<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended September 27, 1998. 

Or

[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR 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.

        (1) Yes X  No                             (2) 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                    25,665,800 shares
 ----------------------------------      -----------------------------------
          (Class)                         (Outstanding at November 2, 1998)


<PAGE>


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

                                    FORM 10-Q

                    FOR THE QUARTER ENDED SEPTEMBER 27, 1998




                                      INDEX
<TABLE>
<CAPTION>
                                                                          PAGES
                                                                          -----
<S>                                                                       <C>
PART I.   FINANCIAL INFORMATION

 Item 1.  Financial Statements (Unaudited):

          Condensed Consolidated Balance Sheets as of
          September 27, 1998 and March 29, 1998. . . . . . . . . . . . . .   3

          Condensed Consolidated Statements of Operations and
          Comprehensive Loss for the period from March 3, 1989
          (date of inception) to September 27, 1998 and for each
          of the three and six month periods ended September 27,
          1998 and September 28, 1997 . . . . . . . . . . . . . . . . . . .  4

          Condensed Consolidated Statements of Cash Flows
          for the period from March 3, 1989 (date of inception)
          to September 27, 1998 and for each of the six month periods
          ended September 27, 1998 and September 28, 1997. . . . . . . . .   5

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

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


PART II.  OTHER INFORMATION

 Item 1.  Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . .  14

 Item 2.  Changes in Securities and Use of Proceeds. . . . . . . . . . . .  14

 Item 3.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .  15


SIGNATURE
</TABLE>

                                        2

<PAGE>


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

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                (in thousands, except share and per share amounts)
                                   (unaudited)
                                   -----------

<TABLE>
<CAPTION>

                                                     September 27,     March 29,
                                                        1998              1998
                                                     -------------  ------------
 <S>                                                 <C>            <C>
                       ASSETS
 Current assets:
      Cash and cash equivalents                      $    6,724      $    8,400
      Accounts receivable                                 1,078           1,429
      Prepaids and other current assets                      99             880
                                                     -------------  ------------
           Total current assets                           7,901          10,709

 Property, plant and equipment, net                      34,025          31,712
 Investment in joint venture                              -                 285
 Other assets                                             -                 188
                                                     -------------  ------------
           Total assets                              $   41,926     $   42,894
                                                     -------------  ------------
                                                     -------------  ------------

                     LIABILITIES
 Current liabilities:
      Current portion of long-term debt              $    2,584      $      399
      Accounts payable                                    2,004           2,353
      Accrued expenses                                    4,094           5,207
      Accrued royalties and license fees                    500           1,000
      Advances                                              700             700
      Accrued compensation                                  548             817
                                                     -------------  ------------
           Total current liabilities                     10,430          10,476

 Deferred revenue                                         2,500           2,500
 IDB grant                                                2,056           2,006
 Long-term debt, less current portion                     4,790           4,950
                                                     -------------  ------------
                Total liabilities                        19,776          19,932
                                                     -------------  ------------

 Contingencies (Note 4).

                STOCKHOLDERS' EQUITY
 Preferred stock, $0.001 par value:
      Authorized:   10,000,000 shares;
      Issued and outstanding:  7,500 shares and
          0 shares at September 27, 1998 and
          March 29, 1998 respectively                     5,975             -
          

 Common stock, $0.001 par value:
      Authorized:  50,000,000 shares;
      Issued and outstanding:  25,538,000 and
          25,068,000 shares at September 27, 1998
          and March 29, 1998, respectively              156,095        153,583
      Notes receivable from stockholder                  (4,862)        (4,862)
  Deficit accumulated during the development stage     (137,254)      (128,012)
  Accumulated other comprehensive income                  2,196          2,253
                                                     -------------  ------------
           Total stockholders' equity                    22,150         22,962
                                                     -------------  ------------
              Total liabilities and stockholders'
               equity                                $   41,926     $   42,894
                                                     -------------  ------------
                                                     -------------  ------------
</TABLE>



                                        3
<PAGE>

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

       CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                      (in thousands, except per share amounts)
                                    (unaudited)
                                    ------------


