<PAGE>

EXHIBIT 99.1

Engagement Letter with Morgan Keegan & Co., Inc.



                          MORGAN KEEGAN & COMPANY, INC.


December 3, 2003



Mr. Steve Larson
Chief Financial Officer
Drexler Technology Corporation
2644 Bayshore Parkway
Mountain View, CA  94043

Dear Steve:

     Drexler Technology Corporation (the "Company") wishes to offer and sell in
a private placement to accredited investors (the "Placement") between seven and
twelve million dollars worth of its common stock, with or without warrants to
purchase common stock, (the "Securities") on the terms and conditions set forth
below. The Company desires to retain Morgan Keegan & Company, Inc. ("Morgan
Keegan") to act as exclusive placement agent in connection with the Placement on
the terms and conditions set forth below.

     1.   The Company hereby appoints Morgan Keegan to act as its exclusive
placement agent in connection with the Placement of Securities and authorizes
Morgan Keegan, on behalf of the Company as its placement agent and not as
principal, to offer the Securities to investors meeting qualifications agreed
upon by the Company and Morgan Keegan. Subject to Morgan Keegan's satisfactory
completion of its due diligence review of the Company and the approval of Morgan
Keegan's Commitment Committee, Morgan Keegan hereby accepts such appointment to
act as exclusive placement agent. In the event Morgan Keegan does not revoke in
writing its acceptance on account of due diligence review or failure to obtain
Commitment Committee approval within five (5) days from the date of this letter,
Morgan Keegan will be deemed to have unconditionally accepted this appointment
without further qualification. The Company and Morgan Keegan agree that
Securities will be offered and sold only at prices and on terms that are
acceptable to the Company and that Morgan Keegan makes no representation as to
what, if any, price or on

                                        1
<PAGE>

what terms investors will be willing to purchase Securities of the Company. The
Company may reject any subscriber or subscription at its sole discretion. Morgan
Keegan undertakes this engagement on a "best efforts" basis only, and shall not
be obligated to purchase any unsold allotment of Securities offered by the
Company. The Placement of the Securities is to be made directly by the Company
to purchasers of Securities pursuant to a definitive stock purchase or other
agreement entered into by the purchasers and the Company. The Company agrees
that any definitive purchase agreement shall, among other things (a) contain
customary representations, warranties and covenants on behalf of the Company,
and (b) provide for the delivery by the Company's counsel of customary opinions.
The foregoing exclusive relationship and the terms of this Agreement will not
apply to potential strategic investors who have, or are proposing, commercial
business relationships with the Company ("Strategic Investors") if such
Strategic Investors express an interest in investing in the Company separate
from the Placement being placed by Morgan Keegan..

     2.   As compensation for Morgan Keegan's services hereunder, the Company
agrees to pay to Morgan Keegan, contingent upon the successful closing of a sale
of Securities (the "Contingent Placement Fee"), a placement fee in the form of
cash and warrants as follows:

          (a) The Company will pay Morgan Keegan in cash at each closing a fee
          equal to five (5) percent of the gross proceeds delivered to the
          Company at such closing from the sale of Securities in the Placement;
          and

          (b) The Company shall at its discretion either (1) pay Morgan Keegan
          in cash at each closing an additional fee equal to one (1) percent of
          the gross proceeds delivered to the Company at such closing from the
          sale of Securities in the Placement or (2) issue to Morgan Keegan at
          each closing warrants (the "Placement Warrants") to purchase two (2)
          percent of the common shares sold as part of the Placement. The
          Placement Warrants shall be identical to any warrants sold to
          investors; provided, however, that if no warrants are sold to
          investors, the Placement Warrants shall have an exercise price per
          share equal to one-hundred (100) percent of the fair market value of a
          share as represented by the closing price on the NASDAQ National
          Market System on the date of closing of the Placement and shall be
          exercisable for a three (3) year term. If there are no investor
          warrants, the Placement Warrants shall contain terms and conditions
          normally found in such instruments, including, but not limited to,
          piggyback registration rights, and the shares for which such warrants
          are exercisable shall have the same rights and privileges as the
          shares of common stock acquired by purchasers of the Securities but
          will not contain anti-dilution or cashless exercise provisions.

