<PAGE>

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


                                    FORM 10-Q


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

                  For the Quarterly Period Ended June 30, 2002


                        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 1, 2002:
                                   10,313,379

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                                TABLE OF CONTENTS

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

         Item 2.   Management's Discussion and Analysis of Financial                  8
                   Condition and Results of Operations (Unaudited)

         Item 3.   Quantitative and Qualitative Disclosures about Market Risk        15

PART II. OTHER INFORMATION                                                           15

         Item 5.   Other Information                                                 15

         Item 6.   Exhibits and Reports on Form 8-K                                  15

SIGNATURES                                                                           16

-------------------------------------------------------------------------------------------
</TABLE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                      -2-
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                 DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
               (In thousands, except share and per share amounts)

                                                                                                 March 31,              June 30,
                                                                                                   2002                   2002
                                                                                                   ----                   ----
                                     ASSETS
<S>                                                                                             <C>                   <C>
Current assets:
    Cash and cash equivalents ................................................................  $    8,193            $   7,211
    Short-term investments....................................................................       8,883               10,478
    Accounts receivable, net .................................................................       1,659                1,735
    Inventories ..............................................................................       4,973                5,021
    Deferred tax asset, net...................................................................       3,849                3,849
    Other current assets......................................................................         561                  625
                                                                                                ----------            ---------
       Total current assets ..................................................................      28,118               28,919
                                                                                                ----------            ---------

Property and equipment, at cost...............................................................      20,979               21,771
    Less--accumulated depreciation and amortization ...........................................    (14,561)             (14,876)
       Property and equipment, net............................................................       6,418                6,895
                                                                                                ----------            ---------
Long-term investments.........................................................................       1,002                1,002
Patents and other intangibles, net............................................................         612                  564
Deferred tax asset, net.......................................................................       4,563                4,256
                                                                                                ----------            ---------
            Total assets......................................................................  $   40,713            $  41,636
                                                                                                ==========            =========


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable..........................................................................  $      738                  622
    Accrued liabilities ......................................................................       1,117                1,157
    Deferred revenue..........................................................................         235                  311
    Advance payments from customers...........................................................       2,551                2,622
    Deferred gross profit.....................................................................       2,860                2,150
       Total current liabilities..............................................................       7,501                6,862
    Deferred revenue, long-term...............................................................         875                  875
                                                                                                ----------            ---------
            Total liabilities.................................................................  $    8,376            $   7,737
                                                                                                ==========            =========

Stockholders' equity:
    Preferred stock, $.01 par value:
       Authorized--2,000,000 shares
       Issued--none............................................................................         --                   --
    Common stock, $.01 par value:
       Authorized--30,000,000 shares
       Issued--10,240,687 shares at March 31, 2002 and
       10,312,779 shares at June 30, 2002.....................................................         102                  103
    Additional paid-in capital................................................................      40,334               41,236
    Accumulated deficit.......................................................................      (8,099)              (7,440)
       Total stockholders' equity.............................................................      32,337               33,899
                                                                                                ----------            ---------
            Total liabilities and stockholders' equity........................................  $   40,713            $  41,636
                                                                                                ==========            =========

The accompanying notes are an integral part of these condensed consolidated financial statements.
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                                      -3-
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<TABLE>
<CAPTION>

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

                                                                                                        Three Months Ended
                                                                                                              June 30,
                                                                                                    2001                   2002
                                                                                                    ----                   ----
<S>                                                                                               <C>                    <C>
Revenues:
    Product sales   ..............................................................................$    3,972             $   6,588
    License and royalty revenue...................................................................       311                    --
                                                                                                  ----------             ---------
       Total revenues.............................................................................     4,283                 6,588
                                                                                                  ----------             ---------

Cost of product sales.............................................................................     2,273                 3,285
                                                                                                  ----------             ---------

