8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of Earliest Event Reported): November 11, 2003

Southwall Technologies Inc.

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(Exact name of registrant as specified in its charter)

Delaware

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(State of incorporation or organization)

0-15930 94-2551470

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(Commission File Number) (I.R.S. Employer

Identification No.)

3975 East Bayshore Road, Palo Alto, California 94303

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(Address of Principal Executive Office) (Zip Code)

Registrant's telephone number, including area code: (650) 962-9111

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Item 5. Other Events.

On November 11, 2003, Southwall Technologies Inc. ("Southwall") issued a press release announcing that on that same day it had entered into a letter agreement with Needham & Company, Inc. ("Needham"), outlining the principal elements of a proposed financing and proposed guarantees of an increase in the borrowing capacity under Southwall's bank facility. Pursuant to the letter, Southwall and Needham have agreed to negotiate in good faith definitive agreements with respect to the proposed guarantees and financing, subject to the satisfactory completion by Needham of its due diligence review of Southwall.

Pursuant to the letter agreement, the definitive agreements would provide that Needham would guarantee $1,500,000 of additional borrowing by Southwall under its existing Domestic Factoring Agreement with Pacific Business Funding, a division of Cupertino National Bank, which is a subsidiary of Greater Bay Bancorp ("PBF"), upon the satisfaction, in Needham's reasonable discretion, of certain conditions. These conditions would include a confirmation of PBF's liens in connection with its facility; Needham, Southwall and PBF's agreeing on the form of Needham's guarantee, which will be acceptable to Needham in its sole and absolute discretion; PBF's agreeing to the additional borrowing; the extension of the expiration of the PBF facility from May 6, 2004 to May 6, 2005; and the filing by Southwall of its Form 10-Q for the third quarter. In addition, Southwall would grant Needham board observer rights and appoint George Boyadjieff as the chairman of the board of directors. In connect ion with this guarantee, Southwall would issue Needham a five year warrant to purchase a number of shares of Southwall's common stock equal to 5% of the total shares outstanding, at a nominal exercise price.

The definitive agreements would further provide that Needham would guarantee an additional $500,000 under the PBF facility upon the satisfaction, in Needham's reasonable discretion, of additional conditions. These additional conditions would include that PBF would have agreed to the additional borrowing; Southwall would have secured unconditional releases from its Tempe, Arizona landlord and the lessor of the equipment located in Tempe and renegotiated its Palo Alto, California leases; Southwall would have reached agreement with Sanwa Bank with respect to Southwall's outstanding debt owing to Sanwa Bank (currently $1,250,000 in principal amount plus accrued interest); and Southwall would have entered into agreements with its trade creditors deferring and/or extending payment terms. In connection with this additional guarantee, Southwall would issue Needham an additional five year warrant to purchase a number of shares of Southwall's common stock equal to 5% of the total shares outstandin g, at a nominal exercise price.

Pursuant to the letter agreement, the definitive agreements would further provide that, following the extension of credit described above, Needham would agree to purchase from Southwall, and Southwall would agree to sell to Needham, 1,000,000 shares of a newly-created convertible preferred stock at a price of $1.00 per share, upon the completion, in Needham's reasonable discretion, of certain restructuring measures on or before January 4, 2004. The preferred stock would be convertible on a one-for-one basis into Southwall common stock, have a preference over the common stock in the event of a liquidation or winding up of Southwall, and carry a cumulative dividend of 10% per annum along with other protective and anti-dilution provisions. In connection with this purchase of Southwall's preferred stock, Needham would receive an additional five year warrant to purchase a number of shares of Southwall's common stock equal to 5% of the total shares outstanding, at a nominal exercise price.

The definitive agreements would further provide that Needham would agree to purchase from Southwall, and Southwall would agree to sell to Needham, an additional 2,000,000 shares of the newly-created convertible preferred stock at a price of $1.00 per share upon satisfaction, in Needham's reasonable discretion, of certain conditions. These conditions would include Southwall's having attained at least $10 million of revenue for the first quarter of 2004 from current business lines (excluding revenue from LCD anti-reflective film and Class B PDP film) and Southwall's having been cash flow break-even for the first quarter. Cash flow break-even would mean that Southwall's net loss plus depreciation, amortization and non-cash asset impairment and restructuring charges, measured in accordance with GAAP, would not show a loss in excess of $200,000. In connection with this second purchase of Southwall's preferred stock, Needham would receive an additional warrant to purchase a number of shares o f Southwall's common stock equal to 4% of the total shares outstanding, at a nominal exercise price.

If all of the transactions contemplated by the letter agreement between Southwall and Needham are consummated, Southwall will receive guarantees with respect to an additional $2,000,000 of borrowing under its factoring agreement with PBF and $3,000,000 in cash, in exchange for warrants to purchase an aggregate number of shares of common stock equal to approximately 19% of the shares outstanding before such issuance and 3,000,000 shares of a newly-created preferred stock, which would be convertible into a number of shares of common stock equal to approximately 24% of the shares outstanding before such issuance. If Needham were to exercise all such warrants and convert all such shares of preferred stock and continue to hold the approximately 1,480,548 shares of common stock currently held by it, it would own approximately 6,855,5486,863,594 shares of Southwall common stock, or about 4438% of the total shares of Southwall after such exercise and conversion.

In connection with the execution of the letter agreement with Needham, Southwall issued to Needham Capital Partners a warrant to purchase 1,254,235 shares of common stock, approximately 10% of the total shares currently outstanding. The warrant, exercisable for $0.01 per share, will expire on the earlier of five years from its issuance and the execution of the definitive agreements by Southwall, Needham and PBF. The number of shares issuable upon exercise of the warrant will increase in an amount equal to 10% of any securities issued in connection with a financing or capital raising, other than with Needham, occurring before the end of Southwall's first fiscal quarter of 2004. Southwall granted certain registration rights to Needham Capital Partners with respect to the shares issuable upon exercise of the warrant. If the parties have not entered into definitive agreements by November 30, 2003, the letter agreement will terminate and Needham will have no obligation to extend the guarant ees or purchase the shares of preferred stock, as described above.

