<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q



               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 2003


                        Commission File Number: 000-06377


                         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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] Yes [ ] No

Number of outstanding shares of common stock, $.01 par value, at August 5, 2003:
10,555,007

<PAGE>
<TABLE>
<CAPTION>

                                            TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION                                                            Page Number
<S>                <C>                                                                    <C>
         Item 1.   Condensed Consolidated Financial Statements (Unaudited)
                       Condensed Consolidated Balance Sheets                                   3
                       Condensed Consolidated Statements of Operations                         4
                       Condensed Consolidated Statements of Cash Flows                         5
                   Notes to Condensed Consolidated Financial Statements                        6

         Item 2.   Management's Discussion and Analysis of Financial
                   Condition and Results of Operations (Unaudited)                            10

         Item 3.   Quantitative and Qualitative Disclosures about Market Rate Risks           17

         Item 4.   Controls and Procedures                                                    18

PART II. OTHER INFORMATION                                                                    18

         Item 1.   Legal Proceedings                                                          18
         Item 5.   Other Information                                                          18
         Item 6.   Exhibits and Reports on Form 8-K                                           18

SIGNATURES                                                                                    19

CERTIFICATIONS                                                                                20


------------------------------------------------------------------------------------------------------

PART I.  FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
</TABLE>

                                                  -2-

<PAGE>
<TABLE>
<CAPTION>

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

                                                                                               March 31, 2003          June 30, 2003
                                                                                               --------------          -------------

                                                               ASSETS
<S>                                                                                            <C>                    <C>
Current assets:
   Cash and cash equivalents .....................................................                $  5,754               $ 10,971
   Short-term investments ........................................................                   4,363                  2,972
   Accounts receivable ...........................................................                   1,659                    256
   Inventories ...................................................................                   5,711                  5,448
   Deferred tax asset ............................................................                   2,689                  3,660
   Prepaid and other current assets ..............................................                   1,016                    632
                                                                                                  --------               --------
      Total current assets .......................................................                  21,192                 23,939
                                                                                                  --------               --------

Property and equipment, at cost ..................................................                  23,204                 23,151
   Less--accumulated depreciation and amortization ...............................                 (15,795)               (15,405)
                                                                                                  --------               --------
      Property and equipment, net ................................................                   7,409                  7,746

Long-term investments ............................................................                   6,898                  2,398
Patents and other intangibles, net ...............................................                     567                    534
Deferred tax asset, net ..........................................................                   4,397                  4,397
                                                                                                  --------               --------

           Total assets ..........................................................                $ 40,463               $ 39,014
                                                                                                  ========               ========

                                                LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable ..............................................................                $  1,085               $    333
   Accrued liabilities ...........................................................                   1,439                  1,650
   Advance payments from customers ...............................................                   1,096                    529
                                                                                                  --------               --------
      Total current liabilities ..................................................                   3,620                  2,512
                                                                                                  --------               --------

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--10,443,192 shares at March 31, 2003
           and 10,545,724 shares at June 30, 2003 ................................                     104                    105
   Additional paid-in capital ....................................................                  42,556                 43,670
   Accumulated deficit ...........................................................                  (5,817)                (7,273)
                                                                                                  --------               --------
      Total stockholders' equity .................................................                  36,843                 36,502
                                                                                                  --------               --------

           Total liabilities and stockholders' equity ............................                $ 40,463               $ 39,014
                                                                                                  ========               ========


                  The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>

                                                                -3-
<PAGE>
<TABLE>
<CAPTION>

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

                                                                                                       Three Months Ended
                                                                                                           June 30,
                                                                                                      2002            2003
                                                                                                      ----            ----
<S>                                                                                                <C>             <C>
Revenues:
       Total revenues .............................................................................    6,588           2,446
                                                                                                    --------        --------

Cost of product sales .............................................................................    3,285           2,556
                                                                                                    --------        --------

       Gross profit (loss) ........................................................................    3,303            (110)
                                                                                                    --------        --------

Operating expenses:
    Selling, general, and administrative expenses .................................................    1,570           1,769
    Research and engineering expenses .............................................................      776             612
                                                                                                    --------        --------
       Total operating expenses ...................................................................    2,346           2,381
                                                                                                    --------        --------

           Operating income (loss) ................................................................      957          (2,491)

Other income ......................................................................................      106              64
                                                                                                    --------        --------

           Income (loss) before income taxes ......................................................    1,063          (2,427)

Income tax expense (benefit) ......................................................................      404            (971)
                                                                                                    --------        --------

           Net income (loss)......................................................................  $    659        $ (1,456)
                                                                                                    ========        ========

Net income (loss) per share:
           Basic .................................................................................  $    .06        $   (.14)
           Diluted................................................................................  $    .06        $   (.14)

Weighted-average shares used in computing net income (loss) per share:
           Basic ..................................................................................   10,300          10,478
           Diluted ................................................................................   11,117          10,478


              The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>

                                                             -4-
<PAGE>
<TABLE>
<CAPTION>

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


                                                                                                           Three Months Ended
                                                                                                                June 30,
                                                                                                           2002          2003
                                                                                                           ----          ----
<S>                                                                                                      <C>           <C>
Cash flows from operating activities:
   Net income (loss)...................................................................................  $    659      $ (1,456)
   Adjustments to reconcile net income (loss)  to net cash
       provided by (used in) operating activities:
       Depreciation and amortization ...................................................................      408           466
       Provision for doubtful accounts receivable ......................................................       11             2
       (Increase) decrease in deferred tax asset .......................................................      307          (971)
       Provision for excess and obsolete inventory .....................................................       43            --
       Tax benefit for stock option exercises ..........................................................       96            --

   Changes in operating assets and liabilities:
       (Increase) decrease in accounts receivable ......................................................      (87)        1,401
       (Increase) decrease in inventories ..............................................................      (91)          263
       (Increase) decrease in other assets .............................................................      (64)          384
       Decrease in accounts payable and accrued liabilities ............................................      (76)         (545)
       Increase in deferred revenue ....................................................................       76             4
       Increase (decrease) in advance payments from customers ..........................................       71          (567)
       Decrease in deferred gross profit ...............................................................     (710)           --
                                                                                                         --------      --------

            Net cash provided by (used in) operating activities ........................................      643        (1,019)
                                                                                                         --------      --------

Cash flows from investing activities:
   Purchases of property and equipment .................................................................     (802)         (736)
   Investment in patents and other intangibles .........................................................      (35)          (34)
   Purchases of investments ............................................................................   (3,838)           --
   Proceeds from maturities of investments .............................................................    2,243         5,891
                                                                                                         --------      --------

            Net cash provided by (used in) investing activities ........................................   (2,432)        5,121
                                                                                                         --------      --------

Cash flows from financing activities:
       Proceeds from sale of common stock through stock plans ..........................................      807         1,115
                                                                                                         --------      --------

            Net cash provided by financing activities ..................................................      807         1,115
                                                                                                         --------      --------

            Net increase (decrease) in cash and cash equivalents .......................................     (982)        5,217

Cash and cash equivalents:
   Beginning of period .................................................................................    8,193         5,754
                                                                                                         --------      --------
   End of period  .....................................................................................  $  7,211      $ 10,971
                                                                                                         ========      ========


                The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>

                                                               -5-
<PAGE>

                 DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     BASIS OF PRESENTATION. The condensed consolidated financial statements
contained herein include the accounts of Drexler Technology Corporation and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

     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 accounting principles generally accepted in the United States of America
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 include only normal recurring adjustments) necessary to present fairly
the financial position and results of operations as of and for the periods
indicated.

