<PAGE>

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


                                    FORM 10-Q

[Mark One]

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

                For the Quarterly Period Ended December 31, 2001

                                       OR

   / /         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                        For the Transition Period from to


                        Commission File Number: 000-6377


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


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


1077 INDEPENDENCE AVENUE, MOUNTAIN VIEW, CA                       94043-1601
--------------------------------------------------           -------------------
   (Address of principal executive offices)                       (Zip Code)


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



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


     Number of outstanding shares of common stock, $.01 par value, at February
4, 2001: 10,197,791

<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 accounting principles generally accepted in the United States 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.

     These condensed consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto for the year
ended March 31, 2001, included in the Company's Annual Report on Form 10-K.

     The results of operations for the nine months ended December 31, 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
third quarter of fiscal 2001 ended on December 29, 2000, and the 13-week third
quarter of fiscal 2002 ended on December 28, 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 to 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 December 31, 2001, the Company
had $6,873,000 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
cost or estimated realizable value. The components of inventories are (in
thousands):

                                      March 31,      December 31,
                                          2001             2001
                                          ----             ----
                                                      (Unaudited)
Raw materials........................ $  2,954          $  3,441
Work-in-process......................      552               335
Finished goods.......................    1,267             1,457
Systems and components
   held for resale...................      108                20
                                      --------          --------
                                      $  4,881          $  5,253
                                      ========          ========

     RECENT ACCOUNTING PRONOUNCEMENTS: On June 29, 2001, the Financial
Accounting Standard Board (FASB) approved for issuance Statement of Financial
Accounting Standards (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


                                      -2-
<PAGE>


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.

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset.
This statement states that companies should recognize the asset retirement cost,
at its fair value, as part of the cost of the asset and classify the accrued
amount as a liability in the condensed consolidated balance sheet. The asset
retirement liability is then accreted to the ultimate payout as interest
expense. The initial measurement of the liability would be subsequently updated
for revised estimates of the discounted cash outflows. The statement will be
effective for fiscal years beginning after June 15, 2002. The Company has not
yet determined the effect SFAS No. 143 will have on its financial position,
results of operations, or cash flows.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121 by requiring that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operations to include more disposal
transactions. The statement will be effective for fiscal years beginning after
December 5, 2001. The Company has not yet determined the effect SFAS No. 144
will have on its financial position, results of operations, or cash flows.

     RECLASSIFICATIONS:  Certain reclassifications were made to prior period
financial data to conform with the current period presentation.

     EARNINGS PER SHARE: 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 and nine months ended December 31, 2000 and
December 31, 2001 is shown in the following table (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                                 Three Months Ended            Nine Months Ended
                                                                   December 31,                  December 31,
                                                               2000            2001           2000           2001
                                                               ----            ----           ----           -----

<S>                                                          <C>              <C>           <C>             <C>
Net income..............................................     $  1,785         $   720       $  4,879        $  2,528
                                                             ========         =======       ========        ========

Basic earnings per share:
    Weighted average common shares outstanding..........        9,926          10,015          9,901           9,883
                                                             --------         -------       --------        --------
Basic earnings per share................................     $    .18         $   .07       $    .49        $    .26
                                                             ========         =======       ========        ========

Diluted earnings per share:
    Weighted average common shares outstanding..........        9,926          10,015          9,901           9,883
    Weighted average common shares from
    stock option grants.................................          727             832            581             452
                                                             --------         -------       --------        --------

    Weighted average common shares and common
    stock equivalents outstanding.......................       10,653          10,847         10,482          10,335
                                                             --------         -------       --------        --------

Diluted earnings per share..............................     $    .17         $   .07        $   .47         $   .24
                                                             ========         =======       ========        ========
</TABLE>
     Stock options having an exercise price greater than the average market
value for the periods are excluded from the calculation of diluted earnings per
share. As the effect would be antidilutive, 22,000 shares and 3,500 shares are
excluded from the calculation of diluted earnings per share for the three months
ended December 31, 2001 and 2000, respectively. For the same reason, stock
options representing 427,100 shares and 304,000 shares are excluded from the
calculation of diluted earnings per share for the nine months ended December 31,
2001 and 2000, respectively.

