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): December 18, 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 December 19, 2003, Southwall Technologies Inc. (`Southwall') issued a press release announcing that the previous day it had entered into a new loan and security agreement with Pacific Business Funding,a division of Cupertino National Bank, which is a subsidiary of Greater Bay Bancorp (`PBF'), creating a $3,000,000 revolving line of credit which will be guaranteed by Needham & Company, Inc. (`Needham'). Availability under the PBF line of credit is subject to the effectiveness of Needham's guarantees. Southwall also announced that it had entered into an investment agreement with Needham, certain affiliates of Needham and Dolphin Direct Equity Partners, L.P. (`Dolphin') governing the terms of Needham's guarantees and providing for the potential future purchase by Needham, certain affiliates of Needham and Dolphin of up to an aggregate of 4,500,000 shares of Southwall's newly created Series A convertible preferred stock at a price of $1.00 per share.

Under the terms of the investment agreement, Needham will issue the guarantees of Southwall's new line of credit facility in two separate pieces of $2.25 million and $750,000, respectively, and Needham, certain affiliates of Needham, and Dolphin will purchase the equity in two separate tranches of $1.5 million and $3.0 million, respectively, following the extensions of credit under the new facility. The new borrowings and the purchase of each equity tranche are subject to certain conditions. These conditions include, among other things, the receipt of concessions from creditors and landlords, the completion of certain restructuring actions and the achievement of cash flow break-even at quarterly revenue levels below those of third quarter 2003. There is no assurance that any of these conditions will be satisfied or that any subsequent closings will occur.

On December 18, 2003, Needham executed a guarantee of up to $2.25 million under the line of credit facility and received a warrant to purchase 941,115 shares of Southwall's common stock, approximately 7.5% of Southwall's total shares currently outstanding. The warrant, exercisable for $0.01 per share, will expire five years from its issuance. Upon Needham's guarantee of the remaining $750,000 under the line of credit, Needham will receive an additional warrant to purchase 941,115 shares of common stock on the same terms and conditions. Southwall may draw down on the line of credit up to the amount of Needham's guarantees only if Needham provides a joint instruction and the other conditions to borrowing are met.

The investment agreement provides that, following the extensions of credit described above, Needham, certain affiliates of Needham, and Dolphin would agree to purchase from Southwall, and Southwall would agree to sell to them, an aggregate of 1,500,000 shares of the Series A preferred stock at a price of $1.00 per share, upon the completion, in the purchasers' reasonable discretion, of certain restructuring measures. 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. The approval of the holders of the Series A preferred stock will be required for Southwall to take certain actions, including the consummation of any merger or sale of the company or all or substantially all of its assets. In connection with this purchase of Southwall's preferred stock, the purchasers would receive additional five year warrants to purchase a number of shares of Southwall's common stock equal to an aggregate of 7.5% of the total shares outstanding, at a nominal exercise price.

The investment agreement further provides that Needham, certain affiliates of Needham, and Dolphin would agree to purchase from Southwall, and Southwall would agree to sell to them, an additional 3,000,000 shares of the Series A preferred stock at a price of $1.00 per share upon satisfaction, in the purchasers' reasonable discretion, of certain conditions. These conditions include Southwall's having attained certain revenue levels for the first quarter of 2004 from current business lines and the achieving of cash flow break-even at quarterly revenue levels below third quarter 2003 levels. In connection with this second purchase of Southwall's preferred stock, the purchasers would receive additional warrants to purchase a number of shares of Southwall's common stock equal to an aggregate of 6% of the total shares outstanding, at a nominal exercise price. Southwall granted certain registration rights to Needham, certain affiliates of Needham, and Dolphin with respect to the shares issuable upon exercise of the warrants or conversion of the preferred stock.

If all of the transactions contemplated by the investment agreement are completed and if Needham and its affiliated entities were to exercise all such warrants and convert all such shares of preferred stock, while maintaining their current position of approximately 1,481,000 shares of common stock, then the firm and its affiliated entities would own approximately 6,865,000 shares of Southwall common stock, or about 31% of the total shares outstanding. Dolphin currently does not own any shares of common stock but upon exercise of its warrants and conversion of its preferred stock would own approximately 2,692,000 shares of Southwall common stock, or about 12% of the total shares outstanding.

Under the investment agreement, Southwall is also required to issue additional common stock warrants to Needham, certain affiliates of Needham, and Dolphin to protect their ownership position if Southwall issues debt or equity in connection with its restructuring efforts. It is unlikely that Southwall will have enough authorized shares of common stock to cover all of the foregoing issuances and if that is the case, Southwall will be required to hold a shareholder meeting to obtain the consent of its shareholders to increase the number of authorized shares of its common stock. There can be no assurances that Southwall will not be sued by Needham, certain affiliates of Needham, or Dolphin if it does not have enough authorized shares of common stock to make the required issuances.

The PBF loan and security agreement expires on May 5, 2004. In connection with the line of credit, Southwall granted to PBF a lien upon and security interest in, and right of set off with respect to all of Southwall's interest in all accounts receivable, inventory, monies, remittances and fixed assets. Southwall and PBF have also entered into a Forbearance Agreement in which PBF has agreed to forbear until May 5, 2004 from pursuing its remedies pursuant to certain defaults by Southwall under a factoring line of credit previously entered into between the parties. In exchange for the forbearance, Southwall issued PBF a warrant to purchase 250,000 shares of common stock at an exercise price of $0.01 per share. The warrant will expire five years from its issuance. Southwall granted certain registration rights to PBF with respect to the shares issuable upon exercise of the warrant.

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

(c) Exhibits

99.1 Press Release, dated December 19, 2003, issued by Southwall Technologies Inc.

99.2 Investment Agreement, dated December 18, 2003, by and among Southwall Technologies Inc., Needham & Company, Inc., Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P., Needham Capital Partners III (Bermuda), L.P., and Dolphin Direct Equity Partners, LP.

99.3 Registration Rights Agreement, dated December 18, 2003, by and among Southwall Technologies Inc., Pacific Business Funding, Needham & Company, Inc., Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P., Needham Capital Partners III (Bermuda), L.P., and Dolphin Direct Equity Partners, LP.

99.4 Certificate of Designation, Preferences and Rights of Series A 10% Cumulative Preferred Stock of Southwall Technologies Inc. filed with the Secretary of State of Delaware on December 18, 2003.

99.5 Form of Warrant to purchase shares of Southwall's common stock.

99.6 Loan and Security Agreement, dated December 18, 2003, between Southwall Technologies Inc. and Pacific Business Funding.

99.7 Forbearance Agreement, dated December 18, 2003, between Southwall Technologies Inc. and Pacific Business Funding.

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: December 22, 2003 By: /s/ Thomas G. Hood____________

Thomas G. Hood

President and Chief Executive Officer

EXHIBIT INDEX

Exhibit No. Description

99.1 Press Release, dated December 19, 2003, issued by Southwall Technologies Inc.

99.2 Investment Agreement, dated December 18, 2003, by and among Southwall Technologies Inc., Needham & Company, Inc., Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P., Needham Capital Partners III (Bermuda), L.P., and Dolphin Direct Equity Partners, LP.

99.3 Registration Rights Agreement, dated December 18, 2003, by and among Southwall Technologies Inc., Pacific Business Funding, Needham & Company, Inc., Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P., Needham Capital Partners III (Bermuda), L.P., and Dolphin Direct Equity Partners, LP.

99.4 Certificate of Designation, Preferences and Rights of Series A 10% Cumulative Preferred Stock of Southwall Technologies Inc. filed with the Secretary of State of Delaware on December 18, 2003.

99.5 Form of Warrant to purchase shares of Southwall's common stock.

99.6 Loan and Security Agreement, dated December 18, 2003, between Southwall Technologies Inc. and Pacific Business Funding.

99.7 Forbearance Agreement, dated December 18, 2003, between Southwall Technologies Inc. and Pacific Business Funding.

EX-99

EXHIBIT 99.3

Southwall Technologies Inc.
REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (this `Agreement') is made as of December 18, 2003, by and among Southwall Technologies Inc., a Delaware corporation (the `Company'), and the persons listed on the attached Exhibit A (collectively, the `Investors').

RECITALS

1. The Company and the Investors have either (i) entered into an investment agreement of even date herewith (the `Investment Agreement') which provides, among other things, for arrangements with one Investor guaranteeing borrowings under the Company's new line of credit and the sale by the Company and purchase by the other Investors of Series A Preferred Stock of the Company or (ii) entered into a Loan and Security Agreement (the `Loan and Security Agreement').
2. The Company and the Investors wish to enter into this Agreement in order (i) to provide for certain rights of the Investors, and (ii) to induce the Investors to purchase shares of the Series A Preferred Stock or enter into arrangements relating to the extension of credit, as the case may be.

THE PARTIES AGREE AS FOLLOWS:

1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings:
0. `Board' shall mean the Board of Directors of the Company.
1. `Commission'shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.
2. `Convertible Securities' shall mean the shares of Series A Preferred Stock purchased by the Investors purchasing Series A Preferred Stock pursuant to the Investment Agreement, the Warrants issued to the Investors and/or the Warrants issued pursuant to the Loan and Security Agreement.
3. `Exchange Act' shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.
4. `Form S-3' shall mean Form S-3 issued by the Commission or any substantially similar form then in effect.
5. `Holder' shall mean any holder of outstanding Registrable Securities which have not been sold to the public, but only if such holder is one of the Investors or an assignee or transferee of registration rights as permitted by Section 10.
6. `Initiating Holders' shall mean Holders who in the aggregate hold at least 50% of the Registrable Securities.
7. `Material Adverse Event' shall mean any change, event or effect that (a) is materially adverse to the general affairs, business, operations, assets, condition (financial or otherwise) or results of operations or prospects of the Company, or (b) is reasonably foreseeable, has a reasonable likelihood of occurring, and if it were to occur could reasonably be expected to materially adversely affect the general affairs, business, operations, assets, condition (financial or otherwise) or results of operations or prospects of the Company.
8. 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.
9. `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 Company's Convertible Securities purchased by or issued to the Investors, including Common Stock issued pursuant to stock splits, stock dividends, and similar distributions; provided, however, that such shares of Common Stock as to which any of the following apply shall cease to be Registrable Securities: (a) a registration statement with respect to the sale of such Registrable Securities shall have become effective under the Securities Act and such Registrable Securities shall have been disposed of under such registration statement; (b) such Registrable Securities shall have been transferred pursuant to Rule 144 or any successor rule or provision promulgated under the Securities Act (`Rule 144'); (c) such Registrable Securities shall have been transferred in a transaction in which the Investor's rights and obligations under this Agreement were not assigned; (d) the holder of such Registrable Securities is then permitted to sell all of such securities within any three-month period pursuant to Rule 144 (and, with respect to any holder who is a registered broker/dealer, counsel to such holder delivers a written opinion to such effect); or (e) the termination of this Agreement.
10. `Registration Expenses' shall mean all expenses incurred by the Company in complying with Sections 4 and 6 of this Agreement, including, without limitation, all federal and state registration, qualification, and filing fees, printing expenses, fees and disbursements of counsel for the Company and reasonable fees and disbursements of one special counsel for all Holders, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration. Registration Expenses shall not include Selling Expenses or fees and disbursements of counsel for any underwriter of any Registrable Securities being registered.
11. `Securities Act' shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.
12. `Selling Expenses' shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities pursuant to this Agreement.
2. Demand Registration.
0. Request for Registration on Form other than Form S-3.Subject to the terms of this Agreement, in the event that the Company shall receive from the Initiating Holders at any time after December 18, 2004 a written request that the Company effect any Registration with respect to all or a part of the Registrable Securities on a form other than Form S-3 for an offering of at least 40% (which shall be at least an aggregate of 500,000 shares) of the then outstanding Registrable Securities the Company shall (i) promptly give written notice of the proposed Registration to all other Holders, and (ii) 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, together with any Registrable Securities of any Holder joining in such request as are specified in a written request given within 20 days after written notice from the Company. The Company shall not be obligated to take any action to effect any such registration after the Company has effected three such Registrations pursuant to this Section 2.1 and such Registrations have been declared effective.
1. Request for Registration on Form S- 3.Any time after December 18, 2004, if the Initiating Holders request that the Company file a Registration Statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of Registrable Securities the reasonably anticipated aggregate price to the public of which, net of Selling Expenses, would not be less than $1,000,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use all reasonable efforts to effect Registration of the Registrable Securities on such form; provided, however, that the Company shall not be required to effect more than one Registration pursuant to this Section 2.2 in any 12 month period. The substantive provisions of Section 2.5 shall be applicable to each Registration initiated under this Section 2.2.
2. Right of Deferral.Notwithstanding the foregoing, the Company shall not be obligated to file a registration statement pursuant to this Section 2 if the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board it would be seriously detrimental to the Company or its stockholders for a Registration Statement to be filed in the near future, then the Company's obligation to use all reasonable efforts to file a Registration Statement shall be deferred for a period not to exceed 90 days from the receipt of the request to file such registration by such Holder; provided, however, that the Company shall not exercise the right contained in this subsection 2.3 more than once in any 12 month period.
3. Registration of Other Securities in Demand Registration.Any Registration Statement filed pursuant to the request of the Initiating Holders under this Section 2 may, subject to the provisions of Section 2.5, include securities of the Company other than Registrable Securities.
4. Underwriting in Demand Registration.
1. Notice of Underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2, and the Company shall include such information in the written notice referred to in Sections 2.1 and 2.3. The right of any Holder to Registration pursuant to Section 2 shall be conditioned upon such Holder's agreement to participate in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting.
2. Selection of Underwriter in Demand Registration.The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement with the representative (`Underwriter's Representative') of the underwriter or underwriters selected for such underwriting by the Holders of a majority of the Registrable Securities being registered by the Initiating Holders and agreed to by the Company.
3. Marketing Limitation in Demand Registration.If the Underwriter's Representative advises the Initiating Holders in writing that market factors (including, without limitation, the aggregate number of shares of Common Stock requested to be Registered, the general condition of the market, and the status of the persons proposing to sell securities pursuant to the Registration) require a limitation of the number of shares to be underwritten, then (i) first, the Common Stock (other than Registrable Securities) held by officers or directors of the Company, (ii) second, the securities other than Registrable Securities, and (iii) third, the securities requested to be registered by the Company, shall be excluded from such Registration to the extent required by such limitation. If a limitation of the number of shares is still required, the Initiating Holders shall so advise all Holders and the number of shares of Registrable Securities that may be included in the Registration and underwriting shall be allocated among all Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities entitled to inclusion in such Registration held by such Holders at the time of filing the Registration Statement. No Registrable Securities or other securities excluded from the underwriting by reason of this Section 2.5(c) shall be included in such Registration Statement.
4. Right of Withdrawal in Demand Registration.If any Holder of Registrable Securities, or a holder of other securities entitled (upon request) to be included in such Registration, disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the Underwriter's Representative and the Initiating Holders delivered at least fifteen days prior to the effective date of the Registration Statement. The securities so withdrawn shall also be withdrawn from the Registration Statement.
3. Piggyback Registration.
0. Notice of Piggyback Registration and Inclusion of Registrable Securities.Subject to the terms of this Agreement, if the Company decides to Register any of its Common Stock (either for its own account or the account of a security holder or holders exercising their respective demand registration rights) on a form that would be suitable for a registration involving solely Registrable Securities, the Company shall: (i) promptly give each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable Blue Sky or other state securities laws), and (ii) include in such Registration (and any related qualification under Blue Sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request delivered to the Company by any Holder within 15 days after delivery of such written notice from the Company.
1. Underwriting in Piggyback Registration.
1. Notice of Underwriting in Piggyback Registration.If the Registration of which the Company gives notice is for a Registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 3.1. In such event, the right of any Holder to Registration shall be conditioned upon such underwriting and the inclusion of such Holder's Registrable Securities in such underwriting to the extent provided in this Section 3. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement with the Underwriter's Representative for such offering. The Holders shall have no right to participate in the selection of the underwriters for an offering pursuant to this Section 3.
2. Marketing Limitation in Piggyback Registration.If the Underwriter's Representative advises the Holders seeking registration of Registrable Securities pursuant to this Section 3 in writing that market factors (including, without limitation, the aggregate number of shares of Common Stock requested to be Registered, the general condition of the market, and the status of the persons proposing to sell securities pursuant to the Registration) require a limitation of the number of shares to be underwritten, the Underwriter's Representative (subject to the allocation priority set forth in Section 3.2(c)) may limit the number of shares of Registrable Securities to be included in such Registration and underwriting to not less than 20% of the securities included in such Registration.
3. Allocation of Shares in Piggyback Registration.If the Underwriter's Representative limits the number of shares to be included in a Registration pursuant to Section 3.2(b), the number of shares to be included in such Registration shall be allocated (subject to Section 3.2(b)) in the following manner: The shares (other than Registrable Securities) held by officers or directors of the Company shall be excluded from such registration and underwriting to the extent required by such limitation. If a limitation of the number of shares is still required after such exclusion, the number of shares that may be included in the Registration and underwriting by selling stockholders shall be allocated among all other Holders thereof and other holders of securities (other than Registrable Securities) requesting and legally entitled to include such securities in such Registration, in proportion, as nearly as practicable, to the respective amounts of securities (including Registrable Securities) which such Holders and such other holders would otherwise be entitled to include in such Registration. No Registrable Securities or other securities excluded from the underwriting by reason of this Section 3.2(c) shall be included in the Registration Statement.
4. Withdrawal in Piggyback Registration.If any Holder disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company and the Underwriter's Representative delivered at least fifteen days prior to the effective date of the Registration Statement. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such Registration. The Company shall have the right to postpone or withdraw any Registration effected pursuant to this Section 3.2 without obligation to any Holder.
4. Expenses of Registration.All Registration Expenses incurred in connection with two Registrations pursuant to Section 2.1, three Registrations pursuant to Section 2.2 and unlimited Registrations pursuant to Section 3, shall be borne by the Company. All Registration Expenses incurred in connection with any other Registration, qualification, or compliance, shall be apportioned among the Holders and other holders of the securities so registered on the basis of the number of shares so registered. Notwithstanding the above, the Company shall not be required to pay for any expenses of any Registration proceeding begun pursuant to Section 2 if the Registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (which Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand Registration pursuant to Section 2; provided further, however, that if at the time of such withdrawal, the Holders have learned of a Material Adverse Event not known to the Holders at the time of their request, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 2. All Selling Expenses shall be borne by the holders of the securities Registered pro rata on the basis of the number of shares Registered.
5. Termination of Registration Rights.The rights to cause the Company to register securities granted under Sections 2 and 3 of this Agreement and to receive notices pursuant to Section 3 of this Agreement shall terminate, with respect to each Holder, if such Holder is eligible to sell all of such Holder's Registrable Securities within a three- month period under Rule 144 of the Securities Act.
6. Registration Procedures and Obligations.Whenever required under this Agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:
1. Prepare and file with the Commission a Registration Statement with respect to such Registrable Securities and use its reasonable efforts to cause such Registration Statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such Registration Statement effective until the expiration of 12 months after such Registration Statement first becomes effective, or, if sooner, such time as all shares so Registered have been sold.
2. Prepare and file, as expeditiously as reasonably practicable, with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement; 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, in the best interests of the Company, such filing shall not be made until the Board in good faith determines.
3. Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; provided that the obligation of the Company to deliver copies of prospectuses or other documents to each Holder shall be subject to the receipt by the Company of reasonable assurances from such Holder that such Holder 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. Use its reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business in any jurisdiction where it is not so qualified, to subject itself to taxation in any such jurisdiction or to file a general consent to service of process in any such states or jurisdictions, and provided, further, that in the event any jurisdiction in which the securities shall be qualified imposes a non-waivable requirement that expenses incurred in connection with the qualification of the securities be borne by selling stockholders, such expenses shall be payable pro rata by selling stockholders.
5. In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.
6. Notify each Holder of Registrable Securities covered by such Registration Statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made.
7. Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such Registration Statement and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration.
8. Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Agreement, on the date that such Registrable Securities are delivered for sale in connection with a registration pursuant to this Agreement, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters (with a copy provided to each holder of Registrable Securities) in an underwritten public offering, and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters (with a copy provided to each holder of Registrable Securities).
9. Use all reasonable efforts to list the Registrable Securities covered by such registration statement with NASDAQ or any securities exchange on which the Common Stock of the Company is then listed, or NASDAQ or such securities exchange as shall be selected by the Company, or, if the Company fails to make an application to so list within 30 days of a request for the same by the Investors in connection with a Registered public offering involving an underwriting, the Investors may determine the place of listing, subject to qualification by the Company to list its shares thereon.
10. Notify each seller of Registrable Securities under such registration statement of (i) the effectiveness of such registration statement, (ii) the filing of any post-effective amendments to such registration statement, or (iii) the filing of a supplement to such registration statement.
11. Make available for inspection upon reasonable notice during the Company's regular business hours by each seller of Registrable Securities, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant, or other agent retained by such seller or underwriter, all material financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees 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.
7. Information Furnished by Holder.It shall be a condition precedent of the Company's obligations under this Agreement that each Holder of Registrable Securities included in any Registration furnish to the Company such information regarding such Holder and the distribution proposed by such Holder or Holders as the Company may reasonably request.
8. Indemnification.
0. Company's Indemnification of Holders.To the extent permitted by law, the Company shall indemnify each Holder, each of its officers, directors, and constituent partners, legal counsel for the Holders, and each person controlling such Holder, with respect to which Registration, qualification, or compliance of Registrable Securities has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter against all claims, losses, damages, liabilities, or actions in respect thereof (collectively, `Damages') to the extent such Damages arise out of or are based upon any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus (including any related Registration Statement) incident to any such Registration, qualification, or compliance, or are based on any omission (or alleged omission) to state therein 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, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such Registration, qualification, or compliance; and the Company shall reimburse each such Holder, each such underwriter, and each person who controls any such Holder or underwriter, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided, however, that the indemnity contained in this Section 8.1 shall not apply to amounts paid in settlement of any such Damages if settlement is effected without the consent of the Company (which consent shall not unreasonably be withheld); and provided, further, that the Company shall not be liable in any such case (a) to the extent that any such Damages arise out of or are based upon any untrue statement or omission based upon written information furnished to the Company by such Holder, underwriter, or controlling person and stated to be for use in connection with the offering of securities of the Company or (b) in connection with the failure by the Holder to deliver in connection with any sale or sales by the Holder 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 Holder prior to such sale.
1. Holder's Indemnification of Company.To the extent permitted by law, each Holder shall, if Registrable Securities held by such Holder are included in the securities as to which such Registration, qualification or, compliance is being effected pursuant to this Agreement, indemnify the Company, each of its employees, directors and officers, each legal counsel and independent accountant of the Company, each underwriter, if any, of the Company's securities covered by such a Registration Statement, each person who controls the Company or such underwriter within the meaning of the Securities Act, and each other such Holder, each of its officers, directors, and constituent partners, and each person controlling such other Holder, against all Damages arising out of or based upon (a) any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement, prospectus, offering circular, or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (b) any violation by such Holder of any rule or regulation promulgated under the Securities Act applicable to such Holder and relating to action or inaction required of such Holder in connection with any such Registration, qualification, or compliance including, but not limited to, failure by the Holder to deliver in connection with any sale or sales by the Holder 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 Holder prior to such sale, and shall reimburse the Company, such Holders, such employees, directors, officers, partners, persons, law and accounting firms, underwriters, or control persons for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided, however, in the case of a situation set forth in Section 8.2(a), to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such Registration Statement, prospectus, offering circular, or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use in connection with the offering of securities of the Company; provided, further, that the indemnity contained in this Section 8.2 shall not apply to amounts paid in settlement of any such Damages if settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld); and provided, further, that each Holder's liability under this Section 8.2 shall not exceed such Holder's proceeds from the offering of securities made in connection with such Registration.
2. Indemnification Procedure.Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense of such claim; provided, however, that the indemnifying party shall be entitled to select counsel for the defense of such claim with the approval of any parties entitled to indemnification, which approval shall not be unreasonably withheld; provided further, however, that if either party reasonably determines that there may be a conflict between the position of the Company and the Investors in conducting the defense of such action, suit, or proceeding by reason of recognized claims for indemnity under this Section 8, then counsel for such party shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interest of such party. The failure to notify an indemnifying party promptly of the commencement of any such action, if prejudicial to the ability of the indemnifying party to defend such action, shall relieve such indemnifying party, to the extent so prejudiced, of any liability to the indemnified party under this Section 8, but the omission so to notify the indemnifying party shall not relieve such party of any liability that such party may have to any indemnified party otherwise than under this Section 8.
3. Contribution.If the indemnification provided for in this Section 8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any Damages referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such Damages in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such Damages as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.
4. Conflicts.Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.
5. Survival of Obligations.The obligations of the Company and Holders under this Section 8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Agreement or otherwise.
9. Limitations on Registration Rights Granted to Other Securities. From and after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any securities of the Company providing for the granting to such holder of any Registration rights.
10. Transfer of Rights.The right to cause the Company to Register securities under this Agreement may be assigned by any Holder to a transferee or assignee of at least 500,000 shares of Registrable Securities (or Convertible Securities convertible into at least 500,000 shares of Registrable Securities) not sold to the public (i) the Company must receive written notice prior to the time of said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such rights are being assigned, and (ii) such transferee or assignee must agree to be bound by the terms and conditions of this Agreement. Notwithstanding the limitation set forth in the foregoing sentence respecting the minimum number of shares which must be transferred, any Holder which is a partnership or limited liability company may transfer such Holder's Registration rights to such Holder's constituent partners or members, as the case may be, without restriction as to the number or percentage of shares acquired by any such constituent partner or member.
11. No-Action Letter or Opinion of Counsel in Lieu of Registration; Conversion of Preferred Stock.Notwithstanding anything else in this Agreement, if the Company shall have obtained from the Commission a `no-action' letter in which the Commission has indicated that it shall take no action if, without Registration under the Securities Act, any Holder disposes of Registrable Securities covered by any request for Registration made under this Section 11 in the specific manner in which such Holder proposes to dispose of the Registrable Securities included in such request (such as including, without limitation, inclusion of such Registrable Securities in an underwriting initiated by either the Company or the Holders) and that such Registrable Securities may be sold to the public without Registration, or if in the opinion of counsel for the Company concurred in by counsel for such Holder, which concurrence shall not be unreasonably withheld, no Registration under the Securities Act is required in connection with such disposition and that such Registrable Securities may be sold to the public without Registration, the Registrable Securities included in such request shall not be eligible for Registration under this Agreement; provided, however, that any Registrable Securities not so disposed of shall be eligible for Registration in accordance with the terms of this Agreement with respect to other proposed dispositions to which this Section 11 does not apply. The Registration rights of the Holders of the Registrable Securities set forth in this Agreement are conditioned upon the conversion of the Registrable Securities with respect to which registration is sought into Common Stock prior to the effective date of the Registration Statement.
12. Certain Events. In the event: (i) of any request by the Commission 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 Commission 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, a certificate in writing to each Holder (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 Holder will refrain from selling any Registrable Securities pursuant to a Registration Statement (a `Suspension') until the Holder's receipt of copies of a supplemented or amended prospectus prepared and filed with the Commission 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 event 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, in the best interests of the Company, such Suspension shall be continued until the Board in good faith determines.
13. Reports under the Exchange Act.With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the Commission that may at any time permit a Holder to sell securities of the Company to the public without Registration or pursuant to a registration on Form S-3, the Company agrees to:
1. use commercially reasonable efforts to make and keep public information available, as those terms are understood and defined in Rule 144, at all times after 90 days after the effective date of the first Registration Statement filed by the Company for the offering of its securities to the public;
2. use commercially reasonable efforts to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as reasonably practicable after the end of the fiscal year in which the first Registration Statement filed by the Company for the offering of its securities to the general public is declared effective;
3. use commercially reasonable efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and
4. furnish to any Holder, so long as the Holder owns any Registrable Securities, promptly upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first Registration Statement filed by the Company), the Securities Act, and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the Commission which permits the selling of any such securities without Registration or pursuant to such form.
14. Stand-Off Agreement. Each Holder, if requested by the Company and the managing underwriter of a Registration, hereby agrees not to sell publicly or otherwise transfer or dispose of any Registrable Securities 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 stockholders of the Company enter into similar agreements.
15. Miscellaneous.
0. Governing Law.This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, excluding those laws that direct the application of the laws of another jurisdiction.
1. Headings.The headings of the sections of this Agreement are for convenience and shall not by themselves determine the interpretation of this Agreement.
2. Notices.Any notice required or permitted hereunder shall be given in writing and shall be conclusively deemed effectively given upon personal delivery or delivery by courier, or on the first business day after transmission if sent by confirmed facsimile transmission, or five days after deposit in the United States mail, by registered or certified mail, postage prepaid, addressed (i) if to the Company, as set forth below the Company's name on the signature page of this Agreement, and (ii) if to an Investor, at such Investor's address as set forth below such Investor's name on the signatures pages of this Agreement, or at such other address as the Company or an Investor may designate by 10 days' advance written notice to the other parties hereto.
3. Amendment of Agreement.Any provision of this Agreement may be amended only by a written instrument signed by the Company and by persons holding a majority of the Registrable Securities (calculated on an as-converted basis).
4. Severability.In case any provision of this Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
5. Entire Agreement; Successors and Assigns.This Agreement constitutes the entire agreement among the parties with regard to the subject matter hereof and supercedes any and all prior negotiations, correspondence, understandings and agreements among the parties regarding the subject matter hereof. Subject to the exceptions specifically set forth in this Agreement, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective executors, administrators, heirs, successor, and assigns of the parties.
6. Counterparts.This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

[SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement as of the date first above written.

Company: Southwall Technologies Inc.

a Delaware corporation

By:

Thomas G. Hood
Chief Executive Officer

Address:

Investors: Needham & Company, Inc.

By:

Name:
Title:

Address:

Needham Capital Partners III, L.P.

By:

Name:
Title: Authorized Signatory

Address:

Needham Capital Partners IIIA, L.P.

By:

Name:
Title: Authorized Signatory

Address:

Needham Capital Partners III (Bermuda), L.P.

By:

Name:
Title: Authorized Signatory

Address:

Dolphin Direct Equity Partners, LP

By:

Name:
Title: Authorized Signatory

Address:

Pacific Business Funding, A division of Cupertino National Bank

By:

Name:
Title: Authorized Signatory

Address:

Exhibit A

SCHEDULE OF INVESTORS

Needham & Company

Needham Capital Partners III, L.P.

Needham Capital Partners IIIA, L.P.

Needham Capital Partners III (Bermuda), L.P.

Dolphin Direct Equity Partners, LP

Pacific Business Funding, a division of Cupertino National Bank

_________________________________________________________________ _______

_________________________________________________________________ _______

Southwall Technologies Inc.

REGISTRATION RIGHTS AGREEMENT

_________________________________________________________________ _______

_________________________________________________________________ _______

December 18, 2003

()

EX-99

EXHIBIT 99.4

Certificate of Designation, Preferences and Rights of Series A 10% Cumulative Preferred Stock of Southwall Technologies Inc.

SOUTHWALL TECHNOLOGIES INC. (the `Company'), a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that, pursuant to the authority conferred upon the Board of Directors of the Company by the Certificate of Incorporation of the Company and pursuant to Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Company, at a meeting duly held on December 18, 2003, duly adopted resolutions authorizing a series of the Company's previously authorized Preferred Stock, par value $0.001 per share, with the following preferences and rights:

1. Designation, Amount and Par Value. The Series of Preferred Stock shall be designated the Series A 10% Cumulative Convertible Preferred Stock (the `Series A Preferred Stock'), and the number of shares so designated shall be 4,500,000. The par value of each share of Series A Preferred Stock shall be $0.001. Each share of Series A Preferred Stock shall have a stated value of $1.00 per share (the `Stated Value').

2. Dividends.

(a) Accrual. Holders of Series A Preferred Stock shall be entitled to receive and the Company shall pay, when, as and if declared by the Board of Directors out of funds legally available therefor, cumulative cash dividends at the rate per share (as a percentage of the Stated Value per share) equal to 10% per annum, payable quarterly in arrears on each March 31, June 30, September 30 and December 31 (each, a `Dividend Payment Date') and on the Conversion Date (as herein defined). Dividends on the Series A Preferred Stock shall accrue daily commencing on the Original Issue Date (as defined in Section 8) and shall be deemed to accrue whether or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. The person that is shown on the Company's records as the holder of the Series A Preferred Stock on an applicable record date (the `Holder') for any dividend payment will be entitled to receive such dividend payment and any other accrued and unpaid dividends which accrued prior to such Dividend Payment Date, without regard to any sale or disposition of such Series A Preferred Stock subsequent to the applicable record date but prior to the applicable Dividend Payment Date. Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued on the Series A Preferred Stock, such payment shall be distributed ratably among the Holders of the Series A Preferred Stock based upon the number of shares held by each Holder.

(b) Restrictions on Company. So long as any Series A Preferred Stock shall remain outstanding, unless all accrued dividends payable on the Series A Preferred Stock for all prior Dividend Payment Dates shall have been paid, neither the Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire, directly or indirectly, any Common Stock (as defined in Section 5) or any shares of any other capital stock of the Company, ranking junior to the Series A Preferred Stock in respect of dividends or liquidation preference, except the repurchase of shares of capital stock of the Company held by officers, directors or employees or former officers, directors or employees (or their estates or beneficiaries), upon death, disability, retirement, severance or termination of employment, or in order to satisfy tax withholding obligations of such persons upon the exercise of options or the vesting of performance shares or pursuant to any agreement under which such shares were issued, nor shall the Company directly or indirectly pay or declare any cash dividend or make any cash distribution (other than a dividend or distribution described in Section 5) upon, nor shall any cash distribution be made in respect of, any Common Stock or any other capital stock of the Company ranking junior to the Series A Preferred Stock in respect of dividends or liquidation preference, nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Common Stock or any shares of any other capital stock of the Company, ranking junior to the Series A Preferred Stock in respect of dividends or liquidation preference, except as described above.

3. Voting Rights. Except as otherwise expressly provided herein or as provided by law, the Series A Preferred Stock shall have no voting rights.

4. Liquidation. Upon any (i) liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, (ii) the sale, lease, assignment, transfer, conveyance or disposal of all or substantially all of the assets of the Company, or (iii) the acquisition of the Company by another entity by means of consolidation, corporate reorganization, merger or other transaction or series of related transactions in which the stockholders of the Company immediately prior to such transaction do not own at least 50% of the outstanding voting securities of the successor entity, (a `Liquidation Event'), the Holders of shares of Series A Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Series A Preferred Stock an amount equal to the Stated Value, plus an amount equal to the then-accrued but unpaid dividends per share, whether declared or not, but without interest (`Liquidation Preference'), before any distribution or payment shall be made to the holders of Common Stock or any other capital stock of the Company junior in respect of distribution of assets, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed shall be distributed among the Holders of Series A Preferred Stock ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. The Company shall mail written notice of any such Liquidation, not less than 30 days prior to the payment date stated therein, to each record Holder of Series A Preferred Stock.

5. Conversion.

(a) Right to Convert. Each Holder of the Series A Preferred Stock shall have the right at any time and from time to time, at the option of such Holder, to convert any or all Series A Preferred Stock held by such Holder, into such number of fully paid, validly issued and nonassessable shares of common stock, par value $0.001 per share, of the Company (`Common Stock'), free and clear of any liens, claims or encumbrances created by the Company, as is determined by dividing (i) the Liquidation Preference times the number of shares of Series A Preferred Stock being converted (`Conversion Amount'), by (ii) the applicable Conversion Price (determined as hereinafter provided) in effect on the Conversion Date. Immediately following such conversion, the rights of the Holders of converted Series A Preferred Stock shall cease and the persons entitled to receive the Common Stock upon the conversion of Series A Preferred Stock shall be treated for all purposes as then having become the owners of such Common Stock. If the Per Share Market Value of the Company's Common Stock is $4.00 or more per share for 30 consecutive days, all of the remaining shares of Series A Preferred Stock then outstanding shall be converted into the number of shares of Common Stock into which such shares of Series A Preferred Stock are then convertible pursuant to this Section 5. All Holders of record of shares of Series A Preferred Stock will be given at least 20 days' prior written notice of the date fixed and the place designated for mandatory conversion of all such shares of Series A Preferred Stock pursuant to this Section 5(a). On or before the date fixed for conversion, each Holder of shares of Series A Preferred Stock shall surrender such Holder's certificate or certificates for all such shares to the Company or its transfer agent at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such Holder is entitled pursuant to this Section 5(a). As soon as reasonably practicable after the date of such mandatory conversion and the surrender of the certificate of certificates for Series A Preferred Stock, the Company shall cause to be issued and delivered to such Holder, or on such Holder's written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Section 5(h) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion.

(b) Mechanics of Conversion. To convert Series A Preferred Stock into Common Stock, the Holder shall give written notice (`Conversion Notice') to the Company (which Conversion Notice may be given by facsimile transmission no later than the Conversion Date) stating that such Holder elects to convert the same and shall state therein the number of shares of Series A Preferred Stock to be converted and the name or names in which such Holder wishes the certificate or certificates for Common Stock to be issued (the conversion date specified in such Conversion Notice shall be referred to herein as the `Conversion Date'). As soon as possible after delivery of the Conversion Notice, such Holder shall surrender the certificate or certificates representing the Series A Preferred Stock being converted, duly endorsed, at the office of the Company or, if identified in writing to such Holder by the Company, at the offices of any transfer agent for the Series A Preferred Stock. The Company shall, upon receipt of such Conversion Notice, issue and deliver to or upon the order of such Holder, against delivery of the certificates representing the Series A Preferred Stock which have been converted, a certificate or certificates for the number of shares of Common Stock to which such Holder shall be entitled (with the number of and denomination of such certificates designated by such Holder), and the Company shall immediately issue and deliver to such Holder a certificate or certificates for the number of shares of Series A Preferred Stock (including any fractional shares) which such Holder has not yet elected to convert hereunder but which are evidenced in part by the certificate(s) delivered to the Company in connection with such Conversion Notice. The Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of the Series A Preferred Stock being converted are either delivered to the Company or its transfer agent or the Holder notifies the Company or any such transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion of Series A Preferred Stock, provided the Company's transfer agent is participating in the Depository Trust Company (`DTC') Fast Automated Securities Transfer program, upon request of the Holder, the Company shall use reasonable commercial efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder, by crediting the account of the Holder's prime broker with DTC through its Deposit Withdrawal Agent Commission (`DWAC') system. The parties agree to coordinate with DTC to accomplish this objective.

The conversion pursuant to this Section 5 shall be deemed to have been made immediately prior to the close of business on the Conversion Date. The person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock at the close of business on the Conversion Date. The Company's obligation to issue Common Stock upon conversion of Series A Preferred Stock shall, except with respect to the Holder's compliance with the notice and delivery requirements set forth above in this Section 5(b), be absolute, is independent of any covenant of the Holder of Series A Preferred Stock, and shall not be subject to: (i) any offset or defense, or (ii) any claims against the Holders of Series A Preferred Stock whether pursuant to this Certificate of Designation, the Investment Agreement (as defined in Section 7) or otherwise. In the event that the Company disputes the Holder's computation of the number of shares of Common Stock to be received, then the Company shall deliver to the Holder the number of shares of Common Stock not in dispute and shall seek to mutually agree with the Holder in good faith on the correct number of shares to be received.

(c) Determination of Conversion Price. The Conversion Price applicable with respect to the Series A Preferred Stock (the `Conversion Price'), subject to the adjustments set forth below, shall be $1.00 per share.

(d) Stock Splits; Dividends; Adjustments.

(i) If the Company, at any time while the Series A Preferred Stock is outstanding, (A) pays a stock dividend or otherwise makes a distribution or distributions on any equity securities (including instruments or securities convertible into or exchangeable for such equity securities) in shares of Common Stock, (B) subdivides outstanding Common Stock into a larger number of shares, or (C) combines outstanding Common Stock into a smaller number of shares, then the Conversion Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately before such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section 5(d)(i) shall become effective immediately after the paying or making of such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination.

(ii) In the event that the Company issues or sells any Common Stock or securities which are convertible into or exchangeable for its Common Stock (other than the Series A Preferred Stock), or any warrants or other rights to subscribe for or to purchase or any options for the purchase of its Common Stock (`Convertible Securities') (other than shares or options issued or which may be issued pursuant to (A) the Company's current or future employee, consultant or director stock incentive or option plans or shares issued upon exercise of options, warrants or rights outstanding on the date of the Investment Agreement (as defined herein), (B) arrangements with the Holders of Series A Preferred Stock, (C) upon the conversion of the Series A Preferred Stock) or (D) transactions for which certain stockholders of the Company will be entitled to receive Common Stock or Convertible Securities under Section 4.14 of the Investment Agreement (`Exempted Issuances') at an effective purchase price per share which is less than the Per Share Market Value (as defined in Section 8) of the Common Stock on the Trading Day next preceding such issue or sale or, in the case of issuances to holders of its Common Stock, the record date fixed for the determination of stockholders entitled to receive Common Stock or Convertible Securities (the `Fair Market Price') (such shares of Common Stock or Convertible Securities, the `Dilutive Securities'), the Conversion Price in effect immediately prior to such issue or sale or record date, as applicable, shall be reduced effective concurrently with such issue or sale to an amount determined by multiplying the Conversion Price then in effect by a fraction, (1) the numerator of which shall be the sum of (x) the number of shares of Common Stock outstanding immediately prior to such issue or sale and (y) the number of shares of Common Stock which the aggregate consideration received by the Company for such Dilutive Securities would purchase at the Fair Market Price, and (2) the denominator of which shall be the number of shares of Common Stock of the Company and the Dilutive Securities outstanding immediately after such issue or sale.

For the purposes of the foregoing adjustment, shares of Common Stock owned by or held on account of the Company or any subsidiary shall not be deemed outstanding for the purpose of any such computation. In addition, for the purposes of the foregoing adjustment, in the case of the issuance of any Convertible Securities, the maximum number of shares of Common Stock issuable upon exercise, exchange or conversion of such Convertible Securities shall be deemed to be outstanding, and the aggregate consideration received by the Company for the issuance or sale of such Convertible Securities shall be deemed to include any consideration that would be received by the Company in connection with the exercise, exchange or conversion of such Convertible Securities, provided that no further adjustment shall be made upon the actual issuance of Common Stock upon exercise, exchange or conversion of such Convertible Securities. However, upon the expiration of any Convertible Securities or any right or warrant to purchase Common Stock the issuance of which resulted in an adjustment in the Conversion Price pursuant to this Section 5(d)(ii), if any such right or warrant shall expire and shall not have been exercised, the Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Conversion Price made pursuant to the provisions of this Section 5 after the issuance of such rights or warrants) had the adjustment of the Conversion Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised.

(iii) If the Company, at any time while the Series A Preferred Stock is outstanding, shall distribute to all holders of Common Stock evidence of its indebtedness or assets or cash (other than ordinary cash dividends) or rights or warrants to subscribe for or purchase any security of the Company or any of its subsidiaries (excluding those referred to in Sections 5(d)(i) or 5(d)(ii) above), then concurrently with such distributions to holders of Common Stock, the Company shall distribute to Holders of the Series A Preferred Stock, the amount of such indebtedness, assets, cash or rights or warrants which the Holders of Series A Preferred Stock would have received had they converted all their Series A Preferred Stock into Common Stock immediately prior to the record date for such distribution.

(iv) All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.

(v) Whenever the Conversion Price is adjusted pursuant to this Section 5(d), the Company shall promptly mail to each Holder of Series A Preferred Stock, a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

(vi) No adjustment in the Conversion Price shall reduce the Conversion Price below the then-par value of the Common Stock.

(vii) The Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least 20 Trading Days and if the reduction is irrevocable during the period. Whenever the Conversion Price is reduced, the Company shall mail to the Holders of Series A Preferred Stock a notice of the reduction. The Company shall mail the notice, first-class, postage-prepaid, at least 10 days before the date the reduced Conversion Price takes effect. The notice shall state the reduced Conversion Price and the period it will be in effect. A reduction of the Conversion Price does not change or adjust the Conversion Price otherwise in effect for purposes of Section 5(d)(i), (ii) or (iii).

(viii) If:

A. In the event of any taking by the Company of a record date 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, any security or right convertible into or entitling the holder thereof to receive additional shares of Common Stock, 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; or

B. The Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or

C. The approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company (other than a subdivision or combination of the outstanding shares of Common Stock), any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or

D. The Company shall authorize the voluntary or involuntary dissolution, liquidation or winding-up of the affairs of the Company;

then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Series A Preferred Stock, and shall cause to be mailed to the Holders of Series A Preferred Stock at their last addresses as they shall appear upon the stock books of the Company, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice.

(e) Other Actions. The Company will not avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company and will at all times in good faith assist in the carrying out of all of the provisions of this Section 5 and in the taking of all action as may be necessary or appropriate in order to protect the conversion rights of the Holders of the Series A Preferred Stock against impairment.

(f) Reservation of Shares. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Series A Preferred Stock as herein provided, free from preemptive rights or any other contingent purchase rights of persons other than the Holders of Series A Preferred Stock, such number of shares of Common Stock as shall be issuable (taking into account the adjustments of Section 5(d) hereof) upon the conversion of all outstanding shares of Series A Preferred Stock. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid and nonassessable. The Company promptly will take such corporate action as may, in the opinion of its counsel, which may be an employee of the Company, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including without limitation engaging in reasonable commercial efforts to obtain the requisite stockholder approval.

(g) Fractional Shares. Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted by applicable law, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder of a share of Series A Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

(h) Taxes. The issuance of certificates for shares of Common Stock on conversion of Series A Preferred Stock shall be made without charge to the Holders thereof for any documentary, stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such shares of Series A Preferred Stock so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

(i) Status of Converted Shares. Shares of Series A Preferred Stock converted into Common Stock shall be canceled and shall have the status of authorized but unissued shares of Series A Preferred Stock.

(j) Giving of Notice. Each Conversion Notice shall be given (i) by facsimile and by mail, postage prepaid, addressed to the attention of the Chief Financial Officer of the Company at the facsimile telephone number and address of the principal place of business of the Company, (ii) by overnight courier or (iii) by hand. Any such notice shall be deemed given and effective upon the earliest to occur of (1)(a) if such Conversion Notice is delivered via facsimile prior to 4:30 p.m. (local time in New York City) on any date, such date or such later date as is specified in the Conversion Notice, and (b) if such Conversion Notice is delivered via facsimile after 4:30 p.m. (local time in New York City) on any date, the next date or such later date as is specified in the Conversion Notice, (2) if such Conversion Notice is delivered by overnight courier, two business days after delivery to a nationally recognized overnight courier service or (3) if such Conversion Notice is delivered by hand, upon actual receipt.

6. Redemption. The Series A Preferred Stock shall not be redeemable.

7. Covenants. In addition to any other rights provided by law, so long as any shares of Series A Preferred Stock remain issued and outstanding, the Company shall not, without first obtaining the affirmative vote or written consent of the Holders of a majority of the then- outstanding shares of Series A Preferred Stock, voting as a single class:

(a) authorize or issue shares of any class or series of stock having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any preference or priority of any series of Series A Preferred Stock;

(b) reclassify any shares of capital stock of the Company into shares having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any preference or priority of any series of Series A Preferred Stock;

(c) authorize or issue any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of the Company having any preference or priority as to dividends or redemption rights, liquidation preferences, conversion rights, or voting rights, superior to or on a parity with any preference or priority of Series A Preferred Stock;

(d) declare or pay dividends on or make any distributions with respect to Common Stock;

(e) increase or decrease the authorized number of shares of Series A Preferred Stock;

(f) amend or repeal any provision of, or add any provision to, its certificate of incorporation or bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, any series of Series A Preferred Stock;

(g) increase the number of shares of Common Stock reserved for issuance under the Company's stock option plans, other than the annual increase currently provided in such plans and other than a further increase of not more than 500,000 shares under the Company's 1997 Stock Incentive Plan;

(h) engage in any transaction or series of related transactions constituting a Liquidation Event;

(i) do any act or thing which would result in taxation of the Holders of shares of the Series A Preferred Stock under Section 305 of the Tax Code (or any comparable provision of the Tax Code as hereafter from time to time amended); or

(j) make any material change to the Company's line of business.

8. Definitions. For the purpose hereof, the following terms shall have the following meanings:

`Original Issue Date' shall mean the date of the first issuance of any shares of Series A Preferred Stock regardless of the number of transfers of any particular shares of Series A Preferred Stock and regardless of the number of certificates which may be issued to evidence such Series A Preferred Stock.

`Per Share Market Value' means on any particular date (a) the closing sales price per share of the Common Stock on such date on The Nasdaq Stock Market or if the Common Stock is not listed on The Nasdaq Stock Market, on such other stock exchange on which the Common Stock has been listed or if there is no such price on such date, then the closing sales price on such exchange on the date nearest preceding such date, or (b) if the Common Stock is not listed on The Nasdaq Stock Market or any stock exchange, the closing sales price for a share of Common Stock in the over-the-counter market, as reported by the NASD at the close of business on such date, or (c) if the Common Stock is not quoted on the NASD, the closing sales price for a share of Common Stock in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), or (d) if the Common Stock is no longer publicly traded the fair market value of a share of Common Stock as determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an `Appraiser') selected in good faith by the Holders of a majority of the shares of the Series A Preferred Stock; provided, however, that the Company, after receipt of the determination by such Appraiser, shall have the right to select an additional Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Appraiser.

`Investment Agreement' means the Investment Agreement, dated as of the date hereof, between the Company and the original Holder of the Series A Preferred Stock and certain other parties.

`Trading Day' means (a) a day on which the Common Stock is traded on The Nasdaq Stock Market or principal stock exchange on which the Common Stock is then listed, or (b) if the Common Stock is not listed on The Nasdaq Stock Market or any stock exchange, a day on which the Common Stock is traded in the over-the-counter market, as reported by the NASD, or (c) if the Common Stock is not quoted on The Nasdaq Stock Market, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices).

IN WITNESS WHEREOF, Southwall Technologies Inc. has caused this certificate to be signed by Thomas G. Hood, its Chief Executive Officer, this 18th day of December 2003.

SOUTHWALL TECHNOLOGIES INC.

By: /s/ Thomas G. Hood

Thomas G. Hood
Chief Executive Officer

EX-99

EXHIBIT 99.5

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 December 18, 2003, is issued to Needham & Company, Inc. by Southwall Technologies Inc., a Delaware corporation (hereinafter with its successors called the `Company'). This Warrant is issued pursuant to Section 2.2 of that certain Investment Agreement dated as of December 18, 2003, by and among Needham & Company, Inc. (`Needham'), Needham Capital Partners III, L.P., Needham Capital Partners IIIA, L.P., Needham Capital Partners III (Bermuda), L.P., Dolphin Direct Equity Partners, LP and the Company (the `Investment 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 on or before the Termination Date (as defined below), to purchase from the Company 941,115 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 December 18, 2008.
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.

