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 [NO FEE REQUIRED]


     For the quarterly period ended July 4, 1999

/_/  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

     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 July 4, 1999 there were 7,446,280 shares of the Registrant's  Common Stock
outstanding.


                                       1
<PAGE>


                           SOUTHWALL TECHNOLOGIES INC.

                                      INDEX



Page Number

                          PART I FINANCIAL INFORMATION

Item 1       Financial Statements:
                                                                           Page
                                                                           ----
                 Consolidated Balance Sheets - July 4, 1999
                 and December 31, 1998........................................3

                 Consolidated Statements of Operations -
                 three month and six month periods
                 ended July 4, 1999 and June 28, 1998 ........................4

                 Consolidated Statements of Cash Flows -
                 three month and six month periods
                 ended July 4, 1999 and June 28, 1998 ........................5

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

Item 2           Management's Discussion and Analysis
                 of Financial Condition and Results of Operations.............7

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...........................................15

Item 6           Exhibits and Reports on Form 8-K............................15

                 Signatures..................................................16


                                       2
<PAGE>



                                                    PART I FINANCIAL INFORMATION

Item 1 - Financial Statements:
<TABLE>

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

<CAPTION>
ASSETS                                                                                         July 4, 1999       December 31, 1998
                                                                                                 --------             --------
<S>                                                                                              <C>                  <C>
Current assets:
     Cash and cash equivalents                                                                   $  1,867             $  4,136
     Short-term investments                                                                          --                      7
     Accounts receivable, net of allowance
      for doubtful accounts of $816 and $845                                                       10,138               12,355
     Inventories                                                                                    5,970                6,057
     Other current assets                                                                           1,214                  813
                                                                                                 --------             --------
         Total current assets                                                                      19,189               23,368

Property and equipment, net                                                                        32,335               29,068
Other assets                                                                                        1,574                1,583
                                                                                                 --------             --------

     Total assets                                                                                $ 53,098             $ 54,019
                                                                                                 ========             ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Bank credit line                                                                            $  4,111             $   --
     Accounts payable                                                                               7,202                6,307
   Accrued compensation                                                                             2,500                2,265
     Other accrued liabilities                                                                      1,416                3,655
     Current portion of long-term debt                                                             12,122               15,397
                                                                                                 --------             --------
         Total current liabilities                                                                 27,351               27,624

Long-term debt                                                                                         83                  141
Deferred income taxes                                                                                 437                  437
                                                                                                 --------             --------
         Total liabilities                                                                         27,871               28,202
                                                                                                 --------             --------

Commitments

Stockholders' equity:
     Common stock, $.001 par value,
      20,000 shares authorized:
      Issued and outstanding: 7,889 and 7,889                                                           8                    8
     Capital in excess of par value                                                                51,892               52,181
     Notes Receivable                                                                                (940)              (1,020)
     Accumulated deficit                                                                          (23,485)             (22,500)
     Less cost of treasury stock, 442
    and 565 shares                                                                                 (2,248)              (2,852)
                                                                                                 --------             --------
         Total stockholders' equity                                                                25,227               25,817
                                                                                                 --------             --------

     Total liabilities and
          stockholders' equity                                                                   $ 53,098             $ 54,019
                                                                                                 ========             ========

<FN>
                                    See accompanying notes to consolidated financial statements.

</FN>
</TABLE>

                                                                 3
<PAGE>


<TABLE>
                                                     SOUTHWALL TECHNOLOGIES INC.
                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                                (in thousands, except per share data)
                                                             (Unaudited)

<CAPTION>

                                                                    Three Months Ended                       Six Months Ended
                                                               ----------------------------            -----------------------------
                                                                July 4,            June 28,             July 4,            June 28,
                                                                 1999                1998                1999                1998
                                                               --------            --------            --------            --------
<S>                                                            <C>                 <C>                 <C>                 <C>
Net revenues                                                   $ 13,527            $ 14,057            $ 24,385            $ 24,473
                                                               --------            --------            --------            --------