                                      -3-
<PAGE>



                 DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES

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

<TABLE>
<CAPTION>

                                                                                            March 31,      December 31,
                                                                                               2001            2001
                                                                                               ----            -----
,                                                                                                            (Unaudited)
                                     ASSETS
Current assets:
<S>                                                                                       <C>              <C>
    Cash and cash equivalents ..........................................................  $    6,221       $   8,897
    Short-term investments..............................................................       5,387           6,873
    Accounts receivable, net ...........................................................       1,278           1,175
    Inventories ........................................................................       4,881           5,253
    Other current assets................................................................         566             574
                                                                                          ----------       ---------
       Total current assets ............................................................      18,333          22,772
                                                                                          ----------       ---------

Property and equipment, at cost.........................................................      19,310          20,361
    Less--accumulated depreciation and amortization .....................................    (13,423)        (14,270)
                                                                                          ----------       ---------
       Property and equipment, net......................................................       5,887           6,091
                                                                                          ----------       ---------
Patents and other intangibles, net......................................................         878             687
Deferred tax asset, net.................................................................       5,282           6,633
Other assets   .........................................................................         111              --
                                                                                          ----------       ---------
            Total assets................................................................  $   30,491       $  36,183
                                                                                          ==========       =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable....................................................................  $    1,039       $     653
    Accrued payroll costs ..............................................................         439             487
    Deferred revenue....................................................................         994             875
    Advance payments from customers.....................................................       1,275           1,851
    Other accrued liabilities...........................................................         422             353
                                                                                          ----------       ---------
       Total current liabilities........................................................       4,169           4,219
                                                                                          ----------       ---------
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
            10,149,683 shares at December 31, 2001......................................          99             101
    Additional paid-in capital..........................................................      37,852          39,124
    Less--common stock treasury shares, at cost: 127,424 shares at March 31, 2001
       and no shares at December 31, 2001...............................................      (1,840)             --
    Accumulated deficit.................................................................      (9,789)         (7,261)
                                                                                          ----------       ---------
       Total stockholders' equity.......................................................      26,322          31,964
                                                                                          ----------       ---------

            Total liabilities and stockholders' equity..................................  $   30,491       $  36,183
                                                                                          ==========       =========

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


                                      -4-
<PAGE>

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

<TABLE>
<CAPTION>

                                                                           Three Months Ended            Nine Months Ended
                                                                             December 31,                   December 31,
                                                                         2000            2001            2000          2001

Revenues:
<S>                                                                 <C>              <C>              <C>          <C>
    Product revenue ..............................................  $   4,839        $   5,269        $  15,179    $  13,296
    License and royalty revenue...................................        206               --              568        1,076
                                                                    ---------        ---------        ---------    ---------
       Total revenues.............................................      5,045            5,269           15,747       14,372
                                                                    ---------        ---------        ---------    ---------

Costs and expenses:
    Cost of sales.................................................      2,278            2,892            8,164        7,317
    Selling, general, and administrative expenses.................        993            1,289            3,031        3,653
    Research and engineering expenses.............................        564              894            1,599        2,253
                                                                    ---------        ---------        ---------    ---------
       Total costs and expenses...................................      3,835            5,075           12,794       13,223
                                                                    ---------        ---------        ---------    ---------

          Operating income........................................      1,210              194            2,953        1,149
                                                                    ---------        ---------        ---------    ---------

Other income:
    Interest income...............................................        177               88              439          299
                                                                    ---------        ---------        ---------    ---------
          Total other income......................................        177               88              439          299
                                                                    ---------        ---------        ---------    ---------

          Income before income taxes..............................      1,387              282            3,392        1,448

Income tax benefit................................................       (398)            (438)          (1,487)      (1,080)
                                                                    ---------        ---------        ---------    ---------

          Net income..............................................  $   1,785        $     720        $   4,879    $   2,528
                                                                    =========        =========        =========    =========

Net income per share:
          Basic ..................................................  $     .18        $    . 07        $     .49    $     .26
                                                                    =========        =========        =========    =========
          Diluted.................................................  $     .17        $     .07        $     .47    $     .24
                                                                    =========        =========        =========    =========

