Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**
| **x**      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                           |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                        |
| ** ** | **For the quarterly period ended December 31,  2008**                                                                                                        |
| ** ** | ** **                                                                                                                                                        |
| ** ** | **Or**                                                                                                                                                            |
| ** ** | ** **                                                                                                                                                        |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                          |
| ** ** | ** **                                                                                                                                                        |
| ** ** | **For the transition period from             to            ** |

 

**Commissionfile number: 0-20028**

 

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**VALENCE TECHNOLOGY, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

| **12303 Technology  Blvd., Suite 950, Austin, Texas** | ** ** | **78727**  |
|------------------------------------------------------------|------------|------------|
| (Address of principal  executive offices)                  |       | (Zip Code) |

 

**(512)527-2900**

(Registrant’s telephonenumber, including area code)

 

 

(Former name, former addressand former fiscal year, if changed since last report)

 

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Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.     x  Yes     o  No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definitions of “accelerated filer”, “largeaccelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one)

 

| Large Accelerated Filer             |   | o      |   | Accelerated Filer                   |   | x |
|-----------------------------------------------|--------|--------|--------|-------------------------------------|--------|---|
| Non-Accelerated Filer                    |   | o      |   | Smaller Reporting Company |   | o |
| (Do not check if a smaller reporting company) |   |   |   |                                |

 

Indicate by check markwhether the registrant is a Shell Company (as defined in Rule 12b-2 of theExchange Act). o  Yes  x  No

 

APPLICABLE ONLY TO CORPORATEISSUERS:

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

The number of shares ofcommon stock, par value of $0.001 per share, outstanding at January 30,2009 was 122,754,317.

 

 

 

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Table of Contents

 

VALENCE TECHNOLOGY, INC.

FORM 10-Q

INDEX

 
| PART I – FINANCIAL INFORMATION                                                                                                                              |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                  |   |   |
| Item 1. Financial Statements (Unaudited):                                                                                                                        |   |   |
|                                                                                                                                                                  |   |   |
| Condensed Consolidated Balance Sheets as of December 31, 2008  and March 31, 2008                                                                           |   | 1      |
| Condensed Consolidated Statements of Operations and Comprehensive  Loss for the Three and Nine Month Periods Ended December 31, 2008 and  December 31, 2007 |   | 2      |
| Condensed  Consolidated Statements of Cash Flows for the Nine Month Periods Ended  December 31, 2008 and December 31, 2007                                  |   | 3      |
| Notes to  Condensed Consolidated Financial Statements                                                                                                                 |   | 4      |
|                                                                                                                                                                  |   |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                             |   | 14     |
|                                                                                                                                                                  |   |   |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                                                                              |   | 23     |
|                                                                                                                                                                  |   |   |
| Item 4. Controls and Procedures                                                                                                                                  |   | 23     |
|                                                                                                                                                                  |   |   |
| PART II – OTHER INFORMATION                                                                                                                                 |   |   |
|                                                                                                                                                                  |   |   |
| Item 1. Legal Proceedings                                                                                                                                        |   | 24     |
|                                                                                                                                                                  |   |   |
| Item 1A. Risk Factors                                                                                                                                            |   | 24     |
|                                                                                                                                                                  |   |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.                                                                                            |   | 26     |
|                                                                                                                                                                  |   |   |
| Item 3.  Defaults Upon Senior Securities.                                                                                                                        |   | 26     |
|                                                                                                                                                                  |   |   |
| Item 4.  Submission of Matters to a Vote of Security Holders.                                                                                                    |   | 26     |
|                                                                                                                                                                  |   |   |
| Item 5. Other Information.                                                                                                                                       |   | 26     |
|                                                                                                                                                                  |   |   |
| Item 6. Exhibits.                                                                                                                                                |   | 27     |
|                                                                                                                                                                  |   |   |
| Signatures and Certifications                                                                                                                                         |   | 28     |

 

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Table of Contents

 

**PART I– FINANCIAL INFORMATION**

 

**ITEM 1.**          **FINANCIAL STATEMENTS (UNAUDITED)**

 

**ValenceTechnology, Inc.**

**Condensed Consolidated Balance Sheets**

(in thousands, except shareamounts)

 
| ** **                                                                                                                                                                                                                                             | ** ** | **December 31,  2008** | ** ** | **March 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                                                                             | ** ** | **(unaudited)**             | ** ** | ** **               | ** ** |
| ASSETS                                                                                                                                                                                                                                                 |       |                        |       |                     |       |
| Current assets:                                                                                                                                                                                                                                        |       |                        |       |                     |       |
| Cash and cash equivalents                                                                                                                                                                                                                              |       | $                           | 8,469      |                     | $          | 2,616 |   |
| Trade receivables, net of allowance of $163  and $123, respectively                                                                                                                                                                                    |       | 1,175                       |       | 7,208                    |       |
| Inventory, net                                                                                                                                                                                                                                         |       | 9,311                       |       | 8,904                    |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                              |       | 5,659                       |       | 3,283                    |       |
| Total current assets                                                                                                                                                                                                                                   |       | 24,614                      |       | 22,011                   |       |
|                                                                                                                                                                                                                                                   |       |                        |       |                     |       |
| Property, plant and equipment, net                                                                                                                                                                                                                     |       | 6,483                       |       | 5,090                    |       |
| Intellectual property, net                                                                                                                                                                                                                             |       | —                      |       | 57                       |       |
|                                                                                                                                                                                                                                                   |       |                        |       |                     |       |
| Total assets                                                                                                                                                                                                                                           |       | $                           | 31,097     |                     | $          | 27,158 |   |
|                                                                                                                                                                                                                                                   |       |                        |       |                     |       |
| LIABILITIES, PREFERRED STOCK AND  STOCKHOLDERS’ DEFICIT                                                                                                                                                                                           |       |                        |       |                     |       |
| Current liabilities:                                                                                                                                                                                                                                   |       |                        |       |                     |       |
| Accounts payable                                                                                                                                                                                                                                       |       | $                           | 1,419      |                     | $          | 4,214 |   |
| Accrued expenses                                                                                                                                                                                                                                       |       | 6,067                       |       | 5,755                    |       |
| Deferred revenue                                                                                                                                                                                                                                       |       | 142                         |       | 756                      |       |
| Current portion of long-term debt                                                                                                                                                                                                                      |       | 79                          |       | 86                       |       |
| Total current liabilities                                                                                                                                                                                                                              |       | 7,707                       |       | 10,811                   |       |
|                                                                                                                                                                                                                                                   |       |                        |       |                     |       |
| Long-term interest payable to stockholder                                                                                                                                                                                                              |       | 23,683                      |       | 21,447                   |       |
| Long-term debt, net of debt discount                                                                                                                                                                                                                   |       | 19,325                      |       | 18,964                   |       |
| Long-term debt to stockholder, net of debt  discount                                                                                                                                                                                                   |       | 34,735                      |       | 34,643                   |       |
| Other long-term liabilities                                                                                                                                                                                                                            |       | 118                         |       | —                   |       |
|                                                                                                                                                                                                                                                   |       |                        |       |                     |       |
| Commitments and contingencies                                                                                                                                                                                                                          |       |                        |       |                     |       |
|                                                                                                                                                                                                                                                   |       |                        |       |                     |       |
| Preferred stock:                                                                                                                                                                                                                                       |       |                        |       |                     |       |
| Redeemable convertible preferred stock,  $0.001 par value, 10,000,000 shares authorized, 861 shares issued and  outstanding as of December 31, 2008 and March 31, 2008, liquidation  value $8,610                                            |       | 8,610                       |       | 8,610                    |       |
|                                                                                                                                                                                                                                                   |       |                        |       |                     |       |
| Stockholders’ deficit:                                                                                                                                                                                                                            |       |                        |       |                     |       |
| Common stock, $0.001 par value, 200,000,000  shares authorized, 124,557,461 shares issued and 122,754,317 shares  outstanding as of December 31, 2008 and 117,439,248 shares issued and  115,636,104 shares outstanding as of March 31, 2008 |       | 125                         |       | 117                      |       |
| Additional paid-in-capital                                                                                                                                                                                                                             |       | 498,451                     |       | 477,657                  |       |
| Treasury shares, 1,803,144 at cost                                                                                                                                                                                                                     |       | (5,164                      | )          | (5,164                   | )          |
| Accumulated deficit                                                                                                                                                                                                                                    |       | (553,246                    | )          | (536,260                 | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                   |       | (3,247                      | )          | (3,667                   | )          |
|                                                                                                                                                                                                                                                   |       |                        |       |                     |       |
| Total stockholders’ deficit                                                                                                                                                                                                                       |       | (63,081                     | )          | (67,317                  | )          |
|                                                                                                                                                                                                                                                   |       |                        |       |                     |       |
| Total liabilities, preferred stock and  stockholders’ deficit                                                                                                                                                                                     |       | $                           | 31,097     |                     | $          | 27,158 |   |

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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Table of Contents

 

**ValenceTechnology, Inc.**

**Condensed Consolidated Statements of Operations andComprehensive Loss**

 