Sanwa Bank has notified Southwall that Southwall has not made the final payment under its borrowing arrangement with Sanwa ($1,250,000 in principal plus accrued interest) that was due on November 6, 2003, and that on November 1112, 2003, Sanwa will deem Southwall in default.

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

(c) Exhibits

99.1 Press Release, dated November 11, 2003, issued by Southwall Technologies Inc.

99.2 Letter agreement, dated November 11, 2003, between Southwall and Needham & Company, Inc.

99.3 Warrant to purchase shares of Southwall's common stock, dated November 11, 2003, issued to Needham Capital Partners.

SIGNATURE

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 hereunto duly authorized.

SOUTHWALL TECHNOLOGIES INC.

Date: November 11, 2003 By: /s/ Thomas G. Hood____________

Thomas G. Hood

President and Chief Executive Officer

EXHIBIT INDEX

Exhibit No. Description

99.1 Press Release, dated November 11, 2003, issued by Southwall Technologies Inc.

99.2 Letter agreement, dated November 11, 2003, between Southwall and Needham & Company, Inc.

99.3 Warrant to purchase shares of Southwall's common stock, dated November 11, 2003, issued to Needham Capital Partners.

EX-99.1

PRESS RELEASE

3975 East Bayshore Road

Palo Alto, CA 94303

Phone: (650) 962-9111

Fax: (650) 967-8713

www.southwall.com

Contacts:

Thomas G. Hood, President and CEO

thood@southwall.com

Michael E. Seifert, Sr. Vice President and CFO

mseifert@southwall.com

For Immediate Release

Southwall Announces Proposed Bank Guarantee and Equity Financing with Needham & Company

PALO ALTO, Calif.-November 11, 2003-Southwall Technologies Inc. (Nasdaq: SWTX), a global developer, manufacturer and marketer of thin-film coatings for the automotive glass, electronic display and architectural markets, today announced that on November 11, 2003, it entered into a letter agreement with Needham & Company, Inc., for a proposed bank guarantee and equity financing package with Needham or its affiliates of up to $5 million.

"As we noted in our news release on third-quarter results, we recognize the urgent need to reduce our spending and raise additional cash," said Thomas G. Hood, Southwall's president and chief executive officer. "We believe that our proposed financing with Needham, in conjunction with internal actions designed to reduce our expenses, will address our cash requirements and offer the most appropriate financing alternative currently available."

If all of the transactions contemplated by the letter agreement between Southwall and Needham were consummated, Southwall would receive guarantees with respect to an additional $2,000,000 of borrowing under its factoring agreement with Pacific Business Funding¹ and $3,000,000 in cash, in exchange for warrants to purchase an aggregate number of shares of Southwall common stock equal to approximately 19% of the total shares outstanding before such issuance and 3,000,000 shares of a newly issued convertible preferred stock. This preferred stock would be convertible into a number of shares of Southwall common stock equal to approximately 24% of the total shares outstanding before such issuance. If Needham were to exercise all such warrants and convert all such shares of preferred stock, while maintaining its current position of approximately 1,481,000 shares of common stock, then it would own ap proximately 6,864,000 shares of Southwall common stock, or about 38% of the total shares outstanding.

Under the letter agreement, Needham would issue the guarantees of the Company's bank line in two separate pieces of $1.5 million and $500,000 and would purchase the equity in two separate tranches of $1.0 million and $2.0 million following the issuance of the guarantees. The issuance of each guarantee and the purchase of each equity tranche would be subject to the satisfaction, in Needham's reasonable discretion, of certain conditions, including, among other things, the receipt of concessions from creditors and landlords, the achieving of cash flow break-even at quarterly revenue levels below third quarter 2003 levels and the naming of a new chairman of the board.

The company has nominated George Boyadjieff for this role. Mr. Boyadjieff is the chairman emeritus and recently retired chief executive officer of Varco International, Inc. (NYSE: VRC), a diversified oil service company with over $1.4 billion in annual revenues. In addition, Needham would receive board observer rights.

Southwall and Needham have agreed to negotiate in good faith definitive agreements with respect to the proposed guarantees and equity financing. There is no assurance, however, that the parties will enter into definitive agreements (which will include representations, warranties, covenants, and closing conditions customary for transactions of this type) or that even if the parties do reach definitive agreements that the transactions contemplated by such agreements would be consummated fully or partially. Moreover, the extension of guaranties will require that Pacific Business Funding, the Company and Needham enter into agreements and, similarly, there is no assurance that the parties will be able to reach such agreements on commercially reasonable terms, if at all. If the parties have not entered into definitive agreements by November 30, 2003, the letter agreement will terminate and Needham will have no obligation to extend the guarantees or purc hase the shares of preferred stock, as described above.

In connection with the execution of the letter agreement, Southwall issued to Needham a warrant to purchase 1,254,235 shares of common stock, approximately 10% of the total shares currently outstanding. The warrant, exercisable at $0.01 per share, will expire on the earlier of five years from its issuance or the execution of the definitive agreements. The number of shares issuable upon exercise of the warrant will increase in an amount equal to 10% of any securities issued in connection with a financing or capital raising, other than with Needham, occurring before the end of Southwall's first fiscal quarter of 2004. Southwall granted certain registration rights to Needham with respect to the shares issuable upon exercise of the warrant.

For a complete description of the letter agreement and the warrant issued to Needham, please refer to the Southwall's Form 8-K to be filed Wednesday, November 12, 2003, with the Securities and Exchange Commission, which includes as exhibits copies of the letter agreement and the warrant. The descriptions in this release of those documents are qualified in their entirety by reference to the actual documents.