Weighted average number of common and common equivalent shares:
          Basic...................................................      9,926           10,015            9,901        9,883
          Diluted.................................................     10,653           10,847           10,482       10,335

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





                                      -5-
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                                  Nine Months Ended
                                                                                                     December 31,
                                                                                                 2000            2001
                                                                                                 ----            ----
Cash flows from operating activities:
<S>                                                                                            <C>             <C>
   Net income...............................................................................   $  4,879        $  2,528
   Adjustments to reconcile net income to net cash provided by operating
activities:
       Depreciation and amortization........................................................      1,223           1,151
       Provision for doubtful accounts receivable...........................................        (16)            (18)
       Provision for excess and obsolete inventory, net.....................................         92             288
       Provision for product return reserve.................................................       (150)            (26)
       Increase in deferred tax asset.......................................................     (1,885)         (1,351)
       Compensation on stock plan activity..................................................         40              54
       Tax benefit for stock option exercises...............................................         83             149

   Changes in operating assets and liabilities:
       Decrease in accounts receivable......................................................        576             147
       Increase in inventories..............................................................       (202)           (660)
       (Increase) decrease in other assets..................................................       (380)            103
       (Decrease) increase in accounts payable and accrued expenses.........................        441            (407)
       (Decrease) increase in deferred revenue..............................................        849            (119)
       (Decrease) increase in advance payments from customers...............................       (718)            576
                                                                                               --------        --------

            Net cash provided by operating activities.......................................      4,832           2,415
                                                                                               --------        --------

Cash flows from investing activities:
   Purchases of property and equipment, net.................................................     (1,757)         (1,083)
   Investment in patents and other intangibles..............................................       (336)            (81)
   Investment in commercial paper...........................................................    (16,496)        (10,352)
   Maturities in commercial paper...........................................................     12,649           8,866
                                                                                               --------        --------

            Net cash used for investing activities..........................................     (5,940)         (2,650)
                                                                                               --------        --------

Cash flows from financing activities:
   Proceeds from sale of common stock through stock plans...................................      1,220           3,086
   Cash used to purchase common stock through an open market repurchase program.............    (1,365)            (175)
                                                                                               --------        --------

            Net cash provided by (used for) financing activities............................       (145)          2,911
                                                                                               --------        --------

            Net increase (decrease) in cash and cash equivalents............................     (1,253)          2,676

Cash and cash equivalents:
   Beginning of period......................................................................      2,818           6,221
                                                                                               --------        --------
   End of period............................................................................   $  1,565        $  8,897
                                                                                               ========        ========

                   The accompanying notes are an integral part of these 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
assembly and design and the Company's research and engineering efforts,
including the expected development of lower cost drives, customer-optimized
drive systems, and drive systems with advanced security features; the need for
and efforts to develop read-only drives and new read/write drives and software
products; the Company's efforts to recruit new VARs or licensees and eliminate
nonproductive VARs; the adequacy of inventory; anticipated orders from the
Company's U.S. government subcontract; expected shipment volumes for the 2002
and 2003 fiscal years; expectations regarding revenues, margins, expenses,
capital resources, capital expenditures and investments, and the Company's
deferred tax asset and valuation allowance; potential reductions of federal tax
cash payments due to current Company tax benefits; the effects of read/write
drive prices on gross profits from read/write drive sales; the Company's
estimates for the level of sales of drives that would be necessary to achieve a
gross profit at current prices; expectations regarding the market for read/write
drives, read/write drive prices, and inventory of drives and parts; 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 expected decrease in demand for the
Company's cards in laser eye-surgery systems and the expected emergence of
opportunities for the Company's products in Canada, China, India, Italy,
Macedonia, and Saudi Arabia and further opportunities in expansion of current
U.S. government ID card programs 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, potential manufacturing
difficulties and complications associated with increasing manufacturing capacity
of cards and drives, uncertainties related to the ability to design and develop
new drives, reliance on single-source and limited-source suppliers for
components and raw materials, customer concentration, lengthy sales cycles, and
other risks detailed from time to time in the SEC reports of Drexler Technology
Corporation, including its annual report on Form 10-K for the 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.

