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 March 29, 1998

/_/  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: (415) 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 March 29,  1998 there were  7,618,095  shares of the  Registrant's  Common
Stock outstanding.

This report, including all attachments, contains 12 pages.


                                       1

<PAGE>


                           SOUTHWALL TECHNOLOGIES INC.

                                      INDEX



                                                                     Page Number

                          PART 1 FINANCIAL INFORMATION

Item 1   Financial Statements:

         Consolidated Balance Sheet - March 29, 1998
         and December 31, 1997......................................3

         Consolidated Statement of Operations -
         three months ended March 29, 1998
         and March 30, 1997 ........................................4

         Consolidated Statement of Cash Flows -
         three months ended March 29, 1998
         and March 30, 1997 ........................................5

         Consolidated Statement of Stockholders' Equity -
         three months ended March 29, 1998..........................6

         Notes to Consolidated Financial Statements.................7

Item 2   Management's Discussion and Analysis
         of Financial Condition and Results of Operations...........9


                            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>


<TABLE>
                                                    PART 1 FINANCIAL INFORMATION

Item 1  Financial Statements
                                                     CONSOLIDATED BALANCE SHEET
                                                (in thousands, except per share data)

<CAPTION>
                                                                                              March 29, 1998       December 31, 1997
                                                                                              --------------       -----------------
                                                                                               (Unaudited)
<S>                                                                                              <C>                    <C>     
ASSETS

Current assets:
     Cash and cash equivalents                                                                   $  8,861               $ 10,524
     Short-term investments                                                                         1,517                      7
     Accounts receivable, net of allowance
      for doubtful accounts of $915 and $834                                                        9,214                 11,926
     Inventories                                                                                   10,453                 10,118
     Other current assets                                                                           1,120                  1,118
                                                                                                 --------               --------
            Total current assets                                                                   31,165                 33,693

Property and equipment, net                                                                        26,394                 26,272
Other assets                                                                                        1,486                  1,504
                                                                                                 --------               --------

            Total assets                                                                         $ 59,045               $ 61,469
                                                                                                 ========               ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                                            $  5,727               $  4,835
     Accrued compensation                                                                           2,102                  2,009
     Other accrued liabilities                                                                      1,506                  1,546
     Current portion of long-term debt                                                              1,436                  1,304
                                                                                                 --------               --------

            Total current liabilities                                                              10,771                  9,694

Long-term debt                                                                                     15,289                 15,539
Deferred income taxes                                                                                 496                    496
                                                                                                 --------               --------
            Total liabilities                                                                      26,556                 25,729
                                                                                                 ========               ========

Commitments

Stockholders' equity:
     Common stock, $.001 par value,
      20,000 shares authorized:
      Issued and outstanding: 7,742 and 7,636                                                           8                      8
     Capital in excess of par value                                                                51,708                 51,513
     Notes Receivable                                                                                (606)                  (656)
     Accumulated deficit                                                                          (18,006)               (14,631)
      Less treasury stock, 124
      and 123 shares                                                                                 (615)                  (494)
                                                                                                 --------               --------

            Total stockholders' equity                                                             32,489                 35,740
                                                                                                 --------               --------
            Total liabilities and
             stockholders' equity                                                                $ 59,045               $ 61,469
                                                                                                 ========               ========

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

                                                                 3

<PAGE>


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

<CAPTION>
                                                                                             March 29, 1998           March 30, 1997
                                                                                             --------------           --------------
<S>                                                                                             <C>                     <C>     
Net revenues                                                                                    $ 10,416                $ 10,855
                                                                                                --------                --------

Costs and expenses:
   Cost of sales                                                                                  10,215                   6,980
   Start-up costs - Tempe                                                                           --                       178
   Research & development                                                                          1,060                     707
   Selling, general and
    administrative                                                                                 2,408                   2,161
                                                                                                --------                --------

    Total costs and expenses                                                                      13,683                  10,026
                                                                                                --------                --------