     These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto for
the year ended March 31, 2003, included in the Company's Annual Report on Form
10-K.

     The results of operations for the three months ended June 30, 2003 are not
necessarily indicative of results to be expected for the entire fiscal year
ending March 31, 2004.

     FISCAL PERIOD: For purposes of presentation, the Company labels its annual
accounting period end as March 31 and its interim quarterly periods as ending on
the last day of the corresponding month. The Company, in fact, operates and
reports based on quarterly periods ending on the Friday closest to month end.
The 13-week first quarter of fiscal 2003 ended on June 28, 2002, and the 13-week
first quarter of fiscal 2004 ended on June 27, 2003.

     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,
                                            2003        2003
                                            ----        ----

                 Raw materials ........... $3,234      $3,113
                 Work-in-process .........    220         231
                 Finished goods ..........  2,257       2,104
                                           ------      ------
                                           $5,711      $5,448
                                           ======      ======

     RECLASSIFICATIONS. Certain items have been reclassified in the prior year
to conform to the current year presentation.

     NET INCOME (LOSS) PER SHARE: Basic net income (loss) per share is computed
by dividing net income (loss) by the weighted average number of shares of common
stock outstanding. Diluted net income (loss) per share is computed by dividing
net income (loss) by the weighted average number of shares of common stock and
common stock equivalents outstanding. Common stock equivalents consist of stock
options using the treasury stock method. As their effect would be antidilutive,
stock options were excluded from the calculation of the diluted net loss per
share for the three months ended June 30, 2003. The reconciliation of the
denominators of the basic and diluted net income (loss) per share computation
for the three months ended June 30, 2002 and June 30, 2003 is shown in the
following table (in thousands, except per share data):

                                      -6-
<PAGE>

                                                           Three Months Ended
                                                                 June 30,
                                                           2002          2003
                                                           ----          ----

Net income (loss) .................................      $    659      $ (1,456)
                                                         ========      ========

Basic net income (loss) per share:
    Weighted average common shares outstanding ....        10,300        10,478
                                                         --------      --------
Basic net income (loss) per share .................      $    .06      $   (.14)
                                                         ========      ========

Diluted net income (loss) per share:
    Weighted average common shares outstanding ....        10,300        10,478
    Weighted average common shares from
       stock option grants ........................           817          --
                                                         --------      --------

    Weighted average common shares and common
       stock equivalents outstanding ..............        11,117        10,478
                                                         --------      --------

Diluted net income (loss) per share ...............      $    .06      $   (.14)
                                                         ========      ========

     REVENUE RECOGNITION. Product sales primarily consist of card sales and
sales of read/write drives. The Company recognizes revenue from product sales
when the following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4)
collectibility is reasonably assured. The Company recognizes revenue on product
sales at the time of shipment when shipping terms are F.O.B. shipping point,
orders are placed pursuant to a pre-existing sales arrangement and there are no
post-shipment obligations or customer acceptance criteria. Where appropriate,
provision is made at the time of shipment for estimated warranty costs and
estimated returns.

     The Company's U.S. government subcontract requires delivery to a secure,
government-funded vault built on Company premises. Deliveries are made into the
vault on a fixed schedule specified by the prime contractor. At the time the
cards are delivered to the vault, title to the cards transfers to the
government, the prime contractor is invoiced, and payment is due according to
normal trade payment terms. However, revenue is recognized when the cards are
shipped from the vault to the government unless the Company receives a fixed
schedule, notification, or plan for shipments out of the vault to the
government, in which case revenue is recognized upon the latter of receipt of
such fixed shipment schedule or delivery of the cards into the vault.

     License revenue, which may consist of up-front license fees and long-term
royalty payments, is recognized as revenue when realized. The cost of license
revenue, unless patent litigation is involved, is not material and is included
in selling, general, and administrative expenses.

     The Company applies the provisions of Statement of Position (SOP) 97-2,
"Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products. Revenue from the license
of the Company's software products is recognized when persuasive evidence of an
arrangement exists, the software product has been delivered, the fee is fixed or
determinable, and collectibility is reasonably assured, and, if applicable, upon
acceptance when acceptance criteria are specified or upon expiration of the
acceptance period. To date, software sales have not been significant to the
Company's business.

     ACCOUNTING FOR INCOME TAXES. As part of the process of preparing its
consolidated financial statements, the Company is required to estimate income
taxes in each of the jurisdictions in which it operates. This process involves
estimating the actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheets. The Company must then assess the likelihood that the deferred tax assets
will be recovered from future taxable income and to the extent that management
believes recovery is not likely, the Company must establish a valuation
allowance. To the extent that a valuation allowance is established or increased
in a period, the Company must include an expense within the tax provision in the
statements of operations.

                                      -7-
<PAGE>

     Significant management judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance recorded against
the Company's deferred tax assets. The Company has recorded a valuation
allowance of $5.3 million as of June 30, 2003, due to uncertainties related to
its ability to utilize some of the deferred tax assets, primarily consisting of
certain net operating losses attributable to stock option deductions carried
forward, before they expire. The amount of the valuation allowance has been
determined based on management's estimates of taxable income by jurisdiction in
which the Company operates over the periods in which the related deferred tax
assets will be recoverable.

