<PAGE>

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


                                   FORM 10-Q/A


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

                  For the Quarterly Period Ended June 30, 2001


                        Commission File Number: 000-6377


                         DREXLER TECHNOLOGY CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


          Delaware                                             77-0176309
-------------------------------                       --------------------------
(State or other jurisdiction of                            (I.R.S.  Employer
incorporation or organization)                             Identification No.)


1077 Independence Avenue, Mountain View, CA                     94043-1601
-------------------------------------------           --------------------------
 (Address of principal executive offices)                       (Zip Code)


                                 (650) 969-7277
              ----------------------------------------------------
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No


     Number of outstanding shares of common stock, $.01 par value, at August 8,
2001: 9,812,627

<PAGE>

                                Introductory Note

     The purpose of this Quarterly Report on Form 10-Q/A is to restate the
condensed consolidated financial statements for Drexler Technology Corporation
("Company") for the fiscal 2002 first quarter ended June 30, 2001. The Company
filed a Form 8-K on May 15, 2002 which contains a press release issued on May
14, 2002. The press release contains information relating to the Company's
intention to restate these financial statements.

     In connection with the Company's audit for the fiscal year ended March 31,
2002, the Company and its newly appointed independent public accountants
conducted an internal review of revenue recognition practices that were being
followed as they related to a government subcontract. This review resulted in
accounting adjustments arising from changes in the timing of revenue recognition
of LaserCard(R) optical memory card shipments into and out of a secure,
government-funded vault built for the government on Company premises to comply
with security regulations under the subcontract. In the past, the Company
recognized revenue upon deliveries to the vault since the customer takes title
to the cards, assumes all risks of ownership, is obligated to remit payment for
the cards at that time, and has no rights of return except for product defects.
In the restated financial statements, revenue is recognized upon shipment of
cards from the vault to the customer since the Company had not been provided
with a fixed schedule, notification, or plan for shipments out of the vault to
the government. The Company has restated previously issued results for fiscal
years 1998 through 2001 and the first nine months of fiscal 2002 to reflect
these adjustments in the timing of revenue recognition. As a result of the
restatement, revenue for fiscal 1998, fiscal 1999, and fiscal 2000 declined,
while revenue for fiscal 2001 and the first nine months of fiscal 2002
increased.

     This Quarterly Report on Form 10-Q/A amends the financial information
contained in Items 1 and 2 of the Company's Quarterly Report on Form 10-Q
previously filed for the three months ended June 30, 2000 and 2001.

     This Quarterly Report on Form 10-Q/A only reflects the effects of the
restatement and does not otherwise reflect events occurring after the filing of
the original Quarterly Report on Form 10-Q or otherwise modify or update those
disclosures.

                                      1-A
<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

     The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures which are made are adequate to make the information presented not
misleading. Further, the condensed consolidated financial statements reflect, in
the opinion of management, all adjustments (which included only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations as of and for the periods indicated.

     It is suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and the notes thereto for the
year ended March 31, 2001, included in the Company's Form 10-K/A Annual Report.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     FISCAL PERIOD: For purposes of presentation, the Company has indicated its
accounting period as ending on March 31 and its interim quarterly periods as
ending on the corresponding month end. The Company, in fact, operates and
reports quarterly periods ending on the Friday closest to month end. The 13-week
first quarter of fiscal 2001 ended on June 30, 2000, and the 13-week first
quarter of fiscal 2002 ended on June 29, 2001.

     CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS: The Company considers
all highly liquid investments, consisting primarily of commercial paper, taxable
notes, and U.S. government bonds, with original maturities of three months or
less, to be cash equivalents. All investments with original maturities of more
than three months but less than one year, are classified as short-term
investments. Management determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates the classification of
investments as of each balance sheet date. As of June 30, 2001, the Company had
$1,484,000 classified as short-term investments, and all marketable securities
were classified as held-to-maturity.