Costs and expenses:
   Cost of sales                                                  9,410              11,022              18,321              21,237
   Research and development                                       1,293                 913               2,526               1,973
   Selling, general and
    administrative                                                1,970               2,264               3,936               4,672
                                                               --------            --------            --------            --------

    Total costs and expenses                                     12,673              14,199              24,783              27,882
                                                               --------            --------            --------            --------

Income(loss) from operations                                        854                (142)               (398)             (3,409)

Interest income/(expense), net                                     (307)               (182)               (562)               (290)
                                                               --------            --------            --------            --------

Income(loss) before income taxes                                    547                (324)               (960)             (3,699)

Provision for income taxes                                           13                  24                  25                  24
                                                               --------            --------            --------            --------

Net Income(loss)                                               $    534            $   (348)           $   (985)           $ (3,723)
                                                               ========            ========            ========            ========

Net loss per share - Basic                                     $    .07            $   (.05)           $   (.13)           $   (.49)
                                                               ========            ========            ========            ========
                   - Diluted                                   $    .07            $   (.05)           $   (.13)           $   (.49)
                                                               ========            ========            ========            ========

Weighted average shares of
common stock and common
stock equivalents - Basic                                         7,404               7,664               7,364               7,614
                  - Diluted                                       7,454               7,664               7,364               7,614


<FN>

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


                                                                 4
<PAGE>

<TABLE>

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


<CAPTION>
                                                                 Six Months Ended
                                                       ----------------------------------
                                                       July 4, 1999        June 28, 1998
                                                       ------------        -------------
<S>                                                       <C>                <C>
Cash flows from operating activities:
     Net loss                                             $   (985)          $ (3,723)
     Adjustments to reconcile net loss
         to net cash provided by (used in)
         operating activities:
     Depreciation and amortization                           2,380              2,048
     Decrease (increase) in accounts receivable              2,217              2,129
     Decrease (increase) in inventories                         87              1,499
     Decrease (increase) in other current assets              (401)                51
     (Decrease) increase in accounts payable
         and accrued liabilities                            (1,017)            (1,650)

Cash provided by operating activities                        2,281                354
                                                          --------           --------

Cash flows from investing activities:
     Decrease in short-term investments                          7               --
     Expenditures for property and equipment
          and other assets                                  (5,638)            (2,417)

Net cash used in investing activities                       (5,631)            (2,417)
                                                          --------           --------

Cash flows from financing activities:
     Payments on long-term debt                             (3,333)              (440)
     Bank line of credit borrowings                          4,111               --
     Issuance of treasury stock, net                           223                330
     Sale of common stock, net                                --                  154
     Repayment (issuance) of stock option loans, net            80               (250)
                                                          --------           --------

Net cash provided (used) by financing activities             1,081               (206)
                                                          --------           --------

Net decrease in cash and cash
     equivalents                                            (2,269)            (2,269)

Cash and cash equivalents, beginning of year                 4,136             10,524
                                                          --------           --------

Cash and cash equivalents, end of period                  $  1,867           $  8,255
                                                          ========           ========

<FN>

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

                                       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.   It  is  suggested  that  these
consolidated  financial  statements  be read in  conjunction  with the financial
statements  contained in the Company's Form 10-K for the year ended December 31,
1998.  The results of  operations  for the  interim  periods  presented  are not
necessarily indicative of the operating results of the full year.

Note 2 - Inventories:

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

                                              July 4, 1999  December 31, 1998
                                              ------------  -----------------
          Raw materials                          $3,456         $2,314
          Work-in-process                           462          2,155
          Finished goods                          2,052          1,588
                                                 ------         ------
              Total                              $5,970         $6,057
                                                 ======         ======

Note 3 - Commitments:

     During  1996,  the Company  entered  into an addendum to a previous  supply
agreement  with a major  customer for the sale of the Company's  anti-reflective
film.  Beginning  in July 1997,  the  Company  was  committed  to supply and the
customer was committed to purchase fixed volumes  thereafter  until December 31,
2000.  During the second  quarter of 1999 the Company and its customer  modified
certain  terms  and  conditions  of  the  supply  agreement.  The  modifications
significantly  reduced the amount of product the Company is  committed to supply
and the  customer is  committed  to purchase  through  December  31,  1999.  The
modified  agreement  also  eliminated  any  penalties  for  failure to supply or
purchase minimum quantities.  The supply agreement terminates effective December
31, 1999.

