<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q

                Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934



For the quarter ended:                                   Commission file number:
  December 31, 1995                                                0-6377



                         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)



                                 (415) 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, 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 December 31,
1995:   8,826,447
<PAGE>   2
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, 1995, included in the Company's Form 10-K Annual Report.

     The results of operations for the nine months ended December 31, 1995 are
not necessarily indicative of results to be expected for the entire year ending
March 31, 1996.





                                      -2-
<PAGE>   3
                DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS


               (In thousands, except share and per share amounts)



                                     Assets
<TABLE>
<CAPTION>
                                                             March 31,    December 31,
                                                               1995           1995
                                                               ----           ----
                                                                          (UNAUDITED)
<S>                                                          <C>          <C>
Current assets:
   Cash and cash equivalents    . . . . . . . . . . . . . .  $  1,050       $  2,090
   Accounts receivable, net   . . . . . . . . . . . . . . .        98            700
   Inventories    . . . . . . . . . . . . . . . . . . . . .       586            814
   Other current assets.    . . . . . . . . . . . . . . . .       139            152
                                                             --------       --------
      Total current assets    . . . . . . . . . . . . . . .     1,873          3,756
                                                             --------       --------

Property and equipment, at cost . . . . . . . . . . . . . .    12,773         12,957
   Less--accumulated depreciation and amortization    . . .   (11,189)       (11,387)
                                                             --------       --------

      Property and equipment, net   . . . . . . . . . . . .     1,584          1,570

Patents, net  . . . . . . . . . . . . . . . . . . . . . . .     1,074          1,012
                                                             --------       --------

         Total assets   . . . . . . . . . . . . . . . . . .  $  4,531       $  6,338
                                                             ========       ========

                      Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable   . . . . . . . . . . . . . . . . . . .  $    420       $  1,135
   Accrued payroll costs    . . . . . . . . . . . . . . . .       222            289
   Advance payments from customers  . . . . . . . . . . . .       216            166
   Other accrued liabilities  . . . . . . . . . . . . . . .       137            142
                                                             --------       --------
         Total current liabilities  . . . . . . . . . . . .       995          1,732
                                                             --------       --------
Stockholders' equity:
   Preferred stock, $.01 par value:
      Authorized--2,000,000 shares
      Outstanding--none
   Common stock, $.01 par value:
      Authorized--15,000,000 shares
      Outstanding--8,358,029 shares at March 31, 1995
         and 8,826,447 shares at December 31, 1995  . . . .        83             88
   Additional paid-in capital   . . . . . . . . . . . . . .    27,082         29,405
   Accumulated deficit  . . . . . . . . . . . . . . . . . .   (23,629)       (24,887)
                                                             --------       --------
      Total stockholders' equity  . . . . . . . . . . . . .     3,536          4,606
                                                             --------       --------

         Total liabilities and stockholders' equity   . . .  $  4,531       $  6,338
                                                             ========       ========
</TABLE>





                                      -3-
<PAGE>   4
                DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

                    (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                  Three Months Ended           Nine Months Ended
                                                                     December 31,                 December 31,
                                                                  1994          1995           1994          1995
                                                                  ----          ----           ----          ----
<S>                                                              <C>           <C>           <C>            <C>
Revenues:
   Product sales  . . . . . . . . . . . . . . . . . . . . . .    $  232        $1,582        $ 1,572        $ 3,129
   License fees and royalties   . . . . . . . . . . . . . . .     1,003             7          1,016            224
                                                                 ------        ------        -------        -------
      Total revenues  . . . . . . . . . . . . . . . . . . . .     1,235         1,589          2,588          3,353
                                                                 ------        ------        -------        -------
Costs and expenses:
   Cost of product sales  . . . . . . . . . . . . . . . . . .       178         1,111          1,074          2,200
   Selling, general, and administrative expenses  . . . . . .       492           620          1,430          1,760
   Research and engineering expenses  . . . . . . . . . . . .       410           246          1,524            899
                                                                 ------        ------        -------        -------
      Total costs and expenses  . . . . . . . . . . . . . . .     1,080         1,977          4,028          4,859
                                                                 ------        ------        -------        -------

