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, 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 February
1, 2001: 9,905,884

<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 nine months ended December 31, 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
third quarter of fiscal 2000 ended on December 31, 1999, and the 13-week third
quarter of fiscal 2001 ended on December 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. The Company invests 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 December 31, 2000, the Company had $9,250,000 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,        December 31,
                                                    2000               2000
                                                    ----               ----

Raw materials ............................         $2,851             $2,448
Work-in-process ..........................            658                549
Finished goods ...........................            745              1,475
Systems and components
   held for resale .......................            165                 57
                                                   ------             ------
                                                   $4,419             $4,529
                                                   ======             ======

      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." 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 nine months ended December 31, 1999 and
December 31, 2000 is shown in the following table (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                     Three Months Ended       Nine Months Ended
                                                        December 31,             December 31,

                                                     1999         2000        1999         2000
                                                     ----         ----        ----         ----
<S>                                                 <C>         <C>          <C>         <C>
Net income ...................................      $1,378      $ 1,785      $3,610      $ 4,879
                                                    ======      =======      ======      =======

Basic earnings per share:
    Weighted average common shares outstanding       9,816        9,926       9,800        9,901
                                                    ------      -------      ------      -------
Basic earnings per share .....................      $  .14      $   .18      $  .37      $   .49
                                                    ======      =======      ======      =======

Diluted earnings per share:
    Weighted average common shares outstanding       9,816        9,926       9,800        9,901
    Weighted average common shares from
    stock option grants ......................          74          727          80          581
                                                    ------      -------      ------      -------

    Weighted average common shares and common
    stock equivalents outstanding ............       9,890       10,653       9,880       10,482
                                                    ------      -------      ------      -------

Diluted earnings per share ...................      $  .14      $   .17      $  .37      $   .47
                                                    ======      =======      ======      =======
</TABLE>

      Because they would be antidilutive, having an exercise price greater than
the average market value for the periods, stock options representing 1,486,750
shares are excluded from the calculation of diluted earnings per share for the
three months ended December 31, 1999, and stock options representing 3,500
shares are excluded from the calculation of diluted earnings per share for the
three months ended December 31, 2000. For the same reason, stock options
representing 1,461,750 shares are excluded from the calculation of diluted
earnings per share for the nine months ended December 31, 1999, and stock
options representing 304,000 shares are excluded from the calculation of diluted
earnings per share for the nine months ended December 31, 2000.


                                       -3-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                      March 31,     December 31,
                                                                                                        2000            2000
                                                                                                        ----            ----
                                                                                                                     (Unaudited)
                                                      ASSETS
<S>                                                                                                  <C>              <C>
Current assets:
    Cash and cash equivalents ...............................................................        $  2,818         $  1,565
    Short-term investments ..................................................................           5,403            9,250
    Accounts receivable .....................................................................           1,435            1,026
    Note receivable .........................................................................             150              150
    Inventories .............................................................................           4,419            4,529
    Other current assets ....................................................................             264              485
                                                                                                     --------         --------
        Total current assets ................................................................          14,489           17,005
                                                                                                     --------         --------

Property and equipment, at cost .............................................................          17,122           18,871
    Less--accumulated depreciation and amortization .........................................         (12,398)         (13,176)
                                                                                                     --------         --------
        Property and equipment, net .........................................................           4,724            5,695

Patents and other intangibles, net ..........................................................           2,124            2,022
Deferred tax asset, net .....................................................................           2,643            4,528
Other assets ................................................................................              --              159
                                                                                                     --------         --------

              Total assets ..................................................................        $ 23,980         $ 29,409
                                                                                                     ========         ========

                                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable ........................................................................        $    951         $  1,180
    Accrued payroll costs ...................................................................             367              376
    Deferred revenue ........................................................................             397            1,246
    Advance payments from customers .........................................................           1,118              400
    Other accrued liabilities ...............................................................             156              359
                                                                                                     --------         --------
        Total current liabilities ...........................................................           2,989            3,561
                                                                                                     --------         --------

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
              9,904,284 shares at December 31, 2000 .........................................              99               99
    Additional paid-in capital ..............................................................          37,168           37,146
    Accumulated deficit .....................................................................         (16,276)         (11,397)
                                                                                                     --------         --------
        Total stockholders' equity ..........................................................          20,991           25,848
                                                                                                     --------         --------

              Total liabilities and stockholders' equity ....................................        $ 23,980         $ 29,409
                                                                                                     ========         ========
</TABLE>


