UNITED STATES 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

                For the Quarterly Period Ended September 30, 2000

                                       OR
   |_|         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                For the Transition Period from __________ to _________

                        Commission File Number: 000-6377

                         DREXLER TECHNOLOGY CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

             Delaware                                         77-0176309
-------------------------------                      ---------------------------
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification No.)

1077 Independence Avenue, Mountain View, CA                   94043-1601
-------------------------------------------          ---------------------------
 (Address of principal executive offices)                     (Zip Code)

                                 (650) 969-7277
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

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. |X| Yes |_| No

         Number of outstanding shares of common stock, $.01 par value,
                         at November 1, 2000: 9,911,051
<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                 DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
             CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

      The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures which are made are adequate to make the information presented not
misleading. Further, the condensed consolidated financial statements reflect, in
the opinion of management, all adjustments (which included only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations as of and for the periods indicated.

      It is suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and the notes thereto for the
year ended March 31, 2000, included in the Company's Form 10-K Annual Report.

      The results of operations for the six months ended September 30, 2000 are
not necessarily indicative of results to be expected for the entire year ending
March 31, 2001.

      Fiscal Period: For purposes of presentation, the Company has indicated its
accounting period as ending on March 31 and its interim quarterly periods as
ending on the corresponding month end. The Company, in fact, operates and
reports quarterly periods ending on the Friday closest to month end. The 13-week
second quarter of fiscal 2000 ended on October 1, 1999, and the 13-week second
quarter of fiscal 2001 ended on September 29, 2000.

      Note 1 - Cash, Cash Equivalents, and Short-term Investments: The Company
considers all highly liquid investments, consisting primarily of commercial
paper with original maturities of three months or less, to be cash equivalents.
All investments with original maturities of more than three months but less than
one year, are classified as short-term investments. During the fiscal 2000
second quarter ended September 30, 1999, the Company began investing in
short-term investments, consisting primarily of commercial paper. Management
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
As of September 30, 2000, the Company had $8,773,000 classified as short-term
investments, and all marketable securities have been classified as
held-to-maturity and consisted of commercial paper.

      Note 2 - Inventories: Inventories are stated at the lower of cost or
market, with cost determined on a first-in, first-out basis and market based on
the lower of replacement cost or estimated realizable value. The components of
inventories are (in thousands):

                                                    March 31,    September 30,
                                                      2000           2000
                                                      ----           ----
      Raw materials ........................         $2,851         $2,209
      Work-in-process ......................            658            803
      Finished goods .......................            745            823
      Systems and components
         held for resale ...................            165            106
                                                     ------         ------
                                                     $4,419         $3,941
                                                     ======         ======

      Recent Accounting Pronouncements. In December 1999, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements" and amended it in March and June
2000 with respect to the effective dates. SAB 101 provides guidance on applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The Company believes that its current revenue recognition
policies comply with SAB 101.


                                       -2-
<PAGE>

      In March 2000, the Financial Accounting Standards Board (FASB) issued
Financial Standards Board Interpretation (FIN) No. 44, "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion No.
25." FIN 44 addresses the application of APB 25 to clarify, among other issues,
(a) the definition of employee for purposes of applying APB 25, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occur after either December
15, 1998, or January 12, 2000. To the extent FIN 44 covers events occurring
during the period after December 15, 1998, or January 12, 2000, but before the
effective date of July 1, 2000, the effects of applying the interpretation will
be recognized on a prospective basis from July 1, 2000. The Company adopted FIN
44 in July 2000 and this adoption did not have a material effect on the
financial position or results of operations.

      Earnings Per Share: The Company computes earnings per share in accordance
with SFAS 128, "Earnings Per Share." SFAS 128 requires companies to compute net
income per share under two different methods, basic and diluted, and present per
share data for all periods in which a statement of income is presented. Basic
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding. Diluted earnings per share is
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding. Common stock equivalents
consist of stock options using the treasury stock method. The reconciliation of
the numerators and denominators of the basic and diluted earnings per share
computation for the three months and six months ended September 30, 1999 and
September 30, 2000 is shown in the following table (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                 Three Months Ended  Six Months Ended
                                                    September 30,      September 30,
                                                   1999      2000      1999      2000
                                                   ----      ----      ----      ----
<S>                                              <C>       <C>       <C>       <C>
Net income ...................................   $ 1,387   $ 1,654   $ 2,232   $ 3,094
                                                 =======   =======   =======   =======

