SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    FORM 10-Q


(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                 For the quarterly period ended June 30, 2001.

                                       Or

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

          For the transition period from ____________ to ____________

                         Commission file number 0-20028

                            VALENCE TECHNOLOGY, INC.
             (Exact name of registrant as specified in its charter)


           Delaware                                   77-0214673
-------------------------------            ------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)


                   301 Conestoga Way, Henderson, Nevada 89015
            ---------------------------------------------------------
              (Address of principal executive offices including zip
                                      code)


                                 (702) 558-1000
            ---------------------------------------------------------
              (Registrant's telephone number, including area code)



            ---------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report



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.   Yes X     No


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Common Stock $0.001 par value                            45,546,293
-----------------------------                  --------------------------------
         (Class)                               (Outstanding at August 3, 2001)


<PAGE>


                    VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
                      (companies in the development stage)

                                    FORM 10-Q

                       FOR THE QUARTER ENDED JUNE 30, 2001




                                      INDEX

                                                                          PAGES

PART I.    FINANCIAL INFORMATION

  Item 1.  Financial Statements (Unaudited):

           Condensed Consolidated Balance Sheets as of
           June 30, 2001 and March 31, 2001...................................3

           Condensed Consolidated Statements of Operations and
           Comprehensive Loss for the period from March 3, 1989
           (date of inception) to June 30, 2001 and for each of
           the three month periods ended June 30, 2001 and June 30, 2000......4

           Condensed Consolidated Statements of Cash Flows for the
           period from March 3, 1989 (date of inception) to
           June 30, 2001 and for each of the three month periods
           ended June 30, 2001 and June 30, 2000..............................5

           Notes to Condensed Consolidated Financial Statements...............6

  Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations...............................13

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk........24


PART II.   OTHER INFORMATION

  Item 1.  Legal Proceedings.................................................25

  Item 6.  Exhibits and Reports on Form 8-K..................................25

SIGNATURE  ..................................................................26


                                     Page 2
<PAGE>


<TABLE>
<CAPTION>
                    VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
                          (a development stage company)
                      CONDENSED CONSOLIDATED BALANCE SHEETS
               (in thousands, except share and per share amounts)
                                   (unaudited)
                                      -----

                                                                June 30, 2001         March 31, 2001
                                                               ---------------        ---------------
<S>                                                            <C>                    <C>
ASSETS
Current assets:
     Cash and cash equivalents                                 $       2,518           $       3,755
     Receivables, net                                                  2,136                   4,038
     Short-term investments                                            5,057                   5,133
     Inventory                                                         4,110                   4,825
     Prepaid and other current assets                                  2,131                   1,752
                                                               --------------          --------------
Total current assets                                                  15,952                  19,503

Long-term investments                                                 12,554                  12,554
Property, plant and equipment, net                                    31,156                  29,988
Intellectual property, net                                            25,210                  25,690
                                                               --------------          --------------
Total assets                                                   $      84,872           $      87,735
                                                               ==============          ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current portion of long-term debt                         $       1,550           $       1,686
     Accounts payable                                                  2,315                   5,759
     Accrued expenses                                                  3,618                   2,977
     Grant payable                                                     1,700                   1,713
     Accrued compensation                                                936                     648
                                                               --------------          --------------
Total current liabilities                                             10,119                  12,783

Deferred revenue                                                                               2,500
Long-term debt, less current portion                                   6,633                   4,568
Long-term debt to stockholder                                         25,495                  16,083
                                                               --------------          --------------
Total liabilities                                                     42,247                  35,934
                                                               --------------          --------------
Commitments and contingencies (Note 11)

Mandatorily redeemable convertible preferred stock
  Authorized: 10,000,000 shares
    Series B, $0.001 par value, issued and outstanding:
       0 and 3,500 shares at June 30, 2001 and
       March 31, 2001, respectively                                                            2,736

Stockholders' equity
Common stock, $0.001 par value, authorized: 100,000,000 shares,
  issued and outstanding: 45,535,639 and 44,421,974 shares
      at June 30, 2001 and March 31, 2001, respectively                   46                      44
Additional paid-in capital                                           328,022                 325,103
Notes receivable from stockholder                                     (4,862)                 (4,862)
Deficit accumulated during the development stage                    (276,224)               (267,083)
Accumulated other comprehensive loss                                  (4,357)                 (4,137)
                                                               --------------          --------------
Total stockholders' equity                                            42,625                  49,065
                                                               --------------          --------------
      Total liabilities, mandatorily redeemable convertible
           preferred stock and stockholders' equity            $      84,872           $      87,735
                                                               ==============          ==============
</TABLE>


         The accompanying notes are an integral part of these condensed
                       consolidated financial statements.


                                     Page 3
<PAGE>


<TABLE>
<CAPTION>
                    VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
                          (a development stage company)
     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                    (in thousands, except per share amounts)
                                   (unaudited)

                                    Period from
                                   March 3, 1989
                                     (date of
                                     inception)                Three Months Ended
                                      Through           -----------------------------------
                                   June 30, 2001        June 30, 2001       June 30, 2000
                                   ---------------      ---------------     ---------------
<S>                                <C>                  <C>
Revenue:
Research and development
    contracts                      $       21,605       $                   $
License revenue                             3,633                2,133
Battery and laminate sales                  9,434                  725               2,000
                                   ---------------      ---------------     ---------------
      Total revenue                        34,672                2,858               2,000

Cost of Sales                              18,865                2,802               3,996
   IDB revenue grant                       (1,191)
                                   ---------------      ---------------     ---------------
      Net cost of sales                    17,674                2,802               3,996
Gross Margin                               16,998                   56              (1,996)

Costs and expenses:
Research and product development          121,217                3,086               2,839
Marketing                                   5,447                  433                 102
General and administrative                 61,387                2,734               1,341
Depreciation and amortization              48,216                2,390               2,493
Write-off of in-process
   technology                               8,212
Investment in Danish subsidiary             3,489
Factory start-up costs                      3,171
One-time social charge                        333
Special charges                            18,872
                                   ---------------      ---------------     ---------------
      Total costs and expenses            270,344                8,643               6,775
                                   ---------------      ---------------     ---------------
Operating loss                           (253,346)              (8,587)             (8,771)

Stockholder lawsuit settlement            (30,061)
Interest and other income                  19,538                  195                 299
Interest expense                           (9,855)                (749)               (429)
Equity in loss of joint venture            (2,500)                                    (345)
                                   ---------------      ---------------     ---------------
Net loss                           $     (276,224)              (9,141)             (9,246)
                                   ===============
Beneficial conversion feature
  on preferred stock                                                                   (53)
                                                        ---------------     ---------------
Net loss available to common
   stockholders                                         $       (9,141)     $       (9,299)
                                                        ===============     ===============
Other comprehensive loss:
   Net loss                                             $       (9,141)     $       (9,246)
   Change in foreign currency
      translation adjustments                                     (183)             (2,256)
                                                        ---------------     ---------------
         Comprehensive loss                             $       (9,324)     $      (11,502)
                                                        ===============     ===============
Net loss per share available to
   common stockholders                                  $        (0.20)     $        (0.25)
                                                        ===============     ===============
Shares used in computing net
   loss per share available
      to common stockholders,
         basic and diluted                                      45,345              36,856
                                                        ===============     ===============
</TABLE>


                   The accompanying notes are an integral part
                         of these condensed consolidated
                              financial statements.


                                     Page 4
<PAGE>


<TABLE>
<CAPTION>
                    VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
                          (a development stage company)
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

                                                   Period from
                                                   March 3, 1989
                                                    (date of
                                                    inception)      Three Months     Three Months
                                                     through           Ended             Ended
                                                   June 30, 2001    June 30, 2001    June 30, 2000
                                                   --------------   --------------   -------------
<S>                                                <C>              <C>              <C>
Cash flows from operating activities:
Net loss                                            $  (276,224)    $     (9,141)    $    (9,246)
Adjustments to reconcile net loss to net
  cash used in operating activities:
Depreciation and amortization                            48,216            2,390           2,493
Write-off of equipment                                   15,390
Write-off of in-process technology                        6,211
Compensation related to stock options                     3,891
Non-cash charge related to acquisition of
  Danish subsidiary                                       2,245
Non-cash charge from stockholder lawsuit
  settlement                                             29,450
Equity in losses of joint venture                         2,500                              345
Amortization of debt discount                             1,455              163             163
Changes in assets and liabilities:
Receivables                                              (2,066)           1,886          (1,348)
Prepaid expenses and other current assets                (2,169)            (380)            994
Inventory                                                (4,117)             709          (1,168)
Accounts payable                                          2,889           (3,416)         (3,636)
Accrued liabilities                                      (1,220)             948             395
Deferred revenue                                                          (2,500)
                                                    ------------    -------------    ------------
Net cash used in operating activities                  (173,549)          (9,341)        (11,008)
                                                    ------------    -------------    ------------
Cash flows from investing activities:
Purchase of long-term investments                      (665,789)
Maturities of long-term investments                     661,545
Net reduction of short-term investments                      76               76
Capital expenditures                                    (95,924)          (2,558)         (3,983)
Sale of equipment                                         1,269
Other                                                      (222)
                                                    ------------    -------------    ------------
Net cash used in investing activities                   (99,045)          (2,482)         (3,983)
                                                    ------------    -------------    ------------
Cash flows from financing activities:
Property and equipment grants                            12,243
Acquisition of West Coast Venture Capital                11,949
Borrowings of long-term debt                             46,853           11,349
Payments of long-term debt:
Product development loan                                   (482)
Stockholder and director                                 (6,173)
Other long-term debt                                    (13,506)            (136)            (95)
Proceeds from issuance of common stock
    and warrants, net of issuance costs                 215,045              185          12,656
Proceeds from issuance of preferred stock,
    Series A, net of issuance costs                       7,075
Proceeds from issuance of preferred stock,
    Series B, net of issuance costs                       7,125
                                                    ------------    -------------    ------------
      Net cash provided by financing activities         280,129           11,398          12,561
                                                    ------------    -------------    ------------
Effect of foreign exchange rates on cash
        and cash equivalents                             (5,017)            (812)           (802)
                                                    ------------    -------------    ------------
Increase (decrease) in cash and cash equivalents          2,518           (1,237)         (3,232)
Cash and cash equivalents, beginning of period                             3,755          24,556
                                                    ------------    -------------    ------------
Cash and cash equivalents, end of period                  2,518     $      2,518     $    21,324
                                                    ============    =============    ============
</TABLE>


                         The accompanying notes are an
                        integral part of these condensed
                       consolidated financial statements.


