<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

(MARK ONE)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [NO FEE REQUIRED]

     For the quarterly period ended September 29, 1996
                                    ------------------

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

     For the transition period from ______ to ________


                       Commission File Number:  0-15930


                          SOUTHWALL TECHNOLOGIES INC.
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)


                 DELAWARE                                  94-2551470
     -------------------------------                 ---------------------
     (State or other jurisdiction of                   (I.R.S. Employer
      incorporation or organization)                 Identification Number)


     1029 Corporation Way, Palo Alto, California                94303
     -------------------------------------------              ----------
      (Address of principal executive offices)                (Zip Code)


Registrant's telephone number, including area code: (415) 962-9111
                                                    --------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                           Yes  [X]          No  [_]

As of October 27, 1996 there were 6,467,514 shares of the Registrant's Common
Stock outstanding.

This report, including all attachments, contains 12 pages.

                                       1
<PAGE>
 
                          SOUTHWALL TECHNOLOGIES INC.

                                     INDEX

 
                                                                Page Number
                                                                -----------

                         PART 1  FINANCIAL INFORMATION

Item 1    Financial Statements:

          Consolidated Balance Sheet - September 29, 1996
          and December 31, 1995......................................3

          Consolidated Statement of Operations -
          three month and nine month periods ended
          September 29, 1996 and October 1, 1995.....................4

          Consolidated Statement of Cash Flows -
          nine months ended September 29, 1996
          and October 1, 1995 .......................................5

          Consolidated Statement of Stockholders' Equity -
          nine months ended September 29, 1996.......................6

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

Item 2    Management's Discussion and Analysis
          of Financial Condition and Results of Operations...........8


                          PART II  OTHER INFORMATION
 
Item 1    Legal Proceedings.........................................11
 
Item 2    Changes in Securities.....................................11
 
Item 3    Defaults Upon Senior Securities...........................11
 
Item 4    Submission of Matters to a Vote of Stockholders...........11
 
Item 5    Other Information.........................................11
 
Item 6    Exhibits and Reports on Form 8-K..........................11

          Signatures................................................12

                                       2
<PAGE>
 
                         PART 1 FINANCIAL INFORMATION

Item 1  Financial Statements
----------------------------
                          CONSOLIDATED BALANCE SHEET
                     (in thousands, except per share data)
<TABLE>
<CAPTION>
                                             Sept. 29, 1996    December 31, 1995
                                             --------------    -----------------
                                               (Unaudited)
<S>                                          <C>               <C>
ASSETS
 
Current assets:
  Cash and cash equivalents                    $  2,319              $  1,434 
  Short-term investments                          1,005                 2,132 
  Accounts receivable, net of allowance                                       
   for doubtful accounts of $708 and $534         7,930                 5,288 
  Inventories                                     7,329                 6,624 
  Other current assets                              746                 1,166 
                                               --------              -------- 
  Total current assets                           19,329                16,644 
                                                                              
Property and equipment, net                      16,884                15,518 
Other assets                                      1,821                 1,943 
                                               --------              -------- 
  Total assets                                 $ 38,034              $ 34,105 
                                               ========              ======== 
LIABILITIES AND STOCKHOLDERS' EQUITY                                          
                                                                              
Current liabilities:                                                          
  Accounts payable                             $  4,120              $  3,236 
  Accrued compensation                            1,446                 1,413 
  Other accrued liabilities                       2,549                 2,170 
  Current portion of long-term debt                 104                   101 
                                               --------              -------- 
  Total current liabilities                       8,219                 6,920 
                                                                              
Long-term debt                                    2,804                 2,890 
Deferred income taxes                               381                   381 
                                               --------              -------- 
  Total liabilities                              11,404                10,191 
                                               --------              -------- 
Commitments and contingencies                                                 
                                                                              
Stockholders' equity:                                                         
  Common stock, $.001 par value,                                              
   20,000 shares authorized:                                                  
   Issued and outstanding: 6,917 and 6,917            7                     7 
  Capital in excess of par value                 46,792                47,206 
  Accumulated deficit                           (17,569)              (19,339)
  Treasury stock, 663 and 981 outstanding        (2,600)               (3,960)
                                               --------              -------- 
  Total stockholders' equity                     26,630                23,914 
                                               --------              -------- 
  Total liabilities and stockholders' equity   $ 38,034              $ 34,105 
                                               ========              ======== 
</TABLE>
See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
 
                          SOUTHWALL TECHNOLOGIES INC.
                     CONSOLIDATED STATEMENT OF OPERATIONS
                     (in thousands, except per share data)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                               Three Months Ended          Nine Months Ended   
                                              --------------------        -------------------                   
                                              Sept. 29,    Oct. 1,        Sept. 29,   Oct. 1,                   
                                              --------    --------        --------   --------                   
                                                1996        1995            1996       1995                  
                                                ----        ----            ----       ----                  
<S>                                           <C>        <C>             <C>         <C>                       