     RESULTS OF OPERATIONS--FISCAL 2002 THIRD QUARTER AND FIRST NINE MONTHS
          COMPARED WITH FISCAL 2001 THIRD QUARTER AND FIRST NINE MONTHS

REVENUES

      For the fiscal 2002 third quarter ended December 31, 2001, the Company's
total revenues were $5,269,000 compared with $5,045,000 for last year's third
quarter. Total revenues for the fiscal 2002 first nine months were $14,372,000
compared with $15,747,000 for last year's first nine months.

      PRODUCT REVENUES. Sales of LaserCard(R) optical memory cards and related
products were $5,269,000 for the third quarter and $13,296,000 for the first
nine months ended December 31, 2001 versus $4,839,000 for the third quarter and
$15,179,000 for the first nine months ended December 31, 2000. The Company sold
approximately 1,545,000 optical memory cards and approximately 50 read/write
drives in the fiscal 2002 third quarter compared with approximately 1,206,000
optical memory cards and approximately 160 read/write drives for the fiscal 2001
third quarter. The Company sold approximately 3,895,000 LaserCard(R) optical
memory cards and 211 read/write drives in the fiscal 2002 first nine months
compared with approximately 3,600,000 optical memory cards and 1,140 read/write
drives in the fiscal 2001 first nine months. Read/write drive revenues decreased
by $362,000 for the fiscal 2002 third quarter and $2,843,000 for the fiscal 2002
first nine months. Of the 1,140 read/write drives sold during the first nine
months of fiscal 2001, about 600 drives were delivered mainly for the U.S.
Department of Defense "Automated Manifest System" as compared with 35


                                      -7-
<PAGE>

read/write drives in the current fiscal year. Orders for this program have
historically been sporadic. The remaining decrease in read/write drive shipments
was due to a reduction in sales to VISX Incorporated, discussed below.

      The Company's principal LaserCard market today involves high-security,
counterfeit-resistant, tamper-resistant cards for "digital governance," defined
as the utilization of digital information technology by a nation, state, region,
municipality, agency, or institution. Within this market, the Company's largest
customer for LaserCard products is the United States government, representing
55% of total revenues for fiscal year 2001 compared with 83% of total revenues
for the fiscal 2002 third quarter and 77% of total revenues for the fiscal 2002
first nine months. 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, represented 26%
of total revenues for fiscal year 2001 compared with 6% of total revenues for
the fiscal 2002 third quarter and 9% of total revenues for the fiscal 2002 first
nine months. VISX 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 and children's healthcare
cards in China, and state government motor-vehicle registration cards in India.
The Company believes that market opportunities for optical memory cards also
appear to include identification cards for Saudi Arabia, identification cards
for Macedonia, and resident immigrant cards for Canada, as well as an expansion
of current U.S. government ID card programs. In addition, the Company is
continuing its efforts to develop new optical card read/write drives and
read-only drives and software products.

      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. 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.

      The Company believes that its proprietary optical memory card software
provides a strong competitive advantage in developing the commercial market. 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.

      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. 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, but now selects and
qualifies 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. Prior to May 2001, the
Company had been selling its read/write drives for just under three thousand
dollars per unit, and these units generally include the Company's interface
software/device drivers. The Company subsequently reduced the selling price for
basic read/write drives by about 20% for typical purchase quantities, in an
effort to increase the markets for optical cards.


                                      -8-
<PAGE>

      LICENSE FEE REVENUES. The Company had no license revenue for the third
quarters of fiscal 2002 and 2001. For the fiscal 2002 first nine months,
revenues from license fees were $1,076,000. This license revenue included
$956,000 recognized on digital sound patent licenses 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 fiscal 2001 first
nine months, license revenue was $356,000, earned on the Italian license.

BACKLOG

      As of December 31, 2001, the backlog for LaserCard optical memory cards
only (consisting of firm card orders and card-order releases under card supply
contracts) was approximately $3.8 million. As of December 31, 2001, there was no
existing backlog for read/write drives.

