<PAGE>   1
                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 December 31, 1996

                                       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:  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 (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 December 31, 
1996:  9,119,684



<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, 1996, included in the Company's Form 10-K Annual
Report.

         The results of operations for the nine months ended December 31, 1996
are not necessarily indicative of results to be expected for the entire year
ending March 31, 1997.


















                                      -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,
                                                                                            1996                    1996
                                                                                        -----------             -----------    
                                                                                                                 (Unaudited)
<S>                                                                                     <C>                     <C>
Current assets:
   Cash and cash equivalents    . . . . . . . . . . . . . . . . . . . . . . . . . .     $     2,094              $    1,090
   Accounts receivable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             667                     283
   Inventories    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             864                   1,009
   Other current assets.    . . . . . . . . . . . . . . . . . . . . . . . . . . . .             157                     173
                                                                                        -----------             -----------    
      Total current assets    . . . . . . . . . . . . . . . . . . . . . . . . . . .           3,782                   2,555
                                                                                        -----------             -----------

Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . . . . . . .          13,067                  13,329
   Less--accumulated depreciation and amortization    . . . . . . . . . . . . . . .         (11,460)                (11,703)
                                                                                        -----------             -----------
      Property and equipment, net   . . . . . . . . . . . . . . . . . . . . . . . .           1,607                   1,626

Patents, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             982                     907
                                                                                        -----------             -----------

         Total assets   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $     6,371             $     5,088
                                                                                        ===========             ===========


                                                      Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $     1,498             $       196
   Accrued payroll costs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             233                     249
   Advance payments from customers  . . . . . . . . . . . . . . . . . . . . . . . .             177                     122
   Other accrued liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . .             136                     107
                                                                                        -----------             -----------
      Total current liabilities   . . . . . . . . . . . . . . . . . . . . . . . . .           2,044                     674
                                                                                        -----------             -----------

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--8,831,674 shares at March 31, 1996 and
         9,119,684 shares at December 31, 1996  . . . . . . . . . . . . . . . . . .              88                      91
   Additional paid-in capital   . . . . . . . . . . . . . . . . . . . . . . . . . .          29,452                  31,313
   Accumulated deficit  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (25,213)                (26,990)
                                                                                        -----------             -----------
      Total stockholders' equity  . . . . . . . . . . . . . . . . . . . . . . . . .           4,327                   4,414
                                                                                        -----------             -----------

         Total liabilities and stockholders' equity   . . . . . . . . . . . . . . .     $     6,371             $     5,088
                                                                                        ===========             ===========
</TABLE>





                                      -3-
<PAGE>   4
                DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)
               (In thousands, except share and per share amounts)





<TABLE>
<CAPTION>
                                                                     Three Months Ended              Nine Months Ended
                                                                       December 31,                     December 31,
                                                                   1995             1996             1995            1996
                                                                   ----             ----             ----            ----
<S>                                                              <C>              <C>              <C>             <C>
Revenues:
   Product sales  . . . . . . . . . . . . . . . . . . . . . .    $   1,582        $     813        $  3,129        $   2,435
   License fees and royalties   . . . . . . . . . . . . . . .            7                2             224               16
                                                                 ---------        ---------       ---------        ---------   
      Total revenues  . . . . . . . . . . . . . . . . . . . .        1,589              815           3,353            2,451
                                                                 ---------        ---------       ---------        ---------   
Costs and expenses:
   Cost of product sales  . . . . . . . . . . . . . . . . . .        1,111              558           2,200            1,656
   Selling, general, and administrative expenses  . . . . . .          620              673           1,760            1,885
   Research and engineering expenses  . . . . . . . . . . . .          246              289             899              736
                                                                 ---------        ---------       ---------        ---------   
      Total costs and expenses  . . . . . . . . . . . . . . .        1,977            1,520           4,859            4,277
                                                                 ---------        ---------       ---------        ---------   

         Operating loss   . . . . . . . . . . . . . . . . . .         (388)            (705)         (1,506)          (1,826)

Other income and expense:
   Other income, net  . . . . . . . . . . . . . . . . . . . .           --                2             195               22
   Interest income, net   . . . . . . . . . . . . . . . . . .           24                9              53               27
                                                                 ---------        ---------       ---------        ---------   
      Total other income, net   . . . . . . . . . . . . . . .           24               11             248               49
                                                                 ---------        ---------       ---------        ---------