     STOCK-BASED COMPENSATION. On December 31, 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 148, Accounting for Stock Based Compensation - Transition and Disclosure,
which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent
disclosures about the effects of stock-based compensation. The Company accounts
for its stock-based compensation plans using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Compensation cost for stock options, if any, is measured by
the excess of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. SFAS No. 123,
Accounting for Stock-Based Compensation, established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation plans. Had compensation expense been determined consistent
with SFAS No. 123, the Company's net income (loss) and basic and diluted net
income (loss) per share would have decreased to the following pro forma amounts
(dollars, in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                                           Three Months Ended
                                                                                                June 30,
                                                                                          2002             2003
                                                                                          ----             ----
<S>                                                                                     <C>              <C>
                 Net income (loss), as reported ................................        $    659         $ (1,456)
                                                                                        ========         ========

                 Deduct: total stock-based employee compensation
                    determined under fair value based method for all
                    awards, net of related tax effects .........................            (255)            (316)
                                                                                        --------         --------
                 Pro forma net income (loss) ...................................        $    404         $ (1,772)
                                                                                        ========         ========

                 Basic net income (loss) per common share:
                    As reported ................................................        $    .06         $   (.14)
                                                                                        ========         ========
                    Pro forma ..................................................        $    .04         $   (.17)
                                                                                        ========         ========

                 Diluted net income (loss) per common share:
                    As reported ................................................        $    .06         $   (.14)
                                                                                        ========         ========
                    Pro forma ..................................................        $    .04         $   (.17)
                                                                                        ========         ========

                 Shares used in computing basic and diluted pro forma net income
                    (loss) per share:
                    Basic ......................................................          10,300           10,478
                    Diluted ....................................................          11,117           10,478

                 Stock-based employee compensation expense included
                    in reported net income (loss), net of related tax effect ...              17               20
</TABLE>

                                      -8-
<PAGE>

     The Company computed the fair value of each option grant on the date of
grant using the Black-Scholes option valuation model with the following
assumptions:

<TABLE>
<CAPTION>
                                                                      Three Months Ended
                                                                           June 30,
                                                                  2002                  2003
                                                                  ----                  ----
<S>                                                              <C>                   <C>
                 Risk-free interest rate.........................4.41% to 4.99%        2.74%
                 Average expected life of option.................5 to 8 years          5 years
                 Dividend yield..................................0%                    0%
                 Volatility of common stock......................50%                   50%
                 Weighted average fair value of option grants....$10.67                $10.06
</TABLE>

     CONCENTRATION OF CREDIT RISK. One United States customer comprised 99% of
accounts receivable at March 31, 2003 and three United States customers
comprised 67%, 16%, and 13%, respectively, of accounts receivable at June 30,
2003.

     LEGAL MATTERS. The Company was informed on July 10, 2003, that its
subsidiary, LaserCard Systems Corporation, had been named as one of several
defendants in a lawsuit brought by George Rawe. Mr. Rawe alleged in the lawsuit
that he was injured in laser eye surgery performed using a VISX, Incorporated
laser system that may have incorporated a LaserCard and read/write drive as
components. Mr. Rawe is suing the physicians involved for malpractice and VISX,
Incorporated, the Company, and various unnamed defendants for product
liability, alleging their products were defective. The lawsuit was filed in
California Superior Court for San Joaquin County, case number CV020962 and seeks
unspecified damages. The Company is just beginning to evaluate the complaint and
the Company's defenses, and any indemnification rights or obligations the
Company may have with respect to VISX, Incorporated. The Company has tendered
defense of the lawsuit to its product liability insurance carrier which has
agreed to provide a defense.

     RECENT ACCOUNTING PRONOUNCEMENTS. In November 2002, the Emerging Issues
Task Force (EITF) reached a consensus on Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of EITF Issue No.
00-21 will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company believes that the adoption of this
standard will have no material impact on its consolidated financial statements.

     In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). FIN 46 addresses
consolidation by business enterprises of variable interest entities. Under that
interpretation, certain entities known as Variable Interest Entities (VIEs) must
be consolidated by the primary beneficiary of the entity. The primary
beneficiary is generally defined as having the majority of the risks and rewards
arising from the VIE. For VIEs in which a significant (but not majority)
variable interest is held, certain disclosures are required. It applies
immediately to variable interest entities created after January 31, 2003, and
applies in the first year or interim period beginning after June 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The Company does not believe that the
adoption of this interpretation will have a material effect on its consolidated
financial position, results of operations, or cash flows.

     In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
Company does not believe that adoption of SFAS No. 149 will have any material
impact on its consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity. It
requires companies to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
beginning with the second quarter of fiscal 2004; the Company does not believe
that adoption of SFAS No. 150 will have any material impact on its consolidated
financial statements.

                                      -9-
<PAGE>

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

     The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the condensed
consolidated financial statements and related notes included elsewhere in this
Form 10-Q Report and the consolidated financial statements and notes thereto for
the year ended March 31, 2003, included in the Company's fiscal 2003 Annual
Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

     All statements contained in this report that are not historical facts are
forward-looking statements. The forward-looking statements in this report are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. They are not historical facts or guarantees of future
performance or events. Rather, they are based on current expectations,
estimates, beliefs, assumptions, and goals and objectives and are subject to
uncertainties that are difficult to predict. As a result, the Company's actual
results may differ materially from the statements made. Often such statements
can be identified by their use of words such as "may," "will," "intends,"
"plans," "believes," "anticipates," "visualizes," "expects," and "estimates."
Forward-looking statements made in this report include statements as to current
and potential customers, applications, orders, or market segments for optical
memory card products; statements as to anticipated release orders and/or
shipment quantities and schedules under the Company's U.S. government and
Canadian government subcontracts; the Company's expectations that it will
receive an order this calendar year for the purchase of 1,000 read/write drives
pursuant to a Request for Quotation (RFQ) issued by the U.S. Department of
Homeland Security; the Company's expectations regarding current and future
orders and deliveries of cards and read/write drives under Italian government
card programs; the need for, expected success of, and potential benefits from
the Company's research and engineering efforts, including developing new or
enhanced card capabilities, software products, production-model read-only
drives, or drives with advanced security features or lower manufacturing costs;
whether introduction of new drives will increase sales, and the effects of
read/write drive prices and sales volume on gross profits or gross margins from
read/write drive sales; the Company's belief that the read/write drive inventory
at June 30, 2003 is reflected at its net realizable value; belief that there is
a market for both designs of its read/write drives to support and expand optical
card sales and that the read/write drive inventory on hand will be ordered by
customers; the Company's efforts to recruit new value-added resellers (VARs);
expectations regarding revenues, margins, capital resources, capital
expenditures and investments, and the Company's deferred tax asset and related
valuation allowance; anticipated reductions of federal tax cash payments due to
current Company tax benefits; statements as to expected card delivery volumes,
estimates of optical card production capacity, expected card yields therefrom,
the Company's ability to expand production capacity, and the Company's plans and
expectations regarding the growth and associated capital costs of such capacity;
estimates that revenues will be sufficient to generate cash from operating
activities over the next 12 months despite expected quarterly fluctuations;
expectations regarding market growth, product demand, and foreign business
including emerging programs or prospective applications in China, India, Italy,
Saudi Arabia, and Macedonia; and expectations as to continued, or expanded, or
potential U.S. government or other governmental card programs.