                                     Page 5
<PAGE>


1.      INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

        These interim condensed consolidated financial statements are unaudited
        but reflect, in the opinion of management, all normal recurring
        adjustments necessary to present fairly the financial position of
        Valence Technology, Inc. and subsidiaries (the "Company") as of June 30,
        2001, its consolidated results of operations for the period from March
        3, 1989 (date of inception) to June 30, 2001 and for each of the
        three-month periods ended June 30, 2001 and June 30, 2000, and the
        consolidated cash flows for each of the three-month periods ended June
        30, 2001 and June 30, 2000, and for the period from March 3, 1989 (date
        of inception) to June 30, 2001. Because all the disclosures required by
        generally accepted accounting principles are not included, these interim
        condensed consolidated financial statements should be read in
        conjunction with the audited financial statements and notes thereto in
        the Company's Annual Report on Form 10-K as of and for the year ended
        March 31, 2001. The results for the three-month period ended June 30,
        2001 are not necessarily indicative of the results to be expected for
        the entire fiscal year ending March 31, 2002. The year-end condensed
        consolidated balance sheet data as of March 31, 2001 was derived from
        audited financial statements, but does not include all disclosures
        required by generally accepted accounting principles.

        The Company is in the development stage as of June 30, 2001. Successful
        completion of the Company's development program and, ultimately, the
        attainment of profitable operations is dependent upon future events,
        including maintaining adequate financing to fulfill its development
        activities, and achieving a level of sales adequate to support the
        Company's cost structure.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

        PRINCIPLES OF CONSOLIDATION:

        The consolidated financial statements include the accounts of the
        Company and its subsidiaries. All significant intercompany accounts and
        transactions have been eliminated.

        USE OF ESTIMATES:

        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 effect 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 revenue and expenses during the reporting period. Actual
        results could differ from those estimates.

        CASH AND CASH EQUIVALENTS:

        The Company considers all highly liquid investments purchased with an
        original maturity of three months or less to be cash equivalents. Cash
        and cash equivalents are on deposit in multiple banks and with an
        investment counsel, and are primarily comprised of money market funds
        and government securities.

        RECEIVABLES:

        Receivables consist primarily of amounts due from customers as a result
        of normal business operations. The Company periodically performs credit
        evaluations of its customers and reviews receivable balances in order to
        determine an allowance for potential credit losses. At June 30, 2001, an
        allowance of $65,000 for potential credit losses was deemed necessary.
        Additionally, the receivable balance contained amounts due for Value
        Added Tax ("VAT") refunds pertaining to purchases made by the Company's
        Northern Ireland facility.

        INVENTORIES:

        Inventories are stated at the lower of cost or market. The Company
        utilizes the first-in, first-out ("FIFO") inventory method.


                                     Page 6
<PAGE>


        INVESTMENTS:

        The Company accounts for its investments in accordance with SFAS No.
        115, Accounting for Certain Investments In Debt and Equity Securities.
        Under SFAS No. 115, the Company currently classifies its securities as
        held-to-maturity. Held to maturity securities are those investments in
        which the Company has the ability and intent to hold the security until
        maturity. Held to maturity securities are recorded at amortized cost,
        which approximates market value. Dividend and interest income are
        recognized in the period earned.

        CAPITAL AND REVENUE GRANTS:

        Grants relating to the acquisition of property, plant and equipment are
        recorded upon satisfaction of the capital investment requirements
        underlying the grant and the receipt of grant funds. Such grants are
        deferred and amortized over the estimated useful lives of the related
        assets as a reduction of depreciation expense. The Company has qualified
        and applied for revenue grants made available to reduce the cost of
        labor in Northern Ireland and such grants have been accounted for as a
        reduction to cost of sales.

        DEPRECIATION AND AMORTIZATION:

        Property and equipment are stated at cost and depreciated on the
        straight-line method over their estimated useful lives, generally three
        to five years. Building improvements are amortized over the lesser of
        their estimated useful life, generally five years, or the remaining
        lease term. The Company assesses its ability to recover the net book
        value of its long-term assets. The carrying value of assets determined
        to be impaired is written down to net realizable value. In the period
        assets are retired or otherwise disposed of, the costs and accumulated
        depreciation or amortization are removed from the accounts, and any gain
        or loss on disposal is included in results of operations.

        LONG-LIVED ASSETS:

        The Company periodically assesses the recoverability of property, plant
        and equipment and evaluates such assets for impairment whenever events
        or changes in circumstances indicate that the carrying amount of an
        asset may not be recoverable. Asset impairment (including intangible
        assets) is determined to exist if estimated future cash flows,
        undiscounted and without interest charges, are less than the carrying
        amount of the asset. If it is determined that an impairment loss has
        occurred, the impairment loss is measured as the difference between the
        amount of the discounted cash flows and the carrying amount of the
        asset. The Company had no impairment losses for the quarter ended June
        30, 2001.

        INTELLECTUAL PROPERTIES:

        Intellectual properties acquired consist of patents and are recorded at
        cost based on the market value of the common stock used in their
        acquisition. These costs are being amortized over the average remaining
        lives of the patents, which is 13.67 years. Intellectual properties
        developed in-house are expensed as incurred.

        REVENUE RECOGNITION:

        For product sales, revenue is recognized when the sale is complete and
        title has transferred to the buyer. For license and royalty fees,
        revenue is realized and earned when all of the following criteria are
        met:

                o       persuasive evidence of an arrangement exists,

                o       delivery has occurred or services have been rendered,

                o       the seller's price to the buyer is fixed or
                        determinable, and

                o       collectibility is reasonably assured.


                                     Page 7
<PAGE>


        DEFERRED REVENUE:

        Deferred revenue related to payments received from the Company's joint
        venture partner in Hanil Valence Co., Ltd. See Note 10 Joint Venture
        Agreement.

        RESEARCH AND DEVELOPMENT:

        Research and development costs are expensed as incurred.

        FOREIGN CURRENCY TRANSLATION:

        Exchange adjustments resulting from foreign currency transactions are
        generally recognized in operations, whereas adjustments resulting from
        the translation of financial statements are reflected as a separate
        component of stockholders' equity. Net foreign currency transaction
        gains or losses are not material in any of the periods presented.

        INCOME TAXES:

        The Company utilizes the liability method to account for income taxes
        where deferred tax assets or liabilities are determined based on the
        differences between the financial statements and tax bases of assets and
        liabilities using enacted tax rates in effect for the year in which the
        differences are expected to affect taxable income. Valuation allowances
        are established when necessary to reduce deferred tax assets to the
        amounts expected to be realized.

        FAIR VALUE OF FINANCIAL INSTRUMENTS:

        Carrying amounts of certain of the Company's financial instruments,
        including cash and cash equivalents, receivables, accounts payable, and
        other accrued liabilities, approximate fair value due to their short
        maturities. Based on borrowing rates currently available to the Company
        for loans with similar terms, the carrying value of its debt obligations
        approximates fair value.

        RECLASSIFICATIONS:

        Certain prior period amounts in the consolidated financial statements
        have been reclassified to conform to the current year's presentation.
        These reclassifications had no effect on the Company's net loss.


3.      RECEIVABLES, NET:

        Receivables consist of the following (in thousands):

<TABLE>
<CAPTION>
                                            June 30, 2001      March 31, 2001
                                          ------------------   ----------------
            <S>                           <C>                  <C>
            Trade receivables                $     1,517          $       2,840
            Other receivables                        684                  1,198
            Allowance for credit losses              (65)
                                          ------------------   ----------------
            Total receivables                $     2,136          $     4,038
                                          ==================   ================
</TABLE>

4.      INVESTMENTS:

        During the fourth quarter of fiscal 2001, the Company completed the
        acquisition of the assets of West Coast Venture Capital, Inc. which
        included investment equivalent instruments. These instruments have a
        value of $17,611,000 as of June 30, 2001 and are presented as short-term
        investments of $5,057,000 and long-term investments of $12,554,000 on
        the balance sheet depending upon scheduled maturity.

<TABLE>
<CAPTION>
                               Maturity Date of Investments (in thousands)
             Less than            1 - 5           5 - 10           After
               1 year             years            years          10 years         Total
         -----------------    --------------   -------------    ------------    --------------
         <S>                  <C>              <C>              <C>             <C>
               $5,057             $977            $11,577                         $17,611
</TABLE>


                                     Page 8
<PAGE>


5.      INVENTORIES:

        Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                             June 30, 2001             March 31, 2001
                             --------------            ---------------
<S>                          <C>                       <C>
Raw materials                $       2,516             $        3,295
Work-in-process                      1,594                      1,530
                             --------------            ---------------
Total                        $       4,110             $        4,825
                             ==============            ===============
</TABLE>


6.      INTELLECTUAL PROPERTY:

        During the third quarter of fiscal year 2001, the Company acquired, from
        Telcordia Technologies, Inc., its rights in lithium-ion polymer battery
        technology including 42 U.S. patents, 14 U.S. patents pending, and more
        than 200 foreign patents, issued and pending. The patents acquired are
        being amortized over the average lives of the patents, which is 13.67
        years. As of June 30, 2001, $1,040,000 has been expensed as
        amortization.