(in thousands)

( *Unaudited* )

 
| ** **                                                                                       | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2008**                                            | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                       | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                                                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Battery and system sales                                                                         |       | $                                                   | 4,455      |                                               | $          | 3,127 |   | $ | 20,454 |   | $ | 12,468 |   |
| Licensing and royalty revenue                                                                    |       | 227                                                 |       | 251                                                |       | 1,033 |   | 515 |   |
| Total revenues                                                                                   |       | 4,682                                               |       | 3,378                                              |       | 21,487 |   | 12,983 |   |
| Cost of sales (1)                                                                                |       | 4,432                                               |       | 3,413                                              |       | 21,435 |   | 11,830 |   |
|                                                                                             |       |                                                |       |                                               |       |   |   |   |   |
| Gross margin / (loss)                                                                            |       | 250                                                 |       | (35                                                | )          | 52 |   | 1,153 |   |
|                                                                                             |       |                                                |       |                                               |       |   |   |   |   |
| Operating expenses:                                                                              |       |                                                |       |                                               |       |   |   |   |   |
| Research and product development (1)                                                             |       | 1,031                                               |       | 912                                                |       | 3,380 |   | 2,707 |   |
| Marketing (1)                                                                                    |       | 637                                                 |       | 746                                                |       | 2,138 |   | 1,758 |   |
| General and administrative (1)                                                                   |       | 2,343                                               |       | 2,462                                              |       | 7,309 |   | 6,798 |   |
| Depreciation and amortization                                                                    |       | 56                                                  |       | 163                                                |       | 703 |   | 616 |   |
| (Gain) / loss on disposal of assets                                                              |       | —                                              |       | 8                                                  |       | 1 |   | 15 |   |
| Total operating expenses                                                                         |       | 4,067                                               |       | 4,291                                              |       | 13,531 |   | 11,894 |   |
|                                                                                             |       |                                                |       |                                               |       |   |   |   |   |
| Operating loss                                                                                   |       | (3,817                                              | )          | (4,326                                             | )          | (13,479 | ) | (10,741 | ) |
|                                                                                             |       |                                                |       |                                               |       |   |   |   |   |
| Foreign exchange gain                                                                            |       | (50                                                 | )          | 377                                                |       | 568 |   | 727 |   |
| Interest and other income                                                                        |       | 13                                                  |       | 13                                                 |       | 25 |   | 30 |   |
| Interest and other expense                                                                       |       | (1,298                                              | )          | (1,767                                             | )          | (3,971 | ) | (4,884 | ) |
|                                                                                             |       |                                                |       |                                               |       |   |   |   |   |
| Net loss                                                                                         |       | $                                                   | (5,152     | )                                                  | $          | (5,703 | ) | $ | (16,857 | ) | $ | (14,868 | ) |
|                                                                                             |       |                                                |       |                                               |       |   |   |   |   |
| Dividends on preferred stock                                                                     |       | (43                                                 | )          | (43                                                | )          | (130 | ) | (130 | ) |
|                                                                                             |       |                                                |       |                                               |       |   |   |   |   |
| Net loss available to common stockholders,  basic and diluted                                    |       | $                                                   | (5,195     | )                                                  | $          | (5,746 | ) | $ | (16,987 | ) | $ | (14,998 | ) |
|                                                                                             |       |                                                |       |                                               |       |   |   |   |   |
| Other comprehensive loss:                                                                        |       |                                                |       |                                               |       |   |   |   |   |
| Net loss                                                                                         |       | $                                                   | (5,152     | )                                                  | $          | (5,703 | ) | $ | (16,857 | ) | $ | (14,868 | ) |
| Change in foreign currency translation  adjustments                                              |       | 76                                                  |       | 220                                                |       | 421 |   | (4 | ) |
| Comprehensive loss                                                                               |       | $                                                   | (5,076     | )                                                  | $          | (5,483 | ) | $ | (16,436 | ) | $ | (14,872 | ) |
|                                                                                             |       |                                                |       |                                               |       |   |   |   |   |
| Net loss per share available to common  stockholders, basic and diluted                          |       | $                                                   | (0.04      | )                                                  | $          | (0.05 | ) | $ | (0.14 | ) | $ | (0.14 | ) |
| Shares used in computing net loss per share  available to common stockholders, basic and diluted |       | 121,146                                             |       | 113,100                                            |       | 118,256 |   | 110,758 |   |

 

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| (1)    | Includes share-based compensation as  follows: |   |   |   |   |   |   |   |   |   |
|--------|------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|   | Cost of sales                                  |   | $      | 15     |   | $      | — |   | $      | 9      |   | $ | — |   |
|   | Research and product development               |   | 74     |   | 120    |   | 218    |   | 250    |   |
|   | Marketing                                      |   | 33     |   | 116    |   | 278    |   | 242    |   |
|   | General and administrative                     |   | 353    |   | 592    |   | 1,008  |   | 1,237  |   |
|   | Total share-based compensation                 |   | $      | 475    |   | $      | 828    |   | $      | 1,513  |   | $ | 1,729 |   |

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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**Valence Technology, Inc.**

**Condensed Consolidated Statements of Cash Flows**

 

(inthousands)

(*Unaudited* )

 
| ** **                                                                  | ** ** | **Nine Months Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
|                                                                        |       |                                               |       |   |   |
| Cash flows from operating activities:                                       |       |                                               |       |   |   |
| Net loss                                                                    |       | $                                                  | (16,857    | ) | $ | (14,868 | ) |
| Adjustments to reconcile net loss to cash  used in operating activities:    |       |                                               |       |   |   |
| Depreciation and amortization                                               |       | 1,633                                              |       | 732 |   |
| Loss on disposal of assets                                                  |       | 1                                                  |       | 15 |   |
| Bad debt expense                                                            |       | 65                                                 |       | 58 |   |
| Accretion of debt discount and other                                        |       | 2,682                                              |       | 913 |   |
| Share-based compensation                                                    |       | 1,513                                              |       | 1,729 |   |
| Changes in operating assets and  liabilities:                               |       |                                               |       |   |   |
| Trade receivable                                                            |       | 5,968                                              |       | 2,274 |   |
| Inventory                                                                   |       | (407                                               | )          | 42 |   |
| Prepaid and other current assets                                            |       | (2,376                                             | )          | (1,129 | ) |
| Accounts payable                                                            |       | (2,795                                             | )          | (1,441 | ) |
| Accrued expenses and long-term interest                                     |       | 301                                                |       | 3,043 |   |
| Deferred revenue                                                            |       | (614                                               | )          | 81 |   |
|                                                                        |       |                                               |       |   |   |
| Net cash used in operating activities                                       |       | (10,886                                            | )          | (8,551 | ) |
|                                                                        |       |                                               |       |   |   |
| Cash flows from investing activities:                                       |       |                                               |       |   |   |
| Purchases of property, plant and equipment                                  |       | (6,333                                             | )          | (1,187 | ) |
| Proceeds from disposal of property, plant  and equipment                    |       | 3,669                                              |       | — |   |
|                                                                        |       |                                               |       |   |   |
| Net cash used in investing activities                                       |       | (2,664                                             | )          | (1,187 | ) |
|                                                                        |       |                                               |       |   |   |
| Cash flows from financing activities:                                       |       |                                               |       |   |   |
| Proceeds from short term loans                                              |       | 7,633                                              |       | — |   |
| Proceeds from stock option exercises                                        |       | 809                                                |       | 69 |   |
| Proceeds from issuance of common stock and  warrants, net of issuance costs |       | 10,846                                             |       | 11,342 |   |
|                                                                        |       |                                               |       |   |   |
| Net cash provided by financing activities                                   |       | 19,288                                             |       | 11,411 |   |
|                                                                        |       |                                               |       |   |   |
| Effect of foreign exchange rates on cash  and cash equivalents              |       | 115                                                |       | (4 | ) |
|                                                                        |       |                                               |       |   |   |
| Increase in cash and cash equivalents                                       |       | 5,853                                              |       | 1,669 |   |
| Cash and cash equivalents, beginning of  period                             |       | 2,616                                              |       | 1,168 |   |
| Cash and cash equivalents, end of period                                    |       | $                                                  | 8,469      |   | $ | 2,837 |   |
|                                                                        |       |                                               |       |   |   |
| Supplemental information:                                                   |       |                                               |       |   |   |
| Note payable contributed for exercise of  common stock warrants             |       | $                                                  | 7,633      |   | $ | — |   |
| Acquisition of treasury stock from  shareholder                             |       | $                                                  | —     |   | $ | 5,164 |   |
| Interest paid                                                               |       | $                                                  | 1,182      |   | $ | 1,420 |   |

 

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

 

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**Valence Technology, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**December 31, 2008**

*(Unaudited)*

 

**1.**                    **INTERIM CONDENSED CONSOLIDATED FINANCIALSTATEMENTS:**

 

These interim condensedconsolidated financial statements are unaudited but reflect, in the opinion ofmanagement, all normal recurring adjustments necessary to present fairly thefinancial position of Valence Technology, Inc. and its subsidiaries (“Valence”or the “Company”) as of December 31, 2008, its consolidated results ofoperations for each of the three and nine month periods ended December 31,2008 and December 31, 2007, and the consolidated cash flows for the ninemonth periods ended December 31, 2008 and December 31, 2007. Becauseall the disclosures required by accounting principles generally accepted in theUnited States are not included, these interim condensed consolidated financialstatements should be read in conjunction with the audited financial statementsand notes thereto in the Company’s Annual Report on Form 10-K as of andfor the year ended March 31, 2008. The results for the three and ninemonth period ended December 31, 2008 are not necessarily indicative of theresults to be expected for the entire fiscal year ending March 31, 2009.The year-end condensed consolidated balance sheet data as of March 31,2008 was derived from audited financial statements, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates.