Basic earnings per share:
    Weighted average common shares outstanding     9,799     9,904     9,797     9,888
                                                 -------   -------   -------   -------

Basic earnings per share .....................   $   .14   $   .17   $   .23   $   .31
                                                 =======   =======   =======   =======

Diluted earnings per share:
    Weighted average common shares outstanding     9,799     9,904     9,797     9,888
    Weighted average common shares from
    stock option grants ......................        57       636        78       506
                                                 -------   -------   -------   -------

    Weighted average common shares and common
    stock equivalents outstanding ............     9,856    10,540     9,875    10,394
                                                 -------   -------   -------   -------

Diluted earnings per share ...................   $   .14   $   .16   $   .23   $   .30
                                                 =======   =======   =======   =======
</TABLE>

      Because they would be antidilutive, having an exercise price greater than
the average market value for the periods, stock options representing 1,469,666
shares are excluded from the calculation of diluted earnings per share for the
three months ended September 30, 1999, and stock options representing 303,500
shares are excluded from the calculation of diluted earnings per share for the
three months ended September 30, 2000. For the same reason, stock options
representing 1,444,666 shares are excluded from the calculation of diluted
earnings per share for the six months ended September 30, 1999, and stock
options representing 470,300 shares are excluded from the calculation of diluted
earnings per share for the six months ended September 30, 2000.


                                       -3-
<PAGE>

                 DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                             March 31,  September 30,
                                                               2000        2000
                                                               ----        ----
                                                                        (Unaudited)
<S>                                                          <C>         <C>
ASSETS

Current assets:
    Cash and cash equivalents ............................   $  2,818    $  3,118
    Short-term investments ...............................      5,403       8,773
    Accounts receivable ..................................      1,435       1,317
    Note receivable ......................................        150         150
    Inventories ..........................................      4,419       3,941
    Other current assets .................................        264         312
                                                             --------    --------
       Total current assets ..............................     14,489      17,611
                                                             --------    --------

Property and equipment, at cost ..........................     17,122      18,264
    Less--accumulated depreciation and amortization ......    (12,398)    (12,907)
                                                             --------    --------
       Property and equipment, net .......................      4,724       5,357

Patents and other intangibles, net .......................      2,124       2,135
Deferred tax asset, net ..................................      2,643       3,992
                                                             --------    --------

            Total assets .................................   $ 23,980    $ 29,095
                                                             ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable .....................................   $    951    $  1,078
    Accrued payroll costs ................................        367         421
    Deferred revenue .....................................        397       1,000
    Advance payments from customers ......................      1,118       1,532
    Other accrued liabilities ............................        156         213
                                                             --------    --------
       Total current liabilities .........................      2,989       4,244
                                                             --------    --------

Stockholders' equity:
    Preferred stock, $.01 par value:
       Authorized--2,000,000 shares
       Outstanding--none .................................         --          --
    Common stock, $.01 par value:
       Authorized--30,000,000 shares
       Outstanding--9,864,103 shares at March 31, 2000 and
            9,941,051 shares at September 30, 2000 .......         99          99
    Additional paid-in capital ...........................     37,168      37,934
    Accumulated deficit ..................................    (16,276)    (13,182)
                                                             --------    --------
       Total stockholders' equity ........................     20,991      24,851
                                                             --------    --------

            Total liabilities and stockholders' equity ...   $ 23,980    $ 29,095
                                                             ========    ========
</TABLE>


                                       -4-
<PAGE>

                 DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                   Three Months Ended       Six Months Ended
                                                                      September 30,           September 30,
                                                                    1999        2000        1999        2000
                                                                    ----        ----        ----        ----
<S>                                                               <C>         <C>         <C>         <C>
Revenues ......................................................   $  4,252    $  5,531    $  7,993    $ 10,702
                                                                  --------    --------    --------    --------

Costs and expenses:
    Cost of sales .............................................      2,357       2,872       4,520       5,886
    Selling, general, and administrative expenses .............        989       1,010       1,993       2,038
    Research and engineering expenses .........................        269         606         483       1,035
                                                                  --------    --------    --------    --------
       Total costs and expenses ...............................      3,615       4,488       6,996       8,959
                                                                  --------    --------    --------    --------

          Operating income ....................................        637       1,043         997       1,743
                                                                  --------    --------    --------    --------

