SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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FORM 10-Q

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(Mark One)


[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Quarterly Period Ended June 29, 2003

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 0-15930



Southwall Technologies Inc.



|Delaware                                                       | 94-2551470                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

3975 East Bayshore Road
Palo Alto, California    94304

(650) 962-9111









Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).   Yes

As of August 1, 2003, there were 12,542,357 shares of the Registrant's Common Stock outstanding.







Southwall Technologies Inc.

      QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2003
                                TABLE OF CONTENTS



|PART I.   FINANCIAL INFORMATION                                                                                                        | Page No.
|-------------------------------------------------------------------------------------------------------------------------------------- | --------
|                                                                                                                                       |         
|Item 1.   Financial Statements                                                                                                         |         
|                                                                                                                                       |         
|Condensed Consolidated  Balance Sheets 
            
June 30, 2003 (unaudited) and December 31, 2002                                   | 3       
|                                                                                                                                       |         
|Unaudited Condensed Consolidated  Statements of Operations
            
    Three and six months ended June 29, 2003 and June 30, 2002 | 4       
|                                                                                                                                       |         
|Unaudited Condensed Consolidated  Statements of Cash Flows 
            
    Six months ended June 29, 2003 and June 30, 2002          | 5       
|                                                                                                                                       |         
|Notes to Unaudited Condensed Consolidated  Financial Statements                                                                        | 6       
|                                                                                                                                       |         
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                  | 16      
|                                                                                                                                       |         
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                   | 23      
|                                                                                                                                       |         
|Item 4.   Controls and Procedures                                                                                                      | 31      
|                                                                                                                                       |         
|PART II.  OTHER INFORMATION                                                                                                            |         
|                                                                                                                                       |         
|Item 1.   Legal Proceedings                                                                                                            | 32      
|                                                                                                                                       |         
|Item 2: Changes in Securities and Use of Proceeds                                                                                      | 32      
|                                                                                                                                       |         
|Item 3: Defaults Upon Senior Securities                                                                                                | 32      
|                                                                                                                                       |         
|Item 4: Submission of Matters to a Vote of Security Holders                                                                            | 32      
|                                                                                                                                       |         
|Item 5: Other Information                                                                                                              | 33      
|                                                                                                                                       |         
|Item 6.   Exhibits and Reports on Form 8-K                                                                                             | 33      
|                                                                                                                                       |         
|Signatures                                                                                                                             | 34      
|                                                                                                                                       |         
|Certifications                                                                                                                         | 35      

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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Southwall Technologies Inc.

                              Condensed Consolidated Balance Sheets

                                (In thousands, except per share data)

                                               (unaudited)

`June 29,     December 31,
                                                                          2003          2002
                                                                      (unaudited)
                                                                      ------------  ------------
ASSETS
Current assets:                                                                                 
   Cash and cash equivalents........................................ $      2,403  $      1,998
   Restricted cash..................................................          539           531
   Accounts receivable, net of allowance for bad debts of $658
     and $552 at June 30, 2003 and December 31, 2002, respectively..        7,408         8,995
   Inventories, net.................................................        6,224         8,537
   Other current assets.............................................        3,424         4,310
                                                                      ------------  ------------
   Total current assets.............................................       19,998        24,371
Property, plant and equipment, net..................................       50,983        50,251
Restricted loan proceeds............................................          963           885
Other assets........................................................          967         1,075
                                                                      ------------  ------------
   Total assets..................................................... $     72,911  $     76,582
                                                                      ============  ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion term debt........................................ $      6,036  $      7,499 
   Line of credit...................................................        3,003            --
   Accounts payable.................................................        5,100         9,244
   Accrued compensation.............................................        1,451         1,254
   Other accrued liabilities........................................        7,126         5,886
                                                                      ------------  ------------
   Total current liabilities........................................       22,716        23,883
Term debt...........................................................        9,535         9,253
Government grants advanced..........................................          538           604
Other...............................................................        1,762         2,368
                                                                      ------------  ------------
   Total liabilities................................................       34,551        36,108

Commitments and contingencies (Note 8)

Stockholders' equity:
   Common stock, $0.001 par value, 20,000 shares authorized;
      issued and outstanding 12,542 and 12,527 at June 30, 2003
      and December 31, 2002.........................................           13            12
   Capital in excess of par value...................................       69,708        69,657
   Notes receivable and accrued interest............................           --          (126)
   Other comprehensive income
      Translation gain on subsidiary................................        2,113         1,032
   Accumulated deficit..............................................      (33,474)      (30,101)
                                                                      ------------  ------------
   Total stockholders' equity.......................................       38,360        40,474
                                                                      ------------  ------------
   Total liabilities and stockholders' equity....................... $     72,911  $     76,582
                                                                      ============  ============`

See accompanying notes to condensed consolidated financial statements.

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Southwall Technologies Inc.

                 Condensed Consolidated Statements of Operations

                      (In thousands, except per share data)

                                   (Unaudited)

`Three Months Ended       Six Months Ended
                                                     ----------------------  ----------------------
                                                       June 29,    June 30,    June 29,    June 30,
                                                        2003        2002        2003        2002
                                                     ----------  ----------  ----------  ----------
Net revenues....................................... $   15,328  $   19,676  $   30,549  $   38,945
Cost of sales......................................     12,405      12,954      24,588      25,379
                                                     ----------  ----------  ----------  ----------
Gross profit.......................................      2,923       6,722       5,961      13,566
                                                     ----------  ----------  ----------  ----------
Operating expenses
   Research and development........................      1,517       2,060       3,185       3,837
   Selling, general and administrative.............      3,000       2,997       5,811       6,742
                                                     ----------  ----------  ----------  ----------
   Total operating expenses........................      4,517       5,057       8,996      10,579
                                                     ----------  ----------  ----------  ----------
Income (loss) from operations......................     (1,594)      1,665      (3,035)      2,987
Interest expense, net..............................       (217)       (526)       (509)       (992)
Other income, net..................................        274          89         363         467
                                                     ----------  ----------  ----------  ----------
Income (loss) before provision for income taxes....     (1,537)      1,228      (3,181)      2,462
Provision (benefit) for income taxes...............        176        (166)        191        (113)
                                                     ----------  ----------  ----------  ----------
Net income (loss).................................. $   (1,713) $    1,394  $   (3,372) $    2,575
                                                     ==========  ==========  ==========  ==========


Net income (loss) per share:
   Basic........................................... $    (0.14) $     0.16  $    (0.27) $     0.30
   Diluted......................................... $    (0.14) $     0.15  $    (0.27) $     0.27
Weighted average shares outstanding:
   Basic...........................................     12,532       8,624      12,530       8,521
   Diluted.........................................     12,532       9,552      12,530       9,417`

See accompanying notes to condensed consolidated financial statements.

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Southwall Technologies Inc.

                    Condensed Consolidated Statements of Cash Flows

                                  (In thousands)

                                   (unaudited)

`Six Months Ended
                                                           ------------------------
                                                             June 29,     June 30,
                                                              2003         2002
                                                           -----------  -----------
Cash flows provided by operating activities:
   Net income (loss)..................................... $    (3,372) $     2,575
   Adjustments to reconcile net income (loss) to net
    cash provided by operating activities:
   Depreciation and amortization.........................       3,307        2,867
   Loss on disposal of capital equipment.................         133           --
   Stock-based compensation charge.......................          33           --
   Interest on note receivable...........................          (4)         (20)
   Officer loan forgiveness..............................         131           --
   Change in assets and liabilities:
     Accounts receivable, net............................       1,587         (762)
     Inventories, net....................................       2,313         (885)
     Other current and non-current assets................         969          182
     Accounts payable, and accrued liabilities...........      (3,313)      (3,890)
                                                           -----------  -----------
Cash provided by operating activities....................       1,784           67
                                                           -----------  -----------
Cash flows used in investing activities:
   Restricted cash.......................................         (77)         615
   Expenditures for property, plant and equipment
    and other assets.....................................      (2,247)      (3,180)
                                                           -----------  -----------
Net cash used in investing activities....................      (2,324)      (2,565)
                                                           -----------  -----------
Cash flows provided by financing activities:
   Principal payments on borrowings......................      (1,944)      (1,880)
   Borrowings on line of credit..........................       3,003          412
   Proceeds from foreign government grants...............          --          252
   Proceeds from investment allowances...................          --        1,044
   Proceeds from stock options and employee stock
     purchases plan exercises............................          18        1,720
                                                           -----------  -----------
Net cash provided by financing activities................       1,077        1,548
                                                           -----------  -----------
Effect of foreign exchange rate changes on cash..........        (132)        (851)
                                                           -----------  -----------
Net increase (decrease) in cash and cash equivalents.....         405       (1,801)
Cash and cash equivalents, beginning of year.............       1,998        3,362
                                                           -----------  -----------
Cash and cash equivalents, end of period................. $     2,403  $     1,561
                                                           ===========  ===========
Supplemental cash flow disclosures:
   Cash paid for interest................................ $       555  $       622
   Cash paid for income taxes............................ $       150  $        54
Supplemental schedule of non-cash investing
    and financing activities:
   Notes receivable issued to exercise stock options..... $        --  $        15`

See accompanying notes to condensed consolidated financial statements.

---

SOUTHWALL TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands)

(Unaudited)



Note 1



While the information presented in the accompanying
condensed consolidated financial statements is unaudited, it includes all
adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the Company's financial
position and results of operations, changes in financial position as of the
dates and for the periods indicated.



Certain information and footnote disclosures normally
contained in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Company suggests that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
Form 10-K for the year ended December 31, 2002 filed with the
Securities and Exchange Commission on March 31, 2003 (as amended by the
Company's Form 10-K/A filed on April 9, 2003). The results of operations for the
interim periods presented are not necessarily indicative of the operating
results of the full year.



The Company has prepared its consolidated financial
statements assuming the Company will continue as a going concern and meet its
obligations as they become due. The Company has incurred a net loss in the first
six months of 2003, and expects to incur net losses through all of 2003. These
factors together with the Company's working capital position and its significant
debt service and other contractual obligations at June 29, 2003, raise
substantial doubt about its ability to continue as a going concern. If the
Company is unable to obtain additional financing sources, it may be unable to
satisfactorily meet all of its cash commitments required to fully implement its
business plans.



In December 2002, the Company restructured its
operations to reduce its cost structure by reducing the Company's work force in
Palo Alto and vacating excess facilities after consolidating its operations in
Palo Alto. These actions are expected to help improve the Company's operating
results in 2003 but will continue to impact its operating cash flows until the
Company's lease commitments for the excess facilities expire in
December 2004. During the second quarter of 2003, the Company entered into
a $10.0 million receivable financing line of credit agreement with a financial
institution (see Note 4 - Term Debt).  The Company is in discussions with other
potential lenders regarding additional financing . The Company cannot provide
any assurance that alternative sources of financing will be available at all or
on terms favorable to it.



The Company uses a 52-week fiscal year ending on
December 31. The quarters ended June 29, 2003 and June 30, 2002 each
included 13 weeks.



Note 2



Restricted cash



Restricted cash consists of the unexpended portion of
grants received from the Saxony government in Germany to co-finance the costs of
the construction of the Company's Dresden facility. In the event the Company
fails to meet certain conditions related to the grants, the Saxony government
has the right to demand repayment of the grants (see Note 6 - Government
Grants and Investment Allowances).



Inventories



Inventories are stated at the lower of cost (determined
by the first-in, first-out method) or market. Cost includes materials, labor and
manufacturing overhead. The Company establishes provisions for excess and
obsolete inventories to reduce such inventories to their estimated net
realizable value. Such provisions are charged to cost of sales. At June 29, 2003
and December 31, 2002, inventories consisted of the following:

`June 29,    December 3
Inventories                         2003         2002
------------------------------  -----------  -----------
Raw materials................. $     2,682  $     3,703
Work-in-process...............       2,272        3,432
Finished goods................       1,270        1,402
                                -----------  -----------
   Total inventories.......... $     6,224  $     8,537
                                ===========  ===========`

Government grants advanced and investment allowances



Government grants advanced and investment allowances
consist of monies received from the Saxony government in Germany by the Company.
Upon approval and receipt of the grants and investment allowances from the
Saxony government, the funds are applied as a reduction of the costs of the
Dresden facility. In the event the Company fails to meet certain conditions
related to the grants and investment allowances, the Saxony government has the
right to reclaim the grants and allowances (see Note 6 - Government Grants
and Investment Allowances).