 

**2.**                    **BUSINESS AND BUSINESS STRATEGY:**

 

The Company was founded in1989 and has commercialized the industry’s first lithium phosphate technology.Valence develops, manufactures and sells high-energy power systems utilizingits proprietary phosphate-based lithium ion technology for diverseapplications, with special emphasis on portable appliances and futuregenerations of hybrid and electric vehicles.  The Company’s objective isto promote the wide adoption of high-performance, safe, long cycle life,environmentally friendly, low-cost energy storage systems. To accomplish itsobjectives and address the significant market opportunity it believes isavailable to it, the Company utilizes the numerous benefits of its latestenergy storage technology, deep intellectual property portfolio and extensiveexperience of its management team.

 

The Company is now indevelopment of its third generation of lithium phosphate energy storagesystems, which are expected to be commercially available in the second quarterof calendar 2009. The Company’s third generation of lithium ion productsfeature its safe, long-life lithium phosphate technology which utilizes aphosphate-based cathode material. The Company believes that the advancedfunctionality and programmability of its third generation energy storagesystems are well suited for electric vehicle (EV), plug-in hybrid electricvehicle (PHEV) and similar applications. The Company’s third generation lithiumphosphate energy storage systems address the safety and limited life weaknessesof other lithium technologies while offering a solution that is competitive incost and performance. The Company believes that its third generation energystorage systems offer design and performance capabilities that will facilitateadoption in automotive, industrial, UPS, telecommunications, aerospace andmilitary markets not traditionally served by other lithium ion solutions.

 

The Company’s business planand strategy focus on the generation of revenue from product sales, whileminimizing costs through partnerships with contract manufacturers and internalmanufacturing efforts through the Company’s two wholly-owned subsidiaries inChina. These subsidiaries initiated operations in late fiscal 2005. Valenceexpects to develop target markets through the sales of our third generationlithium phosphate energy storage systems and custom lithium phosphate energystorage systems based on programmable Epoch TM Command and Control Logic. In addition,Valence expects to pursue a licensing strategy to supply the lithium phosphatesector with advanced Valence material and components, including lithiumphosphate cathode materials to fulfill other manufacturers’ needs.

 

The Company has thefollowing subsidiaries:

 

Valence Technology (Nevada), Inc.,Valence Technology Cayman Islands Inc., Valence Technology N.V., ValenceTechnology International, Inc., Valence Technology B.V., ValenceTechnology (Suzhou) Co., Ltd., and Valence Energy-Tech (Suzhou) Co., Ltd.

 

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**GoingConcern:**

 

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern, which contemplates the realization of assetsand satisfaction of liabilities in the normal course of business. The Companyhas incurred operating losses each year since its inception in 1989 and had anaccumulated deficit of $553.2 million as of December 31, 2008. For thethree and nine month periods ended December 31, 2008, the Companysustained net losses available to common stockholders of $5.2 and $17.0million, respectively. For the three and nine month periods ended December 31,2007, the Company sustained net losses available to common stockholders of $5.7and $15.0 million, respectively. These factors, among others, indicate that theCompany may be unable to continue as a going concern for a reasonable period oftime. The Company’s ability to continue as a going concern is contingent uponits ability to meet its liquidity requirements. If the Company is unable toarrange for debt or equity financing on favorable terms or at all the Company’sability to continue as a going concern is uncertain. These financial statementsdo not give effect to any adjustments to the amounts and classifications ofassets and liabilities which might be necessary should the Company be unable tocontinue as a going concern.

 

**Liquidityand Capital Resources:**

 

At December 31, 2008,the Company’s principal sources of liquidity were cash and cash equivalents of$8.5 million. The Company expects that its sources of liquidity will not besufficient for the next twelve months. The Company does anticipate thatexisting cash balances, product sales and royalties will be sufficient to coverthe Company’s operating expenses during the remainder of fiscal 2009.Management depends upon its ability to periodically arrange for additionalequity or debt financing to meet the Company’s liquidity requirements. Unlessthe Company’s product sales are greater than management currently forecasts orthere are other changes to the business plan, the Company will need to arrangefor additional financing within the next three to six months to fund operatingand capital needs. This financing could take the form of debt or equity. Giventhe Company’s historical operating results and the amount of the Company’sexisting debt, as well as the other factors, the Company may not be able toarrange for debt or equity financing from third parties on favorable terms orat all.

 

The Company’s cashrequirements may vary materially from those now planned because of changes inthe Company’s operations including the failure to achieve expected revenues,greater than expected expenses, changes in OEM relationships, marketconditions, the failure to timely realize the Company’s product developmentgoals, and other adverse developments. These events could have a negativeimpact on the Company’s available liquidity sources during the remainder of thefiscal year.

 

**3.**                     **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

 

**RevenueRecognition:**

 

Revenues are generated fromsales of products including batteries and battery systems, and from licensingfees and royalties pursuant to technology license agreements. Product sales arerecognized when all of the following criteria are met: persuasive evidence ofan arrangement exists, delivery or transfer of title has occurred, seller’sprice to the buyer is fixed and determinable, and ability to collect isreasonably assured. For some sales to customers in foreign jurisdictions whereretention of title is needed to perfect a security interest, the Companyretains title to products shipped, similar to a lien under the U.S. UniformCommercial Code. For these sales, all other revenue recognition criteria aremet for these shipments and neither the customer nor the Company can rescindthe transaction. Accordingly, the Company recognizes this revenue when theproduct is shipped. Product shipments that are not recognized as revenue duringthe period shipped, primarily N-Charge® Power Systems product shipments toresellers that are subject to right of return, are recorded as deferred revenueand reflected as a liability on the Company’s balance sheet. Products shippedto resellers with right of return are included in finished goods inventory asthe Company retains title to the products. For reseller shipments where revenuerecognition is deferred, the Company records revenue and relieves inventorybased upon the reseller-supplied reporting of sales to its end customers or itsinventory reporting. For direct customers, the Company estimates a return ratepercentage based upon the Company’s historical experience. From time to timethe Company provides sales incentives in the form of rebates or other priceadjustments; these are generally recorded as reductions to revenue on thelatter of the date the related revenue is recognized or at the time the rebateor sales incentive is offered. Perpetual licensing fees are recognized as revenueupon completion of an executed agreement and delivery of licensed information,if there are no significant remaining vendor obligations and collection of therelated receivable is reasonably assured. Royalty revenues are recognized uponlicensee revenue reporting and when collection is reasonably assured.

 

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**Use ofEstimates:**

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theU.S. requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements, as well as therevenues and expenses for the period. The Company has made significantestimates in determining the allowance for bad debt, the amount of inventoryreserves and inventory overhead absorption, warranty liabilities, andshare-based compensation. Actual results could differ from those estimates.

 

**RecentAccounting Pronouncements:**

 

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) 157, *Fair ValueMeasurements*. This standard defines fair value, establishes aframework for measuring fair value in accounting principles generally acceptedin the United States of America, and expands disclosure about fair valuemeasurements. This pronouncement applies under other accounting standards thatrequire or permit fair value measurements. Accordingly, this statement does notrequire any new fair value measurement. This statement is effective for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years. However, SFAS 157 is amended by Financial Statement Position (“FSP”)FAS 157-1, *Application of FASB Statement 157to FASB Statement 13 and Other Accounting Pronouncements That Address FairValue Measurements for Purposes of Lease Classification or Measurement underStatement 13*, which excludes from the scope of this provisionarrangements accounted for under SFAS 13, *Accounting for Leases*.SFAS 157 is also amended by FSP FAS 157-2 *Effective Date of FASBStatement No. 157*, which delays the effective date of SFAS 157for all nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). This FSP partially defers the effectivedate of Statement 157 to fiscal years beginning after November 15, 2008,and interim periods within those fiscal years for items within the scope ofthis FSP. SFAS 157 is also amended by FSP FAS 157-3, *Determining the Fair Value of a Financial Asset When the Market forThat Asset is Not Active*, which clarifies the application of SFAS157 in a market that is not active and provides an example to illustrate keyconsiderations in determining the fair value of a financial asset when themarket for that financial asset is not active. We adopted SFAS 157 on April 1,2008, except as it applies to those nonfinancial assets and nonfinancialliabilities as noted in FSP FAS 157-2. The partial adoption of SFAS 157 did nothave a material impact on the Company’s consolidated financial position orresults of operations.