<TABLE>
<CAPTION>
                                                     Period from
                                                    March 3, 1989
                                                 (date of inception)         Three Months Ended            Six Months Ended
                                                       Through          ----------------------------  ----------------------------
                                                     September 27,       September 27,  September 28,  September 27, September 28,
                                                         1998               1998           1997           1998          1997
                                                 -------------------    --------------  ------------   ------------- -------------
<S>                                              <C>                    <C>             <C>            <C>           <C>
Revenue:
  Research and
    development
    contracts                                        $    21,605        $        -      $      -       $     -       $     -
                                                 -------------------
Costs and expenses:
  Research and product
    development                                           93,219              4,708         4,427         8,738         8,462
  Marketing                                                3,579                 18           129            47           250
  General and
   administrative                                         41,686              1,319         1,462         2,257         2,798
  Write-off of
   in-process
   technology                                              8,212                  -             -             -             -
  Investment in
   Danish
   Subsidiary                                              3,489                  -             -             -             -
  Special charges                                         18,872                  -             -             -             -
                                                 -------------------    --------------  ------------   ------------- -------------

  Total costs and
   expenses                                              169,057              6,045         6,018        11,042        11,510
                                                 -------------------    --------------  ------------   ------------- -------------

  Operating loss                                        (147,452)            (6,045)       (6,018)      (11,042)      (11,510)

Other income                                               2,200              2,200             -         2,200             -
Interest income                                           15,036                 48           321           135           774
Interest expense                                          (4,538)              (130)         (148)         (248)         (299)
Equity in losses of
 joint venture                                            (2,500)                 -          (150)         (287)         (300)
                                                 -------------------    --------------  ------------   ------------- -------------

  Net loss                                           $  (137,254)       $    (3,927)    $  (5,995)     $ (9,242)     $(11,335)
                                                 -------------------    --------------  ------------   ------------- -------------
                                                 -------------------

Other comprehensive income
 (loss):
  Change in foreign currency
     translation adjustments                                                    731          (865)          (57)         (472)
                                                                        --------------  ------------   ------------- -------------
      Comprehensive loss                                                $    (3,196)    $  (6,860)     $ (9,299)     $(11,807)
                                                                        --------------  ------------   ------------- -------------
                                                                        --------------  ------------   ------------- -------------
Net loss per share, basic and
 diluted                                                                $     (0.15)    $   (0.26)     $  (0.36)     $  (0.51)
                                                                        --------------  ------------   ------------- -------------
                                                                        --------------  ------------   ------------- -------------
Shares used in
 computing net loss per share,
 basic and diluted                                                           25,524        22,721        25,436        22,263
                                                                        --------------  ------------   -------------  ------------
                                                                        --------------  ------------   -------------  ------------
</TABLE>


                                       4
<PAGE>


<TABLE>
<CAPTION>
                                              VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
                                                (companies in the development stage)

                                           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                           (in thousands)
                                                             (unaudited)
                                                               ------

                                                                          Period from           
                                                                         March 3, 1989
                                                                       (date of inception)      Six Months          Six Months 
                                                                             through               Ended               Ended
                                                                           September 27,        September 27,       September 28, 
                                                                               1998                 1998                1997
                                                                        -----------------      ---------------    ---------------
<S>                                                                     <C>                    <C>                <C>
Cash flows from operating activities:
  Net loss                                                              $    (137,254)         $   (9,242)        $   (11,335)
  Adjustments to reconcile net loss to net cash
     used in operating activities:
     Depreciation and amortization                                             22,481                 862                 756
     Write-off of equipment                                                    14,792                   -                   -
     Write-off of in-process technology                                         6,211                   -                   -
     Compensation related to stock options                                      3,196                   -                 554
     Noncash charge related to acquisition
       of Danish subsidiary                                                     2,245                   -                   -
     Equity in losses of joint venture                                          2,500                 287                 300
     Changes in assets and liabilities:
       Accounts receivable                                                         13                 353                (738)
       Interest receivable                                                         58                  58                  18
       Notes receivable                                                             -                   -                  78
       Prepaid expenses and other current assets                                 (977)                909                   5
       Accounts payable                                                         1,901                (351)               (989)
       Accrued liabilities                                                       (434)             (1,881)                (86)
       Deferred revenue                                                         2,500                   -                   -
                                                                        -----------------      ---------------    ---------------

         Net cash used in operating activities                                (82,768)             (9,005)            (11,437)
                                                                        -----------------      ---------------    ---------------

