SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(MARK ONE)

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

     For the quarterly period ended April 2, 2000
                                        ---------

[ ]  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.
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)


                 DELAWARE                                  94-2551470
      -------------------------------                 ---------------
      (State or other jurisdiction of                   (I.R.S. Employer
       incorporation or organization)                 Identification Number)


   1029 Corporation Way, Palo Alto, California                94303
   -------------------------------------------              -------
    (Address of principal executive offices)                (Zip Code)


Registrant's telephone number, including area code: (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  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                         Yes    X          No
                              -----

As of April 17,  2000 there were  7,608,547  shares of the  Registrant's  Common
Stock outstanding.


                                        1
<PAGE>


                           SOUTHWALL TECHNOLOGIES INC.

                                      INDEX



                          PART I FINANCIAL INFORMATION

Item 1    Financial Statements:                                      Page Number

            Consolidated Balance Sheets - April 2, 2000
            and December 31, 1999..............................................3

            Consolidated Statements of Operations -
            three months ended April 2, 2000
            and April 4, 1999..................................................4

            Consolidated Statements of Cash Flows -
            three months ended April 2, 2000
            and April 4, 1999..................................................5

            Notes to Consolidated Financial Statements.........................6

Item 2      Management's Discussion and Analysis
            of Financial Condition and Results of Operations..................10

Item 3      Quantitative and Qualitative Disclosures about Market Risk........13

                            PART II OTHER INFORMATION

Item 1      Legal Proceedings.................................................14

Item 2      Changes in Securities.............................................14

Item 3      Defaults Upon Senior Securities...................................14

Item 4      Submission of Matters to a Vote of Stockholders...................14

Item 5      Other Information.................................................14

Item 6      Exhibits and Reports on Form 8-K..................................14

            Signatures........................................................15


                                       2
<PAGE>
                          PART I FINANCIAL INFORMATION

Item 1 - Financial Statements:

                           SOUTHWALL TECHNOLOGIES INC.
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)


                                              (Unaudited)
ASSETS                                          April 2,   December 31,
                                                  2000        1999
                                                --------    --------

Current assets:
    Cash and cash equivalents                   $     25    $  1,794
    Restricted cash                                3,140       1,883
    Accounts receivable, net of allowance
      for doubtful accounts of $852 and $875      14,465      11,417
    Inventories                                   13,232       7,601
    Other current assets                           1,266       1,294
                                                --------    --------
        Total current assets                      32,128      23,989

Property and equipment, net                       45,190      42,824
Other assets                                       3,176       3,310
                                                --------    --------

    Total Assets                                $ 80,494    $ 70,123
                                                ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Bank credit line                            $  7,997    $  4,849
    Accounts payable                              13,286       9,775
    Accrued compensation                           1,079       1,817
    Other accrued liabilities                      2,552       2,410
    Current portion of long-term debt              1,658       2,091
                                                --------    --------
        Total current liabilities                 26,572      20,942

Long-term debt                                    25,047      21,789
Deferred income taxes                                437         437
                                                --------    --------
        Total liabilities                         52,056      43,168

Stockholders' equity:
    Common stock, $.001 par value,
      20,000 shares authorized:
      Issued and outstanding: 7,889 and 7,598          8           8
    Capital in excess of par value                51,641      51,771
    Less cost of treasury stock, 290
        and 371 shares                            (1,474)     (1,888)
    Notes Receivable                                (597)       (906)
    Translation loss on subsidiary                   (44)        (40)
    Accumulated deficit                          (21,096)    (21,990)
                                                --------    --------
        Total stockholders' equity                28,438      26,955
                                                --------    --------

    Total liabilities and

         stockholders' equity                   $ 80,494    $ 70,123
                                                ========    ========


