<PAGE>

                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, 2001

                                       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 8,
2001: 9,812,627

<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, 2001, included in the Company's Form 10-K Annual Report.

     The results of operations for the three months ended June 30, 2001 are not
necessarily indicative of results to be expected for the entire year ending
March 31, 2002.

     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
first quarter of fiscal 2001 ended on June 30, 2000, and the 13-week first
quarter of fiscal 2002 ended on June 29, 2001.

     CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS: The Company considers
all highly liquid investments, consisting primarily of commercial paper, taxable
notes, and U.S. government bonds, 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. Management determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates the classification of
investments as of each balance sheet date. As of June 30, 2001, the Company had
$1,484,000 classified as short-term investments, and all marketable securities
were classified as held-to-maturity.

     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,       June 30,
                                                 2001           2001
                                                 ----           ----
       Raw materials........................ $  2,954        $  3,558
       Work-in-process......................      552             716
       Finished goods.......................    1,267           1,016
       Systems and components
          held for resale...................      108              48
                                             --------        --------
                                             $  4,881        $  5,338
                                             ========        ========

     SEGMENT REPORTING. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information," the Company is required to disclose information about
operating segments. The Company adopted SFAS No. 131 in the fiscal year ended
March 31, 1999. The Company operates in one industry segment--the development,
manufacture, and sale of optical data produces used for information storage and
retrieval.

     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 No. 101 provides guidance on
applying generally accepted accounting


                                      -2-
<PAGE>

principles to revenue recognition issues in financial statements. The Company
believes that its revenue recognition policies comply with SAB No. 101.

     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 No. 44 in July 2000 and this adoption did not have
a material effect on the financial position or results of operations.

     On June 29, 2001, the Financial Accounting Standard Board (FASB) approved
for issuance SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Intangible Assets." Major provisions of these Statements are as follows: all
business combinations initiated after June 30, 2001 must use the purchase method
of accounting; the pooling of interest method of accounting is prohibited except
for transactions initiated before July 1, 2001; intangible assets acquired in a
business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized but are tested for impairment
annually using a fair value approach, except in certain circumstances, and
whenever there is an impairment indicator; other intangible assets will continue
to be valued and amortized over their estimated lives; in-process research and
development will continue to be written off immediately; all acquired goodwill
must be assigned to reporting units for purposes of impairment testing and
segment reporting; effective April 1, 2002, existing goodwill will no longer be
subject to amortization. Goodwill arising between June 29, 2001 and March 31,
2002 will not be subject to amortization. Adoption of SFAS No. 142 on April 1,
2002 will have no effect on the Company's financial position or results of
operations.

     EARNINGS PER SHARE: The Company computes earnings per share in accordance
with SFAS No. 128, "Earnings Per Share." SFAS No. 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 dilutive common stock equivalents outstanding. Common
stock equivalents for all periods presented 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 ended
June 30, 2000 and June 30, 2001 is shown in the following table (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                              June 30,
                                                                       2000              2001
                                                                       ----              ----
<S>                                                                 <C>                <C>
Net income........................................................  $   1,440          $   628
                                                                    =========          =======
Basic earnings per share:
    Weighted average common shares outstanding....................      9,872            9,820
                                                                    ---------          -------
Basic earnings per share..........................................  $     .15          $   .06
                                                                    =========          =======
Diluted earnings per share:
    Weighted average common shares outstanding....................      9,872            9,820
    Weighted average common shares from
       stock option grants........................................        364              315
                                                                    ---------          -------
    Weighted average common shares and common
       stock equivalents outstanding..............................     10,236           10,135
                                                                    ---------          -------
Diluted earnings per share........................................  $     .14          $   .06
                                                                    =========          =======
</TABLE>

     Because they would be antidilutive, having an exercise price greater than
the average market value for the periods, stock options representing 297,200
shares are excluded from the calculation of diluted earnings per share for the
three months ended June 30, 2000, and stock options representing 557,800 shares
are excluded from the calculation of diluted earnings per share for the three
months ended June 30, 2001.