Cash flows from investing activities:
  Purchase of long-term investments                                          (665,789)                  -            (156,869)
  Maturities in long-term investments                                         661,545                   -             165,001
  Capital expenditures                                                        (60,316)             (4,769)             (6,836)
  Other                                                                          (222)                  -                   -
                                                                        -----------------      ---------------    ---------------

         Net cash provided by (used in) investing activities                  (64,782)             (4,769)              1,296
                                                                        -----------------      ---------------    ---------------

Cash flows from financing activities:
  Property and equipment grants                                                 6,419               2,000                   -
  Borrowings of long-term debt                                                 17,528               2,026                   -
  Payments of long-term debt:
    Product development loan                                                     (482)                  -                   -
    Shareholder and director                                                   (6,173)                  -                   -
    Other long-term debt                                                      (11,837)                  -                (958)
  Proceeds from issuance of warrants and common
    stock, net of issuance costs                                              144,511               1,411               4,891
  Proceeds from issuance of preferred stock,
    net of issuance costs                                                       7,075               7,075                   -
                                                                        -----------------      ---------------    ---------------

         Net cash provided by
          financing activities                                                157,091              12,512               3,933
                                                                        -----------------      ---------------    ---------------
Effect of foreign exchange rates on cash and cash
  equivalents                                                                  (2,817)               (414)                472
Increase (decrease) in cash and cash equivalents                                6,724              (1,676)             (5,736)
Cash and cash equivalents, beginning of period                                      -               8,400              27,832
                                                                        -----------------      ---------------    ---------------

Cash and cash equivalents, end of period                                $       6,724          $    6,724         $    22,096
                                                                        -----------------      ---------------    ---------------
                                                                        -----------------      ---------------    ---------------
</TABLE>

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

                                      5

<PAGE>


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

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                    (in thousands, except per share amounts)
                                   (unaudited)
                                    --------


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 September 27, 1998, its 
consolidated results of operations and cash flows for the period from March 
3, 1989 (date of inception) to September 27, 1998 and for each of the 
three-month and six-month periods ended September 27, 1998 and September 28, 
1997.  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 29, 1998.  The year end condensed 
consolidated balance sheet data as of March 29, 1998 was derived from audited 
financial statements, but does not include all disclosures required by 
generally accepted accounting principles.

The Company's current research prototype batteries do not meet all of the
specifications demanded by the marketplace, and the Company presently has no
products available for sale.  To achieve profitable operations, the Company must
successfully develop, manufacture and market its products.  There can be no
assurance that any products can be developed or manufactured at an acceptable
cost and with appropriate performance characteristics, or that such products
will be successfully marketed.

The results of operations and cash flows for the three-month and six-month
periods ended September 27, 1998 are not necessarily indicative of results of
operations and cash flows for any future period.

2.   BASIS OF PRESENTATION
     ---------------------

The accompanying interim condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern.  The Company has
negative working capital and has sustained recurring losses related primarily to
the development and marketing of its products.  Management is actively pursuing
additional equity and debt financing.  In July 1998, the Company completed
private financing arrangements of up to $25 million, subject to completion of
certain milestones (Note 5).  There can be no assurance that the Company will
meet the required milestones to draw down the full $25 million, or that the
Company could successfully consummate any new debt or equity issuances.  These
factors raise substantial doubt about the Company's ability to continue as a
going concern.  The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.  The effects of any such
adjustments, if necessary, could be material.


3.   NET LOSS PER SHARE
     ------------------

Basic Earnings Per Share (EPS) is computed as net loss divided by the 
weighted average number of common shares outstanding for the period.  Diluted 
EPS reflects the potential dilution that could occur from common shares 
issuable through stock options and warrants.  Common equivalent shares are 
excluded from the computation of net loss per share if their effect is 
anti-dilutive.

                                        6
<PAGE>


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

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                    (in thousands, except per share amounts)
                                   (unaudited)
                                     -------

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

<TABLE>
<CAPTION>
                                        Three Months Ended,                              Six Months Ended,            
                          -------------------------------------------      -------------------------------------------  
                          September 27, 1998       September 28, 1997      September 27, 1998       September 28, 1997  
                          ------------------       ------------------      ------------------       ------------------  
<S>                       <C>                      <C>                     <C>                      <C>                 
Loss per share:                                                                                                         
Net loss                      $(3,927)                  $(5,995)               $(9,242)                 $(11,335)       
Weighted average                                                                                                        
 shares outstanding            25,524                    22,721                 25,436                    22,263        
Earnings per share,                                                                                                     
 basic and diluted            $ (0.15)                  $ (0.26)               $ (0.36)                 $  (0.51)       
</TABLE>

Shares excluded from the calculation of diluted EPS as their effect was anti-
dilutive were 3,724 and 3,815 for the six months ended September 27, 1998 and
September 28, 1997, respectively.