          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

<TABLE>
                                 SOUTHWALL TECHNOLOGIES INC.
                            CONSOLIDATED STATEMENTS OF OPERATIONS
                            (in thousands, except per share data)
                                         (Unaudited)
<CAPTION>
                                                                       Three Months Ended
                                                                     ----------------------
                                                                      April 2,     April 4,
                                                                        2000         1999
                                                                     --------      --------
<S>                                                                  <C>           <C>
Net revenues                                                         $ 17,640      $ 10,858
                                                                     --------      --------

Costs and expenses:
     Cost of sales                                                     12,317         8,911
     Research and development                                           1,511         1,233
     Selling, general and
         administrative                                                 2,412         1,966
                                                                     --------      --------

     Total costs and expenses                                          16,240        12,110
                                                                     --------      --------
Income(loss) from operations                                            1,400        (1,252)

Interest expense, net                                                    (470)         (255)
                                                                     --------      --------
Income(loss)before income taxes                                           930        (1,507)

Provision for income taxes                                                 36            12
                                                                     --------      --------

Net Income(loss)                                                     $    894      $ (1,519)
                                                                     ========      ========

Net Income(loss) per share - Basic                                   $   0.12      $  (0.21)
                                                                     ========      ========
                           - Diluted                                 $   0.11      $  (0.21)
                                                                     ========      ========

Weighted average shares of
common stock and common
stock equivalents - Basic                                               7,567         7,324
                  - Diluted                                             8,380         7,324

<FN>
            See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


                                       4
<PAGE>


                           SOUTHWALL TECHNOLOGIES INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (Unaudited)

                                                            Three Months Ended
                                                           April 2,    April 4,
                                                             2000        1999
                                                           --------    --------
Cash flows from (used in) operating activities:
    Net income (loss)                                      $    894    $ (1,519)
    Adjustments to reconcile net income (loss)
      to net cash provided by (used in)
      operating activities:
    Depreciation and amortization                             1,208       1,152
    Translation loss on foreign subsidiary                       (4)        --
    Decrease (increase) in accounts receivable               (3,048)      2,495
    Decrease (increase) in inventories                       (5,631)       (464)
    Decrease (increase) in other current assets                 124        (286)
    (Decrease) increase in accounts payable
      and accrued liabilities                                 2,915      (2,912)
                                                           --------    --------
Cash used in operating activities                            (4,799)     (1,534)
                                                           --------    --------
Cash flows from investing activities:
    Decrease (increase) in short-term investments              --             7
    Expenditures for property and equipment
     and other assets                                        (3,536)     (2,530)
                                                           --------    --------
Net cash used in investing activities                        (3,536)     (2,523)
                                                           --------    --------
Cash flows from financing activities:
    Proceeds from long-term debt                              3,898          39
    Principal payments on long-term debt                     (1,073)       (388)
    Proceeds from bank line of credit                        11,933         500
    Principal payments on bank like of credit                (8,785)       --
    Repayment of stock option loans                             309        --
    Issuance of treasury stock, net                             284        --
                                                           --------    --------
Net cash provided by financing activities                     6,566         151
                                                           --------    --------

Net decrease in cash and cash
 equivalents                                                 (1,769)     (3,906)

Cash and cash equivalents, beginning of year                  1,794       4,136
                                                           --------    --------
Cash and cash equivalents, end of period                   $     25    $    230
                                                           ========    ========

          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>
                           SOUTHWALL TECHNOLOGIES INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (in thousands)
                                   (Unaudited)

         Note 1 - Interim Period Reporting:

              While the information  presented in the accompanying  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,  and 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.   These
         consolidated  financial  statements  should be read in conjunction with
         the financial  statements  contained in the Company's Form 10-K for the
         year ended December 31, 1999. The condensed  consolidated balance sheet
         at  December  31,  1999 has been  derived  from the  audited  financial
         statements as of that date.  The results of operations  for the interim
         periods  presented  are not  necessarily  indicative  of the  operating
         results of the full year.

         Note 2 - Balance Sheet:

              The  restricted  cash  reflected  on the balance  sheet is for the
         purpose of the German project.