Other income and expense:
    Interest income ...........................................         93         150         180         262
    Interest expense ..........................................         --          --          (1)         --
                                                                  --------    --------    --------    --------
       Total other income, net ................................         93         150         179         262
                                                                  --------    --------    --------    --------

          Income before income taxes ..........................        730       1,193       1,176       2,005

Income tax benefit ............................................       (657)       (461)     (1,056)     (1,089)
                                                                  --------    --------    --------    --------

          Net income ..........................................   $  1,387    $  1,654    $  2,232    $  3,094
                                                                  ========    ========    ========    ========

Net income per share:
          Basic ...............................................   $    .14    $    .17    $    .23    $    .31
                                                                  ========    ========    ========    ========
          Diluted .............................................   $    .14    $    .16    $    .23    $    .30
                                                                  ========    ========    ========    ========

Weighted average number of common and common equivalent shares:
          Basic ...............................................      9,799       9,904       9,797       9,888
          Diluted .............................................      9,856      10,540       9,875      10,394
</TABLE>


                                       -5-
<PAGE>

                 DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                         Six Months Ended
                                                                                           September 30,
                                                                                         1999        2000
                                                                                         ----        ----
<S>                                                                                    <C>         <C>
Cash flows from operating activities:
   Net income ......................................................................   $  2,232    $  3,094
   Adjustments to reconcile net income to net cash provided by operating activities:
       Depreciation and amortization ...............................................        533         807
       Provision for doubtful accounts receivable ..................................         24         (17)
       Provision for product return reserve ........................................         --         200
       Increase in deferred tax asset ..............................................     (1,077)     (1,349)
       Compensation on stock plan activity .........................................         25          40
       Tax benefit for stock option exercises ......................................         --          46

   Changes in operating assets and liabilities:
       Increase in accounts receivable .............................................        (28)        (65)
       (Increase) decrease in inventories ..........................................     (1,546)        478
       (Increase) decrease in other current assets .................................         56         (48)
       Increase (decrease) in accounts payable and accrued expenses ................       (125)        238
       Increase in deferred revenue and advance payments from customers ............        127       1,017
                                                                                       --------    --------

            Net cash provided by operating activities ..............................        221       4,441
                                                                                       --------    --------

Cash flows from investing activities:
   Purchases of property and equipment .............................................     (1,134)     (1,151)
   Investment in patents and other intangibles .....................................       (207)       (301)
   Investment in commercial paper (Note 1) .........................................     (1,959)    (12,351)
   Maturities of commercial paper (Note 1) .........................................         --       8,982
                                                                                       --------    --------

            Net cash used for investing activities .................................     (3,300)     (4,821)
                                                                                       --------    --------

Cash flows from financing activities:
   Proceeds from sale of common stock through stock plans ..........................        110         720
   Cash used to purchase common stock through an open market
       repurchase program ..........................................................         --         (40)
                                                                                       --------    --------

            Net cash provided by financing activities ..............................        110         680
                                                                                       --------    --------

            Net decrease in cash and cash equivalents ..............................     (2,969)        300

Cash and cash equivalents:
   Beginning of period .............................................................      8,066       2,818
                                                                                       --------    --------
   End of period (Note 1) ..........................................................   $  5,097    $  3,118
                                                                                       ========    ========
</TABLE>


                                       -6-
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS--FISCAL 2001 SECOND QUARTER AND FIRST SIX MONTHS COMPARED
WITH FISCAL 2000 SECOND QUARTER AND FIRST SIX MONTHS

Revenues

      For the fiscal 2001 second quarter ended September 30, 2000, the Company's
total revenues were $5,531,000 compared with $4,252,000 for last year's second
quarter. Total revenues for the current six-month period were $10,702,000
compared with $7,993,000 for the same period last year.

      Product Revenues. Sales of LaserCard(R) optical memory cards and related
products were $10,340,000 for the first six months of fiscal 2001 versus
$7,975,000 for the comparable period last year. The Company sold approximately
2,395,000 LaserCard optical memory cards for the fiscal 2001 first six months
compared with approximately 2,070,000 for last year's first six months.

