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 28, 1997
                                        ------------------

[ ]      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: (650) 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 September 28, 1997 there were 7,421,009 shares of the Registrant's  Common
Stock outstanding.

This report, including all attachments, contains 14 pages.


                                       1
<PAGE>


                           SOUTHWALL TECHNOLOGIES INC.

                                      INDEX





                          PART 1 FINANCIAL INFORMATION
                                                                     Page Number
                                                                     -----------
Item 1   Financial Statements:

                  Consolidated Balance Sheet - September 28, 1997
                  and December 31, 1996......................................3

                  Consolidated Statement of Operations -
                  three month and nine month periods ended
                  September 28, 1997 and September 29, 1996..................4

                  Consolidated Statement of Cash Flows -
                  nine months ended September 28, 1997
                  and September 29, 1996.....................................5

                  Consolidated Statement of Stockholders' Equity -
                  nine months ended September 28, 1997.......................6

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

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


                            PART II OTHER INFORMATION

Item 1   Legal Proceedings..................................................13

Item 2   Changes in Securities..............................................13

Item 3   Defaults Upon Senior Securities....................................13

Item 4   Submission of Matters to a Vote of Stockholders....................13

Item 5   Other Information..................................................13

Item 6   Exhibits and Reports on Form 8-K...................................13

         Signatures.........................................................14


                                        2

<PAGE>



                          PART 1 FINANCIAL INFORMATION

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

                                                Sept.28, 1997    Dec.31, 1996
                                                -------------    ------------
                                                 (Unaudited)
ASSETS

Current assets:
     Cash and cash equivalents                       $  8,117       $  7,419
     Short-term investments                                 7              7
     Accounts receivable, net of allowance
      for doubtful accounts of $866 and $682            9,956          7,097
     Inventories                                       10,457          8,406
     Other current assets                               1,036            828
                                                      -------        -------
            Total current assets                       29,573         23,757

Property and equipment, net                            24,578         17,223
Other assets                                            1,533          1,529
                                                      -------        -------

     Total assets                                     $55,684        $42,509
                                                      =======        =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                $  4,926       $  2,635
   Accrued compensation                                 2,015          2,141
     Other accrued liabilities                          1,815          1,954
     Current portion of long-term debt                  1,210          1,181
                                                      -------        -------

            Total current liabilities                   9,966          7,911

Long-term debt                                         10,672          6,591
Deferred income taxes                                     410            410
                                                      -------        -------
             Total liabilities                         21,048         14,912
                                                      -------        -------

Commitments

Stockholders' equity:
     Common stock, $.001 par value,
      20,000 shares authorized:
      Issued and outstanding: 7,636 and 6,917               8              7
     Capital in excess of par value                    51,565         46,673
     Notes receivable                                    (679)          (596)
     Accumulated deficit                              (15,334)       (16,912)
     Less Treasury stock of 215 and 390                  (924)        (1,575)
                                                       -------       --------

           Total stockholders' equity                   34,636        27,597
                                                       -------       -------
     Total liabilities and
            stockholders' equity                       $55,684       $42,509
                                                       =======       =======


See accompanying notes to consolidated financial statements.


                                        3
<PAGE>


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


                                     Three Months Ended     Nine Months Ended
                                     ------------------     -----------------
                                     Sept. 28,  Sept.29,    Sept. 28,  Sept.29,
                                     ---------  --------    ---------  --------
                                       1997      1996         1997      1996
                                       ----      ----         ----      ----
                                                          
Net revenues                          $12,083   $ 9,966     $34,622   $31,593
                                      -------   -------     -------   -------
                                                          
Costs and expenses:                                       
   Cost of sales                        8,289     6,677      22,878    21,634
   Start up costs - Tempe                 528      --         1,076      --
   Research and development               794       685       2,228     1,837
   Selling, general and                                   
    administrative                      2,300     2,020       6,845     6,225
                                      -------   -------     -------   -------
                                                          
    Total costs and expenses           11,911     9,382      33,027    29,696
                                      -------   -------     -------   -------
                                                          
Income from operations                    172       584       1,595     1,897
                                                          
Interest income (expense) net              57       (10)         72       (43)
                                      -------   -------     -------   -------
Income before income taxes                229       574       1,667     1,854
                                                          
Provision for income taxes                 19        19          89        84
                                      -------   -------     -------   -------
                                                          
Net income                            $   210   $   555     $ 1,578   $ 1,770
                                      =======   =======     =======   =======
                                                          
Net income per share                  $  0.03   $  0.08     $  0.21   $  0.25
                                      =======   =======     =======   =======
                                                          
Weighted average shares of common                         
 stock and common stock equivalents     8,038     7,004       7,667     6,961
                                      =======   =======     =======   =======
                                                          

See accompanying notes to consolidated financial statements.