1. 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.
2. 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.
3. Expiration Date. This Warrant shall expire at the close of business on the Termination Date, and shall be void thereafter.
4. 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.
5. Subdivisions, Split-ups, Combinations and Stock Dividends; Reclassifications.
1. 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.
2. 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.
6. 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.
7. 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 11, 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.
8. Registration Rights. Reference is hereby made to the Registration Rights Agreement dated December 18, 2003 by and among the Company, Needham and certain other investors named therein for certain provisions relating to the rights of the Holder of this Warrant and the Warrant Shares to require the Company to register the Warrant Shares under the Securities Act of 1933, as amended.
9. 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.
10. Notices of Record Date, Etc. In the event of:
1. 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,
2. any reclassification of the capital stock of the Company, capital reorganization of the Company, Merger or Sale, or
3. 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 (x) 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 (y) 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.

11. Amendment. The terms of this Warrant may be amended, modified or waived only with the written consent of the Company and the Holder.
12. Warrant Register; Transfers, Etc.
1. 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.
2. 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 Warrant 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.
3. 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.
13. 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.
14. 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.
15. 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 & Company, Inc.
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 such 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:

EX-99

EXHIBIT 99.7

FORBEARANCE AGREEMENT

BY AND AMONG

SOUTHWALL TECHNOLOGIES INC.

AND

PACIFIC BUSINESS FUNDING,
A DIVISION OF CUPERTINO NATionaL BANK

FORBEARANCE AGREEMENT

This Forbearance Agreement (`Forbearance Agreement') is entered into on this 18th day of December 2003, at Cupertino, California, by and among the following parties: PACIFIC BUSINESS FUNDING, a division of CUPERTINO NATIONAL BANK, (`PBF'); SOUTHWALL TECHNOLOGIES INC., a Delaware corporation (`STI').

RECITALS

1. STI was and is a Delaware corporation
2. PBF's business includes extensions of credit in the form of factoring of accounts receivable. On or about May 16, 2003, PBF agreed to factor accounts of STI pursuant to certain written agreements between the parties. From time to time thereafter, PBF advanced moneys to STI in various amounts and under certain terms and conditions. Said advances were made pursuant to the certain instruments, documents and agreements (hereinafter `Factoring Documents') executed and delivered to PBF by STI, including the following:
0. That certain DOMESTIC FACTORING AGREEMENT dated May 16, 2003, together with all exhibits and schedules thereto, including without limitation that certain written SCHEDULE 1 TO DOMESTIC FACTORING AGREEMENT, together with that certain written Amendment to the Domestic Factoring dated June 16, 2003, and that certain written AMENDMENT TO DOMESTIC FACTORING AGREEMENT executed in October 2003 (collectively the `Domestic Factoring Agreement').
1. That certain EXPORT-IMPORT BANK FACTORING AGREEMENT dated May 16, 2003, together with all exhibits and schedules thereto including without limitation that certain written SCHEDULE 1 TO EXPORT-IMPORT BANK FACTORING AGREEMENT, together with that certain written Amendment to the Export-Import Factoring Agreement dated June 16, 2003 (collectively the `Ex-Im Factoring Agreement').
2. That certain written Intellectual Property Security Agreement dated May 16, 2003 (the `IP Security Agreement').
3. That certain UCC Financing Statement, which Financing Statement was filed on or about July 30, 2001 in the records of the State of Delaware as Instrument No. 1082062-6
4. That certain written Export Import Bank of the United States Working Capital Guarantee Program Borrower Agreement; and
5. Other Related Documents.
3. As of December 11, 2003, the principal outstanding in respect to the obligations of STI to PBF under the Domestic Factoring Agreement was $1,478,052.92 plus attorneys fees incurred by PBF in connection with STI's default under the Factoring Documents. As of the date of December 11, 2003, the amount outstanding in respect to the obligations of STI to PBF under the Ex-Im Factoring Agreement was $2,678,071.98, plus attorneys fees incurred by PBF in connection with STI's default under the Factoring Documents.
4. The obligations of STI under each of the Domestic Factoring Agreement and the Ex-Im Factoring Agreement are secured by tangible and intangible assets of STI as more particularly described in the Domestic Factoring Agreement, the Ex-Im Factoring Agreement, and the IP Security Agreement. The tangible and intangible assets of STI described in said documents shall hereinafter be referred to as the `Collateral.'
5. Commencing on or about November 17, 2003, and continuing thereafter, STI defaulted under each of the Domestic Factoring Agreement and the Ex-Im Factoring Agreement by breaching the Tangible Net Worth covenants in each of said agreements. Said defaults shall hereinafter be referred to as the `Defaults.'
6. By reason of the Defaults, PBF is entitled to exercise its rights and remedies under the Factoring Documents, including demanding immediate repurchase of Purchased Accounts or seeking to foreclose its security interest in the Collateral.
7. Prior to the execution of this Forbearance Agreement, Needham & Company, Inc. (`Needham') and STI have entered into that certain letter agreement (the `Needham Letter Agreement') dated November 11, 2003. Pursuant to the Needham Letter Agreement, Needham and Southwall, among other parties, have also entered into that certain written Investment Agreement dated December 18, 2003 (hereinafter the `Investment Agreement').
8. Concurrently with the execution of this Forbearance Agreement, STI is entering into a new credit facility with PBF for an extension of credit by a loan in the maximum principal amount of $3,000,000 (the `New Loan'), which shall be guaranteed by Needham, Inc. (`Needham') with the guarantee (the `Needham Guaranty') to be secured or supported by a letter of credit (the `Needham Letter of Credit') acceptable to PBF. The terms and conditions of the New Loan shall be set forth in documents (the `New Loan Documents') acceptable to PBF in its sole discretion and executed by the parties. The New Loan Documents will include a grant to PBF of a security interest in assets of Southwall but such security interest shall be subordinate to the security interests described in Recital D above.
9. STI has requested that PBF forbear from pursuing various remedies to which PBF is legally entitled as a result of the Defaults, including, but not limited to:
0. Requiring immediate re-purchase of all Purchased Accounts under the Factoring Documents;
1. Declining to purchase any additional accounts under the Factoring Documents; and
2. Exercising PBF's rights and remedies with respect to the Collateral.
10. Without waiving the Defaults or any other defaults under the Factoring Documents, PBF has agreed to continue to forbear from exercising the rights and remedies described above, but only upon the terms and conditions expressly set forth herein.

NOW THEREFORE, IN CONSIDERATION of the foregoing Recitals and the terms and conditions and agreements contained herein, the parties hereby agree as follows:

AGREEMENT

1. Definitions. Capitalized terms not otherwise defined in this Forbearance Agreement shall have the meanings set forth in the Factoring Documents.
2. Acknowledgment. STI acknowledges the truth and accuracy of each of the facts and legal relations contained in the Recitals to this Forbearance Agreement, including, but not limited to the following:
0. By reason of the Defaults, all sums outstanding, including sums due for immediate repurchase of Purchased Accounts, under the Factoring Documents are immediately due and owing in full.
1. The Defaults are and continue to be material and serious;
2. As a result of the Defaults, PBF has the right to exercise its rights and remedies under the Factoring Documents and the law, including, but not limited to, rights and remedies with respect to foreclosure of security interests in the Collateral.
3. Payments/Warrants. STI shall pay the following sums in good funds and issue the following warrants to PBF:
0. All payments due or that may come due under the terms of the Domestic Factoring Agreement and the Ex-Im Factoring Agreement; and
1. As a forbearance fee upon execution of this Forbearance Agreement, the sum of $80,000 ($20,000 of which has already been paid), plus PBF's attorneys fees and any other costs incurred as of the date hereof in connection with this Forbearance Agreement or the Defaults, and delivery of a warrant in a form acceptable to PBF for a term of five years for 250,000 shares of STI's common stock with an exercise price of $0.01 per share, such warrant to be in a form acceptable to PBF but substantially similar to the first warrant to be issued to Needham pursuant to the Investment Agreement.
4. Applications of Funds. PBF may apply the funds received by it pursuant to section 3.2 above to other income or to principal, fees or other obligations owed as it deems appropriate, and in its sole discretion.
5. Forbearance. PBF shall forbear from exercising its rights or remedies with respect to foreclosure of the security interests in the Collateral, imposition of the Default Interest rate or other enforcement of the Term Note and other Factoring Documents on the terms and conditions set forth herein including the following:
0. The Maximum Commitment set forth in Schedule 1 of the Domestic Factoring Agreement is hereby amended to mean an amount equal to the lesser of (a) Three Million Dollars or (b) the Advance Rate; and the Maximum Commitment set forth in Schedule 1 of the Ex-Im Factoring Agreement is hereby amended to mean an amount equal to the lesser of (a) Four Million Dollars or (b) the Advance Rate.
1. There shall be no default under the New Loan Documents or the Factoring Documents apart from the Defaults;
2. There shall be no default, as defined in Section 11 below, under this Forbearance Agreement;
3. STI shall, on or before January 31, 2004, have closed and received all funds to be paid to STI pursuant to the `Initial Equity' investment described in Article II of the Investment Agreement,
4. STI shall, on or before May 5, 2004, have closed and received all funds to be paid to STI pursuant to the `Second Equity' investment described in Article II of the Investment Agreement;
5. The terms of this Forbearance Agreement and the New Loan Documents control over any provisions in the Needham Letter Agreement or the Investment Agreement, and performance under the Needham Letter Agreement and Investment Agreement shall be done in a manner consistent with this Forbearance Agreement and the New Loan Documents;
6. No other holder of a voluntary or involuntary lien against all or part of the Collateral shall initiate any action to foreclose or otherwise enforce such lien; and
7. If not terminated earlier pursuant to section 11 below, this forbearance shall terminate on May 5, 2004, at which time the Domestic Factoring Agreement and the Ex-Im Factoring Agreement shall also be deemed to have terminated pursuant to section 10 of each of said agreements.
6. Acknowledgment of Certain Material Facts. STI further acknowledges that the sums claimed by PBF in Recital C to be due and owing under the Factoring Documents are currently due and owing, that no defense to payment thereof exists, that the Factoring Documents are binding and enforceable according to their terms, and that PBF has no obligation to STI to advance further funds to STI or to purchase accounts under the Factoring Documents but continues to have the right to purchase Accounts in its sole discretion in accordance with the terms of the Factoring Documents. Agreement, all the terms and conditions of the Factoring Documents remain in full force and effect, including without limitation the grants of security interests therein.
7. Audits; Inspections. Throughout the term of this Forbearance Agreement, PBF at the expense of STI may conduct audits and/or inspections of the Collateral, including STI's books, records, accounts receivable and inventory. Upon at least one business day's written notice by PBF to STI, STI shall permit representatives, agents and/or employees of PBF during normal business hours to visit, examine, audit, inspect, make copies of, have reasonable access to, and consult with, as the case may be, (i) the Collateral, (ii) STI's books and records relating to the Collateral, including the accounts receivable and/or the inventory of STI, (iii) employees or agents of STI who are familiar with STI's books and records or the information set forth therein, and (iv) such other information as PBF may reasonably request. If STI now or at any time hereafter maintains any books, accounts and/or records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, STI, upon PBF's request, shall notify such party to permit PBF free access to such books, accounts and records at all reasonable times and to provide PBF with copies of any records it may request, all at STI's expense. Said audits and inspections may be conducted as frequently as PBF determines in its sole discretion. PBF's right to conduct said audits and inspections does not excuse STI from complying with any reporting requirements contained in the Factoring Documents or this Forbearance Agreement.
8. Warranty and Release. STI hereby agrees as follows:
0. STI warrants and represents that to the extent STI makes any payments hereunder, at the time of each such payment, STI is fully authorized to make such payment.
1. STI warrants and represents to PBF that to the best of its knowledge or information, it has and has had no claims, causes of action, demands, costs, losses or actions of any nature against PBF, whether the same have been or might have been asserted as a claim, cross-claim, counter-claim or cause of action in any tribunal.
2. For and in consideration of PBF's agreement set forth herein, STI hereby releases and forever discharges PBF, its affiliates, and their respective officers, directors, employees, shareholders, attorneys, agents and representatives, individually and collectively, from any and all matters arising out of the business relationships which have existed to the date hereof between PBF and STI, including any and all past, present or future claims, actions, causes of action, obligations, costs or demands, known or unknown, whether or not any such claim, action, cause of action, obligation, cost, lost or demand has been, or might have been, asserted as a claim, cross-claim, counter-claim or cause of action in any tribunal.
3. STI warrants and represents that it has not assigned or transferred or purported to assign or transfer to any other person or entity any claim or matter released herein and that no other person has any interest therein of any nature. In the event that STI shall have assigned or transferred, or purported to assign or transfer, or any other person shall claim an interest in any claim or other matter herein release, then the releasing party or parties shall indemnify PBF and hold it harmless from and against any and all losses, costs, claims or expenses, including but not limited to all costs related to the defense of any action, including reasonable attorneys' fees, based upon or arising out of or incurred as a result of any such claim, assignment or transfer.
4. STI understands and acknowledges that if any claims or other matters herein released existed, such would be disputed by PBF. No action taken by the parties to this Forbearance Agreement, or any of them, either previously or in connection with this Forbearance Agreement shall be deemed or construed to be (a) an admission to the truth or falsity of any claims made; or (b) an acknowledgment or admission by PBF of any fault or liability whatsoever to any other party or to any third party.
5. STI hereby relinquishes and waives all rights conferred upon it by the provisions of Section 1542 of the California Civil Code (or any like provision of federal or state law), which reads as follows:

A General Release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.

STI hereby acknowledges that it is aware that it or its attorneys might hereafter discover facts different from or in addition to those which it or its attorneys now know or believe to be true with respect to any of the matters herein released, including that no such claims presently exist, and STI agrees that this instrument shall remain in effect as a full and complete release notwithstanding any such different or additional facts. STI hereby covenants that this Forbearance Agreement shall inure to the benefit of and be binding upon its representatives, successors, trustees and assigns.

9. Notice of Material Events. STI hereby covenants and agrees that until the earlier of (i) payment in full of PBF of all obligations under this Forbearance Agreement, the Factoring Documents or (ii) completion by PBF of foreclosure of the security interest in the Collateral, it will, from and after the date of execution of this Forbearance Agreement, promptly give written notice to PBF of:
0. Any substantial dispute which may exist between STI and any governmental or regulatory body or law enforcement authority.
1. Each default hereunder and any event, which upon a lapse of time or notice or both, would reasonably be expected to become a default.
2. Any other matter which has resulted or might result in a material adverse change in the financial condition or operations of STI.
3. Any event which materially adversely affects the value of the Collateral, the ability of STI or PBF to dispose of the Collateral, or the rights and remedies of PBF in relation to the Collateral, including but not limited to the levy or exercise of any legal process or remedy against the Collateral or the adoption of any order, arrangement, or procedure affecting the Collateral, whether governmental or otherwise.
10. Relationship of PBF and Other Parties to this Forbearance Agreement. Nothing contained in this Forbearance Agreement or in any other agreement among the parties is intended, nor shall be construed, to establish PBF as a joint venturer or partner of STI, and STI agrees to indemnify and hold PBF harmless from any and all damages resulting from any such construction of this Forbearance Agreement or any other agreement.
11. Default. The occurrence of any of the following (each a `default') shall, without notice to STI and at the option of PBF, immediately terminate its forbearance under section 5 of this Forbearance Agreement and result in PBF no longer having any obligation to forbear from the exercise of any of its rights or remedies under the Factoring Documents, applicable law or otherwise, including, but not limited to, any obligation to forbear from (i) requiring immediate repurchase of all Purchased Accounts, or (ii) exercising any of PBF's rights or remedies against the Collateral, including foreclosing judicially or non-judicially to the extent permitted under the Factoring Documents or applicable law:
0. The failure of STI to pay on or before the due date any payment required pursuant to this Forbearance Agreement in accordance with the terms hereof.
1. Any representation or warranty to PBF herein or in any other agreement, document, instrument or certificate executed or delivered pursuant hereto or in connection with any transaction contemplated herein, which proves false or misleading in any material respect when made.
2. Failure of any of STI to comply fully and timely with any of the provisions of this Forbearance Agreement.
3. Breach of any of the terms and conditions of the Factoring Documents as modified herein, with the exception of the Defaults.
4. The occurrence of an Event of Default under either the Loan Agreement or the Guaranty as part of the New Loan Documents.
5. Expiration or termination of the Needham Letter of Credit.
6. An Event of Default under the Investment Agreement.
7. If either of STI or Needham before all obligations under the Factoring Documents and this Forbearance Agreement are paid in full make an assignment for the benefit of creditors, file a petition in bankruptcy, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for either of them, or a substantial part of the assets of either of them, or commence any proceeding under any bankruptcy or reorganization, arrangement, readjustment of debt, dissolution or liquidation, under the laws of any jurisdiction, now or hereafter in effect, or shall have such a petition or application or proceeding commenced against any of them which remains undismissed for a period of 60 days or more, or if any of them shall have made or suffered a transfer of any of their assets which transfer may be fraudulent under any bankruptcy, fraudulent conveyance or similar law, or if any of them shall have made a transfer of their respective assets to or for the benefit of a creditor.
12. No Waiver of Default. By entering into this Forbearance Agreement, PBF waives none of the Defaults or any other default under the Factoring Documents nor its right to collect all obligations currently owing under either the Factoring Documents.
13. Notice. Any notice given pursuant to this Forbearance Agreement shall be in writing, shall be effective upon transmission and may be given by deposit in the United States Mail, by personal delivery, by facsimile transmission or by email transmission addressed to the parties hereto as follows:

To STI:

Southwall Technologies Inc.

Attn: Chief Financial Officer

3975 East Bayshore Rd.

Palo Alto, CA 94303

Fax: (65) 967-8713

Email: mseifert@southwall.com

To PBF:

Pacific Business Funding

Attn: Mike Hansen

20195 Stevens Creek Blvd., Suite 220

Cupertino, CA 95014

Fax: (408) 255-9313

Email: mhansen@gbbk.com

or to such other street address, facsimile number or email address of a party hereto as such party may designate by written notice to the other parties. Each party shall be responsible for keeping the other parties hereto apprised of any changes in the above-referenced addresses and/or fax numbers. If a party does not receive notice that an address or fax number has changed, said party may rely on the above-referenced addresses and fax numbers, and any notices sent to said addresses or fax numbers shall be deemed effective and received.

14. Governing Law. This Forbearance Agreement shall be interpreted and governed by California law without giving effect to principles of conflicts of law, and the parties agree that the venue for any lawsuit relating to this Forbearance Agreement or Factoring Documents shall be the State or Federal courts situated in the County of Santa Clara, California. THE PARTIES ACKNOWLEDGE AND AGREE THAT IN ANY SUCH LAWSUIT, THEY EACH WAIVE THE RIGHT TO TRIAL BY JURY AND THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO THE OTHER PARTY TO ENTER INTO THIS FORBEARANCE AGREEMENT.
15. Successors. The parties hereto expressly agree and covenant that this Forbearance Agreement shall inure to the benefit of and be binding upon their respective representatives, successors, trustees and assigns. With the exception of the foregoing, this Forbearance Agreement is not for the benefit of any other parties apart from PBF and STI.
16. Effectuation of Forbearance Agreement. The parties hereto agree to do all things and to execute all documents reasonably necessary to effectuate the provisions of this Forbearance Agreement, including execution and delivery of any documents necessary or appropriate to ensure the existence, priority, validity or perfection of any security interest of PBF. Furthermore, STI agrees to execute whatever documents are necessary and to cooperate with PBF in providing notice to account debtors for Purchased Accounts that such accounts have been purchased by PBF and that PBF is entitled to payment of the proceeds thereof.
17. Entire Agreement. This Forbearance Agreement contains the entire agreement between the parties pertaining to the subject matter herein, and supersedes any and all prior and/or contemporaneous oral or written negotiations, agreements, representations, and understandings, with the exception of the Factoring Documents. The parties, and each of them, understand that this Forbearance Agreement is made without reliance upon any inducement, statement, promise, or representation other than those contained within this Forbearance Agreement.
18. Validity of Forbearance Agreement. If any of the provisions of this Forbearance Agreement or the application thereof to any person, place or circumstance shall be held by a court of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Forbearance Agreement and such provisions as apply to other persons, places and circumstances shall remain in full force and effect.
19. Voluntary Execution. This Forbearance Agreement is executed voluntarily and without any duress or undue influence on the part of or on behalf of any of the parties hereto.
20. Acknowledgments with Respect to this Forbearance Agreement. The parties acknowledge that:
0. They have read this Forbearance Agreement and have not relied upon any statement or representation of any kind of any other party, except as set forth in this Forbearance Agreement;
1. They have been represented in the preparation, negotiation and execution of this Forbearance Agreement by legal counsel of their own choice and have received full and complete advice from such counsel or have knowingly, intentionally and voluntarily waived their right to such representation and advice;
2. They understand the consequences and terms of this Forbearance Agreement and of the releases and waivers it contains; and
3. They are fully aware of the legal and binding effect of this Forbearance Agreement.
21. Time of the Essence. Time is of the essence of this Forbearance Agreement.
22. Execution in Counterparts. This Forbearance Agreement may be executed in an original or one or more counterparts, each of which shall constitute a duplicate original.
23. Headings. The headings and numbers used in this Forbearance Agreement are included for purpose and convenience of reference only. They shall not be used to explain, limit, or extend the meaning of any part of this Forbearance Agreement.
24. Waiver Only in Writing. No party to this Forbearance Agreement may be deemed in the future to have waived or relinquished any power, right, or remedy hereunder except by a writing signed by the party giving the waiver and delivered to the other parties and acknowledged in writing by the party or parties hereto benefiting from the waiver. No failure of any party to exercise any power, right, or remedy given to it hereunder, or to insist on compliance by any other party with any obligation, condition, or covenant hereunder, and no custom or practice of any party at variance with the terms hereof, shall constitute a waiver of any party's right to demand exact compliance with the terms hereof. Waiver of any particular default shall not affect or impair the waiving party's rights with respect to subsequent defaults of the same or of a different nature; nor shall any delay or omission of any party to exercise any of its rights arising from a default of another party affect or impair such party's rights as to said default or to any subsequent default.
25. No Contest and Construction of Forbearance Agreement. Each of the parties to this Forbearance Agreement agrees that it will not seek to have any portion or provision of this Forbearance Agreement, or the Forbearance Agreement as a whole, rendered or declared unenforceable. Further, each of the parties hereto acknowledges and agrees that this Forbearance Agreement has been negotiated and drafted by all parties hereto and that it is not to be construed or interpreted more strongly against any party hereto than any other party hereto.
26. Amendments. This Forbearance Agreement shall not be modified, amended or altered without the written consent of all parties.
27. Reporting Requirements. During the term of this Forbearance Agreement, STI has the following reporting requirements at the address in section 14 above:
0. Upon reasonable request of PBF, STI shall deliver to PBF written cash flow projections in a form satisfactory to PBF; and
1. Within five business days of completion, a copy of the minutes of each of STI's board of director meetings.

Each of the foregoing shall be delivered to PBF's address set forth in section 14 above accompanied by a certification in a form acceptable to PBF by an officer of STI that the information provided is true, complete and correct to STI's knowledge.

28. Termination Of Forbearance. Unless earlier terminated in accordance with the terms of this Forbearance Agreement, PBF's forbearance shall terminate on May 4, 2004, at which time all sums owing under the Factoring Documents and this Forbearance Agreement shall be paid in full.

IN WITNESS WHEREOF, this Forbearance Agreement has been executed as of the date first above written.

PACIFIC BUSINESS FUNDING,

a division of CUPERTINO NATIONAL BANK

By:

Its:

SOUTHWALL TECHNOLOGIES INC.,

a Delaware corporation

By:

Its:

1. Definitions 3

2. Acknowledgment 3

3. Payments/Warrants 3

4. Applications of Funds 3

5. Forbearance 3

6. Acknowledgment of Certain Material Facts 4

7. Audits; Inspections 4

8. Warranty and Release 5

9. Notice of Material Events 6

10. Relationship of PBF and Other Parties to this Forbearance Agreement 6

11. Default 6

12. No Waiver of Default 7

13. Notice 7

14. Governing Law 8

15. Successors 8

16. Effectuation of Forbearance Agreement 8

17. Entire Agreement 8

18. Validity of Forbearance Agreement 9

19. Voluntary Execution 9

20. Acknowledgments with Respect to this Forbearance Agreement 9

21. Time of the Essence 9

22. Execution in Counterparts 9

23. Headings 9

24. Waiver Only in Writing 9

25. No Contest and Construction of Forbearance Agreement 10

26. Amendments 10

27. Reporting Requirements 10

28. Termination Of Forbearance 10

EX-99

Exhibit 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 Technologies Secures New Bank Loan and Equity Financing Agreement Led By Needham & Company

PALO ALTO, CA - December 19, 2003 - Southwall Technologies Inc. (Nasdaq:SWTX), a global developer, manufacturer and marketer of thin-film coatings for the electronic display, automotive glass and architectural markets, today announced that on December 18, 2003, it secured an agreement for a new bank loan guarantee and equity financing package of up to $7.5 million from Needham & Company, Inc., its affiliates and Dolphin Asset Management.

`As noted in our news release on third-quarter 2003 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 this agreement, led by Needham, in conjunction with significant internal changes already in progress, will enable Southwall to achieve quarterly cash break-even in 2004 and begin generating positive cash flow from operations as soon as possible after that. We expect that the Needham led financing will give us the additional time we need to achieve production qualification for the exciting design-ins we have been actively working in the electronic display market.'