     INVENTORIES: Inventories are stated at the lower of cost or market, with
cost determined on a first-in, first-out basis and market based on the lower of
replacement cost or estimated realizable value. The components of inventories
are (in thousands):

                                              March 31,        June 30,
                                                2001             2001
                                                ----             ----
        Raw materials........................ $  2,954         $  3,558
        Work-in-process......................      552              716
        Finished goods.......................    1,267            1,016
        Systems and components
           held for resale...................      108               48
                                              --------         --------
                                              $  4,881         $  5,338
                                              ========         ========

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

                                       2
<PAGE>

     RECENT ACCOUNTING PRONOUNCEMENTS. In December 1999, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements" and amended it in March and June
2000 with respect to the effective dates. SAB No. 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company believes that its revenue recognition
policies comply with SAB No. 101.

     In March 2000, the Financial Accounting Standards Board (FASB) issued
Financial Standards Board Interpretation (FIN) No. 44, "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion No.
25." The Company adopted FIN No. 44 in July 2000 and this adoption did not have
a material effect on the financial position or results of operations.

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

     EARNINGS PER SHARE: The Company computes earnings per share in accordance
with SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires companies to
compute net income per share under two different methods, basic and diluted, and
present per share data for all periods in which a statement of income is
presented. Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is computed by dividing net income by the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding. Common
stock equivalents for all periods presented consist of stock options using the
treasury stock method. The reconciliation of the numerators and denominators of
the basic and diluted earnings per share computation for the three months ended
June 30, 2000 and June 30, 2001 is shown in the following table (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                        June 30,
                                                                 2000             2001
                                                                 ----             ----
                                                                       (Restated)
<S>                                                            <C>               <C>
Net income...................................................  $ 1,506           $ 1,134
                                                               =======           =======
Basic earnings per share:
    Weighted average common shares outstanding...............    9,872             9,820
                                                               -------           -------
Basic earnings per share.....................................  $   .15           $   .12
                                                               =======           =======
Diluted earnings per share:
    Weighted average common shares outstanding...............    9,872             9,820
    Weighted average common shares from
       stock option grants...................................      364               315
                                                               -------           -------
    Weighted average common shares and common
       stock equivalents outstanding.........................   10,236            10,135
                                                               -------           -------
Diluted earnings per share...................................  $   .15           $   .11
                                                               =======           =======
</TABLE>

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

                                       3
<PAGE>
<TABLE>
<CAPTION>

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

                                                                                                  March 31,          June 30,
                                                                                                     2001              2001
                                                                                                     ----              ----
                                                                                                                    (Unaudited)

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

Property and equipment, at cost...............................................................      19,310              19,679
    Less--accumulated depreciation and amortization ...........................................    (13,423)            (13,685)
                                                                                                ----------          ----------
       Property and equipment, net............................................................       5,887               5,994
                                                                                                ----------          ----------

Patents and other intangibles, net............................................................         878                 819
Deferred tax asset, net.......................................................................       4,928               5,755
Other assets   ...............................................................................         111                  64
                                                                                                ----------          ----------

            Total assets......................................................................  $   30,137          $   30,529
                                                                                                ==========          ==========

                                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable..........................................................................  $    1,039          $    1,163
    Accrued payroll costs ....................................................................         439                 488
    Deferred revenue..........................................................................         994                 875
    Advance payments from customers...........................................................       1,275                 966
    Other accrued liabilities.................................................................         422                 289
    Deferred gross profit.....................................................................       3,155               2,965
                                                                                                ----------          ----------

       Total current liabilities..............................................................       7,324               6,746
                                                                                                ----------          ----------

Stockholders' equity:
    Preferred stock, $.01 par value:
       Authorized--2,000,000 shares
       Issued--none...........................................................................          --                  --
    Common stock, $.01 par value:
       Authorized--30,000,000 shares
       Issued-- 9,951,451 shares at March 31, 2001 and
            9,951,451 shares at June 30, 2001.................................................          99                  99
    Additional paid-in capital................................................................      37,852              37,841
    Less--common stock treasury shares, at cost: 127,424 shares at March 31, 2001
       and 138,824 shares at June 30, 2001....................................................      (1,840)             (1,993)
    Accumulated deficit.......................................................................     (13,298)            (12,164)
                                                                                                ----------          ----------