 

In April 2008, the FASBissued FASB Staff Position (FSP) FAS 142-3, *Determinationof the Useful Life of Intangible Assets.* FSP FAS 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FASB Statement No. 142, *Goodwilland Other Intangible Assets.* FSP FAS 142-3 is effective forfinancial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years. Early adoption isprohibited. Based on its current operations, the Company does not expect thatthe adoption of FSP FAS 142-3 will have a material impact on its financialposition or results of operations.

 

In May 2008, the FASBissued SFAS No. 162, *The Hierarchy ofGenerally Accepted Accounting Principles*. SFAS 162 identifiesthe sources of accounting principles and the framework for selecting theprinciples used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with generally accepted accountingprinciples in the United States (the GAAP hierarchy). SFAS 162 willbecome effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411, *The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles.* Based on its currentoperations, the Company does not expect that the adoption of SFAS 162 willhave a material impact on its financial position or results of operations.

 

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**Net Lossper Share Available to Common Stockholders:**

 

Net loss per share iscomputed by dividing the net loss available to common stockholders by theweighted average shares of common stock outstanding during the period. Thedilutive effect of the options and warrants to purchase common stock areexcluded from the computation of diluted net loss per share, since their effectis antidilutive. The antidilutive instruments excluded from the diluted netloss per share computation for the three and nine month periods ended December 31,2008 and December 31, 2007 were as follows:

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                             | ** ** | **December 31****,**        | ** ** | **December 31,**           | ** ** |
| ** **                                                                             | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                             |       |                             |       |                            |       |   |   |   |   |
| Shares reserved for conversion of  Series C-1 and Series C-2 preferred stock |       | 3,628,634                        |       | 3,628,634                       |       | 3,628,634 |   | 3,628,634 |   |
| Common stock options reserved                                                          |       | 6,649,063                        |       | 9,643,881                       |       | 6,649,063 |   | 9,643,881 |   |
| Warrants to purchase common stock                                                      |       | —                           |       | 2,955,643                       |       | — |   | 2,955,643 |   |
| Total                                                                                  |       | 10,277,697                       |       | 16,228,158                      |       | 10,277,697 |   | 16,228,158 |   |

 

The number of shares listedabove as reserved for conversion of Series C-1 and Series C-2preferred stock does not include shares related to accrued dividends that areconvertible at the election of the Company, subject to certain limitations. On December 31,2008, up to $560,000 in accrued dividends would be convertible into up to307,954 shares of common stock based on the closing sales price of $1.82 pershare on December 31, 2008.

 

**4.**                    **INVENTORY:**

 

Inventory consisted of thefollowing (in thousands) at:

 
| ** **      | ** ** | **December 31, 2008** | ** ** | **March 31, 2008** | ** ** |
|-----------------|------------|---------------------------------|------------|------------------------------|------------|
|            |       |                            |       |                         |       |
| Raw materials   |       | $                               | 2,564      |                         | $          | 1,485 |   |
| Work in process |       | 2,503                           |       | 4,140                        |       |
| Finished goods  |       | 4,244                           |       | 3,279                        |       |
| Total inventory |       | $                               | 9,311      |                         | $          | 8,904 |   |

 

Included in inventory at December 31,2008 and March 31, 2008 were valuation allowances of $4.6 million and $2.0million, respectively, to reduce their carrying values to the lower of cost ormarket. Management has valued overhead absorption related to work in processbased on estimates of completion at December 31, 2008 and March 31,2008.

 

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**5.**                    **PROPERTY, PLANT AND EQUIPMENT:**

 

Property, plant andequipment, net of accumulated depreciation and impairment, consisted of thefollowing (in thousands) at:

 
| ** **                      | ** ** | **December 31, 2008** | ** ** | **March 31, 2008** | ** ** |
|---------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                            |       |                            |       |                         |       |
| Leasehold improvements          |       | $                               | 1,163      |                         | $          | 1,141 |   |
| Machinery and equipment         |       | 8,219                           |       | 5,319                        |       |
| Office and computer equipment   |       | 1,644                           |       | 1,620                        |       |
| Construction in progress        |       | 36                              |       | 407                          |       |
| Total cost                      |       | 11,062                          |       | 8,487                        |       |
| Less: accumulated depreciation  |       | (4,190                          | )          | (3,387                       | )          |
| Less: impairment                |       | (389                            | )          | (10                          | )          |
| Total cost, net of depreciation |       | $                               | 6,483      |                         | $          | 5,090 |   |

 

**6.**                   **INTELLECTUAL PROPERTY:**

 

Intellectual propertyconsisting of stacked battery construction technology acquired from TelcordiaTechnologies, Inc. in December 2000 is amortized over its estimateduseful life. Intellectual property, net of accumulated amortization andimpairment, consisted of the following (in thousands) at:

 
| ** **                              | ** ** | **December 31, 2008** | ** ** | **March 31, 2008** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                                    |       |                            |       |                         |       |
| Intellectual property before impairment |       | $                               | 13,602     |                         | $          | 13,602 |   |
| Less: accumulated amortization          |       | (5,108                          | )          | (5,051                       | )          |
| Less: impairment                        |       | (8,494                          | )          | (8,494                       | )          |
| Intellectual property, net              |       | $                               | —     |                         | $          | 57 |   |

 

Amortization expense wasapproximately zero and $29,000 for the three month periods ended December 31,2008 and December 31, 2007, respectively, and $57,000 and $86,000 for thenine month periods ended December 31, 2008 and 2007, respectively.

 

**7.**                    **LONG TERM DEBT:**

 
| **(in thousands)**            | ** ** | **December 31, 2008** | ** ** | **March 31, 2008** | ** ** |
|------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                               |       |                            |       |                         |       |
| 2005 Loan balance                  |       | $                               | 20,000     |                         | $          | 20,000 |   |
| Unaccreted debt discount           |       | (675                            | )          | (1,036                       | )          |
| Balance                            |       | $                               | 19,325     |                         | $          | 18,964 |   |
|                               |       |                            |       |                         |       |
| 2001 Loan from stockholder balance |       | 20,000                          |       | $                            | 20,000     |   |
| 1998 Loan from stockholder balance |       | 14,950                          |       | 14,950                       |       |
| Unaccreted debt discount           |       | (215                            | )          | (307                         | )          |
| Balance                            |       | $                               | 34,735     |                         | $          | 34,643 |   |

 

On July 13, 2005, theCompany secured a $20.0 million loan (the “2005 Loan”) from SFT I, Inc.,the full amount of which has been drawn down. The loan is guaranteed by Mr. CarlBerg, chairman of the Board of Directors and the Company’s principalstockholder. The loan matures in a lump sum on July 13, 2010. Interest isdue monthly based on a floating interest rate. The interest rate is calculatedas the greater of 6.75% or the sum of LIBOR Rate, rounded to the nearest 1/16 th of 1.0%, plus 4.0% (6.75% as of December 31,2008). The loan may be prepaid during the period beginning on July 13,2007 through July 12, 2009, with a 1.0% prepayment premium, and on July 13,2009 and thereafter with no prepayment premium. As of December 31, 2008,no amounts have been paid on the loan.

 

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In connection with the loan,both SFT I, Inc. and Berg & Berg Enterprises, LLC (“Berg &Berg”), an affiliate of Mr. Berg, each received warrants to purchase600,000 shares of the Company’s common stock at a price of $2.74 per share, theclosing price of the Company’s common stock on July 12, 2005. The fairvalue assigned to these warrants, totaling approximately $2.0 million, has beenrecorded as a discount on the debt and will be accreted as interest expenseover the life of the loan. The warrants were valued using the Black-Scholesvaluation method using the assumptions of a life of 36 months, 96.45%volatility, and a risk-free rate of 3.88%. On April 24, 2008, Berg &Berg exercised its warrants by purchasing 600,000 shares of the Company’scommon stock for an aggregate purchase price of $1.6 million. In addition, SFTI, Inc. completed a cashless exercise of its warrants on June 4, 2008and June 27, 2008 and received 230,767 common stock shares upon completionof the cashless exercise. Also in connection with the loan, the Companyincurred a loan commitment fee and attorneys’ fees which, in addition to theinterest rate cap agreement, have been recorded as a discount on the debt andwill be accreted as interest expense over the life of the loan. Through December 31,2008, a total of approximately $1.7 million has been accreted and included asinterest expense. Interest payments on the loan are currently being paid on amonthly basis.

 

 In October 2001,the Company entered into a loan agreement (“2001 Loan”) with Berg &Berg. Under the terms of the agreement, Berg & Berg agreed to advancethe Company funds of up to $20.0 million between the date of the agreement and September 30,2003. Interest on the 2001 Loan accrues at 8.0% per annum, payable from time totime. On July 13, 2005, Berg & Berg agreed to extend the maturitydate for the loan principal and interest from September 30, 2006 to September 30,2008. On June 12, 2008, the Company and Berg & Berg agreed tofurther extend the maturity date for the loan principal and interest from September 30,2008 to September 30, 2010.