                                       -4-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       Three Months Ended            Nine Months Ended
                                                                           December 31,                 December 31,

                                                                       1999          2000           1999           2000
                                                                       ----          ----           ----           ----
<S>                                                                  <C>           <C>            <C>            <C>
Revenues ......................................................      $ 4,321       $  5,045       $ 12,314       $ 15,747
                                                                     -------       --------       --------       --------

Costs and expenses:
    Cost of sales .............................................        2,398          2,278          6,918          8,164
    Selling, general, and administrative expenses .............          936            993          2,929          3,031
    Research and engineering expenses .........................          358            564            841          1,599
                                                                     -------       --------       --------       --------
        Total costs and expenses ..............................        3,692          3,835         10,688         12,794
                                                                     -------       --------       --------       --------

            Operating income ..................................          629          1,210          1,626          2,953
                                                                     -------       --------       --------       --------

Other income and expense:
    Interest income ...........................................           95            177            275            439
    Interest expense ..........................................           --             --             (1)            --
                                                                     -------       --------       --------       --------
        Total other income, net ...............................           95            177            274            439
                                                                     -------       --------       --------       --------

            Income before income taxes ........................          724          1,387          1,900          3,392

Income tax benefit ............................................         (654)          (398)        (1,710)        (1,487)
                                                                     -------       --------       --------       --------

            Net income ........................................      $ 1,378       $  1,785       $  3,610       $  4,879
                                                                     =======       ========       ========       ========

Net income per share:
            Basic .............................................      $   .14       $    .18       $    .37       $    .49
                                                                     =======       ========       ========       ========
            Diluted ...........................................      $   .14       $    .17       $    .37       $    .47
                                                                     =======       ========       ========       ========

Weighted average number of common and common equivalent shares:
            Basic .............................................        9,816          9,926          9,800          9,901
            Diluted ...........................................        9,890         10,653          9,880         10,482
</TABLE>


                                       -5-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                              Nine Months Ended
                                                                                                 December 31,

                                                                                             1999           2000
                                                                                             ----           ----
<S>                                                                                        <C>           <C>
Cash flows from operating activities:
    Net income ......................................................................      $ 3,610       $  4,879
    Adjustments to reconcile net income to net cash provided by operating activities:
        Depreciation and amortization ...............................................          819          1,223
        Provision for doubtful accounts receivable ..................................           24            (16)
        Provision for product return reserve ........................................           --           (150)
        Increase in deferred tax asset ..............................................       (1,737)        (1,885)
        Compensation from stock plan activity .......................................           25             40
        Tax benefit for stock option exercises ......................................           --             83

    Changes in operating assets and liabilities:
        (Increase) decrease in accounts receivable ..................................         (633)           576
        Increase in inventories .....................................................       (2,208)          (110)
        Increase in other current assets ............................................         (112)          (380)
        Increase (decrease) in accounts payable and accrued expenses ................         (376)           441
        Increase in deferred revenue and advance payments from customers ............        1,184            131
                                                                                           -------       --------

              Net cash provided by operating activities .............................          596          4,832
                                                                                           -------       --------

Cash flows from investing activities:
    Purchases of property and equipment .............................................       (1,625)        (1,757)
    Investments in patents and other intangibles ....................................         (489)          (336)
    Investments in commercial paper (Note 1) ........................................       (5,151)       (16,496)
    Maturities of commercial paper (Note 1) .........................................           --         12,649
                                                                                           -------       --------

              Net cash used for investing activities ................................       (7,265)        (5,940)
                                                                                           -------       --------

Cash flows from financing activities:
    Proceeds from sale of common stock through stock plans ..........................          143          1,220
    Cash used to purchase common stock through an open market
        repurchase program ..........................................................           --         (1,365)
                                                                                           -------       --------

              Net cash provided by (used for)financing activities ...................          143           (145)
                                                                                           -------       --------

              Net decrease in cash and cash equivalents .............................       (6,526)        (1,253)

Cash and cash equivalents:
    Beginning of period .............................................................        8,066          2,818
                                                                                           -------       --------
    End of period (Note 1) ..........................................................      $ 1,540       $  1,565
                                                                                           =======       ========
</TABLE>


                                       -6-
<PAGE>

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

RESULTS OF OPERATIONS--FISCAL 2001 THIRD QUARTER AND NINE MONTHS COMPARED WITH
FISCAL 2000 THIRD QUARTER AND NINE MONTHS

Revenues

      For the fiscal 2001 third quarter ended December 31, 2000, the Company's
total revenues were $5,045,000 compared with $4,321,000 for last year's third
quarter. Total revenues for the current nine-month period were $15,747,000
compared with $12,314,000 for the same period last year.