       Total stockholders' equity.............................................................      22,813              23,783
                                                                                                ----------          ----------
            Total liabilities and stockholders' equity........................................  $   30,137          $   30,529
                                                                                                ==========          ==========

         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 INCOME
                                                   (UNAUDITED)
                                     (In thousands, except per share amounts)
                                                   (Restated)


                                                                                         Three Months Ended
                                                                                              June 30,
                                                                                    2000                   2001
                                                                                    ----                   ----
<S>                                                                               <C>                    <C>
Revenues:
    Product sales   ............................................................  $  5,254               $   3,952
    License and royalty revenue.................................................       182                     311
                                                                                  --------               ---------
       Total revenues...........................................................     5,436                   4,263
                                                                                  --------               ---------

Costs and expenses:
    Cost of sales...............................................................     3,180                   2,253
    Selling, general, and administrative expenses...............................     1,028                   1,194
    Research and engineering expenses...........................................       429                     623
                                                                                  --------               ---------
       Total costs and expenses.................................................     4,637                   4,070
                                                                                  --------               ---------

           Operating income.....................................................       799                     193

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

           Income before income taxes...........................................       911                     309

Income tax benefit..............................................................      (595)                   (825)
                                                                                  --------               ---------

           Net income...........................................................  $  1,506               $   1,134
                                                                                  ========               =========
Net income per share:
           Basic ...............................................................  $    .15               $     .12
           Diluted..............................................................  $    .15               $     .11

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


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

                                       5
<PAGE>
<TABLE>
<CAPTION>

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


                                                                                                             Three Months Ended
                                                                                                                   June 30,
                                                                                                             2000           2001
                                                                                                             ----           ----
<S>                                                                                                       <C>             <C>
Cash flows from operating activities:
   Net income..........................................................................................   $  1,506        $  1,134
   Adjustments to reconcile net income to net cash provided by operating
activities:
       Depreciation and amortization...................................................................        395             375
       Provision for doubtful accounts receivable......................................................        (17)              5
       Increase in deferred tax asset..................................................................       (719)           (827)

   Changes in operating assets and liabilities:
       Decrease in accounts receivable.................................................................        248             705
       (Increase) decrease in inventories..............................................................         93            (457)
       Increase in other assets........................................................................        (42)            (52)
       Increase (decrease) in accounts payable and accrued liabilities.................................       (100)             40
       Decrease in deferred revenue....................................................................       (178)           (119)
       Increase (decrease) in advance payments from customers..........................................         32            (309)
       Decrease in deferred gross profit...............................................................        (99)           (190)
                                                                                                          --------        --------

            Net cash provided by operating activities..................................................      1,119             305
                                                                                                          --------        --------

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

            Net cash provided by (used for) investing activities.......................................     (1,675)          3,480
                                                                                                          --------        --------

Cash flows from financing activities:
       Proceeds from sale of common stock through stock plans..........................................        115              11
       Cash used to purchase common stock through an open market repurchase program....................         --            (175)
                                                                                                          --------        --------

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

            Net increase (decrease) in cash and cash equivalents.......................................       (441)          3,621

Cash and cash equivalents:
   Beginning of period.................................................................................      2,818           6,221
                                                                                                          --------        --------
   End of period  .....................................................................................   $  2,377        $  9,842
                                                                                                          ========        ========

