Confirmation of Security Agreement
Exhibit G ................... Confirmation of Guaranty, Subordination
Agreement, and Comfort Letter
</TABLE>

iii

<PAGE> 5

THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of June 30,
1997 (this "Agreement"), is between Applied Films Corporation, a Colorado
corporation (the "Company"), and NBD Bank, a Michigan banking corporation, of
Detroit, Michigan (the "Bank").

INTRODUCTION

The Company, successor by merger to Donnelly Applied Films
Corporation, and the Bank have previously entered into an Amended and Restated
Revolving Credit and Term Loan Agreement dated June 30, 1994 (the "1994 Credit
Agreement"). The Company desires to obtain a revolving credit facility in the
aggregate principal amount of $8,500,000, including letters of credit not to
exceed $3,000,000, in substitution for the facility provided under the 1994
Credit Agreement and in order to provide funds for its general corporate
purposes, to obtain a term loan facility to replace the term loan provided under
the 1994 Credit Agreement, and to provide and confirm certain security for the
Bank's benefit, and the Bank is willing to establish such a credit facility in
favor of the Company on the terms herein set forth.

ARTICLE 1
DEFINITIONS

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

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

"Automatic Termination Date" means June 30, 2000.

"Available Guaranty Amount" means, as of any date, the Guaranty Amount
less the principal amount then outstanding under the Term Loan.

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

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

"Business Day" means a day other than a Saturday, Sunday, or other day
on which the Bank is not open to the public for carrying on substantially all of
its banking functions.

<PAGE> 6

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

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

"Comfort Letter" means the comfort letter dated June 29, 1994,
executed and delivered by the Guarantor for the benefit of the Bank, as
confirmed by a Confirmation of Guaranty, Subordination Agreement, and Comfort
Letter entered into by the Guarantor pursuant to this Agreement in substantially
the form of Exhibit G and as amended or modified from time to time.

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

"Commitment" means the Bank's commitment to make Loans and Letter of
Credit Advances pursuant to Section 2.1 in amounts not exceeding an aggregate
principal amount outstanding at any time of $8,500,000 as such amount may be
reduced from time to time pursuant to Section 2.2, provided, that the aggregate
principal amount of all outstanding Letters of Credit shall not exceed
$3,000,000.

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

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

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

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

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

<PAGE> 7

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

"Eligible Fixed Assets" means, as of any date, those tangible fixed
assets owned by the Company in which the Company has granted to the Bank a
first-priority perfected security interest pursuant to the Security Agreement
and which are listed and valued in an appraisal dated April 21, 1997, performed
by Norman Levy and Associates, which has been furnished to the Bank, valued at
the fair market value established in the appraisal, as up-dated at the Bank's
request from time to time, but not including any such fixed asset (a) that is
not usable in the business of the Company, (b) that is located outside the
United States (which shall not be deemed to include any territories of the
United States), (c) that is subject to, or any accounts or other proceeds
resulting from the sale or other disposition thereof could be subject to, any
Lien (except those in favor of the Bank under the Security Documents), (d) that
is not in the possession of the Company, (e) that is held for sale or lease or
is the subject of any lease, (f) that is subject to any trademark, trade name or
licensing arrangement, or any law, rule or regulation, that could limit or
impair the ability of the Bank to promptly exercise all rights of the Bank under
the Security Documents, (g) if such fixed asset is located on premises not owned
by the Company unless the landlord or other owner of the premises has waived its
distraint, lien, and similar rights with respect to the fixed asset and has
agreed to permit the Bank to enter the premises after an Event of Default has
occurred pursuant to a waiver and agreement of the owner in favor of and
satisfactory to the Bank, (h) with respect to which any insurance proceeds are
not payable to the Bank as a loss payee or are payable to any loss payee other
than the Bank or the Company, or (i) that for any other reason is at any time
reasonably deemed by the Bank to be ineligible. With the Bank's consent, the
Company may add additional tangible fixed assets owned by it to Eligible Fixed
Assets by providing the Bank with an appraisal of the additional assets in form
and substance acceptable to the Bank and granting to the Bank a first-priority
perfected security interest in the additional assets.

"Eligible Inventory" means, as of any date, that raw material and
finished goods inventory owned by the Company in which the Company has granted
to the Bank a first-priority

<PAGE> 8

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

"Environmental Laws" means all provisions of law, statute, ordinances,
rules, regulations, judgments, writs, injunctions, decrees, orders, awards and
standards promulgated by the government of the United States of America or any
foreign government or by any state, province, municipality or other political
subdivision thereof or therein or by any court, agency, or instrumentality,
regulatory authority, or commission of any of the foregoing concerning the
protection of, or regulating the discharge of substances into, the environment.

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

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

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

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

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

<PAGE> 9

(a) Seven-eighths of one percent (7/8%) per annum, plus

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

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

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

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

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

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

Ratio calculated
under Section 5.2(a) Margin

(i) Less than or equal to
1.5 to 1.0 -.50%

<PAGE> 10

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

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

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

"Guarantor" means Donnelly Corporation, a Michigan corporation, and
each person entering into a Guaranty from time to time.

"Guaranty" means the Guaranty and Subordination Agreement dated May 4,
1992, entered into by the Guarantor for the benefit of the Bank, as confirmed by
a Confirmation of Guaranty, Subordination Agreement, and Comfort Letter entered
into by the Guarantor pursuant to this Agreement in substantially the form of
Exhibit G, and as amended or modified from time to time.

"Guaranty Amount" means the maximum amount of the Loans and Letters of
Credit guaranteed by the Guarantor pursuant to the Guaranty from time to time,
which, as of the Effective Date, is $5,000,000.

"Hazardous Materials" means any flammable explosives, radioactive
materials, hazardous materials, hazardous wastes, hazardous or toxic substances
or related materials defined in the comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et
seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C.
Sections 1801, et seq.), the Resource Conservation and Recovery Act, as amended
(42 U.S.C. Sections 6901, et seq.), and in the regulations adopted and
publications promulgated pursuant thereto, or any other federal, state, or local
government law, ordinance, rule, or regulation.

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

<PAGE> 11

obligations of such person to advance funds to, or to purchase assets, property
or services from, any other person in order to maintain the financial condition
of such other person.

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

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

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

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

"Leverage Ratio" means the ratio of the consolidated Total Liabilities
of the Company and its Subsidiaries to the consolidated Tangible Net Worth of
the Company and its Subsidiaries.

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

"Loans" means the Revolving Credit Loans and the Term Loan and "Loan"
means any Revolving Credit Loan or the Term Loan. Any such Loan or portion
thereof may also be denominated as a Floating Rate Loan or a Eurodollar Rate
Loan and such Floating Rate Loans and Eurodollar Rate Loans are referred to
herein as "types" of Loans.

"Maturity Date" means the earlier to occur of (a) June 30, 2000, and
(b) the date to which the maturity of the Term Loan is accelerated by the Bank
pursuant to Section 6.2.

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

<PAGE> 12

"Notes" means the Revolving Credit Note and the Term Note, and "Note"
means the Revolving Credit Note or the Term Note.

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

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

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

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

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

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

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

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

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

<PAGE> 13

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

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

"Security Documents" means, collectively, the Security Agreement, the
Guaranty, the Comfort Letter, and all other related agreements and documents,
including financing statements and similar documents, delivered pursuant to this
Agreement or otherwise entered into by any person to secure the Loans.

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

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

"Term Loan" means the Term Loan issued pursuant to Section 2.1, as
evidenced by the Term Note.

"Term Note" means the Term Note in substantially the form of Exhibit
B, as amended or modified from time to time, and together with any promissory
note or notes issued in exchange or replacement therefor.

<PAGE> 14

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

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

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

1.2 Other Definitions; Rules of Construction. As used herein, the
terms "Bank", "Company", "1994 Credit Agreement", and "this Agreement" shall
have the respective meanings ascribed thereto in the introductory paragraph of
this Agreement. Such terms, together with the other terms defined in Section
1.1, shall include both the singular and the plural forms thereof and shall be
construed accordingly. All computations required hereunder and all financial
terms used herein shall be made or construed in accordance with generally
accepted accounting principles unless such principles are inconsistent with the
express requirements of this Agreement. Use of the terms "herein", "hereof",
and "hereunder" shall be deemed references to this Agreement in its entirety and
not to the Section or clause in which such term appears. References to
"Sections", "subsections" and "Exhibits" shall be to Sections, subsections and
Exhibits, respectively, of this Agreement unless otherwise specifically
provided.

ARTICLE 2
THE COMMITMENT

2.1 Commitment of the Bank. (a) The Bank agrees, subject to the
terms of this Agreement, to make Revolving Credit Loans to the Company pursuant
to Section 2.4 and Section 3.9, and to make Letter of Credit Advances to the
Company pursuant to Section 2.4, from time to time from and including the
Effective Date to but excluding the Termination Date, not to exceed in aggregate
principal amount at any time outstanding the lesser of (i) the amount of the
Borrowing Base as of the close of business on the last day of the month next
preceding the date any such Advance is made and (ii) the amount of the
Commitment as of the date any such Advance is made, provided, that the aggregate
principal amount of Letter of Credit Advances outstanding at any time shall not
exceed $3,000,000.

(b) The Bank further agrees, subject to the terms of this Agreement,
to make a single Term Loan to the Company on the Effective Date in an amount not
to exceed $3,000,000.

2.2 Termination and Reduction of Commitment. (a) The Company shall
have the right to terminate or reduce the Commitment at any time and from time
to time, provided that (i) the Company shall give notice of such termination or
reduction to the Bank specifying the amount and effective date thereof, (ii)
each partial reduction of the Commitment shall be in a minimum amount of
$500,000 and in an integral multiple of $500,000, (iii) no such termination or

<PAGE> 15

reduction shall be permitted with respect to any portion of the Commitment as
to which a request for a Loan or a Letter of Credit Advance pursuant to Section
2.4 is then pending, and (iv) the Commitment may not be terminated if any Loans
or Letters of Credit are then outstanding and may not be reduced below the
principal amount of Loans and Letters of Credit then outstanding. The
Commitment or any portion thereof terminated or reduced pursuant to this
Section 2.2, whether optional or mandatory, may not be reinstated.

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

2.3 Fees. (a) The Company agrees to pay to the Bank a commitment fee
on the daily average unused amount of the Commitment, for the period from the
Effective Date to but excluding the Termination Date, at a rate equal to
one-quarter of one percent (1/4 of 1%) per annum. Accrued commitment fees shall
be payable quarterly in arrears on each Interest Payment Date, commencing on the
first such day occurring after the date of this Agreement, and on the
Termination Date.

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

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

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

(i) Less than or equal to
1.5 to 1.0 .75%
(ii) Greater than 1.5 to 1.0 but

<PAGE> 16

less than or equal to 2.5 to 1.0 1.0 %
(iii) Greater than 2.5 to 1.0 but
less than or equal to 3.0 to 1.0 1.25%
(iv) Greater than 3.0 to 1.0 1.50%

2.4 Disbursement of Loans. (a) The Company shall give the Bank notice
of its request for each Revolving Credit Loan or Letter of Credit Advance in
substantially the form of Exhibit C not later than 10:00 a.m. Detroit time (i)
three Eurodollar Business Days prior to the date a Revolving Credit Loan is
requested to be made if a Revolving Credit Loan is to be made as a Eurodollar
Rate Loan, (ii) on the date such Loan is requested to be made if such Loan to be
made is a Floating Rate Loan, and (iii) five Business Days prior to the date any
Letter of Credit Advance is requested to be made, which notice shall specify
whether a Eurodollar Rate Loan, Floating Rate Loan, or a Letter of Credit
Advance is requested and, in the case of each requested Eurodollar Rate Loan,
the Eurodollar Interest Period to be initially applicable to such Loan,
provided, however, that a Eurodollar Rate Loan may be requested only if the
aggregate outstanding principal amount of the Eurodollar Rate Loans (including
the requested Loan) plus the Letter of Credit Advances would not exceed the
Guaranty Amount. Subject to the terms of this Agreement, the proceeds of each
such requested Loan shall be made available to the Company by depositing the
proceeds thereof, in immediately available funds, in an account maintained and
designated by the Company at the Bank.

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

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

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

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

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

<PAGE> 17

hereby, certified as true and correct as of the Effective Date by a duly
authorized officer of the Company;

(d) Notes. The Revolving Credit Note and the Term Note, each duly
executed on behalf of the Company;

(e) Security Documents. A confirmation of the Security Agreement duly
executed on behalf of the Company substantially in the form of Exhibit F and a
confirmation of the Guaranty and the Comfort Letter substantially in the form of
Exhibit G duly executed on behalf of the Guarantor, granting or confirming to
the Bank the collateral and security intended to be provided pursuant to Section
2.10, together with:

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

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

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

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

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

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

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

<PAGE> 18

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

(d) In the case of any Letter of Credit Advance, the Company shall
have delivered to the Bank an application for the related Letter of Credit and
other related documentation requested by and acceptable to the Bank,
appropriately completed and duly executed on behalf of the Company.

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

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

2.8 Limitation of Requests and Elections. Notwithstanding any other
provision of this Agreement to the contrary, if, upon receiving a request for a
Eurodollar Rate Loan pursuant to Section 2.4, or a request for a continuation of
a Eurodollar Rate Loan as a Eurodollar Rate Loan of the then-existing type, or a
request for a conversion of a Floating Rate Loan to a Eurodollar Rate Loan
pursuant to Section 2.7, (a) in the case of any Eurodollar Rate Loan, deposits
in Dollars for periods comparable to the Eurodollar Interest Period elected by
the Company are not available to the Bank in the relevant interbank or secondary
market, or (b) the Eurodollar Rate will not adequately and fairly reflect the
cost to the Bank of making, funding or maintaining the related Eurodollar Rate
Loan, or (c) by reason of national or international financial, political, or
economic conditions or by reason of any applicable law, treaty, rule, or
regulation (whether domestic or foreign) now or hereafter in effect, or the
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof, or compliance by the Bank
with any guideline, request, or directive of such authority (whether or not
having the force

<PAGE> 19

of law), including without limitation exchange controls, it is impracticable,
unlawful or impossible for the Bank (i) to make or fund the relevant Eurodollar
Rate Loan, or (ii) to continue such Eurodollar Rate Loan as a Eurodollar Rate
Loan, or (iii) to convert a Loan to a Eurodollar Rate Loan, then the Company
shall not be entitled, so long as such circumstances continue, to request a
Eurodollar Rate Loan pursuant to Section 2.4 or a continuation of or conversion
to a Eurodollar Rate Loan type pursuant to Section 2.7. In the event that such
circumstances no longer exist, the Bank shall again consider requests for
Eurodollar Rate Loans pursuant to Section 2.4, and requests for continuations
of and conversions to Eurodollar Rate Loans of the affected type pursuant to
Section 2.7.

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

2.10 Security and Collateral. To secure the payment when due of the
Revolving Credit Note, the Term Note, and all other obligations of the Company
under this Agreement to the Bank, the Company shall execute and deliver, or
cause to be executed and delivered, to the Bank the Security Documents granting
or confirming the following:

(a) Security interests in all present and future accounts, inventory,
equipment, and fixtures of the Company provided, however, that the Company need
not grant to the Bank a security interest in fixed assets which are not Eligible
Fixed Assets; and

(b) The guarantee of the Guarantor.

ARTICLE 3
PAYMENTS AND PREPAYMENTS OF LOANS

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

(b) Term Loan. The Company shall pay the principal amount of the Term
Loan in thirty-five (35) equal monthly installments of $83,333.33 on the last
Business Day of each month, commencing on the last Business Day of July, 1997,
until the Maturity Date, at which time the entire outstanding principal amount
of the Term Loan shall be due and payable.

(c) Prepayment of Loans. The Company may at any time and from time to
time prepay all or a portion of the Loans, without premium or penalty, provided
that (i) the Company may not prepay any portion of any Loan as to which an
election for a continuation of or a conversion to a Eurodollar Rate Loan is
pending pursuant to Section 2.7, and (ii) unless earlier

<PAGE> 20

payment is required under this Agreement, any Eurodollar Rate Loan may only be
prepaid on the last day of the then-current Eurodollar Interest Period with
respect to such Loan. All prepayments of the Term Loan, whether optional or
mandatory, shall be applied to installments of principal in the inverse order
of their maturities, and no partial prepayment of the Term Loan shall reduce
the amounts or defer the date of the scheduled installments of principal
required to be paid thereon.

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

3.2 Interest Payments. The Company shall pay interest to the Bank on
the unpaid principal amount of each Loan, for the period commencing on the date
such Loan is made until such Loan is paid in full, on each Interest Payment Date
and at maturity (whether at stated maturity, by acceleration or otherwise), and
thereafter on demand, at the following rates per annum:

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

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

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

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

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

3.5 Payment on Non-Business Day; Payment Computations. Except as
otherwise provided in this Agreement to the contrary, whenever any installment
of principal of, or interest on, any Loan or any other amount due hereunder
becomes due and payable on a day which

<PAGE> 21

is not a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day and, in the case of any installment of principal,
interest shall be payable thereon at the rate per annum determined in
accordance with this Agreement during such extension. Computations of interest
and other amounts due under this Agreement shall be made on the basis of a year
of 360 days for the actual number of days elapsed, including the first day but
excluding the last day of the relevant period.

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

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

<PAGE> 22

A statement as to the amount of such compensation, prepared in good faith and
in reasonable detail by the Bank and submitted by the Bank to the Company,
shall be conclusive and binding for all purposes absent manifest error in
computation.

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

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

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

<PAGE> 23

the amount so paid by the Bank in respect of such draft or other demand under
such Letter of Credit. Such Revolving Credit Loan shall be disbursed
notwithstanding any failure to satisfy any conditions for disbursement of any
Loan set forth in Article II and, to the extent of the Revolving Credit Loan so
disbursed, the reimbursement obligation of the Company under this Section 3.9
shall be deemed satisfied.

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

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

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

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

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

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

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

<PAGE> 24

Documents, or any other acts or omissions on the part of the
Bank or any such party;

(vii) Any other event or circumstance that would, in the absence of
this clause, result in the release or discharge by operation of
law or otherwise of the Company from the performance or
observance of any obligation, covenant or agreement contained
in this Section 3.9.

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

ARTICLE 4
REPRESENTATIONS AND WARRANTIES

The Company represents and warrants that:

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

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

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

4.4 Subsidiaries. The Company has no Subsidiaries as of the date
hereof except for DAF Export Corporation, a Barbados corporation. Each such
Subsidiary and each corporation

<PAGE> 25

becoming a Subsidiary of the Company after the date hereof is and will be a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction of incorporation and is and will be duly qualified to
do business in each additional jurisdiction where such qualification is or may
be necessary under applicable law. Each Subsidiary of the Company has and will
have all requisite corporate power to own or lease the properties used in its
business and to carry on its business as now being conducted and as proposed to
be conducted. All outstanding shares of capital stock of each class of each
Subsidiary of the Company have been and will be validly issued and are and will
be fully paid and nonassessable and are and will be owned, beneficially and of
record, by the Company or another Subsidiary of the Company, free and clear of
any Liens.

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

4.6 Financial Condition. The consolidated balance sheet of the
Company and its Subsidiaries and the related consolidated statements of income,
retained earnings and changes in financial position of the Company and its
Subsidiaries for the fiscal year ended June 29, 1996, and reported on by Arthur
Andersen & Co., independent certified public accountants, and the interim
consolidated balance sheet and related interim consolidated statements of
income, retained earnings and changes in financial position of the Company and
its Subsidiaries, as of or for the 11-month period ended on May 31, 1997, copies
of which have been furnished to the Bank, fairly present, and the financial
statements of the Company delivered pursuant to Section 5.1(d) will fairly
present, the consolidated financial position of the Company and its Subsidiaries
as at the respective dates thereof, and the results of operations of the Company
and its Subsidiaries for the respective periods indicated, all in accordance
with generally accepted accounting principles consistently applied (subject, in
the case of said interim statements, to year-end audit adjustments). There has
been no material adverse change in the business, properties, operations or
condition, financial or otherwise, of the Company and its Subsidiaries since
June 29, 1996. There is no material Contingent Liability of the Company that is
not reflected in such financial statements or in the notes thereto.

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

<PAGE> 26

this Agreement or any Security Document that may cause the Loans to be deemed
secured, directly or indirectly, by margin stock.

4.8 Consents, Etc. No consent, approval or authorization of or
declaration, registration or filing with any governmental authority or any
nongovernmental person or entity, including without limitation any creditor,
lessor, or stockholder of the Company, is required on the part of the Company in
connection with the execution, delivery and performance of this Agreement, the
Notes, the Security Documents, or the transactions contemplated hereby or as a
condition to the legality, validity or enforceability of this Agreement, the
Notes, or any of the Security Documents.

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

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

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

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

22
<PAGE> 27

with the transactions contemplated hereby contains any untrue statement of a
material fact or omits to state a material fact in order to make the statements
contained herein and therein not misleading.

ARTICLE 5
COVENANTS

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

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

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

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

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

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

23
<PAGE> 28

condition and the action which the Company or the appropriate Subsidiary, as
the case may be, has taken and proposes to take with respect thereto;

(ii) As soon as available and in any event within 10 days after
the end of each month, the consolidated balance sheet of the Company and its
Subsidiaries as of the end of such month, and the related consolidated
statements of income, retained earnings and cash flow for the period commencing
at the end of the previous fiscal year and ending with the end of such month,
setting forth in each case in comparative form the corresponding figures for the
corresponding date or period of the preceding fiscal year, all in reasonable
detail and duly certified (subject to year-end audit adjustments) by the chief
financial officer of the Company as having been prepared in accordance with
generally accepted accounting principles, together with a certificate of the
chief financial officer of the Company stating (A) that no Event of Default or
event or condition which, with notice or lapse of time, or both, would
constitute an Event of Default, has occurred and is continuing or, if an Event
of Default or such an event or condition has occurred and is continuing, a
statement setting forth the details thereof and the action which the Company has
taken and proposes to take with respect thereto, and (B) that a computation
(which computation shall accompany such certificate and shall be in reasonable
detail) showing compliance with Sections 5.2(a), (b), (c), and (d) hereof is in
conformity with the terms of this Agreement;

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

(iv) As soon as available and in any event within 10 days after
the end of each month, a list of all accounts receivable of the Company, aged
from the date of invoice, and a list of inventory then held by the Company,
categorized as raw materials, work-in-process, and finished goods, and valued at
the lower of cost or market, each certified as true and correct by the chief
financial officer of the Company;

(v) As soon as available and in any event no later than 10 days
after the last day of each month, a Borrowing Base Certificate prepared as of
the close of business on the last day of such month, together with supporting
schedules, in form and detail satisfactory to the Bank, setting forth such
information as the Bank may request with respect to the aging, value, location
and other information relating to the computation of the Borrowing Base and the
eligibility of any

<PAGE> 29

property or assets included in such computation, certified as true and correct
by the chief financial officer of the Company;

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

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

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

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

(a) Debt to EBITDA Ratio. Permit or suffer the ratio of (i)
consolidated Indebtedness of the Company and its Subsidiaries as of the end of
each fiscal quarter to (ii) consolidated EBITDA of the Company and its
Subsidiaries for the preceding four fiscal quarters then ended to be greater
than 4.0 to 1.0 at any time from and including the Effective Date.

(b) Tangible Net Worth. Permit or suffer the consolidated Tangible
Net Worth of the Company and its Subsidiaries to be less than the sum of (i)
$5,200,000 plus (ii) 75% of consolidated Cumulative Net Income of the Company
and its Subsidiaries for each fiscal year of the Company ending after the
Effective Date.

(c) Total Liabilities to Tangible Net Worth. Permit or suffer the
Leverage Ratio to be greater than 3.5 to 1.0 at any time from and including the
Effective Date.

(d) Capital Expenditures. Make any capital expenditures during any
fiscal year of the Company, the aggregate amount of which exceeds $4,500,000.

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

(i) The Loans;

25
<PAGE> 30

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

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

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

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

(vi) Indebtedness secured by fixed assets other than Eligible
Fixed Assets.

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

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

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

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

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

<PAGE> 31

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

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

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

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

(ix) Any Lien created to secure payment of a portion of the
purchase price of, or existing at the time of acquisition of, any other tangible
fixed asset acquired by the Company (other than inventory and supplies) may be
created or suffered to exist upon such fixed asset if the aggregate principal
amount of all Indebtedness secured by such Liens does not exceed $100,000,
provided, that such Lien does not encumber any other asset at any time owned by
the Company, and provided, further, that not more than one Lien shall encumber
such fixed asset at any one time.

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

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

<PAGE> 32

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

ARTICLE 6
DEFAULT

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

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

(b) Misrepresentation. Any representation or warranty made by the
Company in Article 4 or by the Company or the Guarantor in any Security Document
or any other certificate, report, financial statement, or other document
furnished by or on behalf of the Company or the Guarantor in connection with
this Agreement shall have been incorrect in any material respect when made or
deemed made; or

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

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

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

<PAGE> 33

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

(g) ERISA. The occurrence of a Reportable Event that results in or
could result in liability of the Company, any of its Subsidiaries or their ERISA
Affiliates to the PBGC or to any Plan and such Reportable Event is not corrected
within thirty (30) days after the occurrence thereof; or the occurrence of any
Reportable Event which could constitute grounds for termination of any Plan of
the Company, any of its Subsidiaries, or their ERISA Affiliates by the PBGC or
for the appointment by the appropriate United States District Court of a trustee
to administer any such Plan and such Reportable Event is not corrected within
thirty (30) days after the occurrence thereof; or the filing by the Company, any
of its Subsidiaries, or any of their ERISA Affiliates of a notice of intent to
terminate a Plan or the institution of other proceedings to terminate a Plan; or
the Company, any of its Subsidiaries, or any of their ERISA Affiliates shall
fail to pay when due any liability to the PBGC or to a Plan; or the PBGC shall
have instituted proceedings to terminate, or to cause a trustee to be appointed
to administer, any Plan of the Company, any of its Subsidiaries, or their ERISA
Affiliates; or any person engages in a Prohibited Transaction with respect to
any Plan which results in or could result in liability of the Company, any of
its Subsidiaries, any of their ERISA Affiliates, any Plan of the Company, any of
its Subsidiaries, or their ERISA Affiliates or fiduciary of any such Plan; or
failure by the Company, any of its Subsidiaries, or any of their ERISA
Affiliates to make a required installment or other payment to any Plan within
the meaning of Section 302(f) of ERISA or Section 412(n) of the Code that
results in or could result in liability of the Company, any of its Subsidiaries,
or any of their ERISA Affiliates to the PBGC or any Plan; or the withdrawal of
the Company, any of its Subsidiaries, or any of their ERISA Affiliates from a
Plan during a plan year in which it was a "substantial employer" as defined in
Section 4001(9a)(2) of ERISA; or the Company, any of its Subsidiaries, or any
of their ERISA Affiliates becomes an employer with respect to any Multiemployer
Plan without the Bank's prior written consent.

(h) Insolvency, Etc. The Company, any of its Subsidiaries, or the
Guarantor shall be dissolved or liquidated (or any judgment, order or decree
therefor shall be entered), or shall generally not pay its debts as they become
due, or shall admit in writing its inability to pay its debts generally, or
shall make a general assignment for the benefit of creditors, or shall
institute, or there shall be instituted against the Company, any of its
Subsidiaries, or the Guarantor any proceeding or case seeking to adjudicate it a
bankrupt or insolvent or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its debts
under

29
<PAGE> 34

any law relating to bankruptcy, insolvency, or reorganization or relief or
protection of debtors, or seeking the entry of an order for relief, or the
appointment of a receiver, trustee, custodian, or other similar official for it
or for any substantial part of its assets, rights, revenues, or property, and,
if such proceeding is instituted against the Company or any Subsidiary or the
Guarantor and is being contested by the Company or the Subsidiary or the
Guarantor in good faith by appropriate proceedings, such proceeding shall
remain undismissed or unstayed for a period of 60 days; or the Company, any
Subsidiary, or the Guarantor shall take any action (corporate or other) to
authorize or further any of the actions described above in this subsection; or

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

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

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

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

(c) Upon the occurrence and during the continuance of any Event of
Default, the Bank may at any time and from time to time, without notice to the
Company (any requirement for such notice being expressly waived by the Company)
set off and apply against any and all of the obligations of the Company now or
hereafter existing under this Agreement any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at

30
<PAGE> 35

any time owing by the Bank to or for the credit or the account of the Company
and any property of the Company from time to time in possession of the Bank,
irrespective of whether or not the Bank shall have made any demand hereunder
and although such obligations may be contingent and unmatured. The Company
grants to the Bank a lien on and security interest in all such deposits,
indebtedness, and property as collateral security for the payment and
performance of the Company's obligations under this Agreement. The Bank's
rights under this Section 6.2(c) are in addition to other rights and remedies
(including without limitation other rights of setoff) which the Bank may have.

ARTICLE 7
MISCELLANEOUS

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

7.2 Notices. (a) Except as otherwise provided in Section 7.2(c), all
notices and other communications hereunder shall be in writing and shall be
delivered or sent to the Company at 6797 Winchester Circle, Boulder, Colorado
80301, Attention: Treasurer, and to the Bank at 611 Woodward Avenue, Detroit,
Michigan 48226, Attention: Manager, Commercial Loans, or to any other address as
may be designated by the Company or the Bank by notice to the other party. All
notices and other communications shall be deemed to have been given at the time
of actual delivery thereof to such address, or if sent by certified or
registered mail, postage prepaid, to such address, on the third day after the
date of mailing, or, if sent by Federal Express or other recognized overnight
delivery service, prepaid, to such address, on the Business Day following the
date of deposit with such delivery service prior to such service's next-day
delivery deadline, provided, however, that notices to the Bank shall not be
effective until received.

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

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

7.3 No Waiver By Conduct; Remedies Cumulative. No course of dealing
on the part of the Bank, nor any delay or failure on the part of the Bank in
exercising any right, power, or privilege hereunder shall operate as a waiver of
such right, power, or privilege or otherwise prejudice the Bank's rights and
remedies hereunder; nor shall any single or partial exercise thereof

<PAGE> 36

preclude any further exercise thereof or the exercise of any other right,
power, or privilege. No right or remedy conferred upon or reserved to the Bank
under this Agreement, the Notes, or any Security Document is intended to be
exclusive of any other right or remedy, and every right and remedy shall be
cumulative and in addition to every other right or remedy granted thereunder or
now or hereafter existing under any applicable law. Every right and remedy
granted by this Agreement, the Notes, or any Security Document or by applicable
law to the Bank may be exercised from time to time and as often as may be
deemed expedient by the Bank and, unless contrary to the express provisions of
this Agreement, the Notes, or any Security Document, irrespective of the
occurrence or continuance of any Default or Event of Default.

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

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

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

<PAGE> 37

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

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

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

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

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

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

<PAGE> 38

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

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

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

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

[THIS SPACE INTENTIONALLY LEFT BLANK]

<PAGE> 39

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

APPLIED FILMS CORPORATION

By: /s/ Roger Smith
---------------------------------------
Roger Smith
Its: Treasurer

NBD BANK

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

35
<PAGE> 40
EXHIBIT A

REVOLVING CREDIT NOTE

$8,500,000 June 30, 1997
Detroit, Michigan

FOR VALUE RECEIVED, the undersigned, APPLIED FILMS CORPORATION, a
Colorado corporation (the "Company"), promises to pay to the order of NBD BANK,
a Michigan banking corporation, of Detroit, Michigan (the "Bank"), at the
principal banking office of the Bank in lawful money of the United States of
America and in immediately available funds, the principal sum of Eight Million
Five Hundred Thousand Dollars ($8,500,000), or such lesser amount as is noted in
the books and records of the Bank, on the Termination Date; and to pay interest
on the unpaid principal balance hereof from time to time outstanding, in like
money and funds, for the period from the date hereof until the Revolving Credit
Loans shall be paid in full, at the rates per annum and on dates provided in
the Credit Agreement referred to below.