7.      EARNINGS PER SHARE:

        Earnings per share ("EPS") is computed by dividing net loss available to
        common stockholders by the weighted average number of common shares
        outstanding for that period. Diluted EPS is computed giving effect to
        all dilutive potential common shares that were outstanding during the
        period. Dilutive potential common shares consist of incremental common
        shares issuable upon conversion of preferred stock and exercise of stock
        options and warrants for all periods.

        The following is a reconciliation of the numerator (net loss) and
        denominator (number of shares) used in the basic and diluted EPS
        calculation (in thousands):

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED
                                          JUNE 30, 2001      JUNE 30, 2000
                                          -------------      -------------
        <S>                               <C>                <C>
        Net loss available
          to common stockholders             $(9,141)         $  (9,299)

        Weighted average
          shares outstanding                  45,345             36,856

        Earnings per share,
          basic and diluted                  $  (.20)         $    (.25)
</TABLE>


        Shares excluded from the calculation of diluted EPS as their effect was
        anti-dilutive were 7,016,000 and 5,426,000 for the three months ended
        June 30, 2001 and June 30, 2000, respectively.

8.      LONG-TERM DEBT (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                June 30,             March 31,
                                                  2001                 2001
                                                ----------           ----------
<S>                                              <C>                  <C>
        Facility loans                           $8,183               $6,254
        Less amounts due within one year         (1,550)              (1,686)
                                                ----------           ----------
        Long-term debt due after one year        $6,633               $4,568
                                                ==========           ==========
</TABLE>

        FACILITY LOANS:

        During fiscal 1995, a bank provided the Company a $2,500,000 facility
        term loan under which drawdowns were available for the purchase and
        improvement of a facility in Henderson, Nevada. The facility term loan
        of $1,231,000 at June 30, 2001 bears interest at 10.4% and is
        collateralized by the related building. The Company makes monthly
        principal payments of $14,000 plus accrued interest through November
        2001, and a final principal payment of $1,161,000 is due December 2001.


                                     Page 9
<PAGE>


        The Company also has a 15-year facility loan for the Northern Ireland
        building payable in equal monthly principal payments of $20,000 plus
        accrued interest. This facility term loan bears interest at an annually
        adjustable published interest rate index (7.375% at June 30, 2001) on
        the outstanding principal. In September 2000, the loan was increased by
        $2,874,000 for the construction of a factory extension. The outstanding
        principal balance as of June 30, 2001 was $4,886,000. This loan is
        collateralized by the related building.

        In May 2001, the Company acquired an additional building, adjacent to
        the existing Northern Ireland facility, for a purchase price of
        $2,090,000. This 15-year facility term loan bears interest at an
        annually adjustable interest rate (7.25% at June 30, 2001) on the
        outstanding principal. The Company makes monthly principal payments of
        $12,000 plus accrued interest. The outstanding principal balance as of
        June 30, 2001 was $2,066,000. This loan is collateralized by the related
        building.

        Principal payments on long-term debt at June 30, 2001 are due as follows
        (in thousands):

                                                    Facility
            Fiscal Year                             Loans
            ----------                              -------
              2002                                  $1,518
              2003                                     584
              2004                                     626
              2005                                     670
              2006                                     717
            Thereafter                               4,068
                                                    -------
                                                    $8,183
                                                    =======

9.      LONG-TERM DEBT TO STOCKHOLDER:

<TABLE>
<CAPTION>
                                                        June 30,          March 31,
                                                          2001              2001
                                                      --------------     ------------
                                                               (in thousands)
                  <S>                                 <C>                <C>
                  Loan balance                             $14,950          $14,950
                  Line of credit balance                    11,250            2,000
                  Unaccreted debt discount                    (705)            (867)
                                                      --------------     ------------
                  Balance                                  $25,495          $16,083
                                                      ==============     ============
</TABLE>


        In July 1998, the Company entered into an amended loan agreement with a
        stockholder and director which allows the Company to borrow, prepay and
        re-borrow up to $10,000,000 principal under a promissory note on a
        revolving basis and provided that the stockholder will subordinate its
        security interest to other lenders when new debt is obtained after the
        stockholder's loan is prepaid to zero. In November 2000, the loan
        agreement was amended to increase the maximum amount to $15,000,000. As
        of June 30, 2001, the Company had an outstanding balance of $14,950,000
        under the loan agreement. The loan bears interest at one percent over
        lender's borrowing rate (approximately 9.00% at June 30, 2001) and is
        available through August 30, 2002. As of June 30, 2001, a total of
        $2,395,843 has been accrued. The amounts charged to interest expense for
        the three month periods ended June 30, 2001 and June 30, 2000 were
        $335,454 and $224,623, respectively.

        In conjunction with the amended loan agreement in fiscal 1999, the
        Company issued warrants to purchase 594,031 shares of common stock. The
        warrants were valued using the Black Scholes valuation method and had an
        average weighted fair value of approximately $3.63 per warrant at the
        time of issuance. The fair value of these warrants, totaling
        approximately $2,158,679, has been reflected as additional consideration
        for the debt financing, recorded as a discount on the debt and accreted
        as interest expense to be amortized over the life of the line of credit.
        As of June 30, 2001, a total of $1,453,893 has been accreted. The
        amounts charged to interest expense for the three month periods ended
        June 30, 2001 and June 30, 2000 were $162,636 for each period.


                                    Page 10
<PAGE>


        During June 2000 the Company entered into a private placement funding
        arrangement with Carl E. Berg, a principal stockholder and director of
        the Company, for an equity investment commitment totaling $12.5 million.
        On February 13, 2001, the Company replaced this $12.5 million commitment
        from Mr. Berg with the acquisition of approximately $30.0 million of
        assets of West Coast Venture Capital, Inc. consisting of cash and
        investment equivalent instruments in exchange for approximately 3.5
        million shares of the Company's common stock. The investment instruments
        have maturities that run from less than one year to over ten years. In
        February 2001, Mr. Berg provided a line of credit in the amount of up to
        $20 million secured by the investment instruments. As of June 30, 2001,
        a total of $11,250,000 had been drawn on this line of credit.

10.     JOINT VENTURE AGREEMENT

        In June 2001, the Company and its joint venture partner in Hanil Valence
        Co., Ltd. reached an agreement to terminate the joint venture. As
        conditions of the termination, Shinhan Bank transferred its payment
        guarantee obligations under a line of credit from the Company to the
        Company's former joint venture partner and the Company granted a license
        to an affiliate of its former joint venture partner. In addition, the
        deferred revenue balance of $2.5 million was offset by approximately
        $896,000 of accounts receivable and the remaining $1.6 million balance
        was recorded as license revenue to recognize the license agreement.

11.     COMMITMENTS AND CONTINGENCIES:

        LITIGATION:

        In April 2001, the Company received notification that 21 former
        employees of the Mallusk, Northern Ireland facility filed claims against
        the Company alleging breach of contract and lack of consultation prior
        to termination due to the reduction in force in March 2001 at the
        facility. The time period for filing such claims expired July 6, 2001,
        although the Tribunal may accept late claims. The Company is currently
        assessing the merit of such claims at this time. The Company does have a
        defense and will contest the claims.

12.     SEGMENT INFORMATION:

        The Company conducts its business in two operating segments and uses
        only one measurement of profitability. During the first quarter of
        fiscal 2002, the Company recorded battery and laminate sales of $725,000
        and license and royalty fees of $2,133,000. If the licensing and royalty
        revenue grows as a percentage of total sales, the Company will separate
        the revenue and related costs.

        Property, plant, & equipment, net, information by geographic area at
        June 30, 2001 and March 31, 2001 is as follows (in thousands):

<TABLE>
<CAPTION>
                                   June 30,    March 31,
                                    2001          2001
                                   ---------   ----------
        <S>                        <C>         <C>
        United States              $ 4,585      $ 4,741
        International                26,571      25,247
                                   ---------   ----------
        Total                      $31,156      $29,988
                                   =========   ==========
</TABLE>

        Revenues by geographic area for the three-month periods ended June 30,
        2001 and June 30, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                   June 30,      June 30,
                                     2001         2000
                                   ---------   ----------
        <S>                        <C>         <C>
        United States              $ 1,207       $  811
        International                1,651        1,189
                                   ---------   ----------
        Total                      $ 2,858      $ 2,000
                                   =========   ==========
</TABLE>


                                    Page 11
<PAGE>


13.     RECENT ACCOUNTING PRONOUNCEMENTS:

        STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133, "ACCOUNTING FOR
        DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"

        In June 1998, the Financial Accounting Standards Board issued Statement
        of Financial Accounting Standards No. 133, ("SFAS 133"), "Accounting for
        Derivative Instruments and Hedging Activities". SFAS 133 establishes new
        standards of accounting and reporting for derivative instruments and
        hedging activities. SFAS 133 requires that all derivatives be recognized
        at fair value in the balance sheet, and that the corresponding gains or
        losses be reported either in the statement of operations or as a
        component of comprehensive income, depending on the type of hedging
        relationship that exists. SFAS 133 will be effective for fiscal years
        beginning after June 15, 2000. The Company adopted SFAS 133 during the
        first quarter of fiscal 2002 and the adoption did not effect the
        Company's consolidated financial statements. Currently, the Company does
        not hold derivative instruments or engage in hedging activities.

        STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 141, "BUSINESS
        COMBINATIONS" AND NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"

        In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
        SFAS No. 142, "Goodwill and Other Intangible Assets". These statements
        require that the purchase method of accounting be used for all business
        combinations initiated after June 30, 2001 and prohibit the
        pooling-of-interest method and change the accounting for goodwill and
        other intangible assets from an amortization method to an
        impairment-only approach. We are required to adopt the new method of
        accounting for goodwill and other intangible assets on April 1, 2002.
        The new method of accounting for goodwill and other intangible assets
        applies to all existing and future unamortized balances at the time of
        adoption. As part of the adoption of these standards, we must reassess
        the useful lives of our goodwill and intangible assets and perform
        impairment tests. We are currently in the process of performing these
        steps but have not yet determined the impact of this standard on our
        future goodwill and intangible asset amortization expense.


                                    Page 12
<PAGE>


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

This report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions and variations of
such words are intended to identify forward-looking statements. Such statements
appear in a number of places in this report and include statements regarding our
intent, belief or current expectations with respect to, among other things, the
progress of our research and development activities, trends affecting our
liquidity position, including, but not limited to, our access to additional
equity or debt financing and our rate of expenditures, our joint venture
relationships, the status of the development of our products and their
anticipated performance and customer acceptance and our business and liquidity
strategies. We caution you not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of our future
performance and involve risks and uncertainties. Our actual results may differ
materially from those projected in this report, for the reasons, among others,
our limited available working capital, uncertain market acceptance of our
products, changing economic conditions, risks in product and technology
development, the effect of the Company's accounting policies and the other risks
discussed below under the caption, "Risk Factors" and in our other filings with
the Securities and Exchange Commission. We undertake no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date of this report. You should carefully review the risk
factors discussed below and the other documents we have filed with the
Securities and Exchange Commission.

This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying condensed
consolidated financial statements and notes thereto contained herein and our
consolidated financial statements and notes thereto contained in our Annual
Report on Form 10-K as of and for the year ended March 31, 2001. The results for
the three-month period ended June 30, 2001 are not necessarily indicative of the
results to be expected for the entire fiscal year ending March 31, 2002.

OVERVIEW

The Company was founded in 1989 to develop and commercialize advanced
rechargeable batteries based on lithium and polymer technologies. Since its
inception, the Company has been a development stage company primarily engaged in
acquiring and developing its initial technology, manufacturing limited
quantities of prototype batteries, recruiting personnel, and acquiring capital.
In the first three-month period of fiscal 2001, the Company recorded its first
significant commercial sales. The Company is a development stage company in as
much as significant revenues from operations have not been achieved. Previously,
other than immaterial revenues from limited sales of prototype batteries, the
Company had not received any significant revenues from the sale of products.
Before the first three-month period of fiscal 2001, substantially all revenues
were derived from a research and development contract with the Delphi Automotive
Systems Group, formerly the Delco Remy Division, an operating group of the
General Motors Corporation. This research and development contract expired in
May 1998. The Company has incurred cumulative losses of $276,224,000 from its
inception to June 30, 2001.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2001 (FIRST QUARTER OF FISCAL 2002) AND JUNE 30,
2000 (FIRST QUARTER OF FISCAL 2001).

REVENUE. Revenue from battery and laminate sales totaled $725,000 for the first
quarter of fiscal 2002. For the corresponding period of fiscal 2001, revenue
from battery and laminate sales totaled $2.0 million. This decrease is the
result of the strategic shift from battery and laminate sales to licensing and
royalty revenues subsequent to the acquisition of technology rights from
Telcordia Technologies, Inc. in December 2000. Licensing and royalty revenue
totaled $2.1 million for the first quarter of fiscal 2002, of which $1.6 million
relates to the conversion of the Hanil joint venture to a license agreement.
There were no licensing or royalty revenues during the corresponding period of
fiscal 2001.

COST OF SALES. The cost of sales for the first quarter of fiscal 2002 was $2.8
million. The cost of sales in the first quarter of fiscal 2001 was $4.0 million.
The decrease is due to the decrease in battery and laminate sales, and the
combined effect of the reduction in manufacturing personnel in March 2001 and
continued automation improvements in our manufacturing facility.

RESEARCH AND PRODUCT DEVELOPMENT. Research and development expenses were $3.1
million and $2.8 million during the three-month periods ended June 30, 2001 and
June 30, 2000, respectively. The slight increase in expenditures resulted from
the addition of new personnel to continue the Company's focus on developing new
technology.


                                    Page 13
<PAGE>


MARKETING. Marketing expenses were $433,000 and $102,000 for the first quarter
of fiscal years 2002 and 2001, respectively. The increased expenditures are the
result of an intensification of efforts in the areas of sales and marketing
through the addition of sales personnel and increased travel activities. We
expect marketing and sales expenses to continue to increase as we continue to
focus on building the infrastructure necessary to support an operating company
rather than our historical focus as a research and development company.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.7
million and $1.3 million for the first three months of fiscal year 2002 and
fiscal year 2001, respectively. The increase between comparable periods is due
primarily to increased legal services associated with patent activity, increased
recruiting efforts and severance packages. We expect general and administrative
expenses to continue to increase as we continue to focus on building the
infrastructure necessary to support an operating company rather than our
historical focus as a research and development company.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $2.4 million
and $2.5 million for the first quarter of fiscal year 2002 and fiscal year 2001,
respectively. The decrease between periods was the result of the full
amortization of certain assets prior to and during the first quarter of fiscal
year 2002.

INTEREST AND OTHER INCOME. Interest and other income was $195,000 for the first
quarter of fiscal 2002 as compared to $299,000 for the same period in fiscal
2001. The decrease primarily results from less funds being available for
investment.

INTEREST EXPENSE. Interest expense was $749,000 and $429,000 during the three
month periods ending June 30, 2001 and June 30, 2000, respectively. This
increase is a result of increased borrowings of long-term debt.

EQUITY IN LOSSES OF JOINT VENTURE. There was no joint venture loss for the first
quarter of fiscal 2001 as the joint venture agreement was converted to a
licensing agreement in June, 2001. The loss was $345,000 for the comparable
period in fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

We used $9.3 million net cash for operating activities during the first three
months of fiscal year 2002 compared to using $11.0 million during the first
three months of fiscal year 2001, a decrease between comparable periods of $1.7
million. The decrease is primarily related to the decrease in manufacturing
personnel.

During the three months ended June 30, 2001, we used $2.5 million net cash in
investing activities compared to $4.0 million during the three months ended June
30, 2000, a decreased usage of $1.5 million between comparable periods. The
difference was the result of a decrease in capital expenditures.

Financing activities provided $11.4 million net cash to us during the first
quarter of fiscal year 2002 compared to $12.6 million during the first quarter
of fiscal year 2001. This decrease of $1.2 million resulted from a decrease in
equity financing in the first quarter of fiscal 2002 compared to fiscal 2001,
offset by an increase in borrowings of long-term debt in the first quarter of
fiscal 2002.

As a result of the above, our cash and cash equivalent balances declined by $1.2
million during the three months ended June 30, 2001.

We have the ability to utilize a line of credit of up to $20 million secured by
investments acquired from West Coast Venture Capital, Inc. As of June 30, 2001,
$11.25 million had been utilized on this line of credit.

In June 2001, Carl Berg, one of our directors and principal stockholders,
provided us with a financing commitment letter in which he committed, subject to
customary conditions, to providing (or causing another person or entity to
provide) us with additional financing of up to $20 million during fiscal 2002,
in the form of a secured loan, equity investment, or a combination of both.

During fiscal year 1994, we, through our Dutch subsidiary, signed an agreement
with the Northern Ireland Industrial Development Board, or IDB, to open an
automated manufacturing plant in Northern Ireland in exchange for capital and
revenue grants from the IDB. We have also received offers from the IDB to
receive additional grants. The grants available under the agreement and offers
for an aggregate of up to (pound)25.6 million, generally become available over a
five-year period through October 31, 2001. As of June 30, 2001, we had received
grants aggregating (pound)9.0 million ($12.7 million). The


                                    Page 14
<PAGE>


amount of the grants available under the agreement and offers depends primarily
on the level of capital expenditures that we make. Substantially all of the
funding received under the grants is repayable to the IDB if the subsidiary is
in default under the agreement and offers, which includes the permanent
cessation of business in Northern Ireland. Funding received under the grants to
offset capital expenditures is repayable if related equipment is sold,
transferred or otherwise disposed of during a four-year period after the date of
grant. In addition, a portion of funding received under the grants may also be
repayable if the subsidiary fails to maintain specified employment levels for
the two-year period immediately after the end of the five-year grant period. As
a result of the temporary reduction of Northern Ireland business activity,
specified employment levels have not been maintained, but the IDB is not seeking
repayment and on the advice of counsel, on the basis that successful
negotiations will be concluded, we do not believe that the IDB will bring any
legal action pursuant to the Letter of Offer. In addition, the payment of
approximately $3.0 million, previously anticipated from the IDB, is not expected
under the current agreement. We have begun discussion with the IDB to end the
current agreement and enter into a new agreement more closely aligned to current
business conditions.

As a condition to receiving funding from the IDB, the subsidiary must maintain a
minimum of (pound)12.0 million (approximately $16.9 million) in debt or equity
financing from us.

We may not be able to meet the requirements necessary to receive and retain
grants under the IDB agreement and offers. If we fail to meet the requirements,
we will not be able to receive any additional grants and the repayment of
existing grants could be accelerated.

At June 30, 2001, we had cash and cash equivalents of $2.5 million. After taking
into account our cash and cash equivalents, projected revenues, receipt of
funds, and financial commitments, we expect that we will have sufficient
financing through fiscal 2002 to complete funding of required capital expansion,
research and product development, marketing, general and administrative expenses
and the costs of integrating the Telcordia licensing activities. Our cash
requirements, however, may vary materially from those now planned because of
changes in our operations, including changes in original equipment manufacturer
relationships, market conditions, joint venture and business opportunities, our
failure to receive additional IDB grant funds, or an acceleration of the
repayment of existing IDB grants. In such event, we may need to raise additional
funding through debt or equity financing through fiscal 2002. If we require
additional funding, we may not be able to arrange such funding on favorable
terms, if at all.