Note 4 - Line of Credit Agreement:

     The Company has secured a $6 million  revolving  line of credit with a bank
which  expires in June 2000.  This line of credit may be  extended  further  for
additional one-year terms with the bank's approval.  The amount of borrowings is
based upon a percentage of accounts  receivable,  which at July 4, 1999, did not
limit available  borrowing under the line. The line is secured by certain assets
of the  Company and bears  interest  at an annual rate of 11.00%.  As of July 4,
1999, $4.1 million was borrowed under this line of credit.

                                       6
<PAGE>

Note 5 - Net income (loss) per share:

     Basic net income (loss) per share is computed by dividing income  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  per share uses the average
market prices during the period. During each of the periods presented there were
no differences  between the numerators used for calculation of basic and diluted
net income (loss) 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 be  anti-dilutive.  Stock options  aggregating
1,415 and 1,637 shares at July 4, 1999 and June 28, 1998, respectively, and were
not  included  in the  computations  of net  income  (loss)  for those six month
periods because the effect on the calculations would be anti-dilutive.

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

     Except  for  the  historical  information  contained  herein,  the  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 to the seasonal
buying patterns for the Company's Heat Mirror(TM) products, which typically have
been  strongest in the second and third  quarters,  and the timing of short-term
sales  contracts.  Additionally,  sales  of the  Company's  energy  conservation
products  are  significantly   influenced  by  the  residential  and  commercial
construction industries, and 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. The development and introduction of
new products and the  changing  mix of products  manufactured  have added to the
production problems and inefficiencies  experienced by the Company. Primarily 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.

     Although the Company has not experienced a significant  amount of inventory
obsolescence and believes that its inventory is recoverable, obsolescence of the
Company's products could be affected by technological change, competition,  loss
of customers and reduction in demand, among other factors.

     The Company believes that it must continue to increase revenues and improve
manufacturing processes and yields to achieve sustained profitability.  Although
the Company  expanded  its capacity by opening a new  manufacturing  facility in
1997 in Tempe,  Arizona and entered into a purchase  agreement in



                                       7
<PAGE>

1998 for a new production  machine to be completed and installed in Tempe by the
fourth  quarter  of  1999,  and  is  continuously  seeking  to  expand  existing
applications,  to develop new applications and to expand international marketing
and sales efforts, there can be no assurance that the Company will be successful
in these efforts and continue to increase revenues.

Year 2000 readiness

     The Company  believes the Year 2000 issue represents a material risk to the
Company.  The Year 2000 issue involves the potential inability of information or
other data dependent systems to properly distinguish year references at the turn
of the century and certain other dates.

     The Company itself is heavily dependent upon the proper  functioning of its
own computer  systems,  including  (1)  computers  and related  software for its
financial and manufacturing  information  systems,  (2) computers,  programmable
logic  controllers  and other  data  dependent  equipment  in its  manufacturing
processes, and (3) computers,  scientific equipment and related software for its
engineering,  research and development activities. Any failure or malfunctioning
on the part of these or other systems  could cause  disruptions  of  operations,
including a temporary inability to process financial  transactions,  manufacture
products  or  engage  in  ordinary  business  activities  in ways  that  are not
currently  known,  discernible,  quantifiable  or otherwise  anticipated  by the
Company.

     In October 1996 the Company began reviewing Year 2000 issues and prepared a
plan ("The Plan") to address those issues.  The Plan consists of several phases.
The first is the inventory and  prioritization of potential Year 2000 items, and
the assessment of Year 2000  compliance.  The second phase is the remediation of
any noted problems.  The third phase is the testing of material  items,  and the
fourth phase is the  preparation  of contingency  plans.  All phases of The Plan
have been addressed  with existing  staff and the Company  believes the costs to
address Year 2000 issues will not be significant.

     The Company is currently  developing  contingency plans which will continue
to be reviewed and revised  through the end of the year to ensure all reasonable
scenarios  have been  accounted  for and  alternate  methods of  resolution  are
addressed.