Note 3



Basic net income (loss) per share is computed by
dividing income (loss) available to common shareholders (numerator) by the
weighted average number of common shares outstanding (denominator) for the
period. Diluted net income (loss) per share gives effect to all dilutive
potential common shares outstanding during the period. The computation of
diluted earnings (loss) per share uses the average of the closing prices of the
common stock during the period.  At June 29, 2003, there were 12,532,000 shares
outstanding which were used for the basic and dilutive earnings per share
calculation.  At June 30, 2002, there were 9,552,000 shares outstanding,
including the dilutive stock options, which were used for the dilutive earnings
per share calculation, and 8,624,000 shares for basic earnings per share. The
total amount of the difference in the basic and diluted weighted average shares
of common stock and common stock equivalents in the periods where there is net
income is attributable to the effect of dilutive stock options. In net loss
periods, the basic and diluted weighted average shares of common stock and
common stock equivalents are the same because inclusion of stock options would
not be dilutive. Accordingly, for the quarter and six months ended June 30,
2003, there was no difference between the denominators used for calculation of
basic and diluted net income (loss) per share, and the number of shares used in
the calculation was 12,532,000 and 12,530,000, respectively.



There were 2,065,000 options outstanding during the
second quarter and first six months of 2003, which were excluded from the
diluted net loss per share calculations as reported because they were anti-
dilutive in view of the losses incurred by the Company in that period.



Note 4



On May 16, 2003, the Company
entered into a $10.0 million receivable financing line of credit agreements
with a financial institution that expires on May 16, 2004 subject to automatic
one-year renewals unless terminated at any time by either party.   The line of
credit bears an annual interest rate of 7% above the financial institution's
Base Rate (which was 4% at June 29, 2003), and is calculated based on the
average daily accounts receivable against which the Company has borrowed.  Half
of the $10.0 million line of credit is represented by a $5.0 million credit
line, guaranteed by the United States Export-Import Bank ("EXIM").
Availability under the EXIM line is limited to 90% of eligible foreign
receivables acceptable to the lender.  The remaining $5.0 million portion of the
$10.0 million credit line is supported by domestic receivables.  Availability
under the domestic line of credit is limited to 70% of eligible domestic
receivable acceptable to the lender.  The financial institution reserves the
right to lower the 70% and 90% of eligible receivable standards for borrowings
under the credit agreements.  In connection with the line of credit, the Company
granted to the bank a lien upon and security interest in, and right of set off
with respect to all of the Company's right, title and interest in all personal
property and other assets, but not in certain of the Company's Dresden property
or assets.  The borrowing arrangements require the Company to comply with
financial covenants to maintain minimum net tangible net worth of $33.0 million,
current ratio of at least 0.70, and revenues equal to or greater than 80% of
revenues projected.  As part of the agreements, the Company incurred and paid a
one-time commitment fee of $0.1 million in the second quarter of 2003, which
will be amortized over the term of the agreements.  As of June 29, 2003, the
Company had approximately $3.0 million of borrowings outstanding and
$1.8 million of availability under the line of credit.  The Company was
in compliance with all financial covenants at June 29, 2003.



Note 5



The Company's term debt consists of the following:

___________

`Balance    Remaining
                                                                             at June 29,  Due in
Description                                                        Rate         2003       2003
-------------------------------------------------------------- ------------  ----------  ---------
Term debt:
     Japanese bank loan guaranteed by Teijin..................   2.25 %(1)  $    1,250      1,250
     German bank loan dated May 12, 1999......................   6.13 %(2)       2,531        195
     German bank loan dated May 28, 1999......................   7.10 %(3)       2,857         --
     German bank loan dated May 28, 1999......................   3.75 %          1,142        326
     German bank loan dated July 25, 2000.....................   7.15 %(4)       1,953        135
     German bank loan dated August 14, 1999 (due June 30, 2009   5.75 %          1,926         --
     German bank loan dated June 29, 2000.....................   5.75 %            146         97
     German bank loan dated July 10, 2000.....................   7.10 %            146         97
     German bank loan dated December 18, 2000.................   7.50 %            148         49
     German bank loan dated December 19, 2000.................   7.50 %            133         46
     Other equipment financings...............................                      72         33
                                                                             ----------  ---------
         Total term debt......................................                  12,304      2,228
                                                                             ----------  ---------
Capital leases:
     Sales-leaseback dated July 19, 1999......................  13.00 %          2,321      2,321
     Sales-leaseback dated October 19, 1999...................  13.00 %            946        946
                                                                             ----------  ---------
         Total capital leases.................................                   3,267      3,267
                                                                             ----------  ---------
Total term debt and capital leases............................                  15,571      5,495
         Less current portion.................................                   6,036   =========
                                                                             ----------
         Term debt, non current...............................                   9,535
                                                                             ==========`

(1)	The interest rate is reset semi-annually at LIBOR plus
1.0%. As of June 29, 2003, the interest rate on this loan was 2.25%.



(2)	Interest rate will be reset to the then prevailing
market rate in 2004.



(3)	Interest rate will be reset to the then prevailing
market rate in 2009.



(4)	Interest rate will be reset to the then prevailing
interest rate in 2005.



The Japanese bank loan, dated May 6, 1997, is
guaranteed by Teijin Limited (Teijin), a Japanese company. Teijin is a
stockholder of and supplier of substrate materials to the Company. In
consideration of the guarantee, Teijin also received warrants in 1997 to
purchase 158,000 shares of Southwall's common stock at $9.0 per share. These
warrants were not exercised and expired on May 30, 2000. The Teijin
guarantee is collateralized by certain equipment located in Southwall's Tempe
manufacturing facility and inventory, to the extent necessary to provide 120%
net book value coverage of the outstanding loan balance. The interest rate on
the loan is re-set semi-annually at LIBOR plus 1.0%, (2.25% at June 29, 2003).
The Company is also subject to certain financial covenants under the guarantee
relating to minimum quick ratio, tangible net worth, and maximum debt/tangible
net worth. The Company pays Teijin semi-annually a loan guarantee service fee
equal to 0.5625% of the outstanding balance. The loan required semi-annual
payments of interest only during the first four years, followed by semi-annual
installments of principal plus interest, beginning in May 2001, for the
remaining three and one half year term. At December 31, 2002, the Company
was not in compliance with certain of the financial covenants with Teijin
pertaining to this promissory note. Southwall has received a waiver from Teijin
and the Japanese bank of any defaults that may exist through and including
September 30, 2003 arising out of its failure to comply with the financial
covenants of the guarantee agreement relating to minimum quick ratio, tangible
net worth and maximum debt/tangible net worth. The waiver was conditioned on the
Company's agreement to prepay $2.5 million of the debt from the proceeds of
its public offering completed in July 2002. The Company paid $2.5 million,
in addition to the scheduled principal payment of $1.25 million, on
November 6, 2002.  The Company paid the scheduled installment of $1.25
million on May 6, 2003. All payments due on the loan have been paid when due.
The Company has classified the remaining outstanding balance of
$1.25 million, which is due on November 6, 2003, as current debt on the
balance sheet at June 29, 2003.



During 1999, Southwall entered into two sale-leaseback
agreements under a master equipment sale-leaseback agreement with a leasing
company ("lessor"). Because the Company has an option to purchase the equipment
at a price to be determined between Southwall and the lessor at the end of the
lease periods, the sale-leaseback agreements have been treated as financing
leases. One lease has a lease term of three years and the other lease has an
initial lease term of two years with an option to extend it for an additional
year. At June 29, 2003, the Company had a total of $3.3 million outstanding
and due under these leases. The leased equipment and certain other production
equipment owned by the Company collateralize the sale-leaseback agreements. The
effective interest rate of both is approximately 13% per annum and the leases
are repayable over the lease term commencing in May 2000. The Company is in
dispute with the lessor over interpretation of certain terms of the lease
agreement and has withheld lease payments due since March 2001. The lessor
has notified the Company that it considers the Company to be in default and in
January 2002 drew down on a letter of credit in the amount of
$0.5 million that collateralized the Company's obligations. In May 2002, a
suit was filed against the Company demanding payment of unpaid lease payments
and alleged residual values (see Note 8 - Contingencies).  The Company
classified the $3.3 million due under the leases, net of a
$1.0 million holdback not funded by the lessor, as a current liability in
the accompanying balance sheet at June 29, 2003.



On May 12, 1999, the Company entered into a loan
agreement with a German bank that provides for borrowings up to
EUR3.1 million ($3.5 million). Under the terms of this agreement, the
funds were used solely for the purpose of capital investment by Southwall's
German subsidiary. The term of the loan is for a period of 10 years and the
principal is repayable in euros after the end of one year in 36 quarterly
payments. The loan bears interest at 6.125% per annum for the first five years,
and will be revised to the prevailing rate at the end of the fifth year. Of the
$2.5 million in borrowings outstanding under this bank loan at June 29,
2003, $2.1 million was classified as noncurrent in the accompanying balance
sheet.



On May 28, 1999, the Company entered into a general
loan agreement with a German bank. Under the terms of the loan agreement, funds
were made available in three tranches, and were used solely for the purpose of
capital investment by the Company's German subsidiary. The agreement contains
various covenants with which the Company was in compliance at March 30,
2003. The Company is current with respect to all principal and interest payments
due under the loan agreement. Under the first tranche, the Company borrowed EUR
2.5 million ($2.9 million) for a term of twenty years beginning on
May 28, 1999. The principal is repayable in euros beginning after ten years
in ten equal, semi-annual payments. The loan bears fixed interest of 7.1% per
annum for the first ten years, after which time the rate will be adjusted to a
current prevailing rate. At June 29, 2003, the amount outstanding under this
first tranche was $2.9 million, of which all $2.9 million was classified as
noncurrent in the accompanying balance sheet. Under the second tranche, the
Company borrowed EUR1.7 million ($1.9 million) for a term of seven years
beginning May 28, 1999. The principal is repayable after one year in twelve
equal semi-annual payments. The loan bears fixed interest at 3.75% per annum for
the period of seven years. At June 29, 2003, the amount outstanding under this
second tranche was $1.1 million, $0.8 million of which was classified
as a noncurrent liability in the accompanying balance sheet. Under the third
tranche, the Company borrowed EUR2.1 million ($2.4 million) for a term
of ten years beginning on July 25, 2000. The principal is repayable after
one year in thirty-six equal quarterly payments. The loan bears fixed interest
of 7.15% per annum for the first five years, after which time the rate will be
adjusted to a current prevailing market rate. At June 29, 2003, the amount
outstanding under the third tranche was $2.0 million, of which
$1.7 million was classified as noncurrent in the accompanying balance
sheet.



On August 14, 1999, the Company entered into a loan
agreement with a German bank that provides for borrowings up to
EUR1.7 million ($1.9 million). As required by this agreement, the funds
were used solely for the purpose of capital investment by the Company's German
subsidiary. The principal balance is due in a single payment on June 30,
2009 and bears interest at a rate of 5.75% per annum. The interest is payable
quarterly in euros. Fifty percent of the loan proceeds are restricted in an
escrow account for the duration of the loan period and are classified as non-
current "Restricted Loan Proceeds" in the accompanying balance sheet. The amount
due under this bank loan at June 29, 2003 was $1.9 million, which was
classified as noncurrent in the accompanying balance sheet.



On June 29, 2000, the Company entered into a loan
agreement with a German bank that provides for borrowings up to
EUR0.5 million ($0.6 million). As required by this agreement, the funds
were used solely for the purpose of capital investment by the Company's German
subsidiary. The principal balance is repayable in 12 quarterly payments
beginning June 2001 and bears interest at a rate of 5.8% per annum. The
interest is payable quarterly in euros. The agreement contains various covenants
with which the Company was in compliance at June 29, 2003. The amount due under
this bank loan was $0.2 million at June 29, 2003, all of which was classified as
current in the accompanying balance sheet.



On July 10, 2000, the Company entered into a loan
agreement with a German bank that provides for borrowings up to
EUR0.5 million ($0.6 million). As required by this agreement, the funds
were used solely for the purpose of capital investment by the Company's German
subsidiary. The principal balance is repayable in 12 quarterly payments
beginning June 2001 and bears interest at a rate of 7.10% per annum. The
interest is payable quarterly in euros. The amount due under this bank loan was
$0.2 million at June 29, 2003, all of which was classified as current in the
accompanying balance sheet.



On December 18, 2000, the Company entered into a
loan agreement with a German bank that provides for borrowings up to
EUR0.3 million ($0.3 million). As required by this agreement, the funds
were used solely for the purpose of capital investment by the Company's German
subsidiary. The principal balance is repayable in nine quarterly payments
beginning March 2002 and bears interest at a rate of 7.5% per annum. The
interest is payable quarterly in euros. At June 29, 2003, the amount outstanding
under this bank loan was $0.2 million, of which $0.05 million was classified as
noncurrent in the accompanying balance sheet.



On December 19, 2000, the Company entered into a
loan agreement with a German bank that provides for borrowings up to
EUR0.3 million ($0.3 million). As required by this agreement, the funds
were used solely for the purpose of capital investment by the Company's German
subsidiary. The principal balance is repayable in 12 quarterly payments
beginning March 2002 and bears interest at a rate of 7.5% per annum. The
interest is payable quarterly in euros. At June 29, 2003, the amount outstanding
under this bank loan was $0.1 million, of which $0.05 million was classified as
noncurrent in the accompanying balance sheet.