       Gross profit...............................................................................     2,010                 3,303
                                                                                                  ----------             ---------
Operating expenses:
    Selling, general, and administrative expenses.................................................     1,194                 1,570
    Research and engineering expenses.............................................................       623                   776
                                                                                                  ----------             ---------
       Total operating expenses...................................................................     1,817                 2,346
                                                                                                  ----------             ---------
           Operating income.......................................................................       193                   957

Other income......................................................................................       116                   106
                                                                                                  ----------             ---------

           Income before income taxes.............................................................       309                 1,063

Income tax expense (benefit)......................................................................      (825)                  404
                                                                                                  ----------             ---------

           Net income.............................................................................$    1,134             $     659
                                                                                                  ==========             =========
Net income per share:
           Basic .................................................................................$      .12             $     .06
           Diluted................................................................................$      .11             $     .06

Weighted average number of common and common equivalent shares:
           Basic..................................................................................     9,820                10,300
           Diluted................................................................................    10,135                11,117

The accompanying notes are an integral part of these condensed consolidated financial statements.
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                                      -4-
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<CAPTION>

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

                                                                                                          Three Months Ended
                                                                                                                June 30,
                                                                                                         2001             2002
                                                                                                         ----             ----
<S>                                                                                                    <C>              <C>
Cash flows from operating activities:
   Net income..........................................................................................$  1,134         $   659
   Adjustments to reconcile net income to net cash provided by operating activities:
       Depreciation and amortization...................................................................     375             408
       Provision for doubtful accounts receivable......................................................       5              11
       (Increase) decrease in deferred tax asset.......................................................    (827)            307
       Provision for excess and obsolete inventory, net................................................     169              35
       Tax benefit for stock option exercises..........................................................      --              96

   Changes in operating assets and liabilities:
       (Increase) decrease in accounts receivable......................................................     705             (87)
       Increase in inventories.........................................................................    (626)            (83)
       Increase in other assets........................................................................     (52)            (64)
       Increase (decrease) in accounts payable and accrued liabilities.................................      40             (76)
       Increase (decrease) in deferred revenue.........................................................    (119)             76
       Increase (decrease) in advance payments from customers..........................................    (309)             71
       Decrease in deferred gross profit...............................................................    (190)           (710)
                                                                                                       --------         -------

            Net cash provided by operating activities..................................................      305            643
                                                                                                       --------         -------

Cash flows from investing activities:
   Purchases of property and equipment.................................................................    (393)           (802)
   Investment in patents and other intangibles.........................................................     (30)            (35)
   Purchases of short-term investments.................................................................  (1,484)         (3,838)
   Proceeds from maturities of short-term investments..................................................   5,387           2,243
                                                                                                       --------         -------

            Net cash provided by (used for) investing activities.......................................   3,480          (2,432)
                                                                                                       --------         -------

Cash flows from financing activities:
       Proceeds from sale of common stock through stock plans..........................................      11             807
       Purchases of common stock through an open market repurchase program.............................    (175)             --
                                                                                                       --------         -------

            Net cash provided by (used for) financing activities.......................................    (164)            807
                                                                                                       --------         -------

            Net increase (decrease) in cash and cash equivalents.......................................   3,621            (982)

Cash and cash equivalents:
   Beginning of period.................................................................................   6,221           8,193
                                                                                                       --------         -------
   End of period  .....................................................................................$  9,842         $ 7,211
                                                                                                       ========         =======

The accompanying notes are an integral part of these condensed consolidated financial statements.
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                                      -5-
<PAGE>

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

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

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

     The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with 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 include only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations as of and for the periods indicated.

     These condensed consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto for the year
ended March 31, 2002, included in the Company's Annual Report on Form 10-K.

     The results of operations for the three months ended June 30, 2002 are not
necessarily indicative of results to be expected for the entire year ending
March 31, 2003.