              Inventories are stated at the lower of cost or market  (determined
         by  the  first-in,  first-out  method).  Inventories  consisted  of the
         following:

                                        April 2, 2000      December 31, 1999
                                        -------------      -----------------

             Raw materials                   $5,283             $2,940
             Work-in-process                  6,695              2,972
             Finished goods                   1,254              1,689
                                             ------              -----
                 Total                      $13,232             $7,601
                                             ======              =====

         Note 3 - Line of Credit Agreement:

              The Company has an $8 million receivable  financing line of credit
         ("line of credit")  with a bank.  Availability  under the line is based
         upon 80% of the approved accounts receivable balance and the line bears
         a finance fee of 0.088% per month  (approximately 12% per annum) of the
         average daily account balance outstanding during the settlement period.
         In connection with the line of credit,  the Company granted to the bank
         a continuing  lien upon and security  interest in, and right of set off
         with respect to all of the Company's rights,  title and interest in all
         accounts receivable,  inventory,  monies, remittances and fixed assets.

                                       6
<PAGE>

         Note 4 - Net income (loss) per share:

              Basic net income (loss) per share is computed as net income (loss)
         available to common stockholders divided by the weighted-average number
         of common shares outstanding.  Diluted net income per share is computed
         as  net  income  available  to  common  stockholders   divided  by  the
         weighted-average  number  of common  shares  outstanding  and  dilutive
         potential   common  shares   outstanding,   including   stock  options,
         restricted  stock awards,  warrants and other  convertible  securities.
         Diluted  net loss per share is  computed  the same as basic net  income
         (loss) per share since the  inclusion of potential  common shares would
         result in an anti-dilutive (lower) loss per share amount.

              During the period  ended  April 2, 2000,  the total  amount of the
         differences in the denominator is attributable to the effect of 813,000
         outstanding non-exercised, dilutive common stock options.

         Note 5 - Long-term debt:

              The Company's long-term debt consists of the following at April 2,
              2000:


              Promissory note dated December 16, 1996.............     $   961
              Promissory note dated May 6, 1997...................      10,000
              Sale-leaseback agreement dated July 19,1999.........       2,934
              Sale-leaseback agreement dated October 19, 1999.....       3,600
              Bank loan dated May 28, 1999........................       3,565
              Bank loan dated August 14, 1999.....................       1,612
              Bank loan dated May 12, 1999........................       3,890
              Other...............................................         143
                                                                      --------
              Total...............................................      26,705
              Less current portion................................       1,658
                                                                      $ 25,047
                                                                      ========

              The  promissory  note  dated  December  16,  1996 is  payable to a
         leasing  company.   The  borrowings  are   collateralized   by  certain
         production  equipment,  bear  interest at an annual rate of 9.7037% and
         are  subject to  certain  financial  covenants.  The Note is payable in
         monthly installments plus interest for a term of 48 months. At April 2,
         2000 the Company was not in  compliance  with certain of the  financial
         covenants  pertaining to this promissory note. The Company has received
         a waiver  from the  leasing  company  for  failure to comply  with such
         covenants   through  the  remaining   term  of  the  loan.  The  amount
         outstanding  is repayable  within the year and has been  classified  as
         current debt.

              The  promissory  note dated May 6, 1997 is payable to a bank.  The
         note payments are guaranteed by Teijin Limited of Japan  ("Teijin"),  a
         stockholder  and  supplier  of the  Company.  The Teijin  guarantee  is
         collateralized  by certain  equipment  located in the Company's  Tempe,
         Arizona 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
         0.4375%,  (6.1313%  at April 2,  2000),  and the  Company is subject to
         certain financial covenants. A loan guarantee service fee is payable to
         Teijin semi-annually on the outstanding balance at the rate of 0.5625%.
         The note provides for semi-annual  payments of interest only during the
         first four years,  followed by semi-annual  installments  plus interest
         for the  remaining  three and one half year  term.  Teijin  also  holds
         warrants in 1997 to purchase  158,000  shares of the  Company's  Common
         Stock at $9.00 per share.  These  warrants  expire on May 30, 2000.  At
         April 2, 2000 the Company  was not in  compliance  with  certain of the
         financial  covenants  with Teijin,  the  guarantor,  pertaining to this
         promissory note. The Company received a waiver from Teijin through June
         30, 2001.