The preceding German bank loans are collateralized by the
production equipment, building and land owned by the Company's German
subsidiary. The dollar equivalent value for the preceding German bank loans has
been calculated using the euro exchange rate as of June 29, 2003.



Other term debt consists of capitalized leases
related primarily to certain computer equipment used by the Company.



Scheduled principal reductions of term debt as of June
29, 2003 for the balance of 2003, and for the next four years and thereafter,
are as follows:



`Year                          Amount
---------------------------  ---------
2003....................... $   5,495
2004.......................     1,308
2005.......................       985
2006.......................       822
2007.......................       659
Thereafter.................     6,302
                             ---------
Total...................... $  15,571
                             =========`

The Company incurred total interest expense of
$0.2 million and $0.5 million in the second quarter of 2003 and 2002,
respectively. The Company did not capitalize any portion of these amounts as
part of the costs related to the construction of new production machines and
facilities.



Note 6



The Company has an agreement to receive cash grant
awards (the "Grant"), which was approved by the Saxony government in
May 1999. As of June 29, 2003, the Company had received approximately
EUR5.6 million ($6.4 million) under this Grant and accounted for the
Grant by applying the proceeds received to reduce the cost of fixed assets of
the Dresden manufacturing facility. Additionally, as of June 29, 2003, the
Company has a balance of unused funds remaining from the government grants
received in May 1999 of EUR0.5 million ($0.6 million), which has
been recorded as an advance and held as restricted cash until the Company
receives approval from the Saxony government to apply the funds to reduce its
capital expenditures.



After giving effect to an amendment of the terms of the
Grant in 2002, the Grant is subject to the following requirements:



(a)	The Grant was earmarked to co-finance the costs of
the construction of a facility to manufacture XIR



(b)	The construction period for the project is from
March 15, 1999 to June 30, 2006;



(c)	The total investment during the construction
period should be at least EUR47.0 million ($53.7 million); and



(d)	The project must create at least 143 permanent
jobs and 7 apprenticeships by June 30, 2006.



If the Company fails to meet the above requirements, the
Saxony government has the right to demand repayment of the Grant.



In addition to the Grant, the Company is eligible for
cash investment allowances from the Saxony government based on the total
projected capital investment by the Company in its Dresden facility of
EUR47.0 million ($53.7 million). The investment allowances are also
subject to European Union regulatory approval. During 2000, the Company received
EUR1.2 million ($1.4 million) in investment allowances from the Saxony
government, which proceeds were applied to reduce the capitalized construction
cost of the Dresden facility. The Company received an additional
EUR2.5 million ($2.9 million) in investment allowances from the Saxony
government in 2001, which proceeds were applied to reduce the capitalized
construction cost of the Dresden facility. The Company received approximately
EUR1.2 million ($1.4 million) in investment allowances in the second
quarter of 2002, which were also applied to reduce the capitalized construction
cost of the Dresden facility. These investment allowances are subject to the
following requirements:



(a)	The movable and immovable assets, the acquisition
costs of which are taken into account in determining the investment allowance,
shall be employed within the subsidized territory for a period of at least five
years following the acquisition or production of such assets; and



(b)	The movable assets, the acquisition costs of which
are taken into account in determining the increased investment allowance, shall
remain in a business that is engaged in the processing industry, or in a similar
production industry, for a period of at least five years following the
acquisition or production of such assets.



If the Company fails to meet the above requirements, the
Saxony government has the right to demand repayment of the allowances.



The Grants and investment allowances, if any, that the
Company is entitled to seek from the Saxony government varies from year to year
based upon the amount of capital expenditures that meet the above requirements.
Generally, Southwall is not eligible to seek total investment grants for any
year in excess of 33% of its eligible capital expenditures for that year. The
Company cannot guarantee that it will be eligible for or receive additional
grants or allowances in the future.



The dollar equivalent value for the preceding grants and
investment allowances has been calculated using the euro exchange rate as of
June 29, 2003.



Note 7



Southwall reports segment information using the
management approach to determine segment information. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of its reportable
segments. The Company is organized on the basis of products and services. The
total net revenues for the automotive glass, electronic display, and
architectural product lines were as follows:



`Three Months Ended       Six Months Ended
                                                     ----------------------  ----------------------
                                                       June 29,    June 30,    June 29,    June 30,
                                                        2003        2002        2003        2002
                                                     ----------  ----------  ----------  ----------
Automotive glass................................... $    6,641  $    6,918  $   12,698  $   13,921
Electronic display.................................      6,090       7,628      12,692      15,553
Architectural......................................      2,597       5,130       5,159       9,471
                                                     ----------  ----------  ----------  ----------
  Total net revenues............................... $   15,328  $   19,676  $   30,549  $   38,945
                                                     ==========  ==========  ==========  ==========`

The following is a summary of net revenues by geographic
area (based on the location of the Company's customers) for the second quarter
and first six months of 2003 and 2002, respectively:



`Three Months Ended       Six Months Ended
                                                     ----------------------  ----------------------
                                                       June 29,    June 30,    June 29,    June 30,
                                                        2003        2002        2003        2002
                                                     ----------  ----------  ----------  ----------
United States...................................... $    1,256  $    3,458  $    2,770  $    6,168
Japan..............................................      5,783       6,863      11,606      14,463
France.............................................      2,199       3,820       5,274       7,854
Pacific Rim........................................      1,090       3,088       3,226       4,944
Germany............................................      2,658       1,175       4,521       2,695
Rest of world......................................      2,342       1,272       3,152       2,821
                                                     ----------  ----------  ----------  ----------
  Total net revenues............................... $   15,328  $   19,676  $   30,549  $   38,945
                                                     ==========  ==========  ==========  ==========`

The Company's five largest customers accounted for net
revenues equal to the following percentages of the Company's total net revenue
for the second quarter and first six months of 2003 and 2002, respectively:



`Three Months Ended       Six Months Ended
                                                     ----------------------  ----------------------
                                                       June 29,    June 30,    June 29,    June 30,
Customer                                                2003        2002        2003        2002
---------------------------------------------------  ----------  ----------  ----------  ----------
A..................................................       14.3 %      19.4 %      16.9 %      20.2 %
B..................................................       14.7 %      15.2 %      13.2 %      18.0 %
C..................................................       22.3 %      17.2 %      23.7 %      15.9 %
D..................................................       17.3 %       7.6 %      14.2 %       9.2 %
E..................................................        3.7 %      10.9 %       7.3 %       8.2 %
                                                     ----------  ----------  ----------  ----------
  Total............................................       72.3 %      70.3 %      75.3 %      71.5 %
                                                     ==========  ==========  ==========  ==========`

Note 8



In July 2002, the Company was served with a
complaint in a lawsuit captioned "Hurricane Glass v. Southwall
Technologies Inc. and V-Kool, Inc." filed in the Circuit Court of the
Twelfth Judicial Circuit in and for Sarasota County, Florida. The complaint
alleges that Hurricane was a distributor of the Company's "Solis" product, that
Hurricane's customers experienced various problems and failures with the product
and that, as a result, Hurricane was required to perform repairs and
replacements under its warranty provisions. The complaint alleges approximately
$0.4 million in damages against both defendants. The Company filed a motion to
dismiss based on improper venue, which was denied.  On June 4, 2003, the Court
of Appeals overturned the lower court's order and granted the Company's motion
to dismiss.



The Company has been named as a defendant, along with
Bostik, Inc., in an action entitled "WASCO Products, Inc. v. Southwall
Technologies Inc. and Bostik, Inc.", Civ. Action No. C 02-2926
CRB, which was filed in Federal District Court for the Northern District of
California on June 18, 2002. The Company was served with the complaint in
this matter on July 1, 2002. The plaintiff has filed the matter as a
purported class action on behalf of all entities and individuals in the United
States who manufactured and/or sold and warranted the service life of insulated
glass units manufactured between 1989 and 1999 which contained the Company's
Heat Mirror film, and were sealed with a specific type of sealant manufactured
by the co-defendant. The plaintiff alleges that the sealant provided by the co-
defendant was defective, resulting in elevated warranty replacement claims and
costs, and asserts claims against the Company for misrepresentation, negligence,
unfair business practices and false or misleading business practices. The
plaintiff seeks recovery of $100.0 million for damages on behalf of the
class allegedly resulting from elevated warranty replacement claims,
restitution, injunctive relief, and non-specified compensation for lost profits.
The Company believes all of the claims to be without merit and intends to defend
the action vigorously. The plaintiff filed its Third Amended Complaint on June
27, 2003. The Company has tendered the defense of this matter to its insurers,
who have agreed to pay a percentage of the Company's defense costs under
reservation of rights. The Company believes they are also obligated to pay any
resulting settlement or judgment. The action is in the early stages, thus an
estimate of the Company's loss exposure cannot be made.



The Company is a defendant in an action entitled "Portfolio
Financial Servicing Company v. Southwall Technologies Inc.," which was
filed in state court in Utah on May 22, 2002. This action arises out of
sale-leaseback agreements, which the Company entered into with an entity
formerly known as Matrix Funding Corporation, or Matrix, in 1999 in connection
with the acquisition of two of the Company's production machines. Matrix
thereafter filed bankruptcy proceedings. Plaintiffs in the action are Bank of
America, which alleges that it is the successor in interest to Matrix, and
Portfolio Financial Servicing Company which claims to be an agent of the
successor to Matrix. The plaintiffs demand payment of $6.5 million, which they
allege constitute unpaid lease payments, plus the alleged residual value of the
equipment, less monies that Matrix owes to Southwall. The Company asserts that
Matrix violated certain material terms of the lease and intends to defend the
action vigorously. The Company and the plaintiffs entered into a settlement
agreement on July 31, 2003, pursuant to which this claim will be extinguished by
payment from the Company to the plaintiffs of $2.5 million.  The settlement
agreement is subject to the satisfaction of certain conditions, which must be
fulfilled on or before October 1, 2003, including the payment of the settlement
amount, a significant portion of which the Company may need to borrow.  There
can be no assurance that the Company will be able to borrow the amount it needs
to pay the settlement.  Pursuant to the settlement agreement, the Company has
paid the plaintiffs $250,000, which will be applied against the settlement
amount if the conditions to settlement are satisfied and which will be applied
against the alleged unpaid lease obligations if the conditions are not
satisfied. If the conditions to the settlement are not fulfilled, the matter
will continue to be litigated.



The Company is a defendant in an action filed on
April 5, 1996 entitled "Four Seasons Solar Products Corp. vs.
Black & Decker Corp., Bostik, Inc. and Southwall
Technologies Inc.," No. 5 CV1695, pending in the United States
District Court for the Eastern District of New York. Plaintiff is a manufacturer
of insulated glass units, which incorporate the Company's Heat Mirror film.
Plaintiff alleges that a sealant provided by the co-defendant is defective,
asserts causes of action for breach of contract, unfair competition, and
fraudulent concealment, and seeks monetary damages of approximately
$36.0 million for past and future replacement costs, loss of customer
goodwill, and punitive damages against all defendants. The Court has dismissed
all claims against the Company.  The plaintiff has filed a Notice of Appeal.
The Company's insurance carrier under reservation of rights is paying a
percentage of its defense costs.



The insurance carriers in some of the litigation related
to alleged product failures and defects in window products manufactured by
others in which the Company was a defendant paid the defense and settlement
costs related to such litigation. Those insurance carriers reserved their rights
and have expressed their intent to proceed against the Company to recover a
portion or all of such payments. As a result, those insurance carriers could
seek from the Company up to an aggregate of $12.9 million plus defense
costs, although any such recovery would be restricted to claims that were not
covered by the Company's insurance policies. The Company intends to vigorously
defend any attempts by these insurance carriers to seek reimbursement. The
Company is not able to estimate the likelihood that these insurance carriers
will seek to recover any such payments, the amount, if any, they might seek, or
the outcome of such attempts.



In addition, the Company is involved in certain other
legal actions arising in the ordinary course of business. The Company believes,
however, that none of these actions, either individually or in the aggregate,
will have a material adverse effect on the Company's business, the Company's
consolidated financial position, results of operations or cash flows.