      On January 22, 2002, the Company received a $10.4 million purchase release
for 3,250,000 million optical memory cards under its current U.S. government
subcontract, calling for deliveries over an eight-month period. This LaserCard
order calls for deliveries of 280,000 cards in the fiscal fourth quarter ending
March 31, 2002. The fiscal fourth quarter is also expected to include shipments
of 1,100,000 cards remaining from a September 20, 2001 order under the same
government subcontract. Under the January 2002 card order, shipments during the
first and second quarters of fiscal 2003 are scheduled at the rate of 1,485,000
cards per quarter.

      Of the $3.8 million backlog at December 31, 2001, about 92% was for INS
Green Cards and DOS Laser Visa cards to be supplied under a U.S. government
subcontract for the purchase of optical memory cards. Under this five-year
subcontract with an authorized maximum of $81 million, the Company expects to
supply up to 24 million LaserCard optical memory cards at an average selling
price of about $3.23 per card. Announced by the Company on June 7, 2000, this
subcontract was received by the Company under a competitive bid, government
procurement contract through a LaserCard VAR that is the U.S. government prime
contractor. The subcontract states that the U.S. government anticipates placing
orders in units of at least one million optical memory cards per order, and it
provides for an initial one-year contract period and four additional one-year
contract options. Of the 24 million card maximum, approximately 9 million cards
(which includes the 3.25 million card order received on January 22, 2002) have
been ordered thus far under the June 2000 subcontract. Shipments commenced in
September 2000. As of December 31, 2001, 4.7 million cards have been shipped, of
which 1.2 million were shipped during the fiscal 2002 third quarter. Including
this subcontract and an earlier subcontract, the Company has shipped a total of
more than 12 million Green Cards and Laser Visa cards since 1997.

GROSS PROFIT

      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 $2.6 million for the fiscal 2002 third quarter and $6.5 million
for the fiscal 2002 first nine months compared with $2.4 million for the fiscal
2001 third quarter and $6.4 million for the fiscal 2001 first nine months. For
the third quarter of fiscal 2002, gross profit was reduced by about $300,000 due
to lower production levels, as the Company was selling inventory previously
produced. The increase in gross profit for the fiscal 2002 first nine months was
mainly due to higher sales volume. Optical memory card gross profit and margins
can vary based on average selling price, sales and production volume, mix of
card types, production efficiency and yields, and changes in fixed costs.

      READ/WRITE DRIVES. For the fiscal 2002 third quarter, gross profit on
read/write drive sales decreased by about $260,000, to a negative gross profit
of about $200,000 compared with a gross profit of about $60,000 for the fiscal
2001 third quarter. For the fiscal 2002 first nine months, gross profit on
read/write drive sales decreased by about $1,015,000, to a negative gross profit
of about $500,000 compared with a gross profit of about $515,000 for the fiscal
2001 first nine months. The decrease for both periods was due to lower sales
volume and lower selling prices for drives. In May 2001, the Company reduced the
selling prices of its basic read/write drives by 20% for typical sales
quantities, in an effort to increase certain markets for optical memory cards.
This reduced gross profit on read/write drive sales in fiscal 2002, and
increased the level 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. The Company has no plans to further lower
read/write drive prices for the current model.


                                      -9-
<PAGE>

      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 December 31, 2001, read/write drive parts and
finished goods inventory totaled $3.4 million compared with $2.2 million at
March 31, 2001. During the remainder of fiscal 2002, the Company will receive an
additional $250,000 in read/write drive parts that are now on order. Including
about 635 drives in finished goods inventory, approximately 900 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 $400,000 in unique parts. The
Company believes there is a market for basic and upgraded 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 December 31, 2001,
including parts to be received, will be ordered by customers within the next 12
months. If these anticipated orders do not materialize, the Company may need to
write-down the value of its inventory for any potential excess quantities.
During the fiscal 2002 first nine months, the Company sold an average of 70
read/write drives per quarter. The Company believes that sales of about 475
read/write drives per quarter would be necessary to achieve a gross profit on
read/write drive sales at current selling prices and costs. The Company believes
that the read/write drive inventory as of December 31, 2001 is reflected at its
net realizable value. In addition, since lower cost read/write drive designs may
become available from the Company before the existing parts are utilized, a
portion of this inventory may be deemed obsolete and would require an inventory
write-down. However, it is anticipated that the introduction of any new
read/write drive would be timed to minimize this risk. In addition, the Company
is investing in research and engineering in an effort to develop new read/write
drive products, as discussed below.