         Operating gain (loss) from continuing operations . .       155          (388)        (1,440)        (1,506)

Other income and expense:
   Other income   . . . . . . . . . . . . . . . . . . . . . .        --            --              4            200
   Other expense  . . . . . . . . . . . . . . . . . . . . . .        --            --             --             (5)
   Interest income  . . . . . . . . . . . . . . . . . . . . .         9            25             26             57
   Interest expense   . . . . . . . . . . . . . . . . . . . .        (2)           (1)            (4)            (4)
                                                                 ------        ------        -------        -------
      Total other income, net   . . . . . . . . . . . . . . .         7            24             26            248
                                                                 ------        ------        -------        -------

         Income (loss) from continuing operations   . . . . .       162          (364)        (1,414)        (1,258)

Income from discontinued operations . . . . . . . . . . . . .        --            --             22             --
                                                                 ------        ------        -------        -------

         Net income (loss)  . . . . . . . . . . . . . . . . .    $  162        $ (364)       $(1,392)       $(1,258)
                                                                 ======        ======        =======        =======
Income (loss) per share:
   Continuing operations    . . . . . . . . . . . . . . . . .    $ 0.02        $(0.04)       $ (0.17)       $ (0.15)
   Discontinued operations  . . . . . . . . . . . . . . . . .        --            --             --             --
                                                                 ======        ======        =======        =======
         Net income (loss)  . . . . . . . . . . . . . . . . .    $ 0.02        $(0.04)       $ (0.17)       $ (0.15)
                                                                 ======        ======        =======        =======

Weighted average common and common equivalent shares  . . . .     8,176         8,809          8,115          8,646
                                                                 ======        ======        =======        =======
</TABLE>


                                      -4-
<PAGE>   5
                DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

                                 (In thousands)


<TABLE>
<CAPTION>
                                                                             Nine Months Ended
                                                                                December 31,
                                                                            1994           1995
                                                                            ----           ----
<S>                                                                       <C>            <C>
Cash flows from operating activities:
   Net loss from continuing operations  . . . . . . . . . . . . . . . .   $(1,414)       $(1,258)
   Adjustments to reconcile net loss to net cash used
         for operating activities:
      Income from discontinued operations   . . . . . . . . . . . . . .        22             --
      Depreciation and amortization   . . . . . . . . . . . . . . . . .       691            331
      Provision for doubtful accounts receivable  . . . . . . . . . . .        --              1
   Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable  . . . . . . . . . . .        49           (603)
      Increase in inventories   . . . . . . . . . . . . . . . . . . . .      (171)          (228)
      (Increase) decrease in other assets   . . . . . . . . . . . . . .        13            (13)
      (Decrease) increase in accounts payable and accrued expenses  . .      (138)           801
      Decrease in advance payments from customers   . . . . . . . . . .      (163)           (50)
      Decrease in liabilities related to discontinued operations  . . .       (66)           (14)
                                                                          -------        -------

         Net cash used for operating activities . . . . . . . . . . . .    (1,177)        (1,033)
                                                                          -------        -------

Cash flows from investing activities:
   Purchase of property and equipment . . . . . . . . . . . . . . . . .      (170)          (199)
   Increase in patents  . . . . . . . . . . . . . . . . . . . . . . . .       (67)           (56)
                                                                          -------        -------

         Net cash used for investing activities . . . . . . . . . . . .      (237)          (255)
                                                                          -------        -------

Cash flows from financing activities:
   Proceeds from sale of common stock . . . . . . . . . . . . . . . . .       751          2,328
                                                                          -------        -------

         Net cash provided by financing activities  . . . . . . . . . .       751          2,328
                                                                          -------        -------

         Net increase (decrease) in cash and cash equivalents . . . . .      (663)         1,040

Cash and cash equivalents:
   Beginning of period  . . . . . . . . . . . . . . . . . . . . . . . .     2,114          1,050
                                                                          -------        -------
   End of period  . . . . . . . . . . . . . . . . . . . . . . . . . . .   $ 1,451        $ 2,090
                                                                          =======        =======
</TABLE>





                                      -5-
<PAGE>   6
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2.  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     RESULTS OF OPERATIONS--FISCAL 1996 THIRD QUARTER AND FIRST NINE MONTHS
         COMPARED WITH FISCAL 1995 THIRD QUARTER AND FIRST NINE MONTHS

REVENUES

     The Company's total revenues for the third quarter of fiscal 1996 were
$1,589,000 as compared with $1,235,000 for last year's third quarter.  Total
revenues for the current nine-month period were $3,353,000 compared with
$2,588,000 in the same period last year.