      Product Revenues. Sales of LaserCard(R) optical memory cards and related
products were $15,179,000 for the first nine months of fiscal 2001 versus
$12,292,000 for the comparable period last year. The Company sold approximately
3,600,000 LaserCard(R) optical memory cards for the fiscal 2001 first nine
months compared with approximately 3,225,000 for last year's first nine months.

      The Company's principal LaserCard market today involves high-security,
counterfeit-resistant, tamper-resistant cards for "digital governance," defined
as the utilization of digital information technology by a nation, state, region,
municipality, agency, or institution. Within this market, the Company's largest
customer for LaserCard optical memory cards is the United States government,
which purchases U.S. Immigration and Naturalization Service (INS) Permanent
Resident Cards ("Green Cards"), U.S. Department of State (DoS) border crossing
cards ("Laser Visas"), and U.S. Department of Defense cargo shipment "Automated
Manifest" cards. Optical memory card digital governance programs that appear to
be emerging in other countries include electronic national identification
card/social services cards in Italy, building construction permit cards in
China, motor vehicle registration cards in India, and import permit/import duty
collection cards in Turkey.

      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 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 $534,000 for the
first nine 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 nine months of fiscal 2000. The Company does not rely on license fees to
finance operations.

Backlog

      As of December 31, 2000, the backlog for LaserCard optical memory cards
(consisting of firm card orders and releases under card supply contracts) was
approximately $2.8 million. Deliveries from this backlog will probably occur
over a ten-month period.

      On January 22, 2001, the Company announced receipt of a $3.16 million
purchase release for one million optical memory cards under a U.S. government
subcontract, for deliveries over a nine-month period. The U.S. government
subcontract, announced during the fiscal 2001 first quarter, is for the purchase
of optical memory cards, 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 $3.23 to $3.40 per card, depending on card features. The
subcontract states that the U.S. government anticipates placing orders in units
of at least one million optical memory cards per order. The subcontract provides
for an initial one-year contract period and four additional one-year contract
options. Shipments under this subcontract commenced in September 2000.

      The Company anticipates additional revenues in the March 2001 quarter.

Margins

      The gross margin on product sales for the first nine months of fiscal 2001
was 46% compared with 44% for the prior-year period. Due to higher product
revenues, gross profit on product sales increased by approximately $1,640,000
for the fiscal 2001 first nine months compared with the year-earlier period. The
gross margin on sales of read/write drives as currently designed probably will
be negligible for the foreseeable future. However, for the nine months ended
December 31, 2000, read/write drive gross profit increased by about $400,000
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 read/write drive inventories. Gross profit on cards increased
approximately $1.1 million for the nine months ended December 31, 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 nine months. Other
items contributed about $140,000 to the increased gross profit.

Income and Expenses

      Selling, General, and Administrative Expenses (SG&A). SG&A expenses were
$993,000 for the fiscal 2001 third quarter compared with $936,000 for the third
quarter of fiscal 2000. For the fiscal 2001 first nine months, SG&A expenses
were $3,031,000 compared with $2,929,000 for the first nine 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 $564,000 for the third quarter of fiscal 2001 compared with $358,000 for
the year-earlier period. For the fiscal 2001 first nine months, R&E expenses


                                       -8-
<PAGE>

were $1,599,000 compared with $841,000 for the first nine months of fiscal 2000.
The increase in R&E spending for the first nine 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.

      Other Income and Expense. Total net other income for the first nine months
of fiscal 2001 was $439,000, consisting of interest income. For last year's
first nine months, total net other income was $274,000, consisting primarily of
interest income.

      Income Taxes. For the third quarter of fiscal 2001, the Company recorded
an income tax benefit of $398,000 compared with $654,000 for last year's third
quarter. The income tax benefit for the fiscal 2001 third quarter included a
credit of $506,000 due to the change in the federal deferred tax asset
(discussed below), partially offset by $108,000 for state tax expense. The
income tax benefit for last year's third quarter included a credit of $660,000
due to the change in deferred tax asset, partially offset by a $6,000 expense
for alternative minimum taxes payable.