                                      -3-
<PAGE>

                 DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                                                   March 31,            June 30,
                                                                                                     2001                 2001
                                                                                                     ----                 ----
                                                                                                                       (Unaudited)
                                     ASSETS
<S>                                                                                            <C>                       <C>
Current assets:
    Cash and cash equivalents ...............................................................  $     6,221               9,842
    Short-term investments...................................................................        5,387               1,484
    Accounts receivable, net ................................................................        1,278                 568
    Inventories .............................................................................        4,881               5,338
    Other current assets.....................................................................          566                 665
                                                                                               -----------         -----------
       Total current assets .................................................................       18,333              17,897
                                                                                               -----------         -----------

Property and equipment, at cost..............................................................       19,310              19,679
    Less--accumulated depreciation and amortization .........................................      (13,423)            (13,685)
                                                                                               -----------         -----------
       Property and equipment, net...........................................................        5,887               5,994
                                                                                               -----------         -----------
Patents and other intangibles, net...........................................................          878                 819
Deferred tax asset, net......................................................................        5,282               5,793
Other assets   ..............................................................................          111                  64
                                                                                               -----------         -----------
            Total assets.....................................................................  $    30,491         $    30,567
                                                                                               ===========         ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable.........................................................................  $     1,039               1,163
    Accrued payroll costs ...................................................................          439                 488
    Deferred revenue.........................................................................          994                 875
    Advance payments from customers..........................................................        1,275                 966
    Other accrued liabilities................................................................          422                 289
                                                                                               -----------         -----------
       Total current liabilities.............................................................        4,169               3,781
                                                                                               -----------         -----------
Stockholders' equity:
    Preferred stock, $.01 par value:
       Authorized--2,000,000 shares
       Issued--none..........................................................................           --                  --
    Common stock, $.01 par value:
       Authorized--30,000,000 shares
       Issued-- 9,951,451 shares at March 31, 2001 and
            9,951,451 shares at June 30, 2001................................................           99                  99
    Additional paid-in capital...............................................................       37,852              37,841
    Less--common stock treasury shares, at cost: 127,424 shares at March 31, 2001
       and 138,824 shares at June 30, 2001...................................................       (1,840)             (1,993)
    Accumulated deficit......................................................................       (9,789)             (9,161)
                                                                                               -----------         -----------
       Total stockholders' equity............................................................       26,322              26,786
                                                                                               -----------         -----------
            Total liabilities and stockholders' equity.......................................  $    30,491              30,567
                                                                                               ===========         ===========
</TABLE>

                                      -4-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                        Three Months Ended
                                                                                                             June 30,
                                                                                                      2000              2001
                                                                                                      ----              ----
<S>                                                                                               <C>                 <C>
Revenues:
    Product sales   ..............................................................................$  4,989            $  3,644
    License and royalty revenue...................................................................     182                 311
                                                                                                  --------            --------
       Total revenues.............................................................................   5,171               3,955
                                                                                                  --------            --------

Costs and expenses:
    Cost of sales.................................................................................   3,014               2,135
    Selling, general, and administrative expenses.................................................   1,028               1,194
    Research and engineering expenses.............................................................     429                 623
                                                                                                  --------            --------
       Total costs and expenses...................................................................   4,471               3,952
                                                                                                  --------            --------
           Operating income.......................................................................     700                   3

Other income:
    Interest income...............................................................................     112                 116
                                                                                                  --------            --------
       Total other income  .......................................................................     112                 116
                                                                                                  --------            --------

           Income before income taxes.............................................................     812                 119

Income tax benefit................................................................................    (628)               (509)
                                                                                                  --------            --------

           Net income.............................................................................$  1,440            $    628
                                                                                                  ========            ========

Net income per share:
           Basic .................................................................................$    .15            $    .06
           Diluted................................................................................$    .14                 .06

Weighted average number of common
   and common equivalent shares:
           Basic..................................................................................   9,872               9,820
           Diluted................................................................................  10,236              10,135