                                  RISK FACTORS

CAUTIONARY STATEMENTS AND RISK FACTORS

Several of the matters discussed in this document contain forward-looking
statements that involve risks and uncertainties. Factors associated with the
forward-looking statements that could cause actual results to differ from those
projected or forecast are included in the statements below. In addition to other
information contained in this Report, you should carefully consider the
following cautionary statements and risk factors.

                          RISKS RELATED TO OUR BUSINESS

WE ARE IN THE EARLY STAGES OF MANUFACTURING, AND OUR FAILURE TO DEVELOP THE
ABILITY TO EFFICIENTLY MANUFACTURE BATTERIES IN COMMERCIAL QUANTITIES WHICH
SATISFY OUR CUSTOMERS' PRODUCT SPECIFICATIONS COULD DAMAGE OUR CUSTOMER
RELATIONSHIPS AND RESULT IN SIGNIFICANT LOST BUSINESS OPPORTUNITIES FOR US.

To be successful, we must cost-effectively manufacture commercial quantities of
our batteries that meet customer specifications. Until recently, our batteries
only had been manufactured on our pilot manufacturing line, which is able to
produce prototype batteries in quantities sufficient to enable customer sampling
and testing and product development. Our manufacturing facilities will require
additional development to enable us to produce batteries cost-effectively,
according to customer specifications and on a commercial scale. To facilitate
commercialization of our products, we will need to reduce our manufacturing
costs. This includes being able to substantially raise and maintain battery
yields of commercial quality in a cost-effective manner. If we fail to
substantially increase yields of our batteries and reduce unit-manufacturing
costs, we will not be able to offer our batteries at a competitive price. We
will lose our current customers and fail to attract future customers.

Failure to scale up our manufacturing facility will harm our customer relations
and threaten future profits. We currently are in the process of transitioning
production to an automated production line that will work with our newest
battery technology in our manufacturing facility in Mallusk, Northern Ireland.
We have begun to manufacture batteries on a commercial scale to fulfill our
first significant purchase orders. The redesign and modification of the Mallusk
manufacturing facility, including its customized manufacturing equipment, will
continue to require engineering work and capital expenses and is subject to
significant risks, including risks of cost overruns and significant delays. In
automating, redesigning and modifying


                                    Page 15
<PAGE>


the manufacturing processes, we continue to depend on several developers of
automated production lines, all of whom have limited experience in producing
equipment for the manufacture of batteries. If we fail to develop and implement
a large scale manufacturing facility capable of cost-effectively producing
commercial quantities of batteries according to customer specifications, it will
harm our ability to serve the needs of our customers and threaten our future
sales and profits.

OUR PATENT APPLICATIONS MAY NOT RESULT IN PATENTS ISSUED AND IF OUR PATENTS ARE
FOUND TO BE INFRINGING, WE MAY NOT BE ABLE TO PROCURE LICENSES TO USE PATENTS
NECESSARY TO OUR BUSINESS AT REASONABLE TERMS, IF AT ALL.

Patent applications in the United States are maintained in secrecy until the
patents issue or are published. Since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries by
several months, we cannot be certain that we were the first creator of
inventions covered by pending patent applications or the first to file patent
applications on such inventions. We can also not be certain that our pending
patent applications will result in issued patents or that any of our issued
patents will afford protection against a competitor. In addition, patent
applications filed in foreign countries are subject to laws, rules and
procedures which differ from those of the United States, and thus we cannot be
certain that foreign patent applications related to issued United States patents
will issue. Furthermore, if these patent applications issue, some foreign
countries provide significantly less patent protection than does the United
States.

The status of patents involves complex legal and factual questions and the
breadth of claims allowed is uncertain. Accordingly, we cannot be certain that
patent applications we file will result in patents being issued, or that our
patents and any patents that may be issued to us in the future will afford
protection against competitors with similar technology. In addition, no
assurances can be given that patents issued to us will not be infringed upon or
designed around by others or that others will not obtain patents that we would
need to license or design around. If existing or future patents containing broad
claims are upheld by the courts, the holders of such patents could require
companies to obtain licenses. If we are found to be infringing third party
patents, we cannot be certain that we could obtain the necessary licenses for
our products on reasonable terms, if at all.

THE LIMITED NUMBER OF SKILLED AND UNSKILLED WORKERS IN NORTHERN IRELAND COULD
AFFECT THE SUCCESS OF OUR IMPROVEMENTS IN THE MANUFACTURING FACILITY.

We may need to hire and train a substantial number of new manufacturing workers.
The availability of skilled and unskilled workers in Northern Ireland is limited
because of a relatively low unemployment rate. As a result, we face the risk
that we may not:

        o       successfully hire and train the new manufacturing workers
                necessary for the ramp-up of our Mallusk, Northern Ireland
                manufacturing facility;

        o       successfully develop improved processes;

        o       design required production equipment;

        o       enter into acceptable contracts for the fabrication of required
                production equipment;

        o       obtain timely delivery of required production equipment;

        o       implement multiple production lines; or

        o       successfully operate the Mallusk facility.

Our failure to successfully automate our production on a timely basis, if at
all, could damage our reputation, relationships with future and existing
customers, cause us to lose business and potentially prevent us from
establishing the commercial viability of our products.

CONTINUED DELAYS IN QUALIFYING OUR MANUFACTURING FACILITIES COULD SIGNIFICANTLY
DELAY OUR BRINGING COMMERCIAL QUANTITIES OF PRODUCT TO MARKET AND INTERFERE WITH
OUR ABILITY TO GENERATE THE REVENUE AND CASH THAT WE NEED TO SUSTAIN OUR
BUSINESS.

We may be unable to meet our schedules regarding delivery, installation,
de-bugging and qualification of our Northern Ireland facility production
equipment, and face the prospect of further delays or problems related to
facility qualification because:

        o       we do not control the design and delivery of most of the
                production equipment which is specifically manufactured for us;


                                    Page 16
<PAGE>


        o       we are modifying and bringing many of the manufacturing
                processes of this production equipment up to date for the first
                time and may need to refine these processes;

        o       even if we are able to refine our process, we may not be able to
                produce the amount of qualification samples required by our
                customers; and

        o       our customers generally require an extensive qualification
                period once they receive their first commercial product off a
                production line.

These delays would impair our ability to bring our batteries to market,
adversely affecting revenue growth and our cash position and harm our
competitive position and economic growth.

OUR ABILITY TO MANUFACTURE LARGE VOLUMES OF BATTERIES IS LIMITED AND MAY PREVENT
US FROM FULFILLING EXISTING ORDERS.

We currently have several outstanding unfilled purchase orders for our batteries
and actively are soliciting additional purchase orders. We presently have
limited quantities of batteries available for sale and do not have the necessary
equipment in operation to manufacture a commercially adequate volume of
products. We are installing additional automated equipment at our facilities in
Mallusk, Northern Ireland, and expect this production facility to be fully
operational by the end of calendar 2001, which will provide us with sufficient
capacity to manufacture and ship batteries in high volumes.

In 1993, we ultimately were unable to fulfill a purchase order for batteries
that incorporated a previous technology due to our inability to produce our
batteries on a commercial scale. If we cannot rapidly increase our production
capabilities to make sufficient quantities of commercially acceptable batteries,
we may not be able to fulfill existing purchase orders in a timely manner, if at
all. In addition, we may not be able to procure additional purchase orders,
which could cause us to lose existing and future customers, purchase orders,
revenue and profits.

WE MAY HAVE A NEED FOR ADDITIONAL CAPITAL

At June 30, 2001, we had cash and cash equivalents of $2.5 million and the
ability to utilize approximately $5.8 million under a line of credit secured by
investments acquired from West Coast Venture Capital, Inc. In addition, in June
2001, Carl Berg provided us with a financing commitment letter pursuant to which
he committed, subject to customary conditions, to provide (or cause another
person or entity to provide) the Company with additional financing of up to $20
million during fiscal 2002, in the form of a secured loan, equity investment, or
a combination of both.

After taking into account our cash and cash equivalents, projected revenues,
receipt of funds, and financial commitments, we expect that we will have
sufficient financing through fiscal 2002 to complete funding of required capital
expansion, research and product development, marketing, general and
administrative expenses and the costs of integrating the Telcordia licensing
activities. Our cash requirements, however, may vary materially from those now
planned because of changes in our operations, including changes in original
equipment manufacturer relationships, market conditions, joint venture and
business opportunities, our failure to receive additional IDB grant funds, or an
acceleration of the payment of our existing IDB grants. In such event, we may
need to raise additional funding through debt or equity financing through fiscal
2002. If we require additional funding, we may not be able to arrange for
additional funding on favorable terms, if at all. If we need capital and cannot
raise additional funds, it may delay further development and production of our
batteries or otherwise delay our execution of our business plan, all of which
may have a material adverse effect on our operations and financial condition.

WE HAVE A HISTORY OF LOSSES, HAVE AN ACCUMULATED DEFICIT AND MAY NEVER ACHIEVE
OR SUSTAIN SIGNIFICANT REVENUES OR PROFITABILITY.

We have incurred operating losses each year since inception in 1989 and had an
accumulated deficit of $276,224,000 as of June 30, 2001. We have working capital
of $5.8 million as of June 30, 2001, and have sustained recurring losses related
primarily to the research and development and marketing of our products. We
expect to continue to incur operating losses and negative cash flows through
fiscal 2002, as we continue our product development, begin to build inventory
and continue our marketing efforts. We may never achieve or sustain significant
revenues or profitability in the future.