                                        2
<PAGE>

If more than one closing is required in connection with the sale of such
Securities, only that portion of the Contingent Placement Fee applicable to each
closing shall be payable at such closing. In addition, whether or not the sale
of the Securities is completed, the Company will reimburse Morgan Keegan at the
initial closing (if one shall occur) or upon termination of this appointment for
its reasonable out-of-pocket expenses (including fees and expenses of counsel)
incurred in connection with its acting as placement agent hereunder, upon
delivery to the Company of reasonable documentation evidencing such expenses.
Such out-of-pocket expenses shall not exceed $50,000 without the prior written
consent of the Company, which may be withheld or granted at the Company's
discretion.

     3.   The Company represents and warrants to Morgan Keegan that it has not,
directly or indirectly, made any offers or sales of the Securities or securities
of the same or a similar class as the Securities during the six month period
ending on the date of this letter, except for offers to less than five
accredited investors, and has no current intention of making an offer or sale of
the Securities or securities of the same or a similar class as the Securities
for a period of six months after completion of this private placement, except
for the offering of the Securities through Morgan Keegan pursuant hereto. As
used herein, the terms "offer" and "sale" have the meanings specified in Section
2(3) of the Securities Act of 1933, as amended (the "Act"). The foregoing
excludes offers and sales in connection with its employee benefit plans and in
connection with an acquisition.

     4.   The Company and Morgan Keegan agree that:

          (a)  The Company will not, directly or indirectly, make any offer or
               sale of any of the Securities or any securities of the same or
               similar class as the Securities, the result of which would cause
               the offer and sale of the Securities to fail to be entitled to
               the exemption from registration afforded by Section 4(2) of the
               Act.

          (b)  The Company will furnish Morgan Keegan with such information (the
               "Information"), including financial statements, with respect to
               the business, operations, assets and liabilities of the Company
               as Morgan Keegan may reasonably request in order to permit Morgan
               Keegan to conduct its due diligence review of the Company and
               assist the Company in preparing a private placement memorandum
               (the "Private Placement Memorandum") for use in connection with
               the offering of the Securities. Morgan Keegan may rely upon the
               accuracy and completeness of the Information without independent
               verification. All such Information, whether oral or written, will
               be kept confidential by Morgan Keegan except for Information (i)
               that is already or becomes public through no breach of this
               provision, (ii) that is in the Private Placement Memorandum or in
               materials delivered by the Company to prospective investors, or
               that the Company agrees may be

                                        3
<PAGE>

               disclosed, (iii) that Morgan Keegan is required to disclose by
               applicable law, regulation or legal process, or (iv) that becomes
               available to Morgan Keegan on a non-confidential basis from a
               third party who is not bound by a confidentiality obligation to
               the Company; and provided, further, that the Information may be
               disclosed to Morgan Keegan's directors, officers, employees,
               agents, advisors and representatives in connection with its
               engagement hereunder with a need to know such Information, who
               shall be informed of the confidential nature of the Information
               and that such Information is subject to a confidentiality
               agreement or if, on the advice of counsel, Morgan Keegan is
               compelled to disclose such Information and has provided the
               Company with at least five (5) business days notice of the
               circumstances, the Information to be disclosed, and the reasons
               Morgan Keegan believes it is compelled to disclose such
               Information..

          (c)  The Company will be solely responsible for the contents of the
               Private Placement Memorandum and any and all other written or
               oral communications provided to any actual or prospective
               purchaser of the Securities with the express approval of the
               Company. The Private Placement Memorandum that will be initially
               circulated will incorporate publicly available documents, will
               not include any non-public material information about the
               Company, and will be approved by the Company; The Company
               represents and warrants that the Private Placement Memorandum and
               such other communications will not, as of the date of the offer
               or sale of the Securities, contain any untrue statement of a
               material fact or omit to state a material fact required to be
               stated therein or necessary in order to make the statements
               therein, in light of the circumstances under which they were
               made, not misleading. The Company authorizes Morgan Keegan to
               approach regarding the Placement and provide the Private
               Placement Memorandum and such other communications to up to ten
               prospective purchasers of the Securities, which number may be
               increased as circumstances warrant by mutual agreement between
               Morgan Keegan and the Company.

          (d)  The Company will comply with all requirements of Regulation D
               promulgated under the Act. Without limitation, the Company will:

               (1)  not offer or sell the Securities by means of any form of
                    general solicitation or general advertising;

               (2)  not offer or sell the Securities to any person who it does
                    not have a reasonable basis to believe is an "accredited
                    investor" (as defined in Rule 501 under the Act);

                                        4
<PAGE>

               (3)  exercise reasonable care to assure that the purchasers of
                    the Securities are not underwriters within the meaning of
                    Section 2(11) of the Act and, without limiting the
                    foregoing, that such purchases will comply with Rule 502(d)
                    under the Act; and

               (4)  file a Form D with the Securities and Exchange Commission as
                    contemplated by Rule 503 under the Act.