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

                                                               6

<PAGE>

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

FORWARD-LOOKING STATEMENTS

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

     RESTATEMENT OF RESULTS FOR FISCAL 1998-2001 AND FIRST NINE MONTHS OF FISCAL
2002

     In connection with the Company's audit for the fiscal year ended March 31,
2002, the Company and its newly appointed independent public accountants
conducted an internal review of revenue recognition practices that were being
followed as they related to a government subcontract. This review, as more fully
described in the Company's Report on Form 8-K dated May 15, 2002, resulted in
accounting adjustments arising from changes in the timing of revenue recognition
of LaserCard(R) optical memory card shipments into and out of a secure,
government-funded vault built for the government on Company premises to comply
with security regulations under the subcontract. In the past, the Company
recognized revenue upon deliveries to the vault since the customer takes title
to the cards, assumes all risks of ownership, is obligated to remit payment for
the cards at that time, and has no rights of return except for product defects.
In the restated financial statements, revenue is recognized upon shipment of
cards from the vault to the customer since the Company had not been provided
with a fixed schedule, notification, or plan for shipments out of the vault to
the government. The Company has restated previously issued results for fiscal
years 1998 through 2001 and the first nine months of fiscal 2002 to reflect
these adjustments in the timing of revenue recognition. As a result of the
restatement, revenue for fiscal 1998, fiscal 1999, and fiscal 2000 declined,
while revenue for fiscal 2001 and the first nine months of fiscal 2002
increased.

     The statements of operations for the three months ended June 30, 2000 and
2001 as originally reported and as restated are shown below. The restatement
resulted in a cumulative decrease in equity of $3,003,000 as of June 30, 2001.

<TABLE>
<CAPTION>
                                  Fiscal 2001 First Quarter     Fiscal 2002 First Quarter
                                     Three Months Ended             Three Months Ended
                                        June 30, 2000                  June 30, 2001
                                   As Reported    Restated      As Reported      Restated
                                   -----------    --------      -----------      --------
<S>                                <C>            <C>           <C>              <C>
Net revenues.....................  $    5,171     $  5,436      $    3,955       $  4,263
Cost of sales....................       3,014        3,180           2,135          2,253
Operating income.................         700          799               3            193
Income before taxes..............         812          911             119            309
Income tax benefit...............        (628)        (595)           (509)          (825)
Net income.......................       1,440        1,506             628          1,134
Net income per share:
    Basic .......................  $      .15     $    .15             .06       $    .12
    Diluted......................  $      .14     $    .15             .06       $    .11
</TABLE>

                                               7
<PAGE>

            RESULTS OF OPERATIONS--FISCAL 2002 FIRST QUARTER COMPARED
                  WITH FISCAL 2001 FIRST QUARTER (AS RESTATED)


REVENUES

     For the fiscal 2002 first quarter ended June 30, 2001, the Company's total
revenues were $4,263,000 compared with $5,436,000 for the comparable prior-year
quarter.

     PRODUCT REVENUES. For the fiscal 2002 first quarter, the Company sold
approximately 1.13 million LaserCard(R) optical memory cards and 100 read/write
drives compared with approximately 1.21 million optical memory cards and 480
read/write drives during last year's first quarter. Sales of LaserCard(R)
optical memory cards and related products were $3,952,000 for the first three
months of fiscal 2002 versus $5,254,000 for the comparable period last year.

     The Company's principal LaserCard market today involves high-security,
counterfeit-resistant, tamper-resistant cards for "digital governance," defined
as the utilization of digital information technology by a nation, state, region,
municipality, agency, or institution. Within this market, the Company's largest
customer for LaserCard products is the United States government, representing
62% of the Company's fiscal 2001 revenues and 81% of fiscal 2002 first-quarter
revenues. These revenues are predominantly the result of two card programs--U.S.
Immigration and Naturalization Service (INS) Permanent Resident Cards ("Green
Cards") and U.S. Department of State (DoS) border crossing cards ("Laser
Visas"). A non-government customer, VISX Incorporated, representing 22% of the
Company's fiscal 2001 revenues and 7% of the Company's fiscal 2002 first-quarter
revenues, has indicated that its new, lower cost, laser eye-surgery equipment
will not employ LaserCard drives for system activation, although its current
LaserCard-equipped surgery systems will use the Company's optical memory cards.
This change and a reduction in eye surgeries due to current economic conditions
will have an adverse effect on the Company's revenue levels. Optical memory card
digital governance programs that appear to be emerging in other countries
include an electronic national identification card/social services card in
Italy, building construction permit cards in China, motor-vehicle registration
cards in several states in India, and import permit/import duty collection cards
in Turkey. The Company believes that identification cards in Saudi Arabia also
represents a market opportunity for optical memory cards.

