<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 October 1, 1995

/_/  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 1, 1995 there were 5,913,581 shares of the Registrant's Common
Stock outstanding.

This report, including all attachments, contains 11 pages.
<PAGE>
 
                          SOUTHWALL TECHNOLOGIES INC.

                                     INDEX
 

<TABLE> 
<CAPTION>  
                                                                     Page Number
                                                                     -----------

                         PART 1  FINANCIAL INFORMATION
<S>        <C>                                                       <C> 
Item 1     Financial Statements: (unaudited)

           Consolidated Balance Sheet - October 1, 1995
           and December 31, 1994..........................................3

           Consolidated Statement of Operations -
           three month and nine month periods ended
           October 1, 1995 and October 2, 1994 ...........................4

           Consolidated Statement of Cash Flows -
           nine months ended October 1, 1995
           and October 2, 1994............................................5

           Consolidated Statement of Stockholders' Equity -
           nine months ended October 1,1995...............................6

           Notes to Consolidated Financial Statements.....................7
                                           
Item 2     Management's Discussion and Analysis
           of Financial Condition and Results of Operations...............7
<CAPTION>
                          PART II  OTHER INFORMATION
<S>        <C>                                                           <C> 
Item 1     Legal Proceedings.............................................10
                                                                       
Item 2     Changes in Securities.........................................10
                                                                       
Item 3     Defaults Upon Senior Securities...............................10
                                                                       
Item 4     Submission of Matters to a Vote of Stockholders...............10
                                                                       
Item 5     Other Information.............................................10
                                                                       
Item 6     Exhibits and Reports on Form 8-K..............................10
                                                                       
           Signatures....................................................11
</TABLE> 

                                       2
<PAGE>
 
                         PART 1 FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                             October 1, 1995   December 31, 1994
                                             ----------------  -----------------
<S>                                          <C>               <C>
                                                (Unaudited)
ASSETS
 
Current assets:
   Cash and cash equivalents                       $ 1,303          $ 1,144
   Short-term investments                            2,132            4,051
   Accounts receivable, net of allowance                          
    for doubtful accounts of $528 and $528           6,133            3,720
   Inventories                                       6,015            3,907
   Other current assets                                993              717
                                                    ------           ------
   Total current assets                             16,576           13,539
                                                               
Property and equipment, net                         15,447           15,994
Other assets                                         1,902            1,839
                                                    ------           ------
                                                               
   Total Assets                                    $33,925          $31,372
                                                    ======           ======
                                                               
LIABILITIES AND STOCKHOLDERS' EQUITY                           
                                                               
Current liabilities:                                           
   Accounts payable                                 $3,643           $2,419
   Accrued compensation                              1,601            1,293
   Other accrued liabilities                         1,916            1,643
   Current portion of long-term debt                   100               82
                                                    ------           ------
                                                               
   Total current liabilities                         7,260            5,437
                                                               
Long-term debt                                       2,898            2,650
Deferred income taxes                                  297              297
                                                    ------           ------
   Total liabilities                                10,455            8,384
                                                    ------           ------
                                                               
                                                               
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                   47,205           47,273
   Accumulated deficit                             (19,692)         (19,972)
   Less cost of treasury stock of 1,003                           
    and 1,070                                      ( 4,050)         ( 4,320)
                                                    ------           ------
   Total stockholders' equity                       23,470           22,988
                                                    ------           ------
   Total Liabilities and                                          
    Stockholders' Equity                           $33,925          $31,372
                                                    ======           ======
</TABLE>



                See accompanying notes to 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
                                ------------------     -----------------
                                  OCT. 1,  OCT. 2,     OCT. 1,    OCT.2,
                                   1995     1994        1995       1994
                                   ----     ----        ----       ----
<S>                               <C>      <C>        <C>        <C>
Net product sales                 $9,315   $6,151     $24,160    $15,657
License revenues                      96       78         223        356
                                   -----    -----      ------     ------
Net Revenues                       9,411    6,229      24,383     16,013
                                                              
Cost and expenses:                                            
  Cost of product sales            6,848    4,768      17,043     11,716
  Research and development           476      634       1,637      1,660
  Selling, general and                                        
      administrative               1,720    1,473       5,332      3,958
                                   -----    -----       -----     ------
                                                              