     OPTICAL MEMORY CARD PRODUCTS.  Sales of optical memory cards and related
products increased to $3,129,000 for the first nine months of fiscal 1996 as
compared with $1,572,000 for last year's comparable period due to an increase
in unit shipments.

     For the development of commercial market applications for its products,
the Company utilizes Value Added Resellers (VARs) as part of its marketing and
distribution program for LaserCard(R) products.  Sales to VARs include the
Company's optical memory cards, the Company's integration software and device
drivers/host adapters, optical card reader/writers made by a licensee of the
Company, 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 then may add application software, personal computers, and
other peripherals, and resell these systems into their end-user markets.

     During the first nine months of fiscal 1996, the Company commercially sold
approximately 263,000 LaserCard optical memory cards and 511 reader/writers
versus 90,000 cards and 234 reader/writers during the first nine months of last
year.  Some of the more significant sales of optical memory cards and
reader/writers in the fiscal 1996 first nine months included: 78,700 cards and
82 reader/writers for American  medical data applications; 21,800 cards and 277
reader/writers to Information Spectrum, Inc. (a U.S. government contractor)
for the U.S. Army's Automated Manifest System; 32,000 cards and 47
reader/writers to an Italian customer for several programs (including an
electronic season ticket for the Parma soccer organization); 80,600 cards and
35 reader/writers to a VAR in the Philippines for two programs: (a) for the
Clark Special Economic Zone for use as an admission pass and retail purchase
log, and (b) for a Honda distributor for issuance to customers as an automobile
warranty/maintenance records card; 10,000 cards for a healthcare field trial in
Saudi Arabia; and 10,000 cards and 15 reader/writers to a customer in Brazil
for a pilot healthcare/social security program.

     There can be no assurances that a VAR company will be successful in its
markets and place follow-on orders with the Company for additional quantities
of cards and systems.  To upgrade its VAR customer base, the Company will
continue its efforts to enlist additional VARs and eliminate nonproductive
ones.  The Company provides marketing leads, technical support, integration
software, application development software tools, and demonstration software to
assist VARs.  Twelve new VARs purchased initial systems including optical cards
and equipment during the first nine months of fiscal 1996.

     Software is an important factor in developing the commercial markets for
optical cards.  The Company's software consists of optical card device driver
and interface software, system software tools, and demonstration programs.  The
Company does not provide software for specific applications, but instead
depends on its VARs to either integrate optical card products into existing
software products or to write new application software for specific optical
card programs.  Several customers have already written optical card


                                      -6-
<PAGE>   7
software programs for applications such as automobile warranty/maintenance,
cargo manifesting, electronic money cards/bank debit cards, optical key
systems, and various medical-related applications such as medical image storage
and patient medical/health history cards.  Other application software
development is underway by VARs and their customers.

     Optical memory cards are used in conjunction with card reader/writer
equipment connected to personal computers and accessed in the same manner as
floppy disk drives.  Such reader/writers are incorporated into LaserCard
systems sold to VARs and other customers of the Company.  The Company does not
manufacture card reader/writers but does expect to continue purchasing such
equipment from its sole-source supplier, Nippon Conlux Co., Ltd., a Japanese
licensee of the Company.  The price, performance, and availability of such
reader/writers are factors in the commercialization of optical cards.  The
Company sells reader/writers for a few thousand dollars per unit, and these
units generally include the Company's integration software and device drivers.

     Two other licensees of the Company have the capability of producing
LaserCard-compatible reader/writers but are not manufacturing them at this
time.  The Company can give no assurance that increased production of card
reader/writers will occur in the near term or that high-volume sales and
correspondingly lower prices will result.  If market demand increases sharply
over a short period of time, an initial shortage of reader/writers could
result.  The Company's inventory level for reader/writers fluctuates based on
the timing of purchases and sales.  Currently, the Company has a sales order
backlog for card reader/writers and, therefore, does not maintain an inventory
of this item at this time.