      Applications for the Company's LaserCard products include: an electronic
commerce pay-per-use system combined with a medical data application in the
United States; various programs in Europe and Asia, including medical-record
cards, a building construction permit, and multi-function card applications; and
U.S. government-related programs, including the U.S. Department of Defense cargo
shipment "Automated Manifest" card, the U.S. Immigration and Naturalization
Service (INS) Permanent Resident Card ("Green Card"), and the U.S. Department of
State (DoS) border crossing card ("Laser Visa"). Optical memory card programs
that appear to be emerging include an electronic national identification
card/social services card in Italy, a motor vehicle registration card in India,
and possibly in the next fiscal year, an immigration card in Canada.

      In addition to using its own marketing staff, the Company utilizes
value-added reseller (VAR) companies and licensee companies for the development
of commercial markets and applications for LaserCard products. Product sales to
VARs and licensees include the Company's optical memory cards, the Company's
system software, optical card read/write drives, and add-on peripherals made by
other companies (such as equipment for adding a digitized photo, fingerprint,
hand template, or signature to the cards). The VARs/licensees may add
application software, personal computers (PCs), and other peripherals, and then
resell these products integrated into data systems.

      In order to upgrade its customer base, the Company is continuing its
efforts to recruit new VARs/licensees and eliminate nonproductive VARs. The
Company provides customer technical support and system software to assist VARs
and licensees.

      Optical card-related software is an important factor in developing the
commercial markets for optical memory cards. The Company's system software
consists of optical card interface software/device drivers, file systems,
software development tools, demonstration software, and an application software
program. To date, the Company's software development has been completed
concurrent with the establishment of technological feasibility and, accordingly,
all software development costs have been charged to research and development
expense in the accompanying statements of income.

      The Company's VARs and/or their customers develop the application software
for specific end-user applications. Several VARs have written optical card
software programs for applications such as automobile warranty and maintenance
records, cargo manifesting, digital optical key systems, admissions/ID, data
logging systems, and various medical-related applications such as health history
cards. The Company sells an application software program that it completed
during fiscal 2000 in coordination with an existing commercial software company,
for LaserCard personalization (printing and encoding of personal data).

      Optical memory cards are used in conjunction with a card read/write drive,
produced by the Company, that connects to a personal computer. The read/write
drive is integrated as a PC logical drive and has drive-letter access in the
same manner as floppy disk drives. The price, performance, and availability of
read/write drives are factors in the


                                       -7-
<PAGE>

commercialization of optical cards. The Company sells read/write drives for less
than three thousand dollars per unit, and these units generally include the
Company's interface software/device drivers.

      The Company maintains an inventory of read/write drive parts and finished
drives that it believes are adequate to meet customer demand. However, an
interruption in the supply of read/write drive parts or difficulties encountered
in read/write drive assembly could cause a delay in shipments of drives and
optical memory cards and a possible loss of sales, which would adversely affect
operating results.

      License Fee Revenues. Revenues from license fees were $356,000 for the
first six months of fiscal 2001, consisting of revenue earned on a license that
allows a licensee in Italy to purchase parts kits from the Company and assemble
read/write drives from the parts kits. There were no license revenues in the
first six months of fiscal 2000. The Company does not rely on license fees to
finance operations.

Backlog

      As of September 30, 2000, the backlog for LaserCard optical memory cards
(consisting of firm card orders and releases under card supply contracts) was
approximately $5.4 million. About 47% of this backlog is for U.S. government
orders.

      During the fiscal 2001 first six months, the Company announced that it was
awarded a U. S. government subcontract with an authorized maximum of $81 million
over a period of up to five years. The subcontract was received by the Company
through a LaserCard VAR that is a U.S. government prime contractor, under a
competitively bid, government procurement contract. Under the subcontract, the
Company will supply up to 24 million LaserCard optical memory cards at an
average selling price of about $3.40 per card. The subcontract provides that
each order release to the Company will be for quantities of not less than one
million cards per order. The subcontract provides for an initial one-year
contract period and four additional one-year contract options. Shipments under
this new contract commenced in September 2000.

Margins

      The gross margin on product sales for the first six months of fiscal 2001
was 43% compared with 43% for the prior-year period. Due to higher product
revenues, gross profit on product sales increased by $1,000,000 for the fiscal
2001 first six months compared with the year-earlier period. The gross margin on
sales of read/write drives as currently designed probably will be negligible
through March 31, 2001. However, for the six months ended September 30, 2000,
read/write drive gross profit increased by about $350,000 compared with the same
period last year, due to the efficiency of in-house production and temporarily
higher sales volume, probably due to customers building inventories. Gross
profit on cards increased approximately $645,000 for the six months ended
September 30, 2000, compared with the same period last year, due to higher card
sales volume and an increase in production efficiency as compared with last
year's first six months.

