SEVERANCE AGREEMENT

        THIS AGREEMENT is entered into as of July 26, 2002, by and between Applied Films Corporation, a Colorado corporation, and Thomas Edman (the Executive).

        WHEREAS, the Executive currently serves as a key employee of the Company and his services and knowledge are valuable to the Company in connection with the management of one or more of the Companys principal operating facilities, departments or subsidiaries; and

        WHEREAS, the Board has determined that it is in the best interests of the Company and its stockholders to secure the Executives continued services and to ensure the Executives continued dedication and objectivity in the event of any threat or occurrence of, or negotiation or other action that could lead to, or create the possibility of, a Change in Control of the Company, without concern as to whether the Executive might be hindered or distracted by personal uncertainties and risks created by any such possible Change in Control, and to encourage the Executives full attention and dedication to the Company, the Board has authorized the Company to enter into this Agreement.

        NOW, THEREFORE, for and in consideration of the promises and the mutual covenants and agreements herein contained, the Company and the Executive hereby agree as follows:

Section 1. Term.

        This Agreement will commence on the Effective Date and shall continue in effect for three (3) years from the Effective Date. However, at the end of such three (3) year period and, if extended, at the end of each additional year thereafter, the term of this Agreement shall be extended automatically for three (3) additional years, unless the Board delivers written notice one hundred eighty (180) days prior to the end of such term, or extended term, to the Executive, that this Agreement will not be extended. If the Board delivers such written notice, this Agreement will terminate at the end of the term, or extended term, then in progress. Notwithstanding the foregoing, no such action shall be taken by the Board during any period of time when the Board has knowledge that any Person has taken steps reasonably calculated to effect a Change in Control until, in the opinion of the Board, such Person has abandoned or terminated its efforts to effect a Change in Control; and provided further, that in no event shall this Agreement be terminated after a Change in Control.

        However, in the event a Change in Control occurs during the original or any extended term, this Agreement will remain in effect for the longer of: (i) twenty-four (24) months beyond the month in which such Change in Control occurred; or (ii) until all obligations of the Company hereunder have been fulfilled, and until all benefits required hereunder have been paid to the Executive.

Section 2. Definitions.

        Whenever used in this Agreement, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized.

2.1

Base Salary means the salary of record paid to the Executive as annual salary, excluding amounts received under incentive or other bonus plan, whether or not deferred.

2.2

Beneficial Owner shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

2.3

Beneficiary means the persons or entities designated or deemed designated by the Executive pursuant to Section 11.3.

2.4

Board means the Company's Board of Directors.

2.5

Cause means: (a) the Executives willful and continued failure to substantially perform his duties with the Company which do not differ, in any material respect, from the Executives duties and responsibilities during the ninety (90) day period immediately prior to a Change in Control (other than any such failure resulting from Disability or occurring after issuance by the Executive of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive that specifically identifies the manner in which the Company believes that the Executive has willfully failed to substantially perform his duties, and after the Executive has failed to resume substantial performance of his duties on a continuous basis within fourteen (14) calendar days of receiving such demand; (b) the Executives willfully engaging in conduct (other than conduct covered under (a) above) which is demonstrably and materially injurious to the Company, monetarily or otherwise; or (c) the Executives having been convicted of a felony. For purposes of this subparagraph, no act, or failure to act, on the Executives part shall be deemed willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interests of the Company.

2.6

Change in Control means an occurrence of a nature with respect to the Company that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act. Without limiting the inclusiveness of the definition in the preceding sentence, a Change in Control shall be deemed to have occurred as of the first day that any one or more of the following conditions is satisfied:

(a)

Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing forty percent (40%) or more of the combined voting power of the Companys then outstanding securities; or

(b)

At any time a majority of the Companys Board of Directors is comprised of other than Continuing Directors (for purposes of this section, the term Continuing Director means a director who was either (i) first elected or appointed as a director prior to the Effective Date of this Agreement; or (ii) subsequently elected or appointed as a director if such director was

2

nominated or appointed by at least a majority of the then Continuing Directors); or

 

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