                                        4
<PAGE>





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


                                                        Nine Months Ended
                                                        -----------------
                                                Sept. 28, 1997    Sept. 29, 1996
                                                --------------    --------------
Cash flows from operating activities:
     Net income                                       $ 1,578          $ 1,770
     Adjustments to reconcile net income to                          
      net cash provided by (used in) operating                       
      activities:                                                    
     Depreciation and amortization                      1,892            1,707
     Decrease (increase) in accounts receivable        (2,859)          (2,642)
     Decrease (increase) in inventories                (2,051)            (705)
     Decrease (increase) in other current assets         (208)             420
     (Decrease) increase in accounts payable                         
      and accrued liabilities                           2,119            1,389
                                                      -------          -------
                                                                     
Cash provided by (used in) operating                                 
 activities                                               471            1,939
                                                      -------          -------
                                                                     
Cash flows from investing activities:                                
     Decrease (increase) in short-term investments       --              1,127
     Expenditures for property and equipment                         
      and other assets                                 (9,251)          (2,951)
                                                      -------          -------
                                                                     
Net cash (used in) provided by investing                             
 activities                                            (9,251)          (1,824)
                                                      -------          -------
                                                                     
Cash flows from financing activities:                                
   Increase in(reduction of) long-term debt             4,110              (83)
   Sale of common stock, net                            4,931             --
   Issuance of treasury stock, net                        437              853
                                                      -------          -------
                                                                     
Net cash (used in) provided by financing activities     9,478              770
                                                      -------          -------
                                                                     
Net increase (decrease) in cash and cash                             
 equivalents                                              698              885
                                                                     
Cash and cash equivalents, beginning of year            7,419            1,434
                                                      -------          -------
                                                                     
Cash and cash equivalents, end of period              $ 8,117          $ 2,319
                                                      =======          =======
                                                                     
Supplemental schedule of non-cash                                    
     investing and financing activities:                             
                                                                     
     Treasury stock used for payment of interest      $    93          $    93
                                                                     
                                                               

See accompanying notes to consolidated financial statements.


                                        5
<PAGE>




<TABLE>
                                           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                                                Nine Months Ended September 28, 1997
                                                           (in thousands)
                                                             (Unaudited)

<CAPTION>
                                 Common Stock        Capital in                                                       Total
                                 ------------         excess of        Notes        Accumulated      Treasury      Stockholders'
                               Shares     Amount      par value      Receivable       Deficit          Stock          Equity
                               ------     ------      ---------      ----------       -------          -----          ------
<S>                              <C>        <C>         <C>            <C>           <C>              <C>             <C>
Balance; December 31, 1996       6,917      $7          $46,673        $(596)        $(16,912)        $(1,575)        $27,597
                                                      
Interest paid with stock                                     31                                            62              93
                                                      
Exercise of options                 52                      (78)                                          535             457
                                                      
                                                      
Stock option loans                                                       (83)                                             (83)
                                                      
                                                      
Sale of stock, net                667        1            4,930                                                         4,931
                                                      
                                                      
Sales to employees under                                     9                                             54              63
  Stock Purchase Plan                                 
                                                      
Net income                                                                              1,578                           1,578
                                ------      --          -------       ------         ---------        --------         -------
                                                      
Balance; September 28, 1997      7,636      $8          $51,565       $(679)         $(15,334)          $(924)        $34,636
                                ======      ==          =======       ======         =========         ======         =======

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


                                        6
<PAGE>





                           SOUTHWALL TECHNOLOGIES INC.


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

Note 1 - Interim Period Reporting:

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

Certain  information and footnote  disclosures  normally  contained in financial
statements prepared in accordance with generally accepted accounting  principles
have  been  condensed  or  omitted.  It is  suggested  that  these  consolidated
financial  statements  be read in  conjunction  with  the  financial  statements
contained in the Company's  Form 10-K for the year ended  December 31, 1996. 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 28, 1997 and December 31,
1996, consisted of the following:

                         September 28, 1997          December 31, 1996
                         ------------------          -----------------
         Raw materials        $ 5,088                    $ 2,869
         Work-in-process        2,034                      1,848
         Finished goods         3,335                      3,689
                              -------                    -------
               Total          $10,457                    $ 8,406
                              =======                    =======


Note 3 - Commitments:

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

The Company began occupying a new leased facility located in Tempe,  Arizona, on
June 27, 1997, has installed and is in the process of bringing on line the


                                        7

<PAGE>

equipment  required for the manufacturing of  anti-reflective  film. The Company
estimates that it will cost approximately $12 million to equip this facility.

