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 April 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 May 12, 1999 there were 7,388,065 shares of the Registrant's  Common Stock
outstanding.

                                       1

<PAGE>


                           SOUTHWALL TECHNOLOGIES INC.

                                      INDEX



                                                                           Page
                                                                          Number

                          PART I FINANCIAL INFORMATION

Item 1       Financial Statements:

                  Consolidated Balance Sheets - April 4, 1999
                  and December 31, 1998.......................................3

                  Consolidated Statements of Operations -
                  three months ended April 4, 1999
                  and March 29, 1998 .........................................4

                  Consolidated Statements of Cash Flows -
                  three months ended April 4, 1999
                  and March 29, 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.12

                            PART II OTHER INFORMATION

Item 1            Legal Proceedings..........................................13

Item 2            Changes in Securities......................................13

Item 3            Defaults Upon Senior Securities............................13

Item 4            Submission of Matters to a Vote of Stockholders............13

Item 5            Other Information..........................................13

Item 6            Exhibits and Reports on Form 8-K...........................13

                  Signatures.................................................14



                                       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 4,  December 31,
                                                            1999        1998
                                                         --------      --------

Current assets:
     Cash and cash equivalents                           $    230      $  4,136
     Short-term investments                                  --               7
     Accounts receivable, net of allowance
      for doubtful accounts of $893 and $845                9,860        12,355
     Inventories                                            6,521         6,057
     Other current assets                                   1,099           813
                                                         --------      --------
         Total current assets                              17,710        23,368

Property and equipment, net                                30,431        29,068
Other assets                                                1,598         1,583
                                                         --------      --------

     Total assets                                        $ 49,739      $ 54,019
                                                         ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Bank credit line                                    $    500      $   --
     Accounts payable                                       5,582         6,307
   Accrued compensation                                     1,806         2,265
     Other accrued liabilities                              1,927         3,655
     Current portion of long-term debt                     15,085        15,397
                                                         --------      --------
         Total current liabilities                         24,900        27,624

Long-term debt                                                104           141
Deferred income taxes                                         437           437
                                                         --------      --------
         Total liabilities                                 25,441        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                        52,181        52,181
     Notes Receivable                                      (1,020)       (1,020)
     Accumulated deficit                                  (24,019)      (22,500)
     Less cost of treasury stock, 565
    and 565 shares                                         (2,852)       (2,852)
                                                         --------      --------
         Total stockholders' equity                        24,298        25,817
                                                         --------      --------

     Total liabilities and
          stockholders' equity                           $ 49,739      $ 54,019
                                                         ========      ========

          See accompanying notes to consolidated financial statements.




                                       3
<PAGE>


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



                                                         Three Months Ended
                                               ---------------------------------
                                               April 4, 1999      March 29, 1998
                                               -------------      --------------

Net revenues                                     $ 10,858              $ 10,416
                                                 --------              --------

Costs and expenses:
   Cost of sales                                    8,911                10,215
     Research and development                       1,233                 1,060
   Selling, general and
    administrative                                  1,966                 2,408
                                                 --------              --------

    Total costs and expenses                       12,110                13,683
                                                 --------              --------

Loss from operations                               (1,252)               (3,267)

Interest income/(expense), net                       (255)                 (108)
                                                 --------              --------

Loss before income taxes                           (1,507)               (3,375)

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

Net loss                                         $ (1,519)             $ (3,375)
                                                 ========              ========

Net loss per share          - Basic              $   (.21)             $   (.45)
                                                 ========              ========
                            - Diluted            $   (.21)             $   (.45)
                                                 ========              ========

Weighted average shares of
common stock and common
stock equivalents
                            - Basic                 7,324                 7,561
                            - Diluted               7,324                 7,561




          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>



<TABLE>


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

                                                                                                         Three Months Ended
                                                                                                 -----------------------------------
                                                                                                 April 4, 1999        March 29, 1998
                                                                                                   --------                --------
<S>                                                                                                <C>                     <C>
Cash flows from operating activities:
     Net loss                                                                                      $ (1,519)               $ (3,375)
     Adjustments to reconcile net loss
        to net cash provided by (used in)
        operating activities:
     Depreciation and amortization                                                                    1,152                     940
     Decrease (increase) in accounts receivable                                                       2,495                   2,712
     Decrease (increase) in inventories                                                                (464)                   (335)
     Decrease (increase) in other current assets                                                       (286)                     (2)
     (Decrease) increase in accounts payable
         and accrued liabilities                                                                     (2,912)                    945
                                                                                                   --------                --------
Cash provided by (used in) operating activities                                                      (1,534)                    885
                                                                                                   --------                --------