      For the first nine months of fiscal 2001, the Company recorded an income
tax benefit of $1,487,000 compared with $1,710,000 for last year's first nine
months. The income tax benefit for the fiscal 2001 first nine months included a
credit of $1,763,000 due to the change in the federal deferred tax asset
(discussed below), net of federal alternative minimum taxes, partially offset by
$276,000 for state tax expense. The income tax benefit for last year's first
nine months included a credit of $1,737,000 due to the change in deferred tax
asset, partially offset by a $27,000 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 December 31, 2000, the Company had cash, cash equivalents, and
short-term investments of $10,815,000, a current ratio of 4.8 to 1, and no
long-term debt.

      Net cash provided by operating activities was $4,832,000 for the first
nine months of fiscal 2001 compared with $596,000 for last year's first nine
months. The $4,236,000 increase in cash generated by operations for the fiscal
2001 first nine months as compared with last year's first nine months is due
mainly to (a) a $1.7 million increase in income before taxes, interest,
depreciation, and amortization, resulting from increased shipments in fiscal
2001 and (b) the $2.2 million increase in inventories, mainly for read/write
drives, in last year's first nine months. Maintaining the level of revenues
achieved during the first nine 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 $4,879,000 profit recorded for the first nine months of
fiscal 2001, the Company's accumulated deficit decreased to $11,397,000.
Stockholders' equity increased to $25,848,000 due to the aforementioned profit.

      Net cash used for investing activities was $5,940,000 for the first nine
months of fiscal 2001 compared with $7,265,000 for last year's first nine
months. For the first nine months of fiscal 2001, these amounts include
purchases of property and equipment (discussed below) of $1,757,000, increases
in patent expenses and other intangibles of $336,000, and short-term investment
in commercial paper, net of maturities, of $3,847,000.


                                       -9-
<PAGE>

      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 $9,250,000 classified as
short-term investments at December 31, 2000 compared with $5,403,000 at March
31, 2000.

      For optical memory card production, the Company added capital equipment
and leasehold improvements of approximately $1,150,000 during the first nine
months of fiscal 2001 compared with approximately $845,000 during the first nine
months of fiscal 2000. Depending on card type, the Company's card production
capacity reached approximately 7 to 9 million cards per year at December 31,
2000, and, if justified by business conditions, could reach a capacity of
approximately 11 million cards per year by December 31, 2001, through an
additional investment of about $2 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 could 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 $600,000
during the first nine months of fiscal 2001 compared with $400,000 during the
first nine months of fiscal 2000. Additional capital investments will be made
during the remainder of fiscal 2001.

      Net cash used for financing activities was $145,000 for the first nine
months of fiscal 2001 compared with $143,000 net cash provided by financing
activities for last year's first nine months, consisting only of equity items.
Financing activities consisted of $1,220,000 in proceeds on sales of common
stock through the Company's stock-option and stock-purchase plans during the
nine months ended December 31, 2000, offset by $1,365,000 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 nine months.

      On November 13, 2000, the Company extended its previously announced 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 December 31, 2000, the
Company had utilized $1,365,000 for the purchase of 82,500 shares.

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 India, Italy, Turkey, or
other foreign countries 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.


                                      -10-
<PAGE>

PART II.    OTHER INFORMATION

ITEM I.     LEGAL PROCEEDINGS

      The Company is in the process of implementing the settlement of all
previously reported litigation actions regarding the enforcement of the
Company's patents related to digital sound encoded on motion picture film. The
settlement agreements, covering all of the defendants, provide for the payment
to the Company of lump sums expected to be received primarily during the fourth
quarter ending March 31, 2001. There will be no ongoing royalty payments
resulting from any continuation of the alleged infringing activities of the
defendants. A net amount of approximately $2 million, which is net of payments
to third parties with contingency interests in the recovery amount, Japanese
withholding taxes, and previously capitalized costs relating to these actions
will be recognized in the appropriate accounting periods.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

      (a)   Exhibit No.       Exhibit Description

            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.

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 6, 2001       /s/Jerome Drexler
                             ---------------------------------------------------
                             Jerome Drexler, Chairman of the Board of Directors
                             and Chief Executive Officer (Principal Executive
                             Officer)


Date: February 6, 2001       /s/Steven G. Larson
                             ---------------------------------------------------
                             Steven G. Larson, Vice President of Finance and
                             Treasurer (Principal Financial Officer and
                             Principal Accounting Officer)


                                      -11-
<PAGE>

                                  EXHIBIT INDEX

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

             27                         Financial Data Schedule