If all of the transactions contemplated by the agreement between Southwall and the Needham led group are completed, Southwall will receive up to $3,000,000 in new borrowings from Pacific Business Funding (which are to be guaranteed by Needham) and up to $4,500,000 in cash in exchange for 4,500,000 shares of a newly issued convertible preferred stock. As part of the guarantee and equity purchases, if any, the investors will also receive warrants to purchase common stock. If Needham and its affiliated entities 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 the firm and its affiliated entities would own approximately 6,865,000 shares of Southwall common stock, or about 31% of the total shares outstanding. Dolphin currently does not own any shares of common stock but upon exercise of its warrants would own approximately 2,692,000 shares of Southwall common stock, or about 12% of the total shares outstanding.

Under the terms of the agreement, Needham will issue the guarantees of Southwall's bank line of credit facility in two separate pieces of $2.25 million and $750,000, respectively, and Needham and Dolphin will purchase the equity in two separate tranches of $1.5 million and $3.0 million, respectively, following the extensions of credit under the new facility. The new borrowings and the purchase of each equity tranche would be subject to Southwall's satisfaction, in Needham's reasonable discretion, of certain conditions. These conditions would include, among other things, the receipt of concessions from creditors and landlords, completion of certain restructuring actions and the achievement of cash flow break-even at quarterly revenue levels below those of third quarter 2003. There is no assurance, however, that any of these conditions will be satisfied.

The board has appointed George Boyadjieff to succeed Joseph B. Reagan as Southwall chairman effective on December 18, 2003. Dr. Reagan will remain on the board. Mr. Boyadjieff is the chairman emeritus and recently retired chief executive officer of Varco International, Inc. (NYSE:VRC), a diversified oilfield equipment manufacturer and service provider with over $1.3 billion in fiscal 2002 revenues.

For a complete description of the Needham bank guarantee and equity financing package, please refer to Southwall's Form 8-K, to be filed with the Securities and Exchange Commission on or about December 22, 2003, which will include as exhibits the investment agreement and loan documents. The descriptions of those documents in this press release 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-Citroën, Pilkington, Renault, Saint- Gobain SEKURIT, and Volvo.

About Needham & Company

Needham & Company, Inc. is 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.

About Dolphin Asset Management

Dolphin Asset Management Corp. is a New York-based asset management firm investing exclusively in micro-cap opportunities.

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, specifically that the conditions for Needham's obligations to provide one or more of the guarantees or to buy some or all of the company's 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 the conditions for Dolphin's obligations to buy some of the company's preferred stock will not be satisfied, that the company's lenders, 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 Southwall will not have enough authorized capital stock to fulfill its obligations to Needham and Dolphin which may result in damages or the inability of Southwall to sell the company's preferred stock, 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 its credit facility or under agreements with Needham or Dolphin; 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'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. The failure of Southwall to satisfy the conditions to the completion of the financing package, including entering into satisfactory arrangements with its landlords and other creditors, will have a material adverse effect on Southwall's future viability. Further risks are detailed in the company's filings with the Securities and Exchange Commission, including those set forth in the company's most recent Annual Report on Form 10-K for the year ended December 31, 2002, filed on March 31, 2003; its Quarterly Report on Form 10-Q for the quarter ended September 28, 2003, filed on November 17, 2003, as amended by its Quarterly Report Form 10-Q/A, filed on November 19, 2003; its Current Reports on Form 8-K, filed on December 9, 2003 and December 16, 2003, respectively; and its Current Report on Form 8-K to be filed on or about December 22, 2003.

###

EX-99

EXHIBIT 99.2

INVESTMENT AGREEMENT

This Investment Agreement is entered into and dated as of December 18, 2003 (this `Agreement'), by and among Southwall Technologies Inc., a Delaware corporation (`Southwall'), Needham & Company, Inc., a Delaware corporation, (`Needham & Company'), and Needham Capital Partners III, L.P., a Delaware limited partnership, Needham Capital Partners IIIA, L.P., a Delaware limited partnership, and Needham Capital Partners III (Bermuda), L.P., a limited partnership organized and existing under the laws of Bermuda (each, individually, an `NCP Entity' and, collectively, `NCP Entities'), and Dolphin Direct Equity Partners, LP, a Delaware limited partnership `(Dolphin'). Each NCP Entity and Dolphin may from time to time be referred to herein individually as a `Preferred Shares Purchaser' and collectively as the `Preferred Shares Purchasers').

RECITALS

1. Southwall needs additional funds to maintain its operations, and Needham & Company and the Preferred Shares Purchasers have indicated their willingness to provide Southwall with a financing package in order for Southwall to maintain its operations.
2. Pursuant to the terms of that certain Domestic Factoring Agreement, as amended (the `Domestic Factoring Agreement') and that certain Export- Import Bank Factoring Agreement, as amended (the `EX-IM Agreement' and collectively with the Domestic Factoring Agreement, the `Bank Agreements'), by and between Southwall and Pacific Business Funding, a division of Cupertino National Bank (the `Bank'), Southwall has borrowed, as of the date hereof, approximately $4,200,000. In connection with the transactions contemplated hereby, the Bank and Southwall have entered into a Forbearance Agreement (the `Forbearance Agreement') and have, among other things, agreed to amend the Bank Agreements to reduce the amount of availability thereunder from $10,000,000 to $7,000,000 (the `Amendment').
3. In connection with the execution of the Forbearance Agreement, the Bank has indicated its willingness to lend additional amounts to Southwall under a Loan and Security Agreement (as defined below), which provides for an extension of credit of up to $3,000,000 so long as Needham & Company executes a guaranty of Southwall's payment obligations under the Loan and Security Agreement.
4. In addition, the Preferred Shares Purchasers, have indicated their willingness to purchase equity from Southwall if, among other things, Southwall completes certain restructuring actions.

THE PARTIES AGREE AS FOLLOWS:

1. 
   
   DEFINITIONS

1.1 Definitions. In addition to the terms defined elsewhere in this Agreement, the following terms shall have the meanings set forth in this Section 1.1:

`Action' means any action, suit, inquiry, notice of violation, proceeding (including any partial proceeding such as a deposition) or investigation pending or threatened in writing against or affecting Southwall or any Subsidiary or any of their respective properties before or by any Person, court, arbitrator, governmental or administrative agency, regulatory authority (federal, state, county, local or foreign), stock market, stock exchange or trading facility.

`Affiliate' means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act.

`Bankruptcy Event' means any of the following events: (a) Southwall or any Subsidiary commences a case or other proceeding under any bankruptcy, reorganization, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to Southwall or any Subsidiary thereof; (b) there is commenced against Southwall or any Subsidiary any such case or proceeding; (c) Southwall or any Subsidiary is adjudicated by a court of competent jurisdiction insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) Southwall or any Subsidiary suffers any appointment of any custodian or the like for it or any part of its property; (e) under applicable bankruptcy law Southwall or any Subsidiary makes a general assignment for the benefit of creditors; (f) Southwall or any Subsidiary fails to pay, or states that it is unable to pay or is unable to pay, its debts generally as they become due; (g) Southwall or any Subsidiary calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (h) Southwall or any Subsidiary, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing; provided that, with respect to (f) and (g) above and (h) solely as it relates to (f) and (g), no action or inaction on the part of Southwall or its Subsidiaries that has been agreed to by the parties in the Transaction Documents or that has been approved by Needham & Company and/or NCP in writing shall constitute a Bankruptcy Event including, but not limited to, the renegotiation of leases and agreements to defer and/or extend payment terms with creditors and lenders on terms agreed to in writing by Needham & Company and/or NCP Entities.

`Business Day' means any day except Saturday, Sunday and any day which shall be a federal legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

`Capital Lease Obligations' of any Person shall mean the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP.

`Certificate of Designation' means that Certificate of Designation, Preferences and Rights of 10% Cumulative Convertible Preferred Stock, in the form attached as Exhibit A hereto, setting forth the terms and conditions of the Series A Preferred Stock.

`Closing,' when used generically herein, means the Closing of any of the extensions of credit and purchases and sale of Securities pursuant to Section 2.1. Specific Closings provided for under this Agreement and subject to its terms and conditions are the Initial Extension of Credit Closing, the Second Extension of Credit Closing, the Initial Equity Closing and the Second Equity Closing.

`Closing Date' means the Business Day immediately following the date on which all the conditions set forth in Article 6 hereof applicable to a Closing are satisfied or waived.

`Commission' means the Securities and Exchange Commission.

`Common Stock' means the common stock of Southwall, $0.001 par value per share, and any securities into which such common stock may hereafter be reclassified.

`Common Stock Equivalents' means any securities of Southwall or any Subsidiary which entitle the holder thereof to acquire Common Stock at any time, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock or other securities that entitle the holder to receive, directly or indirectly, Common Stock.

`Default' means the occurrence of any Event of Default.

`Disclosure Schedule' means the disclosure schedule of Southwall dated as of the date of this Agreement provided to Needham & Company and the Preferred Shares Purchasers.

`Dolphin Initial Equity Warrants' means common stock purchase warrants in the form of Exhibit D hereto issued in favor of Dolphin for an aggregate of 313,705 shares of Common Stock.

`Dolphin Second Equity Warrants' means common stock purchase warrants in the form of Exhibit D hereto issued in favor of Dolphin for an aggregate of 250,964 shares of Common Stock.

`Event of Default' means any of the following:

1. Southwall shall fail to pay the principal and/or interest accrued thereon under the Bank Agreements or the Loan and Security Agreement on or before the expiration of any applicable grace periods;
2. Southwall or any of its Subsidiaries shall fail to pay any obligations on other Indebtedness when due other than, as set forth in the Restructuring Plan, Indebtedness owed to Teijin Limited (including any amounts owed to Teijin Limited as a trade creditor) or The Sanwa Bank Ltd., or any other Indebtedness agreed to by Needham & Company in writing.
3. Southwall breaches in any material respect any covenant contained in this Investment Agreement, any other of the Transaction Documents, or the Bank Agreements and such breach is not cured within 3 Business Days;
4. Any representation or warranty made by Southwall herein or in any other Transaction Document (or in any certificate or other writing furnished in connection with any Transaction Document) shall not have been true and correct in all material respects (without giving effect to any qualifications as to materiality contained therein) (except for such representations and warranties that speak as of a particular date, which shall have been true and correct as of the date when made) and such inaccuracy is not cured within 10 days after such representation or warranty becomes inaccurate;
5. The occurrence of any Bankruptcy Event, and, in the event of a Bankruptcy Event that was commenced by a party other than Southwall, such case or proceeding shall not have been dismissed within 90 days;
6. Any Transaction Document shall fail to be the legal and valid, obligation and agreement of Southwall;
7. Any of Southwall or its Subsidiaries shall be liquidated, dissolved, wound up or cease to exist for any reason whatsoever, or any of Southwall or its Subsidiaries shall elect, undertake or resolve to do so; or
8. Southwall shall default in the payment of principal of or interest on any Indebtedness for borrowed money in an amount greater than $50,000 or default in the performance of any other term, condition or agreement respecting any such Indebtedness and the other party thereto shall have accelerated the maturity thereof;

provided that no action or inaction on the part of Southwall or its Subsidiaries that has been agreed to by the parties in the Transaction Documents or that has been approved by Needham & Company and/or NCP in writing shall constitute an Event of Default including, but not limited to, the renegotiation of leases and agreements to defer and/or extend payment terms with creditors and lenders on terms agreed to in writing by Needham & Company and/or NCP.

`Exchange Act' means the Securities Exchange Act of 1934, as amended.

`Guarantee' of or by any Person shall mean any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the `primary obligor') in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness, provided, that the term Guarantee shall not include endorsements for collection or deposit, in either case in the ordinary course of business.

`Indebtedness' of any Person shall mean, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services (other than trade debt in a total amount not more than $7,500,000 at any time incurred in the ordinary course of business and repayable in accordance with customary trade practices), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations of such Person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements and (j) all obligations of such Person as an account party in respect of letters of credit and bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any partnership in which such Person is a general partner.

`Initial Equity Closing' means the closing of the Initial Equity which shall take place, subject to the terms and conditions of this Agreement (including satisfaction or waiver of conditions), between January 4, 2004, and the Initial Equity End Date.

`Initial Extension of Credit' means the initial extension of credit by Needham & Company up to $2,250,000 pursuant to the Loan and Security Agreement.

`Initial Extension of Credit Closing' means the closing of the Initial Extension of Credit pursuant to Section 2.2.

`Initial Extension of Credit Warrant' means a common stock purchase warrant in the form of Exhibit D hereto for 941,115 shares of Common Stock issued to Needham & Company.

`Loan and Security Agreement' means the Loan and Security Agreement by and between Southwall and the Bank, dated as of the date of this Agreement, attached as Exhibit B hereto.

`Losses' means any and all losses, claims, damages, liabilities, settlement costs and expenses, including without limitation costs of preparation of legal action and reasonable attorneys' fees.

`Material Subsidiary' means Southwall Europe GMBH.

`Needham & Company and NCP Counsel' means Heller Ehrman White & McAuliffe LLP.

`NCP Entities Initial Equity Warrants' means common stock purchase warrants in the form of Exhibit D hereto issued in favor of the NCP Entities for an aggregate of 627,410 shares of Common Stock.

`NCP Entities Second Equity Warrants' means common stock purchase warrants in the form of Exhibit D hereto issued in favor of the NCP Entities for an aggregate of 501,928 shares of Common Stock.

`Person' means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

`Proceeding' means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened in writing.

`Registration Rights Agreement' means the Registration Rights Agreement, dated as of the date of this Agreement, among Southwall and Needham & Company and Southwall and the Preferred Shares Purchasers, in the form of Exhibit C hereto.

`Restructuring Plan' shall mean the restructuring plan of Southwall and its Subsidiaries attached as Disclosure Schedule A hereto.

`Rule 144' means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

`Second Equity Closing' means the closing of the Second Equity which shall take place, subject to the terms and conditions of this Agreement (including satisfaction or waiver of conditions), between April 10, 2004 and the Second Equity End Date.

`Second Extension of Credit' means the extension by Needham & Company of additional credit up to $750,000 pursuant to the Loan and Security Agreement.

`Second Extension of Credit Closing' means the Closing of the Second Extension of Credit which shall take place, subject to the terms and conditions of this Agreement (including satisfaction or waiver of conditions), between January 2, 2004 and the Second Extension of Credit end date.

`Second Extension of Credit Warrant' means the Warrant in the form of Exhibit D hereto for 941,115 shares of Common Stock issued to Needham & Company.

`Securities' means the Series A Preferred Stock, the Warrants and the Underlying Shares issuable to Needham & Company and the Preferred Shares Purchasers pursuant to the Transaction Documents.

`Securities Act' means the Securities Act of 1933, as amended.

`Series A Preferred Stock' means the preferred stock of Southwall, par value $0.001 per share, with the designations, preferences and rights as set forth in the Certificate of Designation.

`Southwall Counsel' means Choate Hall & Stewart.

`Southwall Material Adverse Effect.' An event, circumstance, violation, inaccuracy, or other matter will be deemed to have a `Southwall Material Adverse Effect' if such event, circumstance, violation, inaccuracy, or other matter had, has or could reasonably be expected to have a material adverse effect on (i) the business, condition (financial or otherwise), general affairs, capitalization, assets, liabilities, operations, financial performance or prospects of Southwall and its Subsidiaries, as a whole, (ii) the ability of Southwall to consummate the transactions contemplated by the Transaction Documents or to perform any of its obligations under the Transaction Documents, or (iii) the ability of Needham & Company or the Preferred Shares Purchasers to vote, receive dividends with respect to or otherwise exercise ownership rights with respect to the Common Stock, Series A Preferred Stock or Warrants, other than (a) changes, effects or circumstances that (1) result from changes in general economic or debt or equity market conditions that do not affect the Company disproportionately, (2) are the result of factors generally affecting the Company's industry or are the result of any changes in any regulation or statute that has or could reasonably be expected to have an industry-wide effect, or (3) result from the consummation of transactions contemplated hereby or any of the actions required to be taken by the Company hereunder or the seeking or receiving of a hardship exemption from Nasdaq with respect to its stockholder approval requirements, (b) any adverse change in the Company's stock price, and (c) changes in GAAP or changes in laws or regulations or the interpretation thereof.

`Subsidiary' means any corporation, partnership, joint venture, or other entity more than 50% of whose equity interests (measured by virtue of voting rights) is owned by Southwall.

`Trading Day' means (i) a day on which the Common Stock is traded on a Trading Market, or (ii) if the Common Stock is not listed on a Trading Market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business Day.

`Trading Market' means any other national securities exchange, market or trading or quotation facility on which the Common Stock is then listed or quoted.

`Transaction Documents' means this Agreement, the Warrants, the Certificate of Designation, the Series A Preferred Stock, the Registration Rights Agreement, the Loan and Security Agreement, the Forbearance Agreement and any other documents or agreements executed or delivered in connection with the transactions contemplated hereunder.

`Underlying Shares' means the shares of Common Stock issuable upon exercise of the Warrants, conversion of the Series A Preferred Stock, and in satisfaction of any other obligation of Southwall to issue shares of Common Stock pursuant to the Transaction Documents.

`Warrant' means a Common Stock purchase warrant in the form of Exhibit D.

2. 
   
   EXTENSIONS OF CREDIT, PURCHASE AND SALE

2.1 Closings. Closings shall occur two business days after the conditions set forth in Article VI, as applicable, have been satisfied or waived. Closings shall occur at 9:00 a.m. local time at the offices of Needham & Company and NCP's Counsel. Subject to the terms and conditions set forth in this Agreement, the following Closings shall occur:

1. Initial Extension of Credit Closing. At the Initial Extension of Credit Closing, Needham & Company will grant the Initial Extension of Credit in accordance with the terms of the Loan and Security Agreement.
2. Second Extension of Credit Closing. At the Second Extension of Credit Closing, Needham & Company will grant the Second Extension of Credit in accordance with the terms of the Loan and Security Agreement.
3. Initial Equity Closing. At the Initial Equity Closing, Southwall shall issue and sell to the NCP Entities, and the NCP Entities shall purchase from Southwall, an aggregate of 1,000,000 shares of Series A Preferred Stock, which shall be issued in amounts designated by the NCP Entities prior to or at the Initial Equity Closing. At the Initial Equity Closing, Southwall shall issue and sell to Dolphin, and Dolphin shall purchase from Southwall 500,000 shares of Series A Preferred Stock.
4. Second Equity Closing. At the Second Equity Closing, Southwall shall issue and sell to the NCP Entities, and the NCP Entities shall purchase from Southwall, an aggregate of 2,000,000 shares of Series A Preferred Stock, which shall be issued in amounts designated by the NCP Entities prior to or at the Second Equity Closing. At the Second Equity Closing, Southwall shall issue and sell to Dolphin, and Dolphin shall purchase from Southwall 1,000,000 shares of Series A Preferred Stock.
1. Initial Extension of Credit Closing Deliveries.
1. At the Initial Extension of Credit Closing, Southwall shall deliver or cause to be delivered to Needham & Company the following:
1. A copy of the Loan and Security Agreement executed by Southwall and the Bank;
2. The Initial Extension of Credit Warrant;
3. A copy of the Registration Rights Agreement executed by Southwall;
4. A certified copy of the Certificate of Designation as filed with the Secretary of State of the State of Delaware;
5. The legal opinion of Southwall Counsel, in a form reasonably agreed to by the parties, executed by such counsel and delivered to Needham & Company and the Preferred Shares Purchasers;
6. A certificate from a duly authorized officer certifying on behalf of Southwall that each of the conditions set forth in Sections 6.1 and 6.2 has been satisfied or waived; and
7. A check or evidence of wire transfer to Heller Ehrman White & McAuliffe in the amount of $50,000.
2. At the Initial Extension of Credit Closing, (i) Needham & Company shall grant the Initial Extension of Credit in accordance with the terms of the Loan and Security Agreement and (ii) Needham & Company and NCP shall deliver or cause to be delivered to Southwall (A) the Registration Rights Agreement with Southwall, duly executed by Needham & Company and by the Preferred Shares Purchasers, (B) a certificate from a duly authorized officer certifying on behalf of Needham & Company that each of the conditions set forth in Section 6.6 has been satisfied or waived and (C) the common stock purchase warrant dated November 11, 2003 issued by Southwall in favor of Needham & Company for an aggregate of 1,254,235 shares of Common Stock.
0. Second Extension of Credit Closing Deliveries.
1. Subject to the terms and conditions set forth in this Agreement, on the Second Extension of Credit Closing Date, Southwall shall deliver or cause to be delivered to Needham & Company the following:
1. The Second Extension of Credit Warrant; and
2. A certificate from a duly authorized officer certifying on behalf of Southwall that each of the conditions set forth in Sections 6.1 and 6.3 has been satisfied or waived.
2. Subject to the terms and conditions set forth in this Agreement, at the Second Extension of Credit Closing, (i) Needham & Company shall grant to Southwall the Second Extension of Credit in accordance with the terms of the Loan and Security Agreement and (ii) Needham & Company shall deliver to Southwall a certificate from a duly authorized officer certifying on behalf of Needham & Company that each of the conditions set forth in Section 6.6 has been satisfied or waived.
0. Initial Equity Closing Deliveries.
1. Subject to the terms and conditions set forth in this Agreement, on the Initial Equity Closing Date, Southwall shall sell an aggregate of 1,000,000 shares of Series A Preferred Stock to the NCP Entities and shall deliver or cause to be delivered to the NCP Entities the following:
1. NCP Entities Initial Equity Warrants, issued in the amounts designated by the NCP Entities prior to or at the Initial Equity Closing;
2. Certificate(s) registered in the name of the NCP Entities for an aggregate of 1,000,000 shares of Series A Preferred Stock, issued in the amounts designated by the NCP Entities prior to or at the Initial Equity Closing; and
3. A certificate from a duly authorized officer certifying on behalf of Southwall that each of the conditions set forth in Sections 6.1 and 6.4 has been satisfied or waived.
2. Subject to the terms and conditions set forth in this Agreement, at the Initial Equity Closing, (i) the NCP Entities shall purchase an aggregate of 1,000,000 shares of Series A Preferred Stock from Southwall and shall deliver or cause to be delivered to Southwall $1,000,000 in United States dollars and in immediately available funds, by wire transfer to an account designated in writing by Southwall for such purpose and (ii) NCP Entities shall deliver to Southwall a certificate from a duly authorized officer certifying on behalf of NCP Entities that each of the conditions set forth in Section 6.6 has been satisfied or waived.
3. Subject to the terms and conditions set forth in this Agreement, on the Initial Equity Closing Date, Southwall shall sell an aggregate of 500,000 shares of Series A Preferred Stock to Dolphin and shall deliver or cause to be delivered to Dolphin the following:
1. Dolphin Initial Equity Warrant; and
2. Certificate(s) registered in the name of Dolphin for 500,000 shares of Series A Preferred Stock; and
3. A certificate from a duly authorized officer certifying on behalf of Southwall that each of the conditions set forth in Sections 6.1 and 6.4 has been satisfied or waived;
4. Subject to the terms and conditions set forth in this Agreement, at the Initial Equity Closing, (i) Dolphin shall purchase an aggregate of 500,000 shares of Series A Preferred Stock from Southwall and shall deliver or cause to be delivered to Southwall $500,000 in United States dollars and in immediately available funds, by wire transfer to an account designated in writing by Southwall for such purpose and (ii) Dolphin shall deliver to Southwall a certificate from a duly authorized officer certifying on behalf of Dolphin that each of the conditions set forth in Section 6.6 has been satisfied or waived.
0. Second Equity Closing Deliveries.
1. Subject to the terms and conditions set forth in this Agreement, at the Second Equity Closing, Southwall shall sell an aggregate of 2,000,000 shares of Series A Preferred Stock to NCP Entities and deliver or cause to be delivered to NCP Entities the following:
1. NCP Entities Second Equity Warrants, issued in the amounts designated by the NCP Entities prior to or at the Second Equity Closing; and
2. Certificate(s) registered in the name of the NCP Entities for an aggregate of 2,000,000 shares of Series A Preferred Stock of Southwall, issued in the amounts designated by the NCP Entities prior to or at the Second Equity Closing;
3. A certificate from a duly authorized officer certifying on behalf of Southwall that each of the conditions set forth in Sections 6.1 and 6.5 has been satisfied or waived.
2. Subject to the terms and conditions set forth in this Agreement, at the Second Equity Closing, (i) the NCP Entities shall purchase an aggregate of 2,000,000 Shares of Series A Preferred Stock from Southwall and shall deliver or cause to be delivered to Southwall $2,000,000 in United States dollars and in immediately available funds, by wire transfer to an account designated in writing by Southwall for such purpose and (ii) NCP Entities shall deliver to Southwall a certificate from a duly authorized officer certifying on behalf of NCP Entities that each of the conditions set forth in Section 6.6 has been satisfied or waived.
3. Subject to the terms and conditions set forth in this Agreement, on the Second Equity Closing Date, Southwall shall sell an aggregate of 1,000,000 shares of Series A Preferred Stock to Dolphin and shall deliver or cause to be delivered to Dolphin the following:
1. Dolphin Second Equity Warrant; and
2. Certificate(s) registered in the name of Dolphin for 1,000,000 shares of Series A Preferred Stock; and
3. A certificate from a duly authorized officer certifying on behalf of Southwall that each of the conditions set forth in Sections 6.1 and 6.4 has been satisfied or waived.
4. Subject to the terms and conditions set forth in this Agreement, at the Initial Equity Closing, (i) Dolphin shall purchase an aggregate of 1,000,000 shares of Series A Preferred Stock from Southwall and shall deliver or cause to be delivered to Southwall $1,000,000 in United States dollars and in immediately available funds, by wire transfer to an account designated in writing by Southwall for such purpose and (ii) Dolphin shall deliver to Southwall a certificate from a duly authorized officer certifying on behalf of Dolphin that each of the conditions set forth in Section 6.6 has been satisfied or waived.
0. Obligations. The obligations of the Preferred Shares Purchasers to purchase the Series A Preferred Stock shall be several and not joint.
3. 
   