 

In conjunction with the 2001Loan, Berg & Berg received a warrant to purchase 1,402,743 shares ofthe Company’s common stock at the price of $3.208 per share. These warrantswere exercised on September 30, 2008 when Berg & Berg surrendereda short term note payable of $4.5 million to the Company as exerciseconsideration. The fair value assigned to these warrants, totalingapproximately $5.1 million, has been reflected as additional consideration forthe debt financing, recorded as a discount on the debt and accreted as interestexpense over the life of the loan. The warrants were valued using the Black-Scholesmethod using the assumptions of a life of 47 months (extended to 84 months),100% volatility, and a risk-free rate of 5.5%. Through December 31, 2008,a total of $4.9 million has been accreted and included as interest expense. Theamounts charged to interest expense on the outstanding balance of the loan forthe three month periods ended December 31, 2008 and December 31, 2007were $409,000. The amounts charged to interest expense on the outstandingbalance of the loan for the nine month periods ended December 31, 2008 andDecember 31, 2007 were $1.2 million. Interest payments on the loan arecurrently being deferred, and are recorded as long-term interest. The accruedinterest amounts for the 2001 Loan were $11.2 million and $10.0 million as of December 31,2008 and March 31, 2008, respectively.

 

In July 1998, theCompany entered into an amended loan agreement (“1998 Loan”) with Berg &Berg that allows the Company to borrow, prepay and re-borrow up to $10.0million principal under a promissory note on a revolving basis. In November 2000,the 1998 Loan agreement was amended to increase the maximum amount to $15.0million. As of December 31, 2008, the Company had an outstanding balanceof $15.0 million under the 1998 Loan agreement. The loan bears interest at onepercent over lender’s borrowing rate (approximately 9.0 % at December 31,2008). On July 13, 2005, Berg & Berg agreed to extend thematurity date for the loan principal and interest from September 30, 2006to September 30, 2008. On June 12, 2008, the Company and Berg &Berg agreed to further extend the maturity date for the loan principal andinterest from September 30, 2008 to September 30, 2010. The accruedinterest amounts for the 1998 Loan were $12.5 million and $11.5 million as of December 31,2008 and March 31, 2008, respectively.

 

All of the Company’s assetsare pledged as collateral under the 2001 Loan and the 1998 Loan to stockholder.

 

**8.**                    **COMMITMENTS AND CONTINGENCIES:**

 

**Warranties:**

 

The Company has establisheda warranty reserve in connection with the sale of N-Charge® Power Systemscovering a 12-month warranty period during which the Company would refund thefull value to any customers returning a purchased product because of a productperformance issue. The Company has also established a warranty reserve inrelation to the sale of U-Charge® Power Systems, and other large-format powersystems. The total warranty liability was $1.1 million and $1.2 million as of December 31,2008 and March 31, 2008, respectively.

 

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**Litigation:**

 

On January 31, 2007, Valencefiled a claim against Phostech Lithium Inc. in the Federal Court in Canada(Valence Technology, Inc. v. Phostech Lithium Inc. Court File No. T-219-07)alleging infringement of Valence Canadian Patent 2,395,115. Subsequently, on April2, 2007, Valence filed an amended claim alleging infringement of its CanadianPatents 2,483,918 and 2,466,366. The action is in the discovery phase. TheCompany is seeking monetary damages and injunctive relief for the acts ofPhostech in manufacturing, using and selling phosphate cathode material thatinfringes the asserted Valence Canadian patents.

 

On February 14, 2006,Hydro-Quebec filed an action against the Company in the United States DistrictCourt for the Western District of Texas (Hydro-Quebec v. Valence Technology,Civil Action No. A06CA111). In its amended complaint filed April 13, 2006,Hydro-Quebec alleges that Saphion ® I Technology, the technology utilized in allof the Company’s commercial products, infringes U.S. Patent Nos. 5,910,382 and6,514,640 exclusively licensed to Hydro-Quebec. Hydro-Quebec’s complaint seeksinjunctive relief and monetary damages. The action is in the initial pleadingstate and the Company has filed a response denying the allegations in theamended complaint. The action has been stayed by the Court pending a finaldetermination of reexaminations of the two patents by the USPTO.

 

The Company is subjectto, from time to time, various claims and litigation in the normal course ofbusiness. In the Company’s opinion, all pending legal matters will not have amaterial adverse impact on its consolidated financial statements.

 

**9.**                                                                                      **REDEEMABLE CONVERTIBLEPREFERRED STOCK:**

 

On June 2, 2003, theCompany issued 1,000 shares of Series C Convertible Preferred Stock andwarrants to purchase the Company’s common stock for $10,000 per share, raisingnet proceeds of $9.416 million. On January 22, 2004, the holder of the Series CConvertible Preferred Stock converted 139 of its 1,000 shares with theprincipal amount of $1.39 million, including accrued and unpaid dividends, into327,453 shares of the Company’s common stock at the conversion price of $4.25per share. On November 30, 2004, the Company entered into an amendment andexchange agreement to exchange all outstanding 861 shares of the Company’s SeriesC Convertible Preferred Stock, representing $8.6 million of principal. The SeriesC Convertible Preferred Stock was exchanged for 431 shares of Series C-1Convertible Preferred Stock, with a stated value of $4.3 million, and 430shares of Series C-2 Convertible Preferred Stock, with a stated value of $4.3million. When issued, the Series C-1 Convertible Preferred Stock and Series C-2Convertible Preferred Stock were convertible into common stock at $4.00 pershare. Each series carries a 2% annual dividend rate, payable quarterly in cashor shares of common stock, and were redeemable on December 15, 2005. TheCompany has the right to convert the preferred stock if the average of thedollar-volume weighted average price of the Company’s common stock for aten-day trading period is at or above $6.38 per share. If the preferred sharesare not redeemed in accordance with their terms, the holder of the preferredstock shall have the option to require the Company to convert all or part ofthe redeemed shares at a price of 95% of the lowest closing bid price of theCompany’s common stock during the three days ending on and including the conversiondate. The preferred shares are currently outstanding and subject to redemptionor conversion at the holder’s discretion.

 

Pursuant to assignmentagreements entered into between the Company and Berg & Berg Enterprises,LLC on July 14, 2005 and December 14, 2005, Berg & Berg purchased all ofthe outstanding Series C-1 Convertible Preferred Stock and Series C-2Convertible Preferred Stock from its original holder. Pursuant to the terms ofthe assignment agreement, Berg & Berg agreed that the failure of theCompany to redeem the preferred stock on December 15, 2005 did not constitute adefault under the certificate of designations and has waived the accrual of anydefault interest applicable in such circumstance. In exchange, the Company hasagreed (i) that the Series C-1 Convertible Preferred Stock may be converted, atany time, into the Company’s common stock at the lower of $4.00 per share orthe closing bid price of the Company’s common stock on December 13, 2005($1.98) and (ii) that the Series C-2 Convertible Preferred Stock may beconverted, at any time, into the Company’s common stock at the lower of $4.00per share or the closing bid price of the Company’s common stock on July 13,2005 ($2.96). Berg & Berg has agreed to allow dividends to accrue on thepreferred stock. At December 31, 2008, $560,000 in preferred stock dividendshad accrued.

 

In connection with theissue of the original issuance of the Series C Convertible Preferred Stock, in June2003, the Company issued to the Series C Convertible Preferred Stock originalholder a warrant to purchase 352,900 shares of the Company’s common stock. Thewarrant, which expired on June 2, 2008, had a purchase price of $5.00 pershare. The warrant was valued using the Black-Scholes valuation model. The warrantwas recorded to additional paid in capital at its relative fair value to the SeriesC Convertible Preferred Stock at $933,000. Accretion to the remainingredemption value of $8.61 million was recorded over the eighteen-month periodof the Series C Convertible Preferred Stock ended December 2, 2004.

 

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**10.**                                                                               **SHARE-BASEDCOMPENSATION:**

 

In February 1996, the Boardof Directors adopted a stock plan for outside Directors (the “1996 Non-EmployeeDirector’s Stock Option Plan”). The 1996 plan expired in February of 2006 andas of December 31, 2008 no shares are available to be granted under this plan.

 

In January 2000, theBoard of Directors adopted the 2000 Stock Option Plan (the “2000 Plan”). Underthe 2000 Plan, the Company may grant incentive stock options to employees andnon-statutory stock options to non-employee members of the Board of Directorsand consultants. Options are to be granted at a price not less than fair marketvalue on the date of grant. In the case of an incentive stock option granted toan employee who owns stock possessing more than 10% of the total combinedvoting power of all classes of stock of the Company or any affiliate, theoption is to be granted at a price not less than 110% of the fair market valueon the date of grant. The options are exercisable as determined by the Board ofDirectors, generally over a four-year period. The options expire no later thanten years from the date of grant. Unvested options are canceled and returned tothe 2000 Plan upon an employee’s termination. Vested options, not exercisedwithin three months of termination, also are canceled and returned to the 2000 Plan.During the first nine months of fiscal 2009, 707,200 shares were granted underthis plan. At December 31, 2008, the Company had 543,235 shares available forgrant under the 2000 Plan.