About Southwall Technologies Inc.

Southwall Technologies Inc. designs and produces thin-film coatings that selectively absorb, reflect or transmit light. Southwall products are used in a number of automotive, electronic display and architectural glass products to enhance optical and thermal performance characteristics, improve user comfort and reduce energy costs. Southwall is an ISO 9001:2000-certified manufacturer and exports advanced thin-film coatings to over 25 countries around the world. Southwall's customers include Audi, BMW, DaimlerChrysler, Hewlett-Packard, Mitsubishi Electric, Mitsui Chemicals, Peugeot-Citroen, Pilkington, Renault, Saint-Gobain SEKURIT, and Volvo.

About Needham & Company

Needham & Company, Inc., a leading U.S. investment banking, securities and asset management firm focused primarily on serving emerging growth industries and their investors. Further information is available at www.needhamco.com.

This press release may contain forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995), including, without limitation, statements regarding the Company's expectations, beliefs, intentions, or strategies regarding the future. All forward-looking statements in this press release are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those presented. These risks include the possibility that Southwall and Needham will not enter into definitive agreements, that the terms of the definitive agreements will be materially different from those described in the letter agreement, that Needham will not be satisfied with its due diligence review of the Company, that the conditions for Needham's obligations to provide one or more of the guarantees or to buy some or all of the preferred stock will not be satisfied or that such guarantees will otherwise not be provided or that such shares will otherwise not be purchased, that Pacific Business Funding or the Company's landlords, lessors, vendors, or other creditors will not agree to amendments of their arrangements with the Company that are satisfactory to Needham or at all, that the guarantees and the proceeds from the stock sales described herein will not be sufficient to allow Southwall to meet its obligations or otherwise remain liquid, that the Company will default under the Pacific Business Funding credit facility, that the Company will not receive an exemption from the Nasdaq National Market stockholder approval requirements, that Southwall's common stock may be voluntarily or involuntarily removed from listing on the Nasdaq National Market, that the Company will not reach agreement with its new chairman and that he will not accept such a po sition, that the Company's circumstances will trigger defaults under one or more of its borrowing arrangements, and that the transactions contemplated in this release will have a material adverse effect on the trading price of Southwall's common stock, as well as risks associated with the Company's failure to meet covenants under credit facilities and strains on its liquidity. Further risks are detailed in the Company's filings with the Securities and Exchange Commission, including those set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, filed on March 31, 2003, as amended by an Annual Report on Form 10-K/A filed on April 9, 2003, and its Quarterly Report on Form 10-Q for the quarters ended March 30, 2003 and June 29, 2003, which were filed on May 14, 2003 and August 14, 2003, respectively, and its Current Report on Form 8-K, which will be filed on November 12, 2003.

EX-99.2

CONFIDENTIAL

November 11, 2003

Southwall Technologies Inc.
3975 East Bayshore Road
Palo Alto, California 94304

Attn: Mr. Thomas G. Hood, President

Dear Tom:

The purpose of this letter ("Letter") is to summarize our recent discussions and to outline the principal elements regarding a proposed extension of credit to and, if appropriate, equity financing (the "Proposed Transactions") in Southwall Technologies Inc. ("Southwall") by Needham & Company, Inc., either directly or through one or more of its affiliates (collectively, "Needham").

1. Terms and Conditions of the First Tranche of Extension of Credit. Needham will agree to guarantee $1,500,000 of additional borrowing under Domestic Factoring Agreement ("Factoring Agreement") by and between Southwall and Pacific Business Funding, a division of Cupertino National Bank (the "Bank"), provided that each of the following conditions is, in Needham's reasonable discretion, satisfied:

• Due diligence by Needham and its counsel that the liens granted and security interests created under the Factoring Agreement were, at the time of creation, and are perfected;
• Needham, Southwall and the Bank shall have entered into a guaranty in form and substance satisfactory to the Bank, Needham (in Needham's sole and absolute discretion) and Southwall and the Bank shall have agreed to the additional borrowing;
• The expiration date of the Factoring Agreement shall have been extended from May 6, 2004 to May 6, 2005;
• Southwall shall have issued Needham a five year warrant to purchase common stock for 5% of the issued and outstanding common stock of Southwall at a nominal exercise price per share;
• Southwall shall have granted Needham board observer rights;
• Southwall shall have filed its quarterly report on Form 10-Q for the third quarter of 2003 as required and in compliance with the federal securities laws; and
• Southwall shall have named Mr. George Boyadjieff as its non-executive chairman of the board of directors, Mr. Boyadjieff shall have accepted such position and Southwall and Mr. Boyadjieff shall have reached agreement on terms of his involvement with Southwall.

1. Terms and Conditions of the Second Tranche of Extension of Credit. Needham will agree to guarantee an additional $500,000 under the Factoring Agreement provided that each of the following conditions is, in Needham's reasonable discretion, satisfied:

• Bank shall have agreed to the additional borrowing;
• Southwall shall have secured unconditional releases (releasing Southwall from all claims and liabilities) from its Tempe landlord and Tempe equipment lessor and shall have renegotiated the Palo Alto lease;
• Southwall shall have reached an agreement with Sanwa Bank with respect to Southwall's outstanding debt based on terms agreed between Southwall and Needham;
• Southwall shall have issued Needham a five year warrant to purchase common stock for an additional 5% of the issued and outstanding common stock of Southwall at a nominal exercise price per share (measured without giving effect to any shares issued upon exercise of the warrant described in Section 1 above); and
• Southwall shall have entered into arrangements with its trade creditors deferring and/or extending payment terms based on terms agreed between Southwall and Needham.