   REPRESENTATIONS AND WARRANTIES

3.1 Representations and Warranties of Southwall. Southwall hereby makes the following representations and warranties to Needham & Company and the Preferred Shares Purchasers:

1. Subsidiaries. Except as set forth in Disclosure Schedule 3.1(a), Southwall does not directly or indirectly control or own any interest in any other corporation, partnership, joint venture or other business association or entity. Except as disclosed in Disclosure Schedule 3.1(a), Southwall owns, directly or indirectly, all of the capital stock of each Subsidiary free and clear of any lien, charge, claim, security interest, encumbrance, right of first refusal or other restriction (collectively, `Liens'), and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights. None of Southwall's Subsidiaries, other than the Material Subsidiary, has any material assets or liabilities or is material to the business, operations, condition (financial or otherwise) or prospects of Southwall. None of the Subsidiaries, other than the Material Subsidiary, conducts, or has conducted in the past three years, any business.
2. Organization and Qualification. Each of Southwall and the Material Subsidiary is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither Southwall nor the Material Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Southwall and the Material Subsidiary is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the failure to be so qualified could reasonably be expected to result in a Southwall Material Adverse Effect.
3. Authorization; Enforcement. Southwall has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of each of the Transaction Documents by Southwall and the consummation by it of the transactions contemplated hereunder and thereunder have been duly authorized by all necessary action on the part of Southwall and no further consent or action is required by Southwall, its Board of Directors or its stockholders other than as contemplated by Section 4.16 and any stockholder approval that may be required by the rules applicable to companies listed on the Nasdaq National Market. Each of the Transaction Documents has been (or upon delivery will be) duly executed by Southwall and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of Southwall enforceable against Southwall in accordance with its terms.
4. No Conflicts. The execution, delivery and performance of the Transaction Documents by Southwall and the consummation by Southwall of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of Southwall's or any Subsidiary's certificate or articles of incorporation, bylaws or other organizational or charter documents other than as contemplated by Section 4.16, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both could reasonably be expected to become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any material agreement, credit facility, debt or other instrument (evidencing a Southwall or Material Subsidiary debt or otherwise) or other understanding to which Southwall or the Material Subsidiary is a party or by which any material property or asset of Southwall or the Material Subsidiary is bound or affected (other than such defaults or other rights as shall have been waived or amended away prior to the consummation of the applicable transaction), or (iii) other than violations that could not reasonably be expected to result in a Southwall Material Adverse Effect, result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which Southwall or the Material Subsidiary is subject (including federal and state securities laws and regulations) and the rules and regulations of any self-regulatory organization to which Southwall or its securities are subject other than any stockholder approval that may be required by the rules applicable to companies listed on the Nasdaq National Market, or by which any property or asset of Southwall or the Material Subsidiary is bound or affected.
5. Filings, Consents and Approvals. Southwall is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by Southwall of the Transaction Documents, other than the filing of the Certificate of Designation with the Secretary of State of the State of Delaware, the filing of requisite notices to and receipt of approvals and waivers from the Nasdaq National Market, and the filing of a Form D with the Commission.
6. Issuance of the Securities. Other than contemplated by Section 4.16, the Securities have been duly authorized and, when issued and paid for in accordance with the Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens. Other than as contemplated by Section 4.16, Southwall has reserved from its duly authorized capital stock a number of shares of Common Stock to be issued to Needham & Company or the Preferred Shares Purchasers, as applicable, upon conversion or exercise of the Series A Preferred Stock or Warrants.
7. Capitalization. The number of shares and type of all authorized, issued and outstanding capital stock of Southwall, and all shares of capital stock reserved for issuance under Southwall's various option and incentive plans, is set forth in Disclosure Schedule 3.1(g). Except as set forth in Disclosure Schedule 3.1(g), no securities of Southwall are entitled to preemptive or similar rights, and no Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities and except as disclosed in Disclosure Schedule 3.1(g), there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which Southwall is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Except as set forth in Disclosure Schedule 3.1(g), the issue and sale of the Securities will not, immediately or with the passage of time, obligate Southwall to issue shares of Common Stock or other securities to any Person (other than the Needham & Company and the Preferred Shares Purchasers) and will not result in a right of any holder of Southwall securities to adjust the exercise, conversion, exchange or reset price under such securities.
8. SEC Reports; Financial Statements. Southwall has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the 24 months preceding the date hereof (the foregoing materials being collectively referred to herein as the `SEC Reports' and, together with this Agreement and the Schedules to this Agreement, the `Disclosure Materials') on a timely basis or has timely filed a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. Southwall has made available to Needham & Company and the Preferred Shares Purchasers a copy of all SEC Reports filed within the 10 days preceding the date hereof. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Southwall included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (`GAAP'), except as may be otherwise specified in such financial statements or the notes thereto or in the case of unaudited financial statements, as permitted by Form 10-Q of the Commission, and fairly present in all material respects the financial position of Southwall and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. All material contracts, as such contracts are defined in &sec:601(a)(10) of Reg. S-K under the Securities Act, to which Southwall or the Material Subsidiary is a party or to which the property or assets of Southwall or any Subsidiary are subject are included as part of or specifically identified in the SEC Reports.
9. Press Releases. As of their respective dates, the press releases disseminated by Southwall during the 24 months preceding the date of this Agreement taken as a whole did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
10. Material Changes. Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in the SEC Reports, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Southwall Material Adverse Effect, (ii) Southwall has not incurred any liabilities (contingent or otherwise) other than (A) as of the date hereof, trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) as of the date hereof, liabilities not required to be reflected in Southwall's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (iii) as of the date hereof, Southwall has not altered its method of accounting or the identity of its auditors, (iv) Southwall has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (v) Southwall has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Southwall stock option and stock purchase plans, a warrant to purchase shares of Common Stock to NCP which has terminated and the Warrants and Series A Preferred Stock issued or to be issued to Needham & Company and the Preferred Shares Purchasers pursuant to this Agreement. Other than as set forth on Disclosure Schedule 3.1(j), Southwall does not have pending before the Commission any request for confidential treatment of information.
11. Litigation. Except as set forth on Disclosure Schedule 3.1(k), as of the date hereof, none of Southwall or its Subsidiaries is party to any Action or Proceeding. There is no Action pending that adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents, the Bank Agreements, or the Securities. As of the date hereof, neither Southwall nor any Subsidiary, nor any director or officer thereof, is currently the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of Southwall, there is not pending or contemplated, any investigation by the Commission involving Southwall or any current or former director or officer of Southwall. During the last three years, the Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by Southwall under the Exchange Act or the Securities Act.
12. Labor Relations. No material labor dispute exists or, to the knowledge of Southwall, is imminent with respect to any of the employees of Southwall or the Material Subsidiary.
13. Compliance. Except as set forth in Disclosure Schedule 3.1(m) and except in each case as could not, individually or in the aggregate, reasonably be expected to result in a Southwall Material Adverse Effect, neither Southwall nor the Material Subsidiary is (i) in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, could reasonably be expected to result in a default by Southwall or the Material Subsidiary under), nor has Southwall or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) in violation of any order of any court, arbitrator or governmental body, and (iii) in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters. Southwall is in compliance in all material respects with the applicable requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations thereunder promulgated by the Commission.
14. Regulatory Permits. Southwall and the Material Subsidiary possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not, individually or in the aggregate, have or could reasonably be expected to result in a Southwall Material Adverse Effect (`Material Permits'), and neither Southwall nor the Material Subsidiary has received notice of proceedings relating to the revocation or modification of any Material Permit.
15. Title to Assets. Southwall and the Material Subsidiary have good and marketable title in fee simple to all real property owned by them that is material to their respective businesses and good and marketable title in all personal property owned by them that is material to their respective businesses, in each case free and clear of all Liens, except for Liens granted to the Bank pursuant to the Factoring Agreement, liens set forth in Disclosure Schedule 3.1(o), and except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by Southwall and its Subsidiaries. Any real property and facilities held under lease by Southwall or the Material Subsidiary are held by it under valid, subsisting and enforceable leases of which Southwall and the Material Subsidiary are in compliance in all material respects.
16. Patents and Trademarks. Southwall and the Material Subsidiary have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could, individually or in the aggregate, have or reasonably be expected to result in a Southwall Material Adverse Effect (collectively, the `Intellectual Property Rights'). To the knowledge of Southwall, the Intellectual Property Rights used by Southwall and the Material Subsidiary do not violate or infringe upon the rights of any Person. To the knowledge of Southwall, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights.
17. Proprietary Information of Third Parties. No third party has claimed in writing to Southwall or the Material Subsidiary that any Person employed by or affiliated with any of Southwall or the Material Subsidiary has (a) violated or may be violating to any extent any of the terms or conditions of such Person's employment, non-competition or non-disclosure agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party, or (c) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees.
18. Product Liability. Except as set forth on Disclosure Schedule 3.1(r) or as reserved for in the SEC Reports, all products sold, distributed, installed, used, delivered or held in inventory in connection with the business of Southwall and the Material Subsidiary (including, without limitation, all documentation furnished in connection therewith) conform in all material respects with all applicable contractual commitments and with all express and implied warranties, and neither Southwall nor the Material Subsidiary have any material liability and cost (and there is no basis for any present or future proceeding giving rise to any liability and cost) for replacement or repair thereof or other damages in connection therewith. Except as set forth on Disclosure Schedule 3.1(r), no product sold, distributed, used or delivered by Southwall or the Material Subsidiary in connection with their respective businesses is subject to any guaranty, warranty or other indemnity beyond the applicable standard terms and conditions of sale.
19. Insurance. Southwall and the Material Subsidiary are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which Southwall and the Material Subsidiary are engaged.
20. Transactions With Affiliates and Employees. Except as set forth in SEC Reports, none of the officers or directors of Southwall and, to the knowledge of Southwall, none of the employees of Southwall or the Material Subsidiary is presently a party to any transaction with Southwall or the Material Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of Southwall, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.
21. Internal Accounting Controls. Southwall and the Material Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
22. Certain Fees. No brokerage or finder's fees or commissions are or will be payable by Southwall to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement. Neither Needham & Company nor the Preferred Shares Purchasers shall have any obligation with respect to any fees or with respect to any claims (other than such fees or commissions owed by Needham & Company or the Preferred Shares Purchasers pursuant to written agreements executed by Needham & Company or the Preferred Shares Purchasers, which fees or commissions shall be the sole responsibility of Needham & Company or the Preferred Shares Purchasers, as applicable) made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement.
23. Certain Registration Matters. Assuming the accuracy of the representations and warranties of Needham & Company and the Preferred Shares Purchasers set forth in Sections 3.2(b) and (c), no registration under the Securities Act is required for the offer and sale of the Securities by Southwall to Needham & Company or the Preferred Shares Purchasers under the Transaction Documents. Except as described in Disclosure Schedule 3.1(w), Southwall has not granted or agreed to grant to any Person any rights (including `piggyback' registration rights) to have any securities of Southwall registered with the Commission or any other governmental authority that have not been satisfied.
24. Listing and Maintenance Requirements. Southwall has not, in the two years preceding the date hereof, received notice from the Trading Market to the effect that Southwall is not in compliance with the listing or maintenance requirements thereof.
25. Investment Company. Southwall is not, and is not an Affiliate of, an `investment company' within the meaning of the Investment Company Act of 1940, as amended.
26. Disclosure. Southwall understands and confirms that Needham & Company and the Preferred Shares Purchasers each will rely on the foregoing representations and covenants in effecting transactions in securities of Southwall. All disclosure provided to Needham & Company and the Preferred Shares Purchasers in writing regarding Southwall, its business and the transactions contemplated hereby, furnished by or on behalf of Southwall (including Southwall's representations and warranties set forth in this Agreement) are true and correct in all material respects and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.
27. Acknowledgment Regarding Purchase of Securities by Needham & Company and the Preferred Shares Purchasers. Southwall acknowledges and agrees that each of Needham & Company and the Preferred Shares Purchasers is acting solely in the capacity of an arm's length finance provider with respect to the Transaction Documents and the transactions contemplated hereby and thereby. Southwall further acknowledges that none of Needham & Company nor the Preferred Shares Purchasers is acting as a financial advisor or fiduciary of Southwall (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby and any advice given by either of Needham & Company, the Preferred Shares Purchasers or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby is merely incidental to the purchase of the Securities by Needham & Company and the Preferred Shares Purchasers, respectively. Southwall further represents to each of Needham & Company and the Preferred Shares Purchasers that Southwall's decision to enter into this Agreement has been based solely on the independent evaluation by Southwall, its Board of Directors and its representatives.
28. Seniority. Other than as set forth in Disclosure Schedule 3.1(bb), as of the date hereof, no Indebtedness of Southwall or the Material Subsidiary is senior to or pari passu with the Indebtedness under the Bank Agreements, or the Loan and Security Agreement in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise.

3.2 Representations and Warranties of Needham & Company and the Preferred Shares Purchasers. Each of Needham & Company and the Preferred Shares Purchasers hereby represent and warrant, severally and not jointly, to Southwall as follows:

(a) Organization; Authority. Each of Needham & Company and each of the Preferred Shares Purchasers is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the applicable Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution, delivery and performance by Needham & Company and/or the Preferred Shares Purchasers of the transactions contemplated by this Agreement has been duly authorized by all necessary corporate action by Needham & Company, and other applicable like action by each of the Preferred Shares Purchasers. Each of this Agreement and the applicable Registration Rights Agreement has been duly executed by Needham & Company and the Preferred Shares Purchasers, and when delivered by Needham & Company and the Preferred Shares Purchasers in accordance with terms hereof, will constitute the valid and legally binding obligation of each of Needham & Company and the Preferred Shares Purchasers, respectively, enforceable against it in accordance with its terms.

(b) Accredited Investor Status. At the time each of Needham & Company and each of the Preferred Shares Purchasers was offered the Securities, it was, and at the date hereof and as of each Closing Date (if any), it is, and on each date on which it exercises the Warrants it will be, an `accredited investor' as defined in Rule 501(a) under the Securities Act and will have acquired the Securities for investment purposes only and not with a view to the resale or distribution thereof.

(c) Suitability of Investment

(i) Needham & Company and the Preferred Shares Purchasers are each aware that the Securities have not been registered under the Securities Act, that such offer and sale are intended to be exempt from registration under the Securities Act and the rules promulgated thereunder by the Commission, and that the Securities may not be offered, sold, assigned, transferred or otherwise disposed of unless they are registered under the Securities Act or an exemption from such registration is available. Needham & Company and the Preferred Shares Purchasers are each also aware that sales or transfers of the Securities are subject to further restrictions by state securities laws and the provisions of the Transaction Documents.

(ii) Needham & Company and the Preferred Shares Purchasers each has such knowledge and experience in financial, business and tax matters that it is capable of evaluating the merits and risks relating to the investment in the Securities and making an investment decision with respect to Southwall.

(iii) Each of Needham & Company and the Preferred Shares Purchasers has been given the opportunity to obtain information and documents relating to Southwall and to ask questions of and receive answers from representatives of Southwall concerning Southwall and its investment in Southwall.

(iv) Each of Needham & Company and the Preferred Shares Purchasers is able at this time, and in the foreseeable future, to bear the economic risk of a total loss of its investment in Southwall.

(v) Each of Needham & Company and the Preferred Shares Purchasers is aware that there are substantial risks incident to an investment in the Securities.

(vi) Each of Needham & Company and the Preferred Shares Purchasers are aware that in the foreseeable future Southwall may be de-listed from The Nasdaq Stock Market.

(d) Filings, Consents and Approvals. Each of Needham & Company and the Preferred Shares Purchasers is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by it of the Transaction Documents other than post- closing notice filings.

4. 
   
   OTHER AGREEMENTS OF THE PARTIES
1. Federal and State Securities Loans.
1. Each of Needham & Company and the Preferred Shares Purchasers agree that the Securities will only be offered, sold, assigned, transferred, exchanged or otherwise disposed of in compliance with state and federal securities laws and the Transaction Documents.
2. Each of Needham & Company and the Preferred Shares Purchasers agree that the certificates evidencing the Securities will contain the following legend, so long as is required by this Section 4.1(b) or Section 4.1(c):

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE `SECURITIES ACT'), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO SOUTHWALL. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES, BUT SOUTHWALL MAY REQUIRE A LEGAL OPINION IN CONNECTION WITH A SUBSEQUENT TRANSFER FOLLOWING DEFAULT BY THE TRANSFEREE OF THE PLEDGE.

Southwall acknowledges and agrees that each of Needham & Company and the Preferred Shares Purchasers may from time to time pledge, and/or grant a security interest in some or all of the Securities pursuant to a bona fide margin agreement in connection with a bona fide margin account and, if required under the terms of such agreement or account, each of Needham & Company and the Preferred Shares Purchasers, as applicable, may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval or consent of Southwall and no legal opinion of legal counsel to the pledgee, secured party or pledgor shall be required in connection with the pledge, but Southwall may require such legal opinion in connection with a subsequent transfer following default by the transferee of the pledge and the Securities would still be subject to this Section 4.1. No notice shall be required of such pledge. At the expense of Needham & Company or the Preferred Shares Purchasers, as applicable, Southwall will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder.

3. Certificates evidencing the Underlying Shares shall not contain any legend (including the legend set forth in Section 4.1(b)): (i) following any sale of such Underlying Shares pursuant to Rule 144, or (ii) while such Underlying Shares are eligible for sale under Rule 144(k), or (iii) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the Staff of the Commission). Following the Effective Date or at such earlier time as a legend is no longer required for the Underlying Shares under this Section 4.1(c), Southwall will, no later than three Trading Days following the delivery by Needham & Company and/or the Preferred Shares Purchasers to Southwall or Southwall's transfer agent of a certificate representing the Underlying Shares containing a restrictive legend, deliver or cause to be delivered to Needham & Company and/or the Preferred Shares Purchasers, as applicable, a certificate representing such Underlying Shares that is free from all restrictive and other legends. Southwall may not make any notation on its records or give instructions to any transfer agent of Southwall that enlarge the restrictions on transfer set forth in this Section.
2. Furnishing of Information. As long as each of Needham & Company or the Preferred Shares Purchasers owns the Securities issued or issuable to it that are not registered under the Securities Act or eligible for sale under Rule 144(k), Southwall covenants to use commercially reasonable efforts to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by Southwall after the date hereof pursuant to the Exchange Act. Upon the request of any such Person, Southwall shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. As long as Needham & Company or the Preferred Shares Purchasers owns Securities, if Southwall is not required to file reports pursuant to such laws, it will prepare and furnish to Needham & Company and/or the Preferred Shares Purchasers, as applicable, and make publicly available in accordance with Rule 144(c) such information as is required for Needham & Company or the Preferred Shares Purchasers, as applicable, to sell the Underlying Shares under Rule 144. Southwall further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell such Underlying Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.
3. Acknowledgment of Dilution. Southwall acknowledges that the issuance of the Securities (including the Underlying Shares) will result in dilution of the outstanding shares of Common Stock, which dilution may be substantial. Southwall further acknowledges that its obligations under the Transaction Documents, including without limitation its obligation to issue the Securities (including the Underlying Shares) pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim that Southwall may have against either of Needham & Company or the Preferred Shares Purchasers.
4. Integration. Southwall shall not, and shall use commercially reasonable efforts to ensure that no Affiliate of Southwall shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to Needham & Company or the Preferred Shares Purchasers, or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.
5. Listing of Securities. If the Common Stock is listed on any Trading Market, Southwall shall: (i) in the time and manner required by each Trading Market on which the Common Stock is listed, prepare and file with such Trading Market an additional shares listing application covering the Underlying Shares, (ii) take all steps necessary to cause such shares to be approved for listing on each Trading Market on which the Common Stock is listed as soon as possible thereafter, and (iii) provide to either of Needham & Company or the Preferred Shares Purchasers evidence of such listing.
6. Reservation of Shares; Issuance of Shares. Southwall shall maintain a reserve from its duly authorized shares of Common Stock to comply with its conversion and exercise obligations under the Series A Preferred Stock and the Warrants pursuant to the Transaction Documents. Southwall shall not issue any equity or warrants, options, rights or other instruments exercisable, convertible or exchangeable into equity of Southwall to any trade creditor, other creditor, landlord, employee, director, agent or consultant until such time as Southwall has received approval of its stockholder increasing the authorized number of shares of Common Stock issuable under its certificate of incorporation as contemplated by Section 4.16 of this Agreement.
7. Securities Laws Disclosure; Publicity. By 8:30 a.m. (New York City time) on the Trading Day following each Closing Date, if any, Southwall shall issue a press release reasonably acceptable to Needham & Company or the Preferred Shares Purchasers, as applicable, disclosing the transactions contemplated hereby. In addition, Southwall will make such other filings and notices in the manner and time required by the Commission and the Trading Market on which the Common Stock is listed. Notwithstanding the foregoing, Southwall shall not publicly disclose the name of either of Needham & Company or the Preferred Shares Purchasers, or include the name of either of Needham & Company or the Preferred Shares Purchasers in any filing with the Commission (other than the Registration Statement and any exhibits to filings made in respect of this transaction in accordance with periodic filing requirements under the Exchange Act) or any regulatory agency or Trading Market, without the prior written consent of Needham & Company and/or the Preferred Shares Purchasers, as applicable, except to the extent such disclosure is required by law or Trading Market regulations, in which case Southwall shall provide Needham & Company or the Preferred Shares Purchasers, as applicable, with prior notice of such disclosure, and notice is hereby given that Southwall will disclose the names of Needham & Company and the Preferred Shares Purchasers in filings with the Commission, regulatory agencies and Trading Markets, as required by law or applicable regulations.
8. Use of Proceeds. Southwall shall use the net proceeds from the extensions of credit and sale of the Securities, if any, hereunder for general corporate and working capital purposes.
9. Inspection. So long as Needham & Company or NCP owns shares of Series A Preferred Stock or any amounts remain outstanding under an Extension of Credit, Southwall shall permit each of Needham & Company and NCP, at the expense of each, upon two days prior notice, to visit and inspect Southwall's and the Subsidiaries' properties, to examine their books of account and records and to discuss Southwall's affairs, finances, and accounts with its officers, all at such reasonable times as may be requested; provided, however, that Southwall shall not be obligated pursuant to this Section to provide any information which it reasonably considers to be a trade secret or confidential information.
10. Issuance of Final Warrant. On April 30, 2004, whether or not there is a Second Equity Closing, Southwall shall issue to the NCP Entities Warrants for an aggregate of 501,928 shares of Common Stock, which shall be issued in the amounts designated by the NCP Entities prior to or at the issuance thereof, and a Warrant for 250,964 shares of Common Stock to Dolphin; provided however, that if the Second Equity Closing shall have occurred Southwall shall not be obligated to issue such warrants.
11. Hardship Exemption. Immediately after the execution and delivery of this Agreement Southwall shall use commercially reasonable efforts to apply for and a secure a hardship exemption from The Nasdaq Stock Market that waives any requirement that issuance of securities under this Agreement be approved by Southwall stockholders.
12. Restructuring Plan. Southwall shall use its commercially reasonable efforts to take all actions necessary to complete the Restructuring Plan within the timeline set forth in the Restructuring Plan.
13. Investor Representation at Board Meetings. For so long as Needham & Company or any of its Affiliates owns 5% or more of the Common Stock (on a fully diluted basis) or any amounts remain outstanding under the Loan and Security Agreement, Southwall shall notify each of Needham & Company and NCP of meetings of the Southwall board of directors and deliver minutes of each such meeting as if each were a director. Needham & Company and NCP may collectively designate one Person to attend all board meetings and to speak or otherwise participate in such meetings to the extent permitted by the board; provided, however, that such Person may disclose or use any information made known by virtue of such notice, minutes, or attendance only to the extent consistent with the fiduciary obligations of a director of Southwall, whether or not such Person actually is a director and that such Person shall sign such Confidentiality Agreement as Southwall may reasonably request.
14. Additional Warrants.
1. Debt Issuances. If, in connection with its restructuring efforts as set forth in the Restructuring Plan, Southwall issues notes or other debt instruments to any of its creditors, then Southwall shall issue to Needham & Company and the Preferred Shares Purchasers Warrants representing the right to purchase that number of shares of Common Stock equal to the product of (x) 1.25 and (y) the original principal amount of such note or debt instrument. Southwall shall divide such Warrants among Needham & Company and the Preferred Shares Purchasers as requested by Needham & Company and the Preferred Shares Purchasers at the time of issuance, subject to the allocation rules set forth in paragraph (c) below.
2. Equity Issuances. If, as part of its restructuring efforts as set forth in the Restructuring Plan, Southwall issues any equity or warrants, options, rights or other instruments exercisable, convertible or exchangeable into equity of Southwall to any trade creditor, other creditor, landlord, employee, director, agent or consultant (each, a `Restructuring Equity Issuance'), then Southwall shall, at each Closing thereafter, issue additional Warrants to each of Needham & Company and each of the Preferred Shares Purchasers in such amounts that would allow Needham & Company and each of the Preferred Shares Purchasers to maintain an aggregate ownership percentage (on a fully-diluted basis and assuming exercise of all outstanding warrants and conversion of all outstanding preferred stock and convertible debt and any issuances related to the restructuring including, without limitation, issuances of options or rights to the management of Southwall) of Southwall Common Stock as if the Restructuring Equity Issuance or Restructuring Equity Issuances had not occurred. If, due to the prohibitions set forth in Section 4.6 of this Agreement, Southwall is unable to make Restructuring Equity issuances and a particular Closing occurs, then the right to receive additional Warrants as a result of a Restructuring Equity Issuance shall be deferred until such time as the Restructuring Equity Issuance occurs, and if the Restructuring Equity Issuance occurs after the Second Equity Closing, then the all of the Warrants shall be issued at that time.
3. Maximum Equity Position. Dolphin shall receive one-third of any Warrants issued under this Section 4.14, and Needham & Company and NCP Entities, together, will receive two-thirds or any such Warrants; provided, however, that if the issuances contemplated in this Section 4.14, plus all of the equity securities of Southwall owned by Needham & Company and the NCP Entities aggregated together exceed 49% of the outstanding Southwall Common Stock (on a fully-diluted basis and assuming exercise of all outstanding warrants and conversion of all outstanding preferred stock and convertible debt and any issuances related to the restructuring including, without limitation, issuances of options or rights to the management of Southwall), then the number of shares issuable upon exercise of the Warrants allocable to Dolphin shall be increased and the number of shares issuable upon exercise of Warrants allocable to Needham & Company and the NCP Entities under this paragraph shall be proportionally reduced so that Needham & Company and NCP Entities will own in the aggregate 49% of the outstanding Southwall Common Stock (on a fully- diluted basis and assuming exercise of all outstanding warrants and conversion of all outstanding preferred stock and convertible debt).
15. Certain Other Affirmative Covenants. So long as any Indebtedness remains outstanding under the Loan and Security Agreement, unless Needham & Company otherwise consents in writing (which Needham & Company shall be entitled not to do in its sole discretion), Southwall and its Subsidiaries, as applicable, shall, for the benefit of Needham & Company:
1. use commercially reasonable efforts to timely file all registration statements, prospectuses, proxy or information statements, forms, reports or other reports required to be filed under the Exchange Act or the Securities Act with the Commission;
2. deliver to Needham & Company, promptly upon becoming aware of the existence of any Default or Event of Default, a written notice describing its nature;
3. comply with, and perform all obligations under, all of the Transaction Documents in all material respects;
4. discharge promptly all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any of its property, real, personal or mixed, before they shall become delinquent unless such taxes, assessments, charges or levies are subject to protest in good faith by Southwall; and all material claims of materialmen, mechanics, carriers, warehousemen, landlords and other similar persons for labor, materials, supplies and rent, and all liabilities arising under ERISA which if unpaid might by law become a Lien unless such claims are subject to protest in good faith by Southwall;
5. take all reasonable steps to (i) maintain, preserve, protect and keep all properties owned or held under lease by it in good repair, working order and condition and make all needful and proper renewals, replacements, additions, betterments and improvements thereto, so that the business carried on in connection therewith may be conducted properly and efficiently at all times, (ii) keep adequately insured all its property and assets, and (iii) do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights and franchises except to the extent that failure to do so could not reasonably be expected to result in a Southwall Material Adverse Effect;
6. take all action reasonably necessary to comply with (i) all laws, ordinances, governmental rules and regulations to which it is or might become subject and which the failure to comply with could reasonably be expected to result in a Southwall Material Adverse Effect; and (ii) obtain all patents, trademarks, service-marks, tradenames, servicenames, copyrights, licenses, permits, franchises and other governmental authorizations which are necessary to the ownership of its property or the conduct of its business except to the extent that failure to do so could not reasonably be expected to result in a Southwall Material Adverse Effect; and
7. pay, discharge, or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its material obligations and liabilities of whatever nature except as set forth in the Restructuring Plan.
16. Stockholders Meeting.
1. Promptly after the execution and delivery of this Agreement, Southwall will take all action necessary to call a meeting of its stockholders (the `Stockholders Meeting') for the purpose of seeking approval of an amendment to its certificate of incorporation increasing the number of authorized shares available for issuance (the `Proposal'). In connection therewith Southwall will promptly prepare and file with the Commission proxy materials (including a proxy statement and form of proxy) for use at the Stockholders Meeting and, promptly after receiving clearance from the Commission, shall promptly mail such proxy materials to the stockholders of Southwall. Southwall will comply with Section 14(a) of the 1934 Act and the rules promulgated thereunder in relations to any proxy statement (as amended or supplemented, the `Proxy Statement') and any form of proxy to be sent to the stockholders in connection with the Stockholders Meeting.
2. Southwall's Board of Directors shall recommend to Southwall's stockholders that the stockholders vote in favor of and approve the Proposal at the Stockholders Meeting and will set the date of the Stockholders Meeting no later than 25 days after receiving clearance of the proxy materials from the Commission, and shall cause Southwall to use commercially reasonable efforts to solicit the approval of the stockholders for the Proposal. Southwall is required, and will take, in accordance with applicable law and its certificate of incorporation and bylaws, all actions necessary to convene the Stockholders Meeting along the timeframe indicated herein to consider and vote upon the approval of the Proposal.
5. 
   