     LICENSING.   License revenues of $200,000 during the first nine months of
fiscal 1996 were the result of an agreement which includes a trademark license
and an installment payment toward the purchase of a LaserCard distribution
license.  During the third quarter of fiscal 1995, the Company received a
$1,000,000 single-payment license fee on the sale of an optical memory card
distribution license to a Korean VAR.  License fees received by the Company are
unconditional and nonrefundable,  and no significant obligations remain
unfulfilled by the Company under any of its licenses.  The Company is actively
pursuing its efforts to generate additional license revenues; however, license
sales by the Company are sporadic and unpredictable as to timing and type of
license.  The magnitude of future license revenues, if any, cannot be predicted
or inferred from past events.

     ROYALTIES.  Although royalty revenues have not yet reached material
amounts, the Company does anticipate future royalty income on a long-term,
continuing basis from among two royalty-bearing optical memory card
manufacturing licenses and several royalty- bearing, equipment-license upgrades
previously sold.  The Company cannot predict whether or when equipment or card
sales by its licensees will result in material royalties to the Company, since
the optical memory card industry is in the early commercial stage.  Therefore,
the Company is not relying on royalty income and does not expect it to be a
significant factor in the near term.

     BACKLOG.  The Company generally fills orders within 30 days of receipt of
purchase order or release order.  Therefore, there is not a consistent order
backlog.  At December 31, 1995, the Company's backlog totaled $416,000.  The
Company's quarterly sales are generally dependent upon new orders placed each
quarter.  Until a consistent material level of order backlog is established,
the Company's quarterly sales are subject to material fluctuation.





                                      -7-
<PAGE>   8
MARGINS

     The gross margin on product sales for the first nine months of fiscal 1996
was 30% as compared with 32% for the year-earlier period.  The Company believes
that the decrease in gross margins does not represent a trend.  Gross margins
will fluctuate based upon equipment and optical memory card product mix, type
and volume of cards ordered, and price paid for optical card reader/writers
based upon the yen/dollar exchange rate.  Costs related to the optical memory
card facility (depreciation expense, building lease payments, and other costs)
are allocated to cost of sales based upon the level of manufacturing activity.
As the facility is used for research and engineering purposes when not being
used for manufacturing purposes, the remainder of these expenses are charged to
research and engineering expense. During the first nine months of fiscal 1996,
the Company allocated 42% of the facility expenses to card manufacturing as
compared with 11% for last year's comparable period.

INCOME AND EXPENSES

     SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A).  For the third
quarter and first nine months of fiscal 1996, SG&A expenses were $620,000 and
$1,760,000, respectively, as compared with $492,000 and $1,430,000,
respectively, for the comparable periods in fiscal 1995.  The $128,000 increase
in the third quarter is mainly due to a $58,000 increase in payroll expenses, a
$29,000 increase in promotions and travel expenses, and a $17,000 increase in
insurance expense.  The $330,000 increase for the first nine months is mainly
due to a $137,000 increase in payroll expenses, a $70,000 increase in legal
expenses, a $54,000 increase in promotions and travel expenses, and a $41,000
increase in insurance expense.

     RESEARCH AND ENGINEERING EXPENSES.  Research and engineering expenses were
$246,000 and $899,000, respectively, for the third quarter and first nine
months of fiscal 1996 as compared with $410,000 and $1,524,000, respectively,
for last year's comparable periods.  The optical memory card facility is used
both for engineering and manufacturing.  Therefore, the facility costs
(depreciation expense, building lease payments, and other costs) are allocated
between manufacturing and engineering based upon the level of manufacturing
activity.  Net expenses charged to research and engineering were $187,000 for
the third quarter of fiscal 1996 versus $327,000 for the same period last year,
and $699,000 for the first nine months of fiscal 1996 as compared with
$1,295,000 for last year's comparable period.  Software development costs
related to reader/writers, peripherals, and other software development
decreased to $59,000 and $200,000, respectively, for the third quarter and
first nine months of fiscal 1996 as compared with $83,000 and $229,000 for last
year's comparable periods.  Depreciation and amortization expenses charged to
research and engineering decreased to $115,000 for the first six months of
fiscal 1996 as compared with $491,000 for the same period last year, mainly due
to a change on October 1, 1994 in the estimated useful lives of the optical
memory card manufacturing equipment.  This change in estimate had no effect on
the third quarter of fiscal 1996 as compared with the third quarter of fiscal
1995.