  Total costs and expenses         9,044    6,875      24,012     17,334
                                   -----    -----      ------     ------
                                                              
Income (loss) from operations        367     (646)        371     (1,321)
                                                              
Interest income (expense), net       (22)      36         (91)       156
                                  ------     ----      ------    -------
                                                              
Income (loss) before income taxes    345    ( 610)        280     (1,165)
                                                              
Provision for income taxes             -        -           -          1
                                   ------   -----       -----      -----
                                                              
Net income (loss)                 $  345   $( 610)    $   280   $ (1,166)
                                   =====    =====      ======     ======
                                                              
Net income (loss) per share       $  .05   $( .11)    $   .04   $ (  .20)
                                   =====    =====      ======     ======
                                                      
Weighted average shares                               
 of common stock and common                           
 stock equivalents                 6,341    5,785       6,279     5,794
                                   =====    =====       =====     =====
</TABLE>



                See accompanying notes to financial statements.

                                       4
<PAGE>
 
                          SOUTHWALL TECHNOLOGIES INC.
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                (in thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                   Nine Months Ended
                                                                   -----------------
                                                           October 1, 1995       October 2, 1994
                                                           ---------------       ---------------
<S>                                                        <C>                   <C>
Cash flows from operating activities:                                      
   Net income (loss)                                               280                $(1,166)
   Adjustments to reconcile net income to                                           
     net cash provided by (used in) operating                                         
     activities:                                                                    
     Depreciation and amortization                               1,597                  1,548
     Decrease (increase) in accounts receivable                 (2,413)                (1,599)
     Decrease (increase) in inventories                         (2,108)                  (173)
     Decrease (increase) in other current assets                  (276)                   (25)
     (Decrease) increase in accounts payable                                        
        and accrued liabilities                                  1,915                  1,017
                                                                 -----                  -----
                                                                                 
Cash provided by (used in) operating activities                 (1,005)                (  398)
                                                                 -----                  -----              

Cash flows from investing activities:                                            
   Decrease (increase) in short-term investments                 1,919                  1,530
   Expenditures for property and equipment                                        
      and other assets                                          (1,113)                (  800)
                                                                 -----                  -----              

Net cash provided by (used in) investing activities                806                    730
                                                                 -----                  -----

Cash flows from financing activities:                                            
   Increase (decrease) in long-term debt                           266                  ( 128)
   Proceeds from issuance of treasury stock                         92                      -
   Purchase of treasury stock, net                                   -                  (  74)
                                                               -------                   ----

Net cash provided by (used in)                                                   
   financing activities                                            358                  ( 202)
                                                               -------                   ----

Net increase (decrease) in cash and                                            
   cash equivalents                                                159                    130
Cash and cash equivalents, end of period                         1,144                  1,340
                                                               -------                  -----
                                                                                   
Cash and cash equivalents, end of period                       $ 1,303                 $1,470
                                                               =======                  =====
Supplemental non-cash financing activities:                                      
   Payment of interest with treasury stock                     $   110                 $    -
                                                               =======                  =====
</TABLE>                                                                       

                                        
                                        
 



                See accompanying notes to financial statements.

                                       5
<PAGE>
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                       Nine Months Ended October 1, 1995
                                 (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, 1994      6,917          $7           $47,273       $(19,972)      $(4,320)          $22,988
                                                                                                   
Exercise of option                                              (37)                         108                71
                                                                                                   
Employee Stock Purchase Plan                                    (16)                          37                21
                                                                                                        
Monsanto Interest                                               (15)                         125               110
                                                                                                        
Net Income                                                                     280                             280
                              ---------    --------        ---------       -------       --------           ------
                                                                                                   
Balance: October 1, 1995        6,917         $ 7            $47,205      $(19,692)      $(4,050)          $23,470
                                =====          ===            ======       =======        ======            ======
</TABLE>                                                                
                                                                        
                                                                      
                See accompanying notes to 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 condensed 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 condensed financial
statements be read in conjunction with the financial statements contained in the
Company's Form 10-K for the year ended December 31, 1994. 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 October 1, 1995 and December 31, 1994,
consisted of the following:

