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 June 30, 1999

                                       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 August
10, 1999: 9,799,880

<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, 1999 included in the Company's Form 10-K Annual Report.

      The results of operations for the three months ended June 30, 1999 are not
necessarily indicative of results to be expected for the entire year ending
March 31, 2000.

      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
period presented as June 30, 1998 ended on July 3, 1998 and the 13-week period
presented as June 30, 1999 ended on July 2, 1999.

      Net Income per Share: Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," requires the computation of basic and diluted
earnings per share. Basic earnings per share is computed using the weighted
average number of common shares outstanding. Diluted earnings per share is
computed using the weighted average number of shares of common stock outstanding
and the dilutive common stock equivalents (using the treasury stock method). The
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computation is shown on the following page.


                                      -2-
<PAGE>

<TABLE>
<CAPTION>
                                                                Income           Shares            Per Share
                                                              (Numerator)     (Denominator)          Amount
                                                              -----------     -------------          ------
                                                             (In thousands)   (In thousands)
<S>                                                              <C>               <C>               <C>
For three months ended June 30, 1998:
  Basic earnings per share ...........................                                               $  .10
                                                                                                     ======
  Income available to common stockholders ............           $  975            9,693
  Common shares issuable upon exercise of
     stock options using treasury stock method .......               --              449
                                                                 ------           ------
  Diluted earnings per share .........................                                               $  .10
                                                                                                     ======
  Income available to common stockholders ............           $  975           10,142
                                                                 ======           ======

For three months ended June 30, 1999:
  Basic earnings per share ...........................                                               $  .09
                                                                                                     ======
  Income available to common stockholders ............           $  845            9,794
  Common shares issuable upon exercise of
     stock options using treasury stock method .......               --              108
                                                                 ------           ------
  Diluted earnings per share .........................                                               $  .09
                                                                                                     ======
  Income available to common stockholders ............           $  845            9,902
                                                                 ======           ======
</TABLE>

      Because they have an exercise price greater than the average market value
for the periods, stock options representing 40,000 shares are excluded from the
calculation of diluted earnings per share for the three months ended June 30,
1998, and stock options representing 1,336,734 shares are excluded from the
calculation of diluted earnings per share for the three months ended June 30,
1999.

      In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). As modified by Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," this statement is effective for fiscal years
beginning after June 15, 2000. SFAS 133 established standards for reporting
derivative instruments and hedging activities. Application of SFAS 133 is not
expected to impact the Company's consolidated financial position or results of
operations.


                                      -3-
<PAGE>

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

<TABLE>
<CAPTION>
                                                             March 31,   June 30,
                                                              1999         1999
                                                              ----         ----
                                                            (Audited)   (Unaudited)
<S>                                                         <C>         <C>
                                     Assets
Current assets:
   Cash and cash equivalents ............................   $  8,066    $  7,637
   Accounts receivable ..................................      1,061       1,187
   Note receivable ......................................        150         150
   Inventories ..........................................      1,909       2,851
   Other current assets .................................        299         407
                                                            --------    --------
      Total current assets ..............................     11,485      12,232
                                                            --------    --------

Property and equipment, at cost .........................     16,549      16,888
   Less--accumulated depreciation and amortization ......    (12,926)    (12,815)
                                                            --------    --------
      Property and equipment, net .......................      3,623       4,073

Patents, net ............................................      1,308       1,288
Deferred tax asset, net .................................         --         416
Note receivable .........................................        150         150
                                                            --------    --------

         Total assets ...................................   $ 16,566    $ 18,159
                                                            ========    ========

                    Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable .....................................   $    976    $  1,282
   Accrued payroll costs ................................        369         412
   Advance payments from customers ......................         36         329
   Income taxes payable .................................         99          72
   Other accrued liabilities ............................        132         265
                                                            --------    --------
      Total current liabilities .........................      1,612       2,360
                                                            --------    --------

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--9,794,180 shares at March 31, 1999 and
          9,794,180 shares at June 30, 1999 .............         98          98
   Additional paid-in capital ...........................     36,485      36,485
   Accumulated deficit ..................................    (21,629)    (20,784)
                                                            --------    --------
      Total stockholders' equity ........................     14,954      15,799
                                                            --------    --------

         Total liabilities and stockholders' equity .....   $ 16,566    $ 18,159
                                                            ========    ========
</TABLE>