4.   CONTINGENCIES
     -------------

LITIGATION:

In May 1994, a series of class action lawsuits was filed in the United States
District Court for the Northern District of California against the Company and
certain of its present and former officers and directors.  These lawsuits were
consolidated, and in September 1994 the plaintiffs filed a consolidated and
amended class action complaint.  Following the Court's orders on motions to
dismiss the complaint, which were granted in part and denied in part, the
plaintiffs filed an amended complaint in October 1995 ("Complaint").  The
Complaint alleges violations of the federal securities laws against the Company,
certain of its present and former officers and directors, and the underwriters
of the Company's public stock offerings, claiming that the defendants issued a
series of false and misleading statements, including filings with the Securities
and Exchange Commission, with regard to the Company's business and future
prospects.  The plaintiffs seek to represent a class of persons who purchased
the Company's common stock between May 7, 1992 and August 10, 1994.  The
Complaint seeks unspecified compensatory and punitive damages, attorney's fees
and costs.

On January 23, 1996, the Court dismissed, with prejudice, all claims against the
underwriters of the Company's public stock offerings, and one claim against the
Company and its present and former officers and directors.  In April 1996, the
Court dismissed with prejudice all remaining claims against a present director
and limited claims against a former officer and director to the period when that
person was an officer.  In December 1996, the Company and the individual
defendants filed motions for summary judgment, which the plaintiffs opposed.  In
November 1997, the Court granted the Company's motion for summary judgment and
entered a judgment in favor of all defendants.  Plaintiffs have appealed and the
case is pending before the United States Court of Appeals for the Ninth Circuit.

The ultimate outcome of these actions cannot presently be determined.
Accordingly, no provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.

In addition to the litigation noted above, the Company is from time to time
subject to routine litigation incidental to its business.  The Company believes
that the results of this routine litigation will not have a material adverse
effect on the Company's financial condition.

5.   PREFERRED STOCK
     ---------------

In July 1998, the Company completed private financing arrangements of up to $25
million.  The Company issued 7,500 shares of Series A convertible preferred
stock at $1,000 per share, raising gross proceeds of $7.5 million.  The Series A


                                        7
<PAGE>

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


              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                    (in thousands, except per share amounts)
                                   (unaudited)
                                     -------

convertible preferred stock accretes at an annual rate of 6% per year, and is
convertible into common stock based upon defined conversion formulas.  The
Company has a commitment from an investor to purchase an additional 7,500 shares
of Series A convertible preferred stock upon completion of certain milestones.

In connection with the equity financing, the Company issued warrants to 
purchase 535,261 shares of common stock.  The warrants are exercisable at 
purchase prices of $4.9375 and $6.7838 per share for 87,500 and 447,761 
warrants respectively, and expire in July 2003. The warrants were valued at 
$1.1 million and were recorded as a component of common stock.

6.   LINE OF CREDIT
     --------------

The Company also obtained a $10 million line of credit from a principal
shareholder.  Under the terms of the line of credit, the Company borrowed $2.5
million and could borrow up to an additional $7.5 million, or less if the
Company secures a new line of credit, through July 1999.  The line of credit
bears interest at one percent over the lender's principal line of credit and is
payable August 30, 2002.

In conjunction with the debt financing, the Company issued warrants to purchase 
149,254 shares of common stock. The warrants issued had a fair value of 
approximately $6.7838 per warrant at the time of issuance. The fair value of 
these warrants 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.

7.   COMPREHENSIVE INCOME
     --------------------

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 (SFAS No. 130), Reporting Comprehensive Income. SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner resources.

8.   RECENT ACCOUNTING PRONOUNCEMENTS
     --------------------------------

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION"

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131).  SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders.  SFAS 131 generally supersedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise."  Under SFAS 131, operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.  Generally, financial
information is required to be reported on the basis that is used internally.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997, and restatement of comparative information for earlier years
is required.  However, SFAS 131 is not required to be applied to interim
financial statements in the initial year of application.  The Company has not
determined the impact, if any, on the reporting of segment information.