Income/loss) from operations                                                                      (3,267)                    829

Interest income/(expense), net                                                                      (108)                    (33)
                                                                                                --------                --------

Income/(loss) before income taxes                                                                 (3,375)                    796

Provision for income taxes                                                                          --                        30
                                                                                                --------                --------

Net income/(loss)                                                                               $ (3,375)               $    766
                                                                                                ========                ========

Net income/(loss) per share - Basic                                                             $   (.45)               $    .12
                              Diluted                                                           $   (.45)               $    .11

Weighted average shares of
common stock and common
stock equivalents - Basic                                                                          7,561                   6,534
                    Diluted                                                                        7,561                   7,212

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

                                                                 4

<PAGE>


<TABLE>
                                                     SOUTHWALL TECHNOLOGIES INC.
                                                CONSOLIDATED STATEMENT OF CASH FLOWS
                                                           (in thousands)
                                                             (Unaudited)

<CAPTION>
                                                                                                          Three Months Ended
                                                                                                ------------------------------------
                                                                                                March 29, 1998        March 30, 1997
                                                                                                --------------        --------------
<S>                                                                                                <C>                   <C>     
Cash flows from operating activities:
     Net income (loss)                                                                             $ (3,375)             $    766
     Adjustments to reconcile net income(loss)
      to net cash provided by (used in)
      operating activities:
     Depreciation and amortization                                                                      940                   627
     Decrease (increase) in accounts receivable                                                       2,712                (1,696)
     Decrease (increase) in inventories                                                                (335)                 (227)
     Decrease (increase) in other current assets                                                         (2)                  (48)
     (Decrease) increase in accounts payable
      and accrued liabilities                                                                           945                  (445)
                                                                                                   --------              --------

Cash provided by (used in) operating
 activities                                                                                             885                (1,023)
                                                                                                   --------              --------

Cash flows from investing activities:
     Decrease (increase) in short-term investments                                                   (1,510)                 --
     Expenditures for property and equipment
      and other assets                                                                               (1,044)               (1,367)
                                                                                                   --------              --------

Net cash (used in) provided by investing
   activities                                                                                        (2,554)               (1,367)
                                                                                                   --------              --------

Cash flows from financing activities:
     Increase in(reduction of) long-term debt                                                          (118)                 (317)
     (Purchase) issuance of treasury stock, net                                                          74                   191
     Repayment of stock option loans                                                                     50                  --
                                                                                                   --------              --------


Net cash (used in) provided by financing activities                                                       6                  (126)
                                                                                                   --------              --------

Net increase (decrease) in cash and cash
 equivalents                                                                                         (1,663)               (2,516)

Cash and cash equivalents, beginning of year                                                         10,524                 7,419
                                                                                                   --------              --------

Cash and cash equivalents, end of period                                                           $  8,861              $  4,903
                                                                                                   ========              ========

Supplemental schedule of non-cash
     investing and financing activities:                                                               --                    --

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

                                                                 5

<PAGE>


<TABLE>
                                           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                                                  Three Months Ended March 29, 1998
                                                           (in thousands)
                                                             (Unaudited)

<CAPTION>
                                                                     Capital in                                            Total
                                                 Common Stock        excess of       Notes      Accumulated  Treasury  Stockholders'
                                             Shares       Amount     par value     Receivable    Deficit      Stock       Equity
                                            --------     --------     --------     --------     --------     --------     --------
<S>                                            <C>       <C>          <C>          <C>          <C>          <C>          <C>     
Balance; December 31, 1997                     7,636     $      8     $ 51,513     $   (656)    $(14,631)    $   (494)    $ 35,740

Exercise of Stock Options:
     Paid with cash                                                   $    (69)                              $    143     $     74
     Paid with stock                             106                  $    264                               $   (264)        --

Repayment of Stock Option Loans                                                    $     50                               $     50

Net loss                                                                                        $ (3,375)                 $ (3,375)
                                            --------     --------     --------     --------     --------     --------     --------