                                      -4-
<PAGE>

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

                                                            Three Months Ended
                                                                 June 30,
                                                            1998         1999
                                                            ----         ----

Revenues .............................................    $  3,846     $  3,741

Costs and expenses:
   Cost of sales .....................................       1,965        2,163
   Selling, general, and administrative expenses .....         827        1,079
   Research and engineering expenses .................         134          139
                                                          --------     --------
      Total costs and expenses .......................       2,926        3,381
                                                          --------     --------

       Operating income ..............................         920          360

Other income and expense:
   Other income (expense), net .......................          18           --
   Interest income ...................................          71           87
   Interest expense ..................................          (3)          (1)
                                                          --------     --------
      Total other income, net ........................          86           86
                                                          --------     --------

       Income before income taxes ....................       1,006          446

Provision for (benefit from) income taxes ............          31         (399)
                                                          --------     --------

       Net income ....................................    $    975     $    845
                                                          ========     ========

Net income per share:
       Basic .........................................    $    .10     $    .09
       Diluted .......................................    $    .10     $    .09

Weighted average number of common
   and common equivalent shares:
       Basic .........................................       9,693        9,794
       Diluted .......................................      10,141        9,902


                                      -5-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                        Three Months Ended
                                                                                            June 30,
                                                                                         1998       1999
                                                                                         ----       ----
<S>                                                                                    <C>        <C>
Cash flows from operating activities:
   Net income ......................................................................   $   975    $   845
   Adjustments to reconcile net income to net cash provided by operating activities:
      Depreciation and amortization ................................................       176        263
      Increase in deferred tax asset ...............................................        --       (416)

   Changes in operating assets and liabilities:
      Increase in accounts receivable ..............................................      (190)      (126)
      (Increase) decrease in inventories ...........................................        35       (942)
      Increase in other assets .....................................................        (8)      (108)
      (Decrease) increase in accounts payable and accrued expenses .................       (10)       455
      (Decrease) increase in advance payments from customers .......................      (285)       293
                                                                                       -------    -------

        Net cash provided by operating activities ..................................       693        264
                                                                                       -------    -------

Cash flows from investing activities:
   Purchases of property and equipment .............................................      (431)      (648)
   Increase in patents .............................................................       (42)       (45)
                                                                                       -------    -------

        Net cash used for investing activities .....................................      (473)      (693)
                                                                                       -------    -------

Cash flows from financing activities:
   Proceeds from sale of common stock ..............................................       567         --
                                                                                       -------    -------

        Net cash provided by financing activities ..................................       567         --
                                                                                       -------    -------

        Net increase (decrease) in cash and cash equivalents .......................       787       (429)

Cash and cash equivalents:
   Beginning of period .............................................................     4,830      8,066
                                                                                       -------    -------
   End of period ...................................................................   $ 5,617    $ 7,637
                                                                                       =======    =======
</TABLE>


                                      -6-
<PAGE>

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

RESULTS OF OPERATIONS--FISCAL 2000 FIRST QUARTER
COMPARED WITH FISCAL 1999 FIRST QUARTER

Revenues

      For the fiscal 2000 first quarter ended June 30, 1999, the Company's total
revenues were $3,741,000 compared with $3,846,000 for last year's first quarter.

      Product Revenues. Sales of LaserCard(R) optical memory cards and related
products were $3,730,000 for the first three months of fiscal 2000 versus
$3,838,000 for last year's comparable period.

      The Company sold approximately 1,000,000 LaserCard optical memory cards
for the fiscal 2000 first quarter compared with approximately 930,000 for last
year's first quarter. During the first quarter of fiscal 2000, the Company made
facility modifications to prepare for anticipated optical memory card
procurements by the U.S. government. These modifications interfered with current
card production and limited shipments during the quarter that reduced sales by
nearly $400,000. These delayed shipments will be made in subsequent quarters.

      Applications for the Company's LaserCard products include: medical data
applications in the United States; various programs in Europe and Asia,
including a hospital patient-record card system and a vehicle warranty and
maintenance records card; and U.S. government-related programs, including the
U.S. Department of Defense cargo shipment "Automated Manifest" card, the U.S.
Immigration and Naturalization Service (INS) Permanent Resident Card ("Green
Card"), and the U.S. Department of State border crossing card ("Laser Visa").