</TABLE>

                                      -5-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                             Three Months Ended
                                                                                                                  June 30,
                                                                                                           2000            2001
                                                                                                           ----            ----
<S>                                                                                                    <C>              <C>
Cash flows from operating activities:
   Net income..........................................................................................$  1,440         $   628
   Adjustments to reconcile net income to net cash provided by operating activities:
       Depreciation and amortization...................................................................     395             375
       Provision for doubtful accounts receivable......................................................     (17)              5
       Increase in deferred tax asset..................................................................    (752)           (511)

   Changes in operating assets and liabilities:
       Decrease in accounts receivable.................................................................     248             705
       (Increase) decrease in inventories..............................................................      93            (457)
       Increase in other assets........................................................................     (42)            (52)
       Increase (decrease) in accounts payable and accrued liabilities.................................    (100)             40
       Decrease in deferred revenue....................................................................    (178)           (119)
       Increase (decrease) in advance payments from customers..........................................      32            (309)
                                                                                                       --------         -------

            Net cash provided by operating activities..................................................   1,119             305
                                                                                                       --------         -------
Cash flows from investing activities:
   Purchases of property and equipment, net............................................................    (430)           (393)
   Investment in patents and other intangibles.........................................................    (130)            (30)
   Cash used for purchases of short-term investments...................................................  (5,297)         (1,484)
   Proceeds from maturities of short-term investments..................................................   4,182           5,387
                                                                                                       --------         -------

            Net cash provided by (used for) investing activities.......................................  (1,675)          3,480
                                                                                                       --------         -------
Cash flows from financing activities:
       Proceeds from sale of common stock through stock plans..........................................     115              11
       Cash used to purchase common stock through an open market repurchase program....................      --            (175)
                                                                                                       --------         -------

            Net cash provided by (used for) financing activities.......................................     115            (164)
                                                                                                       --------         -------

            Net increase (decrease) in cash and cash equivalents.......................................    (441)          3,621
                                                                                                       --------         -------
Cash and cash equivalents:
   Beginning of period.................................................................................   2,818           6,221
                                                                                                       --------         -------
   End of period  .....................................................................................$  2,377         $ 9,842
                                                                                                       ========         =======
</TABLE>

                                      -6-
<PAGE>

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

FORWARD-LOOKING STATEMENTS

     When used in this discussion, the words "expects," "anticipates,"
"believes," "estimates" and similar expressions are intended to identify
forward-looking statements. These statements, which include statements as to
expected benefits of the Company's direct control of the read/write drive
manufacturing facility, including lower cost drives, customer-optimized drive
systems, and drive systems with advanced security features; the adequacy of
inventory; anticipated orders from the Company's U.S. government subcontract;
expectations regarding revenues, margins, expenses, capital resources, capital
expenditures, and the Company's deferred tax asset and valuation allowance; the
effects of read/write drive prices on gross profits from read/write sales; the
Company's plans and expectations regarding the growth of its manufacturing
capacity and expected card yields therefrom; and expectations regarding market
growth and product demand, including the demand for the Company's cards in laser
eye-surgery systems and the expected emergence of opportunities for the
Company's products in Italy, India, China, Turkey, and Saudi Arabia are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include, but are not limited
to the Company's reliance on VARs and licensees, risks associated with doing
business in and with foreign countries, the unpredictability of customer demand
for products, manufacturing difficulties and complications associated with
increasing manufacturing capacity, reliance on single source and limited source
suppliers for components and raw materials, customer concentration, lengthy
sales cycles, and other risks detailed from time to time in the SEC reports of
Drexler Technology Corporation, including its annual report on Form 10-K for the
year ended March 31, 2001. These forward-looking statements speak only as of the
date hereof. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions, or circumstances on which any
statement is based.

RESULTS OF OPERATIONS--FISCAL 2002 FIRST QUARTER
COMPARED WITH FISCAL 2001 FIRST QUARTER

Revenues

     For the fiscal 2002 first quarter ended June 30, 2001, the Company's total
revenues were $3,955,000 compared with $5,171,000 for the comparable prior-year
quarter.

     PRODUCT REVENUES. For the fiscal 2002 first quarter, the Company sold
approximately 1,050,000 LaserCard(R) optical memory cards and 100 read/write
drives compared with approximately 1,100,000 optical memory cards and 480
read/write drives during last year's first quarter. Sales of LaserCard(R)
optical memory cards and related products were $3,644,000 for the first three
months of fiscal 2002 versus $4,989,000 for the comparable period last year.