The Company has also secured  financing  from a  combination  of borrowing  from
lending  institutions  and an equity sale to a major  investor  to finance  this
expansion and anticipated related working capital requirements.  On December 16,
1996, the Company borrowed $5 million from an institutional  lender. On April 9,
1997, the Company signed an agreement with Teijin Limited of Japan  (Teijin),  a
major raw material  supplier of the Company,  which  included  arrangements  for
additional  financing  for  the  new  manufacturing  facility  and  for  related
potential  working  capital  growth.  Teijin  purchased  667,000  shares  of the
Company's  common  stock at a price of $7.50 per share,  and  guaranteed  a loan
through Sanwa Bank for an additional $10 million.  Teijin also received warrants
to purchase  158,000 shares of common stock at a price of $9.00 per share at any
time  within  three  years  of the date of the  agreement.  The  stock  purchase
transaction  of  approximately  $5 million was  completed on April 28, 1997.  In
addition,  a loan  agreement  with Sanwa Bank was signed on May 2, 1997, and the
Company  received the first $5 million of funding on May 6, 1997.  The remaining
$5 million of loan funding was  received on November 6, 1997.  The loan is for a
period of seven and one half (7.5)  years,  with a four (4) year  interest  only
grace period, payable semi annually at an interest rate of BBA Libor, fixed semi
annually,  plus seven sixteenths percent.  In addition,  a loan guarantee fee of
nine  sixteenths  percent  (.5625%)  per annum is  payable to Teijin on the same
payment schedule as the loan interest payments.


                                        8
<PAGE>



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

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

General

The Company has experienced  significant  fluctuations  in quarterly  results of
operations.  Revenues  have varied from  quarter to quarter due to the  seasonal
buying patterns for the Company's Heat Mirror(TM) products, which typically have
been strongest in the second and third quarters.  Sales of the Company's  energy
conservation  products  are  significantly  influenced  by the  residential  and
commercial construction industries,  and reduction in construction has generally
resulted in a reduction in the sales of the Company's Heat Mirror  products.  In
addition,  operating results have historically varied from quarter to quarter as
a  function  of  the   utilization   of  the  Company's   production   machines.
Manufacturing inefficiencies have resulted from the development and introduction
of new products and the  changing mix of products  manufactured.  Primarily as a
result of these  factors and in view of the  Company's  strategy  of  developing
additional  applications for its thin-film technology,  and its ongoing practice
of upgrading its manufacturing processes, the Company may continue to experience
quarterly fluctuations in its results of operations.

The  Company  believes  that it must  continue  to  increase  revenues to remain
profitable.  Although the Company is in the process of expanding  it's  capacity
and is seeking to expand existing applications,  to develop new applications and
to continue to expand international marketing and sales efforts, there can be no
assurance  that the  Company  will be able to  continue  to  increase  revenues.
Additionally,  there is  significant  risk  inherent  in the  expansion  project
currently in process.  The project is currently behind schedule and there can be
no assurances  that the Company will be successful in completing this project in
accordance  with the  Company's  current plans and in time to fulfill the supply
requirements for the period ended December 31, 1997 thereby  avoiding  potential
penalties provided for in the contract with Sony.


Nine Months Ended September 28, 1997 and September 29, 1996

Net  revenues  increased  to $34.6  million  for the first nine  months of 1997,
compared to $31.6 million for the similar  period of 1996.  The increase was due
primarily to a $3.5 million increase in sales of  anti-reflective  film compared
to the  similar  period  last year.  Net sales of energy  conservation  products
decreased  by  $.5  million,   primarily   due  to   discontinued   products  of
approximately  $2.1 million sold during  1996,  plus a $1.5 million  decrease in
Heat Mirror(TM) products, partly offset by increases of $1.6 million in sales of
Solis(TM) film, $1.0 million of Heat Mirror XIR(R) for automotive and commercial
and $.5 million of silver reflector product.