Balance; March 29, 1998                        7,742     $      8     $ 51,708     $   (606)    $(18,006)    $   (615)    $ 32,489
                                            ========     ========     ========     ========     ========     ========     ========

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

                                                                 6

<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, 1997.  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 at March 29, 1998
         and December 31, 1997, consisted of the following:

                                             March 29, 1998  December 31, 1997
                                             --------------  -----------------
         Raw materials                          $ 4,010         $ 4,502
         Work-in-process                          3,251           2,551
         Finished goods                           3,192           3,065
                                                -------         -------
             Total                              $10,453         $10,118
                                                =======         =======

         Note 3 - Commitments:

         During the first  quarter of 1996,  the  Company  and Sony  Corporation
         signed  an  Addendum  #1 to  Supply  Agreement.  Under the terms of the
         amended  agreement,  among other  things,  Sony agreed to increase  its
         minimum  order  of  anti-reflective  film  beginning  July 1,  1997 and
         extending through December 31, 2000 and Southwall agreed to install any
         necessary  additional  manufacturing  capacity  to supply  the  minimum
         quantities required by this agreement.  Should either Southwall fail to
         supply or Sony fail to purchase the minimum  quantities  prescribed  in
         the contract, a penalty is enforceable by the other party in the amount
         of one half of the selling  price of the product for the  quantity  not
         supplied or purchased.

         The Company  began  occupying a new leased  facility  located in Tempe,
         Arizona, on June 27, 1997, has installed and is operating the equipment
         required for the manufacturing of anti-reflective film.

         The Company has also secured  financing from a combination of borrowing
         from  lending  institutions  and an equity sale to a major  investor to
         finance this expansion and related  working  capital  requirements.  On
         December 16, 1996, the

                                       7

<PAGE>


         Company borrowed $5 million from an institutional  lender.  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.  The  remaining $5 million of loan funding was received
         on  November  6,  1997.  The loan is for a period of seven and one half
         (7.5) years,  with a four(4) year interest  only grace period,  payable
         semi  annually at an interest rate of BBA Libor,  fixed semi  annually,
         plus seven sixteenths percent (4.375%).  In addition,  a loan guarantee
         fee of nine sixteenths  percent (.5625%) per annum is payable to Teijin
         on the same payment schedule as the loan interest payments.

                                       8

<PAGE>


         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.  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  products.  In
         addition,  operating results have  historically  varied from quarter to
         quarter as a function of the  utilization  of the Company's  production
         machines.   Manufacturing   inefficiencies   have   resulted  from  the
         development  and  introduction  of new products and the changing mix of
         products  manufactured.  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.

         The Company is committed to increasing  revenues by expanding capacity,
         applications,  and introducing new  technologies.  Although the Company
         has recently completed a major expansion of its capacity and is seeking
         to further expand existing  applications,  to develop new  applications
         and to continue to expand  international  marketing and sales  efforts,
         there can be no assurance  that the Company will be able to continue to
         increase  revenues.  The Company is  currently  planning to order a new
         production  machine as early as June 1998 at an approximate cost of $11
         million and is in the  process of  renovating  an  existing  production
         machine at an estimated cost of $1.3 million. The Company believes that
         the additional  capacity will allow continued growth in its Heat Mirror
         XIR(R) films sold to OEM automotive  glass  manufacturers as well as to
         after market  automotive and  architectural  customers.  The Company is
         also considering  ordering another new production machine in the second
         half of 1998 at an  estimated  cost of  approximately  $7.5  million to
         expand its  capacity to  manufacture  anti-reflective  films.  There is
         significant  risk in the  expansion  projects  currently in process and
         planned  and  there  can be no  assurances  that  the  Company  will be
         successful in completing these projects when scheduled or that start-up
         costs and initial  production  will be completed in accordance with the
         Company's current plans.