<TABLE>
<CAPTION>
                           October 1, 1995    December 31, 1994
                           ---------------    -----------------
     <S>                   <C>                <C>
     Raw materials                2,540               $1,299
     Work-in-process                998                  440
     Finished goods               2,477                2,168
                                  -----                -----
     TOTAL                       $6,015               $3,907
                                  =====                =====
</TABLE>

Item 2 -  Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations (in thousands)
---------------------               


Nine Months Ended October 1, 1995 and  October 1, 1994
------------------------------------------------------

Effective September 1, 1994, the Company commenced leasing all the assets
formerly owned by Safety Glass, Inc., dba Armour Worldwide Glass, located in
Southern California, under a five year operating lease for $40 per month. A
wholly-owned subsidiary, Southwall Worldwide Glass Inc. ("SWGI"), was created to
operate the facility and to manufacture the Company's proprietary California
Series (TM) solar control laminated glass, as well as bullet resistant,
security, custom and standard laminated glass products.

Effective October 31, 1994, the Company acquired Sunflex L.P. ("Sunflex") for
$500, which will only be paid from Sunflex's operating income, if any, over the
next four years.  Sunflex assembles and markets aftermarket mesh, glass and film
anti-reflective filters primarily for personal computer monitors.

The consolidated financial statements for 1995 include the results of operations
of SWGI and Sunflex.

The Company's net product sales were $24.2 million for the first nine months of
1995 compared to $15.7 million for the similar period of 1994.  Of this
increase, which was primarily volume related, approximately $2.2 million was
from the new operations discussed above.  In addition, net product sales of
energy conservation products increased by approximately $4.9 million, and net

                                       7
<PAGE>
 
product sales of electronics products, including sales of the Company's new
anti-reflective film product for computer monitors, increased by approximately
$1.8 million, offsetting a decrease of approximately $.4 million in aerospace
and other product sales.

Cost of product sales for the first nine months of 1995 was 71% of product sales
compared to 75% for the same period of 1994.  The percentage decrease was
primarily due to increased sales volume and the related improvement in
manufacturing efficiencies.

Research and development expenses, as a percent of product sales, were 7% for
the nine months of 1995, compared to 11% for the same period in 1994.  The
decrease is primarily attributable to an increased volume of product sales.

Selling, general and administrative expenses, as a percent of net product sales,
decreased to 22% in the first nine months of 1995, from 25% for the similar
period in 1994 due to increased sales volume.  The increase from $4.0 million in
1994 to $5.3 million in 1995, is attributable to the new operations discussed
above, and increased sales and marketing expenses associated with the
introduction of new products and expansion into the Pacific Rim.

Interest income, net decreased in 1995 compared to 1994 due primarily to a
decrease in monies invested.

As a result of the factors discussed above, the Company reported a pre-tax
income of $.3 million for the first nine months of 1995, compared to a pre-tax
loss of $(1.2) for the similar period in 1994.

The Company believes that it must continue to increase revenues to achieve
sustained profitability.  Although the Company is seeking to expand existing
applications, to develop new applications and to expand international marketing
and sales efforts, there can be no assurance that the Company will be able to
remain profitable.


Three Months Ended October 1,1995 and October 2, 1994
-----------------------------------------------------

The Company's net product sales were $9.3 million for the third quarter of 1995
compared to $6.2 million of net product sales for the same period of 1994.  Of
this increase, which was primarily volume related, approximately $.7 million was
from the new operations discussed above.  In addition, net product sales of
energy conservation products increased by approximately $1.7 million, and net
product sales of electronics products, including sales of the Company's new
anti-reflective film product for computer monitors, increased by approximately
$1.1 million, offsetting a decrease of approximately $.3 million in aerospace
and other product sales.

Cost of product sales for the third quarter of 1995 was 74% of product sales
compared to 78% for the same period of 1994.  The percentage decrease was
primarily due to increased sales volume.  However, the Company's new anti-
reflective film product for use on CRTs for computer applications is early in
its commercial cycle and start-up costs have adversely affected cost of sales
and profitability.

Research and development expenses, as a percent of product sales, were 5% for
the third quarter of 1995, compared to 10% for the same period in 1994.  The
percentage decrease was primarily attributable to the higher product sales.