Income and Expenses

      Selling, General, and Administrative Expenses (SG&A). SG&A expenses were
$1,010,000 for the fiscal 2001 second quarter compared with $989,000 for the
second quarter of fiscal 2000. For the fiscal 2001 first six months, SG&A
expenses were $2,038,000 compared with $1,993,000 for the first six months of
fiscal 2000. The Company believes that SG&A expenses for fiscal 2001 will remain
above fiscal 2000 levels, mainly due to increases in patent amortization
expenses and other general increases.

      Research and Engineering Expenses (R&E). Research and engineering expenses
were $606,000 for the second quarter of fiscal 2001 compared with $269,000 for
the year-earlier period. For the fiscal 2001 first six months, R&E expenses were
$1,035,000 compared with $483,000 for the first six months of fiscal 2000. The
increase in R&E spending for the first six months of fiscal 2001 is due to
read/write drive manufacturing engineering and product development. The Company
anticipates that R&E expenses will continue to increase during fiscal 2001,
primarily due to optical card read/write drive development efforts.


                                       -8-
<PAGE>

      Other Income and Expense. Total net other income for the first six months
of fiscal 2001 was $262,000, consisting of interest income. For last year's
first six months, total net other income was $179,000, primarily for interest
income.

      Income Taxes. For the second quarter of fiscal 2001, the Company recorded
an income tax benefit of $461,000 compared with $657,000 for last year's second
quarter. The income tax benefit for the fiscal 2001 second quarter included a
credit of $575,000 due to the change in the federal deferred tax asset
(discussed below), partially offset by $114,000 for state tax expense. The
income tax benefit for last year's second quarter included a credit of $661,000
due to the change in deferred tax asset, partially offset by a $4,000 expense
for alternative minimum taxes payable.

      For the first six months of fiscal 2001, the Company recorded an income
tax benefit of $1,089,000 compared with $1,056,000 for last year's first six
months. The income tax benefit for the fiscal 2001 first six months included a
credit of $1,257,000 due to the change in the federal deferred tax asset
(discussed below), partially offset by $168,000 for state tax expense. The
income tax benefit for last year's first six months included a credit of
$1,077,000 due to the change in deferred tax asset, partially offset by a
$21,000 expense for alternative minimum taxes payable.

      The Company has a valuation allowance which reduces its deferred tax
asset. The Company believes that, more likely than not, at least a portion of
this income tax asset will be realized and, therefore, has reduced the valuation
allowance against it. There are timing differences between when certain items
are included in book income and when the same items are included on income tax
returns. Therefore, tax payments or credits often occur in different periods
than when an income tax expense or benefit is included in the statement of
operations.

LIQUIDITY AND CAPITAL RESOURCES

      As of September 30, 2000, the Company had cash, cash equivalents, and
short-term investments of $11,891,000, a current ratio of 4.1 to 1, and no
long-term debt.

      Net cash provided by operating activities was $4,441,000 for the first six
months of fiscal 2001 compared with $221,000 for last year's first six months.
The $4,220,000 increase in cash generated by operations for the fiscal 2001
first half as compared with last year's first half is due mainly to (a) an
increase in operating income resulting from increased shipments in fiscal 2001
and (b) the $1,350,000 cash invested in read/write drive inventory in last
year's first six months. Maintaining the level of revenues achieved during the
first six months would be sufficient to generate cash from operations after
expenses. Losses would occur if the Company's largest U.S. government programs
were to be delayed, canceled, or not extended and not be replaced by other card
orders or other sources of income.

      The Company has not established a line of credit and has no current plans
to do so. The Company may negotiate a line of credit if and when it becomes
appropriate, although no assurance can be made that such financing would be
available, if needed.

      As a result of the $3,094,000 profit recorded for the first six months of
fiscal 2001, the Company's accumulated deficit decreased to $13,182,000.
Stockholders' equity increased to $24,851,000 due to the aforementioned profit
and the $720,000 in proceeds from the sale of common stock through stock plans
during the first six months of fiscal 2001.

      Net cash used for investing activities was $4,821,000 for the first six
months of fiscal 2001 compared with $3,300,000 for last year's first six months.
For the first six months of fiscal 2001, these amounts include purchases of
property and equipment (discussed below) of $1,151,000, increases in patent
expenses and other intangibles of $301,000, and short-term investment in
commercial paper, net of maturities, of $3,369,000.