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

This Note is entitled to the benefit of the Guaranty and Subordination
Agreement dated as of May 4, 1992, as amended, and as further confirmed by a
Confirmation of Guaranty and Subordination Agreement dated as of even date
herewith, each executed by Donnelly Corporation, a Michigan corporation, in
favor of the Bank.

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

The Company and each endorser or guarantor hereof waives demand,
presentment, protest, diligence, notice of dishonor and any other formality in
connection with this Note. Should the indebtedness evidenced by this Note or
any part thereof be collected in any proceeding or be placed in the hands of
attorneys for collection, the Company agrees to pay, in addition to the
principal and interest due and payable hereon, all costs of collecting this
Note, including attorneys' fees and expenses.

APPLIED FILMS CORPORATION

By: _____________________________
Roger Smith
Its: Treasurer

<PAGE> 41

EXHIBIT C

REQUEST FOR ADVANCE

(date)

NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226

Attention: ____________

Applied Films Corporation, a Colorado corporation (the "Company"),
requests a [Letter of Credit Advance] [Revolving Credit Loan] pursuant to
Section 2.4 of the Amended and Restated Credit Agreement, dated as of June 30,
1997 (the "Credit Agreement"), between the Company and the Bank, in the amount
of $__________, to be issued on __________, 19__, and to be evidenced by the
Company's Revolving Credit Note. Capitalized terms used but not defined herein
shall have the respective meanings assigned to them in the Credit Agreement.

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

Such Letter of Credit Advance shall be made by the Bank issuing its
Letter of Credit for the account of the Company in the maximum amount of
$_______________ to and for the benefit of ___________________ with a stated
expiry date of ___________________, 199__, and containing the further terms and
conditions set forth in the attached letter of credit application to the Bank.

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

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

B. If the Company requests a Eurodollar Rate Loan, then the aggregate
principal amount of the Eurodollar Rate Loans (including the requested loan)
plus the Letter of Credit Advances does not exceed the Guaranty Amount.

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

Acceptance of the proceeds of such Advance by the Company shall be deemed to be
a further representation and warranty that the representations and warranties
made herein are true and correct at the time such proceeds are disbursed.

APPLIED FILMS CORPORATION

By: ___________________________

Its_________________________

<PAGE> 42

EXHIBIT B

TERM NOTE

$3,000,000 June 30, 1997
Detroit, Michigan

FOR VALUE RECEIVED, the undersigned, APPLIED FILMS CORPORATION, a
Colorado corporation (the "Company"), promises to pay to the order of NBD BANK,
a Michigan banking corporation of Detroit, Michigan (the "Bank"), at the
principal banking office of the Bank in lawful money of the United States of
America and in immediately available funds, the principal sum of Three Million
and 00/100 Dollars ($3,000,000), or such lesser amount as is noted in the books
and records of the Bank, in 35 monthly payments of $83,333.33 payable on the
last Business Day of each month, commencing on the last Business Day of July,
1997, to and including the Maturity Date, when the entire outstanding principal
amount of the Term Loan evidenced hereby, and all accrued interest thereon,
shall be due and payable; and to pay interest on the unpaid principal balance
hereof from time to time outstanding, in like money and funds, for the period
from the date hereof until the Term Loan shall be paid in full, at the rates per
annum and on the dates provided in the Credit Agreement referred to below.

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

This Term Note is entitled to the benefit of the Guaranty and
Subordination Agreement dated as of May 4, 1992, as amended, and as further
confirmed by a Confirmation of Guaranty and Subordination Agreement dated as of
even date herewith, each executed by Donnelly Corporation, a Michigan
corporation, in favor of the Bank.

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

The Company and each endorser or guarantor hereof waives demand,
presentment, protest, diligence, notice of dishonor and any other formality in
connection with this Term Note. Should the indebtedness evidenced by this Term
Note or any part thereof be collected in any proceeding or be placed in the
hands of attorneys for collection, the Company agrees to pay, in addition to the
principal and interest due and payable hereon, all costs of collecting this Term
Note, including attorneys' fees and expenses.

APPLIED FILMS CORPORATION

By: ______________________
Roger Smith
Its: Treasurer

<PAGE> 43
EXHIBIT D

REQUEST FOR CONTINUATION OR CONVERSION OF LOAN

(date)

NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226

Attention: _________________

The undersigned (the "Company") requests that $_______ of the
principal amount of the Revolving Credit Loan originally made on
_______________, 19__, which Loan is currently a [insert type of Loan based on
type of interest rate applicable], be continued as or converted to, as the case
may be, a [insert type of Loan requested based on type of interest rate desired]
on ______________, 19__. If such Loan is requested to be converted to a
Eurodollar Rate Loan, the Company elects a Eurodollar Interest Period for such
Loan of [insert permitted Eurodollar Interest Period]. Capitalized terms used
but not defined herein shall have the respective meanings assigned to them in
the Amended and Restated Credit Agreement, dated as of June 30, 1997 (the
"Credit Agreement"), between the Company and NBD Bank.

In support of this request, the Company certifies that:

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

B. If the Company requests that a Floating Rate Loan be converted into
a Eurodollar Rate Loan, then the aggregate outstanding principal amount of the
Eurodollar Rate Loans (including the requested loan) plus the Letter of Credit
Advances does not exceed the Guaranty Amount.

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

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

APPLIED FILMS CORPORATION,
a Colorado corporation

By_______________________________

Its______________________________

<PAGE> 44

EXHIBIT E

BORROWING BASE CERTIFICATE

(date)

NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226

Attention:

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

The Borrower hereby represents and warrants to the Bank that the
following computations of the Borrowing Base, and the related supporting
schedules attached hereto, are true and correct as of the close of business on
__________, 19___ and are in conformity with the terms and conditions of the
Credit Agreement:

Borrowing Base
<TABLE>
<S><C>
1. (1) Eligible Accounts Receivable.......................... $________
(b) 85% of Eligible Accounts Receivable................... $________
2. (a) Value of Eligible Inventory........................... $________
(b) 40% of Value of Eligible Inventory.................... $________
(c) Maximum Eligible Inventory Value...................... $4,000,000
3. (a) Donnelly Corporation Guaranty Amount.................. $________
(b) Outstanding principal amount of Term Loan............. $________
(c) Available Guaranty Amount (3(a) minus 3(b))........... $________
</TABLE>

<PAGE> 45
<TABLE>
<S><C>
4. (a) Fair Market Value of Eligible Fixed Assets................. $________

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

5. Borrowing Base
(1(b), plus the lesser of 2(b) and 2(c), plus 3(c), plus 4(b)).... $_______

6. Aggregate outstanding principal amount of Revolving Credit
Loans plus Letter of Credit Advances............................... $_______

7. 5 minus 6 - if negative, remit difference to the Bank
under Section 3.1(c) of the Credit Agreement....................... $_______
</TABLE>

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

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

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

APPLIED FILMS CORPORATION

By: ____________________________

Its: _______________________

2
<PAGE> 46

EXHIBIT F

CONFIRMATION OF SECURITY AGREEMENT

In connection with the Amended and Restated Credit Agreement dated as
of June 30, 1997 (as it may be amended or modified from time to time, the
"Credit Agreement"), between Applied Films Corporation, a Colorado corporation
(the "Company"), and NBD Bank, a Michigan banking corporation (the "Bank"), the
Company confirms to the Bank the continuing effect of the Security Agreement,
dated June 30, 1994, as security for the payment of all debt now or hereafter
owing by the Company to the Bank, including without limitation the debt arising
under the Credit Agreement.

IN WITNESS WHEREOF, the undersigned has duly executed this
Confirmation on ______________, 1997.

APPLIED FILMS CORPORATION

By: ____________________________
Roger Smith

Its: Treasurer

<PAGE> 47

EXHIBIT G

CONFIRMATION OF GUARANTY,
SUBORDINATION AGREEMENT, AND COMFORT LETTER

In connection with the Amended and Restated Credit Agreement dated as
of June 30, 1997 (as it may be amended or modified from time to time, the
"Credit Agreement"), between Applied Films Corporation, a Colorado corporation
and successor by merger to Donnelly Applied Films Corporation (the "Company"),
and NBD Bank, a Michigan banking corporation (the "Bank"), Donnelly Corporation,
a Michigan corporation (the "Guarantor"), acknowledges that it has previously
executed and delivered in the Bank's favor a Guaranty and Subordination
Agreement dated May 4, 1992, as amended (the "Guaranty"), and a letter dated
June 29, 1994 (the "Letter").

The Guarantor consents to the Company entering into the Credit
Agreement and confirms to the Bank the continuing effect of the Guaranty as a
guaranty of all debt now or hereafter owing by the Company to the Bank,
including without limitation the debt arising under the Credit Agreement;
provided, that the Guarantor's liability under the Guaranty shall be satisfied
by payment to the Bank of Five Million Dollars ($5,000,000).

The Guarantor further confirms that the Letter continues to accurately
represent the Guarantor's intentions regarding the Company.

IN WITNESS WHEREOF, the undersigned has duly executed this
Confirmation on ________________, 1997.

DONNELLY CORPORATION

By: _____________________________
William R. Jellison
VP of Financial Operations,
Treasurer, and Controller

<PAGE> 48

SECURITY AGREEMENT

THIS SECURITY AGREEMENT, dated June 30, 1994 (this "Security
Agreement"), by Donnelly Applied Films Corporation, a Michigan corporation (the
"Company"), in favor of NBD Bank, N.A., a national banking association (the
"Bank").

WHEREAS, the Company has entered into an Amended and Restated
Revolving Credit and Term Loan Agreement, of even date herewith (as amended from
time to time, the "Credit Agreement"), with the Bank, pursuant to which the
Bank may make loans and issue letters of credit to the Company; and

WHEREAS, as a condition to the effectiveness of the Credit Agreement,
the Company is required, among other things, to grant to the Bank a
first-priority security interest in and to the Collateral hereinafter described
to secure all amounts owing or to be owing by the Company to the Bank.

NOW, THEREFORE, to secure (a) the payment of the principal sum of
Eight Million Dollars ($8,000,000), together with interest thereon, in
accordance with the Revolving Credit Note dated June 30, 1994, issued by the
Company under the Credit Agreement, (b) the payment of the principal sum of Four
Million, Seven Hundred Twenty-Two Thousand, Two Hundred Twenty-Two and 00/100
Dollars ($4,722,222), together with interest thereon, in accordance with the
Amended and Restated Term Note dated June 30, 1994, issued by the Company under
the Credit Agreement (the notes issued and to be issued by the Company pursuant
to the Credit Agreement are herein collectively called the "Notes"), (c) the
performance of the covenants herein contained and any monies expended by the
Bank in connection therewith, (d) the payment of all obligations and performance
of all covenants of the Company under the Loan Agreement, and any other
documents, agreements or instruments between the Company and the Bank given in
connection therewith, and (e) any and all other indebtedness, obligations and
liabilities of any kind of the Company to the Bank, now or hereafter existing,
direct or indirect (including without limitation any participation interest
acquired by the Bank in any such indebtedness, obligations or liabilities of the
Company to any other person), absolute or contingent, joint and/or several,
secured or unsecured, arising by operation of law or otherwise, and whether
incurred by the Company as principal, surety, endorser, guarantor, accommodation
party or otherwise (all of the aforesaid indebtedness, obligations and
liabilities of the Company being called the "Secured Obligations" and all of
the documents, agreements and instruments between the Company, and the Bank
evidencing or securing the repayment of, or otherwise pertaining to, the Secured
Obligations being collectively called the "Loan Documents"), for value received
and pursuant to the Credit Agreement, the Company hereby grants, assigns, and

<PAGE> 49

transfers to the Bank a first-priority security interest in and to the following
described property whether now owned or existing or hereafter acquired or
arising and wherever located (all of which is collectively called the
"Collateral"):

(a) All of the Company's present and future accounts, documents,
instruments, general intangibles and chattel paper, including, but without
limitation, all contract rights, all accounts receivable, all notes receivable
(other than those notes receivable in which another bank or financial
institution has a security interest), all equipment leases, all deposit accounts
and all monies and claims for money due or to become due to the Company;

(b) All of the Company's inventory of every type, wherever located,
including but not limited to raw materials, work in process, and finished goods,
and all inventory that is available for leasing or leased to others by the
Company;

(c) All of the Company's furniture, fixtures, machinery, and
equipment, whether now owned or hereafter acquired, and wherever located, and
whether used by the Company or any other person, or leased by the Company to any
person, and whether the interest of the Company is as owner, lessee, or
otherwise;

(d) All books, records, files, correspondence, computer programs,
tapes, disks, cards, accounting information and other data of the Company
related in any way to the Collateral described above, including but not limited
to any of the foregoing necessary to administer, sell or dispose of any of the
Collateral;

(e) All substitutions and replacements for, and all additions and
accessions to, any and all of the foregoing; and

(f) All products and all proceeds of any and all of the foregoing,
and, to the extent not otherwise included, all payments under insurance (whether
or not the Bank is the loss payee thereof), and any indemnity, warranty or
guaranty, payable by reason of loss or damage to or otherwise with respect to
any of the foregoing.

1. Representations, Warranties, Covenants and Agreements. The
Company further represents, warrants, covenants, and agrees with the Bank as
follows:

(a) Priority. At the time security interest of the Bank
otherwise consent, the of collateral; Security Interest any Collateral becomes
subject to a Bank hereunder, unless the Bank shall Company shall be deemed to
have

-2-
<PAGE> 50

represented and warranted that (i) the Company is the lawful owner of such
Collateral and has the right and authority to subject the same to the security
interest of the Bank; (ii) none of the Collateral is subject to any lien other
than that in favor of the Bank and there is no effective financing statement
covering any of the Collateral on file in any public office, other than in favor
of the Bank. This Security Agreement creates in favor of the Bank a valid and
perfected first-priority security interest in the Collateral enforceable against
the Company and all third parties and securing the payment of the Secured
Obligations and all filings and other actions necessary or desirable to create,
preserve or perfect such security interests have been duly taken.

(b) Location of Offices, Records and Facilities. The Company's
chief executive office and chief place of business and the office where the
Company keeps its records concerning its accounts, contract rights, chattel
papers, instruments, general intangibles and other obligations arising out of or
in connection with the sale or lease of goods or the rendering of services or
otherwise ("Receivables"), and all originals of all leases and other chattel
paper which evidence Receivables, are located in the State of Colorado, County
of Boulder, at 6797 Winchester Circle, Boulder, Colorado 80301. The Company
will provide the Bank with prior written notice of any proposed change in the
location of its chief executive office and will not change the location of its
chief executive office without the prior written consent of the Bank. The
Company's only other offices and facilities are at the locations set forth in
Schedule 1(b) hereto. The Company will provide the Bank with prior written
notice of any change in the locations of its other offices and the facilities.
The tax identification number of the Company is 34-1701145. The name of the
Company is Donnelly Applied Films Corporation and the Company operates under no
other names. The Company shall not change its name without the prior written
consent of the Bank.

(c) Location of Inventory, Fixtures, Machinery, and Equipment.
(i) All Collateral consisting of inventory is, and will be, located at the
locations listed on Schedule 1(c), and at no other locations without the prior
written consent of the Bank. (ii) All Collateral consisting of
fixtures, machinery, or equipment is, or will be, located at the locations
listed on Schedule 1(c), and at no other locations without the prior written
consent of the Bank. If any Collateral described in clauses (i) or (ii) is
kept at leased locations or warehoused, the Company has obtained appropriate
landlord's lien waivers or appropriate warehousemen's notices have
been sent, each satisfactory to the Bank, unless waived by the Bank.

-3-
<PAGE> 51

(d) Liens, Etc. The Company will keep the Collateral free at
all times from any and all liens, security interests or encumbrances other than
those described in paragraph 1(a)(ii) and those consented to in writing by the
Bank. The Company will not, without the prior written consent of the Bank, sell
or lease, or permit or suffer to be sold or leased, any of the Collateral except
inventory which is sold in the ordinary course of the Company's business, and
tangible Collateral, not to exceed $100,000 in book value per year, which is
disposed of in the ordinary course of the Company's business as being obsolete.
The Bank or its attorneys may at any and all reasonable times inspect the
Collateral and for such purpose may enter upon any and all premises where the
Collateral is or might be kept or located.

(e) Insurance. The Company shall keep the tangible
Collateral insured at all times against loss by theft, fire and other
casualties. Said insurance shall be issued by a company satisfactory to the
Bank and shall be in amounts sufficient to protect the Bank against any and all
loss or damage to the Collateral. The policy or policies which evidence said
insurance shall be delivered to the Bank upon request, shall contain a lender's
loss payable clause in favor of the Bank, shall name the Bank as an additional
insured, as its interest may appear, shall not permit amendment, cancellation or
termination without giving the Bank at least 30 days prior written notice
thereof, and shall otherwise be in form and substance satisfactory to
the Bank. Reimbursement under any liability insurance maintained by the
Company pursuant to this paragraph 1(e) may be paid directly to the person who
shall have incurred liability covered by such insurance. In case of any
loss involving loss to tangible Collateral when the next succeeding sentence is
not applicable, the Company shall make or cause to be made the necessary repairs
to or replacements of such tangible Collateral and any proceeds of insurance
maintained by the Company pursuant to this paragraph 1(e) shall be paid to the
Company as reimbursement for the costs of such repairs or replacements. Upon
the occurrence and during the continuance of an Event of Default or the actual
or constructive total loss of any tangible Collateral, all insurance payments in
respect of such tangible Collateral shall be paid to and applied by the Bank as
specified in paragraph 3.

(f) Taxes, Etc. The company will pay promptly, and within the
time that they can be paid without interest or penalty, any taxes, assessments
and similar imposts and charges, not being contested in good faith, which are
now or hereafter may become a lien, charge or encumbrance upon any of the
Collateral. If the Company fails to pay any such taxes, assessments or other
imposts or charges in accordance with this Section, the Bank shall have the
option to do so and the Company agrees to repay

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<PAGE> 52

forthwith all amounts so expended by the Bank with interest at the rate equal to
the Overdue Rate (as defined in the Credit Agreement).

(g) Further Assurances. The Company will do all acts and things,
will endorse and deliver to the Bank all original notes and instruments
constituting part of the Collateral, and will execute all financing statements
and writings requested by the Bank to establish, maintain and continue a
perfected and valid security interest of the Bank in the Collateral, and will
promptly on demand pay all reasonable costs and expenses of filing and recording
all instruments, including the costs of any searches deemed necessary by the
Bank to establish and determine the validity and the priority of the Bank's
security interests. A carbon, photographic or other reproduction of this
Security Agreement or any financing statement covering the Collateral shall be
sufficient as a financing statement.

(h) Maintenance of Tangible Collateral. The Company will cause
The tangible Collateral to be maintained and preserved in the same condition,
repair and working order as when new, ordinary wear and tear excepted, and in
accordance with any manufacturer's manual, and shall forthwith, or, in the case
of any loss or damage to any of the tangible Collateral as quickly as
practicable after the occurrence thereof, make or cause to be made all repairs,
replacements, and other improvements made in connection therewith which are
necessary or desirable to such end. The Company shall promptly furnish to the
Bank a statement respecting any loss or damage to any of the tangible
Collateral.

(i) Maintenance of Intangible Collateral. The Company shall
preserve and maintain all rights of the Company and the Bank in the intangible
Collateral, including without limitation the payment of all maintenance fees and
the taking of appropriate action at the Company's expense to halt the
infringement of any of the intangible Collateral.

(j) Special Rights Reqarding Accounts Receivable. The Bank or any
of its agents may, at any time and from time to time in its sole discretion and
irrespective of the existence of any event of default under this Security
Agreement, verify directly with the Company's account debtors the accounts
pledged hereunder in any manner. The Company directs and authorizes any and
all of its present and future account debtors to comply with requests for
information from the Bank, the Bank's designees and agents and/or auditors,
relating to any and all business transactions between the Company and the
Company's account debtors.

-5-
<PAGE> 53

2. Events of Default. The occurrence of any Event of Default
specified in the Credit Agreement shall be deemed an event of default under this
security Agreement.

3. Remedies. Upon the occurrence of any such event of default, the
Bank shall have and may exercise any one or more of the rights and remedies
provided to it under this Security Agreement or any of the other Loan Documents
or provided by law, including but not limited to all of the rights and remedies
of a secured party under the Uniform Commercial Code, and the Company hereby
agrees to assemble the Collateral and make it available to the Bank at a place
to be designated by the Bank which is reasonably convenient to both parties,
authorizes the Bank to take possession of the Collateral with or without demand
and with or without process of law and to sell and dispose of the same at public
or private sale and to apply the proceeds of such sale to the costs and expenses
thereof (including reasonable attorneys' fees and disbursements, incurred by the
Bank) and then to the payment of the indebtedness and satisfaction of other
Secured obligations. Any requirement of reasonable notice shall be met if the
Bank sends such notice to the Company, by registered or certified mail, at least
5 days prior to the date of sale, disposition or other event giving rise to a
required notice. The Bank may be the purchaser at any such sale. The Company
expressly authorizes such sale or sales of the Collateral in advance of and to
the exclusion of any sale or sales of or other realization upon any other
collateral securing the Secured Obligations. The Bank shall have no obligation
to preserve rights against prior parties. The Company hereby waives as to
the Bank any right of subrogation or marshalling of such Collateral and any
other collateral for the Secured Obligations. To this end, the Company hereby
expressly agrees that any such collateral or other security of the Company or
any other party which the Bank may hold, or which may come to any of them or any
of their possession, may be dealt with in all respects and particulars as though
this security Agreement were not in existence. The parties hereto further agree
that public sale of the Collateral by auction conducted in any county in which
any Collateral is located or in which the Bank or the Company does business
after advertisement of the time and place thereof shall, among other manners of
public and private sale, be deemed to be a commercially reasonable disposition
of the Collateral. The Company shall be liable for any deficiency remaining
after disposition of the Collateral.

4. Special Remedies Concerning Certain Collateral. (a) Upon the
occurrence of any event of default, the Company shall, if requested to do so in
writing, and to the extent so requested (i) promptly collect and enforce payment
of all amounts due the Company on account of, in payment of, or in connection
with, any of the Collateral, (ii) hold all payments in the form

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<PAGE> 54

received by the Company as trustee for the Bank, without commingling with any
funds belonging to the Company, and (iii) forthwith deliver all such payments to
the Bank with endorsement to the Bank's order of any checks or similar
instruments.

(b) Upon the occurrence of any event of default., the Company
shall, if requested to do so, and to the extent so requested, notify all account
debtors and other persons with obligations to the Company on account of or in
connection with any of the Collateral of the security interest of the Bank in
the Collateral and direct such account debtors and other persons that all
payments in connection with such obligations and the Collateral be made
directly to the Bank. The Bank itself may, upon the occurrence of an event
of default, so notify and direct any such account debtor or other person that
such payments are to be made directly to the Bank.

(c) Upon the occurrence of any event of default, for purposes of
assisting the Bank in exercising its rights and remedies provided to it under
this Security Agreement, the Company (i) hereby irrevocably constitutes and
appoints the Bank its true and lawful attorney, for it and in its name, place
and stead, to collect, demand, receive, sue for, compromise, and give good and
sufficient releases for, any monies due or to become due on account of, in
payment of, or in connection with the Collateral, (ii) hereby irrevocably
authorizes the Bank to endorse the name of the Company upon any checks, drafts,
or similar items which are received in payment of, or in connection with any of
the Collateral, and to do all things necessary in order to reduce the same to
money, (iii) with respect to any Collateral, hereby irrevocably assents to all
extensions or postponements of the time of payment thereof or any other
indulgence in connection therewith, to each substitution, exchange or
release of Collateral, to the addition or release of any party primarily or
secondarily liable, to the acceptance of partial payments thereon and the
settlement, compromise or adjustment (including adjustment of insurance
payments) thereof, all in such manner and at such time or times as the Bank
shall deem advisable, and (iv) hereby irrevocably authorizes the Bank to notify
the post office authorities to change the address for delivery of the Company's
mail to an address designated by the Bank, and the Bank may receive, open and
dispose of all mail addressed to the Company, Notwithstanding any other
provisions of this Security Agreement, it is expressly understood and agreed
that the Bank shall have no duty or be obligated in any manner to make any
demand or to make any inquiry as to the nature or sufficiency of any payments
received by it or to present or file any claim or take any other action to
collect or enforce the payment of any amounts due or to become due on account of
or in connection with any of the Collateral.

-7-
<PAGE> 55

5. Remedies Cumulative. No right or remedy conferred upon or
reserved to the Bank under any Loan Document is intended to be exclusive of any
other right or remedy, and every right and remedy shall be cumulative in
addition to every other right or remedy given hereunder or now or hereafter
existing under any applicable law. Every right and remedy of the Bank under any
Loan Document or under applicable law may be exercised from time to time and as
often as may be deemed expedient by the Bank. To the extent that it lawfully
may, the Company agrees that it will not at any time insist upon, plead, or in
any manner whatever claim or take any benefit or advantage of any applicable
present or future stay, extension or moratorium law, which may effect observance
or performance of any provisions of any Loan Document; nor will it claim, take
or insist upon any benefit or advantage of any present or future law providing
for the valuation or appraisal of any security for Its obligations under any
Loan Document prior to any sale or sales thereof which may be made under or by
virtue of any instrument governing the same; nor will it, after any such sale or
sales, claim or exercise any right, under any applicable law to redeem any
portion of such security so sold.

6. Conduct No Waiver. No waiver of default shall be effective unless
in writing executed by the Bank and waiver of any default or forbearance on the
part of the Bank in enforcing any of its rights under this Security Agreement
shall not operate as a waiver of any other default or of the same default on a
future occasion or of such right.

7. Governing Law; Definitions. This Security Agreement is a
contract made under, and the rights and obligations of the parties hereunder
shall be governed by and construed in accordance with, the laws of the State of
Michigan applicable to contracts made and to be performed entirely within such
State. Terms used but not defined herein shall have the respective meaning
ascribed thereto in the Credit Agreement. Unless otherwise defined herein or in
the Credit Agreement, terms used in Article 9 of the Uniform Commercial Code in
the State of Michigan are used herein as therein defined on the date hereof.
The headings of the various subdivisions hereof are for convenience of
reference only and shall in no way modify any of the terms or provisions
hereof.

8. Notices. All notices, demands, requests, consents and other
communications hereunder shall be in writing and shall be delivered or sent to
the Company at 6797 Winchester Circle, Boulder, Colorado 80301, Attention: Roger
Smith, and to the Bank at 611 Woodward, Detroit, Michigan 48226, Attention:
William C. Goodhue, or to such other address as may be designated by the Company
or the Bank by notice to the other party. All notices and demands hereunder
shall be deemed to have been duly given or

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<PAGE> 56

served if sent in writing to the addresses set forth above and such notices and
demands shall be deemed delivered upon receipt if delivered by hand, three
business days after mailing if mailed, or one business day after deposit with an
overnight courier service if delivered by overnight courier.

9. Rights Not Construed as Duties. The Bank neither assumes nor
shall it have any duty of performance or other responsibility under any
contracts in which the Bank has or obtains a security interest hereunder. If
the Company fails to perform any agreement contained herein, the Bank may but is
in no way obligated to itself perform, or cause performance of, such agreement,
and the expenses of the Bank incurred in connection therewith shall be payable
by the Company under paragraph 12. The powers conferred on the Bank hereunder
are solely to protect its interests in the Collateral and shall not impose any
duty upon it to exercise any such powers. Except for the safe custody of any
Collateral in its possession and accounting for monies actually received by it
hereunder, the Bank shall have no duty as to any Collateral or as to the taking
of any necessary steps to preserve rights against prior parties or any other
rights pertaining to any Collateral.

10. Amendments. None of the terms and provisions of this Security
Agreement may be modified or amended in any way except by an instrument in
writing executed by each of the parties hereto.

11. Severability. If any one or more provisions of this security
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected, impaired or prejudiced thereby.

12. Expenses (a) The Company agrees to indemnify the Bank from and
against any and all claims, losses and liabilities growing out of or resulting
from this Security Agreement (including, without limitation, enforcement of this
Security Agreement), except claims, losses or liabilities resulting from the
Bank's gross negligence or willful misconduct.

(b) The Company will, upon demand, pay to the Bank an amount of
any and all reasonable expenses, including the reasonable fees and disbursements
of its counsel and of any experts and agents, which the Bank may incur in
connection with (i) the administration of this Security Agreement, (ii) the
custody, preservation, use or operation of, or the sale of, collection from or
other realization upon, any of the Collateral, (iii) the exercise or enforcement
of any of the rights of the Bank hereunder, or (iv) the failure of the Company
to perform or observe any of the provisions hereof.

-9-
<PAGE> 57

13. Successors and Assigns; Termination. This Security Agreement
shall create a continuing security interest in the Collateral and shall (a)
remain in full force and effect until full payment and performance of the
Secured Obligations, (b) be binding upon the Company, its successors and
assigns, and (c) inure, together with the rights and remedies of the Bank
hereunder, to the benefit of the Bank and its successors, transferees and
assigns. Upon the full payment and performance of the Secured obligations,
the security interests granted hereby shall terminate and all rights to the
Collateral shall revert to the Company. Upon any such termination, the Bank
will, at the Company's expense, execute and deliver to the Company such
documents as the Company shall reasonably request to evidence such termination.

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

IN WITNESS WHEREOF, the Company has caused this Security Agreement to
be duly executed as of the day and year first set forth above.

DONNELLY APPLIED FILMS
CORPORATION

By: Roger Smith
------------------------
Roger Smith
Its: Treasurer

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<PAGE> 58
SCHEDULE 1(b) TO SECURITY AGREEMENT

List of Other Office and Facility Locations

Type of
Office
or Facility Address City County State
----------- ------- ---- ------ -----

Factory 6837 Winchester Circle Boulder Boulder CO

Warehouse 7077 Winchester Circle Boulder Boulder CO

Warehouse 1024 Industrial Ave. Holland Ottawa MI

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<PAGE> 59

SCHEDULE 1(c) TO SECURITY AGREEMENT

List of Inventory and Equipment Locations

Address City County State If Leased or
------- ---- ------ ----- Warehoused, Name
and Address of
Lessor/Warehouseman
-------------------

6797 Winchester
Circle Boulder Boulder CO

6837 Winchester
Circle Boulder Boulder CO

7077 Winchester
Circle Boulder Boulder CO

1024 Industrial
Avenue Holland Ottawa MI

8, Sze Shan St.,
Yau Tong Bay Kowloon Hong Kong Sunhing Chekiang
Godown Company Limited

-12-

<PAGE> 1
EXHIBIT 10.6

PARTNERSHIP AGREEMENT

THIS AGREEMENT OF PARTNERSHIP, made and entered into this 1st day of
January, 1981, by and among JAMES R. LOFTUS, CECIL W. VanALSBURG, CHARLES
RICHARD CONDON AND JOHN S. CHAPIN, each living in Colorado, hereinafter
referred to as "partners",

WITNESSETH, that:

WHEREAS, the partners desire to conduct business under a general
partnership in which the net profits and the net losses are distributable or
changable, as the case may be, to the partners in the proportions as set forth
below; and

WHEREAS, the partners desire to commit their agreement to writing; and

WHEREAS, the partners desire to provide that on the death, withdrawal,
bankruptcy, or insanity of any partner, the partnership business shall not
terminate but shall continue with the remaining partners, and in the event of
death or insanity, the interest of any deceased or insane partner shall be
purchased from his estate by the partnership for a fair price; and

WHEREAS, the partners desire to provide that the partnership interest
of a withdrawing partner shall be first offered to the other partners before
being sold to an outsider;

NOW, THEREFORE, the parties agree as follows, to-wit:

1. Partnership Agreement. The parties agree to enter into a general
partnership doing business under the name and style of Winchester 44 Associates
with its principal offices located at Lot 8, Gunbarrel Technical Center,
Boulder, Colorado, which partnership is being formed to hold and own for
investment purposes the following-described real property, situate in the
County of Boulder, State of Colorado, to-wit:

Lot 8, Gunbarrel Technical Center

and to remodel, redevelop and otherwise improve and lease the same as may be
agreed upon from time to time by the partners.