                                        8
<PAGE>


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

The discussion and analysis below, and throughout this report, contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward
looking statements involve a number of risks and uncertainties including, but
not limited to, availability of working capital, market acceptance, changing
economic conditions, risks in product and technology development, effect of the
Company's accounting policies and other risk factors detailed in the Company's
Securities and Exchange Commission filings.  Actual results could differ
materially from those projected or suggested in the forward-looking statements
as a result of the risk factors set forth herein and in the Company's Annual
Report on Form 10-K as of and for the year ended March 29, 1998.

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 the
Company's consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K as of and for the year ended March 29,
1998.  The results for the three and six month period ending September 27, 1998
are not necessarily indicative of the results to be expected for the entire
fiscal year ending March  28, 1999.

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.
To date, other than insubstantial revenues from limited sales of prototype
batteries, the Company has not received any significant revenues from the sale
of products.  Substantially all revenues to date have been derived from a
research and development contract with the Delphi Automotive Systems Group
("Delphi," formerly the Delco Remy Division), an operating group of the General
Motors Corporation.  The Company has incurred cumulative losses of $137,254,000
from its inception to September 27, 1998.

Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.   The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, availability of working capital, market acceptance, changing
economic conditions, risks in product and technology development, effect of the
Company's accounting policies and other risk factors detailed in this section.
Readers should also carefully review the factors set forth in other reports or
documents filed from time to time with the Securities and Exchange Commission,
particularly the quarterly reports on Form 10-Q and any other current reports on
Form 8-K.

RESULTS OF OPERATIONS

THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 27, 1998 (SECOND QUARTER AND FIRST
HALF OF FISCAL 1999) AND SEPTEMBER 28, 1997 (SECOND QUARTER AND FIRST HALF OF
FISCAL 1998)

During the three and six month periods ended September 27, 1998 and September
28, 1997, the Company continued development activities under a research and
development agreement with Delphi.  Payments were generally made in accordance
with the achievement of certain milestones.  No revenues were recognized during
the first three and six month  periods of  fiscal 1999 and fiscal 1998.

In September, 1994 the Company and Delphi signed a new five year agreement to 
combine efforts in developing the Company's rechargeable solid state lithium 
polymer battery technology.  Under the agreement, Delphi and the Company 
combined their research and development activities in a new facility in 
Henderson, Nevada.  The new facility is owned by the Company, with Delphi 
paying a fee of $50,000 per month over the five year term of the new 
agreement for access to the Company's research and development.  In addition, 
Delphi paid a majority of the facility's operating costs over the term of the 
new five year agreement and did so through August 1998.  The Company is 
treating both of these payments as an offset to research and development 
expense.

In May 1998, the Company and Delphi announced the completion of their 
collaboration on lithium polymer battery development.  Delphi will retain a 
license to use Company-developed lithium polymer technology for vehicular and 
stationary load leveling / peak shaving applications.  The Company will 
retain a license to use Delphi-developed lithium polymer technology in all 
other applications.  After August 1998, the Company will receive no further 
payments as a result of the Joint Research and Development agreement with 
Delphi. As part of the early termination of the collaboration agreement, 
Delphi paid the Company $2.2 million. The Company has no future obligations 
under the termination agreement and has recorded the payment as a component 
of other income.

                                        9
<PAGE>


Research and development expenses were $4,708,000 and $8,738,000 during the
three and six month periods ended September 27, 1998 as compared to $4,427,000
and $8,642,000 during the same period of fiscal 1998.  The comparable periods
performance has remained stable in absolute dollars as the Company continued 
to develop its products in fiscal year 1999.

Marketing expenses were $18,000 and $47,000 for the second quarter and first
half of fiscal year 1999, respectively, as compared to $129,000 and  $250,000
during similar periods of fiscal year 1998.  The decrease in marketing 
expense is primarily due to a reduction in workforce.

General and administrative expenses decreased to $1,319,000 and $2,257,000
during the second quarter and first half of fiscal year 1999, down from
$1,462,000 and $2,798,000 during the fiscal year 1998 comparable periods.  The
decrease results from reduced legal fees associated with the shareholder class
action lawsuit and lower headcount.