   NEGATIVE COVENANTS
1. Negative Covenants. So long as any Indebtedness remains outstanding under the Loan and Security Agreement, unless Needham & Company otherwise consents in writing (which Needham & Company shall be entitled not to do in its sole discretion), Southwall shall not, and shall not permit its Subsidiaries to:
1. engage in any business other than the business of developing, manufacturing and marketing thin film coatings for the automotive glass, electronic display and architectural markets;
2. other than with respect to the Series A Preferred Stock, declare, pay or set aside any dividends on any shares of Southwall or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, retirement or other acquisition of any shares of Southwall, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Southwall;
3. enter into any arrangement with any Person whereby Southwall shall sell or transfer any property, real or personal, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which Southwall intends to use for substantially the same purpose or purposes as the property being sold or transferred, if such arrangement would result in Southwall's retention of such property for a period in excess of six months from the date of commencement of such lease;
4. make or permit to remain outstanding any loan or advance to, or guarantee or endorse or otherwise be or become contingently liable, directly or indirectly, for or in connection with, the obligations, shares or dividends of, or own, purchase or acquire any shares, obligations or securities of, or any interest in, or make or maintain any capital contribution to, any Person other than its Subsidiaries;
5. enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of business and pursuant to the reasonable requirements of Southwall's business and upon fair and reasonable terms no less favorable to Southwall than Southwall would obtain in a comparable arm's length transaction with a Person not an Affiliate; and/or
6. modify, amend or change in any manner the Certificate of Designation as filed with the Secretary of State of the State of Delaware.
6. 
   
   CONDITIONS
1. Conditions Precedent to the Obligations of Needham & Company or the Preferred Shares Purchasers at each Closing Date.

The obligations of Needham & Company or the Preferred Shares Purchasers, as applicable, at a Closing, if any, are subject to the satisfaction or waiver by Needham & Company and/or the Preferred Shares Purchasers, as applicable, at or before such Closing, of each of the following conditions:

1. Representations and Warranties. Each of the representations and warranties of Southwall contained herein shall be true and correct in all material respects as of the date when made and as of the Closing as though made on and as of such date (except for such representations and warranties that speak as of a particular date which shall have been true and correct as of the date when made);
2. Performance. Southwall shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by it at or prior to the Closing;
3. Loan and Security Agreement. The Loan and Security Agreement by and between Southwall and the Bank, and the related Forbearance Agreement and guaranty executed by Needham & Company, shall have been entered into, shall not have been modified without the consent of Needham & Company, and shall remain in full force and effect;
4. No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, or promulgated by any court or governmental authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by the Transaction Documents;
5. Bankruptcy Event. No Bankruptcy Event shall have occurred.
6. No Defaults. Neither Southwall nor any of its Subsidiaries shall be in violation or breach of or in default in any material respect with respect to any provision of this Agreement, the Bank Agreements, the Amendment, the Loan and Security Agreement, the other documents executed in connection with this Agreement, the Transaction Documents and/or any other document executed by Southwall to which either the Bank, NCP or Needham & Company is a party;
7. No Action or Proceeding. Since the date hereof, no Action or Proceeding against Southwall or any of its officers and directors shall have commenced or been threatened in connection with the transactions contemplated by the Transaction Documents or could reasonably be expected to have a Southwall Material Adverse Effect; and
8. Adverse Changes. Since the date of this Agreement, no Southwall Material Adverse Effect shall have occurred and be continuing.
2. Conditions Precedent to the Obligations of Needham & Company on the Initial Extension of Credit Closing Date.

The obligations of Needham & Company at the Initial Extension of Credit Closing are subject to the satisfaction or waiver by Needham & Company, at or before the Closing, of the following condition:

1. Appointment of Mr. Boyadjieff. Southwall shall have named Mr. George Boyadjieff as its non-executive chairman of the board of directors, Mr. Boyadjieff shall have accepted such position.
2. Matters relating to Creditors. Needham and Southwall shall have reached agreement in principle with respect to the arrangements that will be offered to Southwall's creditors, trade creditors and landlords.
3. Conditions Precedent to the Obligations of Needham & Company on the Second Extension of Credit Closing Date.

The obligations of Needham & Company at the Second Extension of Credit Closing are subject to the satisfaction or waiver by Needham & Company, at or before the Closing, of each of the following conditions:

1. Releases. Southwall shall have secured releases from its Tempe landlord and the Tempe equipment lessor releasing Southwall from all claims and liabilities on terms reasonably satisfactory to Needham & Company; and
2. Agreements with Creditors. Southwall shall have entered into arrangements with its trade creditors, other creditors and landlords (including, without limitation, (i) Teijin Limited in its capacity as a trade creditor and as the holder of $1.25 million of debt of Southwall that it paid to The Sanwa Bank Ltd. in connection with a guaranty of Southwall's obligations to The Sanwa Bank Ltd. and (ii) the landlords of its leases in Palo Alto with respect to such leases) deferring and/or extending payment terms on terms reasonably satisfactory to Needham & Company.
4. Conditions Precedent to the Obligations of the Preferred Shares Purchasers on the Initial Equity Closing Date.

The obligations of the Preferred Shares Purchaser at the Initial Equity Closing are subject to the satisfaction or waiver by the Preferred Shares Purchaser, at or before the Initial Equity Closing, of each of the following conditions:

1. Restructuring. Southwall shall have completed in all material respects the Restructuring Plan;
2. Occurrence of Earlier Closings. The Initial and Second Extension of Credit Closings between Southwall and Needham & Company shall have taken place; and
3. Certificate of Designation. The Certificate of Designation shall not have been modified, amended or changed and shall be in full force and effect.
5. Conditions Precedent to the Obligations of the Preferred Shares Purchasers at the Second Equity Closing Date.

The obligations of the Preferred Shares Purchasers at the Second Equity Closing are subject to the satisfaction or waiver by the Preferred Shares Purchasers, at or before such Closing, of each of the following conditions:

1. Revenue Target. Southwall shall have derived at least $10 million in revenue during the first quarter of 2004 from existing business lines (excluding revenue from LCD AR on TAC and Class B PDP);
2. Cash Flow Target. Southwall's net loss (as calculated under GAAP) for the first quarter of 2004 excluding depreciation, amortization and non-cash asset impairment and restructuring charges shall be equal to or less than $200,000;
3. Occurrence of Earlier Closings. The Initial and Second Extension of Credit Closings and the Initial Equity Closings shall have taken place; and
4. Certificate of Designation. The Certificate of Designation shall not have been modified, amended or changed and shall be in full force and effect.
6. Conditions Precedent to the Obligations of Southwall on any Closing Date.

The obligations of Southwall at any Closing are subject to the satisfaction or waiver by Southwall, at or before such Closing, of each of the following conditions:

1. Representations and Warranties. The representations and warranties of Needham & Company or the Preferred Shares Purchasers, as applicable, contained herein shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made on and as of such date; and
2. Performance. Needham & Company or the Preferred Shares Purchasers, as applicable, shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by Needham & Company or the Preferred Shares Purchasers at or prior to the Closing.
7. 
   
   MISCELLANEOUS
1. Termination. This Agreement may be terminated prior to the Second Equity Closing under any of the following circumstances:
1. by mutual written consent of Southwall, the Preferred Shares Purchasers and Needham;
2. by either Needham & Company and the Preferred Shares Purchasers or Southwall if a court or other governmental body of competent jurisdiction shall have issued a final and nonappealable order, decree or ruling, or shall have taken any other action, having the effect of permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Transaction Documents;
3. by Southwall if: (i) any of the representations and warranties of Needham & Company or the Preferred Shares Purchasers shall have been inaccurate as of the date of this Agreement in any material respect (without giving effect to any qualifications as to materiality contained therein); (ii) any of the representations and warranties Needham & Company or the Preferred Shares Purchasers become inaccurate in any material respect (without giving effect to any qualifications as to materiality contained therein) as of a date subsequent to the date of this Agreement (as if made on such subsequent date) and Needham & Company or the Preferred Shares Purchasers, as applicable, shall not have cured such inaccuracy within ten days after such representation or warranty becomes inaccurate; or (iii) any of the covenants of Needham & Company or the Preferred Shares Purchasers contained in this Agreement shall have been breached in any material respect;
4. by Needham & Company and the Preferred Shares Purchasers or Southwall if: (i) the Initial Extension of Credit Closing has not occurred by December 19, 2003 (the `Initial Extension of Credit End Date'); (ii) the Second Extension of Credit Closing has not occurred by January 15, 2004 (the `Second Extension of Credit Closing End Date'); (iii) the Initial Equity Closing has not occurred by January 31, 2004 (the `Initial Equity End Date') or (iv) if the Second Equity Closing has not occurred by April 30, 2004 (the `Second Equity End Date'), unless, in each case, the failure of a Closing to occur is attributable to a failure by the party seeking to terminate this Agreement to perform any material obligation required to be performed by such party at or prior to such End Date;
5. by Needham & Company and the Preferred Shares Purchasers if: (i) any of Southwall's representations and warranties shall have been inaccurate in any material respect (without giving effect to any qualifications as to materiality contained therein) as of the date of this Agreement (except for such representations and warranties that speak as of a particular date, which shall have been true and correct as of the date when made); (ii) any of Southwall's representations and warranties become inaccurate in any material respect (without giving effect to any qualifications as to materiality contained therein) as of a date subsequent to the date of this Agreement (as if made on such subsequent date) and Southwall shall not have cured such inaccuracy within ten days after such representation or warranty becomes inaccurate; or (iii) any of Southwall's covenants contained in this Agreement shall have been breached in any material respect;
6. by Needham & Company and the Preferred Shares Purchasers if, since the date of this Agreement, there shall have occurred and be continuing any Southwall Material Adverse Effect; or
7. by Needham & Company and the Preferred Shares Purchasers if a Bankruptcy Event shall have occurred and, in the event of a Bankruptcy Event that was commenced by a party other than Southwall, such case or proceeding shall not have been dismissed within 90 days of being filed.
2. Effect of Termination. In the event of the termination of this Agreement as provided in Section 7.1, this Agreement shall be of no further force or effect; provided, however, that (i) Sections 7.2 through 7.19 shall survive the termination of this Agreement and shall remain in full force and effect; and (ii) the termination of this Agreement shall not relieve any party from any liability for any material inaccuracy in or breach of any representation or any material breach of any warranty, covenant or other provision contained in this Agreement.
3. Fees and Expenses. Except as specified in this Agreement, the Registration Rights Agreement or the Loan and Security Agreement, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of the Transaction Documents. Southwall shall pay all stamp and other taxes and duties levied in connection with the sale of the Securities.
4. Entire Agreement. The Transaction Documents, together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. At or after each and any Closing, and without further consideration, each party will execute and deliver to each other party, as applicable, such further documents as may be reasonably requested in order to give practical effect to the intention of the parties under the Transaction Documents.
5. Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:
If to Southwall: Southwall Technologies Inc.
3975 East Bayshore Road
Palo Alto, CA 94304
Attn: Chief Executive Officer
Facsimile No.: (650) 962-9111
With a copy to (which copy shall not constitute notice):

Choate Hall & Stewart
53 State Street
Boston, MA 02109
Attn: James W. Hackett, Jr., Esq.
Facsimile No.: (617) 248-4000
If to Needham or
NCP Entities: Needham & Company, Inc.
445 Park Avenue
New York, NY 10022
Attn: Ellen McKay
Facsimile No.: (212) 751-1450

and

Needham Capital Partners
445 Park Avenue
New York, NY 10022
Attn: Ellen McKay
Facsimile No.: (212) 751-1450
With a copy to (which copy shall not constitute notice):
Heller Ehrman White & McAuliffe LLP
333 Bush Street
San Francisco, CA 94104
Attn: Victor A. Hebert, Esq.
Facsimile No.: (415) 772-6268
If to Dolphin: Dolphin Direct Equity Partners, LP
c/o Dolphin Asset Management Corp.
129 East 17th Street
New York, NY 10003
Attn: Carlos P. Salas
Facsimile No.: (212) 202-3817

or such other address as may be designated in writing hereafter, in the same manner, by such Person.

6. Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by all the parties or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.
7. Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. This Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement or any of the Transaction Documents.
8. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. Southwall may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each of Needham & Company and the Preferred Shares Purchasers. Each of Needham & Company and the Preferred Shares Purchasers may assign its respective rights under this Agreement to any Person to whom it assigns or transfers any Securities and each of the NCP Entities may assign its rights and obligations hereunder to any entity controlled by Needham & Company, and Dolphin may assign its rights and obligations hereunder to an Affiliate.
9. No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.
10. Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective Affiliates, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan (the `New York Courts'). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such New York Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If any party shall commence a Proceeding to enforce any provisions of a Transaction Document, then the prevailing party in such Proceeding shall be reimbursed by the other parties for its attorney's fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.
11. Survival. The representations, warranties, agreements and covenants contained herein shall survive the Closings (if any) and the delivery, exercise and/or conversion of the Securities, as applicable.
12. Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof.
13. Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefore, and upon so agreeing, shall incorporate such substitute provision in this Agreement.
14. Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever either of Needham & Company or the Preferred Shares Purchasers exercises a right, election, demand or option under a Transaction Document and Southwall does not timely perform its related obligations in all material respects within the periods therein provided, then Needham & Company or the Preferred Shares Purchasers, as applicable, may rescind or withdraw, in its sole discretion from time to time upon written notice to Southwall, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.
15. Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, Southwall shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefore, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to Southwall of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities.
16. Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, either of Needham & Company and the Preferred Shares Purchasers or Southwall will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.
17. Payment Set Aside. To the extent that Southwall makes a payment or payments to either of Needham & Company or the Preferred Shares Purchasers pursuant to any Transaction Document or Needham & Company or the Preferred Shares Purchasers enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to Southwall, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.
18. Adjustments in Share Numbers and Prices. In the event of any stock split, subdivision, dividend or distribution payable in shares of Common Stock (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly shares of Common Stock), combination or other similar recapitalization or event occurring after the date hereof but prior to the Second Equity Closing, each reference in this Agreement to a number of shares or a price per share shall be amended to appropriately account for such event.
19. Confidentiality. Each of Needham & Company and the Preferred Shares Purchasers agrees that, until December 31, 2004, it will keep confidential and will not disclose, divulge or use for any purpose other than to monitor its investment in Southwall any confidential, proprietary or secret information which it may obtain from Southwall pursuant to financial statements, reports and other materials submitted by Southwall to it pursuant to this Agreement, or pursuant to visitation or inspection rights granted hereunder (`Confidential Information'), unless such Confidential Information is known, or until such Confidential Information becomes known, to the public (other than as a result of a breach of this Section 7.19).

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, the parties hereto have caused this Investment Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

SOUTHWALL TECHNOLOGIES INC.

By:
Name: Thomas G. Hood
Title: Chief Executive Officer

NEEDHAM & COMPANY, INC.

By:
Name:
Title: Authorized Signatory

NEEDHAM CAPITAL PARTNERS III, L.P.

By:
Name:
Title: Authorized Signatory

NEEDHAM CAPITAL PARTNERS IIIA, L.P.

By:
Name:
Title: Authorized Signatory

NEEDHAM CAPITAL PARTNERS III (BERMUDA), L.P.

By:
Name:
Title: Authorized Signatory

DOLPHIN DIRECT EQUITY PARTNERS, LP

By:
Name:
Title: Authorized Signatory

[Signature Page to Investment Agreement]

Exhibit A

CERTIFICATE OF DESIGNATION

Exhibit B

LOAN AND SECURITY AGREEMENT

Exhibit C

REGISTRATION RIGHTS AGREEMENT

Exhibit D

FORM OF WARRANT

DISCLOSURE SCHEDULES

Attached hereto.

()

EX-99

EXHIBIT 99.6

LOAN AND SECURITY AGREEMENT

by and among

PACIFIC BUSINESS FUNDING,

a division of CUPERTINO NATIONAL BANK

and

SOUTHWALL TECHNOLOGIES INC.,

a Delaware corporation

DATED AS OF December 18, 2003

LOAN AND SECURITY AGREEMENT

This Loan and Security Agreement (this `Agreement') is made and entered into as of December 18, 2003, by and between PACIFIC BUSINESS FUNDING, a division of Cupertino National Bank (`PBF'), and SOUTHWALL TECHNOLOGIES INC., a Delaware corporation (`Borrower').

RECITALS

A. Borrower wishes to obtain credit from PBF for general working capital purposes.

B. Subject to the representations and warranties of Borrower herein and upon the terms and conditions set forth in this Agreement, PBF is willing to extend credit to Borrower.

Agreement

NOW THEREFORE, in consideration of the foregoing recitals and the terms and conditions and agreements contained herein, the parties hereby agree as follows:

1. Definitions and Construction.
0. Definitions. As used in this Agreement, the following terms shall have the following definitions:

`Accounts' means all presently existing and hereafter arising accounts, accounts receivable, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing.

`Advance' shall mean the advance of credit or money made pursuant to the loan facilities referred to in this Agreement.

`Affiliate' means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners.

`Borrower' has the meaning set forth in the introductory paragraph hereof.

`Borrower's Books' means all of Borrower's books and records including ledgers, records concerning Borrower's assets or liabilities, the Collateral, business operations, or financial condition, and all computer programs, or tape files, and the equipment containing such information.

`Borrowing Base' means 100% of the face value of the Letter of Credit.

`Business Day' means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close.

`Closing' shall mean the closing of the transactions contemplated hereby. The Closing shall take place on the Closing Date, all actions to take place at the closing must take place or none of them shall be deemed to have taken place, and if all actions take place at the Closing they shall be deemed to have taken place simultaneously.

`Closing Date' means the date of this Agreement.

`Code' means the California Uniform Commercial Code.

`Collateral' means the property described on Exhibit B attached hereto, as well as all Proceeds, dividends, profits or income derived from said property.

`Compliance Certificate' means a certificate substantially in the form set forth in Exhibit  D attached hereto.

`Credit Limit' has the meaning set forth in Section 2.1 hereof.

`Daily Balance' means the amount of the Obligations owed at the end of a given day.

`Domestic Factoring Agreement' shall have the meaning set forth in the Forbearance Agreement.

`Equipment' means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts, and attachments in which Borrower has any interest.

`ERISA' means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder.

`Ex-Im Factoring Agreement' shall have the meaning set forth in the Forbearance Agreement.

`Financing Statements' means UCC-1 financing statements and similar filings describing PBF as secured party and Borrower as debtor, covering all or any portion of the Collateral, all of the foregoing in such form, for filing or recording in such jurisdictions and with such filing offices, as PBF shall reasonably deem necessary or advisable.

`Forbearance Agreement' means that certain Forbearance Agreement between Borrower and PBF of even date herewith.

`GAAP' means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by the significant segment of the accounting profession, which are applicable to the circumstances as of the applicable date of determination.

`Guarantor' means Needham & Company, Inc., a Delaware corporation.

`Guaranty' means that certain Guaranty of even date herewith executed by Guarantor in favor of PBF, in form and substance reasonably acceptable to PBF.

`Indebtedness' means (a) all indebtedness for borrowed money or the deferred purchase price of property or services (other than trade debt in a total amount not to exceed $7,500,000 at any time incurred in the ordinary course of business and payable in accordance with customary trade practices), including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures, or similar instruments, (c) all capital lease obligations, and (d) any and all contingent obligations required to be disclosed in financial statements under GAAP.

`Insolvency Proceeding' means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including any case, action, suit, or proceeding for the appointment of a Receiver, any assignment for the benefit of creditors, any formal or informal moratoria, compositions, or any proceedings seeking reorganization, arrangement, liquidation, or other relief.

`Inventory' means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process, and finished products intended for sale or lease or to be finished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any Account or other Proceeds, including insurance Proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the foregoing, and including returned merchandise, merchandise shipped and not paid for, merchandise shipped on consignment, and merchandise shipped but as to which title has not been transferred.

`Investment' means any beneficial ownership of (including stock, partnership interest, or other securities) any Person, or any loan, advance, or capital contribution to any Person, including returned merchandise, merchandise shipped and not paid for, merchandise shipped on consignment, and merchandise shipped but as to which title has not been transferred

`IRC' means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

`Letter of Credit' means that certain irrevocable standby letter of credit issued by Deutsche Bank in favor of PBF in the form set forth in Exhibit F hereto, supporting the obligations of Guarantor under the Guaranty.

`Lien' means any mortgage, lien, deed of trust, charge, pledge, security interest, statutory lien, judgment lien, or other encumbrance.

`Line of Credit' shall have the meaning set forth in Section 2.1 below.

`Loan Documents' means, collectively, this Agreement, the Promissory Note and any note or notes executed by Borrower to PBF in connection with this Agreement, the Financing Statements, the Guaranty, and any other agreement entered into between PBF and Borrower in connection with this Agreement, all as amended or extended from time to time, or any document directly pertaining to the transactions contemplated thereby.

`Material Adverse Effect' means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiary taken as a whole, (ii) the value of the Collateral, (iii) the priority of PBF's Liens in the Collateral, or (iv)  the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents.