2. Term. The partnership shall be in existence from the date of this
agreement for a term of 25 years unless mutually dissolved by the partners or
as otherwise hereinafter provided.

3. Capital. The partnership capital, assets and properties and all
additions and improvements thereto shall initially be owned and held by the
partners in the following shares:

JAMES R. LOFTUS An undivided 25% interest
CECIL W. VAN ALSBURG An undivided 25% interest
CHARLES RICHARD CONDON An undivided 25% interest
JOHN S. CHAPIN An undivided 25% interest

<PAGE> 2

which interests shall be subject, however, to adjustment for sale or purchase
of partial or total interests as set forth below. A separate capital account
shall be maintained for each partner. No partner shall withdraw any part of his
capital account. If the capital account of a partner becomes impaired, his
share of subsequent partnership profits shall be first credited to his capital
account until that account has been restored before such profits are credited
to his income account.

4. Profit and Loss. The net profits of the partnership shall be
allocated among the partners in proportion to their ownership as described in
paragraph 3 above. Net losses, in like manner, shall be borne proportionately
by each of the partners. A separate income account shall be maintained for each
partner. Partnership profits and losses shall be charged or credited to the
separate income account of each partner. If a partner has no credit balance in
his income account, losses shall be charged to his capital account.

5. Contributions. Each partner has contributed funds to the capital
of the partnership from time to time, commencing with the conduct of the
business of the partnership which has hertofore been conducted on an oral
basis. This agreement now commits the partners' agreement to writing upon the
terms and conditions set forth herein.

Each of the partners shall contribute their share of the cost of the
acquisition of the partnership property, or borrow funds therefor in the
partnership name, as the partners may agree, and thereafter, from time to time,
make additional contributions, in proportion to the ownership of the partners
as described above in paragraph 3, to cover principal, interest, taxes,
insurance, compensation of partners and parties, and any other expenses
incurred by the partnership in connection with the ownership, management, sale,
or disposition of the partnership real property. Failure to contribute any
amounts when due shall cause the partner in default to be subject to the
provisions on default set forth in paragraph 19, entitled "Default".

6. Salaries and Drawings. No partner shall receive any salary for
services rendered to the partnership, but each partner shall be entitled to
reimbursement for out-of-pocket expenses incurred on behalf of the partnership,
including necessary travel. Each partner may, from time to time, withdraw the
credit balance in his income account. No additional share of profits shall
inure to

-2-
<PAGE> 3
any partner by reason of his capital or income account being in excess of the
capital or income account of the others.

7. Banking. All funds of the partnership shall be deposited in its name
in a national banking association as designated by the partners, and all
withdrawals therefrom shall be made upon checks signed by such person or
persons as the partners may designate.

8. Good Faith. At all times during the continuance of the partnership,
the parties hereto will give their attendance and best endeavors to the utmost
of their skill and power to assert themselves for their joint interest and
advantage.

9. Books of Account. The partnership books shall be maintained at the
principal office of the partnership with each partner having full access
thereto, and said books shall be closed and balanced periodically upon the
agreement of the partners, but in any event, at least annually.

10. Decisions and Encumbrances. Except as provided below with respect to
matters delegated to the Managing Partner, all decisions of the partnership
with respect to the management and conduct of the Partnership business and
the disposition of its properties shall be made by a vote of the partners who,
at the time of the vote, have a seventy-five percent (75%) interest in that
portion of the capital of the partnership represented by those partners then
having a right to vote ("partnership decisions"); provided, however, no partner
who is in default as defined in paragraph 19 shall have a vote. All partnership
decisions shall be reduced to writing and retained with the books and records of
the partnership. The partners further specifically agree that none of the
partners shall be authorized to encumber his interest during the term of this
agreement. In connection with any transaction that could be reasonably
construed as relating to any partnership business, it is agreed by the partners
that none of the partners shall endorse any note or otherwise become surety for
any person or persons whatsoever without the consent of the other partners.

11. Managing Agent. The parties hereto appoint James R. Loftus as
managing agent for the partnership. As herein used, the word "manage" means
that the managing agent shall collect all rental when due and payable, applying
such funds on taxes, principal, interest, and insurance as far as it may go,
and that he shall be responsible for the handling of all day-to-day details of
the operation of the partnership business. It is expressly acknowledged,
however, that according to Colorado law, any one of the partners has similar
authority to

-3-
<PAGE> 4
to legally bind the partnership within the scope of its business operations,
but that the responsibility and the authority as among the partners for such
management lies with the said managing agent. On or before July 1 of each year,
the managing agent herein shall notify each partner as to his proportionate
share of any assessments that may be required to cover expenses for the
property and shall thereafter collect the same, said monies to be applied by
the managing agent in the payment of principal, interest, taxes, insurance, and
any other obligation which the partners may hereafter agree to. The managing
agent shall also at the same time determine the profits, if any, derived from
the management of the property and shall disburse these profits to the partners
according to their respective interests therein. The managing agent shall also
determine when any default has occurred as hereinafter provided. In the event
the managing agent resigns, refuses to act, is incapacitated or unable to act,
the remaining partners shall designate a successor who shall have all the
rights, duties, and obligations of the original managing agent, which
designation shall be made within thirty (30) days of the occurrence of the
event removing the originally designated managing agent. The partners may, by
a vote of the majority of the partnership interests, displace the said managing
agent or any other managing agent and may designate a successor as provided
above at any time.

12. Title. Title to any land and buildings and personal property
owned in connection therewith shall be held in the name of the partnership, and
the partners expressly agree hereby that all such real and personal property
shall be partnership property and not property of the individual partners. No
partner shall have the right to substitute an assignee without the full consent
of the other partners.

13. Withdrawal.

(a) Any partner who desires to sell his interest in the partnership,
either in whole or in part, may offer and sell the same only to the other
partners, and may not sell all or any portion of his partnership interest to
outside parties without first obtaining the written consent of the other
partners. If any partner desires to sell his interest in the partnership, in
whole or in part, to a party other than the other partners, he must first
submit written notice to the other partners relating the price, terms, and
conditions of such offer, and the name and address of the prospective
purchaser. If the other partners consent to such sale, in writing, the
withdrawing partner may proceed to sell his interest to such third party under
the terms and conditions set forth in the written notice. Such third-party
purchaser shall become a substitute partner and shall be bound by all the terms
and conditions of the within partnership.
<PAGE> 5
(b) If the other partners object to such sale, the withdrawing partner
may not sell his interest, or any portion thereof, to such third party but may
offer such interest to the remaining partners at a price equal to the value of
the interest of the withdrawing partner determined as provided in paragraph 18,
payable at the election of the remaining partners in cash or one-fifth (1/5) in
cash at closing and the remainder in equal annual payments of one-fourth (1/4)
the amount owed, together with interest at the rate of twelve percent (12%) per
annum, such obligation to be evidenced by a negotiable promissary note made by
the remaining partners payable to the withdrawing partner, which note shall be
securred by a deed of trust on any real property owned by the partnership,
subject only to such prior encumbrances as the partners may have previously
agreed upon.
(c) In the event of such offer, the remaining partners shall have the
right and option to purchase for ten (10) days after written notice of such
offer to purchase such interest is received. If said option is not exercised
within said ten-day period by the remaining partners, the withdrawing partner
shall be free to sell the partnership interest in the manner and at the price
and upon the terms and conditions of said offer from the third party, provided
such sale is consummated within but not after the time mentioned in the notice
above.
(d) If the withdrawing partner obtains no such offer from a third party
for the purchase of his interest, or any part thereof, and desires to withdraw,
then and in such event he may give written notice to the remaining partners of
his desire to withdraw, and the remaining partners shall have and are hereby
given the first and exclusive option after twenty (20) days' written notice of
such desire, to purchase the withdrawing partner's interest in its entirety at
a price equal to the value of the interest of the withdrawing partner
determined as provided in paragraph 18 below except that the fair market value
of the land and building shall be reduced by ten percent (10%). Such purchase
price shall be payable on the terms as set forth above. If such option is not
so exercised, then and in such event the withdrawing partner shall be
authorized to list the property owned by the partnership for sale with a
realtor acceptable to the partnership, which listing shall be placed on the
Multiple Listing Service for the price determined in paragraph 18, to be paid
in cash and the assumption of then-existing encumbrances, or upon such other
terms of sale as may be acceptable to the partnership, and when the sale is
consummated, the partnership thereafter shall be liquidated.

-5-
<PAGE> 6
14. Death or Insanity. In the event of the death or insanity (which
term as used herein shall include any insanity, lunacy, or mental incompetency
adjudicated by a court) of any partner, the partnership business shall not
terminate, but the interest of the deceased or insane partner shall be
purchased by the partnership for a price equal to the value of the interest of
the deceased or insane partner as determined in paragraph 18 below, payable in
the manner described above in subparagraph 13 (b).
15. Bankruptcy. In the event of the bankruptcy (which term as used
herein shall include the filing of a petition in bankruptcy by or against any
owner) of a partner, the other partners shall have an election to buy said
partner's interest in the partnership. The election shall be exercised by a
written notice, signed by the purchasing partners and delivered to the legal
representative (which term as used herein shall include a trustee in
bankruptcy) of such bankrupt partner within ninety (90) days after the filing
of a petition in bankruptcy. The purchase price for the bankrupt partner's
interest shall be equal to the value of the interest of the bankrupt partner
determined as provided in paragraph 18 except that the fair market value of the
land and building shall be reduced by twenty percent (20%). Said purchase price
shall be payable in cash or in cash and by promissory note in the same manner
as provided if the bankrupt partner had sold his interest in the partnership.
16. Cooperation on Sale. Upon the execution and delivery of the cash
and/or the note in accordance with the provisions of this agreement, this
agreement will be effective to transfer the interest of the deceased,
withdrawing, bankrupt, or insane partner, and said partner or his legal
representative shall do all the acts necessary to evidence completion of the
transfer.
17. Sale and Indemnification. In the event of such death, withdrawal,
bankruptcy, or insanity, upon payment in full of the purchase price or issuance
of the note as provided herein, the entire assets, business, and good will of
the partnership shall be the property of the surviving or remaining partners,
and they shall be responsible entirely for all partnership debts and
liabilities and save the estate of the deceased, withdrawing, bankrupt, or
insane partner harmless therefrom.
18. Value. The value of the interest of a deceased, withdrawing,
bankrupt, or insane partner shall be determined as of the effective date of
such death, withdrawal, institution of bankruptcy proceedings, or adjudication
of insanity (hereinafter referred to as the "valuation date") and shall be the
sum of his share of the capital of the partnership, his proportionate share of
the net

-6-
<PAGE> 7
profits of the partnership accrued on the valuation date, and any outstanding
advances by him to the partnership. The proportionate share of any net loss
accrued to the partnership on the valuation date and any outstanding
obligations from him to the partnership shall be deducted from the aforesaid
value.
For the purposes of determining the capital of the partnership, all
assets of the partnership shall be valued at book value, except that any land
and buildings shall be valued at their current fair market value as determined
by an independent appraisal made as soon as practical after the valuation date
by an appraiser selected by the remaining partners, which appraiser shall be a
member of the American Institute of Real Estate Appraisers. The expense of the
appraisal will be considered an expense accrued by the partnership on the
valuation date. Notwithstanding the foregoing, the partners may fix a value for
such real estate by executing an Agreement of Value signed by all partners. If,
at any time when it becomes necessary to determine the value of such real
estate for purposes of this agreement, an Agreement of Value is in existence
and said agreement is dated less than twelve (12) months before the valuation
date, then the value set forth in such agreement shall be accepted as the value
of the real estate for the purposes of this agreement and no independent
appraisal of the real estate shall be required or made. The partners may at any
time enter into a new Agreement of Value, and in no event shall any but the
last Agreement of Value be effective, if at all, for the purposes specified
herein. No value shall be attributed to good will, going concern, or similar
intangibles. The surviving partners agree that they will proceed as
expeditiously as possible to determine the value of the interest of the
deceased, withdrawing, bankrupt, or insane partner.
19. Default. If a partner shall fail to contribute his proportionate
share of any expenses of the partnership as provided above, and default thereby
having occurred, or in the event of the involuntary transfer of any partner's
interest, which such transfer may include but not be limited to attachment,
levy, foreclosure, or by virtue of any judicial order of any court of record,
then in any of such cases the remaining partners may purchase the interest of
the defaluting partner or the partner whose interest is subject to involuntary
transfer by giving written notice of such default of involuntary transfer. If
the defaulting partner fails to contribute his share of assessments as provided

-7-
<PAGE> 8
in paragraph 5 above, or, in the case of a partner whose interest is subject to
involuntary transfer, if such partner fails to have the encumbrance against his
interest removed or have the transfer set aside within thirty (30) days of such
written notice, then the defaulting partner or the partner whose interest is
subject to involuntary transfer, as the case may be, will be deemed to have
agreed to a sale of his interest to the remaining partners. The purchase price
of said interest shall be equal to the value of the interest of the withdrawing
partner determined as provided herein in paragraph 18 except that the fair
market value of the land and building shall be reduced by fifteen percent (15%).
Such purchase price shall be payable in the same manner as a purchase from a
withdrawing partner as provided for in paragraph 13 above. A partner whose
interest is so purchased shall execute a warranty deed and/or his good and
sufficient assignment of his interest in the said partnership, together with
any and all other appropriate documents for transfer of his interest in the said
partnership, all unto the remaining partners as further assurance of title, if
requested so to do by the remaining partners.
20. Termination and Amendment. This agreement shall terminate by
mutual agreement of the parties or upon the termination of the partnership for
any reason other than death, legal disability, or withdrawal, signed by all of
the partners hereto.
21. Binding Agreement. This agreement shall be binding upon and
extend to the benefit of the heirs, personal representatives, executors, and
administrators of the respective parties with the express provision that this
agreement may be specifically enforced by or against the estate of any deceased
or legally disabled partner.
IN WITNESS WHEREOF, the parties have set their hands and seals the day
and year first above written.

James R. Loftus
--------------------------
JAMES R. LOFTUS

Cecil W. VanAlsburg
--------------------------
CECIL W. VanALSBURG

Charles Richard Condon
--------------------------
CHARLES RICHARD CONDON

John S. Chapin
--------------------------
JOHN S. CHAPIN

<PAGE> 9

AGREEMENT OF VALUE

PURSUANT TO paragraph 18 of that certain Partnership Agreement dated
the 1st day of January, 1981, by and among the undersigned, the partners do
hereby determine that the agreed gross value of the real estate that is owned
by the partnership as of this date is hereby determined to be $264,000.00.

DATED: 1/1/81

JAMES R. LOFTUS
-----------------------------
JAMES R. LOFTUS

CECIL Van ALSBURG
------------------------------
CECIL Van ALSBURG

CHARLES RICHARD CONDON
------------------------------
CHARLES RICHARD CONDON

JOHN S. CHAPIN
-------------------------------
JOHN S. CHAPIN
<PAGE> 10
AMENDMENT TO PARTNERSHIP AGREEMENT
OF
WINCHESTER 44 ASSOCIATES

This AMENDMENT TO PARTNERSHIP AGREEMENT, effective as of the 14th day
of April, 1993, is by and among James R. Loftus, Cecil W. VanAlsburg, Charles
Richard Condon, John S. Chapin, and Donnelly Applied Films Lab, Inc., a
corporation.

RECITALS:

WHEREAS, the parties hereto, except Donnelly Applied Films Lab, Inc.,
are presently all of the partners of Winchester 44 Associates, a Colorado
general partnership (the "Partnership");

WHEREAS, James R. Loftus desires to withdraw from the Partnership and
sell his interest in the Partnership to Donnelly Applied Films Lab, Inc.;

AND WHEREAS, the Partners desire to amend the Partnership Agreement of
the Partnership (the "Agreement") to provide for substitution of Donnelly
Applied Films Lab, Inc. as a general partner of the Partnership in the place of
James R. Loftus;

NOW, THEREFORE, for good and valuable consideration, the parties hereby
agree as follows:

1. Partners Cecil W. VanAlsburg, Charles R. Condon and John S. Chapin
hereby acknowledge James R. Loftus' compliance with paragraph 13(a) of the
Agreement and hereby consent to the sale of James R. Loftus' interest in the
Partnership and the substitution of Donnelly Applied Films Lab, Inc. as a new
general partner of the Partnership with all right, title and interest
previously held by James R. Loftus.

2. Donnelly Applied Films Lab, Inc. is hereby substituted as a general
partner in the Partnership and agrees to be and shall be bound by all the terms
and conditions of the Agreement.

3. Donnelly Applied Films Lab, Inc. hereby agrees to save and hold
James R. Loftus harmless from, and indemnify him for, any claims asserted
against him by Bank Western with respect to payment of debt of the Partnership,
whether the claim is asserted against James R. Loftus by virtue of having been
a general partner or as a personal guarantor of said debt.

4. Paragraph 11 of the Agreement shall be amended to provide that
Donnelly Applied Films Lab, Inc. shall hereafter be the managing agent for the
Partnership.

5. In all other respects, the terms and provisions of the Agreement
will remain in full force and effect.
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the day and year first above written.

James R. Loftus
------------------------------
JAMES R. LOFTUS
Withdrawing Partner

Cecil W. VanAlsburg
------------------------------
CECIL W. VanALSBURG
General Partner

Charles Richard Condon
------------------------------
CHARLES RICHARD CONDON
General Partner

John S. Chapin
------------------------------
JOHN S. CHAPIN
General Partner

DONNELLY APPLIED FILMS LAB, INC.,
a corporation

By: Cecil W. VanAlsburg
--------------------------
Title: President
-------------------
New General Partner

-2-

<PAGE> 1
EXHIBIT 10.7

Agreement of lease, made at Boulder, Colorado on July 1, 1993 by and between
Randal Bjerke, 3769 Orange Lane, Boulder, Colorado (hereinafter called the
"lessor"), and Donnelly Applied Films Corporation (hereinafter called the
"lessee")

Witnesseth:

For and in consideration of the rental herein reserved and of the
covenants, conditions, agreements and stipulations of the lessee hereinafter
expressed, the lessor hereby leases to lessee and lessee hereby hires from
lessor, the following described premises, situated in the city of Boulder,
county of Boulder, state of Colorado, and known and described as follows, to
wit: 24,000 square feet at 7077 Winchester Circle, Boulder, Colorado 80301
(hereinafter referred to as "premises", as shown on Exhibit A). This lease takes
precedence over and supersedes the original lease for 8,000 square feet of
warehouse space, which space is included in this new lease, and which original
lease was signed March 1, 1992, and extended and modified beginning June 1,
1993.

To have and to hold the same with all the appurtenances unto the said
lessee for a period of sixty (60) months beginning at twelve o'clock noon on
July 1st, 1993, or such later date as caused by paragraph 43, and ending at
twelve o'clock noon on June 30th, 1998. The lessee may extend this lease for
one five year option. It is expressly covenanted and agreed by said lessee that
any default in the performance of the covenants of this section of this lease
shall constitute a default for which the said lease may be terminated by lessor
as in the case of other defaults under the terms hereof.

AND IT IS MUTUALLY COVENANTED AND AGREED:

RENT 1. Lessee shall pay to lessor, at the address of lessor as herein set
forth the following as rental for the leased premises:

(a) $5.27 per square foot per year for 24,000 square feet in the entire
building, for a total of $126,000 per year for the first and second year of the
lease.

(b) Lessee shall also pay $1.20 per square foot for the total 24,000 square
feet for triple net expense reimbursements to the lessor in the first year, for
a total of $28,800.

(d) The total payments of rent, but not triple net expense reimbursements,
will be increased by the United States
<PAGE> 2
2.

Consumer Price Index, Denver area, all items, each year, beginning on the
second anniversary of the lease, or July 1, 1995, and such increase will not be
less than 3% per year, nor more than 6% per year. Notification of this
increase will be given before the July 1st anniversary date of this lease each
year, and shall be based on the CPI increase which has occurred during the
previous calender year.

(e) Lessee and lessor agree that the first year triple net expenses of real
estate property taxes, insurance premiums, and maintenance and management
expenses are $1.20 per square foot, or $28,800 as noted in paragraph 1(b)
above. Beginning with the first anniversary of this lease, or July 1, 1994,
lessee agrees to pay to the lessor concurrently with the monthly rental
payment, 1/12 of the estimated amount of real estate property taxes, insurance
premiums, and maintenance and management expenses not otherwise paid or
reimbursed to the lessor by the lessee. The lessor shall accumulate and
retain the same to be used for the payment of the lessee's obligations for
taxes, insurance premiums, and maintenance and management fees as they become
due. The lessor shall provide lessee with a notification of the amount of said
expenses on each anniversary date. If there is any deficiency in the amounts
on deposit with the lessor, the lessee shall, within the time provided after
such notification, pay such deficiency to lessor, which time shall not in any
case exceed thirty (30) days. If there is any overage in the amounts on
deposit the lessee shall have the overage refunded to it. The initial monthly
payment estimated for taxes, insurance premiums, and maintenance and management
fees shall be $2,400 per month. The first payment of such deposit together
with the base rent shall be due July 1, 1993.

INSURANCE 2. Liability Insurance. Lessee agrees to at all times during the
term of this lease maintain general business liability insurance, such
insurance to afford protection to the tenant of not less than $1,000,000 in
respect to each person and to the limit of not less than $2,000,000 in respect
to property damage, and Lessor will not be liable for personal injury or
property damage in or about the demised premises. Not withstanding the above,
lessee shall have the option to directly purchase building and property
insurance so long as the lessor is provided with the same or better coverage
than the existing policy, and so long as lessor is named as the insured for
casualty loss on the building.

UTILITIES 3. Lessee shall be solely responsible for and promptly pay all
charges for telephone, gas and electricity (Public Service), and water (City of
Boulder) to the building. In no event shall Lessor be liable for any
interruption or failure in the supply of any such utility to the leased
premises not caused by the Lessor.

TRASH AND SNOW REMOVAL 4. Lessee shall pay monthly 100% of
<PAGE> 3
3.

their total trash removal expenses. Lessee shall be responsible for snow
removal from sidewalks and parking lot.

REPAIRS AND MAINTENANCE 5. Subject to Exhibit B (attached) the Lessee shall be
liable for 100% of the actual costs incurred in the operation, maintenance and
repair of the demised premises. Lessee will replace lightbulbs. Maintenance
resulting from normal wear and tear are the responsibility of the Lessee. The
Lessor shall be responsible for the operation, maintenance, and repairs of the
building exterior, exterior grounds, and heating and cooling systems. The
lessor and lessee shall share equally in repairs of the parking lot and roof
after initial repairs are made. The initial repairs to the roof shall be shared
equally up to a total expenditure of $3000, and further initial roof repairs
shall be the responsibility of the lessor except that the lessee shall pay for
upgrades to the repair made necessary by the lessee's use of heavy trucks or
forklifts.

USE 6. The Lessee shall not use, or allow upon the said premises, anything
which will invalidate any policy of insurance now or hereafter carried on the
said building, or which may be dangerous, or which will cause an increase in
the rate of fire insurance on said building, and the Lessee agrees to pay on
demand any such increase; nor shall the Lessee place any weight upon the second
floor which shall exceed fifty (50) pounds per square foot of floor space
covered; nor permit any objectionable noise or permit any food cooking odors or
other offensive odor to be emitted so as to be perceptible outside the leased
premises or to other tenants; nor do or permit anything tending to create a
nuisance or to disturb the occupants of a neighboring property, nor do anything
tending to injure the reputation of the said property, and said Lessee shall
not conduct nor allow upon the premises any business which is contrary to law.
Lessee shall not cause any pollution on the premises or discharge any pollution
into the grounds or groundwater which is contrary to current law or
governmental regulations.

ALTERATIONS ETC. 7. No changes, alterations or improvements in, on or to the
demised premises, of any kind or nature whatsoever, whether it be in the
building or in additions thereto, shall be done, performed, made or changed
without the Lessor's prior written consent, which shall not be unreasonably
withheld, and shall be done only upon the following terms and conditions.

(a) The Lessee shall make such request in writing, specifying in detail the
alterations, changes or additions desired.

(b) Such request shall be accompanied by a plan, blueprint, or diagram showing
such proposed alterations, changes or
<PAGE> 4
4

additions, and a statement of intended equipment changes and Lessee's intended
operations and uses, and a bid or contract signed by a reputable builder or
contractor (acceptable to Lessor) undertaking to perform said work as shown in
said plan, blueprint or diagram for a specified cost stated therein.

(c) The Lessor shall, within ten (10) days, indicate in writing its
approval or disapproval of said request. In the event that the Lessor approves
thereof and the specified cost as above stated is less that $5000.00, such
approval shall constitute the necessary consent herein provided. If, however,
the aforesaid specified cost is in excess of $5000.00, then no consent of the
Lessor shall be valid or binding upon it until the Lessee furnishes the Lessor
with a bond or bonds in the amount of the aforesaid specified cost. Said bond
shall be the bond of a recognized surety company authorized to do business in
the state, and shall indemnify the Lessor against any and all claims, losses or
damages:

(i) for injury to persons or property arising, directly or
indirectly, from the making of such alterations or additions by the Lessee, its
agents, servants, or employees;

(ii) resulting from the failure of the Lessee, its agents, servants or
employees, to fully complete said alterations or additions in accordance with
said plan or blueprint, or to fully pay therefor, or to remove or bond or
commence active defense against any and all mechanic's liens filed against the
demised premises or the building of which the same form a part, for claims for
work done or materials furnished, it being understood that the Lessee's failure
to remove or bond any such lien within twenty (20) days after notice of filing
thereof shall in and of itself constitute an item of damage to the Lessor;

(iii) for any cause or thing whatever arising, directly or indirectly,
from the making of such alterations, changes or additions by the Lessee, its
agents, servants or employees.

(d) Lessee shall, within thirty (30) days after completion of the work
hereinabove set forth, submit to the Lessor an affidavit stating that all bills
for said work have been paid in full by the Lessee and that no liens have been
filed or can be filed on the property of which the demised premises are a part
because of any work performed in or to the demised premises, together with lien
releases from all major material suppliers and all contractors.

IMPROVEMENTS AND FIXTURES 8. All construction additions and improvements,
whether temporary or permanent, fixed or movable, made and maintained in or on
the said premises, either by the Lessee or the Lessor, shall be the sole
property of the Lessor, and shall not be removed or injured by the said Lessee,
nor shall the Lessee claim at any time
<PAGE> 5
5.

compensations therefore. It is understood and agreed that any trade fixtures,
furniture, movable partitions, equipment and supplies placed upon the demised
premises by the Lessee are to remain the property of the Lessee and may be
removed from the demised premises at any time; provided, however, that in no
case shall the Lessee have such right of removal if the fixtures are attached
in such a manner that their separation from the premises will result in injury
to the premises (unless the Lessee restores the premises to its original
condition at the Lessee's expense). In each and every such case the fixtures
shall become and remain the property of the Lessor and the Lessee shall have no
right to remove them.

REPAIRS ETC. 9. Subject to paragraph 5 above, the Lessee shall take good care
of and make necessary repairs, structural and otherwise, to the interior of the
demised premises and the fixtures and equipment therein, including the
maintenance of all plumbing, gas and electrical fixtures and equipment,
including wiring, which repairs shall be in quality and class equal to the
condition at the commencement of this lease, ordinary wear and tear excepted.
Upon the expiration or other termination of this Lease, the Lessee shall remove
all property of the Lessee and quit and surrender to the Lessor the demised
premises, broom clean, in good order and condition, ordinary wear excepted.

PAINTING AND REDECORATING 10. All parts of the interior of the leased
premises shall be well maintained in a neat and presentable condition,
including decor, at the Lessee's expense at all times during the term of this
Lease.

SIGNS 11. Lessee may install and maintain electric or other artistic signs
suitable to the business conducted, providing Lessee obtains necessary permit
from municipal authorities for the erection and maintenance of said sign and the
approval and consent of the Lessor as to design of sign and location of same on
building, which approval will not be withheld unreasonably.

SIDEWALKS 12. The Lessee shall neither encumber nor obstruct the sidewalks in
front of the said premises nor allow the same to be obstructed or encumbered in
any manner.

LIABILITY 13. (a) The lessor shall not be liable for any injury or damage,
either to person or property, sustained by the lessee, or the agents, servants
or employees of the lessee, due to the building or any part thereof, or to the
appurtenances thereto, or caused by or resulting from steam, electricity, gas,
water, rain, ice, or snow, or any leak or flow from or into any part of said
building, or due to the happening of any accident in or about the said
building, or due to any act or neglect of any tenant or occupant of the said
building, or of any other person, such liability being expressly waived by the
lessee, for all damages or occurrences of any kind not covered or paid by
lessor's

<PAGE> 6
6.
insurance policy.
(b) The lessee shall be liable for any damage to the building or property
therein, which may be caused by his act or negligence, or the acts of his
agents or employees, and the lessor may at its option repair such damage, and
the lessee shall thereupon reimburse the lessor for the total cost of such
repair and damage. The lessee hereby indemnifies and agrees to hold harmless
the lessor against all claims of third persons for damages arising out of the
lessee's use of the premises.
(c) The lessee further agrees that all personal property upon the said premises
shall be at the sole risk of the lessee and the lessor shall not be liable for
any damage thereto or theft thereof unless the cause of the loss is lessor's
negligence.
(d) The lessor warrants that the structure is insured at lessor's expense.

DEFAULT 14. This lease is made on condition that if any one or more of the
following events (herein referred to as an "event of default") shall happen:
(a) Lessee shall default in the due and punctual payment of the basic rent or
any additional rent payable hereunder, and such default shall continue for ten
(10) days. Notice of demand for rent due by lessor shall NOT be required.
(b) Lessee shall neglect or fail to perform or observe any of the other
covenants herein contained on the lessee's part to be performed or observed,
except the payment of rent, and lessee shall fail to remedy the same within
twenty (20) days after lessor shall have given to lessee written notice
specifying such neglect or failure (or within such period, if any, as may be
reasonably required to cure such default if it is of such nature that it cannot
be cured within said twenty (20) day period).
(c) This lease or the demised premises or any part thereof shall be taken upon
execution or by other process of law directed against lessee, or shall be taken
upon or subject to any attachment at the instance of any creditor or claimant
against lessee, and said attachment shall not be discharged or disposed of
within fifteen (15) days after the levy thereof.
(d) Lessee shall be involved in financial difficulties as evidenced by (1) his
admitting in writing his inability to pay debts generally as they become due,
or (2) by his filing a petition on bankruptcy or for reorganization or for the
adoption of an arrangement under the Bankruptcy Act (as now or in the future
amended) or an answer or other pleading admitting the material allegations of
such a petition or seeking, consenting to or acquiescing in the relief provided
for under such act, or (3) by making an assignment of all or a substantial part
of his property for the benefit of his creditors, or (4) by his seeking or
consenting to or acquiescing in the appointment of a receiver or trustee for
all or a substantial part of his property or of the demised premises or of his
interest in this lease, or (5) by his being adjudicated bankrupt or insolvent,
or (6) by the entry

<PAGE> 7
7.

of a court order without his consent, which order shall not be vacated, set
aside or stayed within thirty (30) days from the date of entry (i) appointing a
receiver or trustee for all or a substantial part of his property, or (ii)
approving a petition filed against it for the effecting of an arrangement in
bankruptcy or for a reorganization pursuant to said Bankruptcy Act or for any
other judicial modification or alteration of the rights of creditors. (e) after
occupancy lessee shall vacate or abandon the demised premises, which is
conclusively presumed to occur if the demised premises are not actively used by
lessee for a period of ten (10) consecutive days; then, in any one or more of
such events, lessor shall have the right, at his election, then or at any time
thereafter, and while such event of default shall continue, either:
(1) To give lessee 15 days written notice of intention to terminate this lease,
and on the date specified in such notice, lessee's right to possession of the
demised premises shall cease and this lease shall thereupon be terminated;
(2) Upon such written notice of termination, to reenter and take possession of
the demised premises or any part thereof and repossess the same as of Lessor's
former estate and expel lessee and those claiming through or under lessee, and
remove the effects or both or either (forcibly if necessary) without being
deemed guilty of any manner of trespass and without prejudice to any remedies
for arrears of rent or preceding breach of covenants. Should lessor elect to
reenter as provided in this subparagraph (2), or should lessor take possession
pursuant to legal proceedings or pursuant to any notice provided by law, lessor
may, from time to time, without terminating this lease, relet the demised
premises or any part thereof for such term or terms, and at such rental or
rentals, and upon such other terms and conditions as lessor may deem advisable,
with the right to make alterations and repairs to the demised premises. No such
reentry or taking of possession of the demised premises by lessor shall be
construed as election on lessor's part to terminate this lease unless a written
notice of such intention be given to lessee, or unless the termination thereof
be decreed by a court of competent jurisdiction. In the event that lessor does
not elect to terminate this lease as permitted in subsection (1) of section 14,
but, on the contrary, elects to take possession as provided in subsection (2)
of section 14, then such repossession shall not relieve lessee of his liability
and obligations under this lease, all of which shall survive such repossession.
In the event of such repossession, lessor will use reasonable diligence to
relet said premises and lessee shall pay to lessor as liquidated current
damages: (a) the basic rent and additional rent and other sums as hereinafter
provided, which would be payable hereunder if such repossession had not
occurred; Less (b) The net proceeds, if any, of any reletting of the demised
premises after deducting all lessor's expenses in connection with such
reletting, including, but without limitation to, all repossession costs,
marketing costs,

<PAGE> 8
8.

brokerage commissions, legal expenses, attorney fees, and expenses of
preparation, alteration, and demolition of such reletting. Lessee
shall pay such current damages to lessor on the days on which the basic rent
would have been payable hereunder if possession had not been retaken, and
lessor shall be entitled to receive the same from lessee on each such day. (3)
If this lease is terminated by lessor by reason of any default by lessee,
lessor, at its sole election, shall be entitled to recover from the lessee,
upon such termination, the present value of the amount of rent reserved in this
lease for the balance of the term hereof or, as liquidated damages, a sum equal
to three months rent. Payment of said sum, plus any other accrued amounts,
shall terminate all obligations hereunder.