Note 9



Southwall has stock option plans that reserve shares
of its common stock for issuance to employees, officers, directors and
consultants. The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost is recognized for
grants at fair market value. Southwall adopted the disclosure-only provisions of
SFAS No. 123, Accounting for Stock-Based Compensation. Had compensation
cost for the Company's stock option plans and stock purchase plans been
determined based on the fair value at the grant date for awards granted in the
second quarter and the first six months of 2003 and 2002 consistent with the
provisions of SFAS No. 123 and 148, net income (loss) and net income (loss)
per share would have been increased to the pro forma amounts indicated below:

`Three Months Ended       Six Months Ended
                                                     ----------------------  ----------------------
                                                       June 29,    June 30,    June 29,    June 30,
                                                        2003        2002        2003        2002
                                                     ----------  ----------  ----------  ----------
Net income (loss):
   As reported..................................... $   (1,713) $    1,394  $   (3,372) $    2,575
   Add:  stock-based employee compensation included
         in reported net income (loss), net of tax.         --          --          33          --
   Less: stock-based compensation expense determined
         using fair value method, net of tax.......       (262)       (466)       (499)       (738)
                                                     ----------  ----------  ----------  ----------
   Pro forma....................................... $   (1,975) $      928  $   (3,838) $    1,837
                                                     ==========  ==========  ==========  ==========
Net income (loss) per share:
   As reported-basic............................... $    (0.14) $     0.16  $    (0.27) $     0.30
   Pro forma-basic................................. $    (0.16) $     0.11  $    (0.31) $     0.22
   As reported-diluted............................. $    (0.14) $     0.15  $    (0.27) $     0.27
   Pro forma-diluted............................... $    (0.16) $     0.10  $    (0.31) $     0.20`

For the stock option plans, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model for the multiple option approach. The following weighted average
assumptions were used for grants in the second quarter of 2003 and 2002:
expected volatility of 96% in both the second quarter of 2003 and 2002; risk-
free interest rate of 2.1% and 4.2% in the second quarter of 2003 and 2002,
respectively; and expected lives from vesting date of 3.04 and 3.07 years
in the second quarter of 2003 and 2002, respectively. Southwall has not paid
dividends and assumed no dividend yield. The weighted average fair value of
stock options granted in the second quarter of 2003 and 2002 was $0.58 and
$6.30 per share, respectively. The Company granted 95,000 options and 219,000
options during the second quarter of 2003 and 2002, respectively.



For the employee stock purchase plans, the fair value of
each purchase right is estimated at the beginning of the offering period using
the Black-Scholes option-pricing model with the following weighted average
assumptions used in the second quarter of 2003 and 2002:  expected volatility of
96% in both the second quarter of 2003 and 2002; risk-free interest rate of 2.5%
and 4.1% in the second quarter of 2003 and 2002, respectively; and expected
lives of 0.5 year in each of the second quarter of 2003 and 2002.  The Company
has not paid dividends and assumed no dividend yield.  The weighted-average fair
value of those purchase rights granted in the second quarter of 2003 and 2002
was $0.56 and $2.65 per share, respectively.



Note 10 - Related Party Transactions:



During 1998, 1999, 2000, 2001 and 2002, the Company
lent $43,875, $25,313, $0, $18,750 and $14,700, respectively, to Thomas G. Hood,
President and Chief Executive Officer and a director, to permit him to exercise
stock options that were about to expire at a time when he was not able to sell
the shares issuable upon exercise to pay the exercise price.  The indebtedness
was represented by full recourse notes payable to the Company, which were due on
June 30, 2003 each bearing interest at the rate of 7% per annum.  The largest
amount of indebtedness outstanding under these notes at any time during 2003 was
$130,731, including interest.  While the board of director's intention was to
enforce collection of the notes, on June 30, 2003, the Company's board of
directors forgave all of the outstanding loans including interest, in lieu of a
bonus earned which otherwise would have been paid in cash.  The Company recorded
this transaction as compensation expense during the second quarter of 2003.



Note 11 - Restructuring:



The Company implemented a reduction in force at its Palo
Alto location in December 2002, and elected to vacate certain buildings in Palo
Alto.  As result of these actions, the Company incurred a restructuring charge
of $2.6 million in 2002 relating to employee severance packages and the
remaining rents due on excess facilities in Palo Alto no longer occupied.
During the first quarter of 2003, the Company recorded an accounting adjustment
in the amount of $65,000 as a reduction to its restructuring accrual.  The
adjustment was the result of modifications to the severance packages of certain
employees.  In the second quarter of 2003, the Company implemented a reduction
in force in its Tempe and Palo Alto locations.  As a result of the reduction in
force during the second quarter, the Company incurred a charge and made cash
payments of $0.1 million relating to employee severance packages.  The charge of
$0.1 million is reflected in cost of sales in the Company's condensed
consolidated statements of operations.



The remaining outstanding obligations related to the
above described restructuring at June 29, 2003 are:

`Workforce    Excess
                                     Reduction   Facilities    Total
                                     ----------  ----------  ---------
Balance at December 31, 2002....... $      122  $    2,281  $   2,403
Provision..........................        101          --        101
Adjustments to reserve.............        (65)         --        (65)
Cash payments......................       (151)       (225)      (376)
                                     ----------  ----------  ---------
Balance at June 29, 2003........... $        7  $    2,056  $   2,063
                                     ==========  ==========  =========`







Item 2



The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere in this
report. This discussion and analysis contains forward-looking statements that
involve risks and uncertainties, including those discussed below under "Forward-
Looking Statements" and "Risk Factors" and in our Annual Report on Form 10-
K for the year ended December 31, 2002. You should not place undue reliance
on these forward-looking statements. Actual results may differ materially from
those anticipated in the forward-looking statements. These forward-looking
statements represent our judgment as of the date of the filing of this
Form 10-Q.



Overview



We are a global developer, manufacturer and marketer
of thin film coatings for the automotive glass, electronic display and
architectural markets. We have developed a variety of products that control
sunlight in automotive glass, reduce light reflection and improve image quality
in electronic display products and conserve energy in architectural products.
Our products consist of transparent solar-control films for automotive glass;
anti-reflective films for computer screens, including flat panel displays, and
plasma displays; and transparent conductive films for use in touch screen and
liquid crystal displays; energy control films for architectural glass; and
various other coatings.



From our founding in 1979 through the early 1990s, we
developed and produced thin film coated substances primarily for residential and
commercial building applications, and for military applications. In the early
1990s, we began to develop products for the automotive and electronic display
markets. In 1996, we realized our first material revenue from the automotive and
electronic display markets. In 2002, automotive glass products accounted for
approximately 37% of our revenues, electronic display products accounted for
approximately 39% of our revenues, and architectural products accounted for
approximately 24% of our revenues. In the first six months of 2003,
approximately 42% of our revenues came from the automotive glass market,
approximately 41% of our revenues came from the electronic display market, and
approximately 17% of our revenues came from the architectural products market.
In the first six months of 2002, approximately 36% of our revenues came from the
automotive glass market, approximately 40% of our revenues came from the
electronic display market, and approximately 24% of our revenues came from the
architectural products market. Revenues from international customers accounted
for 85%, 87%, 85% and 91% of our net revenues in 2000, 2001, 2002, and the first
six months of 2003 respectively.



Historical Factors Affecting Our Financial Condition and
Results of Operations



As described in more detail below, our financial
condition and results of operations are affected by a number of factors,
including our financing arrangements, expansion of our manufacturing capacity,
demand for our customers' products, the mix of products that we sell, our
relationships with customers and suppliers, product warranty claims,
fluctuations in our selling, general and administrative expenses, and
restructuring costs. Over the past several years, these factors have contributed
to volatility in our results of operations and cash flows and have significantly
affected our financial position.



Our financing arrangements.  We incurred net
losses from operating activities in 1998, 1999, 2000, 2002 and the first six
months of 2003. As a result of net losses, together with the restatement in 2000
of our financial statements for prior periods and the suspension of trading of
our common stock on NASDAQ in 2000, we were in default, as of December 31,
2000, under our German bank loans, our sale-leaseback agreements and our
Japanese bank loan and the guarantee by Teijin of that loan. As a result, we
reclassified all of the debt under those arrangements as current liabilities as
of December 31, 2000. Accordingly, there was substantial doubt about our
ability to continue as a going concern at December 31, 2000.



As of December 31, 2001, December 31, 2002, and
June 29, 2003, we had made all principal and interest payments, that were
required to be made through those dates under our German bank loans and our
Japanese bank loan guaranteed by Teijin. At June 29, 2003 we were in default
with respect to the financial covenants under the Teijin guarantee. However, we
have received waivers from Teijin and the Japanese bank of such defaults for all
periods through September 30, 2003. Because the entire remaining balance
under the Japanese bank loan is due in 2003 in accordance with the scheduled
maturity, the entire balance of $1.25 million has been classified as a
current liability at June 29, 2003. We are in compliance with all of the
covenants of the German bank loans, and we have classified $9.5 million
outstanding under the German bank loans as a long-term liability at June 29,
2003.



During 1999, we entered into a sale-leaseback agreement
for two of our production machines with an equipment leasing company. The
leasing company has filed bankruptcy proceedings. Because we have an option to
purchase the machines at the end of the lease periods, we treat these sale-
leaseback arrangements as financings. During 2001, a dispute arose between us
and an agent purporting to act on behalf of the leasing company. The agent filed
suit against us in 2002 to recover the unpaid lease payments and alleged
residual value of the machines. As a result, we have classified
$3.3 million as short-term liabilities ($4.3 million outstanding under
the sale-leaseback agreement, less $1.0 million of the amounts due from the
leasing company that was not funded).



Expansion of our manufacturing capacity.  The
expansion of our manufacturing capacity has affected our results of operations,
cash flows and financial position. As of June 29, 2003, we had invested
$58.9 million in new production capacity in Tempe and Dresden since 1997.
The expansion has been financed by a combination of term loans, investment
incentive grants from the government of the State of Saxony, in Germany, short-
term borrowings, and cash flows from operating activities. Our results of
operations, profitability, cash flows, stockholders' equity and financial
position were adversely affected by initial start up costs and the lower
production yields we generally experience before our new production machines
reach commercial production levels. As a result, our financial position has been
weakened by reduced liquidity and higher leverage.



Demand for our customers' products.  Volatility in
our customers' markets affects our results of operations. Demand for our
customers' products has changed rapidly from time to time in the past and may do
so in the future. For example, partly as a result of changing demand in the
personal computer industry from 1999 through 2002, our electronic display
revenues rose from $16.0 million in 1999 to $47.7 million in 2000 then
declined to $29.6 million in 2001 and $26.6 million in 2002.
Similarly, our revenues from our automotive segment rose from $20.2 million
in 2000, to $37.4 million in 2001, and declined to $25.7 million in
2002, because of competition from alternative technology solutions. Demand for
our products can also be affected when the markets for the products in which our
films are used evolve to new technologies, such as the evolution from cathode
ray tubes, or CRTs, to flat panel displays. Consequently, as result of the
volatility in our customers' markets, our results of operations and cash flows
can vary significantly from quarter to quarter.



Product mix.  Product mix affects our gross
margins on the products we sell. Our product mix is determined by new products
and applications that we have developed, end-customer market demand for products
which use our applications, the availability of our production capacity and the
allocation of our resources to meet demand for our products in markets we
target. Generally, our gross margins on sales of electronic display film are
lower than automotive and architectural products due to the additional costs of
the outside processing required for electronic display film.



Our customer and supplier relationships.  We
derive significant benefits from our relationships with a few large customers
and suppliers. Our revenues and gross profit can increase or decrease rapidly
reflecting underlying demand for the products of one or a small number of our
customers. In addition, a customer relationship may become unprofitable for a
variety of reasons such as a reduction in our selling price. We may also be
unable to replace a customer when a relationship ends or demand for our product
declines as a result of evolution of our customer's products. In 1999, we began
our relationship with Mitsubishi Electric Company, or Mitsubishi, which
accounted for 21%, 18% and 13% of our total revenues in 2001, 2002 and the first
six months of 2003, respectively. In 1999, we expanded our relationship with
customers in the automotive glass market, including Pilkington PLC, Saint Gobain
Sekurit and Globamatrix Holdings Pte. Ltd., or Globamatrix, which
collectively accounted for approximately 46% of our total revenues in 2001, 37%
in 2002 and 31% in the first six months of 2003.  In July 2003, we entered into
a new manufacturing and supply agreement with Mitsui Chemicals, Inc.



In addition, Teijin, one of our suppliers, has guaranteed
our loan from a Japanese bank in the original principal amount of
$10.0 million, the proceeds of which we used to fund capital expenditures.
Teijin and Globamatrix are investors in us, over time having purchased a total
of 1.1 million shares of our common stock and, as of June 29, 2003,
continue to hold approximately 1.1 million shares, or approximately 9% of
the outstanding stock. In addition, to assist us with our short-term liquidity
needs, some of our key vendors, such as Teijin and Lintec Inc. have, from
time to time, extended the amount of time in which we are required to repay
amounts owed to them.



Product warranty claims.  Our gross margins and
profitability have been adversely affected from time to time by product quality
claims. From 2000 to 2002, our warranty provision has averaged approximately 4%
of net revenues. In 2002, we had certain quality claims with respect to products
produced for Globamatrix, which reduced our gross profit by approximately
$1.5 million.



Fluctuations in our selling, general and
administrative expenses.  Our selling, general and administrative expenses
increased significantly in 2002 from 2001 due to nonrecurring professional fees
associated with certain legal defenses, additional reporting requirements
associated with the recently enacted Sarbanes-Oxley Act, and the evaluation of a
potential acquisition target. In prior years, we have also incurred costs
related to legal settlements.