     FISCAL PERIOD: For purposes of presentation, the Company's annual
accounting period ends on March 31 and its interim quarterly periods end on the
corresponding month end. The Company, in fact, operates and reports based on
quarterly periods ending on the Friday closest to month end. The 13-week first
quarter of fiscal 2002 ended on June 29, 2001, and the 13-week first quarter of
fiscal 2003 ended on June 28, 2002.

     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,
                                                 2002            2002
                                                 ----            ----
        Raw materials...................... $       3,063  $        2,888
        Work-in-process....................           479             339
        Finished goods.....................         1,338           1,697
        Systems and components
           held for resale.................            93              97
                                            -------------  --------------
                                            $       4,973  $        5,021
                                            =============  ==============

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

     RECENT ACCOUNTING PRONOUNCEMENTS. In July 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
No. 146). SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The Company is currently evaluating the provisions of
SFAS No. 146 but does not believe that the adoption will have a material impact
on its results of operations, financial position, or cash flows.

                                       -6-
<PAGE>

     NET INCOME PER SHARE: The Company computes net income 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 net income per share is computed by dividing net
income by the weighted average number of shares of common stock outstanding.
Diluted net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding. Common stock equivalents consist of stock options using the
treasury stock method. The reconciliation of the denominators of the basic and
diluted net income per share computation for the three months ended June 30,
2001 and June 30, 2002 is shown in the following table (in thousands, except per
share data):

                                                       Three Months Ended
                                                              June 30,
                                                       2001             2002
                                                       ----             ----

Net income.........................................  $ 1,134          $     659
                                                     =======          =========

Basic net income per share:
    Weighted average common shares outstanding.....    9,820             10,300
                                                     -------          ---------
Basic net income per share.........................  $   .12          $     .06
                                                     =======          =========

Diluted net income per share:
    Weighted average common shares outstanding.....    9,820             10,300
    Weighted average common shares from
       stock option grants.........................      315                817
                                                     -------          ---------

    Weighted average common shares and common
       stock equivalents outstanding...............   10,135             11,117
                                                     -------          ---------

Diluted net income per share.......................  $   .11          $     .06
                                                     =======          =========

     Stock options having an exercise price greater than the average market
value for the periods are excluded from the calculation of diluted net income
per share. Stock options to purchase 557,800 shares were excluded from the
calculation of diluted net income per share for the three months ended June 30,
2001, as their effect would be antidilutive.

     REVENUE RECOGNITION. The Company recognizes revenue when the following
criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery
has occurred or services have been rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured. Where appropriate,
provision is made for estimated warranty costs and estimated returns relating to
product sales at the time revenue is recognized.

     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 unless the Company receives a fixed schedule,
notification, or plan for shipments out of the vault, in which case revenue
would be recognized upon the latter of receipt of such fixed shipment schedule
or delivery of the cards into the vault.

     ACCOUNTING FOR INCOME TAXES. As part of the process of preparing its
consolidated financial statements, the Company is required to estimate income
taxes in each of the jurisdictions in which it operates. This process involves
estimating the actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheets.

     Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities, and any valuation
allowance recorded against the net deferred tax assets. The Company has recorded
a

                                      -7-
<PAGE>

valuation allowance of $5.7 million as of June 30, 2002, due to uncertainties
related to the Company's ability to utilize some of the deferred tax assets,
primarily consisting of certain net operating losses carried forward, before
they expire. The valuation allowance is based on management's estimates of
taxable income by jurisdiction in which the Company operates and the period over
which the deferred tax assets will be recoverable. In the event that actual
results differ from these estimates or that these estimates are adjusted in
future periods, the Company may need to establish an additional valuation
allowance which could materially impact the Company's results of operations.

     CONCENTRATION OF CREDIT RISK. One United States customer comprised 98% of
accounts receivable at March 31, 2002 and 96% of accounts receivable at June 30,
2002.

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

     The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the condensed
consolidated financial statements and related notes included elsewhere in this
Report and the consolidated financial statements and notes thereto for the year
ended March 31, 2002, included in the Company's fiscal 2002 Form 10-K Annual
Report.