          (e)  Morgan Keegan will comply with all applicable requirements of
               Regulation D promulgated under the Act. Without limitation,
               Morgan Keegan will:

               (1)  not offer the Securities by means of any form of general
                    solicitation or general advertising;

               (2)  not offer the Securities to any person who it does not have
                    a reasonable basis to believe is an "accredited investor"
                    (as defined in Rule 501 under the Act); and

               (3)  exercise reasonable care to assure that the purchasers of
                    the Securities are not underwriters within the meaning of
                    Section 2(11) of the Act and, without limiting the
                    foregoing, that such purchases will comply with Rule 502(d)
                    under the Act.

          (f)  The Company agrees to take such action (if any) pursuant to
               Section 18 of the Act as Morgan Keegan may reasonably request to
               exempt the offer and sale of the Securities from registration or
               qualification under the securities laws of such states as Morgan
               Keegan may specify; provided that in connection therewith the
               Company will not be required to qualify as a foreign corporation
               or file a general consent to service of process. .

          (g)  In order to allow proper coordination of the proposed Placement,
               during the term of this engagement, the Company will instruct its
               executive officers and members of its board of directors to
               promptly notify one of the Company's co-CEO's, who shall turn
               promptly notify Morgan Keegan, if they are approached by any
               potential purchaser interested in purchasing any Securities in
               the Placement. In addition, the Company will keep Morgan Keegan
               fully and promptly informed of the status of any discussions or
               negotiations between the Company and any potential purchaser of
               Securities.

                                        5
<PAGE>

          (h)  Morgan Keegan will (i) advise the Company with regard to the size
               of the Placement and the structure and terms of the Securities
               that might be realized in the current market environment, (ii)
               will assist the Company in identifying and evaluating prospective
               qualified investors, (iii) will approach potential qualified
               investors to participate in the Placement, and (iv) work with the
               Company to develop a negotiating strategy and assist in
               negotiations with potential qualified investors.

     5.   Morgan Keegan will not have any obligations in connection with the
private placement of the Securities contemplated by this Agreement except as
expressly provided in this Agreement. Morgan Keegan will use its reasonable
"best efforts" in connection with the engagement hereunder; provided, however,
that this Agreement does not imply any obligation on the part of Morgan Keegan
to provide such equity capital to the Company, and in no event shall Morgan
Keegan be obligated to purchase the Securities for its own account.

     6.   The Company shall indemnify Morgan Keegan in the manner and to the
extent provided in Appendix A attached hereto, which Appendix A is incorporated
herein by reference.

     7.   The term of Morgan Keegan's appointment and authorization hereunder
shall extend from the date hereof to the earlier of (a) six (6) months from the
date hereof, (b) the date upon which a Placement is completed or (c) until
terminated by notice in writing given by either the Company or Morgan Keegan to
the other, either for convenience or due to a breach that has not been cured
within fifteen (15) business days of prior notice of such breach. The provisions
of Sections 2 (except for ability to incur reimbursable expenses), 5, 6, 8, 9,
12, 13 and this Section 7 shall survive any termination of this Agreement. If
during a period of six (6) months following such termination other than by
Morgan Keegan for convenience or by the Company for cause, the Company sells any
common stock (or securities convertible into or excisable or exchangeable for
common stock) through a private placement to purchasers who were not only
contacted by Morgan Keegan in its capacity as placement agent hereunder but also
had meaningful discussions with the Company regarding the Placement during the
term of this agreement, then the Company shall pay to Morgan Keegan upon the
completion of such a sale a fee equal to the Contingent Placement Fee which
would have been payable to Morgan Keegan pursuant to Section 2 if the sale
occurred during the term of Morgan Keegan's appointment and authorization
hereunder. Within thirty (30) days after termination of this Agreement, Morgan
Keegan shall provide the Company a list of purchasers who not only were
contacted by Morgan Keegan in its capacity as placement agent hereunder but also
had meaningful negotiations with the Company regarding the Placement during the
term of this agreement. Such list will be deemed to have been accepted by the
Company unless the Company notifies Morgan Keegan to the contrary within thirty
(30) days of receipt of such list.