3. Terms and Conditions of First Tranche of Equity Investment. Following the provision of the first and second tranche of the extension of credit outlined in item 1 and 2 above, if any, Needham will agree to purchase from Southwall and Southwall will agree to sell to Needham $1,000,000 of newly-created convertible preferred stock of Southwall at a per share price of $1.00 provided that, in Needham's reasonable discretion, Southwall has completed in all material respects the restructuring measures contained in Southwall's plan dated October 30, 2003 (as amended on November 4, 2003) as presented to Needham concerning, among other things, staffing, closing the Tempe facility and reducing the staffing in Palo Alto provided that such conditions are satisfied on or before January 2, 2004. The convertible preferred stock will have a cumulative dividend of 10% per annum along with other customary protective and anti-dilution provisions. It is contemplated that the closing of the first tranche of the equity investment, if any, will be 10 days after the satisfaction of such conditions. In connection with the first tranche of equity investment, Southwall shall issue Needham a five year warrant to purchase common stock for an additional 5% of the issued and outstanding common stock of Southwall (measured without giving effect to any shares issued upon exercise of any warrants issued to Needham as contemplated by this Letter) at a nominal exercise price per share.

4. Terms and Conditions of Second Tranche of Equity Investment. Needham will agree to purchase from Southwall and Southwall will agree to sell to Needham $2,000,000 of the convertible preferred stock at a per share price of $1.00 provided that each of the following conditions is, in Needham's reasonable discretion, satisfied:

• Southwall shall have attained at least $10M revenue for the first quarter of 2004, from current business lines (excluding revenue from LCD AR on TAC and Class B PDP); and
• Southwall shall have been Cash-flow break-even for the first quarter of 2004.

It is contemplated that the closing of the second tranche of the equity investment, if any, will be on April 10, 2004. On or before April 10, 2004, whether or not the second tranche of equity investment is made, Southwall shall issue Needham a five year warrant to purchase common stock for an additional 4% of the issued and outstanding common stock of Southwall (measured without giving effect to any shares issued upon exercise of any warrants issued to Needham as contemplated by this Letter) at a nominal exercise price per share. If approval of Southwall's stockholders is required under applicable Nasdaq rules in connection with the issuance of the preferred stock as contemplated by Section 3 and this Section 4, Southwall may apply and seek to secure a so-called "hardship exemption" to such requirement from Nasdaq.

5. Due Diligence. Needham will be permitted to perform a full due diligence review as to the operational, regulatory and legal aspects of Southwall and its business, and Southwall will promptly provide reasonable access to all of Southwall's facilities, books, records (including the corporate minute book and shareholder records) and other business, technical and financial information reasonably required by Needham and its agents for this purpose. Completion of the Proposed Transactions are specifically conditioned upon, among other conditions, the satisfactory completion of Needham's due diligence review. Southwall shall promptly notify Needham of any event, condition, circumstance that might result in material adverse effect on Southwall and/or its subsidiaries.

6. Definitive Agreements. The parties shall proceed to negotiate in good faith a definitive agreements governing the Proposed Transactions (the "Definitive Agreements") with terms, representations, warranties, closing conditions and covenants (including, without limitation, registration and information rights) customary for the type of financing being contemplated hereby. If the parties do not enter into Definitive Agreements by November 30, 2003, then this Letter shall terminate and be of no force and effect.

7. Equity Incentives. It is also contemplated that in connection with the equity financings, if any, new equity incentive arrangements will be put in place to properly incentivize Southwall's management.

8. No Exclusivity; Topping Offer Warrant. We bring to your attention that in connection with your consideration of the Letter, Needham is not seeking exclusive negotiations and that Southwall is free to seek alternate sources of financing. In light of this fact and the possibility that Southwall may proceed to pursue another source of financing prior to the execution and delivery of the Definitive Agreements, Southwall shall, upon execution and delivery of this Letter, issue Needham a common stock purchase warrant for 10% of the common stock of Southwall (on a fully-diluted basis after giving effect to any capital raising or financing transaction other than those contemplated by the Letter) at a nominal exercise price per share. The warrant shall expire on the earlier of 5 years after the issuance or at such time as Needham, Southwall and the Bank shall have entered into Definitive Agreements.

9. Expenses. Needham and Southwall shall each pay their own fees, costs and expenses incurred in connection with this Letter and the Proposed Transactions, including all legal, advisory, and accounting fees, costs and expenses, whether or not the Proposed Transactions are completed except that (i) concurrently upon execution and delivery of this Letter, Southwall shall deliver a cashier's check in the amount of $50,000 to the law firm of Heller Ehrman White & McAuliffe LLP which shall be used to pay for the legal fees, costs and expenses incurred by Needham in connection with the Proposed Transactions with the unused balance being returned to Southwall upon completion of the Proposed Transactions, and (ii) Southwall shall pay Needham all costs, fees and expenses imposed on Needham by the Bank in connection with Needham's proposed guaranty.

10. Governing Law. This Letter shall be governed by the laws of the State of New York, without reference to its conflict of law rules.

11. Miscellaneous. This Letter may be executed in two or more counterparts (including by facsimile transmission), each of which shall be deemed an original and all of which together shall constitute one and the same instrument. This Letter supersedes all agreements and understandings, whether written or oral, between the parties with respect to the subject matter hereof. This Letter is not assignable, except that Needham may complete the Proposed Transactions through a wholly owned corporation or other entity and assign its rights under this Letter to such entity without liability or further obligation hereunder.

REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK

We would be pleased to discuss the terms of the this Letter with the board of directors of Southwall at any time. If the foregoing terms and conditions are acceptable to you, please so indicate by signing this Letter and returning an executed copy to my attention by telecopy at (650-854-9853) by no later than 5:00 p.m. Pacific Standard Time on Tuesday, November 11, 2003 after which this Letter will be void.