 

When options areexercised the Company issues new shares to the grantee.

 

Aggregate option activityis as follows (shares in thousands):

 
| ** **                        | ** ** | **Outstanding Options** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average****Exercise  Price** | ** ** |
| Balance at March 31, 2008         |       | 6,688                   |       | $ | 2.95 |   |
| Granted                           |       | 707                     |       | 2.60 |   |
| Exercised                         |       | (388                    | )          | 2.08 |   |
| Cancelled                         |       | (901                    | )          | 5.71 |   |
| Balance at December 31, 2008 |       | 6,106                   |       | $ | 2.55 |   |

 

The following tablesummarizes information about fixed stock options outstanding at December 31,2008 (shares in thousands):

 
| **Options Outstanding**            |   | **Options Exercisable** |   |
|-----------------------------------------|--------|------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number  Outstanding**      |   | **Weighted  Average  Remaining  Contractual   Life  (years)** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
| $ 0.63 - $1.99                          |   | 4,420                        |   | 8.05 |   | $ | 1.57 |   | 507 |   | $ | 1.47 |   |
| $ 1.99 - $4.62                          |   | 1,247                        |   | 6.51 |   | 3.21 |   | 822 |   | 3.19 |   |
| $ 4.62 - $10.06                         |   | 377                          |   | 1.66 |   | 7.25 |   | 375 |   | 7.26 |   |
| $ 10.06 - $15.75                        |   | 10                           |   | 1.74 |   | 13.84 |   | 10 |   | 13.84 |   |
| $ 15.75 - $23.56                        |   | —                       |   | — |   | — |   | — |   | — |   |
| $ 23.56 - $34.62                        |   | 52                           |   | 1.12 |   | 34.11 |   | 52 |   | 34.11 |   |
| $ 0.63 - $34.62                         |   | 6,106                        |   | 7.27 |   | $ | 2.55 |   | 1,766 |   | $ | 4.54 |   |

 

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Compensation expense forstock plans has been determined based on the fair value at the grant date foroptions granted in the current fiscal year. For the three months ended December31, 2008 and December 31, 2007, $475,000 and $828,000 of share-basedcompensation expense has been included in operating expenses in the condensedconsolidated statements of operations and comprehensive loss. For the ninemonths ended December 31, 2008 and December 31, 2007, $1.5 million and $1.7million of share-based compensation expense has been included in operatingexpenses in the condensed consolidated statements of operations andcomprehensive loss. The aggregate intrinsic value of options exercisable at December31, 2008 is $175,000. There were 388,085 options exercised during the ninemonth period ended December 31, 2008.

 

As of December 31, 2008the Company had a total of $3.9 million in compensation costs related toshare-based compensation to recognize over a remaining service period of 2.0years for non-vested options. The fair value of each option grant is estimatedat the date of grant using the Black-Scholes pricing model with the followingweighted average assumptions for grants in fiscal years 2009 and 2008:

 
| ** **                               | ** ** | **December 31, 2008** | ** ** | **March 31, 2008** | ** ** |
|------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| Weighted average risk-free interest rate |       | 2.71                  | %          | 4.27               | %          |
| Average expected life in years           |       | 5.9 years             |       | 5.9 years          |       |
| Average expected volatility              |       | 81.28                 | %          | 80.49              | %          |
| Dividend yield                           |       | None                  |       | None               |       |

 

**11.**                                                                               **RELATED PARTYTRANSACTIONS:**

 

On November 15, 2008,Berg & Berg purchased approximately 1.7 million shares of the Company’scommon stock. As payment of the purchase price of the common stock, Berg &Berg surrendered certain promissory notes issued on July 23, 2008 and amended September30, 2008 ($542,000 in principal and approximately $14,000 in accrued interest),and June 26, 2008 ($2.5 million in principal and approximately $78,000 inaccrued interest). The surrendered promissory notes were the second and firstworking capital loan installments, respectively, made pursuant to an agreementbetween the Company and Berg & Berg whereby Berg & Berg agreed toprovide up to $10.0 million in interim working capital loans from time to timein order to supplement the Company’s working capital and other financial needs.This agreement expired on November 15, 2008 and accordingly, all outstandingamounts were paid on November 15, 2008. No future draws can be taken againstthis loan.

 

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**12.**                                                                               **SEGMENT AND GEOGRAPHICINFORMATION:**

 

The Company’s chief operatingdecision maker is its Chief Executive Officer, who reviews operating results tomake decisions about resource allocation and to assess performance. The Company’schief operating decision maker views results of operations of a singleoperating segment, the development and marketing of the Company’s lithiumphosphate technology. The Company’s Chief Executive Officer has organized theCompany functionally to develop, market and manufacture lithium phosphateproducts.

 

Long-lived assetinformation by geographic area is as follows (in thousands):

 
| ** **    | ** ** | **December 31, 2008** | ** ** | **March 31, 2008** | ** ** |
|---------------|------------|-----------------------|------------|--------------------|------------|
| United States |       | $                     | 283        |               | $          | 340 |   |
| International |       | 6,200                 |       | 4,807              |       |
| Total         |       | $                     | 6,483      |               | $          | 5,147 |   |

 

Revenues by geographicarea are as follows (in thousands):

 
| ** **    | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|---------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                            | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** |   |
|          |       |                                                |       |                                               |       |   |   |   |   |
| United States |       | $                                                   | 2,279      |                                               | $          | 2,146 |   | $ | 12,173 |   | $ | 11,612 |   |
| International |       | 2,403                                               |       | 1,232                                              |       | 9,314 |   | 1,371 |   |
| Total         |       | $                                                   | 4,682      |                                               | $          | 3,378 |   | $ | 21,487 |   | $ | 12,983 |   |

 

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| **ITEM  2.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|-------------------------------------------------------------------------------------------------|

 

This Report contains statementsthat constitute “forward-looking statements” within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended, and Section 27A of theSecurities Act of 1933, as amended. The words “may,” “will,” “expect,” “intend,”“estimate,” “continue,” “anticipate,” “predict,” “believe” and similarexpressions and variations thereof are intended to identify forward-lookingstatements. These statements appear in a number of places in the Report andinclude statements regarding the intent, belief or current expectations ofValence Technology, Inc., to which we refer in this Report as the “Company,” “we”or “us,” our directors or officers with respect to, among other things:

 
| · |   | trends affecting  our financial condition or results of operations; |
|--------|--------|---------------------------------------------------------------------|
| · |   | our product  development strategies;                                |
| · |   | trends affecting  our manufacturing capabilities;                   |
| · |   | trends affecting  the commercial acceptability of our products; and |
| · |   | our business and  growth strategies.                                |

 

You are cautioned not toput undue reliance on forward-looking statements. Forward-looking statementsare not guarantees of future performance and involve risks and uncertainties,and actual results may differ materially from those projected in this Report,for the reasons, among others, discussed in the sections — “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “RiskFactors.” Factors that could cause actual results to differ materially includethose discussed under “Cautionary Statements and Risk Factors,” which include,but are not limited to the following:

 
| · |   | our ability to  develop and market products that compete effectively in targeted market  segments;                                                                                 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | market  acceptance of our current and future products;                                                                                                                             |
| · |   | our ability to  meet customer demand;                                                                                                                                              |
| · |   | our ability to  perform our obligations under our loan agreements;                                                                                                                 |
| · |   | a loss of one of  our key customers;                                                                                                                                               |
| · |   | our ability to  implement our long-term business strategy that will be profitable and/or  generate sufficient cash flow;                                                           |
| · |   | the ability of  our vendors to provide conforming materials for our products on a timely  basis;                                                                                   |
| · |   | the loss of any  of our key executive officers;                                                                                                                                    |
| · |   | our ability to  manage our foreign manufacturing and development operations;                                                                                                       |
| · |   | our ability to  attract and retain skilled personnel;                                                                                                                              |
| · |   | our ability to  protect and enforce our current and future intellectual property;                                                                                                  |
| · |   | our need for  additional, dilutive financing or future acquisitions; and                                                                                                           |
| · |   | current and  future economic, business and regulatory conditions, as well as the  fluctuations in the price of commodities such as oil, which may affect demand  for our products. |

 

**Webelieve that it is important to communicate our future expectations toinvestors. However, there may be events in the future that we are not able toaccurately predict or control. The factors discussed under “Risk Factors” inthis Report and the other Quarterly Reports filed since the end of our lastfiscal year, as well as any cautionary language in this Report or any of ourother reports or filings, including our Annual Report on Form 10-K, provideexamples of risks, uncertainties and events that may cause our actual resultsto differ materially from the expectations we described in our forward-lookingstatements.**

 

**Thefollowing discussion should be read in conjunction with our financialstatements and related notes, which are a part of this Report or incorporatedby reference to our reports filed with the Securities and Exchange Commission,to which we refer in this Report as the Commission. We undertake no obligationto publicly revise these forward-looking statements to reflect events orcircumstances that arise after the date hereof. The results for the three andnine month period ended December 31, 2008 are not necessarily indicative of theresults to be expected for the entire fiscal year ending March 31, 2009 or anyother period.**

 

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** **

**Overview**

 

We were founded in 1989and have commercialized the industry’s first lithium phosphate technology. Wedevelop, manufacture and sell high-energy power systems utilizing ourproprietary phosphate-based lithium ion technology for diverse applications,with special emphasis on portable appliances and future generations of hybridand electric vehicles. Our mission is to promote the wide adoption ofhigh-performance, safe, long cycle life, environmentally friendly, low-costenergy storage systems. To address the significant market opportunity webelieve is available, we utilize the numerous benefits of our latest energystorage technology, deep intellectual property portfolio and the extensiveexperience of our management team.