     These forward-looking statements are based upon the Company's assumptions
about and assessment of the future, which may or may not prove true, and involve
a number of risks and uncertainties including, but not limited to, customer
concentration and reliance on continued U.S. government business; lengthy sales
cycles; changes in and reliance on domestic and foreign government
policy-making; the risks associated with doing business in and with foreign
countries, the impact of litigation or governmental or regulatory proceedings;
the ability of the Company or its customers to initiate and develop new programs
utilizing the Company's card products; the Company's reliance on value-added
resellers (VARs), licensees, or other third parties to generate sales, perform
customer system integration, develop application software, or integrate optical
card systems with other technologies; risks and difficulties associated with
development, manufacture, and deployment of optical cards, drives, and systems;
potential manufacturing difficulties and complications associated with
increasing manufacturing capacity of cards and drives and outsourcing
manufacturing; the Company's ability to produce and sell read/write drives in
volume; the unpredictability of customer demand for products and customer
issuance and release of corresponding orders; government rights to withhold
order releases, reduce the quantities released, and extend shipment dates;
whether the Company receives a fixed schedule, notification, or plan for
shipments out of the government-funded vault located on the Company's premises,
enabling the Company to recognize revenues on cards

                                      -10-
<PAGE>

delivered to the vault instead of when cards later are shipped from the vault;
the U.S. government's right to modify or withdraw its RFQ for 1,000 read/write
drives, award any resulting contract, make multiple awards, and determine the
award quantity at its sole discretion; the possibility that the Company's
products will not be selected for the US-VISIT (United States Visitor and
Immigrant Status Indicator Technology) program and/or the TWIC (Transportation
Workers Identification Credential) program; the possibility that the Italian
government will not fully implement optical memory card programs as currently
visualized or place follow-on orders; the impact of technological advances,
general economic trends, and competitive products; and other risks detailed from
time to time in the SEC filings of Drexler Technology Corporation, including its
Annual Report on Form 10-K for the fiscal year ended March 31, 2003. These
forward-looking statements speak only as to the date of this report, and, except
as required by law, the Company undertakes no obligation to publicly release
updates or revisions to these statements whether as a result of new information,
future events, or otherwise.

CRITICAL ACCOUNTING POLICIES

     REVENUE RECOGNITION. Product sales primarily consist of card sales and
sales of read/write drives. The Company recognizes revenue from product sales
when the following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4)
collectibility is reasonably assured. The Company recognizes revenue on product
sales at the time of shipment when shipping terms are F.O.B. shipping point,
orders are placed pursuant to a pre-existing sales arrangement and there are no
post-shipment obligations or customer acceptance criteria. Where appropriate,
provision is made at the time of shipment for estimated warranty costs and
estimated returns.

     The Company's U.S. government subcontract requires delivery to a secure,
government-funded vault built on Company premises. Deliveries are made into the
vault on a fixed schedule specified by the prime contractor. At the time the
cards are delivered to the vault, title to the cards transfers to the
government, the prime contractor is invoiced, and payment is due according to
normal trade payment terms. However, revenue is recognized when the cards are
shipped from the vault to the government unless the Company receives a fixed
schedule, notification, or plan for shipments out of the vault to the
government, in which case revenue is recognized upon the latter of receipt of
such fixed shipment schedule or delivery of the cards into the vault.

     License revenue, which may consist of up-front license fees and long-term
royalty payments, is recognized as revenue when realized. The cost of license
revenue, unless patent litigation is involved, is not material and is included
in selling, general, and administrative expenses.

     The Company applies the provisions of Statement of Position (SOP) 97-2,
"Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products. Revenue from the license
of the Company's software products is recognized when persuasive evidence of an
arrangement exists, the software product has been delivered, the fee is fixed or
determinable, and collectibility is reasonably assured, and, if applicable, upon
acceptance when acceptance criteria are specified or upon expiration of the
acceptance period. To date, software sales have not been significant to the
Company's business.

     ACCOUNTING FOR INCOME TAXES. As part of the process of preparing its
consolidated financial statements, the Company is required to estimate income
taxes in each of the jurisdictions in which it operates. This process involves
estimating the actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheets. The Company must then assess the likelihood that the deferred tax assets
will be recovered from future taxable income and to the extent that management
believes recovery is not likely, the Company must establish a valuation
allowance. To the extent that a valuation allowance is established or increased
in a period, the Company must include an expense within the tax provision in the
statements of operations.

     Significant management judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance recorded against
the Company's deferred tax assets. The Company has recorded a valuation
allowance of $5.3 million as of June 30, 2003, due to uncertainties related to
its ability to utilize some of the deferred tax assets, primarily consisting of
certain net operating losses attributable to stock option deductions carried
forward, before

                                      -11-
<PAGE>

they expire. The amount of the valuation allowance has been determined based on
management's estimates of taxable income by jurisdiction in which the Company
operates over the periods in which the related deferred tax assets will be
recoverable.

     The Company's net operating losses available to reduce future taxable
income expire on various dates from fiscal 2005 through fiscal 2023. The
Company's methodology for determining the realizability of its deferred tax
assets involves estimates of future taxable income from its core business, which
assume ongoing business under the U.S. government subcontract for Permanent
Resident Cards and Laser Visa Border Crossing Cards and the Canadian
government's Permanent Resident Card program, as well as estimated operating
expenses to support that anticipated level of business; the estimated impact of
future stock option deductions; and the expiration dates and amounts of net
operating loss carryforwards. These estimates are projected through the life of
the related deferred tax assets based on assumptions which management believes
to be reasonable and consistent with current operating results. In concluding
that a valuation allowance was required as of June 30, 2003, the Company
considered both the positive and negative evidence regarding its ability to
generate sufficient future taxable income to realize its deferred tax assets.
Positive evidence included having achieved taxable income in recent periods and
having achieved profitability for financial reporting purposes since 1999, which
the Company concluded provided evidence regarding its ability to generate a
sustained level of future profits through the expiration periods of the net
operating loss carryforwards. Other positive evidence included (1) the level of
sales and business experienced under the contract with the U.S. government for
Permanent Resident Cards and Laser Visa Border Crossing Cards and the Canadian
government's Permanent Resident Card program; (2) prospects in Italy and Saudi
Arabia for national identification card programs; and (3) the heightened
interest in border security initiatives following the events of September 11,
2001. Negative evidence included (1) the Company's reliance on a limited number
of customers for a substantial portion of its business; (2) the uncertainty in
timing of anticipated orders from customers; (3) the impact of future stock
option deductions on taxable income; and (4) recent experience of net operating
loss carryforwards expiring unused; and (5) the loss for the first quarter of
fiscal 2004. In weighing the positive and negative evidence above, the Company
considered the "more likely than not" criteria pursuant to SFAS No. 109 as well
as the risk factors related to its future business described under the
subheadings: "Dependence on VARs and on a Limited Number of Customers," "Lengthy
Sales Cycles," "Technological Change," and "Competition" as noted in the section
entitled "Factors That May Affect Future Operating Results" in the Company's
Report on Form 10-K for the fiscal year ended March 31, 2003.