      In addition to using its own marketing staff, the Company utilizes
value-added reseller (VAR) companies and licensees 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 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/licensees may add application software, personal computers (PCs), and other
peripherals, and then resell these products, integrated into data systems, for
end-user customers.

      There can be no assurances that any new or existing VAR or licensee
company in any country will be successful in its markets or that it will place
follow-on orders with the Company for additional quantities of cards and
systems. In order to upgrade its customer base to increase the probability of
success, the Company will continue 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.


                                      -7-
<PAGE>

      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's VARs and/or their customers develop
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 medical image storage and health history cards. The Company recently
finished development of a complete card issuing application (software program)
in coordination with an existing commercial software company. This is now
offered for sale to all VARs and should greatly reduce the need for VARs to
develop their own personalization software.

      Optical memory cards are used in conjunction with a card reader/writer
device that connects to a personal computer (PC). The reader/writer is
integrated as a PC logical drive and has drive-letter access in the same manner
as floppy disk drives. Reader/writers are sold to VARs/licensees and other
customers of the Company. The price, performance, and availability of
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.

      Until July of 1999, the Company purchased reader/writers from a Japanese
licensee, Nippon Conlux Co., Ltd., ("Conlux"), which was the Company's sole
supplier of reader/writers. On May 28, 1999, arrangements were completed with
Conlux for the Company to purchase sets of parts to assemble reader/writers in
the United States, rather than continuing to purchase complete reader/writers
assembled in Japan by Conlux. The launching of this reader/writer manufacturing
and development operation in a 5,000-square-foot, leased facility, with added
staff is estimated to reduce pretax profit during fiscal 2000 by $1 million for
occupancy-related expenses, depreciation, amortization, salaries and fringe
benefits, and certain one-time expenditures estimated at $250,000 for
reader/writer assembly training. Investment in reader/writer-related inventory
is estimated at $2 million, and capital expenditures for reader/writer assembly
and design are budgeted for approximately $1.2 million in fiscal 2000, including
an estimated $300,000 in capitalized technology transfer costs to be amortized
over three years. The Company will be obligated to pay patent royalties on its
sales of reader/writers. In 1995, the Company assumed worldwide responsibility
for all repair and maintenance of Conlux reader/writer units and has a highly
skilled technical staff to support this function.

      The Company maintains an inventory of reader/writers that it believes is
adequate to meet customer demand. However, an interruption or change in the
supply of reader/writer parts or difficulties encountered in reader/writer
assembly could cause a delay in both reader/writer and optical memory card
shipments and a possible loss of sales, which would adversely affect operating
results.

      License Revenues. There were no licenses sold in the first quarter of
fiscal 2000 or in the fiscal 1999 first quarter. The Company does not rely on
license fees to finance operations.


                                      -8-
<PAGE>

Backlog

      As of June 30, 1999, the backlog for LaserCard optical memory cards was
approximately $8.9 million. Deliveries from this backlog are estimated to
average approximately 300,000 cards per month through January 2000. The monthly
delivery rate would increase with the receipt of additional orders. About 61% of
the June 30, 1999 backlog is for U.S. government orders; as is the case in all
U.S. government procurement, the government reserves the right to change
specifications, delay deliveries, and cancel all or part of the orders.

Margins

      The gross margin on product sales for the first quarter of fiscal 2000 was
42% compared with 49% for the prior-year period. As discussed above, during the
quarter ended June 30, 1999, the Company made facility modifications to prepare
for anticipated optical memory card procurements by the U.S. government. This
work interfered with production, causing lower volume and lower manufacturing
yields than historically achieved. The increased labor and overhead cost, mainly
due to the lower production yields resulting from the facility modification
activity, cost approximately 5 percentage points of the 7% differential between
this year's first quarter and last year's first quarter. This cost combined with
the limit on production volume due to the interference, cost several hundred
thousand dollars in gross margin and, therefore, in pretax profits for the
quarter. A decrease in reader/writer selling prices accounted for 1 percentage
point of the 7% differential between the two periods. The Company anticipates
that card margins will improve over the remainder of fiscal 2000. However, card
margins will fluctuate with the volume of cards produced and yields achieved.