                                        9
<PAGE>


Cost of sales,  excluding  start up costs of the new  manufacturing  facility in
Tempe,  Arizona,  for the  first  nine  months  of 1997 was 66% of net  revenue,
compared to 68% for the  similar  period of 1996.  Additional  costs in 1997 for
start up of the new manufacturing facility were approximately $1.1 million or 3%
of net revenues.  Start up costs will continue into the fourth  quarter of 1997,
but will decrease as the production equipment is brought on line. The percentage
decrease in cost of sales excluding start up costs was primarily attributable to
production efficiency  improvements which have resulted in increased throughputs
and improved  yields on most  products,  which allowed for  increased  volume of
production and sales. Most of these  improvements have taken place  cumulatively
over the twelve month period  beginning  in October 1996 through  September  28,
1997.  These  improvements  more than offset  costs from  unplanned  maintenance
downtime  during the third  quarter of 1997 on two of the  Company's  production
machines,  and cost to scale up production  of  automotive  OEM products for new
customers in Europe.  There were also some  operational  problems  that occurred
during the first quarter of 1996,  and higher cost of certain metals used in the
coating  process  for most of the  Company's  products  during the first half of
1996.

Research and development  expenses, as a percent of net revenue, were 6% for the
first nine months of 1997,  compared to 6% for the similar  period in 1996.  The
absolute  dollars  increased  to $2.2 million in 1997 from $1.8 million in 1996.
The  increase  was  primarily  attributable  to higher new product  development,
mainly in film for laminated glass  products,  including film for the automotive
and   California    Series(TM)   commercial   and   residential   markets,   and
anti-reflective product.

Selling,  general and administrative  expense, as a percent of net revenue,  was
20% in the first nine months of 1997,  compared to 20% for the similar period in
1996. The absolute  dollars  increased to $6.8 million in 1997 from $6.2 million
in 1996.  The  increase  in  absolute  dollars  was  primarily  caused by salary
inflation plus increased headcount to provide greater focus on management of the
two major  product  groupings,  energy and  electronics  products and to broaden
selling coverage in Europe and South America.

Net  interest  income  increased  in 1997  compared to 1996 due to an  increased
amount of money invested and to  capitalization  of interest  expense related to
the construction in progress of the new manufacturing facility in Tempe.

As a result of the factors  discussed above, the Company reported pre-tax income
of $1.7 million for the first nine months of 1997, compared to pre-tax income of
$1.9 million for the similar period in 1996.


Three Months Ended September 28, 1997 and September 29, 1996

Net revenues increased to $12.1 million for the third quarter of 1997,  compared
to $10.0 million for the similar  period of 1996. The increase was due primarily
to a $1.9 million  increase in sales of  anti-reflective  film and a $.3 million
increase in net sales of electronics products other than  anti-reflective  film,
and partly offset by a $.1 million decrease in net sales of energy  conservation
products,

Cost of sales for the third quarter of 1997, excluding start up costs of the new
manufacturing  facility,  was 69% of net sales  compared  to 67% for the similar
period of 1996. This percentage increase was primarily attributable to unplanned
maintenance downtime during the third quarter of 1997 on two of



                                       10

<PAGE>

the Company's production machines, and cost to scale up production of automotive
OEM products for new customers in Europe.  Additional costs in the third quarter
of 1997 for start up of the new  manufacturing  facility were  approximately $.5
million or 4% of net revenues.

Research and development  expenses,  as a percent of net sales,  were 7% for the
third  quarter  of 1997,  compared  to 7% for the  similar  period in 1996.  The
absolute  dollar  increases  in 1997 was  primarily  attributable  to higher new
product development.

Selling,  general  and  administrative  expense,  as a  percent  of  net  sales,
decreased to 19% in the third quarter of 1997,  from 20% for the similar  period
in 1996. The percentage decrease was due to increased net revenues. The absolute
dollar increase from $2.0 million in 1996 to $2.3 million in 1997, was primarily
caused by salary inflation plus increased  headcount to provide greater focus on
management of the two major product groupings,  energy and electronics  products
and to broaden selling coverage in Europe and South America.

As a result of the factors  discussed above, the Company reported pre-tax income
of $.2 million for the third quarter of 1997,  compared to pre-tax income of $.6
million for the similar period in 1996.