     In the event that actual results differ from these estimates or that these
estimates are adjusted in future periods, the Company may need to adjust the
amount of the valuation allowance based on future determinations of whether it
is more likely than not that some or all of its deferred tax assets will be
realized. An increase to the valuation allowance would require a corresponding
amount recorded as additional income tax expense, while a decrease in the
valuation allowance would be recorded as a credit to stockholders' equity.

     INVENTORIES. The Company values its inventory at the lower of the actual
cost to purchase and/or manufacture the inventory or the current estimated
market value of the inventory. Management regularly reviews inventory quantities
on hand and records a provision for excess and obsolete inventory based
primarily on the estimated forecast of product demand. Demand for read/write
drives can fluctuate significantly. LaserCard market growth could be limited and
operating results could be harmed if the Company is unable to produce and sell
read/write drives in volume. In order to obtain favorable pricing, purchases of
read/write drive parts are made in quantities that exceed the historical annual
sales rate of drives. 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.

     Management's analysis of the carrying value of card and read/write drive
inventory is performed on a quarterly basis. At June 30, 2003, read/write drive
parts, work in process, and finished goods inventory totaled $3 million compared
with $2.8 million at March 31, 2003. The Company believes that the read/write
drive inventory as of June 30, 2003 is reflected at its net realizable value.
During fiscal 2003, the Company neared production-ready status for a newer
version of a read/write drive. The design change resulted in a lower cost model
with enhanced functionality that is expected to fulfill the needs of a number of
prospective customers. This newer version, however, does not have a major
function offered by the older drive model, which is therefore not obsolete.
There are 634 drives of the previous model in finished goods inventory that are
available for purchase for the primary use as encoders in personalization
systems. In addition, there are 473 drives of the new design in finished goods
inventory. During the second quarter of fiscal 2004, the Company expects to

                                      -12-
<PAGE>

complete the assembly of an additional 325 drives of the new design. The Company
believes there is a market for both designs of its read/write drives to support
and expand optical card sales and, based on current proposals in process, that
the read/write drive inventory on hand at June 30, 2003 will be ordered by
customers. For example, on July 24, 2003, the Company announced that the U.S.
Department of Homeland Security issued Request for Quotation (RFQ) Solicitation
Number COW-3-R-0039 for 1,000 optical stripe read/write drives/biometric
verification systems, for which the Company expects to receive a read/write
drive order this calendar year through one of its value-added resellers. The
Company is the only manufacturer of read/write drives that function with the
cards to be read in conjunction with this solicitation. The Company is also
working, through a value-added reseller (VAR), with the Italian government
regarding a national identification card program; in addition to supplying the
Company's optical memory cards for the program, the Company expects that there
will be demand both for its previous model of read/write drives (necessary for
encoding and initialization purposes) and for the new model of read/write drives
(for other read/write requirements under this program). The Company is the only
manufacturer of read/write drives that function with the cards to be read under
this program. The Company believes that demand for such drives could be
significantly more than its current inventory, but the quantity needed will
ultimately depend on the nature and scope of deployment of the program. The
current status of this program is described in the "Overview" section below. If
these anticipated drive orders do not materialize, the Company may need to
write-down the value of its inventory for any potential excess quantities.
However, the Company concluded that as of June 30, 2003, there was no need to
write down the value of its read/write drive inventory on hand. In reaching this
conclusion, the Company considered (1) the potential market demand, (2) that the
Company is the only provider of read/write drives that function with the
Company's cards, (3) that the 634 drives of the previous model provide a
function not offered by the new model, and (4) that the new model provides a
solution for applications not requiring the encoding or initialization function.

     With respect to inventory carrying values, the Company follows the
principles articulated in Accounting Research Bulletin 43, Chapter 4, "Inventory
Pricing," paragraphs 5 through 7 and 10 and other authoritative guidance (Staff
Accounting Bulletin 100) as it relates to determining the appropriate cost basis
of inventory and determining whether firm, noncancelable purchase commitments
should be accrued as a loss if forecasted demand is not sufficient to utilize
all such committed inventory purchases. As part of the Company's quarterly
excess/obsolete analysis, management also determines whether lower of cost or
market adjustments (i.e., where selling prices less certain costs are not
sufficient to recover inventory carrying values) are warranted; to date, the
Company has not recorded any significant lower of cost or market adjustments. In
those instances where the Company has recorded charges for excess and obsolete
inventory, management ensures that such new cost basis is reflected in the
statement of operations if that inventory is subsequently sold.

RESULTS OF OPERATIONS--FISCAL 2004 FIRST QUARTER
COMPARED WITH FISCAL 2003 FIRST QUARTER

Overview

     The Company's principal LaserCard market today involves high-security,
counterfeit-resistant, tamper-resistant cards for digital governance. In this
regard, the Company provides governments with high security LaserCard optical
memory cards, read/write drives, and related products to facilitate or expedite
the process of governing by documenting the grant of certain rights to citizens
and/or non-citizen permanent residents. These counterfeit- and tamper-resistant
cards are consumable products because they typically are replaced when the
rights documented by the cards expire. Within this market, the largest user of
LaserCard products is the U.S. government, which purchases the Company's
products through a value-added reseller, Information Spectrum, Inc. (ISI), a
unit of Anteon International Corporation. ISI is the government contractor for
LaserCard product sales to the U.S. Department of Homeland Security (DHS), U.S.
Department of State (DOS), U.S. Department of Defense (DOD), and the government
of Canada. Under government contracts with ISI, the DHS purchases U.S. Permanent
Resident Cards (Green Cards) and DOS "Laser Visa" Border Crossing Cards (BCCs);
the DOD purchases Automated Manifest System cards; and the Canadian government
purchases Permanent Resident Cards. Encompassing all of these programs, the
Company's product sales to ISI represented 93% of total revenues for the fiscal
2004 first quarter ended June 30, 2003 and 97% of total revenues during the
fiscal 2003 first quarter ended June 30, 2002. Green Cards and Laser Visas alone
represented 43% of total revenues for the fiscal 2004 first quarter and 93% of
total revenues for the fiscal 2003 first quarter. Sales of cards and read/write
drives for the Canadian Permanent Resident Card

                                      -13-
<PAGE>

program represented 42% of total revenues for the fiscal 2004 first quarter and
1% of total revenues for the fiscal 2003 first quarter. For Italy, the Company
anticipates orders for two card programs--the CIE card (Carta d'Identica
Elettronica), and the PSE card (Permesso di Soggiorno Elettronico). The Company
has been informed by its Italian VAR that the government of Italy plans to order
significant quantities of CIE cards and PSE cards this fiscal year, with a value
estimated by the Company at approximately $5.2 million for CIE cards and $2.7
million for PSE cards; and, in addition, to place orders for several thousand
read/write drives over a several year period with the initial orders beginning
during calendar year 2004. On July 28, 2003, the Company announced receipt of
the first of what it expects to be several of such orders, for CIE cards valued
at $2.4 million to be shipped prior to the end of fiscal 2004.