FORWARD-LOOKING STATEMENTS

     FORWARD-LOOKING STATEMENTS. When used in this discussion, the words
"expects," "anticipates," "believes," "estimates," "plans," and similar
expressions are intended to identify forward-looking statements. These are
statements that relate to future periods and include statements as to the
Company's read/write drive assembly, pricing, and research and engineering
efforts, including the expected development of lower cost drives,
customer-optimized drive systems, and drive systems with advanced security
features; the Company's efforts to recruit new value-added resellers (VARs) and
eliminate nonproductive VARs; the adequacy of inventory; anticipated orders and
shipment volumes under the Company's U.S. government subcontract; expectations
regarding revenues, margins, expenses, cash flow, 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; statements as to expected orders and
card shipment volumes for fiscal 2003; statements as to potential customers,
applications, orders, or market segments for optical memory card products;
estimates of optical card production capacity, expected card yields therefrom,
and plans and expectations regarding the growth of such capacity; and
expectations regarding market growth, product demand, and foreign business
including the potential emergence of opportunities for the Company's products in
Macedonia, Mexico, and Saudi Arabia and nascent programs in China, Canada,
India, and Italy; and expectations as to continuation or expansion of U.S.
government card programs. Forward-looking statements 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 the impact of litigation or governmental or
regulatory proceedings; the Company's ability to initiate and grow new programs
utilizing the Company's card products; the Company's reliance on VARs and
licensees to generate sales, perform customer system integration, and develop
application software; risks associated with doing business in and with foreign
countries; potential manufacturing difficulties and complications associated
with increasing manufacturing capacity of cards and drives; uncertainties
associated with the design, development, manufacture, and deployment of optical
card drives and systems; customer concentration and reliance on continued U.S.
government business; lengthy sales cycles and reliance on government
policy-making; general economic trends; the unpredictability of customer demand
for products and customer issuance and release of corresponding orders; the U.S.
government's right to withhold order releases, reduce the quantities released,
and extend shipment dates; the impact of technological advances and competitive
products and the ability of the Company or its customers to develop software and
integrate optical card systems with other technologies; 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,
2002.

                                      -8-
<PAGE>

     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.

CRITICAL ACCOUNTING POLICIES

     REVENUE RECOGNITION. The Company recognizes revenue when the following
criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery
has occurred or services have been rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured. Where appropriate,
provision is made for estimated warranty costs and estimated returns relating to
product sales at the time revenue is recognized.

     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 unless the Company receives a fixed schedule,
notification, or plan for shipments out of the vault, in which case revenue
would be recognized upon the latter of receipt of such fixed shipment schedule
or delivery of the cards into the vault.

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

     Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities, and any valuation
allowance recorded against the net deferred tax assets. The Company has recorded
a valuation allowance of $5.7 million as of June 30, 2002, due to uncertainties
related to the Company's ability to utilize some of the deferred tax assets,
primarily consisting of certain net operating losses carried forward, before
they expire. The valuation allowance is based on management's estimates of
taxable income by jurisdiction in which the Company operates and the period over
which the deferred tax assets will be recoverable. In the event that actual
results differ from these estimates or that these estimates are adjusted in
future periods, the Company may need to establish an additional valuation
allowance which could materially impact the Company's results of operations.