         Net loss   . . . . . . . . . . . . . . . . . . . . .    $    (364)       $    (694)      $  (1,258)       $  (1,777)
                                                                 =========        =========       =========        =========

         Net loss per share   . . . . . . . . . . . . . . . .    $   (0.04)       $   (0.08)      $   (0.15)       $   (0.20)
                                                                 =========        =========       =========        =========

Weighted average common shares  . . . . . . . . . . . . . . .        8,809            9,109           8,646            8,967
                                                                 =========        =========       =========        =========
</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,
                                                                                                     1995            1996
                                                                                                  ---------        ---------
<S>                                                                                               <C>              <C>
Cash flows from operating activities:
   Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $  (1,258)       $  (1,777)
   Adjustments to reconcile net loss to net cash used
         for operating activities:
      Depreciation and amortization   . . . . . . . . . . . . . . . . . . . . . . . . . . . .           331              375
      Provision for doubtful accounts receivable  . . . . . . . . . . . . . . . . . . . . . .             1               --
      Compensation on stock plan activity   . . . . . . . . . . . . . . . . . . . . . . . . .            --                7
   Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable  . . . . . . . . . . . . . . . . . . . . . .          (603)             384
      Increase in inventories   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          (228)            (145)
      Increase in other assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (13)             (16)
      (Decrease) increase in accounts payable and accrued expenses  . . . . . . . . . . . . .           801           (1,315)
      Decrease in advance payments from customers and deferred revenue  . . . . . . . . . . .           (50)             (55)
      Decrease in liabilities related to discontinued operations  . . . . . . . . . . . . . .           (14)              --
                                                                                                  ---------        ---------

         Net cash used for operating activities . . . . . . . . . . . . . . . . . . . . . . .        (1,033)          (2,542)
                                                                                                  ---------        ---------

Cash flows from investing activities:
   Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .          (199)            (269)
   Increase in patents  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (56)             (50)
                                                                                                  ---------        ---------

         Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . .          (255)            (319)
                                                                                                  ---------        ---------

Cash flows from financing activities:
   Proceeds from sale of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .         2,328            1,857
                                                                                                  ---------        ---------

         Net cash provided by financing activities  . . . . . . . . . . . . . . . . . . . . .         2,328            1,857
                                                                                                  ---------        ---------

         Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . .         1,040           (1,004)

Cash and cash equivalents:
   Beginning of period  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,050            2,094
                                                                                                  ---------        ---------
   End of period  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $   2,090        $   1,090
                                                                                                  =========        =========
</TABLE>








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


     RESULTS OF OPERATIONS--FISCAL 1997 THIRD QUARTER AND FIRST NINE MONTHS
        AS COMPARED WITH FISCAL 1996 THIRD QUARTER AND FIRST NINE MONTHS

Revenues

         The Company's total revenues for the third quarter of fiscal 1997 were
$815,000 as compared with $1,589,000 for last year's third quarter.  Total
revenues for the current nine-month period were $2,451,000 compared with
$3,353,000 for the same period last year.

         OPTICAL MEMORY CARD PRODUCTS.  Sales of optical memory cards and
related products to value-added resellers (VARs), licensees, and end- user
customers were $2,435,000 for the first nine months of fiscal 1997 as compared
with $3,129,000 for the first nine months of fiscal 1996.  The difference was
due mainly to higher reader/writer sales for the year-earlier period.  In this
year's third quarter, the U.S. Department of Defense (DoD) purchased seven
reader/writers, whereas last year's third quarter included 214 reader/writers
for the DoD.

         For the development of commercial markets and applications for its
products, the Company utilizes VAR companies 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 system software, 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 may add
application software, personal computers, and other peripherals, and then
resell these products, integrated into data systems, for end-user customers in
their geographic regions.

         For the first nine months of fiscal 1997, the Company commercially
sold approximately 305,000 LaserCard(R) optical memory cards compared with
264,000 optical cards for the year-earlier period.  The Company sold 266 card
reader/writers during the first nine months of fiscal 1997 versus 511
reader/writers for the year-ago period, including the above-mentioned sale of
214 reader/writers to the DoD.  Applications for the Company's optical memory
card products currently include:  U.S. government-related programs; medical
data applications in the United States; several programs in Italy, including a
secure soccer-season ticket; and two programs in the Philippines--an admission
pass/retail purchase log at a duty-free shopping zone and a vehicle warranty
and maintenance records card.