         As previously  reported,  process and machine problems during the first
         quarter at the Company's new Tempe,  Arizona facility resulted in yield
         levels on  anti-reflective  film of less than half the level  expected,
         contributing  to  an  increase  in  average  cost  of  the  product  of
         approximately  35%.  In  addition,  average  production  yields on Heat
         Mirror XIR automotive  films  manufactured  in the Company's Palo Alto,
         California  facility  were  approximately  16% lower  than in the first
         quarter 1997,  increasing labor and material costs and using additional
         machine  time to meet  customer  demand.  These yield  issues have been
         addressed  and are  expected to be  substantially  resolved  during the
         second

                                       9

<PAGE>


         quarter 1998.  Improvements  made during the first quarter are expected
         to lead to significantly better yields for these products, allowing the
         Company  to ship more  while  reducing  costs.  Additionally,  capacity
         constraints  which have impacted the Company's ability to meet customer
         demands are being  addressed with the planned  purchase of at least one
         and possibly two new production  machines and renovation of an existing
         machine as mentioned above. Inability to effectively increase yields to
         anticipated   levels  and  to  successfully   complete  the  renovation
         projects,  could  result in the Company not meeting its future  revenue
         and  net  income   objectives   and  the  minimum   quantity   delivery
         requirements under the Sony contract.

         Year 2000

         In October 1996 the Company began reviewing year 2000 issues,  prepared
         a plan to  address  those  issues and began  systematically  modifying,
         upgrading  or  replacing  software as  necessary  and then  testing and
         implementing  those changes.  The Company has completed  major upgrades
         and modifications which have made essentially all mainframe  accounting
         and inventory control software year 2000 compliant. All systems not yet
         compliant are scheduled to be made  compliant by December 31, 1998. All
         projects  relating  to the year  2000  issue  have  been  handled  with
         existing staff, and the total expense is not expected to be material to
         the Company.  The year 2000 problem creates risk for the Company should
         any unforseen  problems arise, both in its own systems and those of key
         customers  and  suppliers.  The  greatest  risk  within the  Company is
         related to custom data base software. The Company plans to discuss with
         key  customers  and  suppliers  their plans to address year 2000 issues
         during 1998, but management has not yet assessed this related potential
         effect on the Company's earnings.

         Three Months Ended March 29, 1998 and March 30, 1997

         Net revenue  decreased  to $10.4  million for the first three months of
         1998,  compared to $10.9  million for the similar  period of 1997.  The
         decrease was due  primarily to a lower price for  anti-reflective  film
         products sold to Sony,  and yield  problems which reduced the amount of
         anti-reflective  product  available to ship to Sony.  Yield problems on
         the  Company's   Heat  Mirror  XIR  film  for  OEM   automotive   glass
         manufacturers also reduced the amount of product available for shipment
         to those  customers  and to other  customers of product in that product
         family.

         Cost of sales for the  first  quarter  of 1998 was 98% of net  revenue,
         compared to 66% for the similar period of 1997. The increase in cost of
         sales was due to process  and  mechanical  problems,  primarily  at the
         Company's new Tempe, Arizona facility, which resulted in low yields and
         throughput on anti-reflective  film for computer  monitors.  Production
         yields on the Company's Heat Mirror XIR automotive film produced in the
         Palo Alto,  California facility were also lower than in the same period
         last year, using additional  machine time and material to meet customer
         demands. Additionally, inventory reserves were increased $.5 million in
         the quarter for older inventories.

         Research and development  expenses, as a percent of net sales, were 10%
         for the first  three  months of 1998,  compared  to 7% for the  similar
         period in 1997. The absolute dollars increased to $1.1 million from $.7
         million.  The  increase in 1998 is  attributable  to higher new product
         development  costs,   primarily  in  development  of  product  for  the
         automotive film market,  and development of new deposition  technology.
         Additionally,  the  Company  wrote  off a  $.1  million  for a  license
         agreement.