IF OUR BATTERIES FAIL TO PERFORM AS EXPECTED, WE COULD LOSE EXISTING AND FUTURE
BUSINESS, AND OUR LONG-TERM ABILITY TO MARKET AND SELL OUR BATTERIES COULD BE
HARMED.

If we manufacture our batteries in commercial quantities and they fail to
perform as expected, our reputation could be severely damaged, and we could lose
existing or potential future business. Even if the performance failure were
corrected, this performance failure might have the long-term effect of harming
our ability to market and sell our batteries.


                                    Page 17
<PAGE>


WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR OUR REVENUES, AND OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED IF WE WERE TO LOSE THE
BUSINESS OF ANY ONE OF THEM.

To date, our existing purchase orders in commercial quantities are from a
limited number of customers. We anticipate that sales of our products to a
limited number of key customers will continue to account for a significant
portion of our total revenues. We do not have long-term agreements with any of
our customers, and do not expect to enter into any long-term agreements in the
near future. As a result, we face the substantial risk that any of the following
events could occur:

        o       reduction, delay or cancellation of orders from a customer;

        o       development by a customer of other sources of supply;

        o       selection by a customer of devices manufactured by one of our
                competitors for inclusion in future product generations;

        o       loss of a customer or a disruption in our sales and distribution
                channels; and

        o       failure of a customer to make timely payment of our invoices.

If we were to lose one or more customers, or if we were to lose revenues due to
a customer's inability or refusal to continue to purchase our batteries, our
business, results of operations and financial condition could be harmed.

WE MUST CONTINUE TO EXPAND OUR EMPLOYEE BASE AND OPERATIONS IN ORDER TO
DISTRIBUTE OUR PRODUCTS COMMERCIALLY, WHICH MAY STRAIN OUR MANAGEMENT AND
RESOURCES AND COULD HARM OUR BUSINESS.

During 1999, we grew rapidly, expanding our manufacturing capacity
significantly. We had grown from 184 employees at March 1999 to 362 employees as
of May 2000. On March 30, 2001, the Company announced the reduction of non-
managerial manufacturing personnel by 181 people. The layoffs were a result of
the expected arrival of new state-of-the-art high-speed automated production and
packaging machinery in May 2001. As the need arises, we plan to expand our
manufacturing capability in the next six months by adding more equipment. We
plan to expand our sales and marketing organizations in addition to increasing
the number of manufacturing employees and adding to our operating team. To
implement our growth strategy successfully, we will have to increase our staff,
including personnel in sales and marketing, engineering, development and product
support capabilities, as well as third party and direct distribution channels.
However, we face the risk that we may not be able to attract new employees to
sufficiently increase our staff or product support capabilities, or that we will
not be successful in our sales and marketing efforts. Failure in any of these
areas could impair our ability to execute our plans for growth and adversely
affect our future profitability.

COMPETITION FOR PERSONNEL, IN PARTICULAR FOR PRODUCT DEVELOPMENT AND PRODUCT
IMPLEMENTATION PERSONNEL, IS INTENSE, AND WE MAY HAVE DIFFICULTY ATTRACTING THE
PERSONNEL NECESSARY TO EFFECTIVELY OPERATE OUR BUSINESS.

We believe that our future success will depend in large part on our ability to
attract and retain highly skilled technical, managerial and marketing personnel
who are familiar with and experienced in the battery industry, as well as
skilled personnel to operate our facility in Northern Ireland. If we cannot
attract and retain experienced sales and marketing executives, we may not
achieve the visibility in the marketplace that we need to obtain purchase
orders, which would have the result of lowering our sales and earnings. We
compete in the market for personnel against numerous companies, including
larger, more established competitors with significantly greater financial
resources than us. We have experienced difficulty in recruiting qualified
personnel in the past, and we cannot be certain that we will be successful in
attracting and retaining the skilled personnel necessary to operate our business
effectively in the future.

BECAUSE OUR BATTERIES ARE PRIMARILY SOLD TO BE INCORPORATED INTO OTHER PRODUCTS,
WE RELY ON ORIGINAL EQUIPMENT MANUFACTURERS ("OEMS") AND BATTERY PACK ASSEMBLERS
TO COMMERCIALIZE OUR PRODUCTS. WE MAY NOT OBTAIN ADEQUATE ASSISTANCE FROM THESE
THIRD PARTIES TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.

We rely heavily on assistance from original equipment manufacturers and battery
pack assemblers to gain market acceptance for our products. We therefore will
need to meet these companies' requirements by developing and introducing new
products and enhanced, or modified, versions of our existing products on a
timely basis. Original equipment manufacturers and battery pack assemblers often
require unique configurations or custom designs for batteries, which must be
developed and integrated into their product well before the product is launched.
This development process not only requires substantial lead-time between the
commencement of design efforts for a customized battery system and the
commencement of volume shipments of the battery system to the customer, but also
requires the cooperation and assistance of the original equipment manufacturers
or battery pack assemblers for purposes of determining the battery requirements
for each specific application. If we are unable to design, develop and introduce
products that meet original equipment manufacturers' and battery pack


                                    Page 18
<PAGE>


assemblers' requirements, we may not be able to fulfill our obligations under
existing purchase orders, we may lose opportunities to enter into additional
purchase orders and our reputation may be damaged. As a result, we may not
receive adequate assistance from OEMs or battery pack assemblers to successfully
commercialize our products, which could impair our profitability.

THE FACT THAT WE DEPEND ON A SOLE SOURCE SUPPLIER FOR OUR ANODE RAW MATERIALS,
AND A LIMITED NUMBER OF SUPPLIERS FOR OTHER KEY RAW MATERIALS, MIGHT DELAY OUR
PRODUCTION OF BATTERIES.

We depend on a sole source supplier for our anode, or negative electrode, raw
material, and we utilize a limited number of suppliers for other key raw
materials used in manufacturing and developing our batteries. We generally
purchase raw materials pursuant to purchase orders placed from time to time and
have no long-term contracts or other guaranteed supply arrangements with our
sole or limited source suppliers. As a result, our suppliers may not be able to
meet our requirements relative to specifications and volumes for key raw
materials, and we may not be able to locate alternative sources of supply at an
acceptable cost. We have in the past experienced delays in product development
due to the delivery of nonconforming raw materials from our suppliers, and if in
the future we are unable to obtain high quality raw materials in sufficient
quantities and on a timely basis, it may delay battery production, impede our
ability to fulfill existing or future purchase orders and harm our reputation
and profitability.

OUR BATTERIES MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN MARKET ACCEPTANCE.

To achieve market acceptance, our batteries must offer significant performance
or other measurable advantages at a cost-effective rate as compared to other
current and potential alternative battery technologies in a broad range of
applications. Our batteries may not be able to achieve or sustain these
advantages. Even if our batteries provide meaningful price or performance
advantages, there is a risk our batteries may not be able to achieve or maintain
market acceptance in any potential market application. Failure to realize these
performance advantages and our failure to achieve significant market acceptance
with our products could hurt our ability to attract customers in the future.

WE HAVE FOUR KEY EXECUTIVES. THE LOSS OF A SINGLE EXECUTIVE OR THE FAILURE TO
HIRE AND INTEGRATE CAPABLE NEW EXECUTIVES COULD HARM OUR BUSINESS.

Our success is highly dependent upon the active participation of four key
executives. We do not have written employment contracts or key man life
insurance policies with respect to any of these key members of management.
Without qualified executives, we face the risk that we will not be able to
effectively run our business on a day-to-day basis or execute our long-term
business plan.

WE MUST EFFICIENTLY INTEGRATE THE TELCORDIA ASSETS INTO OUR BUSINESS.

We are a development stage company primarily engaged in acquiring and developing
our initial technology, manufacturing limited quantities of prototype batteries,
recruiting personnel and acquiring capital. Except for revenues from limited
sales of prototype batteries and battery materials, we did not record
significant revenues from sales of our products until the first three-month
period of fiscal 2001. In December 2000, we acquired the intellectual property
assets of Telcordia Technologies, Inc. As a result of the acquisition of these
intellectual property assets, we significantly increased the role of licensing
in our business activities. Our future operating results could be affected by a
variety of factors including:

        o       our ability to secure and maintain significant customers of our
                proprietary technology;

        o       the extent to which our future licensees successfully
                incorporate our technology into their products;

        o       the acceptance of new or enhanced versions of our technology;

        o       the rate that our licensees manufacture and distribute their
                products to OEMs;

        o       our ability to secure one-time license fees and ongoing
                royalties for our technology from licensees.

Our future success will depend on our ability to integrate successfully our
licensing operations with our other business activities. The degree to which we
can successfully integrate these operations will depend on a number of factors,
including our ability to expand the scope of our operations beyond the design,
development, manufacture and marketing of our rechargeable lithium polymer
batteries to include substantially increased technology licensing activities.
The integration of these licensing operations following the acquisition of the
Telcordia intellectual property assets will require the dedication of management
and other personnel resources which may temporarily distract them from our
day-to-day business. If we fail to integrate the acquired intellectual property
efficiently or otherwise substantially expand our licensing activities, our
results of operations and financial condition will be adversely affected.


                                    Page 19
<PAGE>


OUR REVENUE FROM LICENSE FEES AND ROYALTIES WILL FLUCTUATE AND DEPENDS
SIGNIFICANTLY ON THE SUCCESS OF OUR LICENSEES AND THE MARKET DEMAND FOR OUR
PRODUCTS.