     INVENTORIES. The Company values its inventory at the lower of the actual
cost to purchase and/or manufacture the inventory or the current estimated
market value of the inventory. Management regularly reviews inventory quantities
on hand and records a provision for excess and obsolete inventory based
primarily on the estimated forecast of product demand. As demonstrated during
fiscal 2002, demand for read/write drive products can fluctuate significantly.
If the Company is unable to produce and sell read/write drives in volume and at
prices competitive with alternate technologies, its operating results could be
harmed. 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. Read/write drive parts and finished
goods inventory totaled $3.4 million both at June 30, 2002 and at March 31,
2002. During fiscal 2003, the Company expects to purchase an additional $450,000
in read/write drive parts necessary to complete the currently planned production
of drives. As of June 30, 2002, finished goods inventory contained approximately
750 read/write drives of the current design. In addition, approximately 1,300
read/write drives of a new design could be assembled with the additional
purchase discussed above. The Company

                                      -9-
<PAGE>

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 June 30, 2002, including parts to be
received, will be ordered by customers. 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 fiscal 2002, the Company sold
approximately 450 read/write drives. The Company believes that sales of
approximately 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 based
on current expense levels for overhead costs. The Company believes that the
read/write drive inventory as of June 30, 2002 is reflected at its net
realizable value. If lower cost read/write drive designs become available from
the Company before the existing parts are utilized, a portion of this inventory
may be deemed obsolete and would then 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 optical card drive products.

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
Company is currently evaluating the provisions of SFAS No. 146 but does not
believe that the adoption will have a material impact on its results of
operations, financial position, or cash flows.

RESULTS OF OPERATIONS--FISCAL 2003 FIRST QUARTER COMPARED
WITH FISCAL 2002 FIRST QUARTER

OVERVIEW

     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, predominantly
as a result of two card programs--U.S. Immigration and Naturalization Service
(INS) Permanent Resident Cards ("Green Cards") and U.S. Department of State
border crossing cards ("Laser Visas"). Under the Company's current subcontract
and previous subcontracts to provide cards to the government, the Company has
sold a total of approximately 15 million optical memory cards as of June 30,
2002, for use as U.S. government Green Cards and border-security Laser Visas.

     Optical memory card digital governance programs that are emerging
applications or prospective applications in various countries include the new
national ID cards for Italy, Macedonia, and Saudi Arabia; immigrant permanent
resident cards for Canada; motor vehicle registration cards for two states of
India; building construction permit cards and children's healthcare cards in the
People's Republic of China; a document card program in Mexico; and the expanding
need for enhanced U.S. border security. Since these card programs typically rely
on government policy-making, which in turn is subject to budget approvals and
political considerations, there is no assurance that these programs will be
implemented as visualized.

     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.

                                      -10-
<PAGE>

REVENUES

     For the fiscal 2003 first quarter ended June 30, 2002, the Company's total
revenues increased 54%, to $6,588,000 from $4,283,000 for the comparable
prior-year quarter.

     PRODUCT REVENUES. Sales of LaserCard(R) optical memory cards and related
products totaled $6,588,000 for the fiscal 2003 first quarter compared with
$3,972,000 for the fiscal 2002 first quarter. The increase in product revenues
was due primarily to the sale of optical memory cards for the U.S. government's
Green Card and Laser Visa card programs, as described above, representing 78% of
total revenues for fiscal year 2002 and 96% of fiscal 2003 first quarter
revenues.

     The Company's deliveries to all customers totaled approximately 1.94
million optical memory cards and 75 read/write drives for the fiscal 2003 first
quarter compared with approximately 1.13 million optical memory cards and 100
read/write drives during last year's first quarter.

     Sales during the first quarter ended June 30, 2002 included shipments of
Laser Visas for the U.S. Department of State southwestern border security
program; INS Green Cards; military cargo manifest cards and read/write drives
for the U.S. Department of Defense automated manifest program; a few thousand
cards for the Canadian government's Permanent Resident Card program; and optical
card encoder read/write drives for the Italian government's planned electronic
national ID card program.

     During the fiscal 2003 first quarter, the Company shipped 1,527,000 Green
Cards to the U.S. government, including 1,102,000 shipped on June 21, 2002, as
part of the government's risk management program to limit the number of cards
stored in any one location. This level of Green Card shipments will not continue
in subsequent quarters. The Company has estimated that it will ship 8 to 10
million cards of all types during the current fiscal year.