INDEMNITY 15. Lessee agrees to pay all cost and expenses, including attorney
fees, which may be incurred by or imposed on Lessor either in enforcing this
Lease or in any litigation or arbitration or other dispute resolution procedures
to which Lessor, by reason of any act of Lessee, may be made a party.
If a dispute arises concerning the meaning, application or enforcement of this
Lease which results in the parties engaging in litigation, arbitration or other
dispute resolution proceeding, the prevailing party shall be entitled to an
award of its costs and expenses, including reasonable fees, to be paid by the
non-prevailing party.

WAIVER 16. (a) No waivers of any condition or legal right or remedy, shall be
implied by the failure of the Lessor or declare a forfeiture, or for any other
reason, and no waiver of any condition or covenant shall be valid unless it be
in writing signed by the Lessor, and no waiver by the Lessor in respect to one
lessee shall constitute a waiver in favor of any other lessee, nor shall the
waiver of a breach of condition be claimed or pleaded to excuse a futuure breach
of the same the same condition or covenant or any other condition or
covenant. Neither shall Lessor's acceptance of rent during an event of default
be construed a waiver of the default. (b) No waivers of any condition or legal
right or remedy, shall be implied by the failure of the lessee or declare a
forfeiture, or for any other reason, and no waiver of any condition or covenant
shall be valid unless it be in writing signed by the lessee. The waiver of a
breach of any condition will not be claimed or pleaded to excuse a future breach
of the same condition or covenant or any other condition or covenant.

PREMISES UNTENANTABLE 17. If the demised premises shall be partially damaged
by fire or other cause without default or neglect of the Lessee, Lessee's
servants, employees, agents, visitors, or licencees, the damages shall be
repaired by and at the expenses of the Lessor, and the rent until such repair
shall be made, shall be apportioned according to the part of the demised
premises which is usable by Lessee.
<PAGE> 9
9.

Due allowance shall be made for reasonable delay on account of labor troubles,
material shortages or any other cause beyond Lessor's control, but if the
demised premises are tendered wholly untenantable by fire or other cause, and
Lessor shall decide not to rebuild the same, or if the building shall be so
damaged that Lessor shall decide to demolish it or rebuild it, then or in any
such event, the Lessor may, within ninety days after such fire or other cause,
give Lessee a notice in writing of such decision, which notice may be delivered
to Lessee personally or sent by registered mail addressed to Lessee at the
building of which demised premises are a part, and thereupon the term of this
Lease shall expire by lapse of time upon the third day after such notice is
given, and Lessee shall vacate the demised premises and surrender the same to
the Lessor.

EMINENT DOMAIN 18. If the whole or any part of the demised premises shall be
taken or condemned by any competent authority for any public or quasi-public
use or purpose, then, in the event, the term of the Lease, at the option of
either the Lessor or the Lessee, shall cease and terminate. Any award for the
land and buildings of which the demised premises are part are hereby assigned
to and shall belong to the Lessor. Any award for Lessee's trade fixtures and
tenant improvements installed by the Lessee at his expenses in the demised
premises, and any seperate award for moving or relocation expense shall belong
to the Lessee. The current rental shall in such case be apportioned as of the
date of acquisition by condemnation.

SUBORDINATION 19. This Lease is subject and subordinate in all mortgages which
may now effect the real property of which demised premises form a part, and to
all renewals, modifications, consolidations and extensions thereof. In
confirmation of such subordination, the Lessee shall execute promptly any
certificates for and on behalf of the Lessee.

ASSIGNMENT, ETC. 20. The Lessee shall not assign or encumber this Agreement and
shall not sublet, use or permit the demised premises or any part thereof to be
used by others, Without the prior written approval of the lessor, which
approval shall not be unreasonably withheld.

(a) No assignee or subtenant shall be allowed that would create a
nuisance. (Noise, odor, fire, attractive nuisances, etc.)

ACCESS TO PREMISES 21. The Lessor shall have access to the premises with 3 days
notice for the purpose of examining the same or to make any alterations or
repairs to the building that the Lessor may deem necessary, and also during the
last six months of the term of this Lease for the purpose of exhibiting said
premises and putting up the usual notice "To Rent", which notice shall not be
removed, obliterated or hidden by Lessee. Lessee shall provide Lessor with
working emergency keys to premises upon request.
<PAGE> 10
10.

ADJACENT EXCAVATION - SHORING 22. In the event that an excavation shall be
made for building or other purposes upon land adjacent to the demised premises,
or shall be contemplated to be made, Lessee shall afford to the person or
persons causing or authorized to cause such excavation, license to enter upon
the demised premises for the purpose of doing such work as said person or
person shall deem to be necessary to preserve the wall or walls, structure or
structures of the building of which demised premises form a part from injury or
damage and to support the same by proper foundations without any claims for
damages or indemnity against Lessor, diminution or abatement of rent.

PUBLIC INTERFERENCE 23. If the Lessor shall be required by any lawful
authority to alter, remove, reconstruct or improve any part of the said
building, compliance with such lawful authority shall not in any way affect the
obligation or covenants of the Lessee and the Lessee hereby expressly waives
any and all claims for damages or for abatement of rent.

LAWS, ORDERS 24. The Lessee shall comply with all laws, orders and
regulations of federal, state, county and municipal authorities, and with any
direction of any public officer and officers, pursuant to law, which shall
impose any duty upon Lessor or Lessee with respect to the demised premises, or
the use or occupation thereof.

INTERPRETATION 25. The words "Lessee" and Lessor" shall include their
executors, administrators and assigns, and the necessary grammatical changes
required to make the provisions hereof apply to corporations, individuals, men
or women, partnerships or other associations may be made.

RULES 26. The Lessor reserves the right to adopt and promulgate from time to
time reasonable rules and regulations and to amend or supplement same,
applicable to the occupancy of their building, of which the demised premises
form a part. Notice of such rules and regulations and amendments and
supplements thereof, if any, shall be given to the Lessee, and Lessee shall
comply with such rules and regulations. Any existing regulations shall be
attached to the Lease.

RIDER 27. Any rider attached hereto and duly executed by the Lessor and
Lessee shall be deemed incorporated herein and made part hereof. In the event
that any provision contained in said rider is inconsistent with the printed
provisions of this Lease, the provision contained in said rider shall supersede
said printed provision of the Lease.

ENTIRE AGREEMENT 28. It is understood and agreed by the parties hereto that
this Lease shall constitute the only agreement between them relative to the
demised premises and that no oral statements or prior written matter extrinsic
to this instrument shall have any force or effect. The
<PAGE> 11
11.

Lessee agrees that he has signed this Lease fully aware of the condition of the
premises and all other matters relative thereto and is not relying on any
representations or agreements other than those contained in this Lease. This
Agreement shall not be modified except by writing, subscribed by both parties.
The taking possession of the demised premises by the Lessee shall be conclusive
evidence, as against the Lessee that said premises and the building of which
the same form a part were in good and satisfactory condition at the time such
possession was taken.

QUIET ENJOYMENT 29. The Lessor covenants and agrees with the Lessee that upon
the Lessee paying said rent, and performing all the covenants and conditions
aforesaid on the Lessee's part to be observed and performed, the Lessee shall
and may peaceably and quietly have, hold and enjoy the premises hereby demised,
for the term aforesaid, subject, however, to the terms of the Lease and/or
mortgages hereinbefore mentioned.

BILLS AND NOTICES 30. Except as otherwise in this Lease provided, a bill,
statement, notice or communication which the Lessor may desire or be required to
give to the Lessee, including any notice of expiration, shall be sufficiently
given or rendered only if in writing, delivered to the Lessee or its office at
the address hereinbefore set forth, and the time of the rendition of such bill
or statement and of the giving of such notice or communication shall be deemed
to be the time when the same is delivered to the Lessee, or mailed, or left at
the premises, as herein provided. Any notice by the Lessee to the Lessor must be
addressed to the Lessor at the address hereinbefore set forth. Lessee or
Lessee's agent shall provide Lessor forthwith with a signed receipt for each
said written notice delivered.

MARGINAL NOTES 31. The marginal notices are inserted only as a matter of
convenience and for reference and in no way define, limit, or describe the
scope or intent of this Lease nor in any way affect this Lease.

BINDING EFFECT 32. The conditions, covenants and agreements in the aforesaid
Lease contained, to be kept and performed by the parties hereto shall be
binding upon and inure to the benefit of said respective parties, their legal
representatives, successors and assigns. The term "lessor" as used in this
lease means only the owner for the time being of the land and building (or the
owner of a lease of the building) of which the demised premises form a part, so
that in the event of any sale or sales of the said land, building or of said
Lease, or in the event of a lease of said building, the said Lessor shall be
and hereby is entirely freed and relieved of all covenants and obligations of
Lessor hereunder and it shall be deemed and construed without further agreement
between the parties or their successors-in-interest, or between the parties and
the
<PAGE> 12
12

purchaser, at any such sale, or the said Lessee of the building, that the
purchaser or Lessee of the building has assumed and agreed to carry out any and
all covenants and obligations of lessor hereunder.

CONDITION OF PREMISES 33. Subject to Exhibit B (attached), Lessee has
examined the interior of the demised premises, knows condition thereof and
agrees to take same in "as is" condition.

SECURITY DEPOSIT 34. Lessee will deposit with lessor $12,933.33 as security
for the faithful performance and observance by lessee of the terms, provisions
and conditions of this lease, and said security shall be retained by the lessor
for up to 60 days beyond the term of this lease or extensions thereof. it is
agreed that in the event lessee defaults in respect of any of the terms,
provisions and conditions of this lease, including, but not limited to, the
payment of rent lessor may use, apply or retain the whole or any part of the
security so deposited to the extent required for payment of any rent or any sum
as to which lessee is in default or for any sum which lessor may expend or may
be required to expend by reason of lessee's lease or lessee's default in
respect of any of the terms, covenants and conditions of this lease, including,
but not limited to, and damages or deficiency arising out of the reletting of
the premises, whether such damages or deficiency accrued before or after
summary proceedings or other reentry by lessor. If lessee fails to vacate the
premises following termination of the lease in accordance with the terms hereof
and lessor retains a lawyer to assist lessor in evicting lessee, all legal fees
incurred by lessor and any court costs shall be treated as liquidated damages
and may be paid out of the security without lessor being required to obtain a
judgement for such fees and costs. If the costs agreed to be paid by lessee
pursuant to the terms of this agreement exceed the security deposit, lessee
agrees to pay such excess within three days after receiving written notice of
its amount. If lessee shall fully and faithfully comply with all of the terms,
provisions, covenants, and conditions of this lease, the remaining security
shall be returned, without interest, to lessee after the date fixed as the end
of the lease and within a reasonable time after delivery of entire possession
of the demised premises to lessor. In the event of a sale of the land and
building or a lease of the building, of which the demised premises form a part,
lessor shall have the duty to transfer the security to the vendee or lessee,
and lessor shall thereupon be released by lessee from all liability for the
return of such security and lessee agrees to look to the new lessor solely for
the return of said security; and it is agreed that the provisions hereof shall
apply to every transfer or assignment of the security to a new lessor. Lessee
further covenants that it will not assign or encumber or attempt to assign or
encumber the monies deposited herein as security and that neither lessor nor
its successors or assigns shall be bound by any such
<PAGE> 13
13.

assignment, encumbrance, attempted assignment or attempted encumbrance.

HOLDING OVER 35. If Lessee holds over after the expiration of this Lease or
extension thereof without the written consent of Lessor, Lessee shall be
considered to be a month-to-month tenant and shall pay a monthly rental of 120
percent of the monthly rent due herein for the last month of the lease term.
All other terms and conditions of the Lease shall remain in full force and
effect.

TIME 36. Time is of the essence of this Lease.

LATE FEES 37. In the event Lessee shall be more than ten days late in the
payment of any base rent and triple net expense reimbursements due hereunder,
then Lessor may, at its option, require in addition to the rent due a late fee
equal to the amount of five (5%) percent of the said rent for each such
occurrence. With regard to all other amounts billed by Lessor to Lessee
hereunder, payment in full of the same is due from Lessee to lessor hereunder,
not later than thirty (30) days from the date of billing. In the event that any
such payment is not received by Lessor within thirty (30) days of the date of
billing or in the event that Lessee shall be more than thirty (30) days late in
the payment of any other sums due hereunder, the Lessor may, at its sole
option, require payment of an amount equal to an additional five (5%) percent
of any such unpaid amounts for each such occurrence.

JANITORIAL SERVICES 38. Lessee shall, at his expense provide necessary
cleaning and paper supplies and maintain all window and door glass, the men's
and women's bathrooms and the interior of the remainder of the leased premises
in a neat, clean, serviceable and unobstructed condition at all times during
the term of this Lease. In the event the aforesaid maintenance and cleaning is
not reasonably maintained by the Lessee, the Lessor reserves the right to
insist upon and compel the Lessee to hire at Lessee's expense professional
janitorial services acceptable to Lessor in order to satisfactorily provide the
required maintenance, cleaning and supplies.

NUISANCES 39. In the event the entry halls, sidewalks, or parking lot become,
in the judgement of the Lessor, an attractive nuisance due to the patronage of
the Lessee's business, then Lessor may insist upon and compel Lessee at
Lessee's expense to use a security guard or other system to remove and
discourage such attractive nuisance. Lessee shall be responsible for keeping all
common areas such as hallways, parking lot and sidewalks free from snow and
debris at all times.

RENEWAL 40. Four (4) months prior to the end of this Lease, Lessee will
notify Lessor in writing of its intention to renew or terminate this Lease.
Lessee may elect to renew
<PAGE> 14
14

this lease for one five year period if there has been no default during the
initial five year term. The renewal will be upon the same terms and provisions
as this initial lease agreement, except that the rental rate shall be at the
then market rate for comparable buildings in the Boulder area.

FIRST RIGHT OF REFUSAL 41. Lessor will notify lessee at such time as he
decides to sell the building. Lessee shall have first right of refusal to
purchase the building on the same terms as another prospective purchaser, if
the lessor decides to sell the building. When the lessee is notified of
the terms of the proposed purchase, lessee shall have ten (10) days to inform
lessor in writing of his intention to match these terms and purchase the
building. If lessor does not receive notice from lessee within ten days this
first right of refusal shall expire.

CONTINGENCY 42. This agreement is contingent upon, and will not take effect,
until the existing tenant, Allegro Rug Weaving, vacates this building so that
Donnelly Applied Films may lease the space.
<PAGE> 15

15.

In witness whereof, the parties hereto have set their hands to
duplicates hereof, and hereby acknowledge receipt of a copy hereof.

LESSOR:
RANDAL BJERKE By: Randal Bjerke
---------------------------

Date: 6-23-93
-------------------------

LESSEE:
Donnelly APPLIED FILMS INC.
CECIL VANALSBURG, PRESIDENT By: Cecil VanAlsburg
---------------------------

Date: 23 June 1993
-------------------------

<PAGE> 1
EXHIBIT 10.8

LEASE AGREEMENT

LEASE AGREEMENT made this 27th day of April, 1995, between Winchester
"44" Associates, a Colorado general partnership (hereinafter referred to as
"Landlord"), and Donnelly Applied Films Corporation, a Michigan corporation
(hereinafter referred to as "Tenant").

Landlord and Tenant agree as follows:

1. Property-Leased Premises. Landlord leases to Tenant the following
described premises:

A 36,000 square foot single story, block building located
at 6797 Winchester Circle in Boulder, Colorado.

2. Term. This lease shall commence on the 1st day of May, 1995, and end
on the 30th day of April, 2000.

3. Rental Charges.

a. Base Rental Charges. Tenant shall pay to Landlord as minimum base
rent the total sum of $1,250,539.56 (One Million Two Hundred Fifty Thousand Five
Hundred Thirty-Nine and 56/100 Dollars), payable as follows:

In the first year of the lease the sum of $241,248.00, payable in equal
monthly payments of $20,104,00.
In the second year of the lease, the sum of $241,248.00, payable in
equal monthly payments of $20,104.00.
In the third year of the lease, the sum of $248,485.44, payable in equal
monthly payments of $20,707.12.
In the fourth year of the lease, the sum of $255,939.96, payable in
equal monthly payments of $21,328.33.
In the fifth year of the lease, the sum of $263,618.16, payable in equal
monthly payments of $21,968.18.

b. Additional Rental. Tenant shall pay Landlord additional annual
rental equal to 100% of the total maintenance and operating costs for the
building.
Operating and maintenance expenses shall be defined as taxes,
assessments, and governmental charges levied or charged against the real estate
where the premises are located excluding federal and state income taxes; and
insurance premiums attributable to the real estate of which the leased premises
form a part; and all maintenance and repair expenses as set forth under
Landlord's repairs; and any and all other operating costs which are incurred by
the Landlord or its manager in connection with the maintenance, operation, and
repair of the building. Tenant shall pay for its own utilities (or pro rata
share thereof) and operating expenses shall not include management fee expenses.
At the beginning of each calendar year of the lease term Landlord will
provide Tenant with an estimated cost of twelve months of operating expenses.
Tenant shall pay monthly one-twelfth (1/12) of these operating expenses. At the
end of each calendar year of the lease term the Landlord shall provide an
actual statement of operating expenses and the Tenant will be credited

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<PAGE> 2
with or required to pay the difference with the next monthly rental payment.
Failure by the Landlord to provide the estimates or a final statement shall not
relieve Tenant of liability for its appropriate share of operating expenses.

4. Security Deposit. Landlord hereby acknowledges receipt of the sum of
$8,750.00 paid by Tenant, to be retained by Landlord as security for the
performance of the terms and conditions of this Lease Agreement. In the event
deductions are made by Landlord for failure to meet obligations, upon request
by the Landlord, Tenant shall redeposit sufficient amounts to maintain the
security deposit in the amount noted as received above. The receipt or use of
any security deposits shall not relieve Tenant of any liability for damages or
loss occasioned by the actions of Tenant. There shall be no interest payable on
the security deposit held by Landlord.

5. Personal Property Taxes. Tenant shall be responsible for all taxes and/or
assessments levied or assessed against any furniture, fixtures, equipment, or
similar items installed or located on the leased premises by Tenant.

6. Option to Extend and Holdover. If Tenant fully and completely performs all
terms and conditions, including rental payment, of this agreement, then Tenant
shall have the option to renew this lease for an additional term of five (5)
years. If tenant wishes to exercise this option, notice shall be given to
Landlord not less than 60 days and not more than 120 days prior to the
expiration of the term of this lease. This additional lease term will be under
the same terms and conditions as this lease, except for the amount of base
rent, which shall be at prevailing market rates and will be agreed upon in
writing between Landlord and Tenant. If the term of this lease expires without
such a written agreement, then this lease will be considered to be a
month-to-month lease with a monthly rental payment of five percent (5%) greater
than the last monthly rental prior to the termination of this lease. All other
terms and conditions of this lease will remain in effect.

7. Insurance. Landlord shall insure the real estate in which the leased
premises are located against fire and extended coverage hazards with a licensed
casualty insurance company. These premium costs shall be part of operating
expenses. The insurance obtained by Landlord shall not cover the contents of
the premises leased by Tenant.

Tenant shall keep in effect with a licensed insurance company public
liability and property damage insurance with a bodily injury coverage in the
names of and for the benefit of Tenant and Landlord with minimum limits as
follows: Bodily Injury, $100,000 each person - $300,000 each accident; Property
Damage, $100,000. A copy of such insurance policy shall be furnished to
Landlord and adequate certificates shall be issued by the insurance company to
Landlord upon Landlord's request.

8. Landlord's Repairs. Landlord shall maintain and repair all structural
elements, including the roof and exterior walls but excluding any glass and
doors as a Landlord responsibility and not as part of operating expenses.
Landlord shall replace at his expense any defective equipment installed by
landlord on the premises. All other repairs and maintenance are part of
operating expenses.

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<PAGE> 3
9. Tenant's Repairs. Tenant shall maintain the leased premises in good order
and repair. Upon expiration of this lease, or upon earlier termination, Tenant
shall deliver leased premises to Landlord in the same condition as when leased,
reasonable wear and tear excepted.

10. Tenant's Obligation. Tenant agrees not to perform any act or carry on any
practice which may damage the real estate or leased premises and shall not be a
nuisance or menace to other tenants in the building.

11. Tenant's Compliance. Tenant shall promptly comply with all lawful
orders, laws, regulations or ordinances, of all municipal, county, state, and
federal authorities affecting the leased premises.

12. Covenant of Quiet Enjoyment. Tenant shall at all times be entitled to
peaceably and quietly enjoy the leased property without any disturbance from
Landlord or management agent except as provided in this agreement.

13. Licenses or Easements. Tenant grants to Landlord such licenses or
easements to the leased premises as are reasonably required for installation or
maintenance and repairs and the Landlord agrees to use every effort to assure
that such activities shall not result in any unreasonable interference with
Tenant's use.

14. Sublet. Tenant shall not sublet the leased premises nor assign this
lease or any interest in this lease without the written consent of the
Landlord, which consent shall not be unreasonably withheld.

15. Care of Leased Premises by Tenant. Tenant agrees that the Landlord shall
not be liable for any damages incurred by the failure of Tenant to keep the
leased premises in repair. Landlord shall not be liable for any damage arising
from the negligence of the Tenant, co-tenants or other occupants of the
building except to the extent that such damages arise from Landlord's own
negligent conduct or breach of performance.

16. Tenant Improvement Changes. Any and all Tenant improvement changes may be
made only after consultation and receipt of written consent by the Landlord.

17. Landlord Covenants. The Landlord covenants that it is the present owner
in fee simple of the premises and that it has the right and authority to make
this lease.

18. Parking and Common Use Areas and Facilities - Rules and Regulations of
Building. All parking areas, driveways, entrances and exits and other
facilities furnished by the Landlord, including all common areas of the
building, shall at all times be subject to the management and control of
Landlord. Landlord shall have the unilateral right from time to time to further
establish, modify, or impose additional rules and regulations with respect to
all facilities and areas in common.

19. Eminent Domain. In the event the real estate, the lease premises, or any
part thereof are taken by power of eminent domain, the rights and duties of the
parties regarding the aggregate eminent domain award shall be:

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<PAGE> 4
a. If the entire premises are condemned, the lease shall terminate as
of the date of the condemnation and the Tenant shall be released from any
liability and the entire award shall be received by Landlord.

b. If only a part of the premises are taken and the remaining premises
are unusable by Tenant, the lease shall terminate with the same effect as a
total taking and the award shall be received by the Landlord.

c. If only a part of the premises are taken and the part remaining can
be reasonable used by the Tenant, then this agreement shall remain in full
force and effect with equitable rental adjustments made if necessary and the
award shall only be received by the Landlord.

20. Premises Damaged or Destroyed. If the premises are damaged or wholly or
partially made unusable by fire, flood, windstorm, explosion, or any other
casualty, then the rights between the Landlord and Tenant shall be:

Landlord shall promptly repair or replace the damaged premises if
reasonable to do so in 180 days. If not completed within 180 days, the Tenant
may terminate this lease. Rent shall be the same and only abated if more than
30% of the interior floor space is rendered untenable and the repairs are not
completed in 30 days. If the premises are damaged by such casualties and the
Tenant feels that its property would be endangered and wishes to make emergency
repairs, the Landlord authorizes these emergency repairs but they should be
made and borne by Tenant. Landlord shall not be obligated to make these
emergency repairs.

21. Subordination of Lease to Mortgage. The Tenant acknowledges and agrees
that this lease shall be subordinate in lien and claim to any mortgage or
mortgages of the Landlord. Tenant agrees to execute an instrument in such form
as required by Landlord to indicate the lease is subordinate to the rights of
any mortgages related to the building and leased premises.

Landlord agrees that the rights of the Tenant under this lease,
including occupancy and use, shall not be disrupted or affected by such
required subordination.

22. Certification of Lease Effectiveness. Tenant agrees upon request by
Landlord to execute a written statement certifying the present status of the
lease including its present effectiveness, lack of any default and the dates to
which rent has been paid. It is understood that this statement will be relied
upon by Landlord and prospective purchasers or mortgage holders. The failure of
Tenant to deliver the certification within the requested time period shall be
the equivalent of delivery of such certification by the Tenant.

23. Sale by Landlord. The sale or conveyance by Landlord shall release the
Landlord from any and all liability under this lease. The Tenant's right to
quiet possession shall not be disturbed and if any security deposit has been
made, this security deposit may be transferred to the new purchaser who will
assume all responsibilities and the Landlord will be discharged from any
further liability regarding a security deposit or lease provisions.

23. Showing of the Premises. Tenant agrees that for a period beginning 90 days
prior to the termination of this lease, the landlord may show the premises to
prospective tenants.

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<PAGE> 5
25. Right of Inspection. Landlord shall have the right to enter upon the leased
premises at all reasonable hours for the purposes of inspecting the leased
premises.

26. Signs. Tenant may place a sign on the leased premises to indicate the
nature of the business of Tenant. The sign shall be lawful under applicable
sign codes and all signs shall be approved by the Landlord before being placed
on the premises.

27. Partial Invalidity. If any term or condition of this lease is deemed
invalid or unenforceable, the remainder of the terms and conditions of this
lease not held unenforceable or invalid shall continue to be in full force and
effect to the extent permitted by law.

28. Use of Premises. The use of the lease premises by Tenant is limited to the
following intended use:

Manufacturing and Assembly

29. Liability for Overload. Tenant shall be liable for any damage to the leased
premises or the building which results from any movement of heavy articles by
Tenant or its employees and agents. Tenant shall not overload the floors or any
part of the leased premises.

30. Glass and Door Responsibility. All glass and doors on the leased premises
shall be the responsibility of Tenant. Any replacement or repair shall be
completed at the expense of Tenant.

31. Interest on Past Due Obligations. Any amounts due Landlord which are not
paid when due shall bear interest at 1-1/2% per month from the due date until
paid. Payment of interest shall not excuse or cure any default by Tenant.

32. Late Charge. The Landlord may make a collection service charge in the
minimum amount of $25.00 or three percent (3%) monthly, whichever is greater,
of any rent installment or other payment which is more than 10 days delinquent.

33. Legal Proceedings Responsibility. If any legal action or proceeding is
brought by either Landlord or Tenant against the other for matters arising out
of disputes under this lease, the prevailing party in any dispute shall be
entitled to recover reasonable attorney's fees and costs and expenses incurred
in the legal action and such amount shall be included in any judgement rendered
in any legal action or proceeding.

34. Memorandum of Lease - Recording. This lease shall not be recorded in the
office of the County Clerk and Recorder of Boulder County. If the Landlord and
Tenant wish to record, the Landlord and Tenant shall execute a Memorandum of
Lease incorporating the basic terms and conditions but deleting therefrom any
statement or mention of rental payments and this Memorandum of Lease shall be
the only recorded document.

35. Waivers. No express or implied agreement or acquiescence of any breach of
the provisions of this lease shall be deemed to be a waiver of any rights of
Landlord or Tenant as to any other activities of Landlord and Tenant.

- 5 -

<PAGE> 6

36. Default. Upon the happening of any of the following events, the Landlord
may give notice to Tenant that the lease is terminated on a date certain and
the lease shall terminate on the date stated by the Landlord:

a. Failure of Tenant to pay any rental or other charges due the
Landlord when the failure continues for a period of 10 days following receipt
of notice by Tenant.

b. Failure of Tenant to perform any obligations under the lease within
five days after receipt of notice of the need to remedy the default.

c. An assignment by Tenant for the benefit of its creditors.

d. Any levying of a Writ of Execution or Attachment against the
property of Tenant if it is not released or discharged within 30 days.

e. The instituting of any proceeding of involuntary bankruptcy,
reorganization, liquidation, or dissolution of Tenant under the Federal
Bankruptcy Act or any state bankruptcy laws or insolvency acts. The doing or
permitting to be done by Tenant of any act which creates a Mechanic's lien or
claim against the land or building of which leased premises are a part, unless
resolved within 20 days after receipt of notice by Tenant.

f. The Abandonment or vacating of the leased premises by Tenant.

39. Remedies of Landlord. If there is a default, the Landlord shall have the
following rights and remedies which can be exercised without notice to Tenant.
The listing of remedies is not intended to preclude the rights of the Landlord
to any other remedies available by law:

a. The Landlord can terminate the lease by giving written notice of
the date of termination.

b. If the Landlord terminates the lease, the Tenant shall continue to
be liable to the Landlord for all rental charges until the original or extended
term of the lease has expired. Tenant shall also be responsible for any other
costs and expenses incurred by Landlord.

c. Landlord may peaceably and lawfully re-enter the leased premises
for purposes of making reasonable efforts to re-lease the premises. Any rent
collected upon re-lease of the premises shall be offset against Tenant's
obligations to Landlord.

d. If the Tenant abandons the premises, the Tenant shall continue to
be liable to the Landlord for all rents and additional charges due and owing
under the lease.

40. Notices. All notices to Landlord shall be sent to:

Winchester 44 Associates, 6797 Winchester Circle, Boulder, CO 80301.

- 6 -
<PAGE> 7
All notices to Tenant shall be sent to:

Donnelly Applied Films Corporation, 6797 Winchester Circle, Boulder, CO
80301.

41. Place of Payment. Payment of all rental charges and other payments due
under this lease shall be made to: Winchester 44 Associates, 6797 Winchester
Circle, Boulder, CO 80301.

42. Binding Upon Successors. All agreements, terms, and conditions for the
benefit of Landlord and Tenant shall also benefit their respective successors
and shall be binding upon any of their successors.

43. Controlling Law. This lease and all terms and conditions shall be
interpreted under the laws of the State of Colorado. Any dispute shall be
resolved in Colorado courts and in no other jurisdiction.