Sincerely,

Needham & Company, Inc.

______________________
John C. Michaelson

Managing Director

AGREED AND ACCEPTED:

SOUTHWALL TECHNOLOGIES INC.

By:

Name:

Title:

Date:

11/11/03 3:36 PM ()

EX-99.3

NEITHER THIS WARRANT NOR ANY SHARES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAW, AND NEITHER THIS WARRANT NOR ANY SHARES ISSUABLE UPON CONVERSION HEREOF MAY BE TRANSFERRED IN THE ABSENCE OF REGISTRATION THEREUNDER OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.

Warrant

To Purchase Common Stock of

Southwall Technologies Inc.

1. Issuance. This Warrant, dated as of November 11, 2003, is issued to Needham Capital Partners by Southwall Technologies Inc., a Delaware corporation (hereinafter with its successors called the "Company"). This Warrant is issued pursuant to Section 8 of that certain letter agreement dated as of November 11, 2003, by and between Needham & Company, Inc. ("Needham") and the Company (the "Letter Agreement").

2. Purchase Price; Number of Shares. Subject to the terms and conditions hereinafter set forth, the registered holder of this Warrant (the "Holder"), is entitled upon surrender of this Warrant with the subscription form annexed hereto duly executed, at the office of the Company, 3975 East Bayshore Road, Palo Alto, California 94304, or such other office in the United States as the Company shall notify the Holder of in writing, from and after December 1, 2003, and on or before the Termination Date (as defined below), to purchase from the Company 1,254,235 shares (as adjusted or increased, the "Warrant Shares") of the Company's Common Stock, $.001 par value per share ("Common Stock"), at an exercise price equal to $0.01 per share. The "Termination Date" shall mean the earlier to occur of (a) November 11, 2008, and (b) the execution and delivery by Needham and the Company of the Definitive Agreements (as defined in the Letter Agreement).

3. Payment of Purchase Price. The aggregate purchase price payable upon any exercise of this Warrant may be paid in cash or by check or as set forth in Section 4 below.

4. Net Issuance Election. The Holder may elect to receive, without the payment by the Holder of any additional consideration, Warrant Shares equal to the value of this Warrant or any portion hereof by the surrender of this Warrant or such portion to the Company, with the net issuance election notice annexed hereto duly executed, at the office of the Company. Thereupon, the Company shall issue to the Holder such number of fully paid and nonassessable Warrant Shares as is computed using the following formula:

X = Y (A-B)

A

where X = the number of Warrant Shares to be issued to the Holder pursuant to this Section 4.

Y = the number of Warrant Shares covered by this Warrant in respect of which the net issuance election is made pursuant to this Section 4.

A = Fair Market Value (as defined below) of one Warrant Share at the time the net issuance election is made pursuant to this Section 4.

B = the purchase price per share in effect under this Warrant at the time the net issuance election is made pursuant to this Section 4.

For purposes of this Section 4, "Fair Market Value" on any day shall mean (a) the average of the closing bid and asked prices of a share of Common Stock on the trading day immediately preceding the day in question in the over-the-counter market as shown by the National Association of Securities Dealers, Inc. Automated Quotation System, or any similar system of automated dissemination of quotations and securities prices then in common use, if so quoted, as reported by any member firm of the New York Stock Exchange selected by the Company and the Holder, (b) if not quoted as describe in clause (a), the average closing bid and asked prices for a share Common Stock on the trading day immediately preceding the day in question as reported by the National Quotation Bureau Incorporated or any similar successor organization, as reported by any member firm of the New York Stock Exchange selected by the Company and the Holder, or (c) if not quoted as described in clause (a) or (b) above, the fair market value of a share of Common Stock on such date as determined by the board of directors of the Company and the Holder in good faith.

5. Partial Exercise. This Warrant may be exercised in part, and the Holder shall be entitled to receive a new warrant, which shall be dated as of the date of this Warrant, covering the number of Warrant Shares in respect of which this Warrant shall not have been exercised.

6. Issuance Date. The person or persons in whose name or names any certificate representing Warrant Shares is issued hereunder shall be deemed to have become the holders of record of such shares represented thereby as at the close of business on the date this Warrant is exercised with respect to such shares, whether or not the transfer books of the Company shall be closed.

7. Expiration Date. This Warrant shall expire at the close of business on the Termination Date, and shall be void thereafter.

8. Reserved Shares; Valid Issuance. The Company covenants that it will reserve and keep available at all times from and after the date hereof such number of its authorized shares of Common Stock, free from all preemptive or similar rights therein, as will be sufficient to permit the exercise of this Warrant in full. The Company further covenants that such shares as may be issued pursuant to the exercise of this Warrant will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof.

9. Subdivisions, Split-ups, Combinations and Stock Dividends; Reclassifications.

(a) If after the date hereof the Company shall subdivide the Common Stock, by split up or otherwise, or combine such shares, or issue additional shares in payment of a stock dividend on such shares, the number of shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination, and the purchase price shall forthwith be proportionately decreased in the case of a subdivision or stock dividend, or proportionately increased in the case of a combination.

(b) If after the date hereof there shall be any reclassification, capital reorganization or change of the Common Stock (other than as a result of a subdivision, combination or stock dividend provided for in Section 9(a) hereof), then, as a condition of such reclassification, reorganization or change, lawful provisions shall be made, and duly executed documents evidencing the same from the Company shall be delivered to the Holder, so that the Holder shall thereafter have the right to purchase, at a total price not to exceed that payable upon the exercise of this Warrant in full, the kind and amount of shares of stock and other securities and property receivable upon such reclassification, reorganization or change, by holders of the number of shares of Common Stock which might have been purchased by the Holder immediately prior to such reclassification, reorganization or change, and in such case appropriate provisions shall be made with respect to the rights and interest of the Holder to the end that the provisions hereof (including, without limitation, provisions for the adjustment of the purchase price and the number of shares issuable hereunder) shall thereafter be applicable in relation to any shares of stock or other securities and property thereafter deliverable upon exercise hereof.