Other income for the three and six months ended September 27, 1998 increased 
$2.2 million as a result of the termination payment from Delphi.

Interest income decreased to $48,000 and $135,000 during the second quarter and
first half of fiscal year 1999, as compared to $321,000 and $774,000 during the
prior fiscal year's same periods.  The decrease is due to the decline in
funds available for investment purposes.

Interest expense was $130,000 and $248,000 during the three and six month
periods ended September 27, 1998 as compared to $148,000 and $299,000 during the
same period of fiscal 1998.  This decrease is a result of principal maturities
of debt, offset partially by the drawdown on the line of credit during the 
second quarter of fiscal year 1999.

Joint venture expenses were $0 and $287,000 for the second quarter and first
half of fiscal year 1999, respectively, as compared to $150,000 and $300,000
during similar periods of fiscal year 1998.  Joint venture expenses represent
50% of the start up costs associated with the Hanil Valence operations. The 
Company's investment in the joint venture is $0, so the Company is no longer 
recording their pro rata share of the losses.

LIQUIDITY AND CAPITAL RESOURCES

The Company used $9,005,000 net cash for operating activities during fiscal year
1999's first six months compared to using $11,437,000 during the first six
months of fiscal year 1998, a decrease between comparable periods of $2,432,000.
This decrease resulted primarily from  collection of accounts receivable and
proceeds from insurance advance.

During the six months ended September 27, 1998, the Company used $4,769,000 
net cash from investing activities compared to providing $1,296,000 during 
the first six months of fiscal year 1998, an increased usage of $6,065,000 
between comparable periods.  The increase primarily was a result of the 
benefit of maturities of long term investments during the six months ended 
September 28, 1997 which offset the use of funds for equipment purchases.

The Company provided $12,512,000 net cash from financing activities during
fiscal year 1999's first six months compared to $3,933,000 during the
first six months of fiscal year 1998.  This increase resulted from proceeds of
issuance of preferred stock and initial borrowing on line of credit from
principal shareholder.

As a result of the above, the Company had a net decrease in cash and cash
equivalents of $1,676,000 during the six months ended September 27, 1998,
whereas it had a net decrease of $5,736,000 during the same period of fiscal
year 1998.

During fiscal year 1994, the Company, through its Dutch subsidiary, signed an
agreement with the Northern Ireland Industrial Development Board (IDB) to open
an automated manufacturing plant in Northern Ireland in exchange for capital and
revenue grants from the IDB.  The Company has also received offers from the IDB
to receive additional grants.  The grants available under the agreement and
offers, for an aggregate of up to L27,555,000, generally become available over a
five year period through October 31, 2001.  As of September 27, 1998, the
Company had received grants aggregating L4,035,000 reducing remaining grants
available to L23,520,000 ($40,038,000 as of September 27, 1998).

As a condition to receiving funding from the IDB, the subsidiary must maintain a
minimum of L12,000,000 in debt or equity financing from the Company.  Aggregate
funding under the grants is limited to L4,035,000 until the Company has
recognized $4,000,000 in aggregate revenue from the sale of its batteries
produced in Northern Ireland.  Given that the Company has no agreements to
supply batteries using its current technology, there are no assurances that the
Company will be able to meet the agreement's revenue test.

The amount of the grants available under the agreement and offers is primarily
dependent on the level of capital expenditures made by the Company.
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



                                       10
<PAGE>


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.  The Company has
guaranteed the subsidiary's obligations to the IDB under the agreement.

There can be no assurance that the Company will be able to meet the requirements
necessary for it to receive and retain grants under the IDB agreement and
offers.

The Company expects that its existing funds as of September 27, 1998, together
with the interest earned thereon, will be sufficient to fund the Company's
operations through  December, 1998.

On July 27, 1998, the Company completed private financing arrangements of up to
$25,000,000, under which it had drawn down $2,500,000 in debt and $7,500,000 of
convertible preferred stock.  Under the terms of the agreements, the Company
sold 7,500 shares of a newly designated Series A Convertible Preferred Stock for
gross proceeds of $7,500,000.  Simultaneously, the Company arranged a guaranteed
line of credit from Carl E. Berg, a director and prinicpal shareholder of the
Company, in an amount up to $10,000,000, under which it has already drawn down
$2,500,000.  Upon the Company's achieving certain milestones, the Company may
draw down the balance of the funds.