      The Company believes that potential markets for read/write drives include
the U.S. Immigration and Naturalization Service, U.S. Department of State, the
U.S. armed forces, and Italy and several other countries. 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 the Company's operating
results.

INCOME AND EXPENSES

      SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). SG&A expenses were
$1,289,000 for the fiscal 2002 third quarter compared with $993,000 for the
fiscal 2001 third quarter. For the fiscal 2002 first nine months, SG&A expenses
were $3,653,000 compared with $3,031,000 for the fiscal 2001 first nine months.
The increase for fiscal 2002 compared with fiscal 2001 was mainly due to
increased compensation expenses, travel and promotion expenditures, and
occupancy costs. The Company believes that SG&A expenses for fiscal 2002 will
remain above fiscal 2001 levels, mainly due to increases in marketing expenses
and other general increases.

      RESEARCH AND ENGINEERING EXPENSES (R&E). The Company is continuing its
efforts to develop new optical memory card read/write drives and read-only
drives and software products in order to provide new products that can stimulate
sales growth. The Company anticipates that these R&E efforts will result in
lower cost drives, customer-optimized drive systems, and drive systems with
advanced security features. R&E expenses were $894,000 for the fiscal 2002 third
quarter compared with $564,000 for the fiscal 2001 third quarter. For the fiscal
2002 first nine months, R&E expenses were $2,253,000 compared with $1,599,000
for the fiscal 2001 first nine months. The increase in R&E spending for the
fiscal 2002 first nine months consists of a $545,000 increase in read/write
drive manufacturing engineering and product development and a $109,000 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 memory card read/write drive development efforts.

      OTHER INCOME. Total other income for the fiscal 2002 third quarter
consisted of $88,000 of interest income compared with $177,000 of interest
income for the fiscal 2001 third quarter. Total other income for the first nine
months of fiscal 2002 consisted of $299,000 of interest income compared with
$439,000 of interest income for the first nine months of fiscal 2001. The
decreases for both periods are due to a decline in interest rates.

                                      -10-
<PAGE>

      PRETAX PROFIT. Pretax profit for the fiscal 2002 third quarter decreased
by $1,105,000 compared with the fiscal 2001 third quarter due to the $184,000
reduction in product gross profit, a $626,000 increase in expenses, and a
$206,000 decrease in license revenue. Pretax profit for the fiscal 2002 first
nine months decreased by about $1,944,000 compared with the fiscal 2001 first
nine months due to the $1,036,000 reduction in product gross profit and a
$1,276,000 increase in expenses, offset by a $508,000 increase in license
revenue. Pretax profit for the first nine months of fiscal 2002 was $1,448,000
and license revenues were $1,076,000 for the same period.

      INCOME TAXES. 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. For the fiscal 2002 third quarter, the
Company recorded an income tax benefit of $438,000 versus a $398,000 income tax
benefit for the fiscal 2001 third quarter. For the first nine months of fiscal
2002, the Company recorded an income tax benefit of $1,080,000 compared with
$1,487,000 for last year's first nine months. The Company anticipates that after
fiscal 2002, ending March 31, 2002, it will have realized all prior tax benefits
for income statement purposes.

      There are temporary 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. For
income tax purposes, the Company estimates that as these temporary differences
are realized on the tax return, future federal tax cash payments could be
reduced by about $12 million.

                         LIQUIDITY AND CAPITAL RESOURCES

      As of December 31, 2001, the Company had cash, cash equivalents, and
short-term investments of $15,770,000, a current ratio of 5.4 to 1, and no
long-term debt.

      Net cash provided by operating activities was $2,415,000 for the fiscal
2002 first nine months compared with $4,832,000 for the fiscal 2001 first nine
months. The major categories comprising this increase are:

<TABLE>
<CAPTION>

                                                                      Nine Months Ended
                                                                         December 31,
                                                                      2000           2001
                                                                     -----           ----
<S>                                                               <C>             <C>
    Earnings before taxes, depreciation, and amortization......   $  4,615        $ 2,599
    Tax payments...............................................       (278)          (124)
    Decrease in accounts receivable............................        576            147
    Increase in inventories....................................       (202)          (660)
    Increase in advance payments from customers
       and deferred revenue....................................        131            460
    Other .....................................................        (10)            (7)
                                                                  --------        -------
                                                                  $  4,832        $ 2,415
                                                                  ========        =======
</TABLE>

      The Company believes that the estimated level of revenues over the next 12
months will be sufficient to generate cash from operations over the next 12
months. Operating cash flow could be negatively impacted to a significant degree
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.