10. Adjustment upon Financing. The total number of Warrant Shares for which this Warrant shall be exercisable shall be increased by the number of shares of Common Stock equal to 10% of the number of shares of Common Stock issued in any Other Financing Transaction (as defined below). An "Other Financing Transaction" shall mean any capital raising or financing transaction consummated on or before the end of the Company's first fiscal quarter of 2004, by the Company with a party other than Needham or an affiliate of Needham. For purposes of calculating the number of shares issued in any Other Financing Transaction, any warrants, rights or options exercisable for Common Stock and any securities convertible or exchangeable for Common Stock that are issued in such Other Financing Transaction shall be deemed an issuance of the number of shares of Common Stock into which such warrants, rights, options or securities could be exercised, converted or exchanged as of the date of the issuance thereof.

11. Merger or Sale. If this Warrant has not been exercised prior to the closing of a "Merger or Sale", this Warrant will terminate automatically upon such closing. "Merger or Sale" shall mean one or a series of related transactions involving a sale of all or substantially all of the Company's assets, a merger of the Company with or into another entity (if after such merger or asset sale the holders of a majority of the Company's voting securities before the transaction do not constitute a majority of the voting securities of the successor entity), or a transfer of all or substantially all of the Company's voting equity securities to another person or entity.

12. Fractional Shares. In no event shall any fractional share of Common Stock be issued upon any exercise of this Warrant. If, upon exercise of this Warrant as an entirety, the Holder would, except as provided in this Section 12, be entitled to receive such a fractional share, then the Company shall issue the next higher number of full shares of Common Stock, issuing a full share with respect to such fractional share.

13. Registration Rights.

(a) Effective Date. The rights of each Holder that holds Registrable Securities under this Section 13 are effective as of the date hereof and shall remain in full force and effect for so long as the Holder continues to hold any Registrable Securities.

(b) Demand Registrations. In the event that the Company shall receive a written request any time on or after December 1, 2003 that the Company effect any Registration with respect to all or a part (but at least an aggregate of 500,000) of the Registrable Securities for an offering of all or part of the Registrable Securities, the Company shall, subject to receipt of all necessary information from the holders of such shares, as soon as practicable use commercially reasonable efforts to effect Registration of the Registrable Securities specified in such request. The Company shall not be obligated to take any action to effect any such registration pursuant to this Section 13(b) after the Company has effected two such Registrations pursuant to this Section 13(b) and such Registrations have been declared effective.

(c) Piggyback Registrations. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a registration on Form S-8 or Form S-4 or any successor forms, a registration covering only an employee benefit plan (as defined in Rule 405 of the Securities Act) or a registration covering only securities proposed to be issued in exchange for securities or assets of another corporation) and the registration form to be used may be used for the registration of Registrable Securities (a "Piggyback Registration"), the Company will give prompt written notice to all holders of Registrable Securities and shall include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 Business Days after the day on which the Company's notice is deemed delivered under the terms hereof. Notwithstanding anything herein to the contrary, in connection with any Registration under this Section 13(c) involving an underwriting, the Company shall not be required to include any Registrable Securities in such offering unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it. If in the opinion of the managing underwriter, it is appropriate because of marketing factors to limit the number of Registrable Securities to be included in the offering pursuant to this Section 13(c), then the Company shall include in the offering only that number of Registrable Securities, if any, that the managing underwriter believes would not jeopardize the offering. The Company shall have the right to postpone or withdraw any Registration effected pursuant to this Section 13(c) without obligation to any Holder.

(d) Undertakings of the Company. The Company agrees not to effect any public sale or distribution (including sales pursuant to Rule 144 under the Securities Act) of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and during the 90-day period beginning on the effective date of any Registration, unless the Holder agrees in writing.

(e) Registration Procedures. Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to this Section 13, the Company will use commercially reasonable efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition therefor, and pursuant thereto, the Company will, as expeditiously as reasonably possible, do all of the following:

(1) REGISTRATION STATEMENT. Prepare and file with the U.S. Securities and Exchange Commission (the "SEC") a registration statement with respect to such Registrable Securities and use commercially reasonable efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to the counsel selected by the holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents will be subject to the review and approval of such counsel) and use commercially reasonable efforts to avoid the issuance of (or if issued, obtain the withdrawal of) any order suspending the effectiveness of a registration statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction as soon a s possible;

(2) AMENDMENTS & SUPPLEMENTS. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof or until all shares registered thereunder have been sold, which period shall not be longer than 12 months, provided that, if the filing of any such amendment or supplement would cause the disclosure of material non-public information concerning the Company, the disclosure of which at the time is not, in the good faith opinion of the Board of Directors of the Company, in the best interests of the Company, such filing shall not be made until the Board of Directors in good faith determines;

(3) FURNISH COPIES. Furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included therein (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities covered by such registration statement; provided that the obligation of the Company to deliver copies of prospectuses or other documents to each seller shall be subject to the receipt by the Company of reasonable assurances from such seller that such seller will comply with the applicable provisions of the Securities Act and of such other securities or blue sky laws as may be applicable in connection with the use of any such prospectus or other documents;

(4) BLUE-SKY COMPLIANCE. Use commercially reasonable efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such United States jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify for this subparagraph, (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction other than with respect to the registration, qualification or exemption therefrom of the Registrable Securities);

(5) NOTIFICATIONS. Notify each seller of such Registrable Securities at any time when a registration statement related thereto is effective under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading in light of the circumstances they were made, and, at the request of any such seller, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading in light of the circumstances in which they were made;