`Maturity Date' means May 5, 2004, unless this Agreement is sooner terminated under the provisions hereof.

`Needham Agreement' means that certain Investment Agreement dated on or about the date hereof, between Borrower and Guarantor, as the same may be amended or replaced from time to time.

`Obligations' means all debt, principal, interest, PBF Expenses, and other amounts owed to PBF by Borrower pursuant to this Agreement or any of the other Loan Documents including, without limitation, the Guaranty, and the Promissory Note, whether such amounts are absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that PBF may have obtained by assignment or otherwise.

`Payment Date' means Wednesday of each and every week commencing with the Wednesday immediately following the Closing Date.

`PBF' shall have the meaning set forth in the introductory paragraph hereof.

`PBF Expenses' means the sum of Ten Thousand Dollars ($10,000), plus all reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation of Loan Documents and ancillary costs incurred in connection with making of the loan evidenced by this Agreement and all other documents referenced herein (including without limitation filing fees, UCC search fees, and similar costs), as well as in defense and enforcement of the Loan Documents, including reasonable attorneys' fees and expenses whether or not suit is brought.

`Periodic Payments' means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to PBF pursuant to the terms and provisions of this Agreement.

`Permitted Investment' means:

1. Investments in Subsidiaries and Investments existing on the Closing Date disclosed in the Schedule;
2. (i) Marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing not more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment and shares of so-called `money market' funds;
3. Extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business;
4. Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and
5. Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business.

`Person' means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, joint stock company, estate, entity, or governmental agency.

`Prime Rate' means the variable rate of interest, per annum, that is reported by the Wall Street Journal, Western Edition from time to time as the `Prime Rate.'

`Proceeds' means all moneys received from the issuance of common stock, preferred stock, or any other ownership security, or subordinated debt instrument.

`Promissory Note' shall have the meaning set forth in Section 2.1 hereof.

`Responsible Officer' means each of the Chief Executive Officer, President, Chief Financial Officer or the Controller of Borrower and each of the Director of Finance, Managing Director, Managing Member, or the General Manager of Guarantor. Without limiting the generality of the foregoing, Michael Seifert shall be deemed a Responsible Officer of Borrower, and Glen Albanese shall be deemed a Responsible Officer of Guarantor.

`Schedule' means the schedule of exceptions attached hereto as Exhibit A, if any.

`SEC Documents' means the current and periodic reports filed by Borrower with the Securities and Exchange Commission.

`Subsidiary' or `Subsidiaries' means Southwall Europe GmbH, and any corporation, limited liability company, or partnership in which (i) any general partnership interest, or (ii) more than 50% of the stock or membership interests of which by the terms thereof ordinary voting power to elect the Board of Directors, managers, or trustees of the entity shall, at the time as of which any determination is being made, be owned by Borrower, either directly or through an Affiliate. Notwithstanding the foregoing, `Subsidiary' or `Subsidiaries' shall not include either Southwall Worldwide Glass, Inc. or Southwall Sunflex, Inc., each of which Borrower represents and warrants to PBF are not operating subsidiaries, and have no assets, revenue, or liabilities.

`Transfer' means sell, convey, assign, hypothecate, lease, lend, transfer or otherwise dispose.

1. Accounting Terms. Any accounting term used in this Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given such term in accordance with GAAP, and all financial data required to be submitted by this Agreement shall be prepared and computed, unless otherwise specifically provided herein, in accordance with GAAP. That certain terms or computations are explicitly modified by the phrase `in accordance with GAAP' shall in no way be construed to limit the foregoing. In the event that GAAP changes during the term of this Agreement such that any covenants contained in this Agreement would then be calculated in a different manner or with different components, (a) the parties hereto agree to amend this Agreement in such respects as are necessary to conform those covenants as criteria for evaluating the Borrower's financial condition to substantially the same criteria as were effective prior to such change in GAAP, and (b) Borrower shall be deemed to be in compliance with those covenants during the sixty-day period following any such change in GAAP if and to the extent that Borrower would have been in compliance therewith under GAAP as in effect immediately prior to such change.
2. Loan and Terms of Payment.
0. Advances. Upon satisfaction of the conditions set forth in Section 3, and otherwise subject to the terms and conditions of this Agreement, and so long as no Event of Default shall have occurred and be continuing, PBF agrees to make available to Borrower a line of credit in an amount not to exceed Three Million Dollars ($3,000,000) (the `Credit Limit'), for general working capital purposes (the `Line of Credit'). PBF shall make Advances to Borrower under the Line of Credit from time to time not exceeding in the aggregate the lesser of (i) the Credit Limit, or (ii) the Borrowing Base. Amounts borrowed under this Section 2.1 may be repaid and reborrowed during the term of this Agreement. As a condition to any disbursement under the Line of Credit, Responsible Officers of both Borrower and Guarantor must authorize the disbursement in writing in the form attached hereto as Exhibit E, and Borrower shall deliver to PBF a Compliance Certificate in the form attached hereto as Exhibit D, confirming compliance in all material respects with the terms of this Agreement. To obtain an Advance, Borrower must notify PBF by facsimile or telephone by 11:00 a.m. on the Business Day for which the Advance is requested. Borrower must promptly confirm such notification in writing. PBF may make Advances under this Agreement based on instructions from (x) a Responsible Officer of Borrower or its designee, and (y) a Responsible Officer of Guarantor or its designee. PBF may rely on any telephone notice given by a person whom PBF believes is a Responsible Officer or designee. Borrower will indemnify PBF from and against any loss PBF suffers as a result of such reliance. Borrower's Obligations hereunder shall be evidenced by this Agreement and by a promissory note in the form attached hereto as Exhibit C (the `Promissory Note').
1. Interest Rates, Payments, and Calculations.
1. Interest Rate. Except as set forth in Section 2.2(b), all outstanding Obligations shall bear interest, on the average Daily Balance, at a rate per annum equal to two percent (2.00%) in excess of the Prime Rate, and shall be due and payable in arrears on each Payment Date. The rate of interest applicable to the Loan shall change as and when the Prime Rate changes.
2. Default Interest. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate per annum equal to five (5.00) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. If and when the Event of Default is cured, the interest shall revert to the previously applicable interest rate.
3. Payments. Interest only payments shall be due and payable on the Payment Date of each week during the term hereof after the Closing Date, commencing with the Payment Date immediately following the Closing Date. Where Borrower fails to make part or all of any such payment on any Payment Date, PBF, in addition to any other rights and remedies under this Agreement or otherwise, shall have the right to withdraw and apply against all or any unpaid portion of any such payment first (i) any funds in PBF's possession or control under the Domestic Factoring Agreement and/or the Ex-Im Factoring Agreement, in PBF's sole discretion, and second (ii) funds held in any depository account or accounts of Borrower with Cupertino National Bank. Upon the Maturity Date, or upon earlier acceleration pursuant to the terms and conditions of this Agreement, Borrower shall pay PBF all amounts due and outstanding, including, but not limited to, the principal balance, unpaid interest, and any unpaid PBF Expenses, reasonable attorneys fees and such other costs and charges related to the Obligations incurred under this Agreement. Upon the Maturity Date, or upon earlier acceleration pursuant to the terms and conditions of this Agreement, PBF shall, at its option, charge interest, all PBF Expenses, and all periodic payments that Borrower is obligated to pay PBF hereunder against any of Borrower's accounts with PBF. PBF will promptly notify Borrower of all debits which PBF makes against Borrower's accounts. Any such debits against Borrower's accounts in no way shall be deemed a set-off. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder.
4. Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed.
5. Usury. In no event shall the amount paid or agreed to be paid by Borrower for the use, forbearance, or detention of any money advanced hereunder exceed the highest lawful rate permissible under applicable usury laws. In the event that performance of any obligation of Borrower under this Agreement or any other document referred to herein shall require the payment of interest in excess of such highest lawful rate, then such obligation shall, automatically and retroactively to the date of this Agreement, be deemed reduced to the highest lawful rate permissible under applicable usury laws and the amount of any interest paid in excess of the highest lawful rate shall be credited to principal and, to the extent that the then principal balance is insufficient for such purpose, repaid to Borrower.
6. Crediting Payments. Prior to the occurrence of an Event of Default, PBF shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligations as Borrower and Guarantor specify. After the occurrence of an Event of Default, the receipt by PBF of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by PBF after 12:00 noon Pacific time shall be deemed to have been received by PBF as of the opening of business on the immediately following Business Day. Whenever any payment to PBF under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension.
2. PBF Expenses. Borrower shall pay to PBF the following:
1. Financial Examination and Appraisal Fees. PBF's customary fees and out-of-pocket expenses for PBF's audits of Borrower's Accounts, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by PBF or its agents.
2. PBF Expenses Through Closing Date. Upon the date hereof, all PBF Expenses incurred through the Closing Date; and

(c) PBF Expenses after Closing Date. After the date hereof, all PBF Expenses, including reasonable attorneys' fees and expenses, as and when they become due.

3. Additional Costs. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law), in each case after the date of this Agreement:

(a) subjects PBF to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of PBF imposed by the United States of America or any political subdivision thereof);

(b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, PBF; or

(c) imposes upon PBF any other condition with respect to its performance under this Agreement;

and the result of any of the foregoing is to increase the cost to PBF, reduce the income receivable by PBF or impose any expense upon PBF with respect to any loans, PBF shall notify Borrower thereof. Borrower agrees to pay to PBF the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by PBF of a statement of the amount and setting forth PBF's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error; provided however, that Borrower shall not be liable for any such amount attributable to any period prior to the date of one hundred eighty (180) days prior to the date of such statement. Notwithstanding the foregoing, if Borrower repays all outstanding Obligations within forty-five (45) days of the date of such certificate, no amount shall be assessed by virtue of this Section 2.4.

4. Reimbursement of Costs Upon Failure of Closing. If the loan contemplated hereunder fails to close for any reason other than a default by PBF under this Agreement, Borrower shall pay PBF all PBF Expenses incurred by PBF in connection with the contemplated loan, this Agreement, and any other Loan Documents prepared in contemplation of the contemplated loan.
5. Term. Except as otherwise set forth herein, this Agreement shall become effective on the Closing Date and, subject to Section 13.7 hereof, shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, PBF shall have the right to terminate any obligation to make any Advances under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding any termination, PBF's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding.
3. Conditions of Loan.
0. Conditions Precedent to Loan. The obligation of PBF to make the loan described herein is subject to the conditions precedent that PBF shall have received each of the following:
1. this Agreement, fully executed by all the parties hereto;
2. the Promissory Note, fully executed by Borrower;
3. the Guaranty, fully executed by Guarantor;
4. the Letter of Credit, fully executed by Deutsche Bank;
5. a certificate by a Responsible Officer of Borrower confirming Borrower's authorization and ability to execute, enter into, and deliver this Agreement to PBF, in a form acceptable to PBF;
6. a certificate by a Responsible Officer of Guarantor confirming Guarantor's authorization and ability to execute, enter into, and deliver the Guaranty to PBF, in a form acceptable to PBF;
7. delivery of all Collateral that must be delivered or endorsed over to PBF in accordance with the terms and conditions of this Agreement, the Guaranty, or the Promissory Note;
8. delivery of all Financing Statements, notification materials, escrow instructions or other documents necessary to enforce, perfect or provide notice of PBF's security interest in the Collateral;
9. such other documents, including without limitation Financing Statements under the UCC or California law, and the completion of such other matters, as PBF may reasonably deem necessary or appropriate; and
10. copies of corporate, partnership, or limited liability company resolutions, as applicable, of Borrower and Guarantor, in form and substance acceptable to PBF.
1. Additional Conditions to Closing. The obligation of PBF to make the loan described herein is further subject to the following conditions:
1. the representations and warranties contained in Section 7 hereof shall be true and correct in all material respects on and as of the Closing Date as though made at and as of such date, and no Event of Default shall have occurred and be continuing;
2. each of the documents and instruments set forth in Section 3.1 hereof shall be in full force and effect and shall not have been modified in any respect, except with the written consent of PBF;
3. Borrower shall have provided and PBF shall have reviewed and approved any and all financial information concerning Borrower reasonably requested by PBF; and
4. Except as otherwise disclosed in writing to PBF, there shall have been no material adverse change in the financial condition of, or transfer of any interest in, Borrower or Guarantor since November 18, 2003.
4. Creation of Security Interest.
0. Grant of Security Interest. Borrower hereby grants and pledges to PBF a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, each security interest constitutes a valid, security interest in the presently existing Collateral, and will constitute a valid security interest in Collateral acquired after the date hereof, in each case, to the extent that a security interest in such Collateral can be perfected by the filing of a Financing Statement, or, in the case of Collateral consisting of instruments, documents, chattel paper or certificated securities, to the extent that PBF takes possession of such Collateral. The security interest in the Collateral created hereunder shall be subject and subordinate to PBF's security interest in the Collateral (or any portion thereof) both (i) under the Domestic Factoring Agreement, and (ii) under the Ex-Im Factoring Agreement, but shall be subject to no prior security interests in favor of any other party whatsoever. Borrower acknowledges that PBF may place a `hold' on any deposit account pledged as Collateral to secure the Obligations, or on any other deposit item under the normal terms of PBF's business practice. Borrower hereby authorizes PBF to file and record such Financing Statements and other instruments as PBF may deem necessary or desirable from time to time to perfect its security interest in the Collateral.
1. Delivery of Additional Documentation Required. Borrower shall from time to time execute, deliver and endorse to PBF, at the request of PBF, all Collateral, all Financing Statements, and all other documents that PBF may reasonably request, in form satisfactory to PBF, to perfect and continue perfected PBF's Liens in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents, including without limitation any documents or instruments which may be required by the laws of the State of California.
2. Right to Inspect. PBF (through any of its officers, employees, or agents) shall have the right upon reasonable prior notice, or upon no notice if an Event of Default shall then be existing, from time to time, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral.
5. Release of Claims.
0. No Known Claims Against PBF. Borrower warrants and represents to PBF that, to Borrower's knowledge, it has and has had no claims, causes of action, demands, costs, losses or actions of any nature against PBF, whether the same have been or might have been asserted as a claim, cross-claim, counter-claim or cause of action in any tribunal.
1. Release By Borrower. For and in consideration of PBF's agreement set forth herein, Borrower hereby releases and forever discharges PBF, its affiliates, officers, directors, employees, shareholders, attorneys, agents and representatives, individually and collectively, of and from any and all matters arising out of any business, legal, or lending relationships that have existed prior to the date hereof between Borrower and PBF and including any and all past, present or future claims, actions, causes of action, obligations, costs or demands, known or unknown, whether or not any such claim, action, cause of action, obligation, cost, lost or demand has been, or might have been, asserted as a claim, cross-claim, counter-claim or cause of action in any tribunal.
2. No Prior Assignment of Released Claims. Each of the parties warrants and represents that it has not assigned or transferred or purported to assign or transfer to any other person or entity any claim or matter released herein and that no other person has any interest therein of any nature. In the event that releasing party shall have assigned or transferred, or purported to assign or transfer, or any other person shall claim an interest in any claim or other matter herein released, then the releasing party shall indemnify the released party and hold it harmless from and against any and all losses, costs, claims or expenses, including but not limited to all costs related to the defense of any action, including reasonable attorneys' fees, based upon or arising out of or incurred as a result of any such claim, assignment or transfer.
3. No Admission of Liability. Borrower understands and acknowledges that if any claims or other matters herein released existed, such would be disputed by PBF. No action taken by PBF, either previously or in connection with this Agreement, shall be deemed or construed to be (a) an admission to the truth or falsity of any claims made; or (b) an acknowledgment or admission by PBF of any fault or liability whatsoever to any other party or to any third party.
4. Waiver of California Civil Code &sec: 1542. Each of the parties hereby relinquishes and waives all rights conferred upon it by the provisions of Section 1542 of the California Civil Code (or any like provision of federal or state law), which reads as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.

Each of the parties hereby acknowledges that it or its attorneys might hereafter discover facts different from or in addition to those which it or its attorneys now know or believe to be true with respect to any of the matters herein released, including that no such claims presently exist, and agrees that this instrument shall remain in effect as a full and complete release notwithstanding any such different or additional facts. Each of the parties hereby covenants that this Agreement shall inure to the benefit of and be binding upon its administrators, representatives, successors, trustees and assigns.

6. Representations And Warranties.

Borrower represents and warrants as follows:

0. Due Organization and Qualification. Borrower (i) is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware; (ii) is duly qualified to do business and is in good standing in every jurisdiction where the nature of its business requires it to be so qualified (except where the failure to so qualify would not have a Material Adverse Effect on Borrower's condition, financial or otherwise, or on Borrower's ability to pay or perform the Obligations); and (iii) has all requisite power and authority to execute and deliver this Agreement and each Loan Document executed and delivered by Borrower pursuant to this Agreement and to perform its obligations thereunder and hereunder.
1. Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents (i) are within Borrower's powers and have been duly authorized by all necessary action; (ii) do not conflict with nor constitute a breach of any provision contained in Borrower's operating agreement or charter documents or a material breach of any law or any contractual restriction binding on or affecting Borrower or by which Borrower's property may be affected; (iii) do not require any authorization or approval or any other action by, or any notice to, or filing with, any governmental authority or any other Person under any indenture, mortgage, deed of trust, lease, agreement or other instrument to which Borrower is a party or by which Borrower or any of its Property is bound except such as have been obtained or made and except for filings required by the Securities and Exchange Commission and The Nasdaq National Market; and (iv) do not constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Except for those defaults specifically identified in that certain Form 10-Q filed with the Securities and Exchange Commission on behalf of Borrower for the quarterly period ended September 28, 2003, under Commission File Number 0-15930 and Schedule 6.2 hereto, Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could reasonably be expected to have a Material Adverse Effect.
2. Name; Location of Chief Executive Office. Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive offices of Borrower are located at the addresses indicated in Section 11 hereof.
3. Litigation. Except as set forth in the SEC Documents and Schedule 6.4, there are no actions or proceedings pending by or against Borrower, or any Subsidiary of Borrower, before any court or administrative agency in which an adverse decision is reasonably likely to have a Material Adverse Effect on Borrower, or upon PBF's security interest in the Collateral. Borrower has no knowledge of any such actions or proceedings that are pending or that have been threatened in writing.
4. Financial Statements. All unconsolidated, consolidating, and consolidated financial statements related to Borrower or any Subsidiary that have been delivered by Borrower to PBF fairly present in all material respects Borrower's unconsolidated financial condition as of the date thereof and Borrower's unconsolidated results of operations for the period then ended and the consolidated financial condition of Borrower. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to PBF.
5. Solvency. Borrower's assets exceed its liabilities such that it has a positive net worth.
6. Regulatory Compliance. Borrower and each Subsidiary of Borrower have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from any failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could reasonably be expected to have a Material Adverse Effect. Borrower is not an `investment company' or a company `controlled' by an `investment company' within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T, and U of the Board of Governors of the Federal Reserve System). Borrower has materially complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances, or rules applicable to it, violation of which could reasonably be expected to have a Material Adverse Effect.
7. Environmental Condition. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state, or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing or otherwise disposing of hazardous waste or hazardous substances into the environment.
8. Taxes. Borrower and each Subsidiary of Borrower has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein.
9. Subsidiaries. Borrower does not own any stock, partnership interest, or other equity securities of any Person, except as set forth on Schedule 6.10 and except for Permitted Investments.
10. Government Consents. Borrower and each Subsidiary of Borrower have obtained all consents, approvals, and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted except where the failure to obtain any such consent, approval, or authorization, to make any such declaration or filing, or to be given any such notice could not reasonably be expected to have a Material Adverse Effect.
11. Full Disclosure. No representation, warranty, or other statement made by Borrower in any certificate or written statement furnished to PBF contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading (it being recognized by PBF that the projections and forecasts provided by Borrower are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results).
12. Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of all Liens, except with respect to the prior Liens in favor of PBF as described in Section 4.1 above and otherwise set forth on Schedule 8.6 hereto.
13. Needham Agreement. There has been no modification or amendment to the Needham Agreement, and that, except for the documents expressly contemplated in the Needham Agreement, no other document or instrument has been entered into between Borrower and Guarantor in connection with the Needham Agreement
7. Affirmative Covenants.

Borrower covenants and agrees that until payment in full of all outstanding Obligations, and for so long as PBF may have any commitment to make an Advance hereunder, Borrower shall do all of the following:

0. Good Standing. Borrower shall maintain or cause to be maintained its and each of its Subsidiaries' legal existence and good standing in its jurisdiction of formation, creation, or incorporation, and maintain qualification in each jurisdiction in which the failure to so qualify is reasonably likely to have a Material Adverse Effect. Borrower shall maintain and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could reasonably be expected to have a Material Adverse Effect or a Material Adverse Effect on the Collateral or the priority of PBF's Lien on the Collateral.
1. Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances, and government rules and regulations to which it is subject, noncompliance with which is reasonably likely to have a Material Adverse Effect.
2. Financial Statements, Reports, Certificates. So long as any Obligations under the Loan Documents are outstanding, Borrower shall deliver to PBF, in addition to all those financial reports required under the terms of Schedule 1, Section 5(V)(ii) of the Domestic Factoring Agreement and under the terms of the Forbearance Agreement, the following:
1. within five (5) days of filing, copies of all statements, reports and notices sent or made available generally by Borrower to its members, security holders or to any creditors of Borrower, and all reports filed with any regulatory agency;
2. promptly upon receipt of notice thereof, a report of any legal actions pending or threatened in writing against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more;
3. such budgets, sales projections, operating plans or other financial information as PBF may reasonably request from time to time; and
4. promptly after the occurrence of an event which has resulted in a Material Adverse Effect, a report of such event.
3. Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to PBF, on demand, appropriate certificates attesting to the payment or deposit thereof, and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish PBF with proof satisfactory to PBF indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.
4. Insurance.
1. Borrower shall keep all of its assets insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks and in such amounts as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of its assets in amounts and of a type that are customary to businesses similar to Borrower's.
2. All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to PBF. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to PBF, naming PBF as first loss payee thereof and all liability insurance policies shall name PBF as an additional insured, and shall specify that the insurer must give at least thirty (30) days' notice to PBF before canceling its policy for any reason. Borrower shall deliver to PBF certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All Proceeds payable under any such policies shall, at the option of PBF, be payable to PBF to be applied to the Obligations.
5. Registration of Intellectual Property Rights. Borrower shall register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those additional intellectual property rights developed or acquired by Borrower from time to time in connection with any product prior to the sale or licensing of such product to any third party.
6. Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by PBF to effect the purposes of this Agreement.
7. Use of Proceeds. Borrower shall use the Line of Credit for general working capital purposes.
8. Asset Transfers to Subsidiaries. Except in the ordinary course of business, Borrower shall not Transfer any of its cash or cash equivalents or of its assets to Subsidiaries at any time prior to payment in full of all outstanding Obligations of Borrower to PBF.
9. Audits. Borrower shall provide Accounts Receivable audits at the PBF's request, from time to time, but no less frequently than semi-annually. The reasonable cost of each audit will be paid by Borrower within 10 days after demand.
10. Depository Accounts. Borrower shall maintain depository accounts with Cupertino National Bank or one of its Affiliates at all times.
8. Negative Covenants.

Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of all outstanding Obligations of Borrower to PBF, Borrower will not do any of the following:

0. Chief Executive Office.During the continuance of this Agreement, change the chief executive office or principal place of business or cause or permit the Collateral (other than in the ordinary course of business), or the records concerning the Collateral, to be located at any location other than the locations listed on the Schedule without thirty (30) days prior written notice to PBF.
1. Dispositions. Transfer, or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii)  Transfers of non-exclusive licenses and exclusive licenses with geographic or other limitations granted in the ordinary course of business and similar arrangements for the use of the property of Borrower or its Subsidiaries; or (iii)  Transfers of worn-out or obsolete Equipment or Equipment financed by other vendors; or (iv)  Transfers which constitute liquidation of Investments permitted under Section 8.9.
2. Change in Business. Engage in any business other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Borrower's ownership, management, or directors. For purposes of this Section 8.3, a change in ownership of 15% or more of the ownership interest in Borrower shall constitute a material change in Borrower's ownership; provided that the ownership change contemplated in the Needham Agreement shall not constitute a material change in ownership under this Section 8.3. Borrower will not, without thirty (30) days' prior written notification to PBF, relocate its chief executive office or change its name or do business under any other name than is set forth on the signature page hereof.
3. Mergers or Acquisitions. Merge or consolidate with or into any other business organization, or acquire all or substantially all of the capital stock or property of another Person (collectively, a `Merger'), without the prior written consent of PBF, which may be withheld in PBF's sole discretion.
4. Indebtedness. Create, incur, or assume any Indebtedness, except pursuant to this Agreement and under the Ex-Im Factoring Agreement and the Domestic Factoring Agreement.
5. Encumbrances. Create, incur, assume, or suffer to exist any Liens against Borrower's total assets other than the liens set forth on Schedule 8.6 hereto.
6. Assignment of Income. Without PBF's prior written approval, assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do.
7. Distributions. Pay any cash dividends or make any other distribution or payment on account of or in redemption, retirement, or purchase of any capital stock in Borrower.
8. Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries (other than Southwall Europe GmbH) to do so, other than Permitted Investments.
9. Compliance. Become an `investment company' or a company controlled by an `investment company,' within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the Proceeds of any Advance for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act, or violate any law or regulation, which violation could reasonably be expected to have a Material Adverse Effect, or permit any of its Subsidiaries to do any of the foregoing.
9. Events of Default.

Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement:

0. Payment Default. If Borrower fails to pay the principal of, or any interest on, the Advance when due; or fails to pay when due any portion of any other Obligations not constituting such principal or interest, including without limitation PBF Expenses.
1. Covenant Default.
1. If Borrower fails to perform in a material respect as and when required any obligation under Section 7 of this Agreement or violates in a material respect any of the covenants contained in Section 8 of this Agreement and such default is not cured within 10 days of the notice thereof; or
2. If Borrower fails or neglects to perform, keep or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the other Loan Documents, or in any other present or future agreement between Borrower and PBF and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any Responsible Officer of Borrower becomes aware thereof; provided however, that if the default cannot by its nature be cured within the ten (10) day period or cannot, after diligent attempts by Borrower, be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period).
2. Material Adverse Effect. If there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of PBF's security interests in the Collateral; or a material impairment of the value or priority of PBF's security interests in the Collateral;
3. Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ of distress warrant or levy has not been removed, discharged or rescinded within thirty (30) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower;
4. Insolvency. If Borrower's liabilities exceed its assets such that it has a negative net worth, or if any Insolvency Proceeding is commenced by Borrower, or if any Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within sixty (60) days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding);
5. Other Agreements. If (i) a default or breach occurs and continues beyond any applicable grace or cure period under any other existing or future loan made to Borrower by PBF or any Affiliate of PBF, including without limitation any default or breach under the Domestic Factoring Agreement or under the Ex-Im Factoring Agreement; (ii) a material default or breach occurs under the Needham Agreement, or any related document or instrument, or (iii) a default or breach occurs and continues beyond any applicable grace or cure period under any other agreement, document, or instrument to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, to accelerate the maturity of any Indebtedness in excess of $50,000, and such party so accelerates;
6. Letter of Credit. The Letter of Credit expires or is terminated or dishonored for any reason (except if draws under the Letter of Credit are dishonored because of acts or omissions of PBF or its Affiliates), or if any notice of termination is given by the issuer of the Letter of Credit for any reason;
7. Judgments. If a final, nonappealable judgment or judgments for the payment of money in an amount in excess of $50,000 not covered by insurance shall be rendered against Borrower at any time before all outstanding Obligations of Borrower to PBF have been paid in full;
8. Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any other Loan Document or in any certificate delivered to PBF by any Responsible Officer pursuant to this Agreement or any other Loan Document or to induce PBF to enter into this Agreement or any other Loan Document;
9. Litigation. If Borrower or any of Borrower's Affiliates brings litigation against PBF or any of PBF's Affiliates with respect to this Agreement, any of the Loan Documents, or any of the transactions contemplated hereby or thereby; or
10. Guaranty. The Guaranty ceases for any reason to be in full force or Guarantor does not perform any obligation under the Guaranty in any material respect, or any material misrepresentation or material misstatement exists now or later in any warranty or representation in the Guaranty or any other document or instrument executed by Guarantor, or any circumstance described in Sections 9.4, 9.5, or 9.6 occurs with respect to Guarantor.
10. PBF's Rights And Remedies.
0. Rights and Remedies Regarding All Events of Default. Upon the occurrence and during the continuance of an Event of Default, PBF may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower:
1. Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 9.5 all Obligations shall become immediately due and payable without any action by PBF);
2. Commence legal action against Borrower to collect all amounts due and outstanding pursuant to the terms of this Agreement, provided however, that the commencement of such an action is not necessary or a prerequisite to the exercise of any of PBF's other rights or remedies hereunder;
3. Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and PBF;
4. Settle or adjust disputes and claims directly with account debtors for amounts, upon terms, and in whatever order that PBF reasonably considers advisable;
5. Without notice to or demand upon Borrower, make such payments and do such acts as PBF considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if PBF so requires, and to make the Collateral available to PBF as PBF may designate. Borrower authorizes PBF to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in PBF's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants PBF a license to enter into possession of such premises and to occupy the same, without charge, for up to ninety (90) days in order to exercise any of PBF's rights or remedies provided herein, at law, in equity, or otherwise;
6. Without notice to Borrower, set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by PBF, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by PBF;
7. Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. PBF is hereby granted a license or other right, solely pursuant to the provisions of this Section 10.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with PBF's exercise of its rights under this Section 10.1, Borrower's rights under all licenses and all franchise agreements shall inure to PBF's benefit;
8. Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as PBF determines is commercially reasonable and in accordance with the Code;
9. Credit bid and purchase at any public sale of all or any portion of the Collateral, whether it be a foreclosure sale, an execution sale, a sale pursuant to Section 363 of the Bankruptcy Code, or otherwise;
10. Upon not less than 30 days prior written notice to Borrower, audit Borrower's Accounts at Borrower's expense; and
11. Exercise any other right or remedy PBF may have under the Code or other law; and
12. Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower.
1. Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints PBF (and any of PBF's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of PBF's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into PBF's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; and (e) settle and adjust disputes and claims respecting the Accounts directly with Account debtors, for amounts and upon terms which PBF determines to be reasonable; provided PBF may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 and otherwise to perfect and continue perfected PBF's Liens in the Collateral regardless of whether an Event of Default has occurred. The appointment of PBF as Borrower's attorney-in-fact, and each and every one of PBF's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed.
2. Accounts Collection. At any time from the date of this Agreement, PBF may notify any Person owing funds to Borrower of PBF's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for PBF, receive in trust all payments as PBF's trustee, and immediately deliver such payments to PBF in their original form as received from the Account debtor, with proper endorsements for deposit.
3. PBF Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then PBF may do any or all of the following: (a) make payment of the same or any part thereof; or (b) set up such reserves as PBF deems necessary to protect PBF from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type required under the terms of this Agreement and take any action with respect to such policies as PBF deems prudent. Any amounts so paid or deposited by PBF shall constitute PBF Expenses, and shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided. Any payments made by PBF shall not constitute an agreement by PBF to make similar payments in the future or a waiver by PBF of any Event of Default under this Agreement.
4. PBF's Liability for Collateral. So long as PBF complies with the same practices as banks generally use in connection with collateral held by them, PBF shall not in any manner or way be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person. All risk of loss, damage, or destruction of the Collateral shall be borne by Borrower.
5. Remedies Cumulative. PBF's rights and remedies under this Agreement, the Guaranty, the Promissory Note, the other Loan Documents, and all other agreements between Borrower and PBF shall be cumulative. PBF shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by PBF of one right or remedy shall be deemed an election, and no waiver by PBF of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by PBF shall constitute a waiver, election, or acquiescence by it. No waiver by PBF shall be effective unless made in a written document signed by PBF and then shall be effective only in the specific instance and for the specific purpose for which it was given.
6. Demand; Protest. Except as otherwise expressly provided in this Agreement, the Guaranty, or the Promissory Note, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by PBF on which Borrower may in any way be liable.
11. Notices.

Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by facsimile to Borrower or to PBF, as the case may be, at its addresses set forth below:

If to Borrower:	Southwall Technologies Inc. 3975 East Bayshore Road Palo Alto, CA 94303 Attn: Mike Seifert Fax: (650) 967-8713
If to PBF:	Pacific Business Funding 20195 Stevens Creek Blvd., Suite 220 Cupertino, CA 95014 Attn: Mike Hansen Fax: (408) 255-9313

The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.

1. Choice of Law and Venue, Jury Trial Waiver.

This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and PBF hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND PBF EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

2. General Provisions.
0. Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without PBF's prior written consent, which consent may be granted or withheld in PBF's sole discretion. PBF shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, PBF's obligations, rights, and benefits hereunder.
1. Indemnification. Borrower shall defend, indemnify, and hold harmless PBF and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the loan transactions contemplated by this Agreement; (b)  all costs, expenses and reasonable attorneys fees that PBF suffers, incurs or pays in connection with any legal proceedings, depositions, discovery or legal process which (i) occurs after Closing and (ii) arises out of acts or conduct of Borrower; and (c) all losses or PBF Expenses in any way suffered, incurred, or paid by PBF as a result of or in any way arising out of, following, or consequential to transactions between PBF and Borrower whether under this Agreement or otherwise (including without limitation reasonable attorneys' fees and expenses), except for losses caused by PBF's gross negligence or willful misconduct.
2. Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement.
3. Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any provision.
4. Amendments in Writing, Integration. This Agreement cannot be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents.
5. Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.
6. Survival. All covenants, representations, and warranties made in this Agreement shall continue in full force and effect so long as any Obligations of Borrower to PBF remain outstanding. The obligations of Borrower to indemnify PBF with respect to the expenses, damages, losses, costs, and liabilities described in Section 13.2 hereof shall survive until all applicable statute of limitations periods with respect to actions that may be brought against PBF have run.
7. Confidentiality. In handling any confidential information, PBF shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement, except that disclosure of such information may be made (i) to the subsidiaries, agents, advisers, and affiliates of PBF in connection with its present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the loan, made hereunder, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulation, rule or order, subpoena, judicial order, or similar order; and (iv) as may be required in connection with the audit, or similar investigation of PBF. Confidential information hereunder shall not include information that either (a) is in the public domain or in the knowledge or possession of PBF when disclosed to PBF, or becomes part of the public domain after disclosure to PBF through no fault of PBF; or (b) is disclosed to PBF by a third party, provided PBF does not have actual knowledge that such third party is prohibited from disclosing such information.
8. Exhibits. Exhibits A through F, inclusive are incorporated herein by this reference.
9. Effect of Headings. The subject headings of the sections, subsections, paragraphs and subparagraphs of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

SOUTHWALL TECHNOLOGIES INC.,

a Delaware corporation

By:

Name:

Title:

PACIFIC BUSINESS FUNDING, a division

of CUPERTINO NATIONAL BANK

By:

Name:

Title:

LIST OF EXHIBITS AND SCHEDULES

Exhibits

A. Schedule of Exceptions

B. List Identifying the Collateral

C Form of Promissory Note

D. Form of Compliance Certificate

E. Form of Disbursement Authorization

F. Form of Letter of Credit

Schedules

3.2/6.5

6.2. Compliance

6.4 Litigation

6.10. Subsidiaries

8.6. Liens

EXHIBIT A

SCHEDULE OF EXCEPTIONS

There are no exceptions.

Borrower has disclosed to PBF that, since November 18, 2003, one of Borrower's suppliers, DTF (Dupont Teijin Films), has changed Borrower to a COD status, which has negatively affected Borrower's cash flow between $500,000 and $1,000,000.

EXHIBIT B

COLLATERAL

All of Borrower's right, title and interest in, to and under the following, whether now owned by or owing to, or hereafter acquired by or arising in favor of, Borrower, and regardless of where located:

1. All accounts, accounts receivable, chattel paper, cash, investment property, contract rights, documents, instruments, letters of credit, certificates of deposit, banker's acceptances, drafts, securities and general intangibles, including all claims, causes of action, deposit accounts (including, without limitation, the Depository Accounts), rights to receive tax refunds, rights in and claims under insurance policies (including rights to unearned premiums), customer lists, copyrights, copyright applications, copyright registrations, patents, patent applications, patent registrations, trademarks, service marks, trade styles, trade names, trade secret rights (including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements, and confidential information), mask work or similar rights, license agreements, goodwill associated with trademarks and trademark licenses, and other intellectual property of every kind, as well as other rights to payment, leases, franchise agreements, blueprints, drawings, purchase orders, route lists, computer discs, computer tapes, literature, reports, catalogs, design rights, royalties, license rights, and rights to payment of any kind, as well as credit insurance, guaranties, and other security for any right to payment;
2. All inventory, merchandise, raw materials, parts, supplies, packing and shipping materials, work in process, and finished products;
3. All Advances, funds, monies, remittances, and other amounts advanced under this Agreement and any other agreement between Borrower and Bank;
4. All goods, equipment, machinery, vehicles, motor vehicles, furniture, fixtures, tools and supplies;
5. All investment securities;
6. All farm products, crops, timber, minerals and like (including oil and gas);
7. All books and records relating to the foregoing, including all computer programs, printed output and computer readable data;
8. All attachments, accessories, accessions to, additions to, improvements to, and substitutions and replacements for, all of the foregoing; and
9. All Proceeds and products of the foregoing, whether due to voluntary or involuntary disposition, including insurance Proceeds. Borrower agrees to deliver to Bank the originals of all instruments, chattel paper, and documents evidencing or related to Accounts and other Collateral.

EXHIBIT C

PROMISSORY NOTE

$3,000,000.00 _____________, California

December 18, 2003

FOR VALUE RECEIVED, the undersigned, Southwall Technologies Inc., a Delaware corporation (`Borrower'), promises to pay to the order of Pacific Business Funding, a division of Cupertino National Bank (the `PBF'), at such place as the holder hereof may designate, in lawful money of the United States of America, the principal sum of Three Million Dollars ($3,000,000), or so much thereof as may be advanced from time to time, pursuant to the terms of the Line of Credit made by PBF to Borrower under that certain Loan and Security Agreement between Borrower and PBF of even date herewith, as amended from time to time (the `Loan Agreement'). Borrower shall also pay interest on the unpaid advances under the Line of Credit at the rate and in accordance with the terms of the Loan Agreement. The entire principal amount and all accrued but unpaid interest thereon shall be due and payable on the Maturity Date. Terms with initial capital letters and not otherwise defined herein shall have the meanings designated for such terms in the Loan Agreement.

PBF is hereby authorized by Borrower to endorse on PBF's books and records the principal amount advanced pursuant to the Line of Credit under this Promissory Note (the `Note') and the amount of each payment or prepayment of principal received by PBF; it being understood, however, that failure to make any such endorsement (or any errors in notation) shall not affect the obligations of Borrower with respect to amounts due hereunder, and payments of principal by Borrower shall be credited to Borrower notwithstanding the failure to make a notation (or any errors in notation) thereof on such books and records.

Borrower promises to pay PBF all costs and expenses of collection of this Note and to pay all reasonable attorneys' fees incurred in such collection or in any suit or action to collect this Note or in any appeal thereof, except where a judgment is rendered against PBF in any such suit or action. Borrower waives presentment, demand, protest, notice of protest, notice of dishonor, notice of nonpayment, and any and an other notices and demands in connection with the delivery, acceptance, performance, default or enforcement of this Note, as well as any applicable statute of limitations. No delay by PBF in exercising any power or right hereunder shall operate as a waiver of any power or right. Time is of the essence as to all obligations hereunder.

This Note is issued pursuant to the Loan Agreement, which is hereby incorporated by reference, and shall govern the rights and obligations of Borrower with respect to all obligations hereunder.

This Note is secured by a security interest in certain collateral, which security interest was granted by Borrower to PBF pursuant to the terms and conditions of the Loan Agreement and other documents or instruments referenced therein.

BORROWER AND PBF HEREBY WAIVE THEIR RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. This Note shall be deemed to be made under, and shall be construed in accordance with and governed by the laws of the State of California, excluding conflicts of laws principles.

SOUTHWALL TECHNOLOGIES INC.,

a Delaware corporation

By:

Name:

Title:

EXHIBIT D

COMPLIANCE CERTIFICATE

TO: PACIFIC BUSINESS FUNDING

FROM: SOUTHWALL TECHNOLOGIES INC.

The undersigned duly-authorized officer or member (hereinafter, `Officer') of Southwall Technologies Inc., a Delaware corporation (`Borrower') hereby certifies that, in accordance with the terms and conditions of the Loan and Security Agreement (the `Loan Agreement'), dated as of December 18, 2003, between Borrower and Pacific Business Funding, a Division of Cupertino National Bank (`PBF'):

(i) Borrower is in compliance in all material respects for the period ending _________________ with all required covenants of the Loan Agreement, and the Promissory Note, except as expressly noted below; and

(ii) all representations and warranties of Borrower stated in the Loan Agreement are true and correct in all material respects as of the date hereof.

Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (`GAAP') and are consistently applied from one period to the next except as explained in an accompanying letter of footnotes.

Please indicate compliance status by circling Yes/No under `Complies' column.

Reporting Covenants	Required	Complies
All financial reports required under Domestic Factoring Agreement and under the Forbearance Agreement	Various	Yes No
Annual audited financial statements of Guarantor	Within 120 days of fiscal year end	Yes No

Comments regarding Exceptions: See Attached.

Sincerely,

SIGNATURE

TITLE

DATE

EXHIBIT E

DISBURSEMENT AUTHORIZATION

TO: PACIFIC BUSINESS FUNDING

FROM: SOUTHWALL TECHNOLOGIES INC. and
NEEDHAM & COMPANY, INC.

The undersigned duly-authorized responsible officers of Southwall Technologies Inc., a Delaware corporation (`Borrower') and Needham & Company, Inc., a Delaware corporation (`Guarantor') each hereby authorize and instruct Pacific Business Funding, a Division of Cupertino National Bank (`PBF'), in accordance with the terms and conditions of the Loan and Security Agreement (the `Loan Agreement'), dated as of December 18, 2003, between Borrower and PBF, to disburse the sum of $________________ to Borrower.

Sincerely, Sincerely,

SIGNATURE SIGNATURE

TITLE TITLE

DATE DATE

EXHIBIT F

LETTER OF CREDIT

[TO BE ADDED]

DISCLOSURE SCHEDULE 3.2/6.5

Since November 18, 2003 one of Southwall's suppliers, DTF (Dupont Teijin Films) has put them on COD.  This action has negatively impacted their cash flow between $.5M and $1.0M.

DISCLOSURE SCHEDULE 6.2

COMPLIANCE

1. Southwall is in default under the Domestic Factoring Agreement and Export-Import Bank Factoring Agreement with Pacific Business Funding each dated as of May 16, 2003.

2. Southwall is in default under the Credit Agreement and Promissory Note, each dated May 6, 1997, with Sanwa Bank, Limited. Southwall is also in default under the Guarantee Agreement Regarding 10 million US$ Credit Facility and Reimbursement and Security Agreement, each dated May 6, 1997, with Teijin Limited.

3. Southwall is in default under the Master Lease Agreement dated July 19, 1999 with Matrix Funding Corporation.

4. All of Southwall's German loans and credit facilities contain provisions to the effect that a material adverse change to Southwall or the like will be an event of default; the other parties to some or all of those loans or agreements may deem those provisions to be triggered by the Company's recent financial performance and results and/or the transactions contemplated hereby or the efforts hereof.

5. Southwall's credit facilities with Teijin/Sanwa contain provisions to the effect that a material adverse change to Southwall or the like will be an event of default; the other parties to some or all of those loans or agreements may deem those provisions to be triggered by the Company's recent financial performance and results and/or the transactions contemplated hereby or the efforts hereof.

DISCLOSURE SCHEDULE 6.4

LITIGATION

1.`Hurricane Glass Shield, Inc. v. Southwall Technologies Inc.' filed in the Superior Court of the State of California in Santa Clara, California

2. `WASCO Products, Inc. v. Southwall Technologies Inc. and Bostik, Inc.', Civ. Action No. C 02-2926 CRB, which was filed in Federal District Court for the Northern District of California.

3. `Portfolio Financial Servicing Company v. Southwall Technologies Inc.,' filed in state court in Utah.

4. `Four Seasons Solar Products Corp. vs. Black & Decker Corp., Bostik, Inc. and Southwall Technologies Inc.,' No. 5 CV1695, pending in the United States District Court for the Eastern District of New York.

The insurance carriers in some of Southwall's litigation related to alleged product failures and defects in window products manufactured by others reserved their rights to recover a portion or all of defense and settlement costs related to the above-described and other litigation.

DISCLOSURE SCHEDULE 6.10

SUBSIDIARIES

Southwall Europe GmbH.

Southwall Worldwide Glass, Inc.

Southwall Sunflex, Inc.

DISCLOSURE SCHEDULE 8.6

LIENS

Secured Party	Jurisdiction	File Type	File Number	File Date
Pacific Business Funding	Delaware Secretary of State	UCC-1	10820626	7/30/2001
VAResources, Inc.	Delaware Secretary of State	UCC-1	11497945	10/25/2001
IBM Credit Corporation	Delaware Secretary of State	UCC-1	20360838	1/18/2002
Teijin Limited	Delaware Secretary of State	UCC-1	20796346	3/28/2002
IBM Credit Corporation	Delaware Secretary of State	UCC-1	21202799	4/25/2002
IBM Credit Corporation	Delaware Secretary of State	UCC-1	21338718	5/8/2002
IBM Credit Corporation	Delaware Secretary of State	UCC-1	21997927	7/26/2002
IBM Credit Corporation	Delaware Secretary of State	UCC-1	22225310	8/28/2002
Academy Corporation	Delaware Secretary of State	UCC-1	30637796	3/14/2003
Tokai Financial Services	California Secretary of State	UCC-1	9908160372	3/11/1999
Crown Credit Company	California Secretary of State	UCC-1	9909860692	3/31/1999
Matrix Funding Corporation	California Secretary of State	UCC-1	9922160432	7/28/1999
Matrix Funding Corporation	California Secretary of State	UCC-1	9922260697	8/29/1999
Handy & Harman	California Secretary of State	UCC-1	9925860467	9/10/1999
Matrix Funding Corporation	California Secretary of State	UCC-1	9930661180	10/25/1999
Matrix Funding Corporation	California Secretary of State	UCC-1	9930661182	10/25/1999
Matrix Funding Corporation	California Secretary of State	UCC-1	0007560767	3/13/2000
Academy Precision Materials	California Secretary of State	UCC-1	0116960718	6/11/2001
US Bancorp	California Secretary of State	UCC-1	0228360154	10/8/2002
Pacific Business Funding	Arizona Secretary of State	UCC-1	1072185-0	6/14/1999
Pacific Business Funding	Arizona Secretary of State	UCC-1	1075193-0	7/6/1999
Matrix Funding Corporation	Arizona Secretary of State	UCC-1	1077342-0	7/23/1999
Matrix Funding Corporation	Arizona Secretary of State	UCC-1	1090220-0	10/26/1999
Matrix Funding Corporation	Arizona Secretary of State	UCC-1	1090221-0	10/26/1999
Matrix Funding Corporation	Arizona Secretary of State	UCC-1	1107904-0	3/13/2000
Cupertino National Bank	Arizona Secretary of State	UCC-1	1122803-0	6/22/2000
Handling Systems, Inc. (Assignee of Secured Party is Raymond Leasing Corporation)	Arizona Secretary of State	UCC-1	1137900-0	9/13/2000
Academy Precision Materials/Academy Corporation	Arizona Secretary of State	UCC-1	1174895-0	6/7/2001

Deutsche Bank, IKB Deutsche Industriebank, European Investment Bank and the Saxony Government have liens on Production Machine 8, Production Machine 9, Production Machine 10 and related assets in Germany.

1. Definitions and Construction 1

1.1 Definitions 1

1.2 Accounting Terms 6

2. Loan and Terms of Payment. 6

2.1 Advances 6

2.2 Interest Rates, Payments, and Calculations 7

2.3 PBF Expenses 8

2.4 Additional Costs 9

2.5 Reimbursement of Costs Upon Failure of Closing 9

2.6 Term 10

3. Conditions of Loan. 10

3.1 Conditions Precedent to Loan 10

3.2 Additional Conditions to Closing 11

4. Creation of Security Interest 11

4.1 Grant of Security Interest 11

4.2 Delivery of Additional Documentation Required 11

4.3 Right to Inspect 12

5. Release of Claims 12

5.1 No Known Claims Against PBF 12

5.2 Release by Borrower 12

5.3 No Prior Assignment of Released Claims 12

5.4 No Admission of Liability 12

5.5 Waiver of California Civil Code &sec: 1542 13

6. Representations And Warranties 13

6.1 Due Organization and Qualification 13

6.2 Due Authorization; No Conflict 13

6.3 Name; Location of Chief Executive Office 14

6.4 Litigation 14

6.5 Financial Statements 14

6.6 Solvency 14

6.7 Regulatory Compliance 14

6.8 Environmental Condition 14

6.9 Taxes 15

6.10 Subsidiaries 15

6.11 Government Consents 15

6.12 Full Disclosure 15

6.13 Prior Encumbrances 15

6.14 Needham Agreement 15

7. Affirmative Covenants 15

7.1 Good Standing 16

7.2 Government Compliance 16

7.3 Financial Statements, Reports, Certificates 16

7.4 Taxes 16

7.5 Insurance 17

7.6 Registration of Intellectual Property Rights 17

7.7 Further Assurances 17

7.8 Use of Proceeds 17

7.9 Asset Transfers to Subsidiaries 17

7.10 Audits 18

7.11 Depository Accounts 18

8. Negative Covenants 18

8.1 Chief Executive Office 18

8.2 Dispositions 18

8.3 Change in Business 18

8.4 Mergers or Acquisitions 18

8.5 Indebtedness 18

8.6 Encumbrances 19

8.7 Assignment of Income 19

8.8 Distributions 19

8.9 Investments 19

8.10 Compliance 19

9. Events of Default 19

9.1 Payment Default 19

9.2 Covenant Default 19

9.3 Material Adverse Effect 20

9.4 Attachment 20

9.5 Insolvency 20

9.6 Other Agreements 20

9.7 Letter of Credit 21

9.8 Judgments 21

9.9 Misrepresentations 21

9.10 Litigation 21

9.11 Guaranty 21

10. PBF's Rights And Remedies 21

10.1 Rights and Remedies Regarding All Events of Default 21

10.2 Power of Attorney 23

10.3 Accounts Collection 23

10.4 PBF Expenses 23

10.5 PBF's Liability for Collateral 23

10.6 Remedies Cumulative 24

10.7 Demand; Protest 24

11. Notices 24

12. Choice of Law and Venue, Jury Trial Waiver 25

13. General Provisions 25

13.1 Successors and Assigns 25

13.2 Indemnification 25

13.3 Time of Essence 25

13.4 Severability of Provisions 26

13.5 Amendments in Writing, Integration 26

13.6 Counterparts 26

13.7 Survival 26

13.8 Confidentiality 26

13.9 Exhibits 27

13.10 Effect of Headings 27

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