Restructuring costs.  Based on lower revenue
expectations, we have decided to transfer more of our product manufacturing from
our Palo Alto manufacturing site to our Tempe and Dresden manufacturing
facility, which have a lower cost base. As a consequence of this decision, we
implemented a reduction in force at our Palo Alto location in
December 2002, and elected to consolidate our Palo Alto facilities. As a
result of these actions, we incurred a restructuring charge of $2.6 million
in 2002 relating to employee severance packages and the remaining rents due on
excess facilities in Palo Alto that will not be occupied after July 2003.
Approximately $0.2 million of the restructuring costs were paid prior to
December 31, 2002. During the first quarter of 2003, the Company recorded
an accounting adjustment in the amount of $65,000 as a reduction to its
restructuring accrual.  The adjustment was the result of modifications to the
severance packages of certain employees.  In the second quarter of 2003, the
Company implemented a reduction in force in its Tempe and Palo Alto locations.
As a result of the reduction in force during the second quarter, the Company
incurred a charge and made cash payments of $0.1 million relating to employee
severance packages.  The charge of $0.1 million is reflected in cost of sales in
the Company's condensed consolidated statements of operations.



Three Months Ended June 29, 2003 compared with Three
Months Ended June 30, 2002



Net revenues.  Our net revenues decreased
$4.4 million, or 22%, from $19.7 million for the second quarter of
2002 to $15.3 million for the second quarter of 2003. Sales to the
automotive glass market decreased by $0.3 million, or 4%, from
$6.9 million in the first second quarter of 2002 to $6.6 million in
the second quarter of 2003. The decline in automotive glass sales was primarily
due to lower unit sales volume. We believe the decline was a result of increased
competition from coated glass manufacturers, which we feel has adversely
affected revenues from our automotive customers. Sales to the electronic display
market decreased by $1.5 million, or 20%, from $7.6 million in the
second quarter of 2002 to $6.1 million in the second quarter of 2003. The
decrease in our electronic display revenues resulted primarily from a decrease
in revenues from cathode ray tube, or CRT, film products was primarily due to
lower selling prices, which we believe is a result of the decline of CRT
technology as the primary technology used in computer monitors. The decrease in
our revenue from CRT film products was partially offset by increased sales of
our reflective film products used in liquid crystal displays, or LCDs, which
provide backlighting for laptop computers, and our plasma display film product,
or PDP, which provides electronic and infrared shielding for the PDP market. Our
sales to the architectural market decreased $2.5 million, or 49%, from
$5.1 million in the second quarter of 2002 to $2.6 million in the
second quarter of 2003. The decrease was primarily attributable to a reduction
in orders of our Heat Mirror



Cost of sales.  Cost of sales consists primarily
of materials and subcontractor services, labor and manufacturing overhead. Cost
of sales decreased $0.6 million, or 5%, from $13.0 million in the
second quarter of 2002, to $12.4 million in the second quarter of 2003. The
higher manufacturing costs in the second quarter of 2002 were primarily due to
higher cost of materials and outside processing costs.  In the second quarter of
2003, we incurred a charge of $0.1 million for employee severance packages as a
result of a reduction in force in our Tempe and Palo Alto facilities.  Cost of
sales as a percentage of net revenue increased from 66% in the second quarter of
2002, to 81% for the same period in 2003. Facility costs, depreciation expense
and labor costs comprise the majority of our manufacturing expenses. These costs
are relatively fixed and do not fluctuate proportionately with net revenues. As
a result of these fixed costs, the increase in cost of sales as a percentage of
revenue was primarily the result of lower revenues in the second quarter of 2003
as compared to the same period last year.



Gross profit and gross margin.  Our gross profit
decreased $3.8 million, or 57%, from $6.7 million in the second
quarter of 2002, to $2.9 million in the second quarter of 2003. Our gross
margin declined from 34% in the second quarter of 2002, to 19% in the second
quarter of 2003. The decreases in gross profit and gross margin in the 2003
period from the 2002 period were due to decreased revenues and relatively fixed
manufacturing expenses.



Operating Expenses



Research and development.  Research and
development spending decreased $0.6 million, or 29%, from $2.1 million
in the second quarter of 2002, to $1.5 million in the second quarter of
2003. Research and development expenses decreased to 10% of net revenues in the
second quarter of 2003 from 11% of net revenues in the second quarter of 2002.
The decrease in our research and development spending during the second quarter
of 2003 was primarily attributable to lower labor and occupancy costs, which
were partially offset by an increase in materials that were used in on-going
research and development activities.



Selling, general and administrative.  Selling,
general and administrative expenses were relatively the same, $3.0 million, in
the second quarter of 2002 and 2003.  Selling, general and administrative
expenses, as a percentage of revenue, increased from 15% in the second quarter
of 2002, to 206% in the second quarter of 2003.  The increase in our selling,
general and administrative expense as a percentage of revenues was primarily the
result of lower revenues in the second quarter of 2003.  In addition, we forgave
an officer loan, including interest in lieu of a bonus earned in the amount of
$0.1 million.



Income (loss) from operations.  Income from
operations decreased $3.3 million from $1.7 million in the second
quarter of 2002, to a loss of $1.6 million for the same period in 2003. The
decline was due to lower revenues and relatively fixed manufacturing expenses,
which were partially offset by lower research, selling, general and
administrative expenses.



Interest expense.  Interest expense decreased
$0.3 million, or 60%, from $0.5 million in the second quarter of 2002,
to $0.2 million in the first quarter of 2003. The reduction in interest
expense was primarily attributable to lower interest rates and the reduction of
$5.7 million in our term debt and the amount outstanding in our line of credit
from $24.3 million at June 30, 2002 to $18.6 million at June 29, 2003.



Other income, net.  Other income, net includes
interest income and foreign exchange transaction gains and losses. Other income,
net increased $0.2 million from $0.1 million in the second quarter of
2002, to $0.3 million in the second quarter of 2003. The increase in other
income, net was primarily attributable to foreign currency fluctuations. Some of
our transactions with foreign suppliers are denominated in foreign currencies,
principally the Japanese yen, and revenue from certain customers is denominated
in euros. As exchange rates fluctuate relative to the U.S. dollar, exchange
gains and losses occur.



Income (loss) before provision for income taxes.
We recorded a pre-tax profit of $1.2 million in the second quarter of 2002,
compared to a pre-tax loss of $1.5 million in the second quarter of 2003.
The decline in the 2003 period from the 2002 period was due to lower revenues
and relatively fixed manufacturing expenses during the 2003 period, which was
partially offset by lower research and development expenses, lower interest
expense and higher other income.



Provision (benefit) for income taxes.  Income
taxes increased $0.4 million, or 200%, from a benefit of $0.2 million in the
second quarter of 2002, to a provision of $0.2 million in the second quarter of
2003.  The increase in income taxes was primarily attributable to a provision to
accrue foreign income tax of $0.2 million during the second quarter of 2003.  In
addition, during 2002 the federal government enacted legislation that
established a tax holiday on alternative minimum tax obligations for 2001 and
2002 for which we received a refund during the second quarter of 2002.



Six Months Ended June 29, 2003 compared with Six Months
Ended June 30, 2002



Net revenues.  Our net revenues decreased
$8.4 million, or 22%, from $38.9 million for the first six months of
2002 to $30.5 million for the first six months of 2003. Sales to the
automotive glass market decreased by $1.2  million, or 9%, from
$13.9 million in the first six months of 2002 to $12.7 million in the
first six months of 2003. The decline in automotive glass sales was primarily
due to lower unit sales volume and reductions in our selling prices as a result
of increased competition from coated glass manufacturers, and a slowdown in
sales by several European automobile manufacturers to which we sell our
products.  Sales to the electronic display market decreased by
$2.9 million, or 19%, from $15.6 million in the first six months of
2002 to $12.7 million in the first six months of 2003. The decrease in our
electronic display revenues resulted primarily from a decrease in revenues from
cathode ray tube, or CRT, film products was primarily due to lower selling
prices, which we believe is a result of the decline of CRT technology as the
primary technology used in computer monitors. The decrease in our revenue from
CRT film products was partially offset by increased sales of our reflective film
products used in liquid crystal displays, or LCDs, which provide backlighting
for laptop computers, and our plasma display film product, or PDP, which
provides electronic and infrared shielding for the PDP market. Our sales to the
architectural market decreased $4.3 million, or 45.3%, from
$9.5 million in the first six months of 2002 to $5.2 million in the
first six months of 2003. The decrease was primarily attributable to a reduction
in orders of our Heat Mirror



Cost of sales. Cost of sales decreased
$0.8 million, or 3%, from $25.4 million in the first six months of
2002, to $24.6 million in the first six months of 2003.  Cost of sales as a
percentage of net revenues increased from 65% of net revenues in the first six
months of 2002, to 81% of net revenues for the same period in 2003.  The higher
manufacturing costs in the second quarter of 2002 in dollars were primarily due
to higher cost of materials and outside processing costs. Facility costs,
depreciation expense and labor costs comprise the majority of our manufacturing
expenses. These costs are relatively fixed and do not fluctuate proportionately
with net revenues. As a result of these fixed costs, the increase in cost of
sales as a percentage of revenue was primarily the result of lower revenues in
the first six months of 2003 as compared to the same period last year.



Gross profit and gross margin.  Our gross profit
decreased $7.6 million, or 56%, from $13.6 million in the first six
months of 2002, to $6.0 million in the first six months of 2003. Our gross
margin declined from 35.0% in the first six months of 2002, to 20% in the first
six months of 2003. The decreases in gross profit and gross margin in the 2003
period from the 2002 period were due to decreased revenues and relatively fixed
manufacturing expenses.



Operating Expenses



Research and development.  Research and
development spending decreased $0.6 million, or 16%, from $3.8 million
in the first six months of 2002, to $3.2 million in the first six months of
2003. Research and development expenses increased from 10% of net revenues in
the first six months of 2002, to 11% of net revenues in the first six months of
2003. The decrease in our research and development spending during the first six
months of 2003 was primarily attributable to lower labor and occupancy costs,
which were partially offset by an increase in materials that were used in on-
going research and development activities.   The increase in our research and
development as a percentage of revenues was primarily the result of lower
revenues in the first six months of 2003 as compared to the same period last
year.



Selling, general and administrative.  Selling,
general and administrative expenses decreased $0.8 million, or 12%, from $6.7
million in the first six months of 2002, to $5.9 million in the first six months
of 2003.  Selling, general and administrative expenses, as a percentage of
revenue, increased from 17% in the first six months of 2002, to 19% in the first
six months of 2003.  The decrease in expenses in the first six months of 2003
was mainly the result of lower employment compensation costs.  The increased in
our selling, general and administrative expense as a percentage of revenues was
primarily the result of lower revenues in the first six months of 2003.



Income (loss) from operations.  Income from
operations decreased $6.0 million from $3.0 million in the first six
months of 2002, to a loss of $3.0 million for the same period in 2003. The
decline was due to lower revenues and relatively fixed manufacturing expenses,
which were partially offset by lower research, selling, general and
administrative expenses.



Interest expense.  Interest expense decreased
$0.5 million, or 50%, from $1.0 million in the first six months of
2002, to $0.5 million in the first six months of 2003. The reduction in
interest expense was primarily attributable to lower interest rates and the
reduction of $5.7 million in our term debt and the amount outstanding in our
line of credit, from $24.3 million at June 30, 2002 to $18.6 million at June 29,
2003.



Other income, net. Other income, net, decreased
$0.1 million from $0.5 million in the first six months of 2002, to
$0.4 million in the first six months of 2003. The decrease in other income,
net was primarily attributable to foreign currency fluctuations. Some of our
transactions with foreign suppliers are denominated in foreign currencies,
principally the Japanese yen, and revenue from certain customers is denominated
in euros. As exchange rates fluctuate relative to the U.S. dollar, exchange
gains and losses occur.



Income (loss) before provision for income taxes.
We recorded a pre-tax profit of $2.5 million in the first six months of
2002, compared to a pre-tax loss of $3.2 million in the first six months of
2003. The decline in the 2003 period from the 2002 period was due to lower
revenues and relatively fixed manufacturing expenses during the 2003 period,
which was partially offset by lower research and development expenses, lower
interest expense, and higher other income.



Provision (benefit) for income taxes.
Income taxes increased $0.3 million, or 300%, from a benefit of $0.1 million in
the first six months of 2002, to a provision of $0.2 million in the first six
months of 2003.  The increase in income taxes was primarily attributable to a
provision to accrue foreign income tax of $0.2 million during the second quarter
of 2003.  In addition, during 2002 the Federal government enacted legislation
that established a tax holiday on alternative minimum tax obligations for 2001
and 2002 for which we received a refund during the second quarter of 2002.