                                       7

<PAGE>



              During 1999, the Company entered into two equipment sale-leaseback
         agreements with a leasing company  ("Lessor").  Because the Company has
         an option to purchase the equipment at a price to be determined between
         the  Company  and  the  Lessor  at the  end of the  lease  period,  the
         sale-leaseback  agreements  have been treated as  financing.  One lease
         agreement has a lease term of three years and the other lease agreement
         has an  initial  lease term of two years with an option to extend it an
         additional  year.  At April 2, 2000,  the Company had a total of $6,534
         outstanding and due under the leases.  The leases are collateralized by
         the leased  equipment  and certain  other  production  equipment of the
         Company.  The effective  interest rate of both leases is  approximately
         13% per annum and they are repayable over their term  commencing in May
         2000. Additionally,  the Company has provided the Lessor an irrevocable
         standby letter of credit in the amount of $500 to collateralize  all of
         the Company's obligations under these agreements.  The letter of credit
         shall not expire before January 1, 2002. In addition, $1 million of the
         amount  received  from the Lessor is in an escrow  account  and will be
         released upon the Company meeting certain financial conditions.  Due to
         the  uncertainty of compliance  with these  financial  conditions,  the
         Company has  classified the amount in escrow under  non-current  "Other
         Assets."

              On May 28, 1999, the Company  entered into a loan agreement with a
         German bank that  provides for  borrowings  up to $6.4 million (DM 12.5
         million).  Under the terms of this  agreement,  the funds  will be used
         solely for capital investment by the German subsidiary. The term of the
         loan is for 20 years and the principle is repayable after the end of 10
         years in 20 equal  semi-annual  payments.  The loan bears  interest  at
         7.10% per annum for the first ten  years,  and will be  revised  to the
         prevailing rate at the end of the tenth year.

              On May 12, 1999, the Company  entered into a loan agreement with a
         German bank that  provides  for  borrowings  up to $3.9 million (DM 7.5
         million).  Under the terms of this  agreement,  the funds  will be used
         solely for capital investment by the German subsidiary. The term of the
         loan is for a period of 10 years and the  principal is repayable  after
         the end of 5 years in 10 equal  semi-annual  payments.  The loan  bears
         interest  at 7.10%  per annum for the  first  five  years,  and will be
         revised to the  prevailing  rate at the end of the fifth year. The loan
         is repayable in Deutscheman.

              An additional loan for $733 (DM 1.5 million) was received from the
         bank discussed above.  This loan is an advance on a government grant to
         be received  approximately  August 2001.  The proceeds of the grant are
         collateral  for  the  loan  and,  per  legal  arrangement  will be paid
         directly to the bank by the government at the time of issue.

              The preceding three loans are  collateralized  by the building the
         machine(s) and the land owned by the German subsidiary.

              On August 14, 1999, the Company entered into a loan agreement with
         a German bank that  provides for  borrowings up to $1.7 million (DM 3.3
         million).  Under the terms of this  agreement,  the funds  will be used
         solely for capital investment by the German  subsidiary.  The principle
         balance  is due in a  single  installment  on June 30,  2009 and  bears
         interest  at a rate  of  5.75%  per  annum.  The  interest  is  payable
         quarterly.  50% of the loan is restricted in an escrow  account for the
         duration  of the  loan  period  and  was,  therefore,  classified  as a
         non-current "Other Asset."