(6) LISTING. Cause all such Registrable Securities to be listed on the securities exchange or on the National Association of Securities Dealers, Inc. National Market System ("NASDAQ NMS") or any other nationally recognized United States trading market, if applicable, on which similar securities of the same class issued by the Company are then listed;

(7) TRANSFER AGENT; REGISTRAR. Provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;

(8) UNDERWRITING AGREEMENTS, ETC. In the event of an underwritten public offering, enter into and perform its obligations under such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of a majority of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities;

(9) SUPPLY INFORMATION. Make available for inspection by any seller of Registrable Securities, underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement, provided that the Company shall not be required to disclose any confidential information or to meet with any seller or its representatives until and unless the seller and/or such representative shall have entered into a confidentiality agreement with the Company in form and substance reasonably satisfactory to the Company; and

(10) OBTAIN COLD COMFORT LETTER AND OPINIONS OF COUNSEL. Obtain a cold comfort letter from the Company's independent public accountants and opinions of counsel from the Company's attorneys, each in customary form and covering such matters as are customarily given or covered by independent public accountants and attorneys, as applicable, in an underwritten public offering of securities, addressed to the sellers.

(f) Certain Events. In the event: (i) of any request by the SEC or any other federal or state governmental authority during the period of effectiveness of any Registration Statement for amendments or supplements to a Registration Statement or related prospectus or for additional information; (ii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of proceedings for that purpose; (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceedings for such purpose; or (iv) of any event or circumstance that necessitates the making of changes in the Registration Statement or prospectus, or any document incorporated or deemed to be incorporated therein by reference, so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of a prospectus, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; then the Company shall deliver, upon a resolution of the board of directors of the Company, a certificate in writing to each seller (a "Suspension Notice") to the effect of the foregoing and detailing the facts and circumstances related to the foregoing and, upon receipt of such Suspension Notice, each seller will refrain from selling any Registrable Securities pursuant to a Registration Statement (a "Suspension") until seller's receipt of copies of a supplemented or am ended prospectus prepared and filed with the SEC by the Company, or until it is advised in writing by the Company that the current prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in any such prospectus. In the even of any Suspension, the Company shall use commercially reasonable efforts to cause the use of the prospectus so suspended to be resumed as soon as reasonably practicable provided that, if such use would cause the disclosure of material non-public information concerning the Company, the disclosure of which at the time is not, in the good faith opinion of the Board of Directors of the Company, in the best interests of the Company, such Suspension shall be continued until the Board of Directors in good faith determines.

(g) Registration Expenses. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to this Section 13, including, without limitation, all registration, filing and qualification fees, printing and accounting fees, listing fees and expenses, fees and expenses of compliance with securities or blue sky laws, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling holders of Registrable Securities. Underwriting discounts and commissions relating to Registrable Securities will be borne and paid ratably by the selling holders of such Registrable Securities.

(h) Indemnification Provisions.

(1) INDEMNITY OF HOLDERS OF REGISTRABLE SECURITIES. The Company agrees to indemnify, to the extent permitted by law, each holder of Registrable Securities, its officers and directors and each person who controls each such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, except (i) insofar as the same are caused by or contained in any information furnished in writing to the Company or any underwriter by such holder expressly for use therein or by such holder's failure to deliver to the Company in writing the information and affidavits requ ired by subsection (2) of this Section 13(h) or (ii) in connection with the failure by the seller to deliver in connection with any sale or sales by the seller a subsequent prospectus, amendment or supplement that corrects any statement or omission in any prospectus if such subsequent prospectus, supplement or amendment was delivered to the seller prior to such sale.

(2) DISCLOSURE AND INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. In connection with any registration statement in which a holder of such Registrable Securities is participating, each such holder will furnish to the Company in writing such information and affidavits relating to disclosure concerning such holder required to be included in the registration statement as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, will indemnify the Company, its directors and officers and each person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any (i) untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission of a material fact required to be stated therein or necessary to make the statemen ts therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder or (ii) failure by the purchaser to deliver in connection with any sale or sales by the seller a subsequent prospectus, amendment or supplement that corrects any statement or omission in any prospectus if such subsequent prospectus, supplement or amendment was delivered to the seller prior to such sale.

(3) NOTICE AND DEFENSE. Any person entitled to indemnification hereunder will: (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification, and (ii) unless in the reasonable opinion of such indemnified party's counsel a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. The failure to give timely notice will not relieve the receiving party of any obligation unless such delay unduly prejudices such party's ability to defend such claim. If no event shall the indemnifying party be subject to any liability for any settlement or omission made by the indemnified party without its consent (but such consent will not be unreasonably withheld). In no event shall an indemnified party be subject to any liability for any settlement or omission made by th e indemnifying party without its consent (but such consent will not be unreasonably withheld) unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim.

(4) CONTINUING AND SURVIVING OBLIGATIONS; RIGHT OF CONTRIBUTION. The indemnification provided for under this Warrant will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and will survive the transfer of securities after the completion of any offering. In the event indemnification is unavailable hereunder for any reason, each indemnifying party shall contribute to the amount paid or payable to the indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein in such proportion as is appropriate to reflect the relative fault of the Company and the seller in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses.

(i) Rule 144 Requirements. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Registrable Securities to the public without registration, the Company agrees to: (1) use commercially reasonable efforts to make and keep public information available, as defined for purposes of Rule 144 under the Securities Act, (2) use commercially reasonable efforts to file with the SEC in a timely manner all reports and other documents required of the Company to be filed under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") (at any time after it has become subject to such reporting requirements, and (3) furnish to any holder of Registrable Securities, upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144 under the Securities Act (at any time after 90 days following the close of the first sale of securities by the Company pursuant to a registration statement), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as such holder may reasonable request to avail itself of any similar rule or regulation of the SEC allowing it to sell any such securities without registration.