                                       8
<PAGE>
 
Selling, general and administrative expense, as a percent of net product sales
decreased to 18% in the third quarter of 1995, from 24% for the similar period
in 1994 due to increased sales volume.  The increase from $1.5 million to $1.7
million in 1995, is attributable to the new operations discussed above, and
increased sales and marketing expenses associated with the introduction of new
products and expansion into the Pacific Rim.

Interest income, net decreased in 1995 compared to 1994 due primarily to a
decrease in monies invested.

As a result of the factors discussed above, the Company reported net income of
$.3 million for the third quarter of 1995, compared to a net loss of $.6 million
for the similar period in 1994.

The Company believes that it must continue to increase revenues to achieve
sustained profitability.  Although the Company is seeking to expand existing
applications, to develop new applications and to expand international marketing
and sales efforts, there can be no assurance that the Company will be able to
increase revenues and sustain profitability.

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

At October 1, 1995, the Company's net working capital was $9.3 million compared
to $8.1 million at December 31, 1994.  For the past 4 years the Company has
financed its operations through a combination of equity and debt instruments and
cash flow from operations.

From December 31, 1994, to October 1, 1995, cash and short-term investments
decreased by $1.8 million, while accounts receivable increased by $2.4 million
and inventories increased by $2.1 million.  The increase in accounts receivable
is primarily attributable to the increase in net revenues from $5.9 million in
the fourth quarter of 1994 to $9.4 million in the third quarter of 1995, most of
which occurred during the later portion of the quarter.  The increase in
inventories is primarily due to the fact that inventories at December 31, 1994,
were at relatively low levels as a result of a shut down of the Company's
production equipment during part of the fourth quarter of 1994 and a planned
increase in production during 1995.  Further, additions to property and
equipment were approximately $1.1 million during the first nine months of 1995.

The Company anticipates total capital expenditures of approximately $1.5 million
during 1995.

At October 1, 1995, the Company has $3.4 million of cash and short-term
investments and a $5 million line of credit, which is subject to certain
financial covenants.  As of October 1, 1995, 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 at least through 1995.  Failure to generate sufficient cash flow
from operations or external sources would have a material adverse effect on the
Company.

                                       9
<PAGE>
 
                           PART II  OTHER INFORMATION


Item 1    Legal Proceedings

          In January 1992, the Company filed a patent infringement suit against
Cardinal IG Company, and one of its customers, in the U.S. Federal District
Court of San Francisco, California. The suit alleges that Cardinal's LoE glass
product violates the Company's U.S. Patent #4,799,745, which covers the
structure of particular optical coatings for glass products, including the
Company's Heat Mirror XIR solar reflecting film.

          In April 1993, Cardinal filed a motion for summary judgment alleging
that the LoE coatings do not infringe the Company's patent and that the patent
is invalid. On March 2, 1994, the District Court judge entered an order denying
Cardinal's motion that the Company's patent was invalid, but granting its motion
with respect to noninfringement. The Company filed an appeal to the
noninfringement decision with the Court of Appeals for the Federal Circuit. In
May 1995, the Court of Appeals for the Federal Circuit affirmed the Federal
District Court decision. The Company's subsequent petition for a rehearing was
denied. The Company has filed an appeal to the Supreme Court of the United
States.

The Company is not a party to any other material litigation.


Item 2     Changes in Securities
           Not applicable
         
         
Item 3     Defaults upon Senior Securities
           Not applicable
         
         
Item 4     Submission to Matters to a Vote of Security Holders
           No matters were submitted to a vote of security holders during the
           quarter ended October 1, 1995.
         
         
Item 5     Other Information
           Not applicable
         
         
Item 6     Exhibits and Reports on Form 8-K
         
       (a) Exhibits - None
         
       (b) Reports on Form 8-K -October 31, 1994, filed August 15, 1995

                                       10
<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 13, 1995    



                                  By:/s/Martin M. Schwartz
                                     ---------------------
                             
                             
                             
                             
                                  Martin M. Schwartz
                                  President and Chief Executive Officer
                             
                             
                             
                             
                                  By:/s/Alfred V. Larrenaga
                                     ----------------------
                             
                                  Alfred V. Larrenaga
                                  Senior Vice President and
                                  Chief Financial Officer

                                       11