     In addition to using its own marketing staff, the Company utilizes
value-added reseller (VAR) companies and card distribution licensees for the
development of commercial markets and applications for LaserCard products.
Product sales to VARs and licensees include the Company's optical memory cards,
the Company's system software, optical card read/write drives, and add-on
peripherals made by other companies (such as equipment for adding a digitized
photo, fingerprint, hand template, or signature to the cards). The
VARs/licensees may add application software, personal computers (PCs), and other
peripherals, and then resell these products integrated into data systems.

     In order to upgrade its customer base, the Company is continuing its
efforts to recruit new VARs and card distribution licensees and eliminate
nonproductive VARs. The Company provides customer technical support and system
software to assist VARs and licensees.

     Optical card-related software is an important factor in developing the
commercial markets for optical memory cards. The Company's system software
consists of optical card interface software/device drivers, file systems,
software development tools, demonstration software, and an application software
program. To date, the Company's software development has been completed
concurrent with the establishment of technological feasibility and, accordingly,
all software development costs have been charged to research and development
expense in the accompanying statements of income.

     The Company's VARs and/or their customers develop the application software
for specific end-user applications. Several VARs have written optical card
software programs for applications such as automobile warranty and maintenance
records, cargo manifesting, digital optical key systems, admissions/ID, data
logging systems, and various medical-related applications such as health history
cards. The Company sells an application software program for LaserCard
personalization (printing and encoding of personal data).

     Optical memory cards are used in conjunction with a card read/write drive,
produced by the Company, that connects to a personal computer. The read/write
drive is integrated as a PC logical drive and has drive-letter access in the
same manner as floppy disk drives. The price, performance, and availability of
read/write drives are factors in the commercialization of optical cards. The
Company had been selling its read/write drives for less than three thousand
dollars per unit, and these units generally

                                       8
<PAGE>

include the Company's interface software/device drivers. During the fiscal 2001
first quarter, the Company reduced the selling price for read/write drives by
about 20% for typical purchase quantities, to increase the markets for optical
cards.

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

     The Company maintains an inventory of read/write drive parts and finished
drives that it believes is adequate to meet customer demand. However, an
interruption in the supply of read/write drive parts or difficulties encountered
in read/write drive assembly could cause a delay in shipments of drives and
optical memory cards and a possible loss of sales, which would adversely affect
operating results.

     In order to obtain favorable pricing, purchases of read/write drive parts
are made in quantities that exceed the historical annual sales rate. Therefore,
based upon last year's sales quantity, the Company has more than one-year's
supply of read/write drive parts on hand. The Company purchases read/write drive
parts for its anticipated read/write drive demand and takes into consideration
the order-to-delivery lead times of vendors and the economic purchase order
quantity for such parts. At June 30, 2001, read/write drive parts and finished
goods inventory totaled $2.6 million. During fiscal 2002, the Company will
receive an additional $1 million in read/write drive parts that are now on
order. Including about 200 drives in finished goods inventory, approximately
1,100 read/write drives of the current design can be assembled from this
inventory. In addition, approximately 1,500 read/write drives of a new design
under development could be assembled with the additional purchase of about
$500,000 in unique parts. The Company believes there is a market for the
read/write drives. However, since lower cost read/write drive designs may become
available from the Company before the parts are utilized, a portion of this
inventory could be written down if the Company determines that, to develop
optical card markets, the market price of drives would need to be reduced for
the read/write drive design containing those parts.