         There can be no assurances that any VAR company in any country will be
successful in its markets or field trials or that it will place follow-on
orders with the Company for additional quantities of cards and systems.  In
order to upgrade its VAR customer base to increase the probability of success,
the Company will continue its efforts to recruit new VARs and eliminate
nonproductive ones.  The Company provides marketing leads, customer support,
and system software to assist VARs.

         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, and demonstration software.  The Company does not provide software for
specific applications, but instead depends on its VARs to integrate optical
card products into existing software products, write new application software
for specific optical card programs, or license software from other VARs.
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





                                      -6-
<PAGE>   7
various medical-related applications such as medical image storage and 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 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
interface software/device drivers.

         The Company does not manufacture card reader/writers but instead
continues to purchase such equipment from a Japanese licensee, Nippon Conlux
Co., Ltd., currently the Company's sole supplier of reader/writers.  The
Company's inventory level for reader/writers fluctuates based on the timing of
purchases and sales.  The Company's reader/writer inventory as of the end of
the fiscal 1997 third quarter was under 100 units.  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.  Also, an interruption or
change in the supply of reader/writers could cause a delay in product shipments
and a possible loss of sales, which would affect operating results adversely.

         LICENSES.   There were no license fee revenues for the first nine
months of fiscal 1997, as compared with revenues of $200,000 for the fiscal
1996 first nine months, from an agreement that included a trademark license and
a LaserCard distribution license payment.  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 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 most orders within 30 to 120
days of receipt of purchase order or release order.  Therefore, to date there
has not been a consistent, large order backlog.  The Company's quarterly sales
are generally dependent upon new orders placed each quarter.  Until a large
order backlog is established, the Company's quarterly sales will be subject to
material fluctuation.

Margins

         The gross margin on product sales for the first nine months of fiscal
1997 was 32% as compared with 30% for the year-earlier period.

         The gross margin on optical memory card sales will fluctuate based
upon type and volume of cards sold.  As card manufacturing for commercial
orders increases, the Company's optical memory card manufacturing facility is
used less for the purposes of research and engineering.  Therefore, more of the
manufacturing facility costs (depreciation expense, building lease payments,
and other costs) are allocated to cost of card manufacturing, and less of these
costs are charged to research and engineering.  For the first nine months of







                                      -7-
<PAGE>   8
fiscal 1997 and fiscal 1996, respectively, the Company allocated 40% and 42% of
the facility expenses to card manufacturing for commercial orders and marketing
samples.  When the Company reaches a production level of approximately 1.5
million cards per year for commercial orders, the cost allocation percentages
should become relatively fixed, with essentially all of the card manufacturing
facility costs allocated to cost of product sales.  The facility expenses will
then become a fixed cost component of product sales and should decrease on a
per-card basis as volumes increase.

Income and Expenses

         SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A).  For the fiscal
1997 third quarter and first nine months, SG&A expenses were $673,000 and
$1,885,000, respectively, as compared with $620,000 and $1,760,000,
respectively, for the same periods last year.  The majority of the increase for
the first nine months is attributable to increased payroll expenses.  SG&A
spending is expected to continue at current levels for the short term.  If
certain financial goals are achieved, the Company's plans include increased
marketing and customer support activity.

         RESEARCH AND ENGINEERING EXPENSES.  Research and engineering expenses
were $289,000 and $736,000, respectively, for the fiscal 1997 third quarter and
first nine months versus $246,000 and $899,000, respectively, for last year's
comparable periods.  The optical memory card facility is used for both
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.

         As optical card production increases and card manufacturing resources
are allocated to card production to a greater degree than at present, reported
research and engineering expenses are expected to decrease.  The Company
believes that the reduction in card manufacturing facility expenses allocated
to research and engineering will not have any negative effect on its optical
card business since research and engineering projects are continuing.  It also
is possible that future projects may require increased spending as the optical
card industry grows.

         OTHER INCOME AND EXPENSE.  Other income for the first nine months of
fiscal 1996 included $200,000 from a forfeited deposit on a license agreement
that was not consummated.  Other income for the fiscal 1997 first nine months
included a $22,000 gain on foreign currency exchange; there was no income of
this type for the first nine months of last year.