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

              Principal reductions of long-term debt are scheduled as follows:

              Year                             Amount
              ----                             ------
              2000                           $  1,658
              2001                              4,538
              2002                              4,870
              2003                              4,073

                                       8

<PAGE>

              2004                              2,500
              2005                                  -
              Thereafter                        9,328
                                               ------
              Total                          $ 26,967
                                             ========

              The Company  incurred total interest expense of $1,478 and $287 in
         the first quarter of 2000 and 1999, respectively. Of these amounts, the
         Company  capitalized $1,065 and nil in the first  quarter of 2000 and
         1999,  respectively as part of the costs related to the construction of
         new manufacturing facilities in Tempe, Arizona.

         Note 6 - Contingencies:

              The Company  has been named a  co-defendant  in a purported  class
         action  lawsuit.  Plaintiffs  contend  that  heat  mirror  glass  units
         manufactured  throughout  the  country  are  subject  to  clouding  and
         discoloration.  The Company is in the process of filing  demurrers  and
         setting pleadings. In addition,  several of the Company's co-defendants
         have settled  their  portions of the case.  At this point,  the Company
         intends to vigorously defend this lawsuit by moving to defeat the class
         action certification.

               In 1997,  the Company was named a defendant  in a lawsuit  with a
         manufacturer  of insulated  glass units wherein the  plaintiff  claimed
         that the  insulated  glass  manufactured  with the use of  coated  film
         manufactured  by the  Company  was  subject  to  various  failures  and
         deficiencies,  giving  rise to  warranty  and  other  consumer  claims.
         Plaintiff  is  claiming  damages for past  replacement  cost and future
         potential  claims.  The  Company  is in the  process of  negotiating  a
         settlement of these claims.

              The company has been named a defendant in a lawsuit filed on April
         5, 1996 by one of its customers in the United States District Court for
         the Eastern  District of New York. The lawsuit  alleges  certain unfair
         competition,  tort and contractual  violations by the Company and seeks
         relief in an aggregate  amount in excess of $32  million.  In addition,
         the Company is involved in a number of other legal  actions  arising in
         the ordinary course of business.

               The  Company  believes,  that the  various  asserted  claims  and
         litigation  in which it is  involved  will not  materially  affect  its
         consolidated  financial  position,  future  operating  results  or cash
         flows.

               In 1995 the  Company  started  selling its  anti-reflective  film
         under a Supply Agreement to Sony Corporation of Japan ("Sony").  In the
         fourth quarter of 1998 the Company  experienced  some quality  problems
         related  to  the   anti-reflective   film  that  did  not  meet  Sony's
         specifications.  The Company further did not meet the minimum  shipping
         requirements stated in the Supply Agreement. As a result, in the fourth
         quarter of 1998,  the Company  recorded a $4.0 million  charge to cover
         any loss contingency,  involving write-off of inventory,  sales returns
         and any penalties  associated with the shipment  shortfall.  During the
         second  quarter of 1999,  the Company  reached a settlement  with Sony,
         wherein Sony agreed to release the Company from any and all  penalties,
         claims,  demands and liabilities that Sony has or will have against the
         Company in connection with the shipment shortfall  experienced in 1998.
         In  consideration  of Sony's  waiver,  the  Company  agreed to wave its
         claims for payment of the  outstanding  accounts  receivable  with Sony
         totaling $2.5 million brought forward from 1998. The amount was written
         off against the sales return  reserve  booked in 1998.  As of September
         30, 1998,  Southwall  terminated all production of anti-reflective film
         for Sony, as mutually  agreed


                                       9
<PAGE>


         under an amended Supply Agreement,  and there were no further shipments
         to Sony.

         Item 2 - Management's  Discussion  and Analysis of Financial  Condition
         and Results of Operations:

              Except for the historical  information  contained herein,  certain
         matters  discussed  in  this  Form  10-Q  Report  are   forward-looking
         statements  that  involve  risks  and  uncertainties,  including  those
         discussed below and in the Company's Annual Report on Form 10-K. Actual
         results   may   differ   materially   from   those   projected.   These
         forward-looking  statements  represent the Company's judgment as of the
         date of the filing of this Form 10-Q  Report.  The  Company  disclaims,
         however,  any  intent or  obligation  to update  these  forward-looking
         statements.