         Selling, general and administrative expense, as a percent of net sales,
         was 23% in the  first  three  months of 1998,  compared  to 20% for the
         similar period

                                       10

<PAGE>


         in 1997.  The absolute  dollars  increased to $2.4 million in 1998 from
         $2.2 million in 1997.  The increase in absolute  dollars was  primarily
         caused by  reorganization  severance  payments  and to the  addition of
         sales personnel in Europe and South America.

         Net interest expense increased in 1998 compared to 1997 due to interest
         payments on long term debt. Long term debt was higher by  approximately
         $9.3 million due to borrowing for expansion projects. Additionally, the
         Company  is no longer  capitalizing  interest  expense  related  to the
         expansion  project in Tempe,  Arizona.  Increased  interest expense was
         also partially  offset by higher  interest income due to an increase in
         cash invested by approximately $5 million.

         As a result of the factors  discussed  above,  the  Company  reported a
         pre-tax  loss of $3.4  million  for the  first  three  months  of 1998,
         compared to a pre-tax  profit of $.8 million for the similar  period in
         1997.

         Liquidity and Capital Resources

         At March 29, 1998, the Company's net working capital was $20.4 million,
         decreasing  from $24.0  million at December 31,  1997.  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 new  manufacturing  facility began  operations  during the
         fourth  quarter 1997,  and is currently  dedicated to the production of
         anti-reflective  film product to fulfill the supply requirements of the
         supply agreement with Sony. Prior to the borrowing  required to finance
         the new  facility,  the Company had financed  itself  through cash flow
         from operations and its existing cash balances.

         From  December  31,  1997,  to March  29,  1998,  cash  and  short-term
         investments decreased by $.2 million.  Accounts receivable decreased by
         $2.7 million  primarily  due to sales which were $5.1 million  lower in
         the first quarter 1998 compared to the fourth quarter 1997.

         Additions to property and  equipment  were  approximately  $1.0 million
         during the first quarter of 1998. The Company anticipates total capital
         expenditures  of  approximately  $4.5  million  during 1998 for general
         replacements  and  discretionary  improvements  of current  facilities,
         including  approximately $1.3 million for the renovation of an existing
         production machine.

         At March 29, 1998, the Company had $10.4 million of cash and short-term
         investments and a $6 million revolving line of credit, which is subject
         to certain  financial  covenants.  The loss incurred by the Company for
         the first quarter of 1998 violated a loan covenant  under the revolving
         line which  prohibited any loss in excess of $1 million dollars for any
         quarter.  However,  the bank has indicated they do not intend to revoke
         the line and will  present a new  proposal  to extend  the line for one
         year from the June 5, 1998

                                       11

<PAGE>


         expiration  date of the current loan  agreement.  As of March 29, 1998,
         there were no borrowings under this line of credit.

         While the Company  believes that it currently has  sufficient  funds to
         finance its  operations  through at least the remainder of 1998, to the
         extent  that  such  funds  are   insufficient  to  fund  the  Company's
         activities,  including a potential major expansion project, the Company
         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.

                                       12

<PAGE>


                            PART II OTHER INFORMATION


         Item 1   Legal Proceedings and Other Matters

         The Company has been named a defendant  in a lawsuit  filed on April 5,
         1996 by one of its  customers in the United States  District  Court for
         the Eastern  District of New York. The lawsuit in federal court alleges
         certain  contractual  violations  by the Company and seeks relief in an
         aggregate  amount in excess of $35 million.  The Company  believes that
         this  lawsuit  is  without  merit  and  intends  to defend  against  it
         vigorously.

         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 March 29, 1998.

         Item 5   Other Information
                  Not applicable

         Item 6      Exhibits and Reports on Form 8-K

              (a)    Exhibits - None

              (b)    Reports of Form 8-K - None

                                       13

<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, 1998


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


                                      By: /s/ L. Ray Christie
                                         ---------------------
                                          L. Ray Christie
                                          Vice President and
                                          Chief Financial Officer

                                       14