                                        6
<PAGE>

     8.   The Company and Morgan Keegan each represent to the other that there
is no other person or entity that is entitled to a finder's fee or any type of
brokerage commission in connection with the transactions contemplated by this
Agreement as a result of any agreement or understanding with it. The Company
further agrees not to enter into any such agreement or understanding during the
term of Morgan Keegan's engagement hereunder.

     9.   All opinions and advice provided to the Company in connection with
this engagement are intended solely for the benefit and use of the Company in
connection with the matters described in this Agreement, and accordingly such
advice shall not be relied upon by any person or entity other than the Company.
The Company will not make any other use of any such opinions or advice. In
addition, none of (i) the name of Morgan Keegan, (ii) any advice rendered by
Morgan Keegan to the Company, or (iii) any communication from Morgan Keegan
pursuant to this Agreement will be quoted or referred to in any report,
document, release or other communication prepared, issued or transmitted by the
Company, or any person controlled by the Company, without Morgan Keegan's prior
written consent, which consent will not be unreasonably withheld.

     10.  The Company will, at the closing, furnish Morgan Keegan with the same
favorable opinion of the Company's counsel as is furnished to the investors,
together with a letter from such counsel that Morgan Keegan may rely on such
opinion as if directed to Morgan Keegan, and Morgan Keegan shall be deemed to be
a third party beneficiary of such opinion provided that Morgan Keegan provides
such counsel with an officer's certificate that it has complied with Section
4(e). Such opinion will include, among other things, legal assurances regarding
compliance with applicable corporate and securities laws and the availability of
exemption from registration for the offer and sale of the Securities in the
Placement. In addition, at closing, the Company will provide Morgan Keegan with
a certificate which provides that Morgan Keegan may rely on the representations
and warranties of the Company provided to the purchasers and the same
certificates of the officers of the Company as are furnished to such purchasers
and such other certification, opinions and documents as we or our counsel may
deem reasonably appropriate, in form and substance reasonably satisfactory to us
and our counsel.

     11.  In the event of consummation of any transaction, Morgan Keegan shall
have the right to place advertisements in financial and other newspapers and
journals at its own expense describing its services to the Company hereunder,
provided that Morgan Keegan will submit a copy of any such advertisements to the
Company for its approval, which approval shall not be unreasonably withheld.

     12.  The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provisions of this
Agreement, which shall remain in full force and effect.

                                        7
<PAGE>

     13.  This Agreement may not be amended or modified except in writing signed
by each of the parties hereto and shall be governed by and construed in
accordance with the laws of the State of Delaware. Each of the parties hereto
expressly waives all right to trial by jury in any action or proceeding arising
out of this Agreement. This Agreement incorporates the entire understanding of
the parties with respect to the subject matter hereof and supercedes all
previous agreements should they exist with respect thereto and shall be binding
upon and inure to the benefit of the Company, Morgan Keegan, and the other
Indemnified Persons and their respective successors, assigns, heirs and personal
representatives.

     14.  The Company and Morgan Keegan covenant and agree that any dispute
between them concerning the Contingent Placement Fee due to Morgan Keegan under
this Agreement shall be submitted to binding arbitration before the American
Arbitration Association (the "AAA") in accordance with the AAA's Commercial
Dispute Resolution Procedures and Supplemental Rules for Large Complex Disputes.

                                        8
<PAGE>

     If the foregoing correctly sets forth the understanding and agreement
between Morgan Keegan and the Company, please so indicate in the space provided
below, whereupon this letter shall constitute a binding agreement as of the date
first above written.

Very truly yours,

MORGAN KEEGAN & COMPANY, INC.

By:       /s/ Alper Cetingok
          ---------------------------------------
Name:     Alper Cetingok
          ---------------------------------------
Title:    Senior Vice President
          ---------------------------------------
Date:     December   , 2003
          ---------------------------------------






Agreed and Accepted:


DREXLER TECHNOLOGY CORPORATION

By:       /s/ Steve Larson
          ---------------------------------------
Name:     Steve Larson
          ---------------------------------------
Title:    Chief Financial Officer
          ---------------------------------------
Date:     December   , 2003
          ---------------------------------------