     Potential applications for optical memory card digital governance programs
in various countries include identification cards for Saudi Arabia and perhaps
Macedonia; motor vehicle registration cards in India; children's healthcare
cards in the People's Republic of China; and the expansion of current U.S.
government ID card programs due to the perceived increasing need for enhanced
U.S. border security. Since governmental card programs typically rely on
government policy-making, which in turn is subject to technical requirements,
budget approvals, and political considerations, there is no assurance that these
programs will be implemented as expected.

     In addition to using its own marketing staff, the Company utilizes VAR
companies and card distribution licensees for the development of commercial
markets and applications for LaserCard products. Product sales to VARs and
licensees consist primarily of the Company's optical memory cards and optical
card read/write drives. The Company also offers for sale, its customized
software applications 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, and other peripherals, and then resell these products integrated into
data systems. The Company is continuing its efforts to recruit new VARs and
eliminate nonproductive VARs.

     The Company's current U.S. government subcontract for Green Cards and Laser
Visas has an authorized maximum of $81 million for up to 24 million cards over a
period of up to five years. Announced in June 2000, this 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. The
subcontract provides for an initial one-year contract period and four additional
one-year contract options. This contract was most recently extended in June 2003
for the one-year period through May 25, 2004. Under this supply subcontract for
up to 24 million optical memory cards, the number of optical memory cards sold
(and recorded as revenue) from September 2000 through June 2003 totaled over 11
million cards. In addition, the Company has supplied 9 million optical memory
cards to the U.S. government since 1997 under previous subcontracts, for a
combined total of over 20 million Green Cards and Laser Visa BCCs.

     In 2002, the Company was awarded a subcontract for production of Canada's
new Permanent Resident Cards. Orders to date under this subcontract now total
1.15 million cards. The subcontract provides for a minimum purchase of 2.3
million cards over the five-year term of the subcontract.

Revenues

     The Company's total revenues for the fiscal 2004 first quarter ended June
30, 2003 consisted of sales of optical memory cards, optical card read/write
drives, drive accessories, maintenance, peripherals, and other miscellaneous
items. For the fiscal 2004 first quarter, the Company's total revenues were
$2,446,000 compared with $6,588,000 for the comparable prior-year quarter. The
decrease in total revenues was due to lower sales of optical memory cards for
the U.S. government's Laser Visa BCC and Green Card programs, as described
above, representing 43% of fiscal 2004 first quarter revenues and 93% of fiscal
2003 first quarter revenues.

     Revenue on optical memory cards totaled $2,290,000 for the fiscal 2004
first quarter as compared with $6,296,000 for the fiscal 2003 first quarter. As
reported previously by the Company, follow-on production of U.S. "Laser Visa"
Border Crossing Cards (BCCs) and Permanent Resident Cards (Green Cards) for the
U.S. Department of Homeland Security (DHS) was delayed during the fiscal 2004
first quarter while new artwork for the cards was being designed by DHS. The
artwork change for Laser Visa BCCs was completed in July 2003, and on July 14,
2003, the Company announced receipt of an optical memory card order valued at
approximately $2 million for Laser Visa BCCs, under the

                                      -14-
<PAGE>

U.S. government subcontract described above. The new order called for card
production to start immediately and to be completed within four months. The
Company will recognize the corresponding revenue according to its
revenue-recognition policy (see Backlog). The DHS has not yet approved new
artwork for Green Cards.

     Revenue on read/write drives, drive accessories, and maintenance totaled
$114,000 for the fiscal 2004 first quarter as compared with $231,000 for the
fiscal 2003 first quarter.

     LaserCard(R) optical memory card sales during the quarter ended June 30,
2003 included shipments of the Canadian government's Permanent Resident Card,
under the Canadian government subcontract described above. A new $1.8 million
order under this subcontract was received by the Company in May 2003 with
deliveries scheduled through February 2004. The Company had anticipated
additional sales, which did not occur, to certain foreign customers during the
fiscal 2004 first quarter, including the Italian government's planned electronic
national ID card program, for which the Company announced a card order in late
July.

     Revenues during fiscal year 2003 included about $21.2 million on sales of
Green Cards and Laser Visa BCCs. The Company anticipates that fiscal 2004
revenues will include revenues ranging from $6.5 million to $10 million for
these programs. In order to maintain card revenues at the fiscal 2003 level,
fiscal 2004 revenues will need to include additional orders from other existing
programs such as Canada and Italy, and from new programs such as those in Saudi
Arabia, perhaps Macedonia, and the United States government's US-VISIT and TWIC
programs.

Backlog

     As of June 30, 2003, the backlog for LaserCard optical memory cards totaled
approximately $1.7 million in firm card orders under the card supply contract
for Canadian government cards with deliveries scheduled through February 2004.
For U.S. government cards, since the Company had a fixed delivery schedule
commencing in September 2002 and continuing through April 2003 for card
shipments out of the secure, U.S. government-funded vault on Company premises,
the Company recognized revenues on the cards as they were delivered to the
vault, and therefore such cards were not included in backlog at June 30, 2003.
As of June 30, 2002, the backlog for LaserCard optical memory cards totaled
approximately $10.4 million, consisting of approximately $6.4 million in card
orders under card supply contracts, and approximately $4.0 million in cards
produced and delivered to the secure, government-funded vault. The fluctuation
in backlog for the fiscal 2004 first quarter compared with fiscal 2003 first
quarter is due to the following: (1) the receipt of fixed delivery schedules
subsequent to the first quarter of fiscal 2003, which permitted the Company to
recognize revenue on $6.3 million in cards then located in the vault; (2) the
fact that government release orders arrive at irregular intervals; (3) orders
were delayed because of new artwork; and (4) the reserve stock on hand at the
government's card-issuing facility had reached its required level. Purchase
order releases under the Company's five-year U.S. government subcontract are
issued at irregular intervals and for varying card quantities.