We expect to generate income from license fees as well as ongoing royalties
based on sales by licensees that design, manufacture and sell products
incorporating our technology. License fees will be nonrefundable and may be paid
in one or more installments. Ongoing royalties will be nonrefundable and
generally based upon a percentage of the selling price of the products that
incorporate our technology sold by the licensee. Because we expect to derive a
portion of our future revenues from royalties on shipments by our licensees, our
future success depends upon the ability of our licensees to develop and
introduce high volume products that achieve and sustain market acceptance. We
cannot assure you that our licensees will be successful or that the demand for
lithium polymer batteries or for devices utilizing these batteries will continue
to increase. In addition, our license fee revenues depend on our ability to gain
additional licensees within existing and new markets. A reduction in the demand
for lithium polymer batteries, our loss of key existing licensees or our failure
to gain additional licensees could have a material adverse effect on our
business.

THERE IS A POTENTIAL CONFLICT BETWEEN OUR FUTURE TECHNOLOGY LICENSEES AND US.

The acquisition of the Telcordia intellectual property assets has added
significant diversity to our overall business structure and our opportunities.
We recognize that there is potential for a conflict among our sales channels and
those of our future technology licensees. Although our manufacturing and
marketing business generally is complimentary to our licensing business, we
cannot assure you that sales-channel conflicts will not arise. If these
potential conflicts do materialize, we may not be able to mitigate the effect of
a conflict that, if not resolved, may impact our results of operations.

IF WE CANNOT PROTECT OR ENFORCE OUR EXISTING INTELLECTUAL PROPERTY RIGHTS OR IF
OUR PENDING PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, WE MAY LOSE THE
ADVANTAGES OF OUR RESEARCH AND MANUFACTURING SYSTEMS.

Our ability to compete successfully will depend on whether we can protect our
existing proprietary technology and manufacturing processes. We rely on a
combination of patent and trade secret protection, non-disclosure agreements and
cross-licensing agreements. These measures may not be adequate to safeguard the
proprietary technology underlying our batteries. Employees, consultants, and
others who participate in the development of our products may breach their
non-disclosure agreements with us, and we may not have adequate remedies in the
event of their breaches. In addition, our competitors may be able to develop
products that are equal or superior to our products without infringing on any of
our intellectual property rights. Moreover, we may not be able to effectively
protect our intellectual property rights outside of the United States.

We have established a program for intellectual property documentation and
protection in order to safeguard our technology base. We intend to vigorously
pursue enforcement and defense of our patents and our other proprietary rights.
We could incur significant expenses in preserving our proprietary rights, and
these costs could harm our financial condition.

We also are attempting to expand our intellectual property rights through our
applications for new patents. Patent applications in the United States are
maintained in secrecy until the patents that are applied for are ultimately
issued. Since publication of discoveries in the scientific or patent literature
tends to lag behind actual discoveries by several months, we cannot be certain
that we were the first creator of inventions covered by pending patent
applications or the first to file patent applications on such inventions.
Therefore, our pending patent applications may not result in issued patents and
our issued patents may not afford protection against a competitor. Our failure
to protect our existing proprietary technologies or to develop new proprietary
technologies may substantially impair our financial condition and results of
operations.

INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS BROUGHT AGAINST US COULD BE TIME
CONSUMING AND EXPENSIVE TO DEFEND.

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. While we currently are
not engaged in any intellectual property litigation or proceedings, we may
become involved in these proceedings in the future. In the future we may be
subject to claims or inquiries regarding our alleged unauthorized use of a third
party's intellectual property. An adverse outcome in litigation could force us
to do one or more of the following:

        o       stop selling, incorporating or using our products that use the
                challenged intellectual property;

        o       pay significant damages to third parties;

        o       obtain from the owners of the infringed intellectual property
                right a license to sell or use the relevant technology, which
                license may not be available on reasonable terms, or at all; or


                                    Page 20
<PAGE>


        o       redesign those products or manufacturing processes that use the
                infringed technology, which may be economically or
                technologically infeasible.

Whether or not an intellectual property litigation claim is valid, the cost of
responding to it, in terms of legal fees and expenses and the diversion of
management resources, could be expensive and harm our business.

OUR BATTERIES CONTAIN POTENTIALLY DANGEROUS MATERIALS, WHICH COULD EXPOSE US TO
PRODUCT LIABILITY CLAIMS.

In the event of a short circuit or other physical damage to a battery, a
reaction may result with excess heat or a gas being generated and released. If
the heat or gas is not properly released, the battery may be flammable or
potentially explosive. Our batteries that were based on an earlier technology,
have, in the past, smoked, caught fire and vented gas. We could, therefore, be
exposed to possible product liability litigation. In addition, our batteries
incorporate potentially dangerous materials, including lithium. It is possible
that these materials may require special handling or that safety problems may
develop in the future. We are aware that if the amounts of active materials in
our batteries are not properly balanced and if the charge/discharge system is
not properly managed, a dangerous situation may result. Other battery
manufacturers using technology similar to ours include special safety circuitry
within the battery to prevent such a dangerous condition. We expect that our
customers will have to use a similar type of circuitry in connection with their
use of our products.

WE ARE ENGAGED IN ONGOING SAFETY TESTING OF OUR BATTERIES TO MEET CUSTOMER
REQUIREMENTS AND MAY NOT BE ABLE TO INCREASE COMMERCIAL SALES OF OUR BATTERIES
IF OUR PRODUCTS ARE NOT SUCCESSFUL IN THESE TESTS.

We have conducted safety testing of our batteries and have submitted batteries
to Underwriters Laboratories for certification, which is required by a number of
OEMs prior to placing a purchase order with us. Underwriters Laboratories has
granted a preliminary acceptance of an earlier generation of our batteries,
pending a manufacturing site audit. Those batteries, while similar to the
batteries we are selling today, are not of the current design and composition.
Our current batteries must be submitted for Underwriters Laboratories' approval,
and Underwriters Laboratories has not yet begun a scheduled audit of our
Northern Ireland manufacturing facility.

As part of our safety testing program, prototype batteries of various sizes,
designs and chemical formulations are subject to abuse testing, in which the
battery is subjected to conditions outside expected normal operating conditions.
Each new battery design will continue to require new safety testing. In
addition, safety problems may develop with respect to our current and future
battery technology that could prevent or delay commercial introduction of our
products.

ACCIDENTS AT OUR FACILITIES COULD DELAY PRODUCTION AND ADVERSELY AFFECT OUR
OPERATIONS.

An accident in our facilities could occur. Any accident, whether due to the
production of our batteries or otherwise resulting from our facilities'
operations, could result in significant manufacturing delays or claims for
damages resulting from personal or property injuries, which would adversely
affect our operations and financial condition.

WE DEPEND UPON THE CONTINUED OPERATION OF A SINGLE MANUFACTURING FACILITY.
OPERATIONAL PROBLEMS AT THIS FACILITY COULD HARM OUR BUSINESS.

Our revenues are dependent upon the continued operation of our manufacturing
facility in Northern Ireland. The operation of a manufacturing plant involves
many risks, including potential damage from fire or natural disasters. In
addition, we have obtained permits to conduct our business as currently operated
at the facility. There can be no assurance that these permits would continue to
be effective at the current location if the facility were destroyed and rebuilt,
or that we would be able to obtain similar permits to operate at another
location. There can be no assurance that the occurrence of these or any other
operational problems at our Northern Ireland facility would not harm our
business.

WE EXPECT TO SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO AND DERIVE A
SIGNIFICANT PORTION OF OUR LICENSING REVENUES FROM CUSTOMERS LOCATED OUTSIDE THE
UNITED STATES. FOREIGN GOVERNMENT REGULATIONS, CURRENCY FLUCTUATIONS AND
INCREASED COSTS ASSOCIATED WITH INTERNATIONAL SALES COULD MAKE OUR PRODUCTS AND
LICENSES UNAFFORDABLE IN FOREIGN MARKETS, WHICH WOULD REDUCE OUR FUTURE
PROFITABILITY.

We expect that international sales and licensing royalties (and other licensing
revenues) will represent an increasingly significant portion of our product
sales. International business can be subject to many inherent risks that are
difficult or impossible for us to predict or control, including:

        o       changes in foreign government regulations and technical
                standards, including additional regulation of rechargeable
                batteries or technology or the transport of lithium, which may
                reduce or eliminate our ability to sell or license in certain
                markets;


                                    Page 21
<PAGE>


        o       foreign governments may impose tariffs, quotas and taxes on our
                batteries or our import of technology into their countries;

        o       requirements or preferences of foreign nations for domestic
                products could reduce demand for our batteries and our
                technology;

        o       fluctuations in currency exchange rates relative to the U.S.
                dollar could make our batteries and our technology unaffordable
                to foreign purchasers and licensees or more expensive compared
                to those of foreign manufacturers and licensors;

        o       longer payment cycles typically associated with international
                sales and potential difficulties in collecting accounts
                receivable may reduce the future profitability of foreign sales
                and royalties;

        o       import and export licensing requirements in Northern Ireland or
                Korea may reduce or eliminate our ability to sell or license in
                certain markets; and

        o       political and economic instability in Northern Ireland or Korea
                may reduce the demand for our batteries and our technology or
                our ability to market our batteries and our technology in
                foreign countries.

These risks may increase our costs of doing business internationally and reduce
our sales and royalties or future profitability.

POLITICAL INSTABILITY IN NORTHERN IRELAND COULD INTERRUPT MANUFACTURING OF OUR
BATTERIES AT OUR NORTHERN IRELAND FACILITY AND CAUSE US TO LOSE SALES AND
MARKETING OPPORTUNITIES.

Northern Ireland has experienced significant social and political unrest in the
past and we cannot assure you that these instabilities will not continue in the
future. Any political instability in Northern Ireland could temporarily or
permanently interrupt our manufacturing of batteries at our facility in Mallusk,
Northern Ireland. Any delays could also cause us to lose sales and marketing
opportunities, as potential customers would find other vendors to meet their
needs.