Income and Expenses

      Selling, General, and Administrative Expenses (SG&A). For the fiscal 2000
first quarter, SG&A expenses were $1,079,000 compared with $827,000 for the
first quarter of fiscal 1997. The $252,000 increase in SG&A spending primarily
consists of $88,000 for marketing, $85,000 for start-up expenses for the
reader/writer manufacturing and development operation, a $43,000 increase in
general and administrative expenses, and a $29,000 increase in patent
amortization expense. The Company believes that SG&A expenses during the
remainder of fiscal 2000 will remain above fiscal 1999 levels.

      Research and Engineering Expenses (R&E). Research and engineering expenses
were $139,000 for the first quarter of fiscal 2000 compared with $134,000 for
the year-earlier period. The Company believes that R&E spending will increase
during fiscal 2000 for reader/writer development.

      Other Income and Expense. Total net other income for the first quarter of
fiscal 2000 was $86,000, including $87,000 interest income and $1,000 interest
expense. For last year's first quarter, total net other income was $86,000,
including $71,000 interest income, $3,000 interest expense, and $18,000 gain on
foreign currency exchange.

      Income Taxes. The Company recorded a $399,000 income tax benefit for the
first quarter of fiscal 2000 versus a $31,000 tax expense for the same period
last year. The income tax benefit for the fiscal 2000 first quarter included a
credit of $416,000 due to the change in the deferred tax asset discussed below,
partially offset by a $17,000 expense for alternative minimum taxes payable.


                                      -9-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      As of June 30, 1999, the Company had cash and cash equivalents of
$7,637,000 and no long-term debt.

      Net cash provided by operating activities was $264,000 for the first three
months of fiscal 2000 compared with $693,000 for the first three months of
fiscal 1999. Fluctuations in operating assets and liabilities will use cash in
some quarters and provide cash in other quarters. The increase in inventory
during the first quarter, net of the accounts payable increase, used
approximately $600,000 in cash during the first quarter of fiscal 2000. During
fiscal 2000, the Company will invest an estimated $2 million in
reader/writer-related inventory. The current level of revenues is sufficient to
generate cash from operations after expenses. Losses would recur if both of the
Company's largest U.S. government programs were to be canceled or not renewed
and not be replaced by other card orders.

      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 $845,000 profit recorded for the first quarter of
fiscal 2000, the Company's accumulated deficit was reduced to $20,784,000 and
stockholders' equity increased to $15,799,000.

      The Company's total deferred income tax asset was $14,202,000 at June 30,
1999. When utilized, the total deferred tax asset reduces income tax expense.
The Company believes that it is more likely than not that at least a portion of
this income tax asset will be realized and therefore has reduced the valuation
allowance against it. The net deferred income tax asset amounted to $416,000 at
June 30, 1999. 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.

      During the first quarter of fiscal 2000, the Company added capital
equipment and leasehold improvements of approximately $230,000, mainly for its
new reader/writer manufacturing and design operation, and approximately $290,000
of capital equipment and leasehold improvements for its card production
facility. For the production of state-of-the-art optical memory cards, the
Company's card production capacity exceeds 6 million cards per year. This
capacity can be expanded to a production capacity exceeding 8 million cards per
year over a six-month period with an expenditure of approximately $1.5 million,
previously budgeted for this purpose. 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 the investment used for expansion, the Company also
will make additional capital expenditures for cost savings, quality
improvements, and other purposes. The Company believes that during the next few
years, capital expenditures would be a minimum of $1.5 million per year for card
production equipment and automatic inspection equipment. In addition, the
Company's plans for fiscal 2000 include approxi mately $1.2 million in equipment
and other capital expenditures for reader/writer assembly and design, as
discussed above. Also in the fiscal 2000 first quarter, the Company capitalized
approximately $110,000 in costs associated with the transfer of reader/writer
designs and specifications.


                                      -10-
<PAGE>

YEAR 2000 DISCLOSURE

      Information Technology Systems. For purposes of upgrading in response to
ordinary business requirements, rather than in connection with Year 2000
preparedness, the Company comprehensively renovated its internal computer and
network systems during the past three years. As a result, the Company has
virtually no hardware systems more than three years old. Similarly, with the
exception of the Company's manufacturing tracking system, for which the Company
has contingency plans including possible replacement with a Year 2000 compliant
system before year end, most of the Company's software systems operate with
recent Microsoft products, which Microsoft has indicated are Year 2000
compliant. The Company has conducted an internal audit of its information
technology systems; and, based on this review and on information provided by the
manufacturers, the Company does not believe that the prospect of Year 2000
disruption of its information technology systems is likely to be material. With
respect to information processing conducted for the Company by third parties,
such as payroll processing and banking, the Company has obtained explicit
assurances of Year 2000 compliance.