Net Product Sales                              $9,932     $9,315          $31,297     $24,160                
Other Revenues                                     34         96              296         223                
                                               ------     ------          -------     -------                
Net revenues                                    9,966      9,411           31,593      24,383                
                                               ------     ------          -------     -------                
Costs and expenses:                                                                                          
   Cost of product sales                        6,677      6,848           21,634      17,043                
   Research and development                       685        476            1,837       1,637                
   Selling, general and administrative          2,020      1,720            6,225       5,332                
                                               ------     ------          -------     -------                
    Total costs and expenses                    9,382      9,044           29,696      24,012                
                                               ------     ------          -------     -------                
Income from operations                            584        367            1,897         371                
Interest income (expense) net                   (  10)     (  22)          (   43)     (   91)               
                                               ------     ------          -------     -------                
Income before income taxes                        574        345            1,854         280                
Provision for income taxes                         19          -               84           -                
                                               ------     ------          -------     -------                
Net income                                     $  555     $  345          $ 1,770     $   280                
                                               ======     ======          =======     =======                
Net income per share                           $ 0.08     $ 0.05          $  0.25     $  0.04                
                                               ======     ======          =======     =======                
Weighted average shares of common                                                                            
 stock and common stock equivalents             7,004      6,341            6,961       6,279                
                                               ======     ======          =======     =======                 
</TABLE>
See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
 
                          SOUTHWALL TECHNOLOGIES INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                               Nine Months Ended          
                                                                              ------------------          
                                                                        Sept. 29, 1996     Oct. 1, 1995   
                                                                        --------------     ------------   
<S>                                                                    <C>                <C>             
Cash flows from operating activities:                                                                     
   Net income                                                                $ 1,770         $   280      
   Adjustments to reconcile net income to                                                                 
    net cash provided by (used in) operating activities:                                                  
   Depreciation and amortization                                               1,707           1,597      
   Decrease (increase) in accounts receivable                                 (2,642)         (2,413)     
   Decrease (increase) in inventories                                           (705)         (2,108)     
   Decrease (increase) in other current assets                                   420          (  276)     
   (Decrease) increase in accounts payable and accrued liabilities             1,389           1,805      
                                                                             -------         -------      
Cash provided by (used in) operating activities                                1,939          (1,115)     
                                                                             -------         -------      
Cash flows from investing activities:                                                                     
   Decrease (increase) in short-term investments                               1,127           1,919      
   Expenditures for property and equipment and other assets                   (2,951)         (1,113)     
                                                                             -------         -------      
Net cash (used in) provided by investing activities                           (1,824)            806      
                                                                             -------         -------      
Cash flows from financing activities:                                                                     
   Increase in(reduction of) long-term debt                                      (83)            266      
   (Purchase)issuance of treasury stock, net                                     853               -      
   Other changes in paid in capital                                                -             202      
                                                                             -------         -------      
Net cash (used in) provided by financing activities                              770             468      
                                                                             -------         -------      
Net increase (decrease) in cash and cash equivalents                             885             159      
Cash and cash equivalents, beginning of year                                   1,434           1,144      
                                                                             -------         -------      
Cash and cash equivalents, end of period                                     $ 2,319         $ 1,303      
                                                                             =======         =======      
Supplemental schedule of non-cash investing and financing activities:                       
   Treasury stock used for payment of interest                               $    93         $   110       
</TABLE>

See accompanying notes to consolidated financial statements.

                                       5
<PAGE>
 
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                     Nine Months Ended September 29, 1996
                                (in thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                  Capital in                                 Total     
                                                                  ----------                                 -----     
                                           Common Stock           excess of     Accumulated    Treasury   Stockholders'
                                           ------------           ---------     -----------    --------   ------------ 
                                       Shares        Amount       par value       Deficit        Stock       Equity    
                                       ------        ------       ---------       -------        -----       ------     
<S>                                    <C>           <C>          <C>           <C>            <C>        <C>    
Balance; December 31, 1995             6,917           $7         $47,206       $(19,339)      $(3,960)      $23,914

Interest paid with Treasury stock                                       5                           88            93

Exercise of Stock Options                                           ( 414)                       1,227           813

Employee Stock Purchase Plan                                        (   5)                          45            40              

Net income                                                                         1,770                       1,770
                                       -----           --         -------       --------       -------       -------

Balance; September 29, 1996            6,917           $7         $46,792       $(17,569)      $(2,600)      $26,630
                                       =====           ==         =======       ========       =======       ======= 
</TABLE>

See accompanying notes to consolidated financial statements.