The Company anticipates that it may need substantial additional funds in the
future for capital expenditures, research and product development, marketing and
general and administrative expenses and to pursue joint venture opportunities.
The Company's cash requirements, however, may vary materially from those now
planned because of changes in the Company's operations, including changes in OEM
relationships or market conditions.  There can be no assurance that funds for
these purposes, whether from equity or debt financing agreements with strategic
partners or other sources, will be available on favorable terms, if at all.
These factors raise substantial doubts about the Company's ability to continue
as a going concern.  The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The effects
of such adjustments, if necessary, could be material.

RECENT ACCOUNTING PRONOUNCEMENTS

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION"

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131).  SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders.  SFAS 131 generally supersedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise."  Under SFAS 131, operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.  Generally, financial
information is required to be reported on the basis that is used internally.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997, and restatement of comparative information for earlier years
is required.  However, SFAS 131 is not required to be applied to interim
financial statements in the initial year of application.  The Company has not
determined the impact, if any, on the reporting of segment information.

YEAR 2000 COMPLIANCE

The Company is in the process of formulating and implementing a program 
designed to ensure that all software used in connection with the Company's 
information systems, research and development testing and other equipment 
will manage and manipulate data involving the transition of dates from 1999 
to 2000 without functional or data abnormality and without inaccurate results 
related to such dates. The Company currently anticipates that this program 
will not require additional manpower, although there can be no assurances 
that this will be the case or that the Company will not incur significant 
additional costs in connection with such program. Currently, the Company does 
not have a contingency plan in place should the Company be unsuccessful in 
its efforts to become Year 2000 compliant. However, the Company intends to 
create such a contingency plan during the second half of fiscal 1999.

The Company's information systems are not currently Year 2000 compliant, 
although some of the individual hardware and software components recently 
have been upgraded and tested for compliance. Additionally, the Company's 
financial and accounting system is not Year 2000 compliant. The Company 
intends to upgrade the system in fiscal 1999 to make the system Year 2000 
compliant. The Company's systems incorporate certain third-party software 
that may not be Year 2000 compliant. There can be no assurances that the 
customers and suppliers of the Company will be in compliance with Year 2000 
requirements.

Any failure of systems maintained by the Company or the Company's customers 
and suppliers to be Year 2000 compliant could cause the Company to incur 
significant expenses to remedy any problems or could have a material adverse 
effect on the Company, its financial condition and its results of operations.

                                       11
<PAGE>


                           PART II - OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS

In May 1994, a series of class action lawsuits was filed in the United States
District Court for the Northern District of California against the Company and
certain of its present and former officers and directors.  These lawsuits were
consolidated, and in September 1994 the plaintiffs filed a consolidated and
amended class action complaint.  Following the Court's orders on motions to
dismiss the complaint, which were granted in part and denied in part, the
plaintiffs filed an amended complaint in October 1995 ("Complaint").  The
Complaint alleges violations of the federal securities laws against the Company,
certain of its present and former officers and directors, and the underwriters
of the Company's public stock offerings, claiming that the defendants issued a
series of false and misleading statements, including filings with the Securities
and Exchange Commission, with regard to the Company's business and future
prospects.  The plaintiffs seek to represent a class of persons who purchased
the Company's common stock between May 7, 1992 and August 10, 1994.  The
Complaint seeks unspecified compensatory and punitive damages, attorney's fees
and costs.

On January 23, 1996, the Court dismissed, with prejudice, all claims against the
underwriters of the Company's public stock offerings, and one claim against the
Company and its present and former officers and directors.  In April 1996, the
Court dismissed with prejudice all remaining claims against a present director
and limited claims against a former officer and director to the period when that
person was an officer.  In December 1996, the Company and the remaining
individual defendants filed motions for summary judgment, which the plaintiffs
opposed.  In November 1997, the Court granted the Company's motion for summary
judgment and entered a judgment in favor of all defendants.  Plaintiffs have
appealed and the case is pending before the United States Court of Appeals for
the Ninth Circuit.

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

On  July 27, 1998, the company completed the private sale of 7,500 shares of
Series A Convertible Preferred Stock ("Series A Preferred") to a single private
institutional investor,  for an aggregate purchase price of  $7.5 million.  The
sale was exempt from registration under the Securities Act of 1933, as amended,
pursuant to Rule 506 under such Act.