      The Company considers all highly liquid investments, consisting primarily
of commercial paper with original maturi ties of three months or less, to be
cash equivalents. All investments with original maturities of more than three
months but less than one year, are classified as short-term investments. During
fiscal 2000, the Company began investing in short-term investments, consisting
primarily of commercial paper. This resulted in $8,773,000 classified as
short-term investments at September 30, 2000 compared with $5,403,000 at March
31, 2000.


                                       -9-
<PAGE>

      For optical memory card production, the Company added capital equipment
and leasehold improvements of approximately $830,000 during the first six months
of fiscal 2001 compared with approximately $580,000 during the first six months
of fiscal 2000. The Company's card production capacity reached approximately 8
million cards per year at September 30, 2000, and probably will reach a capacity
of approximately 11 million cards per year by July 2001, through an additional
investment of about $2.6 million. The Company plans to purchase additional
production equipment in a series of steps as optical memory card orders expand
to justify production capacity increases, to a rate of up to 25 million cards
per year. In addition to investment used for expansion, the Company will make
additional capital expenditures for cost savings, quality improvements, and
other purposes. The Company believes that during the next few years, capital
expenditures will be a minimum of $1.5 million per year for card production
equipment and automatic inspection equipment.

      In connection with read/write drive manufacturing and design, the Company
added capital equipment and leasehold improvements of approximately $299,000
during the first six months of fiscal 2001 compared with $347,000 during the
first six months of fiscal 2000. Additional capital investments will be made
during fiscal 2001.

      Net cash provided by financing activities was $680,000 for the first six
months of fiscal 2001 compared with $110,000 for last year's first six months,
consisting only of equity items. Financing activities consisted of $720,000 in
proceeds on sales of common stock through the Company's stock-option and
stock-purchase plans, partially offset by $40,000 in purchases of common stock
under a repurchase program, discussed below. There were no debt financing
activities in fiscal 2000 or in the fiscal 2001 first six months.

      On July 13, 2000, the Company announced a four month share repurchase
program under which up to 200,000 shares of common stock may be purchased by the
Company from time to time in Nasdaq Stock Market transactions in an aggregate
amount not exceeding $3 million. As of October 31, 2000, the Company had
utilized $574,000 for this purpose.

FORWARD-LOOKING STATEMENTS

      Certain statements made in this report relating to plans, objectives, and
economic performance go beyond historical information and may provide an
indication of future results. To that extent, they are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and each is subject to factors that could cause actual results
to differ from those in the forward-looking statement. The Company's business
plan depends upon the initiation and growth of new programs utilizing the
Company's card products and is subject to adverse economic and technological
developments. There can be no assurances that any new or existing VAR or
licensee company will be successful in its markets or that it will place
follow-on orders with the Company for additional quantities of cards and
systems. There is no guarantee that governments in Italy, India, or Canada will
purchase the Company's products in material quantities. The Company's estimate
of card deliveries to its primary customers depends upon the issuance of
corresponding order releases by such customers, which have the right to withhold
releases, to reduce the quantities released, and to extend delivery dates. There
is no assurance that the Company's read/write drive assembly and design
operations will result in lower cost drives with advanced features. The ability
of the Company to maintain a profitable level of optical memory card sales is
subject to risks and uncertainties, including reliance on U.S. government
business; customer diversification, expansion, and lengthy sales cycles; the
ability to economically produce optical card read/write drives at lower cost and
in greater quantity; sources of supply of component parts and materials for
reader/writer drives and cards; technological change; patent protection;
competition; and the economic configuration and operation of the Company's card
manufacturing facility for increased output levels. Such factors are described
above, in the Company's Report on Form 10-K, and in other documents filed by the
Company from time to time with the Securities and Exchange Commission.