                                       6
<PAGE>
 
                          SOUTHWALL TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)

Note 1 - Interim Period Reporting:
--------------------------------- 

While the information presented in the accompanying consolidated financial
statements is unaudited, it includes all adjustments (consisting only of normal
recurring adjustments) which, in the opinion of management, are necessary to
present fairly the Company's financial position and results of operations, and
changes in financial position as of the dates and for the periods indicated.

Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted.  It is suggested that these consolidated
financial statements be read in conjunction with the financial statements
contained in the Company's Form 10-K for the year ended December 31, 1995. The
results of operations for the interim periods presented are not necessarily
indicative of the operating results of the full year.

Note 2 - Inventories:
-------------------- 

Inventories are stated at the lower of cost (determined by the first-in, first-
out method) or market.  Inventories at September 29, 1996 and December 31, 1995,
consisted of the following:

<TABLE>
<CAPTION>
                               September 29, 1996   December 31, 1995
                               ------------------   -----------------
<S>                            <C>                  <C>
 
          Raw materials                    $2,611              $2,696
          Work-in-process                   1,688                 989
          Finished goods                    3,030               2,939
                                           ------              ------
             Total                         $7,329              $6,624
                                           ======              ======
</TABLE>

Note 3 - Commitments:
-------------------- 

During the first quarter of 1996, the Company and SONY Corporation signed an
Addendum #1 to Supply Agreement.  Under the terms of the amended agreement,
among other things, SONY has agreed to increase its minimum order of anti-
reflective film beginning July 1, 1997 and extending through December 31, 2000,
and Southwall has agreed to install any necessary additional manufacturing
capacity by July 1, 1997.

The Company is currently in the process of leasing and equipping a new facility
for the manufacturing of anti-reflective film.  The Company estimates that it
will cost approximately $14 million to equip this facility.  The Company is also
in negotiations with lending institutions to finance this expansion.

                                       7
<PAGE>
 
Item 2 -  Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------

Except for the historical information contained herein, the matters discussed in
this Form 10-Q Report are forward-looking statements that involve risks and
uncertainties, including those discussed below and in the Company's Annual
Report on Form 10-K.  Actual results may differ materially from those projected.
These forward-looking statements represent the Company's judgment as of the date
of the filing of this From 10-Q Report.  The Company disclaims, however, any
intent or obligation to update these forward-looking statements.

Nine Months Ended September 29, 1996 and October 1, 1995
--------------------------------------------------------

Net product sales increased to $31.3 million for the first nine months of 1996,
compared to $24.2 million for the similar period of 1995. Most of the increase
was due to $7.2 million of sales of anti-reflective film for the period compared
to $1.0 million for the similar period last year. In addition, net product sales
of energy conservation products increased by $3.4 million and net product sales
of electronics products, other than anti-reflective film, increased by
approximately $.2 million, more than offsetting a $2.1 million dollar decline in
silver reflector film sales and a $.6 million decrease in discontinued aerospace
product sales.

Cost of product sales for the three quarters of 1996 was 69% of net product
sales, compared to 71% for the similar period of 1995.  This percentage decrease
was primarily attributable to increased sales volumes, along with a favorable
product mix, particularly during the third quarter of 1996, and to the adverse
effect on cost of sales of the start up phase of the Company's new anti-
reflective film product during the third quarter of 1995. The above favorable
factors combined to more than off set the adverse impact on the first nine
months of 1996 of taking one of the production machines off line for part of the
third quarter for modifications intended to improve product quality and output.

Research and development expenses, as a percent of net product sales, were 6%
for the first nine months of 1996, compared to 7% for the similar period in
1995. The percentage decrease was primarily attributable to the increase in net
product sales. The absolute dollar increase in 1996 was primarily attributable
to higher new product development.

Selling, general and administrative expenses, as a percent of net product sales,
decreased to 20% in the first nine months of 1996, from 22% for the similar
period in 1995. The percentage decrease was primarily attributable to the
increase in net product sales.  The absolute dollar increase from $5.3 million
in 1995 to $6.2 million in 1996, is attributable to increased sales and
marketing expenses associated with the introduction of new products and
expansion into the Pacific Rim.

Interest income (expense) net, decreased in the first nine months of 1996
compared to the similar period of 1995 due primarily to losses realized on sales
of short term investments during the second quarter of 1995, and reductions in
long term debt, partly offset by a decrease in money invested in 1996.

As a result of the factors discussed above, the Company reported pre-tax income
of $1.9 million for the first nine months of 1996, compared to pre-tax income of
$.3 million for the similar period in 1995.

                                       8
<PAGE>
 
Effective March 31, 1996, the Company terminated its lease of equipment and
facilities in Southern California to laminate glass products.  The Company
continues to market its California Series(TM) clear solar shading laminated
glass products, which are being laminated by a sub-contractor, but no longer
markets other laminated products.

The termination of this lease and discontinuance of the marketing of certain
products, as well as the discontinuance of the aerospace product lines discussed
above, had no adverse effect on operating results and is not expected to have
any adverse effect on future operating results.