     On July 14, 2003, the Company announced an optical memory card order valued
at approximately $2 million for Laser Visa BCCs for the U.S. Department of
Homeland Security, under the Company's U.S. government subcontract discussed
above. The order calls for card production to start immediately and to be
completed within four months. The Company will recognize the corresponding
revenue according to its revenue-recognition policy, as described previously
under "Critical Accounting Policies." As of August 5, 2003, the Company had not
received a fixed delivery schedule for shipments out of the U.S. government
vault. Therefore, revenue will be recognized when the cards are shipped from the
vault to the government unless the Company receives a fixed schedule,
notification, or plan for shipments out of the vault to the government, in which
case revenue will be recognized upon the latter of receipt of such fixed
shipment schedule or delivery of the cards into the vault.

     On July 28, 2003, the Company announced an optical memory card order valued
at approximately $2.4 million for Italian government national ID cards, called
CIE cards. The order calls for card production beginning in September for
delivery within four to seven months.

                                      -15-
<PAGE>

Gross Margin

     Excluding license and royalty revenue, gross margin on product sales was
negative 4% for the first quarter of fiscal 2004 and positive 50% for the first
quarter of fiscal 2003. The overall gross profit declined $3,413,000 to a
negative $110,000 for the first quarter of fiscal 2004 from a positive
$3,303,000 for the first quarter of fiscal 2003.

     OPTICAL MEMORY CARDS. Historically, optical memory card gross margins have
approximated 50%. Optical memory card gross profit and margins can vary
significantly based on average selling price, sales and production volume, mix
of card types, production efficiency and yields, and changes in fixed costs. The
gross margin on optical memory cards declined to 4% during the first quarter of
fiscal 2004 versus 55% during the first quarter of fiscal 2003 primarily due to
low sales and production volume. The Company depends on gross profit generated
from optical memory card sales. Gross profit on optical memory card sales was
about $90,000 for the fiscal 2004 first quarter compared with approximately $3.4
million for the fiscal 2003 first quarter.

     READ/WRITE DRIVES. Read/write drive gross margins are currently negative,
inclusive of fixed overhead costs. Even if read/write drive sales volume
achieves positive gross profit, the Company believes that read/write drive gross
margins will remain below 10% for the foreseeable future. For the fiscal 2004
first quarter, gross profit on read/write drive sales was a negative gross
profit of about $210,000 compared with a negative gross profit of about $156,000
for the fiscal 2003 first quarter.

Income and Expenses

     SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). SG&A expenses were
$1,769,000 for the fiscal 2004 first quarter compared with $1,570,000 for the
fiscal 2003 first quarter. The increase for the first quarter of fiscal 2004
compared with the first quarter of fiscal 2003 was primarily due to an increase
of approximately $108,000 for insurance expenditures, and an increase of
$120,000 for accounting services. The Company believes that SG&A expenses for
fiscal 2004 will be higher than fiscal 2003 levels, mainly due to increases in
marketing and selling expenses, increases in insurance premiums and accounting
and audit fees, and other general increases.

     RESEARCH AND ENGINEERING EXPENSES (R&E). The Company is continuing its
efforts to develop new optical memory card features and structures, including
the insertion of contactless chips with radio frequency (RF) capability, optical
memory card read/write drives, read-only drives (readers), and software products
in an effort to provide new products that can stimulate optical memory card
sales growth. For example, the Company has developed a prototype of a LaserCard
handheld reader. The Company anticipates that these ongoing research and
engineering efforts will result in new or enhanced card capabilities,
production-model read-only drives, or drives with advanced security features and
lower manufacturing costs; however, there is no assurance that such product
development efforts will be successful. These features are important for the
Company's existing and future optical memory card markets. Total R&E expenses
were $612,000 for the first quarter of fiscal 2004 compared with $776,000 for
the comparable prior-year period. The $164,000 decrease for fiscal 2004 compared
with 2003 is mainly due to a $94,000 reduction in purchased services, and a
$33,000 reduction due to the completion last year of the amortization of design
technology transfer costs.

     OTHER INCOME AND EXPENSE. Total net other income for the first quarter of
fiscal 2004 was $64,000, consisting of $62,000 in interest income, compared with
$106,000 of interest income for the first quarter of fiscal 2003. This decrease
is due to a decrease in interest rates.

     INCOME (LOSS) BEFORE INCOME TAXES. Income (loss) before income taxes for
the first quarter of fiscal 2004 decreased by $3,490,000 compared with the first
quarter of fiscal 2003, mainly due to the $3,413,000 decrease in gross profit.

     INCOME TAXES. The Company recorded an income tax benefit of $971,000 for
the first quarter of fiscal 2004 compared with an income tax expense of $404,000
for the first quarter of fiscal 2003. The amount of income tax benefit recorded
for the fiscal 2004 first quarter was based upon the Company's anticipated tax
rate for the full fiscal year.

                                      -16-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     As of June 30, 2003, the Company had cash, cash equivalents, and short-term
investments of $13,943,000, a current ratio of 9.5 to 1, and no long-term debt.
The Company also had $2,398,000 in long-term investments with original
maturities from 12 to 13 months.

     Net cash used for operating activities was $1,019,000 for the first quarter
of fiscal 2004 compared with $643,000 provided by operating activities for the
first quarter of fiscal 2003. The primary reason for the cash used for operating
activities was the net loss recorded of $1,456,000, subtracting $505,000 in
non-cash adjustments, and adding $942,000 for changes in operating assets and
liabilities. The primary reason for the cash provided by operating activities
during the first quarter of fiscal 2003 was the profit recorded of $659,000,
adding the $865,000 of non-cash adjustments, and deducting $881,000 for changes
in operating assets and liabilities.

     The Company believes that the estimated level of revenues over the next 12
months will be sufficient to generate cash from operating activities over the
same period. However, quarterly fluctuations are expected. Operating cash flow
could be negatively impacted to a significant degree if either 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 $1,456,000 net loss recorded for the fiscal 2004 first
quarter, the Company's accumulated deficit increased to $7,273,000.
Stockholders' equity decreased to $36,502,000 as a result of the net loss
recorded that was partially offset by $1,115,000 in additions to equity due to
stock option exercises.

     Net cash provided by investing activities was $5,121,000 for the first
quarter of fiscal 2004 compared with $2,432,000 used for investing activities in
the first quarter of fiscal 2003. These amounts include changes in the maturity
of liquid investments, purchases of property and equipment of $736,000 for the
first quarter of fiscal 2004, and $802,000 for the first quarter of fiscal 2003,
and increases in patents and other intangibles of $34,000 for the first quarter
of fiscal 2004, and $35,000 for the first quarter of fiscal 2003.