         General

              The Company has experienced significant  fluctuations in quarterly
         results of  operations.  Revenues  have varied from  quarter to quarter
         due,  in part,  to the timing of  short-term  sales  contracts  and the
         seasonal buying  patterns for the Company's Heat  Mirror(TM)  products,
         which  typically have been strongest in the second and third  quarters.
         Sales of the Company's energy  conservation  products are significantly
         influenced by the residential and commercial construction industries. A
         reduction in construction has generally  resulted in a reduction in the
         sales of the Company's Heat Mirror(TM) products.

              Historically,  operating  results  have  varied  from  quarter  to
         quarter as a function of the  utilization  of the Company's  production
         machines.  In 1998, and in the first quarter of 1999, operating results
         were  affected  by process and machine  problems  resulting  in quality
         issues associated with the anti-reflective film product manufactured in
         Tempe,  Arizona.  These problems have been corrected but the Company is
         continuing  to bring  new  production  machines  online  in  Tempe  and
         Dresden,  Germany.  Until all the new machines are in  production,  the
         Company  will  continue to  experience  minor  production  problems and
         inefficiencies.  As a  result  of  these  factors,  and in  view of the
         Company's  strategy  of  developing  additional  applications  for  its
         thin-film  technology,  and  its  ongoing  practice  of  upgrading  its
         manufacturing   processes,  the  Company  may  continue  to  experience
         quarterly fluctuations in its results of operations.

              In 1995,  Southwall  started selling its  anti-reflective  film to
         Sony  Corporation  of Japan  ("Sony") for use on computer  monitor CRTs
         under a Supply Agreement. During the second quarter of 1999, the supply
         agreement  between the Company and Sony was amended.  As a result,  the
         Company received purchase orders from Sony for a significantly  reduced
         amount of product. As of September 30, 1999,  Southwall  terminated all
         production  of film as mutually  agreed in the  amendment to the supply
         agreement and there have been no further shipments to Sony since.

              The Company has not experienced a significant  amount of inventory
         obsolescence  and believes that its inventory is recoverable.  However,
         technological  change,  competition,  loss of  customers,  reduction in
         demand,  or other  factors  could  result  in the  obsolescence  of the
         Company's products.

              The Company  believes that it must  continue to increase  revenues
         and improve  manufacturing  processes  and yields to achieve  sustained
         profitability.  The  Company  expanded  its  capacity  during the first
         quarter of 2000 by initiating  limited  production on the second


                                       10
<PAGE>


         production  machine in Tempe and a third machine is slated for delivery
         during  the  third  quarter  of  2000.  It  is  scheduled  to  commence
         production early in 2001.

              Additionally,  the Company is building another production facility
         in Dresden,  Germany that will house up to three  production  machines.
         The first production  machine in Dresden is undergoing  initial testing
         and is expected to begin  limited  production  in the third  quarter of
         2000.

              The Company is  constantly  working to develop  new  applications,
         expand existing applications, and to expand international marketing and
         sales efforts. However, there can be no assurance that the Company will
         be successful in these efforts and continue to increase revenues.

         Three Months Ended April 2, 2000 and April 4, 1999

              Net revenues  increased  62% to $17.6  million for the first three
         months of 2000,  compared to $10.9  million  for the similar  period of
         1999.  The increase was primarily  attributable  to increased  sales of
         $6.7 million for anti-reflective  film. The increase in anti-reflective
         film sales was  primarily  due to the  successful  improvements  to the
         production machines located in both Palo Alto and Tempe. Due to quality
         concerns,  only a minimum amount was produced in the Tempe plant during
         the first quarter of 1999.  Full  production  recommenced in March 1999
         after re-certification.

              Cost  of  sales  for the  first  quarter  of  2000  was 70% of net
         revenue,  compared to 82% for the similar period of 1999. The reduction
         in cost of sales was due to the production of anti-reflective film with
         improved  yields and  machine  throughput  during the first  quarter of
         2000. This compared to a loss of production capacity and product yields
         in Tempe during the first three months of 1999. Also, the costs for the
         Company's XIR(R) automotive film were slightly lower than those for the
         comparable  quarter  last  year due to  ongoing  yield  and  throughput
         improvement programs.