Three Months Ended September 29, 1996 and October 1, 1995
---------------------------------------------------------

Net product sales increased to $9.9 million for the third quarter of 1996,
compared to $9.3 million for the similar period of 1995. The increase was due
primarily to a $1.0 million increase in sales of anti-reflective film and a $.5
million increase in net product sales of energy conservation products, which
more than offset a $.7 million dollar decline in silver reflector product sales
and a $.2 million decrease in electronics product sales, other than anti-
reflective film.

Cost of product sales for the third quarter of 1996 was 67% of net product
sales, compared to 74% for the similar period of 1995. This percentage decrease
was primarily attributable to increased sales volumes, along with a favorable
product mix, and to the adverse effect on cost of sales of the start up phase of
the Company's new anti-reflective film product during the third quarter of 1995.
The above favorable factors combined to more than offset the adverse impact on
the third quarter 1996 of taking one of the production machines off line for
part of the quarter for modifications intended to improve product quality and
output.

Research and development expenses, as a percent of net product sales, were 7%
for the third quarter of 1996, compared to 5% for the similar period in 1995.
The percentage and absolute dollar increases in 1996 were primarily attributable
to higher new product development.

Selling, general and administrative expense, as a percent of net product sales,
increased to 20% in the third quarter of 1996, from 18% for the similar period
in 1995. The percentage increase and the absolute dollar increase from $1.7
million in 1995 to $2.0 million in 1996, is primarily attributable to increased
sales and marketing expenses associated with the introduction of new products
and expansion into the Pacific Rim.

As a result of the factors discussed above, the Company reported pre-tax income
of $.6 million for the third quarter of 1996, compared to pre-tax income of $.3
million for the similar period in 1995.

Liquidity and Capital Resources
-------------------------------

At September 29, 1996, the Company's net working capital was $11.1 million
compared with $9.7 million at December 31, 1995. The Company has financed itself
through cash flow from operations and its existing cash and cash equivalent
balances.

From December 31, 1995, to September 29, 1996, cash and cash equivalent balances
decreased by $.2 million, while accounts receivable increased by $2.6 million.
The increase in accounts receivable is primarily attributable to the 

                                       9
<PAGE>
 
increase in net revenues from $9.1 million in the fourth quarter of 1995 to $9.9
million in the third quarter of 1996, and due to higher shipments occurring
during the later portion of the quarter.

Additions to property and equipment were approximately $1.4 million during the
third quarter of 1996, including $1.1 million toward equipping a new facility,
to be dedicated to the production of anti-reflective product.  The Company
anticipates total capital expenditures of approximately $2.5 million during 1996
for general replacements and discretionary improvements of current facilities.
The Company has also issued purchase orders totaling $5.6 million as part of
total anticipated commitments of approximately $14 million to equip a new
facility to be dedicated to the production of anti-reflective product and to
fulfill the supply requirements of the supply agreement.

At September 29, 1996, the Company had $3.3 million of cash and short-term
investments and a $6 million revolving line of credit, which is subject to
certain financial covenants, and which expires in February 1997, but may be
extended for additional one year terms with the bank's approval.  As of
September 29, 1996, there were no borrowings under this line of credit.
Existing working capital and cash generated from operations are expected to be
adequate to satisfy the Company's capital and operating requirements of existing
facilities at least through 1996.

The Company is seeking financing for the planned new facility;  however, there
is no assurance that the Company will be successful.

                                       10
<PAGE>
 
                          PART II  OTHER INFORMATION

Item 1    Legal Proceedings and Other Matters

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

In addition, the Company is involved in certain other legal actions arising in
the ordinary course of business.  The Company believes, however, that none of
these actions, either individually or in the aggregate, will have a material
adverse effect on the Company's business or its consolidated financial position
or results of operations.

Item 2    Changes in Securities
          Not applicable


Item 3    Defaults upon Senior Securities
          Not applicable


Item 4    Submission of Matters to a Vote of stockholders
          No matters were submitted to a vote of security holders during the
          quarter ended September 29, 1996.
 

Item 5    Other Information
          Not applicable


Item 6    Exhibits and Reports on Form 8-K

     (a)  Exhibit
          
          Exhibit 27 -- Financial Data Schedule

     (b)  Reports of Form 8-K - None

                                       11
<PAGE>
 
                                  SIGNATURES


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


Dated:  November 12, 1996               Southwall Technologies Inc.



                                       By:/s/Martin M. Schwartz   
                                          ---------------------   
                                           Martin M. Schwartz     
                                           President and          
                                           Chief Executive Officer
                                                                  
                                                                  
                                                                  
                                       By:/s/L. Ray Christie      
                                          ------------------      
                                           L. Ray Christie        
                                           Vice President and     
                                           Chief Financial Officer 

                                       12