Liquidity and Capital Resources



Liquidity:



Our cash and cash equivalents increased by
$0.4 million from $2.0 million at December 31, 2002, to
$2.4 million at June 29, 2003. Cash provided by operating activities for
the first six months of 2003 increased by $1.7 million, from $0.07 million
provided during the first six months of 2002, to $1.8 million provided
during the first six months of 2003.  The increase in cash provided by operating
activities was primarily the result of a decrease in accounts receivable and
inventory, and partially offset by a reduction in accounts payable and accrued
liabilities.   The cash used in investing activities decreased by $0.3 million,
from $2.6 million during the first six months of 2002, to $2.4 million during
the first six months of 2003.  The decrease in cash used in investing activities
was primarily the result of lower capital expenditures and a reduction in
restricted cash. Cash generated from financing activities decreased by $0.5
million, from $1.6 million during the first six months of 2002, to $1.1 million
during the first six months of 2003.  The decrease was primarily attributable to
significantly less cash received through the exercise of employee stock options,
partially offset by additional borrowings from our lines of credit during the
first six months of 2003.



We entered into an agreement with the Saxony government
in May 1999 under which we receive investment grants.  Since 1999 through
June 29, 2003, we had received $6.4 million cumulatively of the grants and
accounted for these grants by applying the proceeds received to reduce the cost
of our fixed assets of our Dresden manufacturing facility. If we fail to meet
certain requirements in connection with these grants, the Saxony government has
the right to demand repayment of the grants (see Note 6 - Government Grants
and Investment Allowances, in the notes to condensed consolidated financial
statements included herewith).  Since 1999 through June 29, 2003, we had also
received $5.7 million in investment allowances, which are reimbursements
for capital expenditures, from the Saxony government and those proceeds were
also applied to reduce the cost of our fixed assets of our Dresden manufacturing
facility. We expect to receive approximately $1.0 million in investment
allowances in the second half of 2003, based on investments made during 2002.
The funds received have been applied to reduce the cost of our fixed assets of
our Dresden manufacturing facility. Additionally, we have received
$0.5 million of Saxony government grants that as of June 29, 2003 were
recorded as an advance until we earn the grant through future expenditures. The
total annual amount of investment grants and investment allowances that we are
entitled to seek varies from year to year based upon the amount of our capital
expenditures that meet certain requirements of the Saxony government. Generally,
we are not eligible to seek total investment grants and allowances for any year
in excess of 33% of our eligible capital expenditures for that year. We expect
to continue to finance a portion of our capital expenditures in Dresden with
additional grants from the Saxony government and additional loans from German
banks, some of which may be guaranteed by the Saxony government. However, we
cannot guarantee that we will be eligible for or will receive additional grants
in the future from the Saxony government. Under the terms of our grant agreement
with the Saxony government, we are required to meet investment and hiring
targets by June 30, 2006. If we fail to meet those targets, the Saxony
government is permitted to require us to repay all grants and investment
allowances previously received by us from the Saxony government.



Borrowing arrangements:



On May 16, 2003, the Company entered into a
$10.0 million receivable financing line of credit agreements with a
financial institution that expires on May 16, 2004, subject to automatic one-
year renewals unless terminated at any time by either party.   The line of
credit bears an annual interest rate of 7% above the financial institution's
Base Rate (which was 4% at June 29, 2003), and is calculated based on the
average daily accounts receivable against which the Company has borrowed.  Half
of the $10.0 million line of credit is represented by a $5.0 million credit
line, guaranteed by the United States Export-Import Bank ("EXIM").
Availability under the EXIM line is limited to 90% of eligible foreign
receivables acceptable to the lender.  The remaining $5.0 million portion of the
$10.0 million credit line is supported by domestic receivables.  Availability
under the domestic line of credit is limited to 70% of eligible domestic
receivable acceptable to the lender.  The financial institution reserves the
right to lower the 70% and 90% of eligible receivable standards for borrowings
under the credit agreements.  In connection with the line of credit, the Company
granted to the bank a lien upon and security interest in, and right of set off
with respect to all of the Company's right, title and interest in all personal
property and other assets, but not certain of the Company Dresden assets and
properties.  The borrowing arrangements require the Company to maintain minimum
net tangible net worth of $33.0 million, current ratio of at least 0.70, and
revenues equal to or greater than 80% of revenues projected.  As part
of the agreements, the Company incurred and paid a one-time commitment fee of
$0.1 million in the second quarter of 2003, which will be amortized over the
life of the agreements.  As of June 29, 2003, the Company had approximately $3.0
million of borrowings outstanding and $1.8 million of availability under
the line of credit.  The Company was in compliance with all financial covenants
as of June 29, 2003.



At December 31, 2001 and 2002, we were not in
compliance with certain of the covenants of the guarantee by Teijin of the
Japanese bank loan. Teijin and the Japanese bank waived the defaults under
Teijin's guarantee of the loan that may exist for any measurement period through
and including September 30, 2003 arising out of our failure to comply with
the minimum quick ratio, tangible net worth and maximum debt/tangible net worth
covenants. The waiver was conditioned on our agreement to prepay
$2.5 million of the debt out of the proceeds of our follow-on public
offering, which prepayment of $2.5 million along with a scheduled principal
payment of $1.25 million was made on November 6, 2002. On May 6, 2003,
we made a scheduled payment of $1.25 million.   Under the terms of the loan
agreement, the remaining balance of $1.25 million outstanding under this
loan at June 29, 2003 is due on November 6, 2003. Accordingly, we have
classified it as current.



Our borrowing arrangements with various German banks as
of June 29, 2003 are described in Note 5 - Term Debt in the condensed
consolidated financial statements.  We are in compliance with all of the
covenants of the German bank loans, and we have classified $9.5 million
outstanding under the German bank loans as a long-term liability at June 29,
2003.



We are in default under a master sale-leaseback agreement
with respect to two of our production machines. We have withheld lease payments
in connection with a dispute with the leasing company. An agent purporting to
act on behalf of the leasing company has recently filed suit against us to
recover the unpaid lease payments and the alleged residual value of the
machines, totaling $6.5 million in the aggregate. The leasing company holds
a security interest in the production machines and may be able to repossess
them. As a result, we have classified all $3.3 million outstanding under
those agreements as short-term capital lease liabilities as of June 29, 2003.



Capital expenditures:



We anticipate spending approximately
$4.0 million in capital expenditures in 2003, approximately
$1.2 million of which will consist of progress payments for a production
machine (PM 10) in Dresden, approximately $1.5 million of which will
be used to install a new enterprise resource planning system, and approximately
$1.3 million of which will be used to maintain and upgrade our production
facilities in Palo Alto and Tempe. For the first six months of 2003, we incurred
$2.2  million in capital expenditures, compared to $3.2 million in
capital expenditures for the same period in 2002.



Financing needs:



We have prepared our consolidated financial
statements assuming we will continue as a going concern and meet our obligations
as they become due. We incurred a net loss in the first six months of 2003, and
expect to incur net losses through the remainder of 2003. These factors together
with our working capital position and our significant debt service and other
contractual obligations at June 29, 2003 raise substantial doubt about our
ability to continue as a going concern. We will continue to look for additional
financing to fund our operations.  However, we cannot provide any assurance that
alternative sources of financing will be available at all or on terms acceptable
to us. If we are unable to obtain additional financing sources, we may be unable
to satisfactorily meet all our cash commitments required to fully implement our
business plans.



In December 2002, we restructured our operations to
reduce our cost structure by reducing our work force in Palo Alto and vacating
excess facilities after consolidating our operations in Palo Alto. These actions
are expected to help improve our operating results in 2003 but will continue to
impact our operating cash flows until our lease commitments for the excess
facilities expire in December 2004.



Item 3



We are exposed to the impact of interest rate changes,
foreign currency fluctuations, and changes in the market values of its
investments.



Financing risk:  Our exposure to market rate risk
for changes in interest rates relates primarily to our term loan, specifically
our loan from Sanwa Bank, which is tied to the London Interbank Offered Rate,
and our line of credit which bears an interest rate equal to 7% above the bank
Base Rate (which was 4% at June 29, 2003) and is calculated based on the average
daily balance of the accounts receivable against which we have borrowed.  In
addition, the interest rate on one of our German loans will be reset to the
prevailing market rate in 2004 and on another of our German loans will be reset
to the prevailing market rate in 2009. Fluctuations or changes in interest rates
may adversely affect our expected interest expense. The effect of a 10%
fluctuation in the interest rate on our loan from Sanwa Bank and our line of
credit would have had an effect of less than $6,000 on our interest expense for
the first six months of 2003. The effect of interest rate fluctuations during
the first six months of 2003 was not material.



Investment risk:  We invest our excess cash in
money market accounts and, by practice, limit the amount of exposure to any one
institution. Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely affected due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. The effect of a 10% fluctuation in the interest rate of any floating
rate securities would have had an adverse effect of less than $35,000 million
for the first six months of 2003.



Foreign currency risk:  International revenues
(defined as sales to customers located outside of the United States) accounted
for approximately 91% of our total sales in the first six months of 2003.
Approximately 41% of our international revenues was denominated in euros
relating to sales from our Dresden operation. The other 59% of our international
sales were denominated in US dollars. In addition, certain transactions with
foreign suppliers are denominated in foreign currencies (principally Japanese
Yen). The effect of a 10% fluctuation in the euro exchange rate would have had
an effect of less than $1.1 million on net revenues for the first six
months of 2003 and the effect on expenses of a 10% fluctuation in the Yen
exchange rate would have been less than $0.7 million for the first six
months of 2003.



FORWARD-LOOKING STATEMENTS



This Quarterly Report contains forward-looking
statements, as that term is defined in the Private Securities Litigation Reform
Act of 1995, which are subject to a number of risks and uncertainties. All
statements other than statements of historical facts are forward-looking
statements. These statements are identified by terminology such as "may,"
"will," "could," "should," "expects," "plans," "intends," "seeks,"
"anticipates," "believes," "estimates," "potential," or "continue," or the
negative of such terms or other comparable terminology, although not all
forward-looking statements contain these identifying words. Forward-looking
statements are only predictions and include statements relating to:































You should not place undue reliance on our forward-
looking statements. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined below under "Risk Factors." These factors may cause
our actual results to differ materially from any forward-looking statement.
Although we believe the expectations reflected in our forward-looking statements
are reasonable as of the date they are being made, we cannot guarantee our
future results, levels of activity, performance, or achievements. Moreover,
neither we nor any other person assumes responsibility for the future accuracy
and completeness of these forward-looking statements.



Risk Factors



Financial Risks



Our working capital position, financial commitments and
historical performance may prevent us from obtaining additional financing.



We have prepared our consolidated financial
statements assuming we will continue as a going concern and meet our obligations
as they become due. We incurred a net loss and negative cash flows from
operations in 2002 and the first six months of 2003 and expect to incur net
losses through the rest of 2003. These factors together with our working capital
position and our significant debt service and other contractual obligations at
June 29, 2003, raise substantial doubt about our ability to continue as a going
concern without restoring profitable operations, generating cash flow from
operating activities and obtaining additional financing. These and other factors
related to our business during recent years, including the restatement in 2000
of our financial statements for prior periods, operating losses in 1998, 1999,
2000, 2002, and the first six months of 2003, our past failure to comply with
covenants in our financing agreements and suspension of trading of our common
stock on NASDAQ in 2000 may make it difficult for us to secure additional
borrowings on favorable terms or at all. We intend to seek additional
borrowings, or alternative sources of financing and difficulties in borrowing
money or raising financing could have a material adverse effect on our
operations, planned capital expenditures, ability to comply with the terms of
government grants and future growth.



Covenants or defaults under our credit agreements may
prevent us from borrowing or force us to curtail our operations.



As of June 29, 2003, we had total outstanding
obligations under our credit agreements of $18.6 million. Our inability to
make timely payments of interest or principal under these facilities could
materially adversely affect our ability to borrow money under existing credit
facilities, to secure additional borrowings or to function as a going concern.
Our current credit facilities contain financial covenants that will require us
to meet certain financial performance targets and operating covenants that limit
our discretion with respect to business matters. Among other things, these
covenants restrict our ability to borrow additional money, create liens or other
encumbrances, and make certain payments including dividends and capital
expenditures. Many of these loans contain provisions that permit the lender to
declare the loans immediately due if there is a material adverse change in our
business. These credit facilities also contain events of default that could
require us to pay off indebtedness before its maturity. The restrictions imposed
by these credit facilities or the failure of lenders to advance funds under
these facilities could force us to curtail our operations or have a material
adverse effect on our liquidity.



Our ability to borrow is limited by the nature of our
equipment and some of our accounts receivable.



Our equipment is custom designed for a special
purpose. In addition, a large portion of our accounts receivable are from
foreign sales, which are often more difficult to collect than domestic accounts
receivable. As a result of the nature of our equipment and accounts receivable,
lenders will generally allow us to borrow less against these items as collateral
than they would for other types of equipment or domestic accounts receivable, or
require us to provide additional credit enhancements.