                       RISKS ASSOCIATED WITH OUR INDUSTRY

IF COMPETING TECHNOLOGIES THAT OUTPERFORM OUR BATTERIES WERE DEVELOPED AND
SUCCESSFULLY INTRODUCED, THEN OUR PRODUCTS MIGHT NOT BE ABLE TO COMPETE
EFFECTIVELY IN OUR TARGETED MARKET SEGMENTS.

The battery industry has experienced rapid technological change which we expect
to continue. Rapid and ongoing changes in technology and product standards could
quickly render our products less competitive, or even obsolete. Various
companies are seeking to enhance traditional battery technologies, such as lead
acid and nickel cadmium. Other companies have recently introduced or are
developing batteries based on nickel metal hydride, liquid lithium ion and other
emerging and potential technologies. These competitors are engaged in
significant development work on these various battery systems and we believe
that much of this effort is focused on achieving higher energy densities for low
power applications such as portable electronics. One or more new, higher energy
rechargeable battery technologies could be introduced which could be directly
competitive with, or be superior to, our technology. The capabilities of many of
these competing technologies have improved over the past several years.
Competing technologies that outperform our batteries could be developed and
successfully introduced and, as a result, there is a risk that our products may
not be able to compete effectively in our targeted market segments.

We have invested in research and development of next generation technology in
energy solutions. If we are not successful in developing and commercially
exploiting new energy solutions based on new materials, or we experience delays
in the development and exploitation of new energy solutions, compared to our
competitors, our future growth and revenues will be adversely affected.

OUR PRINCIPAL COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES THAN WE
DO AND THEY MAY THEREFORE DEVELOP BATTERIES SIMILAR OR SUPERIOR TO OURS OR
OTHERWISE COMPETE MORE SUCCESSFULLY THAN WE DO.

Competition in the rechargeable battery industry is intense. The industry
consists of major domestic and international companies, most of which have
financial, technical, marketing, sales, manufacturing, distribution and other
resources substantially greater than ours. There is a risk that other companies
may develop batteries similar or superior to ours. In addition, many of these
companies have name recognition, established positions in the market, and long
standing relationships with original equipment manufacturers and other
customers. We believe that our primary competitors are existing suppliers of
liquid lithium ion, competing polymer and, in some cases, nickel metal hydride
batteries. These suppliers include Sanyo, Matsushita Industrial Co., Ltd.
(Panasonic), Sony, Toshiba and SAFT America, Inc. All of these companies are
very large and have substantial resources and market presence. We expect that we
will compete against manufacturers of other types of batteries in our targeted
application segments, which include laptops, cellular telephones and personal
digital assistant products, on the basis of performance, size and shape, cost
and ease of recycling. There is also a


                                    Page 22
<PAGE>


risk that we may not be able to compete successfully against manufacturers of
other types of batteries in any of our targeted applications.

LAWS REGULATING THE MANUFACTURE OR TRANSPORT OF BATTERIES MAY BE ENACTED WHICH
COULD RESULT IN A DELAY IN THE PRODUCTION OF OUR BATTERIES OR THE IMPOSITION OF
ADDITIONAL COSTS THAT WOULD HARM OUR ABILITY TO BE PROFITABLE.

At the present time, international, federal, state or local law does not
directly regulate the storage, use and disposal of the component parts of our
batteries or the transport of our batteries. However, laws and regulations may
be enacted in the future which could impose environmental, health and safety
controls on the storage, use, and disposal of certain chemicals and metals used
in the manufacture of lithium polymer batteries as well as regulations governing
the transport of our batteries. Satisfying any future laws or regulations could
require significant time and resources from our technical staff and possible
redesign which may result in substantial expenditures and delays in the
production of our product, all of which could harm our business and reduce our
future profitability.

                  GENERAL RISKS ASSOCIATED WITH STOCK OWNERSHIP

CORPORATE INSIDERS OR THEIR AFFILIATES WILL BE ABLE TO EXERCISE SIGNIFICANT
CONTROL OVER MATTERS REQUIRING STOCKHOLDER APPROVAL THAT MIGHT NOT BE IN THE
BEST INTERESTS OF OUR STOCKHOLDERS AS A WHOLE.

As of June 30, 2001, our officers, directors, and their affiliates as a group
beneficially owned approximately 17.1% of our outstanding common stock. Carl
Berg, one of our directors, owns a substantial portion of that amount. As a
result, these stockholders will be able to exercise significant control over all
matters requiring stockholder approval, including the election of directors and
the approval of significant corporate transactions, which could delay or prevent
someone from acquiring or merging with us. The interest of our officers and
directors, when acting in their capacity as stockholders, may lead them to:

        o       vote for the election of directors who agree with the incumbent
                officers' or directors' preferred corporate policy; or

        o       oppose or support significant corporate transactions when these
                transactions further their interests as incumbent officers or
                directors, even if these interests diverge from their interests
                as shareholders per se and thus from the interests of other
                shareholders.

SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT,
WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND LIMIT THE PRICE POTENTIAL
ACQUIRERS MAY BE WILLING TO PAY FOR YOUR SHARES.

Our board of directors has the authority, without any action by the
stockholders, to issue additional shares of our preferred stock, which shares
may be given superior voting, liquidation, distribution and other rights as
compared to those of our common stock. The rights of the holders of our capital
stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
additional shares of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. These provisions may have the effect of delaying, deferring or preventing
a change in control, may discourage bids for our common stock at a premium over
its market price and may decrease the market price, and infringe upon the voting
and other rights of the holders, of our common stock.

OUR STOCK PRICE IS VOLATILE.

The market price of the shares of our common stock has been and is likely to
continue to be highly volatile. Factors that may have a significant effect on
the market price of our common stock include the following:

        o       fluctuation in our operating results;

        o       announcements of technological innovations or new commercial
                products by us or our competitors;

        o       failure to achieve operating results projected by securities
                analysts;

        o       governmental regulation;

        o       developments in our patent or other proprietary rights or our
                competitors' developments;

        o       our relationships with current or future collaborative partners;
                and

        o       other factors and events beyond our control.


                                    Page 23
<PAGE>


In addition, the stock market in general has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.

As a result of this potential stock price volatility, investors may be unable to
resell their shares of our common stock at or above the cost of their purchase
prices. In addition, companies that have experienced volatility in the market
price of their stock have been the object of securities class action litigation.
If we were the subject of securities class action litigation, this could result
in substantial costs, a diversion of our management's attention and resources
and harm to our business and financial condition.

FUTURE SALES OF CURRENTLY OUTSTANDING SHARES COULD ADVERSELY AFFECT OUR STOCK
PRICE.

The market price of our common stock could drop as a result of sales of a large
number of shares in the market or in response to the perception that these sales
could occur. In addition these sales might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. We had outstanding 45,535,639 shares of common stock as of
June 30, 2001. In addition, we have filed registration statements on Form S-8
under the Securities Act that cover 1,414,526 shares of common stock pursuant to
outstanding but unexercised vested options to acquire our common stock.

WE DO NOT INTEND TO PAY DIVIDENDS AND THEREFORE YOU WILL ONLY BE ABLE TO RECOVER
YOUR INVESTMENT IN OUR COMMON STOCK, IF AT ALL, BY SELLING THE SHARES OF OUR
STOCK THAT YOU HOLD.

Some investors favor companies that pay dividends. We have never declared or
paid any cash dividends on our common stock. We currently intend to retain any
future earnings for funding growth and we do not anticipate paying cash
dividends on our common stock in the foreseeable future. Because we may not pay
dividends, your return on an investment in our stock likely depends on your
ability to sell your shares at a profit.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has long-term debt, in the form of three building mortgages, one of
which has a balloon payoff in calendar 2001. One note bears interest at a fixed
rate of 10.4%, the second note bears interest at an annually adjustable
published interest rate index (7.375% at June 30, 2001), and the third note
bears interest at an adjustable rate (7.25% at June 30, 2001). The Company also
has long-term debt in the form of a loan, which matures in August 2002, to a
stockholder at a fixed interest rate of 9% and a line of credit from the same
stockholder, which matures in January 2006, at a fixed interest rate of 8%. The
table below presents principal amounts by fiscal year for the Company's
long-term debt.

<TABLE>
<CAPTION>
                        2002        2003        2004        2005        2006      THEREAFTER    TOTAL
                      ----------  ----------  ----------  ----------  ----------  ----------  ----------
<S>                   <C>         <C>         <C>         <C>         <C>         <C>         <C>
                                                          (dollars in thousands)
Liabilities:
Fixed rate debt:         $1,230     $14,245                             $11,250                 $26,725
Variable rate debt          288         584        $626        $670         717      $4,068       6,953
</TABLE>


Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its debt obligations approximates fair
value. At June 30, 2001, the weighted average interest rate on the Company's
long-term debt is 8.38%.


                                    Page 24
<PAGE>


                           PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

        In April 2001, the Company received notification that twenty-one former
        employees of the Mallusk, Northern Ireland facility filed claims against
        the Company alleging breach of contract and lack of consultation prior
        to termination due to the reduction in force in March 2001 at the
        facility. The time period for filing such claims expired July 6, 2001,
        although the Tribunal may accept late claims. The Company is currently
        assessing the merit of such claims at this time. The Company does have a
        defense and will contest the claims.


                                    Page 25
<PAGE>


                                    SIGNATURE


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 thereto duly authorized.



                                     VALENCE TECHNOLOGY, INC.
                                     (Registrant)


Date: August 14, 2001                By:   /s/ Stephan B. Godevais
                                         --------------------------------------
                                            Stephan B. Godevais
                                            President, Chief Executive Officer


                                     By:   /s/ Tom Concialdi
                                         --------------------------------------
                                            Tom Concialdi
                                            Controller, Chief Accounting Officer




                                    Page 26