                                      -11-
<PAGE>

      As a result of the $2,528,000 net income recorded for the fiscal 2002
first nine months, the Company's accumulated deficit was reduced to $7,261,000.
Stockholders' equity increased to $31,964,000 as a result of the net income
recorded and $3.1 million in additions to equity, mainly due to stock option
exercises.

      Net cash used for investing activities was $2,650,000 for the fiscal 2002
first nine months compared with $5,940,000 used for investing activities for the
fiscal 2001 first nine months. These amounts include changes in the maturity of
liquid investments, purchases of property and equipment (discussed below) of
$1,083,000 for the fiscal 2002 first nine months and $1,757,000 for the fiscal
2001 first nine months, and increases in patents and other intangibles of
$81,000 for the fiscal 2002 first nine months and $336,000 for the fiscal 2001
first nine months. The difference relates to less cash used to purchase
short-term investments, property, and equipment and less cash used for patent
legal costs.

      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 not more 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 December 31, 2001, the Company had $6,873,000 classified as short-term
investments, compared with $5,387,000 at March 31, 2001, and all marketable
securities were classified as held-to-maturity. Cash plus short-term investments
were $15,770,000 at December 31, 2001, as compared with $11,608,000 at March 31,
2001.

      For optical memory card production, the Company added capital equipment
and leasehold improvements of approximately $695,000 during the first nine
months of fiscal 2002 compared with approximately $1,150,000 during the first
nine months of fiscal 2001. Depending on card type, the Company's card
production capacity is approximately 7 to 9 million cards per year and is
expected to reach a capacity of approximately 11 million cards per year by May
30, 2002. 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 $3 million per year for card production equipment and automatic
inspection equipment to support growth of optical memory card production. On
December 3, 2001, the Company announced that it raised optical memory card
shipment estimates to 8 to 10 million cards for fiscal year 2003, which begins
on April 1, 2002, compared to an estimated 5.3 million cards for fiscal 2002.

      In connection with read/write drive manufacturing and design, the Company
added capital equipment and leasehold improvements of approximately $385,000
during fiscal 2002 first nine months compared with $600,000 during the fiscal
2001 first nine months. The Company expects that additional capital investments
will be made during the remainder of fiscal 2002.

      Net cash provided by financing activities was $2,911,000 for the fiscal
2002 first nine months compared with $145,000 used for financing activities for
the fiscal 2001 first nine months. 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 $3,086,000 for the fiscal 2002 first nine months and $1,220,000 for
the fiscal 2001 first nine months.

      During fiscal 2001, the Company commenced 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. During the first nine months of fiscal 2002, the Company
used cash of $175,000 for this purpose versus $1,365,000 used in fiscal 2001. As
of June 30, 2001, the Company had completed this program.

      There were no debt financing activities for the first nine months of
fiscal 2002 or 2001.

                                      -12-
<PAGE>

ITEM 3.  MARKET RATE RISKS

      INTEREST RATE RISK. There were no material changes during the third
quarter of fiscal 2002 to the Company's exposure to market risk for changes in
interest rates.

      FOREIGN CURRENCY EXCHANGE RATE RISK. There were no material changes during
the third quarter of fiscal 2002 to the Company's foreign currency exchange rate
risk.

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: February 8, 2002               /s/ Jerome  Drexler
                                     -------------------------------------------
                                     Jerome Drexler, Chairman of the Board of
                                     Directors and Chief Executive Officer
                                     (Principal Executive Officer)


Date: February 8, 2002               /s/ Steven G. Larson
                                     -------------------------------------------
                                     Steven G. Larson, Vice President of Finance
                                     and Treasurer (Principal Financial Officer
                                     and Principal Accounting Officer)













                                      -13-