If we default under our secured credit facilities and
financing arrangements, the lenders could foreclose on the assets we have
pledged to them requiring us to significantly curtail or even cease our
operations.



In connection with our current borrowing facilities
and financing arrangements, we have granted security interests in and liens on
substantially all of our assets, including our production machines and our
Dresden facility, to secure the loans. We are currently being sued under a
master sale-leaseback agreement with respect to two of our production machines
because we have withheld lease payments in connection with a dispute with the
leasing company. The leasing company holds a security interest in the production
machines and may be able to repossess those machines. If the leasing company
were to repossess one or more of those machines, our ability to produce product
would be materially impaired. Our revenues, gross margins and operating
efficiency would also be materially adversely affected. Our obligations under
our secured credit facilities contain cross-default and cross-acceleration
provisions and provisions that allow the lenders to declare the loans
immediately due if there is a material adverse change in our business. If we
default under the credit facilities or financing arrangements the lenders could
declare all of the funds borrowed there under, together with all accrued
interest, immediately due and payable. If we are unable to repay such
indebtedness, the lenders could foreclose on the pledged assets. If the lenders
foreclose on our assets, we would be forced to significantly curtail or even
cease our operations.



Our quarterly revenue and operating results are volatile
and difficult to predict. If we fail to meet the expectations of public market
analysts or investors, the market price of our common stock may decrease
significantly.



Our quarterly revenue and operating results have
varied significantly in the past and will likely vary significantly in the
future. Our revenue and operating results may fall below the expectations of
securities analysts or investors in future periods. Our failure to meet these
expectations would likely adversely affect the market price of our common stock.



Our quarterly revenue and operating results may vary
depending on a number of factors, including:























We expect to be subject to increased foreign currency risk
in our international operations.



Approximately 15% and 37% of our total revenues in
2002 and the first six months of 2003, respectively, were denominated in euros,
primarily related to sales from our Dresden operation, including sales to one of
our largest customers, a European automotive glass manufacturer. As a result,
our operating results and cash flows may vary due to fluctuations of the euro
against the dollar. In addition, other customers may request to make payments in
foreign currencies. Also, certain transactions with foreign suppliers are
denominated in foreign currencies, primarily yen.



The majority of our international sales are currently
invoiced and collected in U.S. dollars. A strengthening in the dollar relative
to the currencies of those countries in which we do business would increase the
prices of our products as stated in those currencies and could hurt our sales in
those countries. Significant fluctuations in the exchange rates between the U.S.
dollar and foreign currencies could cause us to lower our prices and thus reduce
our profitability and cash flows. These fluctuations could also cause
prospective customers to cancel or delay orders because of the increased
relative cost of our products.



Operational Risks



We depend on a small number of customers for nearly all of
our sales, and the loss of a large customer could materially adversely affect
our revenues or operating results.



Our ten largest customers accounted for approximately
85%, 85%, 84% and 86% of net sales in 2000, 2001, 2002, and the first six months
of 2003 respectively. We have contracts extending past 2003 with only three of
these customers. We expect to continue to derive a significant portion of our
net sales from this relatively small number of customers. Accordingly, the loss
of a large customer could materially hurt our business, and the deferral or loss
of anticipated orders from a large customer or a small number of customers could
materially reduce our revenue and operating results in any period. Some of our
largest automotive glass customers have used a technology



We must continue to develop new products or enhance
existing products on a timely basis to compete successfully in a rapidly
changing marketplace.



Our future success depends upon our 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 our customers, especially in the electronic
display and automotive markets. Technological changes, process improvements, or
operating improvements that could adversely affect us include:























Our research and development efforts may not be
successful in developing products in the time, or with the characteristics,
necessary to meet customer needs. If we do not adapt to technological changes,
or process or operating improvements, our competitive position, operations and
prospects would be materially adversely affected.



Our ability to successfully identify suitable target
companies and integrate acquired companies or technologies may affect our future
growth.



A potential part of our continuing business strategy
is to consider acquiring companies, products, and technologies that complement
our current products, enhance our market coverage, technical capabilities or
production capacity, or offer other growth opportunities. Our ability to
successfully complete acquisitions requires that we identify suitable target
companies, agree on acceptable terms, and obtain acquisition financing on
acceptable terms. In connection with these acquisitions, we could incur debt,
amortization expenses relating to identified intangibles, impairment charges
relating to goodwill, or merger related charges, or could issue stock that would
dilute our current shareholders' percentage of ownership. The success of any
acquisitions will depend upon our ability to integrate acquired operations,
retain and motivate acquired personnel, and increase the customer base of the
combined businesses. We cannot assure you that we will be able to accomplish all
of these goals. Any future acquisitions would involve certain additional risks,
including:























Failure to meet the volume requirements of our customers
may result in a loss of business or contractual penalties.



Our long-term competitive position will depend to a
significant extent on our manufacturing capacity. The failure to have sufficient
capacity, to fully utilize capacity when needed or to successfully integrate and
manage additional capacity in the future could adversely affect our
relationships with customers and cause customers to buy similar products from
our competitors if we are unable to meet their needs. For example, we believe
that we lost substantial potential architectural products sales in 2001 because
we did not have the capacity to manufacture the required amounts of products.
Also, our failure to produce required amounts of products under some of our
contracts will result in price reductions on future sales under such contracts
or penalties under which we would be required to reimburse the customer for the
full cost of any product not delivered in a timely manner, either of which would
reduce our gross margins.



We depend on our OEM customers for the sale of our
products.



We sell a substantial portion of our products to a
relatively small number of original equipment manufacturers, or OEMs. The
timing and amount of sales to these customers ultimately depend on sales levels
and shipping schedules for the OEM products into which our products are
incorporated. We have no control over the volume of products shipped by our OEM
customers or shipping dates, and we cannot be certain that our OEM customers
will continue to ship products that incorporate our products at current levels
or at all. We currently have long-term contracts with only two of our OEM
customers. Failure of our OEM customers to achieve significant sales of products
incorporating our products and fluctuations in the timing and volume of such
sales could be harmful to our business. Failure of these customers to inform us
of changes in their production needs in a timely manner could also hinder our
ability to effectively manage our business.



We rely upon our OEM customers for information relating to
the development of new products so that we are able to meet end-user
demands.



We rely on our OEM customers to inform us of
opportunities to develop new products that serve end-user demands. If our OEM
customers do not present us with market opportunities early enough for us to
develop products to meet end-user needs in a timely fashion, or if the
OEMs fail to anticipate end-user needs at all, we may fail to develop new
products or modify our existing products for the end-user markets for our
products. In addition, if our OEM customers fail to accurately anticipate end-
user demands, we may spend resources on products that are not commercially
successful.



We depend on a distributor for the sale of our after-
market products.



We primarily use one independent distributor to sell
our after-market products. We have a distribution agreement with Globamatrix
Holdings Pte. Ltd., or Globamatrix, under which we granted an exclusive
worldwide license to distribute our after-market applied film in the automotive
and architectural glass markets. Failure of Globamatrix to achieve significant
sales of products incorporating our products and fluctuations in the timing and
volume of such sales could be harmful to our business. We believe that the
success of our after-market products will continue to depend upon this
distributor.



We face intense competition, which could affect our
ability to increase our revenue, maintain our margins and increase our market
share.



The market for each of our products is intensely
competitive and we expect competition to increase in the future. Competitors
vary in size and in the scope and breadth of the products they offer. We compete
both with companies using technology similar to ours and companies using other
technologies or developing improved technologies. Direct-to-glass sputtering
represents the principal alternative technology to our sputter-coated film
products. Direct-to-glass is a mature, well-known process for applying thin film
coatings directly to glass, which is used by some of our current and potential
customers to produce products that compete with our products. This technology is
commonly used to manufacture products that conserve energy in buildings and
automobiles. Many of our current and potential competitors have significantly
greater financial, technical, marketing and other resources than we have. In
addition, many of our competitors have well-established relationships with our
current and potential customers and have extensive knowledge of our industry.



We may not be able to expand our manufacturing capacity
efficiently which could lead to lower gross margins.



Our newest production machine (PM 10) is at our
Dresden manufacturing facility, and it began commercial production in the first
quarter of 2003. In addition, we anticipate that PM 7 in our Tempe facility will
be available for limited commercial production during 2003. PM 7 is currently
being used in customer paid, research projects to develop future products, which
will utilize plasma enhanced chemical vapor disposition, or PECVD, technology.
The PECVD technique uses a gas rather than a solid target as the base material
for sputter coating onto film. During the processes of bringing PM 7 and PM 10
up to commercial production levels, we expect to have decreased manufacturing
yields and higher costs, which will lower our gross margins.



We are dependent on key suppliers of materials, which may
prevent us from delivering product in a timely manner.



We manufacture all of our products using materials
procured from third-party suppliers. We do not have long-term contracts with our
third-party suppliers, except for an agreement with a third-party supplier to
purchase Indium metal through the second quarter of 2003. Certain of the
materials we require are obtained from a limited number of sources. Delays or
reductions in product shipments could damage our relationships with customers.
Further, a significant increase in the price of one or more of the materials
used in our products could have a material adverse effect on our cost of goods
sold and operating results.



We are dependent on a few qualified subcontractors to add
properties to some of our products.



We rely on third-party subcontractors to add
properties, such as adhesives, to some of our products. There are only a limited
number of qualified subcontractors that can provide some of the services we
require and we do not have long-term contracts with any of those subcontractors.
Qualifying alternative subcontractors could take a great deal of time or cause
us to change product designs. The loss of a subcontractor could adversely affect
our ability to meet our scheduled product deliveries to customers, which could
damage our relationships with customers. If our subcontractors do not produce a
quality product, our yield will decrease and our margins will be lower. Further,
a significant increase in the price charged by one or more of our subcontractors
could force us to raise prices on our products or lower our margins, which could
have a material adverse effect on our operating results.



We are dependent on key suppliers of production machines,
which may prevent us from delivering an acceptable product on a timely basis and
limit our capacity for revenue growth.



Our production machines are large, complex and
difficult to manufacture. It can take up to a year from the time we order a
machine until it is delivered. Following delivery, it can take us, with the
assistance of the manufacturer, up to six additional months to test and prepare
the machine for commercial production. There are a very limited number of
companies that are capable of manufacturing these machines. Our inability in the
future to have new production machines manufactured and prepared for commercial
production in a timely manner would prevent us from delivering product on a
timely basis and limit our capacity for revenue growth.



Fluctuations or slowdowns in the overall electronic
display industry have and may continue to adversely affect our revenues.



Our business depends in part on sales by
manufacturers of products that include electronic displays. The markets for
electronic display products are highly cyclical and have experienced periods of
oversupply resulting in significantly reduced demand for our products. For
example, due to the deteriorating economic environment, sales by flat cathode
ray tube manufacturers decreased in 2001 and further in 2002, contributing to
our electronic display product revenues declining by 38% 2001, and another 11%
for 2002. Mitsubishi Electric is the only CRT manufacturer that buys our anti-
reflective ("AR") film and it has decided to consolidate all of its manufacture
of this product to Japan. In connection with that consolidation, Mitsubishi
expects to cease production of the 17" AR product in its Mexico plant by the
third quarter of 2003. We expect to continue to produce AR product in the 22"
and 19" sizes for Mitsubishi Electric. We expect a reduction in revenues of the
AR product in 2003 and a further reduction in succeeding years. If the flat
display and other electronic display markets in which we sell our products do
not recover or experience further slowdowns in the future, it could cause
revenues from our electronic display products to decrease further.



Performance, reliability or quality problems with our
products may cause our customers to reduce or cancel their orders.



We manufacture our products based on specific,
technical requirements of each of our customers. We believe that future orders
of our products will depend in part on our ability to maintain the performance,
reliability and quality standards required by our customers. If our products
have performance, reliability or quality problems, then we may experience:



















For example, in 1998, our operating results were
materially adversely affected by quality problems associated with the electronic
display film produced by us for one of our largest customers.



If we fail to recruit and retain a significant number of
qualified technical personnel we may not be able to develop, enhance and
introduce our products on a timely basis, and our business will be harmed.



We require the services of a substantial number of
qualified technical personnel. Intense competition and aggressive recruiting, as
well as a high-level of employee mobility characterize the market for skilled
technical personnel. These characteristics make it particularly difficult for us
to attract and retain the qualified technical personnel we require. We have
experienced, and we expect to continue to experience, difficulty in hiring and
retaining highly skilled employees with appropriate technical qualifications. It
is especially difficult for us to recruit qualified personnel to move to the
location of our Palo Alto, California offices because of the high-cost of
living. If we are unable to recruit and retain a sufficient number of qualified
technical employees, we may not be able to complete the development of, or
enhance, our products in a timely manner. As a result, our business may be
harmed and our operating results may suffer.



We may be unable to attract or retain the other highly
skilled employees that are necessary for the success of our business.