     LICENSE FEE REVENUES. Revenues from license fees were $311,000 for the
fiscal 2002 first quarter. This license revenue included $191,000 recognized on
a patent license and $119,000 earned on a license that allows a licensee in
Italy to purchase parts kits from the Company and assemble read/write drives
from the parts kits. For the first quarter of fiscal 2001, license revenue was
$179,000, earned on the Italian license. The Company does not rely on license
fees to finance operations.

BACKLOG

     As of June 30, 2001, the backlog for LaserCard optical memory cards totaled
approximately $8.5 million, consisting of approximately $3 million in firm card
orders under card supply contracts, and approximately $5.5 million in cards
produced and delivered to a secure, government-funded vault (see discussion
below). Of the $3 million amount, 60% is for U.S. government Green Cards or
Laser Visas under a U.S. government subcontract for the purchase of optical
memory cards. Of the $5.5 million amount, all are Green Cards or Laser Visas
produced under this subcontract. Announced by the Company in June 2000, this
subcontract has an authorized maximum of $81 million for up to 24 million cards
over a period of up to five years. The subcontract was received by the Company
through a LaserCard VAR that is a U.S. government prime contractor, under a
competitively bid, government procurement contract. Under the subcontract, the
Company will supply up to 24 million LaserCard optical memory cards at an
average selling price of about $3.23 per card. The subcontract states that the
U.S. government anticipates placing orders in units of at least one million
optical memory cards per order. The subcontract provides for an initial one-year
contract period and four additional one-year contract options. Deliveries
commenced in September 2000, and 2.5 million cards have been delivered to the
vault (see discussion below) as of June 30, 2001, under this subcontract.

     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 would be recognized upon delivery of the cards
into the vault.

                                       9
<PAGE>

     As of June 30, 2001, the vault the vault contained 1.7 million cards with a
sales value of $5.5 million. The $5.5 million in sales value will be recorded as
revenue and the associated costs will be recorded in cost of sales when the
cards are shipped unless the Company receives a fixed schedule, notification, or
plan for shipments out of the vault to the government, in which case revenue
would be recognized upon delivery of the cards into the vault. The 1.7 million
cards are owned by the U.S. government and are not included in inventory on the
Company's condensed consolidated balance sheets. The net of the revenue value of
$5.5 million and the $2.53 million cost is recorded as deferred gross profit in
the amount of $2.97 million on the condensed consolidated balance sheet as of
June 30, 2001. On July 10, 2001, the Company announced a $3.87 million order for
optical memory cards to be delivered to the vault during a period extending from
October 2001 through February 2002. On July 31, 2001, the Company announced a
$754,000 order for optical memory cards to be delivered during a five-month
period beginning in August 2001.

MARGINS

     OPTICAL MEMORY CARDS. The Company continues to depend on gross profit
generated from optical memory card sales. Gross profit on optical memory card
sales was about $1.8 million for the first quarter of fiscal 2002 compared with
$1.9 million for the first quarter of fiscal 2001. The decrease was due to the
decrease in card sales volume and increases in building-occupancy costs.

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

INCOME AND EXPENSES

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

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

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

     PRETAX PROFIT. Pretax profit for the fiscal 2002 first quarter decreased by
about $600,000 compared with the fiscal 2001 first quarter due to the $1,302,000
reduction in product revenue, offset by the $129,000 increase in license and
royalty revenue and a $567,000 reduction in costs and expenses.

     INCOME TAXES. For the first quarter of fiscal 2002, the Company recorded an
income tax benefit of $825,000 versus a $595,000 income tax benefit for the
fiscal 2001 first quarter.

     The Company has a valuation allowance which reduces its deferred tax asset.
The Company believes that, more likely than not, at least a portion of this
income tax asset will be realized and, therefore, has reduced the valuation
allowance against it. There are timing differences between when certain items
are included in book income and when the same items are included on income tax
returns. Therefore, tax payments or credits often occur in different periods
than when an income tax expense or benefit is included in the statement of
operations.