     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. There were no license fee revenues for the fiscal 2003
first quarter.

BACKLOG

     As of June 30, 2002, the backlog for LaserCard optical memory cards totaled
approximately $10.4 million, consisting of approximately $6.4 million in card
orders under card supply contracts, and, as further described below,
approximately $4.0 million in cards produced and delivered to a secure,
government-funded vault. Of the $10.4 million amount, 84% is for U.S. government
Green Cards or Laser Visas under a U.S. government subcontract for the purchase
of optical memory cards. 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 the government-funded vault.

     Announced in June 2000, the Company's current U.S. government subcontract
for Green Cards and Laser Visas has an authorized maximum of $81 million for up
to 24 million cards, at an average selling price of about $3.23 per card, 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. 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.

     The Company's current U.S. government subcontract for Green Cards and Laser
Visas 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 unless the Company receives
a fixed schedule, notification, or plan for shipments out of the vault, in which
case revenue would be recognized upon

                                      -11-
<PAGE>

the latter of receipt of such fixed shipment schedule or delivery of the cards
into the vault. Under the Company's current supply subcontract for up to 24
million optical memory cards, the number of optical memory cards sold (and
recorded as revenue) from September 2000 through June 2002 totaled over 6
million cards. In addition, the Company has supplied 9 million optical memory
cards to the U.S. government since 1997 under previous subcontracts.

     At June 30, 2002, the vault contained 1.25 million cards with a sales value
of $4.0 million. The $4.0 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,in which case revenue would be recognized upon
receipt of such fixed delivery schedule. The 1.25 million cards are owned by the
U.S. government and are not included in inventory on the Company's consolidated
balance sheets. The net of the revenue value of $4.0 million and the $1.85
million cost is recorded as deferred gross profit in the amount of $2.15 million
on the consolidated balance sheets. As of March 31, 2002, the vault contained
1.67 million cards with a sales value of $5.34 million. The net of the revenue
value of $5.34 million and the $2.48 million cost was recorded as deferred gross
profit in the amount of $2.86 million on the condensed consolidated balance
sheets as of March 31, 2002.

     On July 26, 2002, the Company received an order valued at $1.8 million for
optical memory cards to be supplied to the Canadian government under a
subcontract for their Permanent Resident Card program. Orders to date under this
subcontract total 750,000 cards. Deliveries on the initial order received in
February of this year commenced in June. The purchase orders specify that
deliveries of the 750,000 cards occur over an eleven-month period. The
subcontract provides for a minimum purchase of 2.3 million cards over the
five-year term of the subcontract.

GROSS PROFIT

     Excluding license and royalty revenue, the gross margin on product sales
was 50.1% for the fiscal 2003 first quarter and 42.8% for the first quarter of
fiscal 2002.

     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 $3.4 million for the fiscal 2003 first quarter compared with
approximately $1.8 million for the fiscal 2002 first quarter. The increase in
gross profit for the fiscal 2003 first quarter was mainly due to the higher
sales volume of cards, which resulted in manufacturing overheads being spread
over a larger number of cards. 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 2003 first quarter, gross profit on
read/write drive sales was a negative gross profit of about $156,000 compared
with a negative gross profit of $135,000 for the fiscal 2002 first quarter. The
negative gross profit in each quarter is due to fixed overhead costs which were
expensed during the relevant period. 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 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, Canada, 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 deliveries 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
$1,570,000 for the fiscal 2003 first quarter compared with $1,194,000 for the
fiscal 2002 first quarter. The increase of $376,000 for fiscal 2003 compared
with fiscal 2002 was due mainly to a $226,000 increase in marketing and selling
expenditures and a $125,000 increase in legal and accounting fees. The Company
believes that SG&A expenses for fiscal 2003 will remain above fiscal 2002
levels, mainly due to increases in marketing expenses and other general
increases.