                                   LIQUIDITY

         As of December 31, 1996, the Company had cash and cash equivalents of
$1,090,000 and a current ratio of 3.8 to 1.  Cash used for operating activities
was $2,542,000 for the first nine months of fiscal 1997 as compared with
$1,033,000 for last year's first nine months.  The increase in cash used was due
mainly to the $1,315,000 decrease in accounts payable during the first nine
months of fiscal 1997. As of December 31, 1996, the Company had no long-term
debt.

         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.  The Company believes that although working capital requirements
should grow in proportion to product shipment levels, the advance payments will
reduce the need for working capital financing.  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.








                                      -8-
<PAGE>   9
         At the current level of product sales, the Company does not generate
cash or profits from operations.  At December 31, 1996, the Company had an
accumulated deficit of $26,990,000; and, except for sporadic sales of licenses,
quarterly losses are anticipated until there is increased commercialization of
the Company's products.  Thus, 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 optical memory
cards along with sales of related hardware.  If there is slow progress by
customers in the development and implementation of LaserCard-based programs,
this could extend the period during which the Company would need additional
financing.

         The Company's total deferred tax asset was $14,953,000 at March 31,
1996.  If utilized, the deferred tax asset would reduce future tax expense and
payments.  Included are amounts derived from federal income tax net operating
losses that will expire at various dates from 2001 through 2011, amounts from
state income tax net operating losses that will expire at various dates from
1997 through 2001, and amounts from tax credits that will expire from 2000
through 2004.  The ability of the Company to utilize this deferred tax asset is
contingent upon generating sufficient income within the stated time periods;
therefore, it is uncertain that the deferred tax asset will be realized.
Accordingly, the Company has recorded a full valuation allowance against this
asset; and, therefore, the net deferred tax asset is not included on the
Company's balance sheet at this time.

         The Company's plan to increase card production capacity calls for the
addition over several years 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.  This 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.

         During the first nine months of fiscal 1997, Company employees and
consultants purchased from the Company 286,300 shares of registered common
stock, at an average price of $6.48 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 $1,855,000.  As of December 31,
1996, Company employees and consultants held unexercised, vested options to
purchase 632,633 shares of common stock at exercise prices ranging from $4.25
to $9.06 per share, for an average of $6.61 per share.  These stock options, if
exercised, would provide the Company with cash in the amount of $4,182,000.

         The Company will continue its product marketing activities and its
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 materially adverse trends that would limit its ability to finance
operations through additional equity financings, if required.  However, the
Company cannot guarantee that such equity 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.












                                      -9-
<PAGE>   10
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 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.  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.
On May 20, 1996, Dr. Pesch filed a Chapter 11 bankruptcy petition, thereby
effecting an automatic stay of the arbitration proceedings as to Dr. Pesch (but
not as to the other defendants).

         On August 28, 1996, the Arbitrator entered an award holding that the
defendants, other than Dr. Pesch, are liable in the amount of $800,000, plus
interest and costs, and that these defendants are not entitled to any offset,
reduction in award, or affirmative relief based on the cross-complaint.  On
December 19, 1996, the Superior Court confirmed the arbitration award and
issued a judgment based thereon.

         On September 6, 1996, Dr. Pesch's bankruptcy proceedings were
dismissed without discharge of his debts.  Accordingly, on January 13, 1997,
the Superior Court issued a judgment against Dr. Pesch in the amount of
$800,000, plus interest and costs.

         There can be no assurance that the Company will be successful in
collecting on its judgments.  No portion of the $800,000 balance due is
recorded in the Company's financial statements.

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)       Exhibit No.                 Exhibit Description

                   27                     Financial Data Schedule

         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
quarter for which this report is filed.











                                      -10-
<PAGE>   11
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:     February 10, 1997            /s/Jerome Drexler
                                       ----------------------------------------
                                       Jerome Drexler, Chairman of the Board of
                                       Directors and President
                                       (Principal Executive Officer)


Date:     February 10, 1997            /s/Steven G. Larson
                                       ----------------------------------------
                                       Steven G. Larson, Vice President of 
                                       Finance and Treasurer
                                       (Principal Financial Officer and 
                                       Principal Accounting Officer)
















                                      -11-
<PAGE>   12

                                 EXHIBIT INDEX



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

      27                Financial Data Schedule