     For the Company's most  significant IT and non-IT systems  (defined below),
the first,  second  and third  phases  have been  completed.  The fourth  phase,
contingency planning,  has been underway for several months and will continue to
be reviewed and revised through the end of 1999. The Company has completed major
upgrades and modifications, which have made essentially all mainframe accounting
and inventory  control software Year 2000 compliant.  The scope of the Year 2000
compliance  effort includes (1) information  technology  ("IT") such as software
and   hardware;   (2)   non-IT   systems   or   embedded   technology   such  as
micro-controllers  contained in various  manufacturing and laboratory equipment,
environmental  and  safety  systems,  facilities  and  utilities;  and  (3)  the
readiness of key third  parties,  including  suppliers  and  customers,  and the
electronic data interchange (EDI) with those key third parties.

                                       8
<PAGE>

     The  Company's  suppliers  (particularly  sole-source  and  long  lead-time
suppliers)  and key  customers  may be  adversely  affected by their  respective
failures to address the Year 2000 issue.  If the Company's  suppliers are unable
to provide  goods or services,  the  Company's  operations  could be  materially
adversely  affected.  Key customers that encounter Year 2000 difficulties  could
fail to order or take delivery of the Company's products,  or could fail to make
or delay  payments to the  Company.  Such failure or delay could have a material
adverse effect on the Company's  business and results of operations.  While some
of these  risks are  outside the  control of the  Company.  The Plan  includes a
requirement to  communicate  with suppliers and customers to ascertain the state
of their Year 2000  compliance  program.  The Company has received  notification
from most of its major  suppliers  regarding  their  Year  2000  compliance  and
readiness.  Communications are underway with the Company's customers to avoid an
interruption in orders caused by a customer's failure to plan for potential Year
2000 complications.

     The  Company's  products  are not affected by calendar  dating.  Therefore,
there is no known or anticipated Year 2000 impact on its product offerings.

     The  Company  believes  its Year 2000 Plan will  significantly  reduce  the
probability of significant  interruptions  of normal  operations  resulting from
Year 2000 issues.  All reasonable effort has been taken to identify,  assess and
correct all Year 2000 issues.  The Company is attempting in the continued review
and  revision of its  contingency  plans to mitigate  any  problems  that may be
experienced  by its key  supplies  to protect  the  Company  from any  potential
problems that may occur from the  inadequacy of a supplier's  Year 2000 program.
It is still possible however, that Year 2000 issues could have an adverse impact
on the Company's  results of operations,  and  interruption  in normal  business
operations,  or an adverse impact on the Company's relationships with customers,
suppliers, or others.

Six Months Ended July 4, 1999 and June 28, 1998

     Net  revenues  decreased  $0.1  million to $24.4  million for the first six
months of 1999,  compared to $24.5 million for the similar  period of 1998.  The
decrease  was  attributable  primarily  to a $4.8  million  decrease in sales of
anti-reflective film for use on CRT terminals along with a $0.7 million decrease
of other  various  products  partially  offset by an increase of $5.4 million in
sales of film used principally by OEM automotive glass  manufacturers,  compared
to the same period last year. The decrease of anti-reflective film sales was due
to minimal  production in the Tempe plant during the first quarter of 1999 which
was  the  result  of  the   re-certification   of   production   processes   for
anti-reflective  film  provided to a major  customer.  Additionally,  the supply
agreement  with this  customer  was modified  during the second  quarter of 1999
which reduced the quantities of  anti-reflective  film the Company was committed
to supply and the customer was committed to purchase.

     Cost of sales for the first half of 1999 was 75% of net revenues,  compared
to 87% for the  similar  period  of  1998.  The  decrease  in cost of sales as a
percentage  of net revenues  for 1999 from 1998 was due  primarily to a shift in
product mix. Sales of the higher margin automotive film increased  significantly
while sales of lower margin anti-reflective film decreased significantly.  Also,
production  yields on the Company's  automotive  film produced in the Palo Alto,
California  facility  improved over the same period a year ago, thereby reducing
the associated material and overhead costs on a per unit basis.