                                       10
<PAGE>

                  LIQUIDITY AND CAPITAL RESOURCES (AS RESTATED)

     As of June 30, 2001, the Company had cash, cash equivalents, and short-term
investments of $11,326,000, a current ratio of 2.6 to 1, and no long-term debt.

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

<TABLE>
<CAPTION>
                                                                             Quarter Ended
                                                                                June 30,
                                                                          2000           2001
                                                                          ----           ----
                                                                               (Restated)
<S>                                                                     <C>             <C>
       Earnings before taxes, depreciation, and amortization........... $  1,306        $   684
       Decrease in deferred gross profit...............................      (99)          (190)
       Decrease in accounts receivable.................................      248            705
       (Increase) decrease in inventory................................       93           (457)
       Decrease in advance payments from customers
          and deferred revenue.........................................     (146)          (428)
       Other ..........................................................     (283)            (9)
                                                                        --------        -------

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

     The Company believes that the current level of revenues is sufficient to
generate cash from operations after expenses. Losses would occur if both of the
Company's largest U.S. government programs were to be delayed, canceled, or not
extended and not be replaced by other card orders or other sources of income, or
if increases in product revenues or licenses do not keep pace with increased
marketing and R&E expenditures.

     The Company has not established a line of credit and has no current plans
to do so. The Company may negotiate a line of credit if and when it becomes
appropriate, although no assurance can be made that such financing would be
available on favorable terms or at all, if needed.

     As a result of the $1,134,000 profit recorded for the first quarter of
fiscal 2002, the Company's accumulated deficit was reduced to $12,164,000 and
stockholders' equity increased to $23,783,000.

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

     The Company considers all highly liquid investments, consisting primarily
of commercial paper, taxable notes, and U.S. government bonds, with original
maturities of three months or less, to be cash equivalents. All investments with
original maturities of more than three months but less than one year, are
classified as short-term investments. Management determines the appropriate
classification of debt and equity securities at the time of purchase and
reevaluates the classification of investments as of each balance sheet date. As
of June 30, 2001, the Company had $1,484,000 classified as short-term
investments, compared with $5,387,000 at March 31, 2001, and all marketable
securities were classified as held-to-maturity.

     For optical memory card production, the Company added capital equipment and
leasehold improvements of approximately $256,000 during the first quarter of
fiscal 2002 compared with approximately $347,000 during the first quarter of
fiscal 2001. Depending on card type, the Company's card production capacity is
approximately 7 to 9 million cards per year and the Company believes that, if
justified by business conditions, it could reach a capacity of approximately 11
million cards per year by December 31, 2001, through an additional investment of
about $2 million. The Company plans to purchase additional production equipment
in a series of steps as optical memory card orders expand to justify production
capacity increases, to a rate of up to 25 million cards per year. In addition to
investment used for expansion, the Company expects to make additional capital
expenditures for cost savings, quality improvements, and other purposes. The
Company believes that during the next few years, capital expenditures could be a
minimum of $1.5 million per year for card production equipment and automatic
inspection equipment.

                                       11
<PAGE>

     In connection with read/write drive manufacturing and design, the Company
added capital equipment and leasehold improvements of approximately $137,000
during fiscal 2002 first quarter compared with $87,000 during the fiscal 2001
first quarter. The Company expects that additional capital investments will be
made during fiscal 2002.

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

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

PART II. OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

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

SIGNATURES

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

                                DREXLER TECHNOLOGY CORPORATION (Registrant)


Date: May 29, 2002              /s/ Jerome Drexler
                                ------------------------------------------------
                                Jerome Drexler, Chairman of the Board of
                                Directors and Chief Executive Officer (Principal
                                Executive Officer)


Date: May 29, 2002              /s/ Steven G. Larson
                                ------------------------------------------------
                                Steven G. Larson, Vice President of Finance and
                                Treasurer (Principal Financial Officer and
                                Principal Accounting Officer)



                                       12