     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 products is the United States government, representing
55% of the Company's fiscal 2001 revenues and 79% of fiscal 2002 first-quarter
revenues. These revenues are predominantly the result of two card programs--U.S.
Immigration and Naturalization Service (INS) Permanent Resident Cards ("Green
Cards") and U.S. Department of State (DoS) border crossing cards ("Laser
Visas"). A non-government customer, VISX Incorporated, representing 26% of the
Company's fiscal 2001 revenues and 8% of the Company's fiscal 2002 first-quarter
revenues, has indicated that its new, lower cost, laser eye-surgery equipment
will not employ LaserCard drives for system activation, although its current
LaserCard-equipped surgery systems will use the Company's optical memory cards.
This change and a reduction in eye surgeries due to current economic conditions
will have an adverse effect on the Company's revenue levels. Optical memory card
digital governance programs that appear to be emerging in other countries
include an electronic national identification card/social services card in
Italy, building construction permit cards in China, motor-vehicle registration
cards in several states in India, and import permit/import duty collection cards
in Turkey. The Company believes that identification cards in Saudi Arabia also
represents a market opportunity for optical memory cards.

                                      -7-
<PAGE>

     In addition to using its own marketing staff, the Company utilizes
value-added reseller (VAR) companies and card distribution 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 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 and card distribution 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 commercialization of optical cards. The
Company had been selling its read/write drives for less than three thousand
dollars per unit, and these units generally include the Company's interface
software/device drivers. During the fiscal 2001 first quarter, the Company
reduced the selling price for read/write drives by about 20% for typical
purchase quantities, to increase the markets for optical cards.

     During fiscal 2000, the Company established its own capabilities in
read/write drive assembly and design in the United States. Previously, the
Company purchased assembled drives from a licensee in Japan, Nippon Conlux Co.,
Ltd. ("Conlux"), which was a sole supplier of the drives. The Company completed
the acquisition for cash of Conlux's read/write drive manufacturing facility
(manufacturing tooling, equipment, etc.), transferred the facility to Mountain
View, California, and is producing drives locally. Initially, the Company
purchased sets of parts from Conlux for assembly in the United States. Now, the
Company is qualifying vendors for the parts it purchases for read/write drives.
With the read/write drive assembly and design now under the Company's direct
control, lower cost drives, customer-optimized drive systems, and drive systems
with advanced security features are expected to be developed.

     The Company maintains an inventory of read/write drive parts and finished
drives that it believes is 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.

     In order to obtain favorable pricing, purchases of read/write drive parts
are made in quantities that exceed the historical annual sales rate. Therefore,
based upon last year's sales quantity, the Company has more than one-year's
supply of read/write drive parts on hand. The Company purchases read/write drive
parts for its anticipated read/write drive demand and takes into consideration
the order-to-delivery lead times of vendors and the economic purchase order
quantity for such parts. At June 30, 2001, read/write drive parts and finished
goods inventory totaled $2.6 million. During fiscal 2002, the Company will
receive an additional $1 million in read/write drive parts that are now on
order. Including about 200 drives in finished goods inventory, approximately
1,100 read/write drives of the current design can be assembled from this
inventory. In addition, approximately 1,500 read/write drives of a new design
under development


                                      -8-
<PAGE>

could be assembled with the additional purchase of about $500,000 in unique
parts. The Company believes there is a market for the read/write drives.
However, since lower cost read/write drive designs may become available from the
Company before the parts are utilized, a portion of this inventory could be
written down if the Company determines that, to develop optical card markets,
the market price of drives would need to be reduced for the read/write drive
design containing those parts.

     LICENSE FEE REVENUES. Revenues from license fees were $311,000 for the
fiscal 2002 first quarter. This license revenue included $191,000 recognized on
a patent license and $119,000 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. For the first quarter of fiscal 2001, license revenue was
$179,000, earned on the Italian license. The Company does not rely on license
fees to finance operations.