                                      -12-
<PAGE>

     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 $776,000 for the fiscal 2003 first
quarter compared with $623,000 for the comparable prior-year period. The
increase in R&E spending for the fiscal 2003 first quarter was due to the
increase in read/write and read-only drive manufacturing engineering and product
development. The Company anticipates that R&E expenses will continue to increase
during fiscal 2003, primarily due to optical memory card drive development
efforts and optical card-related research and engineering.

     OTHER INCOME AND EXPENSE. Total net other income for the fiscal 2003 first
quarter was $106,000, consisting of interest income, compared with $116,000 for
interest income in the fiscal 2002 first quarter.

     PRETAX PROFIT. Pretax profit for the fiscal 2003 first quarter increased by
$754,000, or 244% over last year's first quarter, mainly due to the $1,293,000
increase in gross profit, offset by a $529,000 increase in operating expenses.

         INCOME TAXES. Despite a significant increase in pre-tax income for the
fiscal 2003 first quarter, net income declined compared with the prior-year
period, primarily due to income taxes. Fiscal 2003 first quarter results include
a provision for income tax EXPENSE of $404,000 compared with an income tax
BENEFIT of $825,000 for the quarter ended June 30, 2001. The income tax benefit
for the fiscal 2002 first quarter included a credit of $852,000 due a reduction
in valuation allowance. As of March 31, 2002, the Company had recognized all
prior federal income tax benefits for income statement purposes, but still has
substantial benefits to reduce actual tax payments, as described below. As such,
the Company recorded income tax expense for the first quarter based on its
estimated annual effective tax rate.

         The Company analyzes its deferred tax assets with regard to potential
realization. The Company has established a valuation allowance on a portion of
the deferred tax assets based upon the uncertainty of their realization. The
Company has considered estimated future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the amount of the valuation
allowance.

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

LIQUIDITY AND CAPITAL RESOURCES

     As of June 30, 2002, the Company had cash, cash equivalents, and short-term
investments of $17,689,000, a current ratio of 4.2 to 1, and no long-term debt.

     Net cash provided by operating activities was $643,000 for the fiscal 2003
first quarter compared with $305,000 for last year's first quarter. The major
categories comprising cash provided by operating activities are (in thousands):

                                      -13-
<PAGE>
<TABLE>
<CAPTION>
                                                                            Quarter Ended
                                                                               June 30,
                                                                          2001           2002
                                                                          ----           ----
<S>                                                                   <C>            <C>
       Earnings before taxes, depreciation, and amortization......... $    684       $  1,471
       Decrease in deferred gross profit.............................     (190)          (710)
       (Increase) decrease  in accounts receivable...................      705            (87)
       Increase in inventory.........................................     (626)           (83)
       Increase (decrease) in advance payments from customers
          and deferred revenue.......................................     (428)           147
       Other ........................................................      160            (95)
                                                                      --------       --------

                                                                      $    305       $    643
                                                                      ========       ========
</TABLE>

      The Company believes that the estimated level of revenues over the next 12
months will be sufficient to generate cash from operations. Operating cash flow
could be negatively impacted to a significant degree if 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 $659,000 of net income recorded for the fiscal 2003
first quarter, the Company's accumulated deficit decreased to $7,440,000.
Stockholders' equity increased to $33,899,000 as a result of the net income
recorded and $807,000 in additions to equity due to stock option exercises.

      Net cash used for investing activities was $2,432,000 for the fiscal 2003
first quarter compared with $3,480,000 provided by investing activities for the
fiscal 2002 first quarter. These amounts include a net decrease of $5,498,000
from purchases and maturities of liquid investments, purchases of property and
equipment of $802,000 for the fiscal 2003 first quarter and $393,000 for the
fiscal 2002 first quarter, and increases in patents and other intangibles of
$35,000 for the fiscal 2003 first quarter and $30,000 for the fiscal 2002 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 when purchased, 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 June 30, 2002, the Company had $10,478,000 classified as short-term
investments, compared with $8,883,000 at March 31, 2002. All marketable
securities were classified as held-to-maturity. Cash plus short-term investments
were $17,689,000 at June 30, 2002 and $17,076,000 at March 31, 2002.