DATED this 27th day of April, 1995.

DONNELLY APPLIED FILMS CORPORATION

Cecil Van Alsburg
- -------------------------------
by: Cecil Van Alsburg
President

Winchester 44 Associates, a Colorado General Partnership, by its partners:

Cecil Van Alsburg John S. Chapin
- ------------------------------- -------------------------------------
Cecil Van Alsburg, Partner John Chapin, Partner

Charles Richard Condon Cecil Van Alsburg
- ------------------------------- -------------------------------------
Charles Richard Condon, Partner Donnelly Applied Films Corp., Partner
by: Cecil Van Alsburg

-7-

<PAGE> 1
EXHIBIT 10.9

LEASE

BETWEEN

APPLIED FILMS CORPORATION ("TENANT")

AND

CFA LLC ("LANDLORD")

<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<S> <C>
SECTION 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 USE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

SECTION 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 LEASE TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 TENANT ACCEPTANCE LETTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

SECTION 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
COMPLETION OF THE PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.1 BUILDING CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 DESCRIPTION OF OVERALL RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 2
A. PLANS AND SPECIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
B. TIME SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
C. ADJUSTMENT TO SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
D. LOAN GUARANTEE AND LOAN COMPLETION GUARANTEE . . . . . . . . . . . . . . . . . . 4
3.3 SUBSTANTIAL COMPLETION AND PUNCH LIST . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.4 ACCEPTANCE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.5 ACCESS BY TENANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.6 PARTIAL OCCUPANCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.7 TENANT FINISH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

SECTION 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.1 BASE RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2 NO OFFSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.3 INTEREST ON LATE PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 CPI ADJUSTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A. ADJUSTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
B. CHANGE OF INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

SECTION 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
TAXES AND OPERATING COST ADJUSTMENT FORMULA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.1 ADDITIONAL RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.2 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
A. MONTHLY PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
B. PRORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
C. DEFINITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
D. ASSESSMENT CONTEST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.3 OPERATING COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
A. INCLUSION IN OPERATING COSTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>

<PAGE> 3
<TABLE>
<S> <C>
5.4 OPERATING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 12

SECTION 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

SECTION 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
BUILDING SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

SECTION 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
USE OF LEASED PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.1 USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.2 HAZARDOUS USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.3 NO WASTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.4 PROTECTION AGAINST INSURANCE CANCELLATION . . . . . . . . . . . . . . . . 13

SECTION 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
COMPLIANCE WITH LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
9.1 COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
9.2 HAZARDOUS MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

SECTION 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MAINTENANCE, ALTERATIONS AND REPAIRS . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.1 TENANT TO MAINTAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.2 ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.3 PROTECTION AGAINST LIENS . . . . . . . . . . . . . . . . . . . . . . . . 17
10.4 SURRENDER OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . 17

SECTION 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ABANDONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

SECTION 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
12.1 LANDLORD'S CONSENT REQUIRED . . . . . . . . . . . . . . . . . . . . . . . 18
12.2 TERMS AND CONDITIONS - ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . 19
12.3 ADDITIONAL TERMS AND CONDITIONS - SUBLETTING . . . . . . . . . . . . . . 20
12.4 LANDLORD'S EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
12.5 ACCEPTANCE OF PERFORMANCE; NO WAIVER . . . . . . . . . . . . . . . . . . 21

SECTION 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
DAMAGE TO PROPERTY, INJURY TO PERSONS . . . . . . . . . . . . . . . . . . . . . . . . . . 21
13.1 TENANT'S WAIVER OF CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . 21
13.2 TENANT'S OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 21
13.3 TENANT'S INDEMNIFICATION AGAINST THIRD-PARTY CLAIMS . . . . . . . . . . . 21
13.4 NEGLIGENCE OF THIRD PARTIES. . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>

<PAGE> 4
<TABLE>
<S> <C>
13.5 TENANT'S PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . 22

SECTION 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
14.1 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
14.2 POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
14.3 PROTECTION AGAINST INSURANCE CANCELLATION . . . . . . . . . . . . . . 24
14.4 BLANKET INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 24
14.5 PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

SECTION 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
DAMAGE OR DESTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

SECTION 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
WAIVER OF SUBROGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

SECTION 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ENTRY OF LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

SECTION 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
DEFAULT BY TENANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18.1 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18.2 LANDLORD'S REMEDIES UPON DEFAULT . . . . . . . . . . . . . . . . . . 28
18.3 DEFAULT BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . 30
A. BEFORE LEASE COMMENCEMENT DATE . . . . . . . . . . . . . . . 30
B. AFTER LEASE COMMENCEMENT DATE . . . . . . . . . . . . . . . . 31
18.4 CUMULATIVE REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . 31
18.5 NO WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
18.6 BANKRUPTCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

SECTION 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
PERSONAL PROPERTY TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

SECTION 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

SECTION 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST . . . . . . . . . . . . . . . . . . . . 34
21.1 LEASE SUBORDINATE TO MORTGAGES . . . . . . . . . . . . . . . . . . . 34
21.2 TENANT'S NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . 34

SECTION 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SALE BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>

iii

<PAGE> 5
<TABLE>
<S> <C>
SECTION 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
RIGHT OF LANDLORD TO PERFORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

SECTION 24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ESTOPPEL CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

SECTION 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
OPTIONS TO EXTEND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

SECTION 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
26.1 AUTHORITY OF TENANT . . . . . . . . . . . . . . . . . . . . . . . . 37
26.2 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 37
26.3 AUTHORITIES FOR ACTION . . . . . . . . . . . . . . . . . . . . . . 37
26.4 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 37
26.5 FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
26.6 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
26.7 NO SETOFF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
26.8 RELATIONSHIP OF PARTIES . . . . . . . . . . . . . . . . . . . . . . 38
26.9 SUCCESSORS BOUND . . . . . . . . . . . . . . . . . . . . . . . . . 38
26.10 INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . . . 39
26.11 EASEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
26.12 LANDLORD'S FAILURE TO CONSENT . . . . . . . . . . . . . . . . . . . 40
26.13 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
26.14 REAL ESTATE BROKER . . . . . . . . . . . . . . . . . . . . . . . . 40
26.15 NO MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
26.16 NO LIGHT, VIEW OR AIR EASEMENT . . . . . . . . . . . . . . . . . . 41
26.17 TIME IS OF ESSENCE . . . . . . . . . . . . . . . . . . . . . . . . 41
26.18 AUCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
26.19 SECURITY MEASURES . . . . . . . . . . . . . . . . . . . . . . . . . 41
26.20 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . 41
26.21 QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 41
26.22 Short Form Lease . . . . . . . . . . . . . . . . . . . . . . . . . 41

SECTION 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
CONTINGENCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
27.1 LAND PURCHASE AND FINANCING . . . . . . . . . . . . . . . . . . . . 42

SECTION 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SPECIAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
28.1 TENANT PURCHASE OPTION . . . . . . . . . . . . . . . . . . . . . . 42
28.2 RIGHT OF FIRST OFFER . . . . . . . . . . . . . . . . . . . . . . . 43
28.3 FINANCING OF TENANT'S IMPROVEMENTS . . . . . . . . . . . . . . . . 43
</TABLE>

<PAGE> 6

EXHIBITS AND SCHEDULES

EXHIBIT A - PROPERTY
EXHIBIT B - PRELIMINARY PLANS
EXHIBIT C - TENANT ACCEPTANCE LETTER
SCHEDULE C-1 - PUNCH LIST ITEMS
EXHIBIT D - TENANT'S SPECIAL IMPROVEMENTS
EXHIBIT E - COMPLETION GUARANTEE
EXHIBIT F - FORM OF SUBORDINATION, NON-DISTURBANCE AND
ATTORNMENT AGREEMENT
EXHIBIT G - NON-FINANCEABLE PROPERTY IMPROVEMENTS
SCHEDULE I - PLANS SCHEDULE
SCHEDULE II - ITEMS INCLUDED IN CORE AND SHELL

v
<PAGE> 7
SUMMARY OF TERMS*

<TABLE>
<S><C>
1. LANDLORD: CFA LLC
---------------------------------------------------

2. TENANT: APPLIED FILMS CORPORATION
-------------------------------------------

3. PROPERTY LOCATION: Lot 1, Block 3, Amendment to Del Camino
------------------------------------------
Center, P.U.D.
---------------------------------------------------

4. GENERAL SIZE AND
DESCRIPTION OF BUILDING: one-story, 126,625 rentable sq. ft. office,
------------------------------------------------------------
R&D and light manufacturing
---------------------------------------------------

5. TERM: 15 years
-----------------------------------------------------------

6. OPTIONS: Two five year options
---------------------------------------------------

7. RENT: $6.35/sq ft/yr = $804,068.75 annually
-----------------------------------------------------------

8. RENT ESCALATORS: CPI beginning with the 4th year of the Lease
---------------------------------------------------

9. SECURITY DEPOSIT: None
-----------------------------------------------------------

10. OPERATING EXPENSE FORMULA: Full triple net
------------------------------------------------------------

11. CONTINGENCIES: construction financing and land acquisition
---------------------------------------------------

12. TENANT FINISH ALLOWANCE: $733,337
------------------------------------------------------------

13. CRITICAL PERFORMANCE DATES: Estimated Substantial Completion Date:January 1, 1998
---------------

</TABLE>

* This sheet is intended as a summary for convenience only and does not
interpret nor modify any provisions of the Lease.

<PAGE> 8

LEASE

THIS LEASE made this 26th day of June, 1997, between a APPLIED FILMS
CORPORATION, a Colorado corporation ("Tenant"), and CFA LLC, a Colorado limited
liability company ("Landlord").

W I T N E S S E T H:

DEMISE

Landlord does hereby lease to Tenant and Tenant hereby hires from
Landlord an approximately 126,625 square foot building (the "Building") to be
constructed on the land described in EXHIBIT A which is attached to and
incorporated in this Lease (the "Property"). The Building and the Property are
hereinafter sometimes collectively called the "Premises" or "Leased Premises."

This Lease is upon and subject to the terms, conditions, and covenants
set forth below, and Tenant and Landlord covenant as a material part of the
consideration for this Lease to keep and perform each and all of the terms,
conditions, and covenants by them to be kept and performed and that this Lease
is made upon the condition of such performance.

SECTION 1

PURPOSE

1.1 USE OF PREMISES. The Premises are to be used primarily for
offices, research and development and light manufacturing, provided that such
use complies with all environmental laws, zoning and use restrictions, and
restrictive covenants and conditions. Landlord represents that local zoning
and all restrictive covenants permit the Premises to be used for these
purposes.

SECTION 2

TERM

2.1 LEASE TERM. The term of this Lease shall be for a period of
180 months, commencing on January 1, 1998, subject to Sections 3.2, 3.3 and
26.5 of this Lease ("Lease Commencement Date"), and ending 180 months from the
Lease Commencement Date ("Termination Date") (alternatively, the "Lease Term"
or "Term"). Notwithstanding the above, if the Lease Commencement Date falls on
a day other than the first day of a month, the Lease Commencement Date shall be
deemed to be on the first day of the next month

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following the date on which the Lease Commencement Date would otherwise occur
but for this sentence. In addition to the first month's Base Rent, Tenant
shall pay an additional amount equal to the first month's Base Rent multiplied
by a fraction, the numerator of which is the number of days from what the Lease
Commencement Date would be, but for the preceding sentence, to the deemed Lease
Commencement Date on the first day of the next month and the denominator of
which is thirty. Upon expiration of the Term, Tenant shall execute and Quit
Claim Deed in favor of Landlord transferring all of Tenant's right, title, and
interest in and to the Premises.

2.2 TENANT ACCEPTANCE LETTER. Within thirty (30) days of the
Lease Commencement Date, Landlord and Tenant shall execute a supplement to this
Lease containing the items set forth in the Tenant Acceptance Letter which is
attached to and incorporated in this Lease as EXHIBIT C together with such
other matters reasonably requested by Landlord.

SECTION 3

COMPLETION OF THE PREMISES

3.1 BUILDING CONSTRUCTION. Landlord, subject to the terms and
conditions of this Lease, shall construct the Premises ("Landlord's Work")
pursuant to the terms of this Lease and in accordance with Final Plans and
Specifications which shall be materially in conformance with the Preliminary
Plans attached to and incorporated in this Lease as EXHIBIT B. The Final Plans
and Specifications (sometimes referred to as the "Plans and Specifications")
shall be attached to this Lease as they are completed and shall be approved by
Landlord and Tenant on or before the dates set forth on the Plans Schedule
("SCHEDULE I"). Landlord agrees that any contract for construction of the
Building with The Neenan Company shall contain a one year warranty against
defects in material or workmanship. Landlord shall assign to Tenant at the
Commencement Date all of its rights to contractor equipment warranties.
Except as set forth in the punch list referred to in Section 3.3 and above, the
Landlord shall not have any liability or obligation to pay any cost or expense
or to perform any work arising out of or pertaining to the Premises or the
ownership, construction, condition, or operation thereof after the Lease
Commencement Date.

3.2 DESCRIPTION OF OVERALL RESPONSIBILITIES.

a. PLANS AND SPECIFICATIONS. Landlord shall provide
Tenant with all of the necessary Plans and Specifications required to construct
the Premises, which shall be subject to Tenant's approval, such approval not to
be unreasonably withheld. Landlord shall provide the various stages of Plans
and Specifications on or before the times set forth in the Plans Schedule.
Landlord shall only begin construction on any specific phase when the Plans and
Specifications for such phase are final and have been approved in writing by
Tenant.

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b. TIME SCHEDULE. Subject to Tenant Delays (as defined below)
and events of Force Majeure (as set forth in Section 26.5), Landlord shall use
reasonable efforts to Substantially Complete (as defined below) Landlord's Work
by January 1, 1998, ("Estimated Substantial Completion Date"). All parties
understand and agree that Landlord is constructing the Building on a fast-track
basis and that the Plans Schedule and Estimated Substantial Completion Date are
the best faith estimates of Landlord as of the execution of this Lease. If
Landlord fails to Substantially Complete the Building within sixty (60) days of
the Estimated Substantial Completion Date, then Tenant shall have the right to
deliver a Notice of Termination to Landlord. If Landlord is unable to
substantially complete the Building within fifteen (15) days of receipt of a
Notice of Termination, then this Lease shall terminate and neither party shall
have any further obligations to the other except that Landlord shall pay Tenant
Sixty Thousand Dollars ($60,000) and Tenant may pursue any remedies it may have
under the Completion Guarantee attached to and incorporated in this Lease as
EXHIBIT E. If Landlord shall be delayed in meeting the Estimated Substantial
Completion Date or the Partial Occupancy Dates set forth in Section 3.6 as a
result of any act, neglect, failure, or admission of Tenant, its agents,
servants, employees, contractors or subcontractors, including without
limitation, any of the following, such delay shall be deemed a "Tenant Delay":

1. Tenant's request for materials, finishes or
installations which are not readily available at the time Landlord is ready to
install the same;

2. Tenant's failure or delay in approving the Plans and
Specifications pursuant to the Plan Schedule;

3. Tenant's changes or revisions in the Plans and
Specifications after approval;

4. Tenant's failure to timely pay any portion of Tenant's
Contribution (as defined below);

5. Any other act or omission by Tenant or its agents.

The Estimated Substantial Completion Date or the Partial Occupancy Dates shall
be delayed one (1) day for each day of Tenant Delay or Force Majeure occurring
after the actual Construction Commencement Date. Landlord shall notify Tenant
at least once every thirty (30) days of the occurrence of any Tenant Delay days
or Force Majeure days.

c. ADJUSTMENT TO SCHEDULE. If the Substantial Completion Date
shall be delayed by reason of a Tenant Delay, the Premises shall be deemed
Substantially Complete for purposes of determining the Lease Commencement Date
as of the day that the Premises would have been Substantially Complete but for
such Tenant Delay as determined by Landlord in its reasonable discretion. Tenant
shall pay to Landlord a sum equal to any additional cost to Landlord in
completing Landlord's Work resulting from any Tenant Delay if, as a result
thereof, the aggregate cost to complete Landlord's Work is increased. Any such
sum shall be in addition to any sums payable pursuant to any other subsection of
this

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Lease and shall be paid to Landlord within ten (10) days after Landlord submits
an invoice to Tenant. Any costs payable pursuant to this Section 3.2 shall be
collectable in the same manner as Rent and, if Tenant defaults in the payment
thereof, Landlord shall have the same rights as in the Event of Default by
Tenant in the payment of Rent in addition to any other remedies and Landlord
shall have no obligation to continue the performance of Landlord's Work until
Tenant shall have cured such Default.

d. LOAN GUARANTEE AND LOAN COMPLETION GUARANTEE. Tenant hereby
acknowledges and agrees that the Completion Guarantee attached hereto as EXHIBIT
E and any renewals or extensions thereof and all indebtedness or obligations
owed to Tenant thereunder, shall be and are hereby subordinated, inferior and
subject to Landlord's lender's Loan Guarantee and Loan Completion Guarantee, if
any, as the Loan Guarantee and/or Loan Completion Guarantee may be revised,
modified, extended or amended from time to time, and all indebtedness or
obligations owed to Landlord's lender thereunder. Until the Loan is paid in
full, Tenant shall not commence any action or proceeding against the Loan
Guarantors in connection with the Completion Guarantee without the Landlord's
lender's prior written consent, which may be granted or withheld by Landlord's
lender in its sole discretion.

3.3 SUBSTANTIAL COMPLETION AND PUNCH LIST. Landlord shall notify
Tenant of the anticipated Substantial Completion Date of Landlord's Work in a
notice given to Tenant at least fifteen (15) days prior to the Substantial
Completion Date. The phrase "Substantial Completion" shall mean that with the
exception of punch list items which would not prevent the use or occupancy of
the Premises, Landlord's Work shall have been completed in accordance with the
Plans and Specifications and all mechanical systems serving or affecting the
Premises shall then be in working order, excluding any work required to be
performed by Tenant to connect its equipment to such systems. The date on which
a receipt of a Certificate of Occupancy or a temporary Certificate of Occupancy
which permits Tenant to occupy the Premises shall conclusively control the
Substantial Completion Date. Within thirty (30) days of the Substantial
Completion Date, Landlord and Tenant shall set a mutually convenient time for
Tenant, Landlord, Tenant's Consultants, and The Neenan Company to inspect the
Premises at which time Tenant shall prepare and submit to Landlord a punch list
of items pertaining to the Premises which are incomplete or do not conform to
the Plans and Specifications. Landlord shall endeavor to complete the punch
list items within twenty (20) days thereafter. If Tenant fails to prepare and
submit a punch list within fifty (50) days after the Substantial Completion
Date, then Landlord's Work shall be deemed complete and satisfactory in all
respects and the Lease Commencement Date shall be deemed to have occurred on the
date set forth in Landlord's notice as the Substantial Completion Date.

3.4 ACCEPTANCE OF PREMISES. By execution of the Acceptance Letter,
Tenant shall be deemed conclusively to have accepted the Premises and to have
acknowledged that the Premises are in the condition required by the Plans and
Specifications, except as to incomplete, or defective items of the Premises
specified in the Acceptance Letter or set forth in the punch list. Further,
Landlord shall only be obligated to repair latent defects in the Premises
Improvements for a period of one (1) year after the Lease Commencement Date,
provided that Tenant notifies Landlord, in writing, of any such defects within
the one (1) year period after the Lease Commencement Date. Landlord shall have
a reasonable period of time following receipt of said defect notice within which
to correct such latent defects. Landlord shall not be responsible for the
repair or completion of any defective or incomplete items of the Premises if the
need for such repair or completion is not set forth in the Acceptance Letter,
the punch list or a timely delivered defect notice. Landlord shall not be
responsible or have any liability for loss or damage to any fixtures, equipment
or other property of Tenant or others installed or placed in the Premises by
Tenant or on Tenant's behalf, by its servants, employees, agents or independent
contractors, except when caused by Landlord's negligence or willful misconduct.

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3.5 ACCESS BY TENANT. Landlord shall permit Tenant and Tenant's
agents to have reasonable access to the Premises as soon as Weld County Building
Department officials permit in order that Tenant may perform special
installations and make the Premises ready for Tenant's use and occupancy. During
such period, Tenant shall comply with all terms and conditions of this Lease
except the obligation to pay Rent. Such permission shall constitute a license
only and not a lease and such license shall be conditioned upon:

a. Tenant working in harmony and not interfering with Landlord
and Landlord's agents, contractors, workmen, mechanics and suppliers;

b. Tenant furnishing Landlord with such insurance and other
security as Landlord may require against liabilities which may arise out of such
entry. Landlord shall have the right to withdraw the license in the event that
Tenant or Tenant's agents substantially interfere with Landlord's Work. Tenant
agrees that Landlord shall not be liable in any way for any injury, loss, or
damage which may occur to any of Tenant's property placed on or installations
made in the Premises prior to the Lease Commencement Date, the same being at
sole risk, and Tenant agrees to protect, defend, indemnify, and hold harmless
Landlord from all liens, liabilities, costs, damages, fees and expenses arising
out of or in connection with the activities of Tenant or its agents,
contractors, suppliers, or workmen in or about the Premises. At Landlord's
request, Tenant shall provide copies of all invoices together with evidence of
payment and lien waivers for all work performed by Tenant prior to the Lease
Commencement Date; and

c. Tenant paying any and all Operating Expenses related to
Tenant's presence on the Premises.

3.6 PARTIAL OCCUPANCY. Landlord agrees to use its reasonable best
efforts to obtain a partial Temporary Certificate of Occupancy by September 1,
1997, regarding the following portions of the Premises: Either the North or
South Office Area subject to HVAC availability; Production Area subject to HVAC
availability and all related mechanical and electrical systems. If Landlord is
unable to obtain a Temporary Certificate of Occupancy with respect to the
above-defined areas by November 1, 1997, then Landlord shall pay Tenant Sixty
Thousand Dollars ($60,000) as liquidated damages for such failure. The dates
set forth above are collectively referred to as the "Partial Occupancy Dates."

3.7 TENANT FINISH. The Base Rent Rate set forth in Section 4.1 below
is computed by taking into consideration a maximum expenditure of $733,337 for
Tenant Finish ("Tenant Finish Allowance"). Tenant Finish shall include any
expenditures on the Building other than the core and shell (as defined in
SCHEDULE II). If the actual costs of Tenant Finish based upon the approved
Plans and Specifications and approved by Tenant exceeds $733,337, then Tenant
shall pay such excess to Landlord ("Tenant Contribution"). Any changes to the
approved Plans and Specifications shall be approved by Tenant. Any deletions
from the approved Plans & Specifications as submitted to Landlord's lender upon
closing of Landlord's financing must be approved by Landlord's lender provided
that such approval shall not be unreasonably withheld. Landlord and Tenant agree
that Tenant shall deposit $1,300,000 into a construction escrow account with
Landlord's lender reasonably acceptable

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to Tenant 24 hours prior to Landlord closing on Landlord's construction
financing. Landlord shall give Tenant three (3) business days prior verbal
notice of the anticipated construction loan closing. Tenant agrees that the
funds in such escrow will be drawn against first, prior to funds being drawn
from the construction loan. If applicable, the Tenant Contribution (in excess
of the $1,300,000 provided for above) shall be invoiced to Tenant monthly based
upon a percentage of completion of Landlord's Work on the Tenant Finish. Such
invoices shall be due within ten (10) days of billing. If, for any reason
other than a default of Landlord, Tenant fails to make funds available to meet
its obligations set forth above within ten (10) days of any request for
payment, then Landlord shall be entitled to stop work on construction of the
Premises until such payment is made and each day of work stoppage shall be one
(1) day of Tenant Delay. If, for any reason other than a default of Landlord,
Tenant fails to make any payment provided for above within thirty (30) days
after Landlord's request for same, then Landlord may declare an Event of
Default and immediately exercise any or all of its remedies under this Lease.

SECTION 4

RENT

4.1 BASE RENT. Subject to adjustment as hereinafter defined in
Section 4.5, Tenant shall pay rent ("Base Rent") for the Premises to Landlord,
at the Rent Payment Address, without any setoff, offset, abatement or deduction
whatsoever during the term of this Lease (except, as expressly permitted under
this Lease), the sum of $6.35 per square foot, Eight Hundred Four Thousand
Sixty-Nine Dollars ($804,069) each year payable in equal monthly installments of
Sixty-Seven Thousand Five Dollars and Seventy-Five Cents ($67,005.75), in
advance, on or before the first day of each and every calendar month during the
term of this Lease, plus any excise, privilege, gross receipts or sales tax
levied on the rentals or the receipt thereof. The first payment of Base Rent
shall be due on the Lease Commencement Date; all other payments of Base Rent
shall be due on the first day of each calendar month during the term of this
Lease. Rent for any period which is for less than one month shall be prorated
on a per diem basis and in such case the first payment shall be made in advance
for the remaining fraction of the month and the next full month to Landlord, in
lawful money of the United States of America at the address of Landlord set
forth in Section 4.2 above, or such place as Landlord may from time to time
designate in writing.

4.2 NO OFFSETS. The Base Rent, Adjusted Base Rent, Operating Costs,
Taxes, and all other sums or charges required by this Lease to be paid by Tenant
to Landlord, (all of which are sometimes collectively referred to as "Rent")
shall be paid to Landlord without abatement, deduction or offset, in lawful
money of the United States of America, at 2620 East Prospect Road, Suite 100, P.
O. Box 2127, Fort Collins, Colorado 80522, Attention: Randolph P. Myers or to
such other person or at such other place as Landlord may from time to time
designate by thirty (30) days advanced written notice to Tenant ("Rent Payment
Address").

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4.3 INTEREST ON LATE PAYMENTS. Any Rent or other amount due from
Tenant to Landlord under this Lease not paid within ten (10) days of when due
shall bear interest from the date due, computed on a daily basis, until the date
paid, at the rate of one and one-half percent (1-1/2%) per month until paid, but
the payment of the interest shall not excuse nor cure any default by Tenant
under this Lease. The failure to charge or collect default interest in
connection with any one or more late payments shall not constitute a waiver of
Landlord's right to charge and collect default interest in connection with any
other similar or like late payments. The covenants in this Lease to pay Rent
shall be independent of any other covenant set forth in this Lease.
Notwithstanding the above, upon the first such late payment during any calendar
year Landlord shall give notice of the late payment to Tenant and no interest
shall be charged under this Section 4.3 provided Tenant makes the payment within
five (5) days following such notice. This interest charge shall be imposed
without notice for all subsequent late payments during the calendar year.

4.4 CPI ADJUSTMENT.

a. ADJUSTMENT. The Base Rent shall be increased (but not
decreased) beginning on the third anniversary of the Commencement Date and on
each anniversary of the Commencement Date thereafter to the extent of the
increase in the Consumer Price Index for All Urban Consumers--U.S. City Average,
(1982-84), (the "Index") as published by the United States Department of Labor's
Bureau of Labor Statistics during the previous twelve (12) months. Beginning on
the third anniversary of this Lease, the Base Rent for each lease year shall be
equal to the annual Base Rent of the immediately preceding lease year multiplied
by a fraction the numerator of which is the Index for the most recently
published month nearest to the first full month of the then current lease year
and the denominator of which is the Index for the same month of the immediately
preceding lease year. The term "lease year" shall mean each twelve (12) month
period following the Lease Commencement Date anniversary. The sum so calculated
shall constitute the new monthly Base Rent. Any delay by Landlord in notifying
Tenant of the new Base Rent shall not be construed as a waiver of Landlord's
right to collect such increase and Tenant shall bring all past due increased
Base Rent current on the next rental payment date after receipt of the increase
notice. Thereafter the Base Rent shall be paid at the increased rate.

b. CHANGE OF INDEX. If the compilation or publication of the
Index shall be transferred to any other governmental department or bureau or
agency or shall be discontinued, then Landlord shall choose a rate/index most
nearly similar to the Index to make such calculations. Tenant shall continue to
pay the Base Rent at the rate previously in effect until the increase, if any,
is determined.

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SECTION 5

TAXES AND OPERATING COST ADJUSTMENT FORMULA

5.1 ADDITIONAL RENT. In addition to Base Rent, Tenant shall pay the
Taxes and Operating Costs of the Premises in the manner, at the times, and in
the amounts set forth in this Section 5.

5.2 TAXES.

a. MONTHLY PAYMENT. Tenant shall directly pay all Taxes related
to the Premises for each calendar year that occurs during any part of the Lease
Term and provide evidence of such payment to Landlord at least thirty (30) days
prior to the payment due date unless Landlord's lender requires monthly
installments, in which event, Tenant shall pay to Landlord's mortgagee on or
before the first day of each calendar month until the next adjustment date
(which period between adjustment dates is herein called a "Tax Deposit Year")
one-twelfth of the estimated amount of the Taxes. Amounts paid under this
Section 5.2(a) in any Tax Deposit Year shall be reconciled with amounts actually
billed to Landlord for the same Tax Deposit Year, and provided there is any
surplus remaining after the credit to Tenant and provided Tenant shall not then
be in default under any of the provisions of this Lease, Landlord shall, at
Landlord's option, either refund the amount of the surplus to Tenant within
thirty (30) days following the end of the Tax Deposit Year or apply the surplus
amount against any other amounts then due from Tenant to Landlord. If upon the
reconciliation there is any deficiency in the amount of Taxes paid by Tenant,
Landlord shall bill Tenant and Tenant shall pay the additional amount within
thirty (30) days. Landlord shall provide Tenant written evidence of the timely
payment, in full, of all Taxes prior to the date of delinquency. If Tenant
fails to timely pay any Taxes, then Landlord may pay such Taxes and bill Tenant
for the Taxes plus a 25% delinquency fee.

b. PRORATIONS. With respect to the calendar years occurring
during the initial and last years of the Lease Term, the Taxes will be prorated
between Landlord and Tenant so that Tenant pays only that portion thereof that
is proportionate to that part of such calendar years elapsing during the Lease
Term. Upon the expiration of the full Lease Term, Landlord will estimate the
amount of the Taxes that are payable by Tenant based upon the then currently
available assessed value and mil levy assessment information; and, within thirty
(30) days after receiving written notice thereof, Tenant will pay such estimated
amount to Landlord in discharge of its obligation to pay the Taxes with respect
to such calendar year. However, if such estimate proves to be inaccurate,
either Landlord or Tenant may give written notice to the other of the amount of
the actual Taxes for such calendar year, and Landlord and Tenant will re-prorate
such Taxes based upon the actual amount thereof, promptly paying any adjustment
between them. In determining the amount of Taxes for any calendar year, the
amount of special assessments to be included shall be limited to the amount of
the installment (plus any interest payable thereon) of such special assessment
which would have been required to have been paid during such calendar year if
Landlord had elected to have the special assessment paid over the maximum period
of time permitted by law, if the election is available to Landlord. All
reference to Taxes "for"

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and "billed for" a particular calendar year shall be deemed to refer to Taxes
levied, assessed, billed or otherwise imposed for such calendar year, without
regard to the dates when any such Taxes are due and payable.

c. DEFINITION. As used in this Lease, the term "Taxes"
means any and all general and special taxes and impositions of every kind and
nature whatsoever levied, assessed, or imposed upon, or with respect to
Landlord's ownership, leasing, or operation of the Premises, any leasehold
improvements, fixtures, installations, additions, and equipment, whether owned
by Landlord or Tenant, or either, including, without limitation, real estate
taxes, personal property taxes, sewer rents, water rents, general or special
assessments, and duties or levies charged or levied upon or assessed against
the Premises and personal property, all reasonable costs and expenses
(including legal fees and court costs) charged for the protest or reduction of
property taxes or assessments in connection with the Premises, or any tax or
excise on rent or any other tax (however described) on account of rental
received for use and occupancy of any or all of the Premises, whether any such
taxes are imposed by the United States, the State of Colorado or any other
authority, agency or any political subdivision. Taxes shall not include any
income, capital stock, succession, transfer, franchise, gift, estate, or
inheritance taxes.

d. ASSESSMENT CONTEST. Landlord may and, at Tenant's
request, Landlord shall, contest in good faith by appropriate proceedings, or
in any other manner permitted by law, at Landlord's expense (or at Tenant's
expense if Tenant requests such contest), in Landlord's name, any Taxes
assessed or levied against the Property and the Improvements. Tenant agrees to
cooperate with Landlord and to execute any documents reasonably required for
such purpose. The contest shall include appeals from any judgments, decrees or
orders until a final determination shall be made by a court or governmental
department or authority having final jurisdiction in the matter.
Notwithstanding such contests, Tenant shall pay the Taxes in a timely fashion
pursuant to all rules and regulations of the applicable governmental taxing
authority and mortgage documents affecting the Premises. Upon the final
determination of any contest, Tenant shall pay to the appropriate authority any
unpaid Taxes together with any fines, interest, penalties, costs and charges as
may, in accordance with such determination, be payable. Any tax refund
obtained or increased tax liability incurred as a result of such contest shall
be refunded to or paid by the Tenant as applicable to all periods during which
Tenant leased the Premises.