 

We are now in developmentof our third generation of lithium phosphate energy storage systems, which areexpected to be commercially available in the second quarter of calendar 2009.Our third generation of lithium ion products feature our safe, long-lifelithium phosphate technology which utilizes a phosphate-based cathode material.We believe that the advanced functionality and programmability of our thirdgeneration energy storage systems are well suited for electric vehicle (EV),plug-in hybrid electric vehicle (PHEV) and similar applications. Our thirdgeneration lithium phosphate energy storage systems address the safety andlimited life weaknesses of other lithium technologies while offering a solutionthat is competitive in cost and performance. We believe that our thirdgeneration energy storage systems offer design and performance capabilitiesthat will facilitate adoption in automotive, industrial, public utility,telecommunications, aerospace and military markets not traditionally served byother lithium ion solutions.

 

**Strategy**

 

Our business plan andstrategy focus on the generation of revenue from product sales, whileminimizing costs through partnerships with contract manufacturers and internalmanufacturing efforts through our two wholly-owned subsidiaries in China. Thesesubsidiaries initiated operations in late fiscal 2005. We expect to developtarget markets through the sales of our third generation lithium phosphateenergy storage systems and custom lithium phosphate energy storage systemsbased on programmable Epoch TM Command and Control Logic. In addition, weexpect to pursue a licensing strategy to supply the lithium phosphate sectorwith advanced Valence material and components, including lithium phosphatecathode materials to fulfill other manufacturers’ needs.

 

Key elements of ourbusiness strategy include:

 

·               *Develop and market differentiated battery solutionsfor a wide array of applications that leverage the advantages of ourtechnology.* Ourproduct development and marketing efforts are focused on large-format batterysolutions, such as our third generation lithium phosphate energy storagesystems and U-Charge ® Power System and other custom batterysolutions that feature advanced performance and technological advantages. Theseproducts are targeted for a broad range of applications in the motive, powerand consumer appliance, telecommunication and utility industries and as asubstitute for certain applications using lead acid batteries.

 

·               *Manufacturing high-quality, cost-competitive productsusing a combination of Company owned and contract manufacturing facilities*. Our products are manufactured in China,using both internal and contract manufacturing resources. Our company-ownedChina facility includes two plants; one manufactures our advanced lithiumphosphate materials with our patented carbothermal process while the secondmanufactures our advanced standard large-format packs such as U-Charge ® and custompacks such as Segway. We have arrangements with contract manufacturers for cellproduction. We believe this manufacturing strategy will allow us to directlycontrol our intellectual property and operations management as well as deliverhigh-quality products that meet the needs of a broad range of customers andapplications.

 

Our business strategy isbeing implemented in three phases, each building on the previous one:

 

·               *Initial Phase*: The initial phase of our strategy, now complete, focused on the firstgeneration of our technology in our patented polymer construction. During thisphase, we introduced the N-Charge ® Power System which has been sold throughnational and regional retailers, top-tier computer manufacturers and nationalresellers.  We have discontinued the saleof our N-Charge® products.

 

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·               *Second Phase*:The second phase of our business strategy is nearly complete. Throughout thisphase our cell development has focused on commercializing a cylindrical LithiumPhosphate cell and advanced third generation Energy Source Storage System. Thisthird generation of products is designed for motive applications such as hybridand electric vehicles, scooters and wheelchairs and has the same dimensions asthe most popular lead acid batteries but with significant increases inperformance related to safety, energy cycle life and weight.

 

·               *Third Phase*:The third phase of our business strategy will entail the development andcommercialization of our patented Lithium Vanadium Phosphate (LVP) and LithiumVanadium Fluorophosphate (LVPF) cathode materials into large-format, highcapacity prismatic cells. These materials offer superior performance withadditional energy storage and higher voltage capabilities for the automotive,industrial, public utility, telecommunications, aerospace, military and othermarkets.

 

Our business headquartersis in Austin, Texas. Our materials research and development center is in LasVegas, Nevada. Our European sales and OEM manufacturing support center is inMallusk, Northern Ireland. Our manufacturing and product development center isin Suzhou, China.  We have the followingsubsidiaries:  Valence Technology(Nevada), Inc., Valence Technology Cayman Islands, Inc., Valence TechnologyN.V., Valence Technology International, Inc., Valence Technology B.V., ValenceTechnology (Suzhou) Co., Ltd., and Valence Energy-Tech (Suzhou) Co., Ltd.

 

**GoingConcern**

 

As a result of ourlimited cash resources and history of operating losses there is substantialdoubt about our ability to continue as a going concern. We presently have nocommitments for financing by our Chairman Carl Berg and/or his affiliates orany other source. If we are unable to obtain financing from Mr. Berg or otherson terms acceptable to us, or at all, we may be forced to cease all operationsand liquidate our assets. Our cash requirements may vary materially from thosenow planned because of changes in our operations, including the failure toachieve expected revenues, greater than expected expenses, changes in OEMrelationships, market conditions, the failure to timely realize our productdevelopment goals, and other adverse developments. These events could have anegative impact on our available liquidity sources.

 

**Basis ofPresentation, Critical Accounting Policies and Estimates**

 

We prepare our condensedconsolidated financial statements in conformity with generally acceptedaccounting principles in the United States. The preparation of our financialstatements requires us to make estimates and assumptions that affect reportedamounts. We believe our most critical accounting policies and estimates relateto revenue recognition. Our accounting policies are described in the Notes toCondensed Consolidated Financial Statements, Note 3, Summary of SignificantAccounting Policies. The following further describes the methods andassumptions we use in our critical accounting policies and estimates:

 

***Revenue Recognition***

 

We generate revenues fromsales of products including batteries and battery systems, and from licensingfees and royalties pursuant to technology license agreements. Product sales arerecognized when all of the following criteria are met: persuasive evidence ofan arrangement exists, delivery or transfer of title has occurred, seller’sprice to the buyer is fixed and determinable, and collection is reasonablyassured. For some sales to customers in foreign jurisdictions where retentionof title is needed to perfect a security interest, we retain title to productsshipped, similar to a lien under the U.S. Uniform Commercial Code. For thesesales, all other revenue recognition criteria is met for these shipments andneither we nor the customer can rescind the transaction. Accordingly, werecognize this revenue when the product is shipped. Product shipments that arenot recognized as revenue during the period shipped, primarily N-Charge® PowerSystems product shipments to resellers that are subject to right of return, arerecorded as deferred revenue and reflected as a liability on our balance sheet.Products shipped with right of return are included in finished goods inventoryas we retain title to the products. For reseller shipments where revenuerecognition is deferred, we record revenue and relieve inventory based upon thereseller-supplied reporting of sales to their end customers or their inventoryreporting. For direct customers, we estimate a return rate percentage basedupon our historical experience. From time to time we provide sales incentivesin the form of rebates or other price adjustments.  These are generally recorded as reductions torevenue on the latter of the date the related revenue is recognized or at thetime the rebate or sales incentive is offered. Licensing fees are recognized asrevenue upon completion of an executed agreement and delivery of licensedinformation, if there are no significant remaining vendor obligations andcollection of the related receivable is reasonably assured. Royalty revenuesare recognized upon licensee revenue reporting and when collection isreasonably assured.