Liquidity and Capital Resources

At September  28, 1997,  the  Company's  net working  capital was $19.6  million
compared  with $15.8  million at December  31, 1996.  On December 16, 1996,  the
Company borrowed $5 million from an institutional  lender for partial  financing
of the new  manufacturing  facility  in Tempe,  Arizona.  On April 9, 1997,  the
Company signed an agreement with Teijin Limited of Japan  (Teijin),  a major raw
material  supplier of the Company,  which included  arrangements  for additional
financing for the new  manufacturing  facility and for related potential working
capital growth. Teijin purchased 667,000 shares of the Company's common stock at
a price of $7.50 per share,  and  guaranteed  a loan  through  Sanwa Bank for an
additional $10 million. Teijin also received warrants to purchase 158,000 shares
of common  stock at a price of $9.00 per share at any time within three years of
the date of the agreement.  The stock purchase  transaction of  approximately $5
million was  completed on April 28, 1997.  In addition,  a loan  agreement  with
Sanwa Bank was  signed on May 2, 1997,  and the  Company  received  the first $5
million of funding on May 6, 1997.  The remaining $5 million of loan funding was
received on November 6, 1997. The new manufacturing facility is currently in the
start  up  process  and  will  be  dedicated  initially  to  the  production  of
anti-reflective  film product to fulfill the supply  requirements  of the supply
agreement  with  Sony.  Prior  to the  borrowing  required  to  finance  the new
facility,  the Company had financed itself through cash flow from operations and
its existing cash balances.

From December 31, 1996, to September 28, 1997,  cash and short-term  investments
increased by $.7 million.  Major increases were derived primarily from financing
activities, as stated above, totaling $9.5 million, net of debt repayments,  net
income plus depreciation and amortization of $3.5 million and increased accounts
payable and accrued liabilities by $2.1 million. Major uses of cash were capital
expenditures  of $9.3 million,  including $7.7 million on the new  manufacturing
facility  mentioned  above,  increased  accounts  receivable by $2.9 million and
increased  inventories  by $2.1  million.  The increase in accounts  payable and
accrued liabilities was primarily due to



                                       11

<PAGE>

timing of payments,  including  capital  payments and raw  materials for the new
manufacturing  facility.  The  increase  in  accounts  receivable  is  primarily
attributable to the increase in shipments  billed in September 1997,  which were
higher by $1.6 million  compared to December  1996,  and to  increased  past due
amounts by $.8 million.  The increase in inventories was mostly due to timing of
receipts,  with $1.1 million of raw materials  received late in the period,  and
due in part to inventories needed for the new manufacturing facility.

Additions to property and equipment were  approximately  $3.2 million during the
third quarter of 1997, including $2.7 million on capital plant and equipment for
the new  manufacturing  facility  mentioned above. This brings the total capital
investment to date on the new manufacturing  facility to $10.1 million,  and the
Company  currently has additional  commitments for expenditures of approximately
$2 million during 1997 on this project, which when completed is expected to cost
a total of  approximately  $12.0 million,  excluding any  additional  production
machinery  yet to be  ordered.  The Company  had  originally  planned to order a
second production machine for the new facility for delivery in mid 1997, but has
delayed  that  decision  pending  further  study of the need and  timing of this
capacity.  The Company  anticipates total capital  expenditures of approximately
$2.0 million during 1997 for general replacements and discretionary improvements
of current facilities in Palo Alto, California.

At  September  28,  1997,  the Company had $8.1  million of cash and  short-term
investments  and a $6  million  revolving  line of  credit,  which is subject to
certain financial covenants and available borrowing base, which at September 28,
1997 did not restrict the amount available to the Company. The revolving line of
credit  expires June 5, 1998,  but may be extended for additional one year terms
with the bank's  approval.  As of September  28, 1997,  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 1997.

Debt and equity  financing  concluded in December  1996 and during April and May
1997,  mentioned  above,  are  expected to be  adequate  to satisfy  capital and
operating requirements of the new manufacturing facility at least through 1997.


                                       12


<PAGE>




                            PART II OTHER INFORMATION


Item 1 Legal Proceedings and Other Matters

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

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


Item 2 Changes in Securities
       Not applicable


Item 3 Defaults upon Senior Securities
       Not applicable


Item 4 Submission of Matters to a Vote of stockholders
       No  matters  were  submitted  to a vote of  security  holders  during the
       quarter ended September 28, 1997.


Item 5 Other Information
       Not applicable


Item 6 Exhibits and Reports on Form 8-K

       (a) Exhibits - None

       (b) Reports of Form 8-K - None



                                       13
<PAGE>

                                   SIGNATURES


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


Dated:  November 10, 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



                                       14