     Research and development expenses,  as a percent of net revenues,  were 10%
for the first six months of 1999, compared to 8% for the similar period in 1998.
The absolute  dollars  increased  $0.5 million to $2.5 million in 1999 from $2.0
million in 1998.  The increase in research and  development  expenses in 1999 is
attributable  to an increase in  personnel  involved in the  development  of new


                                       9
<PAGE>

products  for the  electronic  display  market  and for the  development  of new
deposition technology.

     Selling,  general and administrative expense, as a percent of net revenues,
decreased  to 16% in the first  six  months  of 1999,  from 19% for the  similar
period in 1998. The absolute  dollars  decreased $0.7 million to $3.9 million in
1999 from $4.7  million  in 1998.  The  decrease  in  absolute  dollars  was due
primarily  to a reduction  in staffing  and the  absence of  severance  payments
associated with the realignment of organizations  that occurred in the first six
months of 1998.

     Net  interest  expense  increased  for the first six months of 1999 to $0.6
million  from $0.4  million in the similar  period of 1998 due to an increase in
the use of the  Company's  line of credit with a bank and a decrease in interest
income.  The average cash balances  invested during the first six months of 1999
was  significantly  less than the average  balances  invested for the comparable
period of 1998.

     As a result of the factors  discussed above, the Company reported a pre-tax
loss of $1.0  million  for the first six months of 1999,  compared  to a pre-tax
loss of $3.7 million for the similar period in 1998.


Three Months Ended July 4, 1999 and June 28, 1998

     Net  revenues  decreased to $13.5  million for the second  quarter of 1999,
compared to $14.1  million  for the similar  period of 1998.  The  decrease  was
primarily  attributable  to a  decrease  in  anti-reflective  film sales of $2.2
million  and a  decrease  of $0.4  million in sales of  various  other  products
partially  offset by an increase in automotive  film sales of $2.0 million.  The
decrease  in  anti-reflective  film  sales  in the  second  quarter  of 1999 was
primarily due to the  modification  of a supply  agreement with a major customer
which  reduced the volume of film the Company  was  committed  to supply and the
customer was committed to purchase during the quarter.

     Cost of  sales  for the  second  quarter  of 1999  was 70% of net  revenue,
compared to 78% for the similar period of 1998. The improvement in cost of sales
was  caused  by a change  in sales mix from the  second  quarter  of 1998 to the
second quarter of 1999. Sales of the higher gross margin automotive film product
increased $2.0 million and sales of the lower gross margin  anti-reflective film
product  decreased  $2.2  million  resulting  in a higher  gross  margin for the
Company.

     Research and development  expenses,  as a percent of net sales, were 10% of
net  revenues  for the second  quarter of 1999,  compared  to 6% for the similar
period in 1998.  The  absolute  dollars  increased to $1.3 million in the second
quarter of 1999 from $0.9 million in the comparable period of 1998. The increase
in  1999 is  attributable  to  additional  personnel  required  to  support  the
development  of new  products,  primarily  the  development  of products for the
anti-reflective film market, and the development of new deposition  technologies
which would result in faster coating processes.

     Selling, general and administrative expense, as a percent of net sales, was
15% of net  revenues  in the  second  quarter of 1999,  compared  to 16% for the
similar period in 1998. The absolute  dollars  decreased to $2.0 million in 1999
from $2.3 million in 1998. The decrease in absolute dollars was primarily due to
a decrease in personnel in 1999 and reorganization  severance payments that were
paid in 1998 as a result of combining the  Company's  two divisions  into one in
1998.

     Net interest  expense  increased to $0.3 million for the second  quarter of
1999 compared to $0.2 million for the similar  period of 1998 due to an increase

                                       10
<PAGE>

in the use of the bank  credit  line and a  decrease  in  interest  income.  The
average  cash  balances   invested   during  the  second  quarter  of  1999  was
significantly  less than the average balances invested for the comparable period
of 1998.

     As a result of the factors  discussed  above,  the Company reported pre-tax
income of $0.5  million  for the second  quarter of 1999,  compared to a pre-tax
loss of $0.3 million for the similar period in 1998.