                                        9
<PAGE>

                                   APPENDIX A

                                 INDEMNIFICATION

1.   If, in connection with or arising out of the services or matters that are
     the subject of this letter agreement ("Agreement"), Morgan Keegan or any
     controlling person, affiliate, director, officer, employee or agent of
     Morgan Keegan (Morgan Keegan and each such other person referred to as an
     "Indemnified Person") becomes involved in any capacity in any lawsuit,
     claim or other proceeding for which indemnity may be sought pursuant to
     Section 5 of this Agreement, the Company shall immediately reimburse such
     Indemnified Person for any and all legal or other expenses reasonably
     incurred by such Indemnified Person in connection with investigating,
     preparing to defend or defending such lawsuit, claim or other proceeding.
     The Company also agrees to indemnify each Indemnified Person from, and hold
     it harmless against, any and all losses, claims, damages, liabilities or
     expenses to which such Indemnified Person may become subject (i) arising
     out of or based upon any untrue statement or alleged untrue statement of a
     material fact contained in, or incorporated by reference in, the Private
     Placement Memorandum or any other written or oral communication provided to
     any actual or prospective purchaser of the Securities or arising out of or
     based upon the omission or alleged omission to state therein a material
     fact required to be stated therein or necessary in order to make the
     statements therein, in light of the circumstances under which they were
     made, not misleading or (ii) arising in any manner out of or in connection
     with the services or matters which are the subject of this Agreement,
     including, without limitation, the offer and sale of the Securities;
     provided, however, that the Company shall not be liable in respect of any
     loss, claim, damage, liability or expense to the extent that it is finally
     judicially determined by a court of competent jurisdiction or arbitrator or
     trier in any other form of alternative dispute resolution that such loss,
     claim, damage or liability resulted from the gross negligence or willful
     misconduct of Morgan Keegan in the performance of its services hereunder or
     Morgan Keegan's breach of this Agreement and in such event the Indemnified
     Person will refund to the Company any previously reimbursed expenses.

2.   Promptly after receipt by an Indemnified Person of notice of its
     involvement in any claim, action, suit, proceeding or investigation (a
     "Claim"), such Indemnified Person shall, if a Claim in respect thereof is
     to be made against the Company for indemnification, notify the Company in
     writing of such involvement. Failure by such Indemnified Person to so
     notify the Company shall not relieve the Company from its obligation to
     indemnify any Indemnified Parties under this Agreement, except to the
     extent that such failure to notify results in the forfeiture by the Company
     of substantive rights or defenses. The Company shall not be responsible for
     any expenses incurred by an Indemnified Person until the Company has been
     notified of the Claim and been afforded the opportunity to assume its
     defense. If an Indemnified Person seeks indemnification hereunder with
     respect to any Claim brought by a third party, the Company shall be
     entitled to assume the defense and settlement of any such Claim with
     counsel of the Company's choice reasonably satisfactory to such Indemnified
     Person. Upon assumption by the Company of the defense of any such Claim,
     such Indemnified Person shall have the right to participate in the defense
     of such

                                       10
<PAGE>

     Claim and to retain its own counsel but the Company shall not be liable for
     any legal fees or expenses subsequently incurred by such Indemnified Person
     in connection with the defense thereof, unless (i) the Company has agreed
     in writing to pay such fees and expenses, (ii) the Company shall have
     failed to employ counsel reasonably satisfactory to such Indemnified Person
     in a timely manner or (iii) such Indemnified Person shall have determined
     and can reasonably demonstrate to the Company that representation of such
     Indemnified Party by counsel provided by the Company pursuant to the
     foregoing would be inappropriate due to actual or potential conflicting
     interests between the Company and such Indemnified Person, including,
     without limitation, situations in which there are one or more legal
     defenses available to such Indemnified Person that are different from or
     additional to those available to the Company and provided further that the
     Company shall not be liable for the fees and expenses of more than one
     counsel for all Indemnified Persons with respect to Claims. The Company
     shall not be liable for any settlement of any Claim effected without its
     written consent (which consent shall not be unreasonably withheld or
     delayed). Morgan Keegan and Indemnified Persons shall cooperate with the
     Company as reasonably requested in the defense and settlement of a Claim at
     the Company's expense.

3.   The Company agrees that the indemnification and reimbursement commitments
     set forth in this Section 5: (i) shall apply whether or not any Indemnified
     Person is a formal party to any such lawsuit, claim or other proceeding and
     (ii) are in addition to any liability that the Company may otherwise have
     to any Indemnified Person. The Company agrees that, unless a final judicial
     determination (or decision of an arbitrator or trier in any other form of
     alternative dispute resolution) is made to the effect specified in the
     preceding paragraph, any settlement of a lawsuit, claim or other proceeding
     against the Company arising out of the transactions contemplated by this
     Agreement which is entered into by the Company shall include a release from
     the party bringing such lawsuit, claim or other proceeding of each
     Indemnified Person, which release shall be reasonably satisfactory to
     Morgan Keegan. The Company further agrees that no Indemnified Person shall
     have any liability (whether direct or indirect, in contract, tort or
     otherwise) to the Company in connection with Morgan Keegan's engagement
     hereunder, except for such losses, claims, damages or liabilities incurred
     by the Company that are finally judicially determined by a court of
     competent jurisdiction (or decision of an arbitrator or trier in any other
     form of alternative dispute resolution) to have resulted from the gross
     negligence or willful misconduct of such Indemnified Person or Morgan
     Keegan's breach of this Agreement.