Backlog

     As of June 30, 2001, the backlog for LaserCard optical memory cards only
(consisting of firm card orders and releases under card supply contracts) was
approximately $3 million. Of this amount, about 60% is for U.S. government Green
Cards and Laser Visa cards, under a U.S. government subcontract for the purchase
of optical memory cards. This subcontract, announced during the fiscal 2001
first quarter, has 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 per card. 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 commenced in September
2000, and 2.5 million cards have been shipped as of June 30, 2001, under this
subcontract.

     On July 10, 2001, the Company announced a $3.87 million order for optical
memory cards to be delivered during a period extending from October 2001 through
February 2002. On July 31, 2001, the Company announced a $754,000 order for
optical memory cards to be delivered during a five-month period beginning in
August 2001.

Margins

     OPTICAL MEMORY CARDS. The Company continues to depend on gross profit
generated from optical memory card sales. Gross profit on optical memory card
sales was about $1.6 million for the first quarter of fiscal 2002 compared with
$1.8 million for the first quarter of fiscal 2001. The decrease was due to the
decrease in card sales volume and increases in building-occupancy costs.

     READ/WRITE DRIVES. Gross profit on read/write drive sales decreased by
about $290,000, to a negative gross margin of $135,000, for the first quarter of
fiscal 2002 compared with a gross profit margin of about $155,000 for the first
quarter of fiscal 2001, due to lower sales volume and lower selling prices for
drives. In May 2001, after the fiscal year end, the Company reduced the selling
prices of its read/write drives by 20% for typical sales quantities, to increase
the markets for optical cards. This will reduce gross profit on read/write drive
sales in fiscal 2002 and increase the quantity of sales required to achieve
gross profits on read/write drive sales. Currently, the Company's priority is to
increase the number of read/write drives in the marketplace rather than
maximizing per-unit gross profit on read/write drives.

Income and Expenses

     SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). SG&A expenses were
$1,194,000 for the fiscal 2002 first quarter compared with $1,028,000 for the
first quarter of fiscal 2001. The increase for fiscal 2002 compared with fiscal
2001 was due mainly to increased occupancy costs and compensation expenses. The
Company believes that SG&A expenses for fiscal 2002 will be above fiscal 2001
levels, mainly due to increases in marketing expenses and other general
increases.

                                      -9-
<PAGE>

     RESEARCH AND ENGINEERING EXPENSES (R&E). R&E expenses were $623,000 for the
first quarter of fiscal 2002 compared with $429,000 for the comparable
prior-year period. The increase in R&E spending for fiscal 2002 consists of a
$138,000 increase in read/write drive manufacturing engineering and product
development and a $56,000 increase in optical card-related research and
engineering. The Company anticipates that R&E expenses will continue to increase
during fiscal 2002, primarily due to optical card read/write drive development
efforts.

     OTHER INCOME AND EXPENSE. Total net other income for the first three months
of fiscal 2002 was $116,000, consisting of interest income, compared with
$112,000 for interest income in the first quarter of fiscal 2001.

     PRETAX PROFIT. Pretax profit for the fiscal 2002 first quarter decreased by
about $700,000 compared with the fiscal 2001 first quarter due to the $1,348,000
reduction in product revenue, offset by the $132,000 increase in license revenue
and a $519,000 reduction in costs and expenses.

     INCOME TAXES. For the first quarter of fiscal 2002, the Company recorded an
income tax benefit of $509,000 versus a $628,000 income tax benefit for the
fiscal 2001 first quarter.

     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 June 30, 2001, the Company had cash, cash equivalents, and short-term
investments of $11,326,000, a current ratio of 4.7 to 1, and no long-term debt.