      Embedded Systems. Among the Company's embedded systems, including plant
and manufacturing systems, the Company has identified only one date-sensitive
system, which is amenable to manual adjustment to bypass any potential Year 2000
interruption. With respect to certain plant systems controlled by third parties,
including certain security systems, the Company has obtained explicit assurances
of Year 2000 compliance. The Company has identified one plant system, the energy
management system, that will be disconnected prior to year end 1999, with
minimal effect on costs.

      Third Party Relationships; Contingency Plans. The Company has requested
information from certain key suppliers, customers, and VARs with respect to Year
2000 preparedness. The Company has assessed the responses received to date and
followed up with non-respondents. Interruptions in supply of key components,
such as OEM equipment and raw materials for the Company's products, could
interfere with the Company's ability to continue supplying its products. The
Company will assess the need to increase backup inventory of raw materials and
supplies if the potential exists for a supply interruption. Similarly, an
interruption in the ability of key purchasers to continue to meet payment
obligations to the Company could hinder the Company's cash flow. Such key
customers include the U.S. Immigration and Naturalization Service, the U.S.
Department of Defense, and the Company's VARs supporting those accounts. The
Company currently maintains substantial cash reserves against that contingency.

      Costs of Year 2000 Preparation; Effect on the Company's Business. Based
upon the factors described above, the Company's separately identifiable costs to
prepare for Year 2000 contingencies to date and estimated costs for future
efforts are not material and, apart from contingencies beyond the Company's
reasonable ability to foresee or control, such as general economic or
infrastructure disruption, the Company does not anticipate that Year 2000 issues
would have a material effect on the Company's business, other than possibly to
require the Company to invest in backup inventory, to draw down cash reserves,
or both. To the extent the Company incurs costs specifically relating to Year
2000 preparedness, the Company will expense those costs during the period in
which they are incurred.

      Assumptions and Uncertainties. The Company's expectations about future
costs associated with Year 2000 preparedness, and potential effects of Year 2000
disruptions, are subject to uncertainties which could allow a greater financial
impact than currently anticipated. Factors that could influence


                                      -11-
<PAGE>

the amount and timing of future costs and effects include the Company's success
in identifying systems and programs that contain, or are subject to corruption
as a result of receiving data containing, two-digit year codes; the nature and
amount of programming required to upgrade, or the cost required to replace, each
affected program or system; the rates and magnitude of effort required for labor
and consulting with the appropriate skills for remediation; the availability of
replacement systems and components; and the success of the Company's customers
and suppliers in addressing Year 2000 issues.

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. In particular, the
ability of the Company to maintain a profitable level of optical memory card
sales is subject to risks and uncertainties with respect to changes in
technology, customer diversification, customer expansion, the ability to
economically produce optical card reader/writers, the implementation of ongoing
commercial applications by customers, and the economic configuration and
operation of the Company's card manufacturing facility for increased output
levels. Such factors are described above, in the Company's Report on Form 10-K,
and in other documents filed by the Company from time to time with the
Securities and Exchange Commission.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      The status of actions against Sony Corporation, Dolby Laboratories, Inc.,
and others for infringement of the Company's patents covering digital sound
encoded on motion picture film, is reported in the Company's Form 10-K for the
fiscal year ended March 31, 1999. A trial date of October 30, 2000, has been set
for the earliest filed action against Sony Corporation.

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

      The above-listed exhibit is 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.


                                      -12-
<PAGE>

SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:

                        DREXLER TECHNOLOGY CORPORATION (Registrant)


Date: August 13, 1999   /s/ Jerome Drexler
                        --------------------------------------------------
                        Jerome Drexler, Chairman of the Board of Directors
                        and Chief Executive Officer
                        (Principal Executive Officer)


Date: August 13, 1999   /s/ Steven G. Larson
                        --------------------------------------------------
                        Steven G. Larson, Vice President of Finance
                        and Treasurer
                        (Principal Financial Officer and Principal
                        Accounting Officer)


                                      -13-
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                        EXHIBIT INDEX
EXHIBIT
NUMBER              EXHIBIT DESCRIPTION             PAGE
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  27               Financial Data Schedule           15