4.   The Company and Morgan Keegan agree that if indemnification or
     reimbursement sought pursuant to this Appendix A is finally judicially
     determined by a court of competent jurisdiction to be unavailable for
     reasons other than those set forth in the proviso in the last sentence of
     Paragraph 1 of this Appendix A, then, whether or not Morgan Keegan is the
     Indemnified Person, the Company and Morgan Keegan shall contribute to the
     losses, claims, damages, liabilities and expenses of Morgan Keegan for
     which such indemnification or reimbursement is sought but held unavailable
     (i) in such proportion as is appropriate to reflect the relative benefits
     to the Company, on one hand, and Morgan Keegan on the other, in connection
     with the transactions to which such indemnification or reimbursement
     relates,

                                       11
<PAGE>

     or (ii) if the allocation provided by clause (i) above is not permitted by
     applicable law, in such proportion as appropriate to reflect not only the
     relative benefits referred to in clause (i) but also the relative faults of
     the Company, on the one hand, and Morgan Keegan on the other, as well as
     any other equitable considerations; provided, however, that in no event
     shall the aggregate amount of loss, damage, expense and damage suffered by
     Morgan Keegan exceed the amount of the cash portion of the Contingent
     Placement Fee actually received by Morgan Keegan hereunder.

                                       12
<PAGE>

Amendment Agreement to Prior Letter Agreement



                          MORGAN KEEGAN & COMPANY, INC.



December 31, 2003



Mr. Steve Larson
Chief Financial Officer
Drexler Technology Corporation
2644 Bayshore Parkway
Mountain View, CA  94043

Dear Steve:

This letter confirms the mutually agreed upon understanding between Drexler
Technology Corporation (the "Company") and Morgan Keegan & Company, Inc.
("Morgan Keegan") regarding the fees owed by the Company to Morgan Keegan with
respect to the potential exercise by each "Investor" of the "Investor Option"
and "Warrants", as defined in the Stock and Warrant Purchase Agreement dated
December 23, 2003 (the "Purchase Agreement"), acquired by such Investor in
connection with the Company's private placement closed on December 24 through
30, 2003 (the "Private Placement"). The Company hereby acknowledges that Morgan
Keegan served as the Company's exclusive placement agent in connection with the
Private Placement and, in acting in such capacity, is entitled to receive the
Contingent Placement Fee pursuant to and as defined in Section 2 of the
engagement letter (the "Engagement Letter") between Morgan Keegan and the
Company dated December 5, 2003, should any Investor exercise the Investor Option
or Warrants (each an "Exercise") at any time prior to six (6) months following
the closing of the Private Placement as to such Investor. The Company
acknowledges that it will promptly notify Morgan Keegan of any Exercise and pay
Morgan Keegan the corresponding Contingent Placement Fee in connection with such
Exercise. The Company agrees that it will use its commercially reasonable best
efforts to so notify and remunerate Morgan Keegan within one week following each
Exercise. The Contingent Placement Fee may be all cash or part cash and part
warrants as described in the Engagement Letter. The Company and Morgan Keegan
agree that the full amount of reimbursable expenses to which Morgan Keegan is
entitled under the Engagement Letter is $4,354.67. The Company and Morgan Keegan
agree that the Engagement Letter is terminated as of December 30, 2003, but that
those provisions of the Engagement Letter which by its terms survive such
termination shall remain in full force and effect, except to the extent modified
as provided above.

                                       -1-

<PAGE>

If the foregoing correctly sets forth the understanding between the Company and
Morgan Keegan, please so indicate by signing in the space provided below and
return a copy of this letter to my attention, whereupon this letter shall
constitute a binding agreement as of the date hereof.


Kind regards,                               Agreed and Accepted:

/s/ Alper Cetingok                          /s/ Steve Larson

Alper Cetingok                              Steve Larson
Senior Vice President                       Chief Financial Officer
Morgan Keegan & Company, Inc.               Drexler Technology Corporation


                                       -2-