     The Company considers all highly liquid investments, consisting primarily
of commercial paper, taxable notes, and U.S. government bonds, with original or
remaining maturities of three months or less at date of purchase, to be cash
equivalents. All investments with original or remaining maturities of more than
three months but not more than one year at date of purchase, are classified as
short-term. Investments with original or remaining maturities of more than one
year at date of purchase are classified as long-term. The Company determines the
length of its investments after considering its cash requirements and yields
available for the type of investment considered by the Company. Management also
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, 2003, the Company had $5,370,000 classified
as short-term and long-term investments, compared with $11,261,000 at March 31,
2003. All marketable securities were classified as held-to-maturity. Cash plus
short-term and long-term investments were $16,341,000 at June 30, 2003 and
$17,015,000 at March 31, 2003.

     The Company added capital equipment and leasehold improvements of
approximately $0.7 million during the first quarter of fiscal 2004 compared with
approximately $0.8 million during the first quarter of fiscal 2003. Depending on
card type, the Company's current card production capacity is estimated at
approximately 13 million cards per year. The Company plans to purchase
additional production equipment in a series of steps when deemed appropriate by
the Company. The Company is also increasing production capacity for cards with
new structures used by the Canadian and Italian programs. 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 plans to use cash on hand and cash generated from operations to fund
capital expenditures of about $7 million during fiscal 2004 for equipment and

                                      -17-
<PAGE>

leasehold improvements for card production, read/write drive tooling and
assembly, and general support items. Approximately $5 million of this proposed
expenditure is slated for new card manufacturing equipment.

     Net cash provided by financing activities was $1,115,000 for the first
quarter of fiscal 2004 compared with net cash provided by financing activities
of $807,000 for the first quarter of fiscal 2003. Financing activities consisted
of proceeds on sales of common stock through the Company's stock-option and
stock-purchase plans.

     There were no debt financing activities for the fiscal 2004 first quarter
ended June 30, 2003.

ITEM 3.      QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RATE RISKS

     INTEREST RATE RISK. The Company invests its cash, beyond that needed for
daily operations, in high quality debt securities. In doing so, the Company
seeks primarily to preserve the value and liquidity of its capital and,
secondarily, to safely earn income from these investments. To accomplish these
goals, the Company invests only in debt securities issued by (a) the U.S.
Treasury and U.S. government agencies and corporations and (b) debt instruments
that meet the following criteria:

     -- Commercial paper rated A1/P1 or debt instruments rated AAA, as rated by
        the major rating services
     -- Can readily be sold for cash

There were no material changes during the first quarter of fiscal 2004 to the
Company's exposure to market risk for changes in interest rates.

     FOREIGN CURRENCY EXCHANGE RATE RISK. The Company sells products in various
international markets. All of these sales are denominated in U.S. Dollars. As of
June 30, 2003, the Company had no outstanding foreign currency hedge contracts.
Accordingly, the Company had no material foreign currency exchange risk as of
June 30, 2003. There were no material changes during the first quarter of fiscal
2004 to the Company's foreign currency exchange rate risk.

ITEM 4.      CONTROLS AND PROCEDURES

     EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's principal
executive officer and principal financial officer have evaluated the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)) within the 90 days prior to the filing of this Form 10-Q and have
determined that they are reasonable taking into account the totality of the
circumstances.

     CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, which was shortly
prior to the release of the Company's earnings statement for the period covered
by this Form 10-Q.

PART II.     OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

     As to the litigation previously reported in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2003, the Company has tendered the
defense to its product liability insurance carrier which has agreed to provide a
defense.

ITEM 5.      OTHER INFORMATION

     The Company's Audit Committee has approved certain non-audit services
provided or to be provided by PricewaterhouseCoopers LLP, the Company's
independent accountants. These services relate to consultation, advice, and
other services in connection with tax planning and compliance, SEC

                                      -18-
<PAGE>

registration statements and regulatory matters, and application of generally
accepted accounting principles.

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

       (a)   Exhibit No.        Exhibit Description
             -----------        -------------------

             99.1               Certification of Chief Executive Officer
             99.2               Certification of Chief Financial Officer

       The above-listed exhibits are filed herewith. No other exhibits are
included in this report as the contents of the required exhibits are either not
applicable to Registrant, to be provided only if Registrant desires, or
contained elsewhere in this report.

       (b)   Reports on Form 8-K

       On April 15, 2003, the Company filed a Report on Form 8-K dated April 8,
2003, which reported under Item 12, the issuance of a press release containing
estimates of financial results for the fourth quarter and fiscal year ended
March 31, 2003.

       On May 2, 2003, the Company filed a Report on Form 8-K dated April 28,
2003, which reported under Item 12, the issuance of a press release containing
financial results for the fourth quarter and fiscal year ended March 31, 2003.


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>
<S>                                   <C>
                                      DREXLER TECHNOLOGY CORPORATION (Registrant)

Date: August 8, 2003                  /s/ Jerome Drexler
                                      ------------------
                                      Jerome Drexler, Chairman of the Board of Directors
                                      and Chief Executive Officer (Principal Executive Officer)

Date: August 8, 2003                  /s/ Steven G. Larson
                                      --------------------
                                      Steven G. Larson, Vice President of Finance and Treasurer
                                      (Principal Financial Officer and Principal Accounting Officer)
</TABLE>


                                      -19-
<PAGE>

CERTIFICATIONS


     I, Jerome Drexler, certify that:

     1.   I have reviewed this quarterly report on Form 10-Q of Drexler
Technology Corporation, a Delaware corporation;

     2.   Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

     3.   Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

     4.   The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          (a)  designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

          (b)  evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

          (c)  presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

     5.   The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

          (a)  all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

          (b)  any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

     6.   The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: August 8, 2003


By:      /s/ Jerome Drexler             Jerome Drexler, Chairman of the Board
    -------------------------------
     (Principal Executive Officer)

                                      -20-
<PAGE>

CERTIFICATIONS


     I, Steven G. Larson, certify that:

     1.   I have reviewed this quarterly report on Form 10-Q of Drexler
Technology Corporation, a Delaware corporation;

     2.   Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

     3.   Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

     4.   The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          (a)  designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

          (b)  evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

          (c)  presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

     5.   The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

          (a)  all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

          (b)  any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

     6.   The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: August 8, 2003


By:      /s/ Steven G. Larson           Steven G. Larson, Vice President Finance
    -----------------------------       and Treasurer
    (Principal Financial Officer)


                                      -21-
<PAGE>

                                  EXHIBIT INDEX



                                INDEX TO EXHIBITS
                                  [ITEM 14(c)]
Exhibit
Number         Description
------         -----------

99.1           Certification of Chief Executive Officer
99.2           Certification of Chief Financial Officer








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