In addition to our dependence on our technical
personnel, our success also depends on our continuing ability to attract and
retain other highly skilled employees. We depend on the continued services of
our senior management, particularly Thomas G. Hood, our President and Chief
Executive Officer. We do not have employment contracts with any of our officers
or key person life insurance covering any officer or employee. Our officers have
technical and industry knowledge that cannot easily be replaced. Competition for
similar personnel in our industry where we operate is intense. We have
experienced, and we expect to continue to experience, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. If we do not
succeed in attracting or retaining the necessary personnel, our business could
be adversely affected.



If we are unable to adequately protect our intellectual
property, third parties may be able to duplicate our products or develop
functionally equivalent or superior technology.



Our success depends in large part upon our
proprietary technology. We rely on our know-how, as well as a combination of
patent, trademark and trade secret protection, to establish and protect our
intellectual property rights. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult. Our means of protecting our proprietary rights
may not be adequate. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States. During 2001, one of our U.S. patents relating to our
architectural products expired. In the next three years, two more U.S. patents
will expire. Expiration of these patents or our failure to adequately protect
our proprietary rights may allow third parties to duplicate our products or
develop functionally equivalent or superior technology. In addition, our
competitors may independently develop similar technology or design around our
proprietary intellectual property.



Our business is susceptible to numerous risks associated
with international operations.



We have expanded our operations and hired additional
personnel to address international markets for the thin film coatings industry.
International revenues amounted to approximately 85%, 87%, 85% and 91% of our
net revenues during 2000, 2001, 2002, and the first six months of 2003
respectively. The distance between all three of our manufacturing locations
creates logistical and communications challenges. In addition, to achieve
acceptance in international markets, our products must be modified to handle a
variety of factors specific to each international market as well as local
regulations. We may also be subject to a number of other risks associated with
international business activities. These risks include:















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



We use hazardous chemicals in producing our products
and have air and water emissions that require controls. As a result, we are
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 our
products, compliance with which is expensive. Our failure to comply with current
or future regulations could result in the imposition of substantial fines on us,
suspension of production, alteration of our manufacturing processes, increased
costs or cessation of operations.



We rely on our domestic sales representatives, without
whom our architectural product sales may suffer.



We use independent sales representatives to promote
our Heat Mirror products to architects in the United States. If some or all of
our sales representatives experience financial difficulties, or otherwise become
unable or unwilling to promote our products, our business could be harmed. These
sales representatives could reduce or discontinue promotion of our products.
They may not devote the resources necessary to provide effective marketing
support to us. In addition, we depend upon the continued viability and financial
resources of these representatives, many of which are small organizations with
limited working capital. These representatives, in turn, depend substantially on
general economic conditions and other factors affecting the markets for the
products they promote. We believe that our success in this market will continue
to depend upon these sales representatives.



We may experience unanticipated warranty or other claims
with respect to our products which may lead to extensive litigation costs and
expenses.



In the ordinary course of business, we have
periodically become engaged in litigation principally as a result of disputes
with customers of our architectural products. We have settled some of these
suits and others are pending. We may become engaged in similar or other lawsuits
in the future. For example, we have recently received a letter that threatens
litigation based upon the allegation that a sealant provided by a third party
and used with our film was defective, and as a result the plaintiff has suffered
elevated warranty replacement claims and costs. Some of our products that have
been the basis for lawsuits against us could be the basis for future lawsuits.
An adverse outcome in the defense of a warranty or other claim could subject us
to significant liabilities to third parties. Any litigation, regardless of the
outcome, could be costly and require significant time and attention of key
members of our management and technical personnel.



We may face extensive damages or litigation costs if our
insurance carriers seek to have us indemnify them for settlements of past and
outstanding litigation.



Several of our insurance carriers have reserved their
rights to seek indemnification from us for substantial amounts paid to
plaintiffs by the insurance carriers as part of settlements of litigation
relating to our architectural products. Our insurance carriers in a case in
which the plaintiff alleged we were responsible for defects in window products
manufactured by others have advised us that they intend to seek reimbursement
for settlement and defense costs. Any claims, with or without merit, could
require significant time and attention of key members of our management and
result in costly litigation.



Item 4



As of June 29, 2003, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and the Chief Financial Officer of the
Company, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer of the Company concluded that as of the date of such evaluation, the
Company's disclosure controls and procedures were effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings with the
Securities and Exchange Commission. The Company notes, however, that the design
of any system of controls is based in part upon certain assumptions about the
likelihood of future events, and the Company cannot assure you that any system
of internal controls will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. There have been no
changes in the Company's internal control over financial reporting that occurred
during the quarter ended June 29, 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting subsequent to the date of their evaluation.





PART II



Item 1



The Company was a defendant in an action filed on
April 5, 1996 entitled "Four Seasons Solar Products Corp. vs.
Black & Decker Corp., Bostik, Inc. and Southwall
Technologies Inc.," No. 5 CV1695, pending in the United States
District Court for the Eastern District of New York. By order dated
April 8, 2003 the Court dismissed the remaining claim for breach of
contract and ordered that judgment be entered for Southwall. The plaintiff has
filed a Notice of Appeal.



The Company has been named as a defendant, along with
Bostik, Inc., in an action entitled "WASCO Products, Inc. v. Southwall
Technologies Inc. and Bostik, Inc.," Civ. Action No. C 02-2926
CRB, which was filed in Federal District Court for the Northern District of
California on June 18, 2002. The Company has filed a Motion to Dismiss and
has filed an Opposition to Class Certification. The Motion to Dismiss was
granted to the Company on May 29, 2003.  The plaintiff filed its Third Amended
Complaint on June 27, 2003.



The Company is a defendant in an action entitled "Portfolio
Financial Servicing Company v. Southwall Technologies Inc.," which was
filed in state court in Utah on May 22, 2002. The Company and the
plaintiffs entered into a settlement agreement on July 31, 2003, pursuant to
which this claim will be extinguished by payment from the Company to the
plaintiffs of $2.5 million.  The settlement agreement is subject to the
satisfaction of certain conditions, which must be fulfilled on or before October
1, 2003, including the payment of the settlement amount, a significant portion
of which the Company may need to borrow.  There can be no assurance that the
Company will be able to borrow the amount it needs to pay the settlement.
Pursuant to the settlement agreement, the Company has paid the plaintiffs
$250,000, which will be applied against the settlement amount if the conditions
to settlement are satisfied and which will be applied against the alleged unpaid
lease obligations if the conditions are not satisfied. If the conditions to the
settlement are not fulfilled, the matter will continue to be litigated.



Other litigation filed against the Company was described
under Item 3 in the Company's Form 10-K filed on March 31, 2003. No other
material developments have occurred with respect to the litigation described
therein.



In addition, the Company is involved in certain other
legal actions arising in the ordinary course of business. The Company believes,
however, that none of these actions, either individually or in the aggregate,
will have a material adverse effect on the Company's business, its consolidated
financial position, its results of operations, or its operating cash flows.



Item 2



Not applicable.



Item 3



Not applicable.



Item 4



On May 22, 2003, we held our Annual Meeting of
Stockholders.  The following matters were voted upon:



1. Our stockholders elected William A. Berry, Thomas G.
Hood, Bruce M. Jaffe, Jami K. Nachtsheim, Noriyuki Nakamura, Joseph B. Reagan,
Walter C. Sedgwick, and Robert C. Stempel as directors to serve for the ensuing
year.



|Director           | For        | Withheld
|------------------ | ---------- | --------
|William A.
Berry   | 10,725,811 | 222,504 
|Thomas G.
Hood     | 10,116,304 | 832,011 
|Bruce M.
Jaffe     | 10,734,311 | 214,004 
|Jami K.
Nachtsheim | 10,735,311 | 213,004 
|Noriyuki
Nakamura  | 10,122,710 | 825,605 
|Joseph B.
Reagan   | 10,737,066 | 211,249 
|Walter C.
Sedgwick | 10,737,066 | 211,249 
|Robert C.
Stempel  | 10,737,066 | 211,249 



There were no votes abstaining, nor were there any broker
non-votes, in the selection of directors.







Item 5



None.



Item 6



(a)	Exhibits





|ExhibitNumber | Item                                                                                                                                                                                                                                                            
|------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |                                                                                                                                                                                                                                                                 
|10.123        | Domestic Factoring Agreement
dated May 16, 2003, between Pacific Business Funding and the
Company.                                                                                                                                                              
|10.123.1      | Amendment to the Domestic
Factoring Agreement dated June 16, 2003, between Pacific Business Funding and
the Company.                                                                                                                                            
|10.124        | Intellectual Property
Security Agreement dated May 16, 2003, between Pacific Business Funding and the
Company.                                                                                                                                                  
|10.125        | Export-Import Working Capital
Guarantee Program Borrower Agreement, between Pacific Business Funding and the
Company.                                                                                                                                           
|10.126        | Export-Import Factoring
Agreement dated May 16, 2003, between Pacific Business Funding and the
Company.                                                                                                                                                         
|10.126.1      | Amendment to the Export-
Import Factoring Agreement dated June 16, 2003, between Pacific Business Funding
and the Company.                                                                                                                                      
|10.127        | Manufacturing and Supply
Agreement between the Company and Mitsui Chemicals, Inc. dated July 19, 2003
(portions of this exhibit have been omitted based on a request for confidential
treatment; the non-public information has been filed with the
Commission).
|31.1          | Certification of Principal
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                         
|31.2          | Certification of Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                         
|32.1          | Certification of Principal
Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                          
|32.2          | Certification Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                             



(b)	Reports on Form 8-K



On July 31, 2003, the Company filed a Current Report on
Form 8-K, disclosing under Item 12 a press release announcing the Company's
earnings results for the second quarter of 2003, which contained the condensed
consolidated Income Statement for the second quarter and six months ended June
29, 2003 and June 30, 2002 and Statements of Cash Flows for the quarters ended
June 29, 2003 and June 30, 2002, and the condensed consolidated Balance Sheet
for the periods ended June 29, 2003 and December 31, 2002.





SIGNATURES



Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.



Dated: August 14, 2003





| | By: | /s/ Thomas G. Hood
Thomas G. Hood
President and Chief Executive Officer                 
| | --- | ----------------------------------------------------------------------------------------
| | By: | /s/ Michael E. Seifert
Michael E. Seifert
Sr. Vice President and Chief Financial Officer





Exhibit 31.1



CERTIFICATION

I, Thomas G. Hood, certify that:



1. I have reviewed this quarterly report on Form 10-Q of
Southwall Technologies Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
6. All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
7. Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.



| | Date: August
14, 2003 |  | By:                                   
| | --------------------- |  | --------------------------------------
| |                       |  |                                       
| |                       |  | /s/ Thomas G.
Hood                    
| |                       |  | Thomas G. Hood
Chief Executive Officer



EXHIBIT 31.2

CERTIFICATION

I, Michael E. Seifert, certify that:



1. I have reviewed this quarterly report on Form 10-Q of
Southwall Technologies Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):



a)	All significant deficiencies and material weakness in
the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and



b)	Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.



| | Date: August
14, 2003 |  | By:                                       
| | --------------------- |  | ------------------------------------------
| |                       |  |                                           
| |                       |  | /s/ Michael E.
Seifert                    
| |                       |  | Michael E. Seifert
Chief Financial Officer



EXHIBIT 32.1







CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the accompanying
Quarterly Report on Form 10-Q of Southwall Technologies Inc.(the
"Company"), for the quarter ended June 29, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"),
I, Thomas G. Hood, the Chief Executive Officer of the Company, hereby certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



2) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.







| | August 14,
2003 | By: | /s/ Thomas G.
Hood                    
| | --------------- | --- | --------------------------------------
| |                 |     | Thomas G. Hood
Chief Executive Officer





A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.

In accordance with Item 601 of Regulation S-K, this certification is being
"furnished" as Exhibit 32.1 to the Company's quarterly report and
shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934 (the "Exchange Act") or otherwise
subject to the liabilities of that section, nor shall it be deemed incorporated
by reference in any filing under the Securities Act of 1933 or the Exchange Act,
except as expressly set forth by specific reference in such a filing.



EXHIBIT 32.2







CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the accompanying
Quarterly Report on Form 10-Q of Southwall Technologies Inc.(the
"Company"), for the quarter ended June 29, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"),
I, Michael E. Seifert, the Chief Financial Officer of the Company, hereby
certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



2) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.







| | August 14,
2003 | By: | /s/ Michael E.
Seifert                    
| | --------------- | --- | ------------------------------------------
| |                 |     | Michael E. Seifert
Chief Financial Officer





A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.

In accordance with Item 601 of Regulation S-K, this certification is being
"furnished" as Exhibit 32.2 to the Company's quarterly report and
shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934 (the "Exchange Act") or otherwise
subject to the liabilities of that section, nor shall it be deemed incorporated
by reference in any filing under the Securities Act of 1933 or the Exchange Act,
except as expressly set forth by specific reference in such a filing.



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