Cash flows from investing activities:
     Decrease (increase) in short-term investments                                                        7                  (1,510)
     Expenditures for property and equipment
        and other assets                                                                             (2,530)                 (1,044)
                                                                                                   --------                --------
Net cash used in investing activities                                                                (2,523)                 (2,554)
                                                                                                   --------                --------

Cash flows from financing activities:
     Payments on long-term debt                                                                        (349)                   (118)
   Bank line of credit borrowings                                                                       500                    --
     Issuance of treasury stock, net                                                                   --                        74
   Repayment of stock option loans                                                                     --                        50
                                                                                                   --------                --------

Net cash provided by financing activities                                                               151                       6
                                                                                                   --------                --------

Net decrease in cash and cash
     equivalents                                                                                     (3,906)                 (1,663)

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

Cash and cash equivalents, end of period                                                           $    230                $  8,861
                                                                                                   ========                ========



<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:

                                             April 4, 1999     December 31, 1998
                                             -------------     -----------------
                      Raw materials            $3,829               $2,314
                      Work-in-process           1,056                2,155
                      Finished goods            1,636                1,588
                                               ------               ------
                          Total                $6,521               $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 July 1, 1997, the Company is committed
         to supply and the  customer  is  committed  to purchase  fixed  volumes
         thereafter  until December 31, 2000.  Should either the Company fail to
         supply or the customer  fail to purchase the  specified  quantities,  a
         penalty,  based on the  sales  price  to the  customer  from the  prior
         period,  must be paid to the  other.  Currently,  the  Company  and its
         customer  are in the process of  negotiating  modifications  to certain
         terms and conditions of this supply agreement.

         Note 4 - Line of Credit Agreement:

              The Company has secured a $4 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 April 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 prime plus

                                       6
<PAGE>

         1.25%.  Under the terms of the  agreement,  the  Company is required to
         maintain certain financial covenants.  As of April 4,1999, $0.5 million
         was borrowed under this line of credit.

         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 antidilutive.

         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.


                                       7
<PAGE>

              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 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 are expected
         to be handled with existing staff and the Company  believes the cost to
         address Year 2000 issues will not be material.

              The Company is currently involved in the testing of material items
         and expects this phase to be  completed  by June 30, 1999.  The Company
         anticipates  that it will complete the  contingency  planning  phase by
         June 30, 1999 although the Company  currently has no contingency  plans
         to deal with the most likely worst case scenarios.



                                       8
<PAGE>

              For the Company's most  significant IT and non-IT systems (defined
         below),  the first and second phases have been  completed.  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.

              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 Company's Plan
         includes  communications  with suppliers and customers to ascertain the
         state of their Year 2000 compliance program. The questionnaire phase of
         this  activity  was  completed  as  of  March  31,  1999.   Remediation
         activities and  preparation  of contingency  plans related to suppliers
         and customers is scheduled for completion by June 30, 1999.

              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.  However, the Company may not properly
         identify and assess all Year 2000 issues,  or it may not  remediate and
         test all its IT and non-IT systems in a timely or adequate  manner.  In
         addition,  its key suppliers or customers  could  experience  Year 2000
         problems.  If any of these potential  situations  occur,  the Company's
         contingency  plans may not be adequate to protect the Company  from the
         adverse  effects of such  problems.  The worst case scenario  resulting
         from  Year  2000  issues  would be a  material  adverse  impact  on the
         Company's  results of operations,  an  interruption  in normal business
         operations,  or an adverse impact on the Company's  relationships  with
         customers, suppliers or others.


         Three Months Ended April 4, 1999 and March 29, 1998

              Net revenues increased to $10.9 million for the first three months
         of 1999,  compared to $10.4 million for the similar period of 1998. The
         increase was primarily  attributable to increased sales of $3.3 million
         for  automotive  film  offset by  decreased  sales of $2.1  million for
         anti-reflective  film and $0.7 million of various other  products.  The
         decrease in  anti-reflective  film sales was  primarily  due to minimal
         production  in the Tempe plant during  January and  February  1999 as a
         result of the  re-certification  of  production  processes  for product
         provided  to  a  single   customer.   In  March  the  Tempe  plant  was
         re-certified and commenced production.



                                       9
<PAGE>

              Cost  of  sales  for the  first  quarter  of  1999  was 82% of net
         revenue,   compared  to  98%  for  the  similar  period  of  1998.  The
         improvement  in cost  of  sales  was due to an  increase  in  sales  of
         automotive film which contributes higher gross margins.  Also, the loss
         of production  capacity and product  yields in Tempe in the first three
         months of 1999 had less  impact on cost of sales than the  process  and
         product yield  problems  experienced at the Tempe facility in the first
         three months of 1998.

