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): October 30, 2006

Southwall Technologies Inc.

(Exact name of registrant as specified in its charter)

Delaware	0-15930	94-2551470
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

3788 Fabian Way

Palo Alto, California 94303

(Address of principal executive offices)

(650) 962-9111

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):

£ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

£ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

£ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

£ Pre-commencement communications pursuant to Rule 13e-4(c) under Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition

On October 30, 2006, Southwall Technologies Inc. (the “Registrant”) issued a press release announcing its financial results for the quarter ended September 30, 2006. A copy of such press release of the Registrant is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference in its entirety.

The information in this Current Report on Form 8-K and the exhibit attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise expressly stated in such filing.

Item 9.01. Financial Statements and Exhibits

(c) Exhibits.

Exhibit No.:	Description:
Exhibit 99.1	Press Release, dated October 30, 2006, issued by Southwall Technologies Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

SOUTHWALL TECHNOLOGIES INC.
By:	/s/ George Boyadjieff
	George Boyadjieff
	Chairman and Interim CEO

Date: October 31, 2006

EX-99.1

Exhibit 99.1 Contact: Roween Nacionales Southwall Technologies Phone: (650) 798-1200

For Immediate Release

Southwall Announces Earnings for Q3 2006

Palo Alto, California - October 30, 2006 - Southwall Technologies Inc. (OTC BB: SWTX.OB) released its financial results for the third quarter of fiscal 2006 following the close of market on October 30, 2006.

Selected Third Quarter Financial Highlights

· Third quarter revenues of $9.6 million decreased 20% from $12.0 million in the third quarter 2005 and decreased 15% from $11.3 million in the second quarter 2006. The decrease in revenues was the result of supplier quality problems and yield issues with one electronic display product.

· Third quarter 2006 gross margin was 41%, an increase of 7% from the third quarter 2005 margin of 34% and an increase of 5% over second quarter 2006 gross margin of 36%.

· Third quarter 2006 net loss of $2.7 million included charges of $1.9 million relating to an accrual of leasehold obligations and other expenses as a result of closing down the Palo Alto manufacturing facility, $0.3 million relating to a severance package and $0.1 million accrual for settlement of an employee lawsuit. Third quarter 2005 net income was $15,000. Second quarter 2006 net loss of $1.4 million included charges of $0.2 million relating to net impairment charge for long-lived assets and $0.3 million of restructuring charges.

· Third quarter 2006 net loss per fully diluted share was $0.11, compared to third quarter 2005 net income per fully diluted share of $0.00 and compared to second quarter 2006 net loss per fully diluted share of $0.06.

“Our third quarter 2006 gross margin is a company record high at 41% as we now produce all of our products in our manufacturing facility in Dresden, Germany. We continue to have good demand for our products but are now faced with the challenge of improving our product yields as we transition our Palo Alto products to Germany,” commented George Boyadjieff, Chairman and Interim CEO. “We will continue to reduce operating costs and are committed to returning back to profitability.”

The Company will hold a teleconference at 2:00 p.m. PT / 5:00 p.m. ET today to discuss the results in more detail.

This call will be open to all investors via a webcast accessible at www.southwall.com and by phone. Both phone and webcast replays will be available for approximately one week after the teleconference, beginning approximately two hours after the call ends.

How to Access the Webcast

Go to the Southwall website at www.southwall.com and access the CCBN webcast icon by selecting “News & Events => Press Releases” from the main menu bar. From here, you can listen to the teleconference, assuming that your computer system is configured properly.

How to Access the Call

Using access code # 8354340, domestic U.S. callers can dial (877) 481-7179, while international callers can dial (706) 634-7186. The phone replay will be accessible at (800) 642-1687 or (706) 645-9291, access code # 8354340.

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 sells advanced thin film coatings to over 25 countries around the world. Southwall’s customers include Audi, BMW, DaimlerChrysler, DuPont, Mitsui Chemicals, Peugeot-Citroën, Philips, Pilkington, Renault, Saint-Gobain Sekurit, and Volvo.

This press release may contain forward-looking statements, including, without limitation, statements regarding the Company's expectations, beliefs, intentions, or strategies regarding the future. All forward-looking statements in this press release are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those presented. These risks include the possibility that the Company’s expected future results will be materially worse than estimated, that the Company may not continue to be profitable in future quarters or may not be able to achieve future long-term growth or that margins may decline, that there will be a decline in one or more portions of our business, that the Company will not be successful in improving operations performance or controlling costs, that the Company will suffer a decline in manufacturing or financial effectiveness, that the Company’s new product development will not be successful, and that the Company will not be able to secure additional financing if required, as well as risks associated with its failure to meet potential covenant requirements under future credit facilities. 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, 2005, filed on March 29, 2006, and the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2006, is expected to be filed by November 14, 2006.

###

SOUTHWALL TECHNOLOGIES INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Three months ended						Nine months ended
	September 30, 2006			October 2, 2005			September 30, 2006			October 2, 2005
Net revenues	$	9,597		$	12,025		$	30,968		$	42,844
Cost of revenues		5,667			7,921			19,301			28,979
Gross profit		3,930			4,104			11,667			13,865
Operating expenses:
Research and development		1,659			1,334			5,376			3,047
Selling, general and administrative		4,674			2,104			9,761			6,461
Impairment charge (recoveries) for long-lived assets		(325	)		-			(117	)		(170	)
Restructuring charges		263			-			974			-
Total operating expenses		6,271			3,438			15,994			9,338
Income (loss) from operations		(2,341	)		666			(4,327	)		4,527
Interest expense, net		(169	)		(210	)		(550	)		(778	)
Other income (expenses), net		(18	)		9			161			142
Income (loss) before provision for income taxes		(2,528	)		465			(4,716	)		3,891
Provision for income taxes		193			450			719			782
Net income (loss)		(2,721	)		15			(5,435	)		3,109
Deemed dividend on preferred stock		123			120			367			363
Net income (loss) attributable to common stockholders	$	(2,844	)	$	(105	)	$	(5,802	)	$	2,746
Net income (loss) per share:
Basic	$	( 0.11	)	$	0.00		$	(0.22	)	$	0.10
Diluted	$	(0.11	)	$	0.00		$	(0.22	)	$	0.09
Shares used in computing net income (loss) per share:
Basic		26,957			26,788			26,907			26,727
Diluted		26,957			32,720			26,907			32,999

SOUTHWALL TECHNOLOGIES INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	5,032		$	6,600
Restricted cash		206			402
Accounts receivable, net		4,804			6,780
Inventories, net		5,241			5,879
Other current assets		1,492			982
Total current assets		16,775			20,643
Property, plant and equipment, net		16,689			16,857
Restricted cash loans		1,063			995
Other assets		1,161			1,146
Total assets	$	35,688		$	39,641
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long term debt	$	1,030		$	1,317
Line of credit		2,996			2,996
Accounts payable		1,543			1,402
Accrued compensation		1,109			1,161
Other accrued liabilities		6,300			5,076
Total current liabilities		12,978			11,952
Term debt		8,544			8,790
Government grants advanced		206			396
Other long term liabilities		2,531			2,564
Total liabilities		24,259			23,702
Series A, convertible preferred stock		4,810			4,810
Stockholders’ equity:
Common stock		27			27
Capital in excess of par value		78,050			77,828
Accumulated other comprehensive income:
Translation gain on subsidiary		3,236			2,532
Accumulated deficit		(74,694	)		(69,258	)
Total stockholders’ equity		6,619			11,129
Total liabilities, preferred stock and stockholders’ equity	$	35,688		$	39,641