      For optical memory card production, the Company added capital equipment
and leasehold improvements of approximately $678,000 during the fiscal 2003
first quarter compared with $256,000 during the fiscal 2002 first quarter.
Depending on card type, color-printing specifications, and numerical
serialization requirements, the Company's card production capacity is
approximately 11 million cards per year, which is double the actual card
production of more than 5 million cards for fiscal 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.

                                      -14-
<PAGE>

     For fiscal year 2003 ending March 31, 2003, the Company expects foreign
business to rise substantially, increasing optical memory card shipments to an
estimated 8 to 10 million cards, up from 5.6 million cards for fiscal 2002. The
Company believes it is capable of supporting this expected LaserCard revenue
growth, should it occur, without raising additional equity capital, since as of
June 30, 2002, the Company has cash, cash equivalents, and short-term
investments of $17,689,000, and no debt.

     In connection with read/write drive manufacturing and design, the Company
added capital equipment and leasehold improvements of approximately $130,000
during the fiscal 2003 first quarter compared with $137,000 during the fiscal
2002 first quarter. The Company expects that capital investments relating to
read/write drives of between $400,000 and $800,000 will be made during fiscal
2003.

     Net cash provided by financing activities was $807,000 for the fiscal 2003
first quarter compared with net cash of $164,000 used for by financing
activities for the fiscal 2002 first quarter. Financing activities included
proceeds on sales of common stock through the Company's stock-option and
stock-purchase plans. Sales of common stock through stock plans were in the
amounts of $807,000 for the fiscal 2003 first quarter and $11,000 for the fiscal
2002 first quarter.

     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 fiscal 2002 first quarter, the Company used
$175,000 of cash for share repurchases. As of June 30, 2001, the Company had
completed this program.

     There were no debt financing activities for the fiscal 2003 first quarter
ended June 30, 2002.

ITEM 3.  MARKET RATE RISKS

      INTEREST RATE RISK. There were no material changes during the fiscal 2003
first quarter 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 fiscal 2003 first quarter to the Company's foreign currency exchange rate
risk.


PART II. OTHER INFORMATION

ITEM 5.  OTHER INFORMATION

The Company's Audit Committee has approved certain non-audit services provided
or to be provided by PricewaterhouseCoopers LLP, the Company's independent
accountants. These services relate to consultation, advice, and other services
in connection with tax planning and compliance, SEC registration statements and
regulatory matters, and application of generally accepted accounting principles.

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) Reports on Form 8-K

     On April 12, 2002, the Company filed a Report on Form 8-K, which reported
under Item 4, a change in independent public accountants for the fiscal year
ended March 31, 2002.

     On May 15, 2002, the Company filed a Report on Form 8-K, which reported
under Item 5, the issuance of a press release containing financial results for
the fourth quarter and fiscal year ended March 31, 2002, and the restatement of
financial results for fiscal 1998 through fiscal 2001 and the first nine months
of fiscal 2002 due to changes in the timing of revenue recognition.

                                      -15-
<PAGE>

SIGNATURES

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

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


Date: August 12, 2002         /s/Jerome Drexler
                              -------------------------------------------------------------------
                              Jerome Drexler, Chairman of the Board of Directors
                              and Chief Executive Officer (Principal Executive Officer)


Date: August 12, 2002         /s/Steven G. Larson
                              -------------------------------------------------------------------
                              Steven G. Larson, Vice President of Finance and Treasurer
                              (Principal Financial Officer and Principal Accounting Officer)
</TABLE>

The certification statements by Registrant's chief executive officer and chief
financial officer relating to the Quarterly Report on Form 10-Q, as required by
section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), have
been submitted to the Securities and Exchange Commission as additional
correspondence accompanying this report.





                                      -16-