               Research and  development  expenses were 8.6% of net revenues for
         the first  three  months  of 2000,  compared  to 11.4% for the  similar
         period in 1999. The absolute  dollars  increased to $1.5 million in the
         first  quarter of 2000 from $1.2  million in the  comparable  period of
         1999.  The increase in 2000 is  attributable  to additional  travel and
         personnel  costs  supporting the  installation  of the new  productions
         machines  in the Tempe,  Arizona and  Dresden,  Germany  plants.  Also,
         during the current year's  quarter,  additional  costs were incurred in
         the further  development of the wide bandwidth antenna and the heatable
         windshield for automobiles using the Company's XIR(R) films.

              Selling,  general and  administrative  expenses  were 13.7% of net
         revenues in the first three  months of 2000,  compared to 18.1% for the
         similar period in 1999. The absolute dollars  increased to $2.4 million
         for the first  three  months of 2000 from $2.0  million for the similar
         period in 1999.  The increase in absolute  dollars was primarily due to
         an increase in sales  personnel and marketing  materials to support the
         anticipated  increasing  production  capacities.  Since  a  significant
         portion  of the  Company's  first  quarter  sales  came  from  non-U.S.
         customers,  travel and  communication  expenses  also  increased as the
         additional sales personnel devoted themselves to international sales.


                                       11
<PAGE>


              Net interest expense increased to $0.5 million for the first three
         months of 2000 compared to $0.3 million for the similar  period of 1999
         due to a decrease in interest income and an increase in borrowings from
         debt and bank credit lines. Debt increased to $35.3 million compared to
         $15.8 million for the similar period of 1999. These additional  amounts
         were borrowed at average annual interest rates that are higher than the
         average annual rates paid previously.

              The  effective  tax rate differs from the federal  statutory  rate
         primarily as a result of the  utilization  of net operating  loss carry
         forwards in 1997 and 1999 and the reserves established for deferred tax
         assets in 1998.

              As a result of the factors discussed above, the Company reported a
         pre-tax  income of $0.9  million  for the first  three  months of 2000,
         compared to a pre-tax  loss of $1.5  million for the similar  period in
         1999.

         Liquidity and Capital Resources

              Cash and  cash  equivalents  were  $25 at  April 2,  2000 and $1.8
         million at December 31, 1999. The decrease in cash and cash equivalents
         was due to increases in both  inventories  and accounts  receivables as
         well as  expenditures  for property and equipment  that were  partially
         offset  by cash  provided  by  financing  and the  net  income  for the
         quarter.  Restricted  cash  (restricted  for  use  only  in the  German
         production facility) was $3.1 million at April 2, 2000 and $1.9 million
         at December 31, 1999. The increase was due to proceeds from a loan from
         a German bank offset by progress payments for that plant.

              The $4.8  million in cash used in operating  activities  consisted
         primarily  of an $8.6  million  increase in  inventories  and  accounts
         receivable  offset by a $2.9 million  increase in accounts  payable and
         accrued liabilities,  $1.2 million of depreciation and amortization and
         $0.9 million of net income for the quarter.

              Inventories  increased  to $13.2  million  during the first  three
         months of 2000 from $7.6  million at December 31, 1999 due to increased
         production  throughput to meet anticipated  increased  sales.  Accounts
         receivable  increased to $14.5 million during the first three months of
         2000  from  $11.4  million  at  December  31,  1999 due to  significant
         shipments during the month of March 2000. Accounts payable increased to
         $13.3  million  during the first three months of 2000 from $9.8 million
         at December  31, 1999 due to an increase in the number of vendors  with
         longer terms of settlement.