5.3 OPERATING COSTS.

a. INCLUSION IN OPERATING COSTS. Tenant shall directly
pay the Operating Costs for the Premises. Tenant shall also directly perform
or cause to be performed all activities related to operating the Premises. As
used in this Lease, the term "Operating Costs" means any and all expenses,
costs, and disbursements (other than Taxes) of every kind and nature
whatsoever, which are required to operate, repair, maintain, replace and
rebuild the Premises in a first-class condition, including, without limitation,
the following costs and excluding the costs set forth in Section 5.3(b):

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i. Costs of supplies;

ii. Costs incurred in connection with obtaining
and providing energy for the Building, including, but not limited to, costs of
propane, butane, natural gas, steam, electricity, fuel oils, coal or any other
energy sources;

iii. Costs of water and sanitary and storm drainage
services;

iv. Costs of janitorial and security services, if
agreed to by Tenant;

v. Costs of general maintenance, repairs and
replacements to the Premises, including costs of maintaining, repairing and
replacing heating, ventilation and air conditioning systems and the cost of
maintaining, repairing and replacing the roof or the parking lot;

vi. Costs of insurance;

vii. Costs of maintenance and replacement of
landscaping;

viii. Labor costs associated with operation and
maintenance of the Building;

ix. Costs of repairs or reconstruction to the
foundation, exterior walls, superstructure and any other structural elements
("Structural Elements");

x. Costs of repairs, rebuilding, or other work
occasioned by fire, windstorm or other casualty;

xi. Costs of repairs or rebuilding necessitated
by condemnation;

xii. The costs during the Lease Term of capital
improvements and structural repairs and replacements made in, on or to the
Premises in order to conform to changes subsequent to the Lease Commencement
Date in any applicable laws, ordinances, rules, regulations or orders of any
governmental or quasi-governmental authority having jurisdiction over the
Premises.

b. EXCLUSION FROM OPERATING COSTS. Operating Costs shall
exclude only the following:

i. Leasing commissions, advertising expenses, and
other costs incurred in leasing space in the Building;

ii. Any interest on borrowed money or debt
amortization arising by, through, or under Landlord, except as specifically set
forth above;

iii. Book depreciation on the Building;

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iv. Costs of Landlord's overhead;

v. Items covered by Landlord's warranty set
forth in Section 3.1.

c. PAYMENT OPTIONS. Upon Tenant's failure to maintain
the Premises in accordance with Section 10.1 after notice and opportunity to
cure pursuant to Section 18.1, at Landlord's option, Landlord may require
Tenant to submit payments for Operating Expenses under one of the following
methods which may be changed from time to time upon thirty (30) days advanced
written notice to Tenant, including reinstatement of the direct payment method
set forth in Section 5.3(a):

i. Upon Landlord's election, Landlord may supply
Tenant with written notice of Landlord's estimate of the Operating Expenses
that will be incurred or accrued during the current calendar year (the "Deposit
Year"). On or before the first day of each month during such Deposit Year,
Tenant shall pay to Landlord one-twelfth of the estimated amount. If the
monthly deposit amount is not determined in time for Tenant to make the first
payment on January 1 of the Deposit Year, then the first monthly payment shall
be due on the first day of the month immediately following the date Landlord
supplies Tenant with notice of the amount and the first monthly payment(s)
shall also include a payment equal to one-twelfth of such additional sum
multiplied by the number of calendar months which have elapsed during the
Deposit Year prior to the date Tenant makes its first payment. Not later than
ninety (90) days following the end of each Deposit Year, Landlord shall deliver
to Tenant a written statement itemizing the nature and amounts of the Operating
Costs paid by Landlord during the preceding Deposit Year. If the total of the
estimated payments made by Tenant during the Deposit Year are less than
Tenant's obligation under this Lease for Operating Costs for the Deposit Year,
then Tenant, within thirty (30) days of the billing therefor, shall pay the
deficiency to Landlord. If the total of the Tenant's estimated payments for
the Deposit Year exceed Tenant's obligation for excess Operating Costs for such
year, then the surplus shall be handled in the manner provided in Section
5.2(a). Landlord shall retain records of Operating Costs paid during a Deposit
Year for a period of two (2) years. Tenant shall have the right, at its
expense, to audit the Operating Expenses upon reasonable notice to Landlord.
Any discrepancy agreed to by Landlord and Tenant shall be reconciled by payment
to the appropriate party. If Tenant's audit reveals a discrepancy in excess of
five percent (5%), Landlord shall pay the reasonable costs of the audit; or

ii. Some expenses will be paid directly by Tenant
and some expenses may be paid by Landlord (which it is not obligated to do so)
and Tenant shall reimburse Landlord within ten (10) days of receipt of an
invoice for expenses paid by Landlord.

5.4 OPERATING INFORMATION. Landlord may request up to one time
per year that Tenant provide Landlord with information regarding payments made
during the past two (2) years for taxes, utilities, repairs and maintenance
related to the Premises, which information Tenant agrees to supply within
thirty (30) days of Landlord's request.

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SECTION 6

HOLDING OVER

Should Tenant hold over after the expiration of the Lease Term, Tenant
shall become a tenant from month-to-month upon each and all of the terms herein
provided as may be applicable to such a tenancy, and any such tenancy shall not
constitute an extension of this Lease. During such period Tenant shall be
considered to be in default under this Lease and Landlord may elect to charge
Tenant Landlord's damages, consequential as well as direct, sustained by it by
reason of Tenant's occupying the Premises past the expiration of the Lease Term
including 125% of the Rent payable for the month immediately preceding the date
of expiration of the Lease Term. Tenant shall defend, indemnify and hold
Landlord harmless from and against any and all claims, losses and liabilities
for damages resulting from failure to surrender possession upon the Termination
Date or sooner termination of the Term, including, without limitation, any
claims made by any succeeding tenant, and such obligations shall survive the
expiration or sooner termination of this Lease. The provisions of this
paragraph shall not exclude nor waive Landlord's right of re-entry or any other
right hereunder.

SECTION 7

BUILDING SERVICES

After the Lease Commencement Date, Tenant shall directly contract with
and be solely responsible for providing any necessary utility or service
required for Tenant's use of the Premises. Tenant agrees that Landlord shall
not be liable for the unavailability of any heating, air conditioning, electric
current, or any other utility or service, unless the Landlord is grossly
negligent. Landlord reserves the right to temporarily discontinue such
services at times as may be necessary by reason of accident, emergencies,
strikes, lockouts, riots, acts of God, or any other happening or occurrence
beyond the reasonable control of Landlord. If such services are not available,
Landlord shall not be liable for damages to persons or property for any
discontinuance, nor shall a discontinuance in any way be construed as a
constructive or actual eviction of Tenant or cause an abatement of rent or
operate to release Tenant from any of Tenant's obligations, unless Landlord is
grossly negligent.

SECTION 8

USE OF LEASED PREMISES

8.1 USE. The Leased Premises shall not be used other than for the
purpose set forth in Section 1 of this Lease.

8.2 HAZARDOUS USE. Tenant agrees that it will not keep, use,
sell, or offer for sale in or upon the Leased Premises any article which may be
prohibited by any insurance policy

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in effect from time to time covering the Building or any hazardous substance,
the handling or storage of which is subject to governmental regulations, except
as required to conduct the ordinary course of Tenant's business and provided
that Tenant complies with all such applicable regulations and provides Landlord
with evidence of such compliance as reasonably satisfactory to Landlord.
Tenant shall promptly comply with all reasonable requirements of the insurance
authority or of any insurer now or hereafter in effect relating to the Leased
Premises.

8.3 NO WASTE. Tenant shall not commit, suffer, nor permit any
waste, damage, disfiguration, or injury to the Leased Premises or the fixtures
and equipment located in or on the Building, or permit or suffer any
overloading of the floors and shall not place any safes, heavy business
machinery, or other heavy things in the Premises other than as specifically
provided for in the Plans, without first obtaining the written consent of
Landlord and, if required by Landlord, of Landlord's architect, and shall not
use or permit to be used by any part of the Leased Premises for any dangerous,
noxious, or offensive trade or business, and shall not cause or permit any
nuisance in, at, or on the Leased Premises other than those activities required
in connection with the routine operation and maintenance of Tenant's business
in the Premises and conducted in compliance with all applicable Environmental
Laws and Environmental Permits.

8.4 PROTECTION AGAINST INSURANCE CANCELLATION. If any insurance
policy on the Building or any part thereof shall be cancelled or if
cancellation shall be threatened, or if the coverage shall be reduced or be
threatened to be reduced, in any way by reason of the use or occupation of the
Leased Premises or any part thereof by Tenant, any assignee or subtenant of
Tenant, or by anyone permitted by Tenant to be upon the Leased Premises and, if
Tenant fails to take reasonable efforts to remedy the condition giving rise to
the cancellation, threatened cancellation, reduction, or threatened reduction
of coverage following Tenant's receipt of written notice or to diligently
prosecute such remedial action to completion within a reasonable time following
Tenant's receipt of such written notice, Landlord may, at its option, enter
upon the Leased Premises and attempt to remedy the condition, and Tenant shall
forthwith pay the cost to Landlord as additional Rent. Except for Landlord's
gross negligence, Landlord shall not be liable for any damage or injury caused
to any property of Tenant or of others located on the Leased Premises as a
result of such entry. If Landlord is unable to remedy the offensive
conditions, the Landlord shall have all of the remedies provided for in this
Lease in the event of a default by Tenant. Notwithstanding the foregoing
provisions of this Section 8.4, if Tenant fails to remedy the condition, Tenant
shall be in default and Landlord shall have no obligations to attempt to
remedy.

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SECTION 9

COMPLIANCE WITH LAW

9.1 COMPLIANCE. Landlord warrants to Tenant that on the Lease
Commencement Date the Premises, as constructed by Landlord, comply with all
laws, statutes, ordinances, regulations or restrictive covenants. Tenant shall
not use the Premises, suffer the use of, or permit anything to be done in or
about the Premises which will in any way conflict with any law, statute,
ordinance, governmental rule or regulation, or any applicable restrictive
covenants now in force or which may hereafter be enacted or promulgated.
Tenant shall, at its sole cost and expense, promptly comply with all laws,
statutes, ordinances, restrictive covenants, and governmental rules,
regulations, or requirements now in force or which may hereafter be in force,
and with the requirements of any board of fire underwriters or other similar
body now or hereafter constituted relating to or affecting the Premises
provided nothing in this sentence shall preclude Tenant from making a claim
against Landlord for breach of the warranty in this Section 9.1. The judgment
of any court of competent jurisdiction or the admission of Tenant in an action
against Tenant, whether Landlord be a party to the action or not, that Tenant
has violated any law, statute, ordinance, restrictive covenant, or governmental
rule, regulation, or requirement, shall be conclusive of that violation as
between Landlord and Tenant.

9.2 HAZARDOUS MATERIALS.

a. During the term of this Lease, Tenant shall comply
with all Environmental Laws and Environmental Permits (each as defined in
Section 9.2(d) hereof) applicable to the operation or use of the Premises,
shall cause all other persons occupying or using the Premises to comply with
all such Environmental Laws and Environmental Permits, shall immediately pay
all costs and expenses incurred by reason of such compliance, and shall obtain
and renew all Environmental Permits required for operation or use of the
Premises. Tenant shall not generate, use, treat, store, handle, release or
dispose of, or permit the generation, use, treatment, storage, handling,
release or disposal, of Hazardous Materials (as defined in Section 9.2(e)
hereof) on the Premises, or transport or permit the transportation of Hazardous
Materials to or from the Premises, except as required in connection with the
routine operation and maintenance of Tenant's business in the Premises, and
then only in compliance with all applicable Environmental Laws and
Environmental Permits.

b.(1) Tenant will advise Landlord in writing not later than
five (5) business days after Tenant has knowledge of any of the following: (1)
any pending or threatened Environmental Claim (as defined in Section 9.2(e)
hereof) against Tenant relating to the Premises; (2) any condition or
occurrence on the Premises, of which Tenant has knowledge that results in
noncompliance by Tenant with any applicable Environmental Law; and (3) the
actual or anticipated taking of any removal or remedial action in response to
the actual or alleged presence of any Hazardous Material on the Premises. All
such notices shall describe in reasonable detail the nature of the claim,
investigation, condition, occurrence or removal or remedial action and Tenant's
response thereto. In addition, Tenant will provide

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Landlord with copies of all written communications regarding the Premises with
any government or governmental agency relating to actual or possible
non-compliance with Environmental Laws, all such communications with any person
relating to Environmental Claims, and such detailed reports of any such
Environmental Claim as may reasonably be requested by Landlord. At any time
and from time to time during the term of this Lease, Landlord or its agents may
perform an environmental inspection of the Premises, and Tenant hereby grants
to Landlord and its agents access to the Premises to undertake such an
inspection upon reasonable notice during Tenant's normal business hours and in
a manner to minimize interference with Tenant's business.

b.(2) Landlord will advise Tenant in writing not later than
five (5) business days after Landlord has knowledge of any pending or
threatened Environmental Claim (as defined in Section 9.2(e) hereof) against
Landlord and/or Tenant relating to the Premises. All such notices shall
describe in reasonable detail the nature of the claim. In addition, Landlord
will provide to Tenant all communications with any person relating to
Environmental Claims and such detailed reports in Landlord's possession
relating to any such Environmental Claim as may reasonably be requested by
Tenant.

c. Tenant agrees to defend, indemnify and hold harmless
the Landlord, its officers, managers, owners, lenders, employees, attorneys and
agents ("Landlord Indemnitees") from and against all obligations (including
removal and remedial actions), losses, claims, suits, judgments, liabilities,
penalties (including, by way of illustration and not by way of limitation,
civil fines), damages (including consequential and punitive damages), costs and
expenses (including attorneys' and consultants' fees and expenses) of any kind
or nature whatsoever that may at any time be incurred by, imposed on or
asserted against such Landlord Indemnitees directly or indirectly based on, or
arising or resulting from (a) the actual or alleged presence of Hazardous
Materials on the Premises, which is caused or permitted by Tenant and/or (b)
any Environmental Claim relating in any way to Tenant's operation or use of the
Premises. The provisions of this Section 9.2(c) shall survive the expiration
or sooner termination of this Lease.

d. Landlord agrees to defend, indemnify and hold harmless
the Tenant, its officers, managers, owners, lenders, employees, attorneys and
agents ("Tenant Indemnitees") from and against all obligations (including
removal and remedial actions), losses, claims, suits, judgments, liabilities,
penalties (including, by way of illustration and not by way of limitation,
civil fines), damages (including consequential and punitive damages), costs and
expenses (including attorneys' and consultants' fees and expenses) of any kind
or nature whatsoever that may at any time be incurred by, imposed on or
asserted against such Tenant Indemnitees directly or indirectly based on, or
arising or resulting from the actual or alleged presence of Hazardous Materials
on the Premises, which is caused by Landlord or existing on the Premises prior
to Tenant's occupancy of the Premises. The provisions of this Section 9.2(d)
shall survive the expiration or sooner termination of this Lease.

e. (1) "Hazardous Materials" means (a) petroleum or
petroleum products, natural or synthetic gas, asbestos in any form, urea
formaldehyde foam insulation, and radon gas; (b) any substances defined now or
in the future as or included in the definition of

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"hazardous substances," "hazardous wastes," "hazardous materials," "extremely
hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic
pollutants," "contaminants" or "pollutants," or words of similar import, under
any applicable Environmental Law; and (c) any other substance exposure to
which is regulated by any governmental authority; (2) "Environmental Law" means
any federal, state or local statute, law, rule, regulation, ordinance, code,
policy or rule of common law now or hereafter in effect and in each case as
amended, and any judicial or administrative interpretation thereof, including
any judicial or administrative order, consent decree or judgment, relating to
the environment, health, safety or Hazardous Materials; (3) "Environmental
Claims" means any and all administrative, regulatory or judicial actions,
suits, demands, demand letters, claims, liens, notices of non-compliance or
violation, investigations, proceedings, consent orders or consent agreements
relating in any way to any Environmental Law or any Environmental Permit,
including without limitation (a) any and all Environmental Claims by
governmental or regulatory authorities for enforcement, cleanup, removal,
response, remedial or other actions or damages pursuant to any applicable
Environmental Law and/or (b) any and all Environmental Claims by any third
party seeking damages, contribution, indemnification, cost recovery,
compensation or injunctive relief resulting from Hazardous Materials or arising
from alleged injury or threat of injury to health, safety or the environment;
and (4) "Environmental Permits" means all permits, approvals, identification
numbers, licenses and other authorizations required under any applicable
Environmental Law.

SECTION 10

MAINTENANCE, ALTERATIONS AND REPAIRS

10.1 TENANT TO MAINTAIN. Tenant shall, at its sole expense, during
the Lease Term maintain, repair, replace and rebuild the Premises, including
the Structural Elements, as necessary to keep the Premises in good order,
condition, and repair, ordinary fair wear and tear excepted, fully operational,
and clean and attractive in appearance in conformance with all applicable
covenants and consistent with a building of similar use in Weld County,
Colorado. Without limiting the generality of the foregoing, the Tenant will
maintain, repair, replace, and rebuild the roof, windows, glass, parking and
driveway surfaces, sidewalks, landscaping, plumbing, heating, ventilating, and
air-conditioning units, and other mechanical and electrical, systems on, or
constituting a part of, the Premises. Any system or portion of the Premises
that has a warranty shall be maintained in such a manner as to not void any
such warranty.

10.2 ALTERATIONS. Tenant shall not, without the prior written
consent of Landlord which shall not be unreasonably withheld so long as Tenant
demonstrates financial assurance of its ability to restore the Premises to
original condition as of the Lease Commencement Date, make any alterations,
improvements, or additions to the Premises, including, but not limited to,
partitions, wall coverings, floor coverings, special lighting or equipment
installations and structural changes (collectively the "Alterations").
Notwithstanding anything else in this Section 10.2, Tenant may make
non-structural changes to the Premises the cost of which is less than $100,000
per year without Landlord's consent provided Tenant gives

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Landlord a copy of as-built plans and appropriate building permits, inspection
reports, and other approvals as applicable, within thirty (30) days after
completion. If Tenant desires to make any Alterations, the cost of which
exceeds $100,000, Tenant shall first submit to Landlord plans and
specifications and obtain Landlord's written approval, if required, prior to
commencing any work. All Alterations, whether temporary or permanent in
character, made by Tenant in or upon the Premises shall, at Tenant's election,
be removed at Tenant's cost upon the termination of this Lease, and Tenant
shall repair any damage caused to the Premises as a result of any removal at
Tenant's cost. Tenant shall not be entitled to exercise this option if the
Lease is terminated pursuant to Tenant's default under the Lease beyond any
applicable cure period. Tenant shall promptly pay, when due, all costs of all
Alterations, and upon completion, deliver to Landlord, evidence of payment and
waivers of all liens for labor, services, or materials. Tenant shall defend
and hold Landlord and the Premises harmless from all costs, including
reasonable attorney fees, damages, liens, claims of liens for labor, services,
or materials relating to the work. Tenant shall immediately give Landlord
notice of any mechanics liens or foreclosure proceedings and Landlord shall be
allowed, at its option, to participate in the defense of or otherwise defend
any such claim at the expense of Tenant. At Landlord's request, Tenant shall
bond over any contested mechanics liens related to Tenant's Alterations at
Tenant's expense. In any event, upon termination of this Lease, Tenant shall
not be obligated to remove any item or work attached to the Building as of the
Lease Commencement Date. Nevertheless, Tenant may at Tenant's sole option upon
termination of this Lease, provided Tenant is not in default, remove Tenant's
Special Improvements (as defined in EXHIBIT D) attached to the Premises as of
the Lease Commencement Date provided that Tenant shall repair any damage done
to the Premises as a result of such removal in a manner such that the Premises
are fit for occupancy and not in violation of any applicable building code or
regulations.

10.3 PROTECTION AGAINST LIENS. At least five (5) days prior to the
commencement of any work on the Leased Premises, Tenant shall notify Landlord
of the commencement of the work and Tenant shall post a written or printed
notice on the Premises that Landlord's interest shall not be subject to any
liens pursuant to Section 38-22-105(2) of the Colorado Revised Statutes.
During the progress of any work on the Leased Premises, Landlord or its
representatives shall have the right to go upon and inspect the Leased Premises
at all reasonable times, and shall have the right to post and keep posted
thereon notices such as those provided for by Section 38-22-105(2) of the
Colorado Revised Statutes or to take any further action which Landlord may deem
to be proper for the protection of Landlord's interest in the Leased Premises.

10.4 SURRENDER OF PREMISES. Upon the expiration of the Lease Term
or any sooner termination of this Lease, Tenant will surrender and deliver the
Premises to Landlord, in good order, condition, and repair, subject only to
ordinary wear and tear and to damage by fire or other casualty if and to the
extent that Landlord is reimbursed by insurance proceeds for the full amount of
such damage. The foregoing will not diminish, or be deemed to diminish, the
obligations of Tenant to maintain, repair and replace the Premises in
accordance with the other provisions of this Lease. Further, upon such
expiration or termination, Tenant will remove all of Tenant's property from the
Premises, except as is

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provided in Section 10.2. The provisions of this Section will survive the
expiration of the Lease Term or any termination of this Lease.

SECTION 11

ABANDONMENT

Tenant shall not abandon the Premises at any time during the Lease Term
and, if Tenant shall abandon or surrender (whether at the end of the stated
Term or otherwise) the Premises, or shall be dispossessed by process of law or
otherwise, then any personal property belonging to Tenant left on the Premises
shall be deemed abandoned and may be sold or otherwise disposed of by Landlord
without any liability to Tenant whatsoever. Tenant shall not at any time
remove Landlord's property or any fixtures constituting property of Landlord
from the Premises. Any removal of Landlord's property from the Premises by
Tenant shall constitute a material breach of this Lease and Landlord shall have
the right to take all reasonable steps to stop or prevent such breach without
such actions constituting a constructive eviction of Tenant.

SECTION 12

ASSIGNMENT AND SUBLETTING

12.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not voluntarily or
by operation of law assign, transfer, mortgage, sublet, or otherwise transfer
or encumber all or any part of Tenant's interest in the Lease or in the
Premises, without Landlord's prior written consent, which Landlord shall not
unreasonably withhold. In no event shall Landlord be required to approve any
transfer to a prospective tenant who fails to meet the use restrictions set
forth in Section 1.1. Landlord shall respond to Tenant's request for consent
hereunder in a timely manner. Any attempted assignment, transfer, mortgage,
encumbrance or subletting without such consent shall be void, and shall
constitute a material default and breach of this Lease without the need for
notice to Tenant under any provision of this Lease. "Transfer" within the
meaning of this Section 12.1 shall include any merger, reorganization, or
similar transaction to which the Tenant's consent is required, the sale or
transfer of all or substantially all of Tenant's assets or the transfer of 51%
or more of Tenant's stock. Notwithstanding the above and without Landlord's
consent, Tenant may make a public offering of its stock, or Tenant may assign
all of its rights, (but not less than all of its rights) to any entity which is
owned by Tenant or to a parent of Tenant or in connection with any merger or
reorganization of Tenant or a sale of all of Tenant's assets provided that
Landlord receives notice of the transaction and sufficient financial
information evidencing that the parties remaining liable on the Lease have the
financial strength and credit worthiness at least equal to Tenant's as of the
date this Lease is executed or the date of assignment, whichever is greater.

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12.2 TERMS AND CONDITIONS - ASSIGNMENT AND SUBLETTING.

a. Regardless of Landlord's consent, no assignment or
subletting shall release Tenant of Tenant's obligations hereunder or alter the
primary liability of Tenant to pay Rent and other sums due Landlord hereunder
including Taxes and Operating Costs, and to perform all other obligations to be
performed by Tenant under this Lease.

b. Landlord may accept Rent from any person other than
Tenant pending approval or disapproval of such assignment.

c. Neither a delay in the approval or disapproval of such
assignment or subletting, nor the acceptance of Rent, shall constitute a waiver
or estoppel of Landlord's right to exercise its remedies for the breach of any
of the terms or conditions of this Section 12 of this Lease.

d. The consent by Landlord to any assignment or
subletting shall not constitute a consent to any subsequent assignment or
subletting by Tenant or to any subsequent or successive assignment or
subletting by the subtenant. However, Landlord may consent to subsequent
sublettings and assignments of the sublease or any amendments or modifications
thereto without notifying Tenant or anyone else liable on the Lease or sublease
and without obtaining their consent and such action shall not relieve such
persons from liability under this Lease or said sublease; however, such persons
shall not be responsible to the extent any such amendment or modification
enlarges or increases the obligations of the Tenant or subtenant under this
Lease or such sublease.

e. Upon any default under this Lease, Landlord may
proceed directly against Tenant, any guarantors or any one else responsible for
the performance of this Lease, including the subtenant, without first
exhausting Landlord's remedies against any other person or entity responsible
to Landlord, or any security held by Landlord or Tenant.

f. Landlord's written consent to any assignment or
subletting of the Premises by Tenant shall not constitute any acknowledgement
that no default then exists under this Lease of the obligations to be performed
by Tenant nor shall such consent be deemed a waiver of any then existing
default, except as may be otherwise stated by Landlord in writing at the time.

g. The discovery of the fact that any financial statement
relied upon by Landlord in giving its consent to an assignment or subletting
was materially false shall, at Landlord's election, render Landlord's consent
null and void.

h. No consent by Landlord to an assignment of this Lease
shall be effective unless and until Tenant shall deliver to Landlord an
agreement in form and substance reasonably satisfactory to Landlord pursuant to
which such assignee assumes and agrees to be bound by all of the terms,
covenants, conditions, provisions and agreements of this Lease.

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12.3 ADDITIONAL TERMS AND CONDITIONS - SUBLETTING. Regardless of
Landlord's consent, the following terms and conditions shall apply to any
subletting by Tenant of all or any part of the Premises and shall be deemed
included in all subleases under this Lease whether or not expressly
incorporated therein:

a. Landlord shall not by reason of any assignment of such
sublease to Landlord nor by reason of the collection of the rents from a
subtenant, be deemed liable to the subtenant for any failure of tenant to
perform and comply with any of Tenant's obligations to such subtenant under
such sublease. Tenant hereby irrevocably authorized and directs any such
subtenant, upon receipt of a written notice from Landlord stating that a
default exists in the performance of Tenant's obligations under this Lease, to
pay to Landlord the rents due and to become due under the sublease. Tenant
agrees that such subtenant shall have the right to rely upon any such statement
and request from Landlord, and that such subtenant shall pay such rents to
Landlord without any obligation or right to inquire as to whether such default
exists and notwithstanding any notice from or claim from Tenant to the
contrary. Tenant shall have no right or claim against said subtenant or
Landlord for any such rents so paid by said subtenant to Landlord.

b. No sublease entered into by Tenant shall be effective
unless and until it has been approved in writing by Landlord. In entering into
any sublease, Tenant shall use only such form of sublease as is reasonably
satisfactory to Landlord, and once approved by Landlord, such sublease shall
not be changed or modified without Landlord's prior written consent. Any
subtenant shall, by reason of entering into a sublease under this Lease, be
deemed, for the benefit of Landlord, to have assumed and agreed to conform and
comply with each and every obligation herein to be performed by Tenant other
than such obligations as are contrary to or inconsistent with provisions
contained in a sublease to which Landlord has expressly consented in writing.

c. If Tenant shall default in the performance of its
obligations under this Lease and Landlord terminates this Lease, Landlord at
its option and without any obligation to do so, may require any subtenant to
attorn to Landlord, in which event Landlord shall undertake the obligations of
Tenant under such sublease from the time of the exercise of said option to the
termination of such sublease; provided, however, Landlord shall not be liable
for any prepaid rents or security deposit paid by such subtenant to Tenant or
for any other prior defaults of Tenant under the sublease.

d. No subtenant shall further assign or sublet all or any
part of the Premises without Landlord's prior written consent.

12.4 LANDLORD'S EXPENSES. If Tenant shall assign or sublet the
Premises or request the consent of Landlord to any assignment or subletting or
if Tenant shall request the consent of Landlord for any act Tenant proposes to
do then Tenant shall pay Landlord's reasonable costs and expenses incurred in
connection therewith, including attorneys, architects', engineers' or other
consultants' fees and all reasonable additional direct expenses incurred by
Landlord due to any such assignee or sublessee taking possession of the
Premises. All such expenses shall not exceed $5,000 per request.

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12.5 ACCEPTANCE OF PERFORMANCE; NO WAIVER. If this Lease is
assigned, or if the Premises or any part are sublet or occupied by anybody
other than Tenant, Landlord may, upon default by Tenant, collect the rent from
the assignee, subtenant, or occupant and apply the net amount collected to the
Rent, but no assignment, subletting, occupancy or collection shall be deemed an
acceptance of the assignee, subtenant or occupant as the Tenant, or constitute
a release of Tenant from further performance by Tenant of covenants on the part
of Tenant.

SECTION 13

DAMAGE TO PROPERTY, INJURY TO PERSONS

13.1 TENANT'S WAIVER OF CLAIMS. Tenant, as a material part of the
consideration to be rendered to Landlord under this Lease, to the extent
permitted by law, hereby waives all claims which Tenant, Tenant's successor, or
assigns may have against Landlord, its officers, directors, owners, employees,
attorneys, and agents (excluding contractors and subcontractors) (collectively
the "Released Parties") resulting from fire, explosion, falling plaster, smoke,
steam, gas, electricity, water or rain which may leak from any part of the
Improvements or from the pipes, appliances or plumbing works therein or from
the roof, street or subsurface or from any other places resulting from dampness
or any other cause whatsoever, except personal injury or loss or damage to
property caused by or due to the gross negligence or willful misconduct of
Landlord or breach of Landlord's warranties set forth in Section 3.1. In
addition and subject to the exceptions of the preceding sentence, the Released
Parties shall not be liable for (i) interference with the utility service,
HVAC, or for any latent defect in the Improvements, except as provided in
Section 3.4, (ii) any loss or damage for which Tenant is required to insure or
(iii) any loss or damage resulting from any construction, Alterations or
repair required or permitted to be performed by Tenant under this Lease.

13.2 TENANT'S OBLIGATIONS. Notwithstanding any other provision in
this Lease to the contrary, if Tenant has a contractual obligation under this
Lease and Tenant's failure to perform such obligation would also give rise to
negligence by Landlord, then Landlord's negligence shall not be considered in
applying any provisions of this Lease. By way of example only, without
limiting the foregoing, if Landlord had a statutory duty or a common law duty
to remove ice and snow from any sidewalks on the Premises and Tenant had a
simultaneous contractual obligation under this Lease to maintain the Premises
in compliance with all governmental laws, rules and regulations and/or maintain
the Premises in good condition, Tenant would nevertheless be required to
indemnify Landlord pursuant to this Section 13.2 from the claim of any person
who slipped on the icy sidewalk even though Landlord may legally be considered
negligent.