               Research  and  development  expenses,  as a percent of net sales,
         were 11% of net revenues  for the first three months of 1999,  compared
         to 10% for the similar period in 1998. The absolute  dollars  increased
         to $1.2  million in the first  quarter of 1999 from $1.1 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
         resulting in faster coating processes.

              Selling,  general and administrative  expense, as a percent of net
         sales,  was 18% of net  revenues  in the  first  three  months of 1999,
         compared to 23% for the similar  period in 1998.  The absolute  dollars
         decreased  to $2.0  million  in 1999 from  $2.4  million  in 1998.  The
         decrease  in  absolute  dollars  was  primarily  due to a  decrease  in
         personnel in 1999 and  reorganization  severance payments in 1998 which
         was the result of combining the  Company's  two  divisions  into one in
         1998.

              Net interest expense increased to $0.3 million for the first three
         months of 1999 compared to $0.1 million for the similar  period of 1998
         due to a  decrease  in  interest  income.  The  average  cash  balances
         invested during the first three 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 $1.5  million  for the  first  three  months  of 1999,
         compared to a pre-tax  loss of $3.4  million for the similar  period in
         1998.

         Liquidity and Capital Resources

              On December  16,  1996,  the Company  borrowed $5 million  from an
         institutional  lender for partial  financing  of the new  manufacturing
         facility in Tempe,  Arizona.  On April 9, 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 new 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 of approximately $5 million
         was completed on April 28, 1997.  In addition,  a loan  agreement  with
         Sanwa Bank was  signed on May 2, 1997,  and the  Company  received  the
         first $5  million  of funding  on May 6,  1997,  and the  remaining  $5
         million was received on November 6, 1997. The manufacturing facility in
         Tempe,  Arizona began operations during the fourth quarter 1997, and is
         currently dedicated to the production of anti-reflective film products.

                                       10
<PAGE>

              From  December  31,  1998 to April 4,  1999,  cash and  short-term
         investments  decreased by $3.9 million,  primarily due to  expenditures
         for property and equipment, payments on debt and cash used in operating
         activities.  Of the capital  expenditures during the first three months
         of 1999, approximately $1.2 million was for the conversion of an older,
         large-scale  production  machine  located in Palo Alto,  California  to
         produce advanced  anti-reflective  film products and approximately $0.9
         million  for the new  manufacturing  machine,  PM#6,  to be  located in
         Tempe,   Arizona.  The  cash  used  in  operating  activities  resulted
         primarily  from a decrease  of $2.9  million in  accounts  payable  and
         accrued  liabilities  and the net loss of $1.5  million  for the  first
         three  months of 1999 offset by a decrease in  accounts  receivable  of
         $2.5 million and depreciation and amortization of $1.2 million.

              At  April 4,  1999,  the  Company  had  $0.2  million  of cash and
         short-term investments.  The Company also has a bank line of credit for
         $4 million  under which the Company has $0.5 million in  borrowings  at
         April 4, 1999 and term loans of $10 million  and $5 million,  which are
         subject  to  certain  financial  covenants.  The  Company  was  not  in
         compliance with some of the financial covenants  pertaining to the term
         loans at April 4, 1999.  The Company is in continuing  default of these
         covenants  and has  therefore  classified  the term  loans  as  current
         liabilities 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  $14
         million to $17 million of new capital  equipment in 1999 which includes
         the purchase of two new production machines for its film products and a
         planned expansion in the European  automotive film market.  The Company
         is currently seeking  approximately $10 million of additional equipment
         financing from one of its current lenders and expects this financing to
         be in place early in the second quarter of 1999,  although there can be
         no assurance  that the Company  will be  successful  in obtaining  this
         financing.  Additionally,  the Company's Convertible  Subordinated Note
         for $2.65 million is due and payable on May 31, 1999.

              While  there  can  be  no  assurance  that  the  Company  will  be
         successful in its efforts to renegotiate  its financial  covenants with
         its lenders or obtain the  additional  financing that will be necessary
         for its 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  borrowing,  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  financing
         described  above,  it may also 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



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<PAGE>

         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") and the
         Company's  Convertible  Subordinated Note and bank line of credit which
         are  tied  to the  prime  rate.  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 three
         months of 1999 was not material.

              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 71% of
         the  Company's  total sales in the first  three  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 three months of 1999 was not material.



                                       12
<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

                           No  matters  were  submitted  to a vote  of  security
                           holders during the quarter ended April 4, 1999.


         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



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<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 12, 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




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