Liquidity and Capital Resources

     In December  1996,  the Company  borrowed $5 million from an  institutional
lender for partial financing of the manufacturing facility in Tempe, Arizona. In
April  1997,  the  Company  signed an  agreement  with  Teijin  Limited of Japan
(Teijin),  a  major  raw  material  supplier  of  the  Company,  which  included
arrangements  for additional  financing for the  manufacturing  facility and for
related potential working capital growth. Teijin purchased 667,000 shares of the
Company's  common  stock at a price of $7.50 per share,  and  guaranteed  a loan
through Sanwa Bank for an additional $10 million.  Teijin also received warrants
to purchase  158,000 shares of common stock at a price of $9.00 per share at any
time  within  three  years  of the date of the  agreement.  The  stock  purchase
transaction with Teijin of approximately $5 million was completed in April 1997.
In addition,  a loan  agreement  with Sanwa Bank was signed in May 1997, and the
Company  received the first $5 million of funding in May 1997, and the remaining
$5 million in November 1997.

     From  December 31, 1998 to July 4, 1999,  cash and  short-term  investments
decreased by $2.3  million,  primarily due to $5.6 million in  expenditures  for
property and equipment  partially  offset by $2.3 million  provided by operating
activities  and  $0.9  million  provided  by  financing  activities.   Financing
activities  included a one-time  $2.7  million  payment to retire the  Company's
Convertible Subordinated Note that became due and payable May 31, 1999. The $5.6
million  in  capital  expenditures  made  during  the first  six  months of 1999
includes approximately $1.3 million for the conversion of an older,  large-scale
production  machine  located  in  Palo  Alto,  California  to  produce  advanced
anti-reflective  film products and $2.1 million for a new manufacturing  machine
to be located in Tempe,  Arizona. The $2.3 million in cash provided by operating
activities resulted primarily from depreciation and amortization of $2.4 million
and from a decrease of $2.2 million in accounts  receivable  partially offset by
an increase of $1.0 million in accounts payable and accrued  liabilities and the
net loss of $1.0 million for the first six months of 1999.



                                       11
<PAGE>

     At July 4,  1999,  the  Company  had $1.9  million  of cash and  short-term
investments.  The Company also has a bank line of credit for $6.0 million  under
which the Company had $4.1 million in borrowings  and term loans of $5.0 million
and $10.0  million,  which are subject to certain  financial  covenants.  In the
fourth  quarter  of 1998  and the  first  quarter  of 1999  the  Company  was in
violation of some of the covenants pertaining to each of the term loans and as a
result classified each as short-term debt during those two periods.  In May 1999
the  covenants  pertaining  to the $5.0  million  term loan were  reset  through
December 31, 1999  allowing the Company to achieve  compliance  at July 4, 1999.
Although  the  Company  expects  to remain in  compliance  with  these  modified
covenants  through the end of 1999,  there is no  assurance  the Company will be
able to remain  compliant in the year 2000 when the covenants  stipulated in the
original loan agreement take effect.  Therefore, the Company has classified this
debt as  short-term  at July  4,  1999.  Additionally,  the  Company  was not in
compliance with some of the financial covenants  pertaining to its $10.0 million
term loan at July 4, 1999,  and has therefore  classified  the loan as a current
liability  until such time when the Company is in full  compliance.  The Company
has maintained favorable relations with all of its financing institutions and is
working  closely with its lenders to reset the covenants  based on the Company's
current 1999 projections.  While there can be no assurance that the Company will
be successful in these efforts the Company  anticipates a favorable resetting of
such  covenants  and the  ability to pay these  loans in  accordance  with their
original terms.

     The Company  anticipates that it will acquire  approximately $10 million to
$12 million of new capital  equipment in the second half of 1999 which  includes
progress  payments on two new  production  machines for its film  products and a
planned  expansion in the  European  automotive  film  market.  In July 1999 the
Company secured $3.0 million of new equipment financing and is currently seeking
an  additional  $7.0  million of equipment  financing  which it expects to be in
place  by the  end of the  third  quarter  of  1999,  although  there  can be no
assurance  that the Company  will be  successful  in obtaining  this  additional
financing.