              Major components of the $3.5 million used in investing  activities
         during  the  first  quarter  2000  included  $2.8  million  for the new
         manufacturing  building and two production  machines located in Dresden
         (which  the  Company  anticipates  will  begin  limited  production  of
         automotive film products in the second half of 2000),  and $0.7 million
         for the new production machines for the Tempe facility.

              The $6.6  million  provided by financing  activities  include $6.0
         million of short and long-term debt. $3.6 million of the long-term debt
         came from a German  bank to provide  progress  payments  on the Dresden
         plant.

              The  Company  has an $8.0  million  receivable  financing  line of
         credit with a bank,  which  expires in June 2000 and bears  interest at
         12% per annum.  There was $8.4 million of borrowing  outstanding  under
         this  line of  credit  at April  2,  2000.  The  Company  is  currently
         negotiating  with  the  bank  to  extend  the  line  of  credit  for an
         additional year and to obtain an increase in the line amount.

              At April 2, 2000 the  Company was not in  compliance  with some of
         the required  financial  covenants.  However,  the Company has received
         waivers  for  the  breached   financial   covenant  from  corresponding
         creditors through the period June 30, 2001.

              The  Company  anticipates  that it will  spend  approximately  $17
         million on new capital  equipment in 2000 that includes $12 million for
         Dresden


                                       12
<PAGE>


         and $5.0  million for Tempe.  The $12 million for Dresden  will be used
         for progress  payments for two new production  machines (to be used for
         Heat Mirror XIR(R)  automotive film products) and the completion of the
         building.  The Company  expects to finance its capital  expenditures in
         Germany  primarily  with the receipt of foreign  government  grants and
         additional  bank  loans.  In  April  2000,  the  Company  entered  into
         additional financing in Germany, consisting of loans and grants of $2.9
         million to finance  additional  equipment  and  furniture  to bring the
         project to production readiness. The loans are payable after five years
         with quarterly payments of interest only during the initial five years.
         The interest  rates will be  determined  at the time the Company  draws
         down the loan amounts.

              The remaining  $5.0 million of capital  expenditures  relates to a
         third production machine and other capital improvement  projects in the
         Tempe  facility,  and, the Company  expects,  will be financed with the
         anticipated  increase  in the bank line of credit  and funds  generated
         from operations.

              The Company  believes that existing cash,  cash  anticipated to be
         generated from operations, the anticipated extended line of credit, and
         the  availability  of foreign  grants and  additional  bank  loans,  as
         discussed  above,  will be sufficient  to meet the Company's  operating
         cash requirements through fiscal 2000.

-
         Item 3 - Quantitative and Qualitative Disclosures about Market Risk:

              Disclosure  about market risk is contained in the  Company's  Form
         10-K for the year  ended  December  31,  1999  filed on April 6,  2000.
         Subsequent to such filing, no material  developments have occurred with
         respect to the risks described therein.


                                       13
<PAGE>



                            PART II OTHER INFORMATION

         Item 1            Legal Proceedings and Other Matters

             Certain  litigation  filed against the Company was described  under
         Item 3 in the Company's Form 10-K filed on April 6, 2000. Subsequent to
         such filing, no 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  or  its  consolidated   financial   position  or  results  of
         operations.

         Item 2   Changes in Securities

                  Not applicable

         Item 3   Defaults upon Senior Securities

                  Not applicable

         Item 4   Submission of Matters to a Vote of Stockholders

                 No  matters  were  submitted  to a vote  of  security
                 holders during the quarter ended April 2, 2000.

         Item 5   Other Information

                  Not applicable

         Item 6   Exhibits and Reports on Form 8-K

                (a)    Exhibits - None

                (b)    Reports on Form 8-K - None



                                       14

<PAGE>
                                   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:  May 19, 2000

                                               By:/s/Thomas G. Hood
                                                  ------------------------------
                                                     Thomas G. Hood
                                                     President and
                                                     Chief Executive Officer

                                               By:/s/Bill R. Finley
                                                  ------------------------------
                                                     Bill R. Finley
                                                     Vice President and
                                                     Chief Financial Officer


                                      15