13.3 TENANT'S INDEMNIFICATION AGAINST THIRD-PARTY CLAIMS. Tenant
shall indemnify, defend and hold harmless Landlord and its officers,
directors, owners, employees, attorneys and agents (collectively, the "Landlord
Indemnitees") from and against any and all claims, demands, causes of action,
judgments, costs, expenses, and all losses and damages incurred

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or claimed by unrelated third-parties (including consequential and punitive
damages) arising from Tenant's use of the Premises or from the conduct of its
business or from any activity, work, or other acts or things done, permitted or
suffered by Tenant in or about the Premises, and shall further indemnify,
defend and hold harmless the Landlord Indemnitees from and against any and all
third-party claims arising from any breach or default in the performance of any
obligation on Tenant's part to be performed under the terms of this Lease, or
arising from any act, omission or negligence or willful or criminal misconduct
of Tenant, or any officer, agent, employee, independent contractor, guest, or
invitee thereof, and from all costs, reasonable attorneys' fees and
disbursements, and liabilities incurred in the defense of any such claim or any
action or proceeding which may be brought against, out of or in any way related
to this Lease. Upon notice from Landlord, Tenant shall defend any such claim,
demand, cause of action or suit at Tenant's expense by counsel satisfactory to
Landlord in its reasonable discretion. As a material part of the consideration
to Landlord for this Lease, Tenant hereby assumes all risk of damage to
property or injury to persons in, upon or about the Premises from any cause,
and Tenant hereby waives all claims with respect thereto against the Landlord
Indemnitees. Tenant shall give immediate notice to Landlord in case of
casualty or accidents in the Premises. The provisions of this Section 13.3
shall survive the expiration or sooner termination of this Lease.

13.4 NEGLIGENCE OF THIRD PARTIES. The Landlord Indemnitees shall
not be liable to Tenant for any damage by or from any act or negligence of any
third party owner or occupant of adjoining or contiguous property or any other
third party.

13.5 TENANT'S PROPERTY. All property belonging to Tenant, or any
occupant of the Premises, that is on the Premises, shall be there at the sole
risk of Tenant or other person only, and the Landlord Indemnitees shall not be
liable for, without limitation loss of or damage to any property by theft or
otherwise, by any means whatsoever. Tenant shall give prompt notice to
Landlord in case of fire or accidents in the Premises or in the Improvements or
of observed defects in the Improvements, its fixtures or equipment.

SECTION 14

INSURANCE

14.1 INSURANCE. Tenant shall, during the entire Term of this
Lease, at its sole cost and expense, obtain, maintain, and keep in full force
and effect the following types of insurance:

a. Fire and extended coverage insurance covering Tenant's
personal property, fixtures, improvements, wall coverings, floor coverings,
window coverings, alterations, furniture, equipment, lighting, ceilings,
heating, ventilation and air conditioning equipment, interior plumbing and
plate glass and other property against loss or damage by fire, flood,
windstorms, hail, earthquakes, explosion, riot, damage from aircraft and
vehicles, smoke damage, vandalism and malicious mischief and such other risks
as are from time to time covered under "extended coverage" endorsements and
special extended coverage

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endorsements commonly known as "all risks" endorsements, in an amount equal to
the greater of the full replacement value or the amount required by the holder
of any mortgage from time to time and containing the waiver of subrogation
required in Section 16 of this Lease. Such policy shall name Landlord as an
additional insured as Landlord's interest may appear and Landlord's mortgagee
under a standard mortgagee policy to the extent of their respective interests.

b. All risk coverage covering all of the improvements on
the Premises in an amount equal to the full replacement value without deduction
for depreciation, (including, without limitation, with respect to the roofs) as
reasonably determined by Landlord from time to time. Landlord and Tenant shall
be named joint loss payees on this policy and Landlord's mortgagee shall be the
sole named mortgagee under a standard mortgagee's clause. Any of Landlord's
mortgagees shall agree to make the proceeds of such insurance available to
Tenant for the purpose of repairing and restoring the Improvements provided
that the loan is not in default and that Tenant is not in default (beyond any
cure period) under this Lease.

c. Comprehensive General Liability Insurance with
contractual liability endorsement utilizing an Insurance Services Office
standard form providing coverage for bodily injury (including death), property
damage and products liability insurance (where such exposure exists) occurring
on the Premises. Such insurance shall have a combined single limit of not less
than Three Million Dollars ($3,000,000) per occurrence and Five Million Dollars
($5,000,000) in the aggregate for all occurrences within each policy year, or
such greater amounts as Landlord may from time to time reasonably require
naming Landlord, and its mortgagees with an insurable interest, as additional
insureds.

d. State Worker's Compensation Insurance in the
statutorily mandated limits and Employers Liability Insurance with limits of
not less than Five Hundred Thousand Dollars ($500,000), or such greater amount
as Landlord may from time to time require.

e. Rent loss insurance in such amounts as will enable
Tenant to keep and perform all the obligations under this Lease for a period of
twelve (12) months.

f. Any other form or forms of insurance or increased
amounts of the above specified forms of insurance as the mortgagees of Landlord
may reasonably require from time to time in form, in amounts and for insurance
risks against which a prudent tenant or landlord would protect itself in
similar circumstances.

14.2 POLICIES. It is expressly understood and agreed that the
foregoing minimum limits of insurance coverage shall not limit the liability of
Tenant for its acts or omissions as provided in this Lease. All of the
foregoing insurance policies (with the exception of Worker's Compensation
Insurance to the extent not available under statutory law) shall name Landlord,
any holder of a mortgage, or any managing agent for the Premises and such
other parties as Landlord shall from time to time designate as an additional
insured as their

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respective interests may appear, and shall provide that any loss shall be
payable to Landlord and any other additional insured parties as their
respective interests may appear. All claims under policies carried by Tenant
with respect to Section 14.1(a), (b) and (c) may be settled by Tenant subject
to Landlord's consent which shall not be unreasonably withheld. All insurance
required hereunder shall be placed with companies which are rated A-:VIII or
better by Best's Insurance Guide and licensed to do business in the state in
which the Premises are located. All such policies shall be written as primary
policies not contributing with and not supplemental to the coverage that
Landlord may carry, with deductibles not to exceed one-half percent (1/2%) of
the amount of coverage. Tenant shall deliver certified copies of all such
policies and all endorsements thereto, thirty (30) days prior to the Lease
Commencement Date, or earlier access to the Premises during construction or, in
the case of renewals thereto, fifteen (15) days prior to the expiration of the
prior insurance policy, together with evidence that such policies are fully
paid for, and that no cancellation, material change or non-renewal thereof
shall be effective except upon thirty (30) days' prior written notice from the
insurer to Landlord. If Tenant shall fail at any time to procure and/or
maintain the insurance required herein, Landlord may, at its option, procure
such insurance on Tenant's behalf and the cost thereof shall be payable upon
demand, as Rent. Payment by Landlord of any insurance premium or the carrying
by Landlord of any such insurance policy shall not be deemed to waive or
release the default of Tenant with respect thereto. If Landlord's lender so
requires, Tenant shall make monthly installments of the amounts necessary to
pay the premiums on all insurance policies set forth above.

14.3 PROTECTION AGAINST INSURANCE CANCELLATION. If any insurance
policy required under this Lease shall be cancelled or if cancellation shall be
threatened, or if the coverage shall be reduced or be threatened to be reduced,
in any way by reason of the use or occupation of the Premises or any part
thereof by Tenant, any assignee or subtenant of Tenant, or by anyone permitted
by Tenant to be upon the Premises, and if Tenant fails to take reasonable
efforts to remedy the condition giving rise to the cancellation, threatened
cancellation, reduction, or threatened reduction of coverage within forty-eight
(48) hours after notice or to complete the remedy within the earlier of five
(5) business days after notice or cancellation of the policy, Landlord may, at
its option, enter upon the Premises and attempt to remedy the condition, and
Tenant shall forthwith pay the cost to Landlord as additional Rent. Landlord
shall not be liable for any damage or injury caused to any property of Tenant
or of other persons located on the Premises as a result of such entry. If
Landlord is unable to remedy the offensive conditions if it chooses to attempt
same, the Landlord shall have all of the remedies provided for in this Lease in
the event of a default by Tenant. Notwithstanding the foregoing provisions of
this Section 14.3, if Tenant fails to remedy the condition, Tenant shall be in
default and Landlord shall have no obligations to attempt to remedy.

14.4 BLANKET INSURANCE. Nothing in this Section 14 shall prevent
Tenant from taking out insurance of the kind and in the amounts provided for
under this Article under a blanket insurance policy or policies covering other
properties as well as the Leased Premises, provided, however, that any such
policy or policies of blanket insurance provide that the amount of the
insurance available to pay claims as required under this Lease, independent of
any events affecting other property or liability of Tenant, shall not be less

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than the amounts required by Section 14.1, and (ii) such amounts so specified
shall be sufficient to prevent any one of the assureds from becoming a
co-insurer within the terms of the applicable policy or policies, and provided
further, however, that any such policy or policies of blanket insurance shall,
as to the Leased Premises, otherwise comply as to endorsements and coverage
with the provisions of this Article. To the extent that Landlord is named as
an additional insured under any blanket insurance policies, such policies shall
insure losses incurred due to the acts or omissions of Landlord, excluding
Landlord's intentional acts. Tenant hereby indemnifies and agrees to hold
Landlord harmless from any loss that would be covered by such policies if the
deductible amounts were zero.

14.5 PROCEEDS. Tenant agrees that in the event of damage or
destruction to the Premises covered by insurance required to be taken out by
Tenant pursuant to this Section 14, Tenant shall use the proceeds of the
insurance for purposes of rebuilding and restoring the Premises to
substantially the same condition that the Premises were in as of the Lease
Commencement Date based upon the original plans and specifications as
constructed, including any changes necessary to comply with current
governmental laws, rules, ordinances, and regulations ("Original Condition").
Landlord shall control the disbursal of such funds pursuant to commercially
reasonable construction financing procedures including, but not limited to,
requiring monthly invoices and mechanics' lien waivers. Tenant shall not be
required to restore or rebuild any additions or changes to the Leased Premises
which were made or added by Tenant after the Lease Commencement Date
("Additional Improvements"). In the event of damage or destruction of the
Building entitling the Landlord to terminate this Lease pursuant to Section 15,
Tenant will pay to Landlord all of its insurance proceeds received, plus the
amount of any deductible under such policies, relating to the Leased Premises.

SECTION 15

DAMAGE OR DESTRUCTION

Tenant shall notify the Landlord of the exact cause, nature, and extent
of any damage for which Tenant may make an insurance claim or any other
material damage immediately upon the occurrence of such damage to any part of
the Premises. Tenant shall promptly either repair, replace or rebuild the
Premises as necessary to restore the Premises to their Original Condition or
notify Landlord within thirty (30) days of the occurrence of such damage if it
desires not to perform such repairs. Upon receipt of such notice, Landlord may
elect to either terminate the Lease and retain all insurance proceeds or
require Tenant to repair, replace or rebuild. Unless Landlord elects to
terminate the Lease within forty-five (45) days of Landlord's receipt of
Tenant's notice regarding the occurrence of damage, Tenant shall promptly
repair, replace and rebuild the Premises to their Original Condition at
Tenant's expense. If Tenant repairs, replaces or rebuilds the Premises, Tenant
shall be entitled to the net insurance proceeds payable under the insurance
carried pursuant to Section 14.1(b) with respect to such damage and Tenant
shall pay any costs in excess of such net insurance proceeds which are incurred
to restore the Premises to their Original Condition except that Tenant shall
not pay to the extent that any such insurance proceeds

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are retained by Landlord's lender and applied to Landlord's loan. If the
Landlord elects to terminate the Lease Term, the Lease shall be deemed to have
expired on the date of notice of loss, and all insurance proceeds, plus the
amount of any deductible under the insurance policies, shall be paid to and
retained by the Landlord. There shall be no abatement of Rent unless and to
the extent that Landlord receives rent insurance proceeds from the insurance
purchased by Tenant. In no event shall Landlord be required to make any
repairs, replacements, or rebuild any portion of the Premises.

SECTION 16

WAIVER OF SUBROGATION

Landlord and Tenant agree that any and all insurance which is required
to be carried under Section 14 shall be endorsed with a subrogation clause,
substantially as follows: "This insurance shall not be invalidated should the
insured waive, in writing, prior to a loss, any and all right of recovery
against any party for loss occurring to the property described herein." Each
party waives all claims for recovery from the other party, its officers, agents
or employees for any loss or damage (whether or not such loss or damage is
caused by negligence of the other party, and notwithstanding any provisions
contained in this Lease to the contrary) to any of its real or personal
property insured under valid and collectible insurance policies to the extent
of the collectible recovery under the insurance.

SECTION 17

ENTRY OF LANDLORD

Landlord, its agents, and its mortgagees, upon 24 hours advance notice
during normal business hours (except in case of emergency), shall have the
right to enter the Premises during normal business hours for the purpose of
examining or inspecting the same and to show same to prospective mortgagees,
purchasers or tenants of the Improvements, and to perform any obligations of
Tenant if Tenant has failed to do so. Landlord shall use reasonable efforts on
any such entry not to unreasonably interrupt or interfere with Tenant's use and
occupancy of the Premises and shall not disclose any trade secrets or
confidential information acquired by Landlord during such entry.

SECTION 18

DEFAULT BY TENANT

18.1 EVENTS OF DEFAULT. Each one of the following events is
referred to as an "Event of Default":

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a. Tenant shall fail to make due and punctual payment of
Rent or any other amounts payable hereunder, and such failure shall continue
for five (5) business days after written notice thereof is given by Landlord;
provided, however, Tenant shall not be entitled to more than one (1) notice of
a delinquency in payment during any calendar year and if thereafter during such
calendar year any Rent or other amounts owing hereunder are not paid when due,
a default shall be considered to have occurred even though no notice is given;

b. Tenant shall default in the performance of or
compliance with any of the other covenants, agreements, terms or conditions of
this Lease to be performed by Tenant (other than any default curable by the
payment of money), and, unless expressly provided elsewhere in this Lease that
no notice and/or opportunity to cure such default is to be afforded Tenant,
such default shall continue for a period of thirty (30) days after written
notice thereof from Landlord to Tenant, or, in the case of a default which
cannot with due diligence be cured within thirty (30) days, Tenant fails to
commence such cure promptly within such thirty (30) day period and thereafter
diligently prosecute such cure to completion within sixty (60) days of written
notice. Notwithstanding the above, Tenant must immediately remedy any default
that presently threatens an injury or harm to any person or property; or

c. Tenant shall become insolvent within the meaning of
the United States Bankruptcy Code, as amended from time to time (the "Code"),
or shall have ceased to pay its debts in the ordinary course of business, or
shall be unable to pay its debts as they become due, or Tenant shall notify
Landlord that it anticipates the occurrence of any of the foregoing conditions;
or

d. Tenant shall file, take any action to file, or notify
Landlord that Tenant intends to file, a petition, case or proceeding under any
section or chapter of the Code, or under any similar law or statute of the
United States or any state thereof relating to bankruptcy, insolvency,
reorganization, winding up or composition or adjustment of debts; or

e. Tenant shall be adjudicated as a bankrupt or insolvent
or consent to, or file an answer admitting or failing reasonably to contest the
material allegations of, a petition filed against it in any such case or
proceeding in the preceding clause (d); or

f. Tenant shall seek to or consent to or acquiesce in the
appointment of any receiver, trustee, liquidator or other custodian of Tenant
or any material part of its or their properties, whether or not the same shall
relate to their interests in this Lease; or

g. Tenant shall make a general assignment for the benefit
of creditors; or take any other action for the purpose of effecting any of the
foregoing clauses (c) through (f); or

h. if, within thirty (30) days after the filing of an
involuntary petition in bankruptcy against Tenant or the commencement of any
case or proceeding against Tenant

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seeking any reorganization, composition, arrangement, liquidation, dissolution,
readjustment or similar relief under any law, such proceeding shall not have
been dismissed; or if, within thirty (30) days after the appointment, without
consent or acquiescence of Tenant, of any trustee, receiver or liquidator of
Tenant, of all or any substantial part of the properties of Tenant, or of all
or any part of the Premises, such appointment shall not have been vacated or
stayed on appeal or otherwise; or if, within thirty (30) days after the
expiration of any such stay, such appointment shall not have been vacated; or
if, within thirty (30) days after the taking of possession without the consent
or acquiescence of Tenant, by any governmental office or agency pursuant to
statutory authority for the dissolution or liquidation of Tenant, such taking
shall not have been vacated or stayed on appeal or otherwise; or

i. the Premises shall be effectively abandoned by Tenant;
or

j. any execution or attachment is issued against Tenant
or any of its property resulting in the Premises being taken or occupied or
attached, or attempted to be taken or occupied or attached by someone other
than Tenant; or

k. Tenant does or permits to be done anything which
creates a lien upon the Premises or the Improvements and in any such event such
lien is not discharged or bonded over by Tenant within ten (10) days after
receipt of notice of the filing thereof; or

l. this Lease shall be transferred to or shall pass to or
devolve upon any other person or party except in the manner set forth in
Section 12.

18.2 LANDLORD'S REMEDIES UPON DEFAULT.

a. Upon the occurrence of any Event of Default, Landlord
shall have the option to pursue any one or more of the following remedies
without any notice or demand whatsoever, in addition to, or in lieu of, any and
all remedies available to Landlord under the laws of the state in which the
Improvements are located:

i. Landlord may give Tenant written notice of
its election to terminate this Lease, effective on the date specified therein,
whereupon Tenant's right to possession of the Premises shall cease and this
Lease, except as to Tenant's liability determined in accordance with this
Lease, shall be terminated.

ii. Landlord and its agents may immediately
re-enter and take possession of the Premises, or any part thereof, either by
summary proceedings, or by any other applicable action or proceeding, or by
force or otherwise (without being liable for indictment, prosecution or damages
therefor) and may repossess same as Landlord's former estate and expel Tenant
and those claiming through or under Tenant, and remove the effects of both or
either, without being deemed guilty in any manner of trespass, and without
prejudice to any remedies for arrears of Rent or Tenant's breach of covenants
or conditions.

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iii. Should Landlord elect to re-enter as provided
hereinabove or should Landlord take possession pursuant to legal proceedings or
pursuant to any notice provided by law, Landlord may, from time to time,
without terminating this Lease, relet the Premises or any part thereof in
Landlord's or Tenant's name, but for the account of Tenant, for such term or
terms (which may be greater or less than the period which would otherwise have
constituted the balance of the Term) and on such terms and conditions (which
may include concessions of free rent and alteration, repair and improvement of
the Premises) as Landlord, in its sole discretion, may determine, and Landlord
may collect and receive the rents therefor without relieving Tenant of any
liability under this Lease or otherwise affecting any such liability. Landlord
shall use reasonable efforts to attempt to mitigate its damages but shall not
be liable for failure to relet the Premises or any part thereof, or, in the
event of any such reletting, for refusal or failure to collect any rent due
upon such reletting, and no such refusal or failure shall operate to relieve
Tenant of any liability under this Lease or otherwise to affect any such
liability. No such re-entry or taking possession of the Premises by Landlord
shall be construed as an election on Landlord's part to terminate this Lease
unless a written notice of such intention be given to Tenant. No notice from
Landlord hereunder or under a forcible entry and detainer statute or similar
law shall constitute an election by Landlord to terminate this Lease unless
such notice specifically so states. Landlord reserves the right following any
such re-entry and/or reletting to exercise its right to terminate this Lease by
giving Tenant written notice thereof, in which event this Lease will terminate
as specified in said notice.

b. Tenant, on its own behalf and on behalf of all persons
claiming through or under Tenant, including all creditors, does further hereby
waive any and all rights which Tenant and all such persons might otherwise have
under any present or future law to redeem the Premises, or to re-enter or
repossess the Premises, or to restore the operation of this Lease following an
Event of Default and, after (i) Tenant shall have been dispossessed by a
judgment or by warrant of any court or judge, or (ii) any re-entry by Landlord,
or (iii) any expiration or termination of this Lease and the Term, whether such
dispossess, re-entry, expiration or termination shall be by operation of law or
pursuant to the provisions of this Lease. The words "re-enter", "re-entry" and
"re-entered" as used in this Lease shall not be deemed to be restricted to
their technical legal meanings. In the event of a breach or threatened breach
by Tenant, or any persons claiming through or under Tenant, of any term,
covenant or condition of this Lease on Tenant's part to be observed or
performed, Landlord shall have the right to enjoin such breach and the right to
invoke any other remedy allowed by law or in equity as if re-entry, summary
proceedings and other special remedies were not provided in this Lease for such
breach.

c.i. If this Lease is terminated by Landlord upon an Event
of Default, Tenant shall remain liable to Landlord for damages in an amount
equal to the Base Rent and any other sums due hereunder ("Additional Rent") as
of the date of termination of this Lease plus the Base Rent and any Additional
Rent which would have been owing by Tenant for the balance of the Term
(collectively, the "Aggregate Gross Rent") had this Lease not been terminated,
less the net proceeds, if any, received as a result of any reletting of the
Premises by Landlord subsequent to such termination, after deducting all of
Landlord's expenses including, without limitation, all repossession costs,
brokerage commissions, legal

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expenses, attorneys' fees, expenses of employees, alteration and repair costs
and expenses of preparation for such reletting (collectively, the "Reletting
Costs"). Landlord shall be entitled to collect Base Rent, any Additional Rent
and all other damages from Tenant monthly on the days on which Base Rent and
any Additional Rent would have been payable hereunder if this Lease had not
been terminated. Alternatively, at the option of Landlord, in the event this
Lease is so terminated, Landlord shall be entitled to recover forthwith against
Tenant, as liquidated damages and not as a penalty, the then present value of
the Aggregate Gross Rent and Reletting Costs less the aggregate rental value
of the Premises for what otherwise would have been the unexpired balance of the
Term. If Landlord relets the Premises, the amount of rent and other sums
payable by the tenant thereunder shall be deemed prima facie to be the rental
value for the Premises (or the portion thereof so relet) for the term of such
reletting. Tenant shall in no event be entitled to any rents collected or
payable in respect of any reletting, whether or not such rents shall exceed the
Base Rent and any Additional Rent reserved in this Lease. Tenant shall bear
the burden of proof in any proceeding to determine the "rental value" for
purposes of the above calculation.

ii. If Landlord does not elect to terminate this
Lease, but takes possession, Tenant shall pay to Landlord the Base Rent,
Additional Rent and Reletting Costs which would be payable hereunder if such
repossession had not occurred, less the proceeds received by Landlord, if any,
of any reletting of the Premises by Landlord. Tenant shall pay Base Rent and
all Additional Rent due to Landlord, monthly, on the days on which Base Rent
would have been payable hereunder if possession had not been retaken.

d.i. This Lease shall continue in effect for so long as
Landlord does not expressly terminate it, and Landlord may enforce all its
rights and remedies under this Lease, including the right to recover the Base
Rent and any Additional Rent, as the same become due under this Lease. Acts of
maintenance or preservation or efforts to relet the Premises or the appointment
of a receiver upon the initiative of Landlord to protect Landlord's interest
under this Lease shall not constitute a termination of Tenant's rights to
possession unless Landlord shall have specifically elected to terminate this
Lease.

ii. No payments of money by Tenant to Landlord
after the expiration or other termination of this Lease after the giving of any
notice by Landlord to Tenant shall reinstate or extend the Term, or make
ineffective any notice given to Tenant prior to the payment of such money.
Landlord may receive and collect any sums due under this Lease, and the payment
thereof shall not make ineffective any notice, or in any manner affect any
pending suit or any judgment theretofore obtained.

e. Upon the occurrence of an Event of Default all rights
granted to Tenant pursuant to Section 25 shall terminate and Tenant shall
execute a Quit Claim Deed of the Premises to Landlord transferring any and all
of Tenant's right, title, and interest in and to the Premises.

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18.3 DEFAULT BY LANDLORD.

a. BEFORE LEASE COMMENCEMENT DATE. If Landlord fails to
Substantially Complete the Improvements within sixty (60) days of January 1,
1998, plus any Tenant Delays or Force Majeure days, then Tenant's sole remedy
shall be to terminate this Agreement and pursue any remedies it has under the
Completion Guarantee attached to and incorporated in this Lease as EXHIBIT E.

b. AFTER LEASE COMMENCEMENT DATE. Landlord shall not be
in default after the Lease Commencement Date unless Landlord fails to perform
its obligations within a reasonable time, but in no event later than thirty
(30) days after written notice by Tenant to Landlord; provided that if the
nature of Landlord's obligation is such that more than thirty (30) days are
required for performance, then Landlord shall not be in default if Landlord
commences performance within such 30-day period and thereafter diligently
prosecutes the same to completion. In no event shall Tenant have the right to
terminate this Lease as a result of Landlord's default and Tenant's remedies
shall be limited to damages and/or injunction except in the event that Landlord
is dispossessed of title to the Premises and Tenant's possession of the
Premises is terminated notwithstanding that Tenant is not in default under this
Lease.

18.4 CUMULATIVE REMEDIES. Suit or suits for the recovery of the
Rent and other amounts and damages may be brought by Landlord, from time to
time, at Landlord's election, and nothing in this Lease shall be deemed to
require Landlord to await the date when this Lease or its Term would have
expired by limitation had there been no default by Tenant, or no termination,
as the case may be. Each right and remedy provided for Landlord or Tenant in
this Lease shall be cumulative and shall be in addition to every other right or
remedy provided for in this Lease or now or hereafter existing at law or in
equity or by statute or otherwise including but not limited to suits for
injunctive relief and specific performance. The exercise or beginning of the
exercise by Landlord or Tenant of any one or more of the rights or remedies
provided for in this Lease or now or hereafter existing at law or in equity or
by statute or otherwise shall not preclude the simultaneous or later exercise
by Landlord or Tenant of any or all other rights or remedies. All such rights
and remedies shall be considered cumulative and non-exclusive. All costs
incurred by Landlord in connection with collecting any Rent or other amounts
and damages owing by Tenant pursuant to the provisions of this Lease, or to
enforce any provision of this Lease, including reasonable attorneys' fees,
whether or not any litigation is commenced by Landlord, shall also be paid by
Tenant to Landlord. All costs incurred by Tenant to collect any amounts owing
from Landlord to Tenant or to enforce any provision of this Lease, including
reasonable attorneys fees from the date such matter is turned over to an
attorney, whether or not one or more actions are commenced by Tenant, shall be
paid by Landlord to Tenant.

18.5 NO WAIVER. No failure by Landlord or Tenant to insist upon
the strict performance of any agreement, term, covenant or condition of this
Lease or to exercise any right or remedy consequent upon a breach, and no
acceptance of full or partial payment of Rent by Landlord during the
continuance of any breach, shall constitute a waiver of any breach or of the
agreement to be performed or complied with by Tenant or Landlord , and

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no breach shall be waived, altered or modified except by written instrument
executed by Landlord or Tenant. No waiver of any breach shall affect or alter
this Lease, but each and every agreement, term, covenant and condition shall
continue in full force and effect with respect to any other then existing or
subsequent breach. Notwithstanding any termination of this Lease, the same
shall continue in force and effect as to any provisions which require
observance or performance by Landlord or Tenant subsequent to such termination.

18.6 BANKRUPTCY.

a. Nothing contained in this Section 18 shall limit or
prejudice the right of Landlord to prove and obtain as liquidated damages in
any bankruptcy, insolvency, receivership, reorganization or dissolution
proceeding, an amount equal to the maximum allowed by any statute or rule of
law governing such a proceeding and in effect at the time when such damages are
to be proved, whether or not the amount is greater, equal to or less than the
amounts recoverable, either as damages or Rent, referred to in any of the
preceding provisions of this Section.

b. Landlord and Tenant understand that, notwithstanding
certain provisions to the contrary contained herein, a trustee or debtor in
possession under the Code may have certain rights to assume or assign this
Lease. Landlord and Tenant further understand that, in any event, Landlord is
entitled under the Bankruptcy Code to adequate assurances of future performance
of the terms and provisions of this Lease. The parties hereto agree that, with
respect to any such assumption or assignment, the term "adequate assurance"
shall include at least the following:

i. In order to assure Landlord that the proposed
assignee will have the resources with which to pay all Base Rent and any
Additional Rent payable pursuant to the terms hereof, any proposed assignee
must have, as demonstrated to Landlord's satisfaction, a net worth (as defined
in accordance with generally accepted accounting principles consistently
applied) of not less than the net worth of Tenant on the date this Lease became
effective, increased by seven percent (7%), compounded annually, for each year
from the Lease Commencement Date through the date of the proposed assignment.
The financial condition and resources of Tenant were a material inducement to
Landlord in entering into this Lease.

ii. Any proposed assignee must have been engaged
in the conduct of business for the five (5) years prior to any such proposed
assignment, which business does not violate the Permitted Uses, and such
proposed assignee shall continue to engage in the Permitted Uses. Landlord's
asset will be substantially impaired if the trustee in bankruptcy or any
assignee of this Lease makes any use of the Premises other than the
Permitted Uses.

iii. Any proposed assignee of this Lease must
assume and agree to be personally bound by the terms, covenants and provisions
of this Lease.

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SECTION 19

PERSONAL PROPERTY TAXES

During the Term hereof, Tenant shall pay, prior to delinquency, all
business and other taxes, charges, notes, duties and assessments levied, and
rates or fees imposed, charged, or assessed against or in respect of Tenant's
occupancy of the Leased Premises or in respect of the personal property, trade
fixtures, furnishings, equipment, and all other personal property of Tenant
contained in the Premises, and shall hold Landlord harmless from and against
all payment of such taxes, charges, notes, duties, assessments, rates, and
fees, and against all loss, costs, charges, penalties, interest, and expenses
(including reasonable attorneys' fees) occasioned by or arising from any and
all such taxes, charges, notes, duties, assessments, rates, and fees, and any
and all taxes.

SECTION 20

EMINENT DOMAIN

If the Building, or a substantial part thereof, the absence of which
materially prevents Tenant's use of the Building, shall be lawfully taken or
condemned (or conveyed under threat of such taking or condemnation) for any
public or quasi-public use or purpose, the Term of this Lease shall end upon,
and not before, the date of the taking of possession by the condemning
authority, and without apportionment of the award. Tenant hereby assigns to
Landlord Tenant's interest, if any, in the award. Rent shall be apportioned as
of the date of termination. If any part of the Premises, not constituting a
substantial part of the Building, or any non-substantial portion of the
Building which does not materially prevent Tenant's use of the Building, shall
be so taken or condemned (or conveyed under threat of such taking or
condemnation), Tenant shall make such repairs and reconstruction as is
necessary to return the Premises, as nearly as possible, to their condition
prior to the taking or conveyance in compliance with all applicable laws, codes
and regulations, such that Tenant may continue to use the Premises. Tenant
shall be reimbursed for any repair and restoration expenses to the extent that
Landlord receives an award and Landlord's mortgagee consents to release the
funds. If the total floor area is reduced, the Rent shall be recomputed
accordingly.

No money or other consideration shall be payable by Landlord to Tenant
for the termination and, except as set forth above, Tenant shall have no right
to share in any condemnation award, or in any judgment for damages, or in any
proceeds of any sale made under any threat of condemnation of taking. Nothing
in this Section shall prevent Tenant from making and pursuing a claim against
the condemning authority in its own right for termination of its leasehold
interest in the event of a total taking of the Premises, provided that such
award does not diminish Landlord's award. If this Lease is not cancelled, the
Lease shall continue in full force and effect, without abatement or reduction
of Rent except to the extent the floor area is reduced.