     While there can be no assurance that the Company will be able to obtain the
additional  financing that will be necessary for its planned 1999 operating cash
requirements,  the Company  believes that existing cash, cash  anticipated to be
generated from operations,  the bank line of credit and the additional term loan
borrowings,  as  discussed  above,  will be  sufficient  to meet  the  Company's
operating cash requirements through fiscal 1999.

     If the Company is not  successful  in obtaining  the  additional  financing
described above, it may need to raise additional funds through public or private
equity or debt financing from other  sources.  The sale of additional  equity or
convertible debt may result in additional dilution to the Company's stockholders
and such securities may have rights,  preferences or privileges  senior to those
of the Common Stock.  There can be no assurance that  additional  equity or debt
financing  will be  available  or that if  available it can be obtained on terms
favorable to the Company or its stockholders.

Item 3 - Quantitative and Qualitative Disclosures about Market Risk:

     The  Company is exposed to the impact of  interest  rate  changes,  foreign
currency fluctuations, and changes in the market values of its investments.

     FINANCING  RISK. The Company's  exposure to market rate risk for changes in
interest  rates relates  primarily to the Company's term loans which are tied to
the London Interbank Offered Rate ("LIBOR").  Fluctuations in interest rates may
adversely impact the interest  expense  expected for the Company.  The effect of
interest  rate  fluctuations  on the Company in the first six months of 1999 was
not material.



                                       12
<PAGE>

     INVESTMENT  RISK. The Company  invests its excess cash in  certificates  of
deposit and money market accounts and, by policy,  limits the amount of exposure
to any one  institution.  Investments  in both  fixed  rate  and  floating  rate
interest earning  instruments carries a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely  impacted due to a rise in
interest  rates,  while  floating rate  securities  may produce less income than
expected if interest rates fall.

     FOREIGN  CURRENCY  RISK.  International  revenues  amounted  to  69% of the
Company's  total  sales in the first six  months of 1999  and,  by  policy,  the
Company limits foreign currency risk by requiring all sales to be denominated in
U.S. dollars. The Company's  international  business is subject to risks typical
of an international business,  including,  but not limited to differing economic
conditions,  changes in  political  climate,  differing  tax  structures,  other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially  adversely  impacted by changes
in these or other factors.  The effect of foreign exchange rate  fluctuations on
the   Company   in  the   first   six   months   of  1999   was  not   material.



                                       13
<PAGE>


                            PART II OTHER INFORMATION


Item 1 Legal Proceedings and Other Matters

     Certain  litigation  filed  against the Company by one of its customers was
described in the Company's Form 10-K filed on March 31, 1999. Subsequent to such
filing, no material developments have occurred with respect to this litigation.

     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

     The Company's  Annual Meeting of  Stockholders  was held on May 24, 1999 at
the Company's  headquarters in Palo Alto,  California.  Of the 7,382,373  shares
outstanding as of the record date,  6,626,502 shares were present or represented
by proxy at the  meeting.  The  following  matters  were  submitted to a vote of
security holders.


(1)  To elect the following to serve as a Director of the Company:

                                          Votes in Favor        Votes Withheld
                                          --------------        --------------
         J. Larry Smart                      6,407,212             216,290
         Bruce J. Alexander                  6,428,295             198,207
         Thomas G. Hood                      6,436,124             187,378
         Hideo Nakamori                      6,443,022             180,480
         Joseph B. Reagan                    6,436,324             187,178
         Walter C. Sedgwick                  6,438,324             185,178

(2)  To ratify the  selection  of  PricewaterhouseCoopers  LLP as the  Company's
     principal independent auditors:

                                               Votes
                                               -----
                  Votes for:                 6,593,173
                  Votes against:                 2,757
                  Votes abstaining:             27,572


Item 5 Other Information

     Not applicable


                                       14
<PAGE>

Item 6 Exhibits and Reports on Form 8-K

     (a) Exhibits - None


     (b) Reports on Form 8-K - None


                                       15
<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: August 16, 1999
                                       Southwall Technologies Inc.




                                        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




                                       16