PART II. OTHER INFORMATION

ITEM I. LEGAL PROCEEDINGS

      On July 27, 1998, the Company filed two complaints in the U.S. District
Court of the Northern District of California, each for infringement of two
patents owned by the Company covering digital sound encoded on motion picture
film. One complaint names as defendants Sony Corporation, provider of the SDDS
digital sound system, and numerous producers,


                                      -10-
<PAGE>

distributors, and exhibitors of motion pictures with SDDS soundtracks. The other
complaint names as defendants Dolby Laboratories, Inc., provider of the Dolby
Digital sound system, and numerous producers, distributors, and exhibitors of
motion pictures with Dolby Digital soundtracks. These actions seek compensatory
damages, enhanced damages and attorneys' fees based on wilfulness, and an
injunction against further infringement. Certain defensive counterclaims have
been filed by defendants in response to the complaints. On December 14, 1998, in
the same court, the Company filed substantially identical complaints against
additional producers, distributors, and exhibitors, and substantially identical
counterclaims have been filed. On April 23, 1999, the court stayed these actions
and approved a stipulation to the effect that the parties will be bound by the
decisions in the previously-filed actions on the issues of patent validity and
infringement by the accused sound systems.

      These proceedings have been taken off the trial calendar to facilitate
implementation of settlement agreements.

      The Company does not believe that resolution of these actions, including
the counterclaims, will have a material adverse effect on the financial
condition of the Company. Certain costs relating to these actions are being
capitalized and amortized over the remaining lives of the patents in issue. (See
Notes 2 and 6 to the Consolidated Financial Statements in the Company's Report
on Form 10-K for the 2000 fiscal year ended March 31, 2000.)

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      At the Company's September 22, 2000 Annual Meeting of Stockholders, the
Company's stockholders (i) re-elected the Board of Directors, (ii) approved an
amendment to the Company's Certificate of Incorporation to increase the number
of shares of common stock authorized for issuance from 15 million shares to 30
million shares, (ii) approved an amendment to the Stock Option Plan to increase
the number of shares reserved thereunder by 300,000 shares, and (iii) approved
an amendment to the Employee Stock Purchase Plan to increase the number of
shares reserved thereunder by 100,000 shares.
 .
      Of the 9,886,303 shares of common stock outstanding as of the record date
of July 26, 2000, a total of 9,124,962 shares were voted by proxy, representing
92.3% of the total votes eligible to be cast, constituting a majority and more
than a quorum of the outstanding shares entitled to vote. Votes cast in
connection with the election of directors were: Messrs. Jerome Drexler
(8,671,282 votes for re-election, 453,680 votes withheld), Arthur H. Hausman
(8,702,251 votes for re-election, 422,711 votes withheld), Dan Maydan
(8,696,827 votes for re-election, 428,135 votes withheld), William E. McKenna
(8,698,115 votes for re-election, 426,847 votes withheld), and Walter F. Walker
(8,725,751 votes for re-election, 399,211 votes withheld). On the amendment to
the Company's Certificate of Incorporation, 8,829,808 shares were voted in
favor; and there were 248,548 negative votes, 46,606 abstentions, and no broker
non-votes. On the amendment to the Stock Option Plan, 8,365,376 shares were
voted in favor; and there were 677,758 negative votes, 81,828 abstentions, and
no broker non-votes. On the amendment to the Employee Stock Purchase Plan,
8,810,016 shares were voted in favor; and there were 256,068 negative votes,
58,878 abstentions, and no broker non-votes.

      There were no other matters submitted to a vote of security holders during
the period for which this report is filed.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

      (a)   Exhibit No.       Exhibit Description

            3.1.1             Amended and Restated Certificate of Incorporation
            3.2.8             Amended and Restated By-Laws
            10.1              Amended Stock Option Plan
            27                Financial Data Schedule

       The above-listed exhibits are filed herewith. No other exhibits are
included in this report as the contents of the required exhibits are either not
applicable to Registrant, to be provided only if Registrant desires, or
contained elsewhere in this report.

       (b) No reports on Form 8-K were filed by Registrant during the period for
which this report is filed.


                                      -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:

                                DREXLER TECHNOLOGY CORPORATION (Registrant)


Date: November 6, 2000          /s/Jerome Drexler
                                ------------------------------------------------
                                Jerome Drexler, Chairman of the Board of
                                Directors and Chief Executive Officer (Principal
                                Executive Officer)


Date: November 6, 2000          /s/Steven G. Larson
                                ------------------------------------------------
                                Steven G. Larson, Vice President of Finance and
                                Treasurer (Principal Financial Officer and
                                Principal Accounting Officer)


                                      -12-
<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number   Description
------   -----------

3.1.1    Amended and Restated Certificate of Incorporation

3.2.8    Amended and Restated By-Laws

10.1     Amended Stock Option Plan

27       Financial Data Schedule