(j) Miscellaneous.

(1) OTHER REGISTRATION RIGHTS. Except as provided in this Warrant and in that certain Stock Purchase Agreement dated April 20, 2001 between the Company and Globamatrix Holding Pte. Ltd. (the "Other Registration Rights Agreement"), the Company has not granted and will not grant to any person the right to request the Company to register any equity securities of the Company, or any securities convertible or exchangeable into or exercisable for such securities or any other Common Stock Equivalents, without the prior written consent of the holders of a majority of the Registrable Securities in existence at the time of such consent, unless the holders of Registrable Securities shall have the right to participate in any such registration on a pro rata basis on terms acceptable to such holders. The rights granted under this Section 13 are subject and subordinate to any rights contained in the Other Registration Rights Agreement.

(2) REMEDIES. Any person having rights under this Section 13 will be entitled to enforce such rights specifically (without posting any bond or other security), to recover damages caused by reason of any breach of any provision of this Section 13, and to exercise all other rights granted by law other than injunctive relief with respect to a registration statement in which such person does not participate.

(3) STAND-OFF AGREEMENT. Each holder of Registrable Securities, if requested by the Company and the managing underwriter of any offering by the Company of securities pursuant to a Registration Statement, hereby agrees not to sell publicly or otherwise transfer or dispose of any Registrable Shares or other securities of the Company held by such holder for a specified period of time (not to exceed 180 days) following the effective date of such Registration Statement; provided that all executive officers, directors and 5% or more stockholder of the Company enter into similar agreement.

For the purposes of this Warrant, the terms "Register", "Registered", and "Registration" refer to a registration effected by preparing and filing a registration statement on Form S-1, S-2, or S-3 in compliance with the Securities Act ("Registration Statement"), and the declaration or ordering of the effectiveness of such Registration Statement.

For the purposes of this Warrant, "Registrable Securities" shall mean all Common Stock not previously sold to the public and issued or issuable upon conversion or exercise of any of the Warrant Shares including Common Stock issued pursuant to stock splits, stock dividends, and similar distributions.

14. Certificate of Adjustment. Whenever the purchase price is adjusted, as herein provided, the Company shall promptly deliver to the Holder a certificate of the Company's Chief Financial Officer setting forth the purchase price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

15. Notices of Record Date, Etc. In the event of:

(a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right,

(b) any reclassification of the capital stock of the Company, capital reorganization of the Company, Merger or Sale, or

(c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company,

then and in each such event the Company will mail or cause to be mailed to the Holder a notice specifying (a) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (b) the date on which any such reclassification, reorganization, Merger or Sale or conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record in respect of such event are to be determined. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any such action is to be taken.

16. Amendment. The terms of this Warrant may be amended, modified or waived only with the written consent of the Company and the Holder.

17. Warrant Register; Transfers, Etc.

(a) The Company will maintain a register containing the names and addresses of the registered holders of the Warrants. The Holder may change his or its address as shown on the warrant register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be given by certified mail or delivered to the Holder at his or its address as shown on the warrant register.

(b) Subject to compliance with applicable federal and state securities laws, this Warrant may be transferred by the Holder with respect to any or all of the Shares purchasable hereunder. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed for transfer of this Warrant as an entirety by the Holder, the Company shall issue a new warrant of the same denomination to the assignee. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed by the Holder for transfer with respect to a portion of the Warrant Shares purchasable hereunder, the Company shall issue a new warrant to the assignee, in such denomination as shall be requested by the Holder hereof, and shall issue to such Holder a new warrant covering the number of shares in respect of which this Warrant shall not have been transferred.

(c) In case this Warrant shall be mutilated, lost, stolen or destroyed, the Company shall issue a new warrant of like tenor and denomination and deliver the same (i) in exchange and substitution for and upon surrender and cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost, stolen or destroyed, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft or destruction of such Warrant (including a reasonably detailed affidavit with respect to the circumstances of any loss, theft or destruction) and of indemnity reasonably satisfactory to the Company.

18. No Impairment. The Company will not, by amendment of its charter or by-laws or through any reclassification, capital reorganization, consolidation, merger, sale or conveyance of assets, dissolution, liquidation, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder.

19. Governing Law. The provisions and terms of this Warrant shall be governed by and construed in accordance with the internal laws of The State of New York.

20. Successors and Assigns. This Warrant shall be binding upon the Company's successors and assigns and shall inure to the benefit of each of the Holder's successors, legal representatives and permitted assigns.

[Signature page follows.]

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed as an instrument under seal by its duly authorized officer as of the date first above written.

Southwall Technologies Inc.

By: ______________________________

Name:

Title:

Agreed to and accepted by:

needham capital partners

By: ______________________________

Name:

Title:

Subscription

Date:___________

The undersigned hereby subscribes for:

_______ shares of Common Stock covered by this Warrant.

The certificate(s) for such shares shall be issued in the name of the undersigned or as otherwise indicated below:

_______________________________

Signature

_______________________________

Name for Registration

_______________________________

Mailing Address

Net Issuance Election Notice

Date:___________

The undersigned hereby elects under Section 4 to surrender the right to purchase:

______ shares of Common Stock covered by this Warrant.

The certificate(s) for the shares issuable upon such net issuance election shall be issued in the name of the undersigned or as otherwise indicated below:

_______________________________

Signature

_______________________________

Name for Registration

_______________________________

Mailing Address

Assignment

For value received _______________hereby sells, assigns and transfers unto

(Please print or typewrite name and address of Assignee above)

the within Warrant, and does hereby irrevocably constitute and appoint ________________ its attorney to transfer the within Warrant on the books of the within named Company with full power of substitution in the premises.

Dated:__________

_______________________________

In the Presence of:

_____________________________

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