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SECTION 21

SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST

21.1 LEASE SUBORDINATE TO MORTGAGES.

a. This Lease and the rights of Tenant shall be and are
hereby made subject and subordinate to the lien of any mortgages, deeds of
trust, assignments of rents, and security interests now or hereafter existing
against the Premises, and to all renewals, modifications, consolidations,
replacements and extensions thereof and to all advances made now or in the
future provided that so long as Tenant duly performs its obligations under this
Lease, its quiet possession, use and enjoyment shall not be disturbed by the
foreclosure or execution of any mortgages, deeds of trust or other grants of
security or deed in lieu of foreclosure. Although the subordination shall be
self-operating, Tenant, or its successors in interest, shall upon Landlord's
request, execute and deliver any and all instruments reasonably desired by
Landlord, subordinating, in the manner reasonably requested by Landlord, this
Lease to any mortgage or deed of trust; provided that such mortgage or deed of
trust holder concurrently executes and delivers to Tenant a reasonably and
customary non-disturbance agreement. If Tenant unreasonably fails to execute
such instruments within ten (10) business days of Landlord's delivery of such
instruments to Tenant, then Tenant shall be deemed to be in default pursuant to
this Lease and shall not be entitled to any opportunity to cure such default
which may be provided for elsewhere in this Lease. If any mortgagee or trustee
shall elect to have this Lease and any options granted hereby prior to the lien
of its mortgage or deed of trust, and shall give written notice thereof to
Tenant, this Lease shall be deemed prior to such mortgage or deed of trust,
whether this Lease is dated prior or subsequent to the date of said mortgage or
deed of trust or the date of recording thereof. Landlord shall provide Tenant
with a Subordination, Non-Disturbance and Attornment Agreement executed by
Landlord's lender substantially in the form of that attached as EXHIBIT F on or
before the Closing Date of Landlord's financing for the Premises.

b. Should any mortgage or deed of trust affecting the
Improvements, the Property or both be foreclosed, then: (i) the liability of
the mortgagee, beneficiary or purchaser at the foreclosure sale to Tenant shall
exist only so long as the mortgagee beneficiary, or purchaser is the owner of
the Improvements and/or Property and the liability shall not continue or
survive after further transfer of ownership; and (ii) Tenant shall be deemed to
have attorned, as Tenant under this Lease, to the purchaser at any foreclosure
sale and this Lease shall continue in force and effect as a direct lease
between and binding upon Tenant and the purchaser at any foreclosure sale. As
used in this Section 21, "mortgagee" and "beneficiary" shall include successors
and assigns of any such party, whether immediate or remote, the purchaser of
any mortgage or deed of trust, whether at foreclosure or otherwise, and the
successors, assigns and mortgagees and beneficiaries of such purchaser, whether
immediate or remote.

21.2 TENANT'S NOTICES. In the event of any act or omission by
Landlord under this Lease which would cause Landlord to be in default or give
Tenant the right to terminate this Lease or to claim a partial or total
eviction, Tenant will not exercise any such right until:

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a. it has given thirty (30) days written notice (by
United States certified or registered mail, postage prepaid) of such act or
omission to Landlord and to the holder of any mortgage or deed of trust on the
Property (whose names and addresses Landlord agrees will be furnished to Tenant
on request) with a copy to Peter Kloepfer, 1660 Lincoln Street, Suite 2900,
Denver, Colorado 80264, or such other person as Landlord may designate, in
writing, from time to time; and

b. any holder of any mortgage or deed of trust on the
Property shall, following the giving of such notice, have failed with
reasonable diligence to commence and to pursue reasonable action to remedy the
act or omission within sixty (60) days of such notice.

SECTION 22

SALE BY LANDLORD

In the event of a sale or conveyance or transfer by Landlord of its
interest in the Premises, and/or in this Lease, each such Transferee shall be
required to assume the obligations of Landlord hereunder, and such transfer
shall then operate to release Landlord from any future liability upon any of
the covenants or conditions, expressed or implied, contained in favor of
Tenant, and in that event Tenant agrees to look solely to the responsibility of
the successor in interest of Landlord in and to this Lease provided that, in
any event, Landlord shall not be relieved of (i) obligations of Landlord the
due date of performance of which arose prior to the date of disposition by
Landlord, (ii) warranties of Landlord contained in Section 3.1 of this Lease,
and (iii) completion of punch list items pursuant to Tenant's Acceptance
Letter. This Lease shall not be affected by any such conveyance or transfer,
and Tenant agrees to attorn to such to such purchaser or transferee. Landlord
agrees to give Tenant notice of any written offer to buy the Premises.

SECTION 23

RIGHT OF LANDLORD TO PERFORM

All covenants and agreements to be performed by Tenant under any of the
terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense, and without any abatement of Rent. If Tenant shall fail to pay any
sum of money, other than Base Rent, required to be paid by it, or shall fail to
perform any other act on its part to be performed, and the failure shall
continue for thirty (30) days after written notice by Landlord, Landlord may,
but shall not be obligated to do so, and without waiving or releasing Tenant
from any obligations of Tenant, make any payment or perform any other act on
Tenant's part to be made or performed as provided for in this Lease.
Notwithstanding anything else in this Lease to the contrary, upon any failure
by Tenant to perform any of its obligations under this Lease, the failure of
which threatens bodily injury, property damage or a violation of any law,
statute, ordinance or regulation, Landlord may, but shall not be obligated to,

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immediately take any reasonable action or make any payment to remedy or
alleviate the situation. In any such event, notice of the situation shall be
given to Tenant as soon as possible, but not later than within 24 hours of
Landlord's commencement of the remediation. All sums so paid by Landlord and
all necessary incidental costs, plus a ten percent (10%) administrative charge,
shall be payable to Landlord within thirty (30) days of Landlord's request, and
Tenant covenants to pay any such sums, and Landlord shall have (in addition to
any other right or remedy of Landlord) the same rights and remedies in the
event of the non-payment thereof by Tenant, as in the case of default by Tenant
in the payment of Rent.

SECTION 24

ESTOPPEL CERTIFICATE

Tenant shall, upon the Lease Commencement Date and at any time and from
time to time thereafter, upon not less than ten (10) business days' prior
written notice from Landlord, execute, acknowledge, and deliver to Landlord a
statement in writing certifying that Tenant is in possession of the Premises,
subject to no protest or reservation of rights, that this Lease is unmodified
and in full force and effect (or if modified, stating the nature of such
modification and certifying that this lease, as so modified, is in full force
and effect) and the dates to which the Rent and other charges are paid, and
acknowledging that Tenant is paying Rent on a current basis with no offsets or
claims, and there are not, to Tenant's knowledge, any uncured defaults on the
part of Landlord hereunder (or specifying the defaults, if any are claimed),
and addressing such other matters as reasonably requested by Landlord or the
holder of a mortgage. It is expressly understood and agreed that any such
statement may be relied upon by any prospective purchaser or encumbrancer of
all or any portion of the Premises or by any other person to whom it is
delivered. Tenant's failure to deliver the statement within the required time
shall be conclusive upon Tenant that this Lease is in full force and effect,
without modification except as may be represented by Landlord, that there are
no uncured defaults in Landlord's performance, that not more than two (2)
months' rental has been paid in advance and that Tenant is in possession
subject to no protest or reservation of rights.

SECTION 25

OPTIONS TO EXTEND

Provided that Tenant is not in default under this Lease beyond any
applicable cure period and provided that the right granted in this Section has
not otherwise been terminated, Tenant shall be entitled to two successive
extension options, each option to have a duration of five years ("Option to
Extend"). If Tenant desires to exercise an Option to Extend, Tenant shall give
notice to Landlord at least nine (9) months prior to the end of the Lease Term
in the case of the first Option to Extend and nine (9) months prior to the
expiration of the first Option to Extend term in the case of the second Option
to Extend. If Tenant exercises an Option to Extend, the Lease Term shall be
extended by an additional five (5)

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years and all of the terms and provisions of the Lease shall remain the same
including that Base Rent shall continue to escalate pursuant to Section 4.5.
Except for elimination of the Option to Extend exercised, all terms of the
Lease shall remain in full force and effect during the Option to Extend term.

SECTION 26

MISCELLANEOUS PROVISIONS

26.1 AUTHORITY OF TENANT. If Tenant is a corporation or other
entity, each individual executing this Lease on behalf of said corporation or
entity represents and warrants that he is duly authorized to execute and
deliver this Lease on behalf of said corporation or entity in accordance with a
duly adopted resolution of the Board of Directors or the By-Laws or applicable
governing documents of said corporation or entity, and that this Lease is
binding upon said corporation or entity in accordance with its terms. In
addition, Tenant shall, at the time of execution of this Lease, deliver to
Landlord a certified copy of a resolution of the Board of Directors of said
corporation or entity authorizing or ratifying the execution of this Lease or
other evidence acceptable to Landlord authorizing the signatory on behalf of
Tenant to execute this Lease and bind Tenant in accordance with its terms.
Landlord represents and warrants that Randolph P. Myers is duly authorized to
execute this Lease and bind Landlord in accordance with its terms.

26.2 FINANCIAL STATEMENTS. Tenant shall, if requested by Landlord
from time to time, furnish current audited financial statements. Landlord
shall keep all such statements confidential.

26.3 AUTHORITIES FOR ACTION. Landlord may act through its managing
agent for the Improvements or through any other person who may from time to
time be designated by Landlord in writing. Tenant shall designate in writing
one or more persons to act on its behalf and may from time to time change such
designation by written notice to Landlord. In the absence of any such
designation, the person or persons executing this Lease on behalf of Tenant
shall be deemed to be authorized to act on behalf of Tenant in any matter
provided for herein.

26.4 ENTIRE AGREEMENT.

a. Tenant acknowledges and agrees that it has not relied
upon any statements, representations, agreements or warranties except those
expressed in this Lease, and that this Lease contains the entire agreement of
the parties. No amendment or modification of this Lease shall be binding or
valid unless expressed in writing and executed and delivered by Landlord and
Tenant in the same manner as the execution of this Lease.

b. The submission of this document for examination and
review does not constitute an option, an offer to lease space, or an agreement
to lease space. This document shall have no binding effect on the parties
hereto unless and until executed and delivered

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by both Landlord and Tenant and will be effective only upon Landlord's
execution and delivery of same.

26.5 FORCE MAJEURE. Any obligation of Landlord or Tenant other
than the obligation to pay money which is delayed or not performed due to Acts
of God, strike, riot, shortages of labor or materials, war (whether declared or
undeclared), governmental laws, regulations or restrictions, governmental
action, or lack thereof, or any other causes of any kind whatsoever which are
beyond Landlord's or Tenant's reasonable control, shall not constitute a
default hereunder and shall be performed within a reasonable time after the end
of such cause for delay or nonperformance.

26.6 SEVERABILITY. If any term or provision of this Lease or the
application thereof to any person or circumstances shall, to any extent, be
illegal, invalid or unenforceable, the remainder of this Lease, or the
application of such term or provision to persons or circumstances other than
those to which it is held invalid or unenforceable, shall not be affected
thereby, and all other terms and provisions of this Lease shall be valid and
enforced to the fullest extent permitted by law.

26.7 NO SETOFF. This Lease shall be construed as though the
covenants herein between Landlord and Tenant are independent, and Tenant shall
not be entitled to any setoff, offset, abatement or deduction of Rent or other
amounts due Landlord hereunder if Landlord fails to perform its obligations
under this Lease; provided, however, the foregoing shall in no way impair the
right of Tenant to commence a separate action against Landlord for any
violation by Landlord of the provisions hereof or to which Tenant has not
waived any claim pursuant to the provisions of this Lease so long as notice is
first given to Landlord and any holder of a Mortgage, and a reasonable
opportunity is granted to Landlord and such holder to correct such violation.
In no event shall Landlord or Tenant, or any holder of a Mortgage be
responsible for any consequential damages incurred by Tenant, including,
without limitation, lost profits or interruption of business, as a result of
any default by Landlord or Tenant, respectively.

26.8 RELATIONSHIP OF PARTIES. Nothing contained in this Lease
shall create any relationship between the parties hereto other than that of
Landlord and Tenant, and it is acknowledged and agreed that Landlord shall not
be deemed to be a partner of Tenant in the conduct of its business, or a joint
venturer or a member of a joint or common enterprise with Tenant.

26.9 SUCCESSORS BOUND. Except as otherwise specifically provided
herein, the terms, covenants and conditions contained in this Lease shall bind
and inure to the benefit of the respective heirs, successors, executors,
administrators and assigns of each of the parties hereto.

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26.10 INTERPRETATION.

a. Whenever in this Lease any words of obligation or duty
are used, such words or expressions shall have the same force and effect as
though made in the form of a covenant.

b. Words of any gender used in this Lease shall be deemed
to include any other gender, and words in the singular shall be deemed to
include the plural, when the context requires.

c. All pronouns and any variances thereof shall be deemed
to refer to the neuter, masculine, feminine, singular or plural, when the
context requires.

d. No remedy or election given pursuant to any provision
in this Lease shall be deemed exclusive unless so indicated, but each shall,
wherever possible, be cumulative with all other remedies at law or in equity as
otherwise specifically provided herein.

e. If and to the extent that, any of the provisions of
any amendment, modification or rider to this Lease conflict or are otherwise
inconsistent with any of the preceding provisions of this Lease, or of the
Rules and Regulations appended to this Lease, whether or not such inconsistency
is expressly noted in such amendment, modification or rider, the provisions of
such amendment, modification or rider shall prevail, or in case of any
inconsistency with the Rules and Regulations, such Rules and Regulations shall
be deemed to be waived with respect to Tenant to the extent of such
inconsistency.

f. The parties mutually agree that the headings and
captions contained in this Lease are inserted for convenience of reference
only, and are not to be deemed part of or to be used in construing this Lease.

g. This Lease shall be construed in accordance with the
laws of the state in which the Improvements are located. Unless herein waived,
Landlord and Tenant acknowledge that all of the applicable statutes of such
state are superimposed on the rights, duties and obligations of Landlord and
Tenant hereunder.

h. Except as expressly contained herein, neither Landlord
nor Landlord's agent or attorneys have made representations, warranties or
promises with respect to the Premises or this Lease.

i. Landlord and Tenant each acknowledge and warrant that
each has been represented by independent counsel and has executed this Lease
after being fully advised by said counsel as to its effect and significance.
This Lease is the result of negotiations between the parties and their
respective attorneys and shall be construed in an even and fair manner,
regardless of the party who drafted this Lease, or any provision thereof.

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j. In all instances where Tenant is required by the terms
and provisions of this Lease to pay any sum of money or to do any act at a
particular indicated time or within any indicated period, it is understood and
agreed that time is of the essence.

26.11 EASEMENTS. Landlord shall have the right to grant any
easements on, over, under and above the Premises for such purposes as Landlord
determines subject to Tenant's consent which shall not be withheld if such
easements will not materially interfere with Tenant's use or quiet enjoyment of
the Premises.

26.12 LANDLORD'S FAILURE TO CONSENT. If Tenant shall request
Landlord's consent hereunder and Landlord shall fail or refuse to give such
consent, Tenant shall not be entitled to any damages for the withholding of its
consent, it being intended that Tenant's sole remedy shall be an action for
specific performance or injunction and that such remedy shall be available only
in those cases where Landlord has expressly agreed in writing not to
unreasonably withhold its consent or where, as a matter of law, Landlord may
not unreasonably withhold its consent.

26.13 NOTICES. Any and all notices, elections, offers, acceptances
and demands made or required to be made under this Agreement shall be made in
writing, signed by the party giving such notice, election, offer, acceptance or
demand and shall be delivered personally, or sent by registered or certified
mail, or sent by reliable overnight express service to the other parties at
their addresses set forth below or at such other addresses as may be supplied
in writing to the parties from time to time. All notices shall be deemed
effective at the time of personal delivery, one day following delivery to an
overnight express courier service, or on the date set forth on the receipt for
registered or certified mail, as applicable, except that if delivery by U.S
Mail or overnight courier is not successful upon the first attempt, second
notice shall be mailed and shall be deemed effective upon the date of mailing.

LANDLORD: TENANT:

CFA LLC Applied Films Corporation
Attn: Randolph P. Myers Attn: Roger Smith
2620 E. Prospect Rd., Suite 100 6797 Winchester Circle
Fort Collins, CO 80525 Boulder, CO 80301

WITH A COPY TO: WITH A COPY TO:

Peter K. Kloepfer Jonathan W. Anderson
Lentz, Evans and King P.C. Varnum, Riddering
1660 Lincoln Street, Suite 2900 P. O. Box 352
Denver, CO 80264 Grand Rapids, MI 49501

26.14 REAL ESTATE BROKER. Each party represents that, a group, no
broker's, finder's or similar fee or commission are due in connection with the
transaction contemplated by this

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Agreement and each party hereby agrees to indemnify and hold harmless the other
party from any claim, expense or cost (including attorneys fees whether suit be
brought or not) resulting from any claim for such fee or commission.

26.15 NO MERGER. The voluntary or other surrender of possession of
the Premises by Tenant, or a mutual cancellation of this Lease, shall not
result in a merger of Landlord's and Tenant's estates, and shall, at the option
of Landlord, either terminate any or all existing subleases or subtenancies, or
operate as an assignment to Landlord of any or all of such subleases or
subtenancies.

26.16 NO LIGHT, VIEW OR AIR EASEMENT. This Lease does not grant any
rights to light, view, or air to, from or over the Premises or the Property to
the extent such items are affected by activities occurring off the Property.
Any diminution or shutting off of light, view, or air by any structure which is
now or hereafter erected on property other than the Property shall not affect
this Lease or impose any liability on Landlord.

26.17 TIME IS OF ESSENCE. Time is of the essence with respect to
the obligations to be performed under this Lease.

26.18 AUCTIONS. Tenant shall not conduct, nor permit to be
conducted, either voluntarily or involuntarily, any auction upon the Premises
without first having obtained Landlord's prior written consent.
Notwithstanding anything to the contrary in this Lease, Landlord shall not be
obligated to exercise any standard of reasonableness in determining whether to
grant such consent. The holding of any auction on the Premises in violation of
this Section shall constitute a material default of this Lease.

26.19 SECURITY MEASURES. Tenant hereby acknowledges that Landlord
shall have no obligation whatsoever to provide guard service or other security
measures for the benefit of the Premises or the Improvements. Tenant assumes
all responsibility for the protection of Tenant, its agents, its employees and
invitees and the property of Tenant and of Tenant's agents and invitees from
acts of third parties.

26.20 SUCCESSORS AND ASSIGNS. Subject to the terms and provisions
of Section 23, the covenants and conditions contained in this Lease shall apply
to and bind the respective heirs, successors, executors, administrators, and
assigns of the parties hereto, and the terms "Landlord" and "Tenant" shall
include the successors and assigns of either such party, whether immediate or
remote.

26.21 QUIET ENJOYMENT. Subject to the terms and conditions of this
Lease, Landlord covenants and agrees that Tenant, upon complying with all of
the obligations of Tenant under this Lease shall peaceably and quietly enjoy
the Premises and Tenant's rights under this Lease during its Term, without
hindrance by Landlord or any persons claiming under Landlord.

26.22 SHORT FORM LEASE. Tenant shall not record this Lease or a
memorandum hereof without the prior written consent of Landlord. Landlord and
Tenant agree to execute

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and acknowledge a short form lease in recordable form, indicating the names and
addresses of Landlord and Tenant, a description of the Premises, the Term, the
Commencement and Expiration Dates, and options for renewal, if any, but
omitting rent and other terms of this Lease. Tenant agrees to execute and
acknowledge a termination of lease in recordable form to be held by Landlord
until the termination of the Lease.

SECTION 27

CONTINGENCIES

27.1 LAND PURCHASE AND FINANCING. The terms of this Lease are
expressly conditioned upon acquisition of the Property on terms and conditions
acceptable to Landlord and the securing of financing acceptable to Landlord to
construct the Premises. If the foregoing condition is not satisfied or waived
by June 15, 1997, then this Lease and all other obligations and rights set out
above shall be void and of no further effect.

SECTION 28

SPECIAL PROVISIONS

28.1 TENANT PURCHASE OPTION. Landlord hereby grants Tenant the one
time exclusive option ("Purchase Option") to purchase the Premises. The
purchase price shall equal Six Million Two Hundred Twenty-Four Thousand and
no/100 Dollars ($6,224,000.00). Tenant may assign this option by giving
written notice to Landlord. Each party shall pay their own attorneys' fees and
all other closing transaction costs shall be split between Landlord and Tenant.
If Tenant elects this Purchase Option, the Premises shall be sold on an
"AS-IS", "WHERE-IS" basis, and Landlord shall make no representations or
warranties of any nature except to convey title to Tenant in fee simple
absolute subject to all exceptions shown on the title insurance commitment as
of the time Landlord took title to the Premises, plus any other title matters
consented to by Tenant. Landlord shall also transfer all contractor or
material supplier warranties on the Premises held by Landlord. Tenant shall
indemnify and hold Landlord harmless from any Environmental Claims, except
those directly caused by Landlord during its construction activities or those
otherwise existing prior to Tenant's occupancy of the Premises. In order to
exercise this option, Tenant shall give Landlord notice on or before December
1, 1997 ("Exercise Notice") together with Tenant's nonrefundable down payment
in the amount of $65,000 if the Exercise Notice is given on or before November
30, 1997, or $80,000 thereafter. The Closing Date shall occur not later than
January 31, 1998 at such time as agreed to by Landlord and Tenant. Within 15
days of Landlord's receipt of the Exercise Notice, Landlord shall prepare the
necessary contract for sale of the property which shall be executed by Tenant
within 30 days of the Exercise Notice. The contract shall be a specific
performance contract and Tenant's title policy shall be evidenced by an ALTA
Owner's Form Policy of Title Insurance in favor of Tenant in the amount of the
purchase price. If Tenant fails to close by reason of Tenant's default, this
Purchase Option shall terminate, Tenant shall be deemed to be in default under
this Lease, and Landlord may elect to pursue specific performance, damages or
other

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remedies under this Lease, or continue the Lease without any rights of first
offer, refusal, or extension, solely at Landlord's option.

28.2 RIGHT OF FIRST OFFER. If Landlord desires to offer the
Premises for sale after expiration or termination of the Purchase Option set
forth in Section 28.1 and provided that the right granted in this Section has
not otherwise been terminated, and that Tenant is not in default under this
Lease beyond any applicable cure period, then Landlord shall first offer the
Premises for sale to Tenant ("Sale Notice") for an amount equal to the price
that Landlord is willing to accept for the purchase of the Premises ("Desired
Sale Price"). Upon Tenant's receipt of the Sale Notice, Tenant shall have 30
days within which to elect to purchase the Premises at the Desired Sale Price
by delivering a written notice to Landlord of its election to do so. If Tenant
delivers a timely written notice of its election to exercise its option to
purchase under this Section 28.2, then Tenant shall purchase the Premises for
an amount equal to the Desired Sale Price pursuant to the terms set forth in
Section 28.1 above. If Tenant fails to deliver a timely notice of exercise of
its rights under this Section, then Landlord shall be free to offer the
Premises for sale and accept any offer that is equal to or greater than 90% of
the Desired Sale Price at any time within six months of the Sale Notice. If
Landlord desires to accept a sale price less than 90% of the Desired Sale
Price, then Landlord shall be obligated to re-offer the Premises for sale to
Tenant pursuant to the terms of this Section 28.2.

28.3 FINANCING OF TENANT'S IMPROVEMENTS. Tenant may obtain
financing and grant a lien on Tenant's leasehold improvements together with any
Alterations made by Tenant provided that any such financing does not create a
lien against the Leased Premises or the Non-Financeable Property Improvements
described in EXHIBIT G of this Lease; and further provided that any such lien
does not impair the lien of Landlord's lender. Any such lien granted by Tenant
to obtain such financing shall be expressly subordinate to the terms of this
Lease and by its terms shall terminate upon termination of this Lease. No such
lien holder shall have the right to remove any such items from the Premises
which is greater than Tenant's right to remove such items from the Premises as
set forth in this Lease. Tenant shall provide notice to Landlord and
Landlord's lender of any such financing and give Landlord and Landlord's lender
an adequate opportunity to review and approve any documentation related to such
financing. Tenant shall reimburse Landlord and Landlord's lender for its
reasonable costs incurred in reviewing such documentation. Landlord's lender
will review Tenant's request within a commercially reasonable time and such
lender will not unreasonably withhold its consent.

43 of 44
<PAGE> 51

IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year first above written.

LANDLORD: CFA LLC, a Colorado limited liability company

BY: /s/ James J. Neenan
---------------------------------------------------
James J. Neenan, Member

TENANT: APPLIED FILMS CORPORATION, a Colorado corporation

BY: /s/ Roger Smith
---------------------------------------------------
Roger Smith Treasurer
---------------------------------------------------

STATE OF COLORADO )
) ss.
COUNTY OF BOULDER )

The foregoing instrument was acknowledged before me this 26th day of
June, 1997, by James J. Neenan, as a Member of CFA LLC, a Colorado limited
liability company, Landlord.

Witness my hand and official seal. My commission expires: January 19, 1999

Norma Lillie
----------------------------------------
[SEAL] Notary Public

STATE OF COLORADO )
) ss.
COUNTY OF BOULDER )

The foregoing instrument was acknowledged before me this 26th day of June,
1997, by Roger Smith as Treasurer of APPLIED FILMS CORPORATION, a Colorado
corporation, Tenant.

Witness my hand and official seal. My commission expires: January 19, 1999

Norma Lillie
----------------------------------------
[SEAL] Notary Public

44 of 44
<PAGE> 52

EXHIBIT A

PROPERTY

BLOCK 3, AMENDMENT TO DEL CAMINO CENTER P.U.D., ACCORDING TO THE PLAT
RECORDED JULY 28, 1993 IN BOOK 1394, AT RECEPTION NO. 2343406, TO BE KNOWN AS
THE PLAT OF Lot 1, Block 3, AMENDMENT TO DEL CAMINO CENTER P.U.D., COUNTY OF
WELD, STATE OF COLORADO.

<PAGE> 53

EXHIBIT B

PRELIMINARY PLANS

(TO BE ATTACHED)

<PAGE> 54

EXHIBIT C

TENANT ACCEPTANCE LETTER

Date: _____________________, 199___

_______________________________
2620 E. Prospect Rd., Suite 100
Fort Collins, Colorado 80525

RE: Lease (the "Lease") dated ________________ ____, 1997,
between _____________ ("Landlord") and _________________
("Tenant")

The undersigned, as Tenant, hereby confirms as of this _____
day of _____________, 199___, the following:

1. Tenant has accepted possession of the Premises on
______________, 199___ and is currently occupying same. Landlord's Work has
been Substantially Completed, except for those punch list items listed on
Schedule C-1 attached to and incorporated in this Letter.

2. The Lease Commencement Date and Expiration Date, as
each is defined in the Lease, are as follows:

Lease Commencement Date:
-------------------------
Termination Date:
-------------------------

3. The obligation to commence the payment of rent
commenced or will commence on ________________ ____, 199___, and the Base Rent
is $_______________.

4. As of the date hereof, Landlord has fulfilled all of
its obligations under the Lease.

5. The Lease is in full force and effect and has not
been modified, altered, or amended.

6. There are no offsets or credits against Base Rent or
Additional Rent, nor has any Base Rent or Additional Rent been prepaid except
as provided pursuant to the terms of the Lease.

1 of 2
<PAGE> 55

7. Tenant has no notice of any prior assignment,
hypothecation, or pledge of the Lease or any rents due under the Lease.

Very truly yours,

____________________________________

By: ____________________________________

2 of 2
<PAGE> 56

SCHEDULE C-1

PUNCH LIST ITEMS

<PAGE> 57

EXHIBIT D

TENANT'S SPECIAL IMPROVEMENTS

ITEM DESCRIPTION

1) Cleanrooms - walls, flooring, ceiling, fan filter,
pass-through's, related fire protection, HVAC connections for
direct cleanroom use, and electrical branch feeds to
cleanrooms.

2) Chilled water system piping including chillers, cooling
towers, sand filter, heat exchanger and pumps, and associated
valves for tool hookup and use.

3) Clean dry air system including air compressors and associated
valves and piping.

4) DI water system and associated valves and piping.

5) Dedicated electrical panels and branch wiring for machine
build areas only.

6) Ceiling mounted air handling units used for cooling Production
and Warehouse areas utilizing the chilled water system.

7) Employee lockers.

8) Quality Lab including exhaust hoods, counters, and other
associated items.

<PAGE> 58

EXHIBIT E

COMPLETION GUARANTEE

(TO BE ATTACHED)

<PAGE> 59

EXHIBIT F

FORM OF SUBORDINATION, NON-DISTURBANCE AND
ATTORNMENT AGREEMENT

(TO BE ATTACHED)

<PAGE> 60

EXHIBIT G

NON-FINANCEABLE PROPERTY IMPROVEMENTS

(TO BE ATTACHED)

<PAGE> 61

SCHEDULE I

PLANS SCHEDULE

Final Plans and Specifications to be attached on or before August 1,
1997.

<PAGE> 62

SCHEDULE II

ITEMS INCLUDED IN CORE AND SHELL

(TO BE ATTACHED)

<PAGE> 1
Exhibit 11.1

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

<TABLE>
<CAPTION>
PERIOD ENDED
----------------------------------------
July 1, June 29, June 28,
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income $1,102 $(1,078) $1,621
------ ------- ------
Shares outstanding
Weighted average number of common shares
outstanding 400 400 399

Assuming exercise of stock options 39 -- 49
Assuming repurchase of treasury stock (39) -- (38)
------ ------- ------
Net incremental shares 73 -- 11
Assuming exercise of stock options considered
cheap stock 8 8 8
------ ------- ------
Weighted average number of common shares
outstanding as adjusted 408 408 48
------ ------- ------
Primary earnings per common share $ 2.70 $ (2.65) $ 3.89
------ ------- ------
FULLY DILUTED EARNINGS PER SHARE(1)
Net income $1,102 $(1,078) $1,621
------ ------- ------
Shares outstanding
Weighted average number of common shares
outstanding 400 400 399

Assuming exercise of stock options 39 -- 49
Assuming repurchase of treasury stock (34) -- (38)
------ ------- ------
Net incremental shares(1) 5 -- 11
Assuming exercise of stock options considered
cheap stock 8 8 8
------ ------- ------
Weighted average number of common shares
outstanding as adjusted 413 408 418
------ ------- ------
Fully diluted earnings per common share $ 2.67 $ (2.65) $ 3.89
------ ------- ------
</TABLE>

- ----------------
(1) This calculation is submitted in accordance with Securities Exchange Act of
1994 Release No. 5083 although not required by footnote 2 to paragraph 14 of
APB No. 15 because it results in dilution of less than 3%.

<PAGE> 1
EXHIBIT 21

SUBSIDIARY OF APPLIED FILMS CORPORATION

DAF EXPORT CORPORATION, INCORPORATED IN BARBADOS

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.

Denver, Colorado,
September 10, 1997.

ARTHUR ANDERSEN LLP

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 28,
1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM S-1 REGISTRATION STATEMENT.
</LEGEND>
<CIK> 0001040660
<NAME> APPLIED FILM CORPORATION

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> JUN-28-1997
<CASH> 297,000
<SECURITIES> 0
<RECEIVABLES> 6,461,000
<ALLOWANCES> 0
<INVENTORY> 6,160,000
<CURRENT-ASSETS> 13,596,000
<PP&E> 17,153,000
<DEPRECIATION> (9,330,000)
<TOTAL-ASSETS> 21,541,000
<CURRENT-LIABILITIES> 8,062,000
<BONDS> 6,448,000
0
0
<COMMON> 4,245,000
<OTHER-SE> 2,495,000
<TOTAL-LIABILITY-AND-EQUITY> 21,541,000
<SALES> 34,050,000
<TOTAL-REVENUES> 34,050,000
<CGS> 27,352,000
<TOTAL-COSTS> 27,352,000
<OTHER-EXPENSES> 3,745,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 822,000
<INCOME-PRETAX> 2,226,000
<INCOME-TAX> 605,000
<INCOME-CONTINUING> 1,621,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,621,000
<EPS-PRIMARY> 3.89
<EPS-DILUTED> 3.89

</TABLE>