     Because the initial development of the optical card and the design and
construction of the optical card facility are complete, the large initial
development costs are no longer necessary.  Therefore, for the short term the
optical card facility expenses are expected to continue at the current level,
except for a possible modest increase.  Research and engineering expenses are
expected to decrease as optical card production increases and these resources
are allocated to production to a greater degree than at present.  The Company
believes this reduction will not have any negative effect on its optical card
business.  It also is possible that future projects may require increased
spending as the optical card industry grows.


                                      -8-
<PAGE>   9
     OTHER INCOME AND EXPENSE.  Other income for the first nine months of
fiscal 1996 consisted of a $200,000 partial payment, received during the fiscal
1996 first quarter, toward a potential license upgrade.  This amount was
recorded as deferred revenue at June 30, 1995.  During the fiscal 1996 second 
quarter, this nonrefundable payment was recognized as income due to the other
party's subsequent default under the agreement.  See Part II, Item 3, "Legal
Proceedings."

     Interest income for the third quarter of fiscal 1996 was $25,000 versus
$9,000 for last year's third quarter, mainly due to an increase in invested
funds.  Interest income for the first nine months of fiscal 1996 was $57,000 as
compared with $26,000 for the first nine months of fiscal 1995.  The Company's
interest expense on short-term loans was $4,000 for the first nine months of
fiscal 1996 and fiscal 1995.

     DISCONTINUED OPERATIONS.  During fiscal 1995, the Company completed
settlement of its remaining commitments related to its emulsion photoplate
operation, which was discontinued during fiscal 1993, at an amount lower than
the Company's accruals for these items.  Therefore, discontinued operations had
income of $22,000 for the first nine months of fiscal 1995.  There was no
income of this type for the first nine months of fiscal 1996.

                                   LIQUIDITY

     As of December 31, 1995, the Company had cash and cash equivalents of
$2,090,000 and a current ratio of 2.2 to 1.  Net cash used for operating
activities was $1,033,000 for the first nine months of fiscal 1996 as compared
with $1,177,000 for last year's first nine months.  The Company had no
long-term debt as of December 31, 1995.

     The Company has not established a line of credit.  Generally, the
Company's customers make advance payments, in whole or in part, at time of
order placement because the Company's optical memory cards are usually made to
custom specifications that are specific to each customer, end user, or
application.  Therefore, the Company believes that working capital should be
sustainable provided order levels increase.  The Company may negotiate a line
of credit if and when it becomes appropriate.

     At the current level of product sales, the Company does not generate cash
or profits from operations.  To fund its operations, the Company requires
either a substantial increase in order levels of optical cards, sales of
additional licenses, or additional financing.  Based on current raw material
costs and other expense calculations, the Company estimates that it will break
even on operations at annual sales of approximately 1.5 million cards along
with sales of related hardware.

     The Company has updated its plan to increase card production capacity,
which calls for the addition of $4.3 million in capital equipment to the card
manufacturing facility and additional production employees when customer orders
are of sufficient magnitude to justify each incremental step.  Previously, in
its Report on Form 10-K for the year ended March 31, 1995, the Company
estimated a requirement for $3 million in capital additions to attain a 25
million card production level.  The updated plan provides for a greater variety
of optical memory card versions based upon presently known customer
requirements.  The added $1.3 million investment in a high-throughput,
color-printing press would further expand the Company's color ink printing
capacity.  This would permit color printing of all of the 25 million cards per
year that the Company estimates it could produce in an updated manufacturing
facility.  The $4.3 million investment in capital equipment would be
implemented incrementally, as follows:  to increase the current production
equipment capabilities from 3 million to 6 million cards annually, $500,000;
for producing up to 10 million cards annually, $2.4 million more; for producing
up to 25 million cards annually, $1.4 million more.  The Company may make
additional capital investments for cost savings and other purposes.