The shares of Series A Preferred are convertible into shares of Common Stock
(the "Conversion Shares"), at the option of the holder, on the earliest of (i)
September 27, 1998; (ii) the effectiveness of a registration statement for the
resale of the Conversion Shares; or (iii) certain defined events resulting in a
material adverse change to the Company.  The initial conversion price (the
"Fixed Conversion Price") with respect to any conversion which occurs prior to
July 27, 1999 (or, if the Company has not signed and announced a material
contract or contracts for the sale of batteries on or before January 27, 1999,
with respect to any conversion after January 27, 1999 will be $6.03.  For
conversions following July 27, 1999 (or January 27, 1999, if a material contract
has not been signed prior to that date), the conversion price will be the lower
of the Fixed Conversion Price or the Variable Conversion Price.  The "Variable
Conversion Price " means 101% of the average of the two lowest closing bid
prices of the Common Stock for the number of trading days set forth in the
schedules below:

If the Company has signed and announced a material contract for the sale of
batteries on or before January 27, 1999:
<TABLE>
<CAPTION>
     Conversion Date:                               Number of Days in Period:
     ----------------                               -------------------------
     <S>                                            <C>
     Before August 27, 1999                                10
     August 27, 1999-September 27, 1999                    11
     September 27, 1999-October 27, 1999                   12
     October 27, 1999-November 27, 1999                    13
     November 27, 1999-December 27, 1999                   14
     After December 27, 1999                               15
</TABLE>

If the Company has not signed and announced a material contract for the sale of
batteries on or before January 27, 1999:

<TABLE>
<CAPTION>
     Conversion Date:                               Number of Days in Period:
     ----------------                               -------------------------
     <S>                                            <C>
     Before February 27, 1999                              10
     February 27, 1999-March 27, 1999                      11
     March 27, 1999-April 27, 1999                         12
     April 27, 1999-May 27, 1999                           13
     May 27, 1999-June 27, 1999                            14
     After June 27, 1999                                   15
</TABLE>

The number of shares of Common Stock, in the aggregate, which may be issued
pursuant to the conversion of Series A Preferred is 5,071,913.  The Company has
agreed to seek stockholder authorization at its next annual meeting to issue
shares above this limit, to the extent such additional shares are necessary due
to the Variable Conversion Price.

The purchaser has agreed to purchase up to $7.5 million of additional shares of
Series A Preferred, on the same terms and conditions, subject to the achievement
of certain milestones by the Company.


                                       12
<PAGE>


The purchaser also received warrants to purchase up to 447,761 shares of Common
Stock at an exercise price of $6.7838 per share.

In connection with the sale price of Series A Preferred, the Company paid Gemini
Capital LLC, the placement agent, a fee of $375,000.  The placement agent also
received warrants to purchase up to 87,500 shares of Common Stock at an exercise
price of $4.9375 per share.  Both the purchaser and the placement agent will be
entitled to receive additional warrants if additional shares of Series A
Preferred are sold.

Concurrently with the sale of Series A Preferred, Baccarat Electronics. Inc.
("Baccarat"), an affiliate of Carl Berg, a director of the Company, loaned the
Company $2.5 million.  Baccarat has agreed to loan the Company up to an
additional $7.5 million on specified terms.  In connection with the loan,
Baccarat received warrants to purchase up to 149,254 shares of Common Stock at
an exercise price of $6.7838 per share, and will be entitled to additional
warrants if further amounts are loaned to the Company.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

     a.   EXHIBITS

          Exhibit 27     Financial Data Schedule

     b.   REPORTS ON FORM 8-K

          The Company filed a current report on Form 8-K on August 3, 1998
          announcing the initial closing of the financing.




                                       13
<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: November 10, 1998     By: /s/ Lev M. Dawson
                                -----------------------------------------------
                                Lev M. Dawson
                                Chairman of the Board, Chief Executive Officer,
                                President and Acting Chief Financial Officer
                                (Principal Financial and Accounting Officer)



                                        14
<PAGE>


                                   EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER    EXHIBIT
-------------------------------------------------------------------------------
<S>       <C>
27        Financial Data Schedule
</TABLE>



                                        15