     Net cash provided by operating activities was $305,000 for the fiscal 2002
first quarter compared with $1,119,000 for last year's first quarter. The major
categories comprising this increase are:

<TABLE>
<CAPTION>
                                                                            Quarter Ended
                                                                               June 30,
                                                                          2000           2001
                                                                          ----           ----
<S>                                                                   <C>             <C>
       Earnings before taxes, depreciation, and amortization........  $  1,207        $   494
       Decrease in accounts receivable..............................       248            705
       (Increase) decrease in inventory.............................        93           (457)
       Decrease in advance payments from customers
          and deferred revenue......................................      (146)          (428)
       Other .......................................................      (283)            (9)
                                                                      --------        -------

                                                                      $  1,119        $   305
                                                                      ========        =======
</TABLE>

     The Company believes that the current level of revenues is sufficient to
generate cash from operations after expenses. Losses would occur if both of 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, or
if increases in product revenues or licenses do not keep pace with increased
marketing and R&E expenditures.

     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 on favorable terms or at all, if needed.

     As a result of the $628,000 profit recorded for the first quarter of fiscal
2002, the Company's accumulated deficit was reduced to $9,161,000 and
stockholders' equity increased to $26,786,000.


                                      -10-
<PAGE>

     Net cash provided by investing activities was $3,480,000 for the fiscal
2002 first quarter compared with $1,675,000 used for investing activities for
the fiscal 2001 first quarter. These amounts include changes in the maturity of
liquid investments as described in the next paragraph, purchases of property and
equipment (discussed below) of $393,000 for the fiscal 2002 first quarter and
$430,000 for the fiscal 2001 first quarter, and increases in patents and other
intangibles of $30,000 for the fiscal 2002 first quarter and $130,000 for the
fiscal 2001 first quarter.

     The Company considers all highly liquid investments, consisting primarily
of commercial paper, taxable notes, and U.S. government bonds, 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. Management determines the appropriate
classification of debt and equity securities at the time of purchase and
reevaluates the classification of investments as of each balance sheet date. As
of June 30, 2001, the Company had $1,484,000 classified as short-term
investments, compared with $5,387,000 at March 31, 2001, and all marketable
securities were classified as held-to-maturity.

     For optical memory card production, the Company added capital equipment and
leasehold improvements of approximately $256,000 during the first quarter of
fiscal 2002 compared with approximately $347,000 during the first quarter of
fiscal 2001. Depending on card type, the Company's card production capacity is
approximately 7 to 9 million cards per year and the Company believes that, if
justified by business conditions, it 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 expects to 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 $137,000
during fiscal 2002 first quarter compared with $87,000 during the fiscal 2001
first quarter. The Company expects that additional capital investments will be
made during fiscal 2002.

     Net cash used for financing activities was $164,000 for the fiscal 2002
first quarter compared with net cash of $115,000 provided by financing
activities for the first quarter of fiscal 2001. Financing activities consisted
of proceeds on sales of common stock through the Company's stock-option and
stock-purchase plans and cash used for purchases of common stock under a stock
repurchase program, discussed below. Sales of common stock through stock plans
were in the amounts of $11,000 for the first quarter of fiscal 2002 and $115,000
for the first quarter of fiscal 2001. There were no debt financing activities
for the fiscal 2002 or 2001 first quarters.

     During fiscal 2001, the Company announced a share repurchase program under
which up to 200,000 shares of common stock could be purchased by the Company
from time to time in Nasdaq Stock Market transactions in an aggregate amount not
exceeding $3 million. As of June 30, 2001, the Company had completed this
program.

PART II.    OTHER INFORMATION

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

     (a)    No exhibits are included in this report as the contents of the
            required exhibits are either not applicable to Registrant, to be
            provided only if Registrant desires, or contained elsewhere in this
            report.

     (b)    No reports on Form 8-K were filed by Registrant during the period
            for which this report is filed.


                                      -11-
<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:

<TABLE>
<CAPTION>
                                    DREXLER TECHNOLOGY CORPORATION (Registrant)

<S>                                 <C>
Date: August 10, 2001               /s/ Jerome Drexler
                                    ---------------------------------------------------------
                                    Jerome Drexler, Chairman of the Board of Directors
                                    and Chief Executive Officer (Principal Executive Officer)


Date: August 10, 2001               /s/ Steven G. Larson
                                    ----------------------------------------------------------
                                    Steven G. Larson, Vice President of Finance and Treasurer
                                    (Principal Financial Officer and Principal Accounting Officer)
</TABLE>


                                      -12-