                                      -9-
<PAGE>   10
     At December 31, 1995, the Company had an accumulated deficit of
$24,887,000.  The Company anticipates that the size of its losses will decrease
due to anticipated increases in sales of optical memory cards and related
products.  However, if increased commercialization is delayed and the Company
does not realize such increased sales, its losses will remain at previous
levels, except in the event of sporadic sales of licenses which range in price
from approximately $1 million for a card distribution license to over $10
million for a card manufacturing license.

     During the first nine months of fiscal 1996, the Company had cash
receipts, net of expenses, of $446,000 from the private placement of 115,000
shares of its common stock.  These shares have not been registered under the
Securities Act of 1933 and cannot be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
The Company has agreed to file an S-3 registration statement covering certain
of the shares sold by the Company under private placements in fiscal years
1994, 1995, and 1996.  At such time as the SEC approves the registration, the
shareholders may resell the shares.

     During the first nine months of fiscal 1996, Company employees and
consultants purchased from the Company 351,800 shares of registered common
stock, at an average price of $5.31 per share, through the exercise of stock
options under the Company's 1991 Stock Option Plan, which resulted in
additional cash receipts to the Company of $1,867,000.  As of December 31,
1995, Company employees and consultants held unexercised, vested options to
purchase 861,550 shares of common stock at exercise prices ranging from $4.25
to $9.06 per share, for an aggregate amount of $5,615,000 and an average price
of $6.52 per share.

     The Company will vigorously continue its marketing and licensing efforts
and will consider opportunities for additional equity financing in order to
strengthen its cash position, to accelerate its marketing and sales activities,
and to add software and manufacturing capabilities to more rapidly build sales
of optical memory cards.  The Company is not aware of any material adverse
trends that would limit its ability to finance operations through additional
equity placements, if required.  However, the Company cannot guarantee that
such financing would be available, if needed.

STOCK PRICE VOLATILITY

     The Company's common stock price is subject to significant volatility due
to fluctuations in revenues, earnings, capitalization, liquidity, press
coverage, and financial market interest.  Some of these factors may be
exacerbated because the Company operates solely in the optical memory card
products industry, which is in the early stage of commercialization.

FORWARD-LOOKING STATEMENTS

     Certain statements made above 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.  Such factors are described above and in the
documents filed by the Company from time to time with the Securities and
Exchange Commission, including Form S-3 Registration Statement 33-88588.


PART II.  OTHER INFORMATION

ITEM 3.   LEGAL PROCEEDINGS

     On September 28, 1995, the Company filed a complaint against LeRoy A.
Pesch, Genus Technology Corporation, LAPESCH & Company, and Genus Technology,
N.V. ("Genus"), in Santa Clara County





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California Superior Court, to collect an $800,000 balance due under an upgrade
license agreement entered into between the Company and Genus.  The other
defendants are guarantors and/or co-obligors.

     On November 29, 1995, the defendants answered by denying the allegations
of the complaint and asserting as a cross-complaint that defendant Genus was
wrongly denied the right to purchase 400,000 shares of the Company's common
stock at a purchase price of $5.75 per share.  The Company believes this
cross-complaint to be meritless.

     On January 16, 1996, the parties entered into a stipulation to submit all
issues raised in this litigation to binding arbitration before the American
Arbitration Association.  The Company intends to vigorously pursue the
complaint and vigorously defend the cross-complaint.


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

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


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)    No 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 quarter
for which this report is filed.


                         DREXLER TECHNOLOGY CORPORATION

                                   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.

<TABLE>
<CAPTION>
       Signature                      Title                                       Date
       ---------                      -----                                       ----
<S>                          <C>                                            <C>
/s/Jerome Drexler            Chairman of the Board of                       February 6, 1996
-------------------------    Directors and President
Jerome Drexler               (Principal Executive Officer)
                             


/s/Steven G. Larson          Vice President of Finance and Treasurer        February 6, 1996
-------------------------    (Principal Financial Officer and
Steven G. Larson             Principal Accounting Officer)
                             
</TABLE>


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