 

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** **

**Resultsof Operations**

 

The following table setsforth, for the periods indicated, the percentages of net sales represented bycertain items reflected in our condensed consolidated statements of operations:

 
| ** **                    | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                            | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** |   |
|                          |       |                                                |       |                                               |       |   |   |   |   |
| Battery and systems sales     |       | 95                                                  | %          | 93                                                 | %          | 95 | % | 96 | % |
| Licensing and royalty revenue |       | 5                                                   | %          | 7                                                  | %          | 5 | % | 4 | % |
| Total revenues                |       | 100                                                 | %          | 100                                                | %          | 100 | % | 100 | % |
|                          |       |                                                |       |                                               |       |   |   |   |   |
| Gross margin profit (loss)    |       | 5                                                   | %          | (1                                                 | )%         | — | % | 9 | % |
| Operating expenses            |       | 87                                                  | %          | 127                                                | %          | 63 | % | 92 | % |
| Operating loss                |       | (82                                                 | )%         | (128                                               | )%         | (63 | )% | (83 | )% |
| Net loss                      |       | (110                                                | )%         | (169                                               | )%         | (78 | )% | (115 | )% |

 

***Revenues and Gross Margin***

 

*Batteryand System Sales*.Battery and system sales totaled $4.5 million and $20.5 million for the threeand nine months ended December 31, 2008, respectively, as compared to $3.1million and $12.5 million for the three and nine months ended December 31,2007, respectively. The year to date increase in revenues was primarily due tofirst quarter fiscal 2009 sales to a new customer, the Tanfield Group (“Tanfield”),of $4.2 million, as well as an increase in sales to Segway of $2.2 million andto Oxygen of $1.5 million for the nine months ended December 31, 2008 comparedto the nine months ended December 31, 2007. We had $142,000 and $756,000 indeferred revenue on our balance sheet at December 31, 2008 and March 31, 2008,respectively, primarily related to sales shipping at the end of the period.Tanfield sales accounted for 0% and 21% of our product sales for the three andnine months ended December 31, 2008 and 0% of our product sales for the threeand nine months ended December 31, 2007. Tanfield revised their expectations tosignificantly lower growth than previously forecasted. We ceased shipments toTanfield in June and how much, if any, future revenues we may receive fromsales to Tanfield is uncertain.  Segwaysales accounted for 36% and 45% of our total product sales for the three andnine months ended December 31, 2008, respectively and 29% and 55% for the threeand nine months ended December 31, 2007, respectively. Sales to Oxygenaccounted for 34% and 10% of our total product sales for the three and ninemonths ended December 31, 2008, respectively compared to 0% and 5% of our totalproduct sales for the three and nine months ended December 31, 2007,respectively. The large-format battery systems sales represent 63% and 17% ofour total revenue for the third fiscal quarter in 2009 and 2008, respectivelyand 52% and 16% of our total revenue for the first nine months of fiscal 2009and 2008, respectively. We believe that the recent growth in large-formatbattery systems sales is primarily due to the increase in demand foralternative energy solutions driven by the rising costs of fossil fuels, aswell as environmental concerns.

 

*Licensingand Royalty Revenue*.Licensing and royalty revenues relate to revenue from licensing agreements forour battery construction technology. Fiscal third quarter 2009 licensing androyalty revenue was $227,000 compared with $251,000 for the same quarter infiscal 2008. Licensing and royalty revenue for the first nine months of fiscal2009 and 2008 was $1.0 million and $515,000, respectively. Licensing androyalty revenue increased in the current fiscal quarter primarily due tolicense amendment with Varta AG, as well as our license agreement with AmperexTechnology Limited, both of whom make ongoing royalty payments as they use ourtechnology. We will continue to pursue licensing strategies as our lithiumphosphate technology receives greater market acceptance.

 

*GrossMargin*. Grossmargin as a percentage of revenue was 5% and 0% for the three and nine monthsended December 31, 2008, respectively, as compared to (1)% and 9% for the threeand nine months ended December 31, 2007, respectively. For the three and ninemonths ended December 31, 2008, revenues from battery and system salesincreased compared to these same periods in 2007. Management revised certainestimates regarding inventory and warranty reserves, thereby decreasing cost ofgoods sold by $138,000 and increasing cost of goods sold by $2.6  million for the three and nine months ended December31, 2008, respectively. Inventory and warranty reserves increased by $127,000and $2.2 million for the three and nine months ended December 31, 2007,respectively. The majority of the reserve adjustment for the three and ninemonth periods ended December 31, 2008, was related to the discontinuation ofthe N-Charge product line. We reduced the $2.1 million carrying value of ourN-Charge® inventory to its net realizable value, which was estimated at $0.6million as of June 30, 2008 and $0 as of September 30, 2008 and December 31,2008.

 

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*** ***

***Operating Expenses***

 

The following tablepresents the change in operating expenses from 2007 to 2008 for the three andnine months ended December 31 of those years:

 
| ** **                    | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                    | ** ** | **Increase /  (Decrease)**                     |       | **% Change**                                       |       | **Increase /  (Decrease)** |   | **% Change** |   |
|                          |       |                                                |       |                                               |       |   |   |   |   |
| Research and development      |       | $                                                   | 119        |                                               | 13         | % | $ | 673 |   | 25 | % |
| Marketing                     |       | (109                                                | )          | (15                                                | )%         | 380 |   | 22 | % |
| General and administrative    |       | (119                                                | )          | (5                                                 | )%         | 511 |   | 8 | % |
| Depreciation and amortization |       | (107                                                | )          | (66                                                | )%         | 87 |   | 14 | % |
| Loss on disposal of assets    |       | (8                                                  | )          | (100                                               | )%         | (14 | ) | (93 | )% |
| Total operating expenses      |       | $                                                   | (224       | )                                                  | (5         | )% | $ | 1,637 |   | 14 | % |

 

During the three and ninemonths ended December 31, 2008, total operating expenses were 87% and 63% ofrevenue, respectively, compared to 126% and 92% of revenue during the sameperiods for the prior year.  The decreasein total operating expenses for the three months ended December 31, 2008 comparedthe same period in the prior year is primarily due to reduced share-basedcompensation and decreases in recruiting and relocation expenses.  The increase in total operating expenses fromthe nine months ended December 31, 2007 to the nine months ended December 31,2008 is primarily due to increased numbers of employees, travel expenses,product testing, and reporting fees.

 

*Researchand Product Development.* Research and product development expenses consist primarily ofpersonnel, equipment and materials to support our efforts to develop batterychemistry and products, as well as to improve our manufacturing processes.Research and product development expenses increased by $119,000, or 13%, to$1.0 million for the three months ending December 31, 2008 from $912,000 forthe three months ending December 31, 2007. Research and product developmentexpenses increased by $673,000, or 25%, to $3.4 million for the nine monthsended December 31, 2008 from $2.7 million for the nine months ended December 31,2007.  The increase in research anddevelopment expenses is the result of increased expenses related to thedevelopment of our third generation lithium phosphate energy storage systems.Engineering and design fees related to third -party consulting services increasedby $50,000 and $216,000 for the three and nine months ended December 31, 2008,respectively from the same periods last year.  For the three and nine months ended December 31,2008, salary expenses increased by $55,000 and $330,000, respectively, primarilydue to the hiring of two application engineers in the first fiscal quarter 2009and three application engineers in the second fiscal quarter 2009. Severancepaid to an executive who left the Company during the three months ended December31, 2008 increased severance expense by $87,000 for the three and nine monthsended December 31, 2008. During the three and nine months ended December 31, 2008,approximately $74,000 and $218,000 of share-based compensation was allocated toresearch and development expenses as compared to $120,000 and $250,000 in thethree and nine months ended December 31, 2007, respectively.

 

*Marketing* . Marketing expenses consist primarilyof costs related to sales and marketing personnel, public relations andpromotional materials. Marketing expenses of $637,000 in the three months endedDecember 31, 2008 were $109,000, or 15%, lower than the $746,000 for the threemonths ended December 31, 2007. Marketing expenses of $2.1 million in the firstnine months ended December 31, 2008 were $380,000, or 22%, higher than the $1.8million for the nine months ended December 31, 2007. During the three and ninemonths ended December 31, 2008, approximately $33,000 and $278,000,respectively, of share-based compensation was allocated to marketing expensesas compared to $116,000 and $242,000 in the three and nine months,respectively, ended December 31, 2007. Salary expenses increased by $76,000 and$248,000 in the three and nine months ended December 31, 2008 compared to thesame periods in fiscal 2007 primarily due to hiring two additional marketingstaff in second fiscal quarter 2009. During the third quarter of fiscal 2009,bad debt expense decreased by $25,000, net of customer write offs. Althoughsome expenses increased for the nine month period ended December 31, 2008compared to this same period in 2007, such as travel to customer sites of$30,000 and marketing and office expenses of $58,000, overall sales andmarketing expenses decreased for the third quarter of fiscal 2009 compared tothis period in fiscal 2008. During the third quarter of fiscal 2009, recruitingexpenses decreased by $60,000 and telecommunications expense decreased by$13,000.

 

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* *

*Generaland Administrative*.. General and administrative expenses consist primarily of salaries,share-based compensation and other related costs for finance, human resources,facilities, accounting, information technology, legal, and corporate-relatedexpenses. General and administrative expenses decreased slightly from $2.5million for the three months ended December 31, 2007 to $2.3 million for thethree months ended December 31, 2008.  These expenses totaled $7.3 million and $6.8million for the nine months ended December 31, 2008 and December 31, 2007,respectively, or an 8% increase. Audit expenses, consulting fees, and annualreport expenses for our SEC filings increased by $135,000 and $641,000 for thethree and nine months ended December 31, 2008 compared to the same periods in2007, respectively. Software expenses increased by $115,000 due to the purchaseof certain Axapta user licenses during the nine months ended December 31, 2008compared to software expenses for this period in 2007.  For the three and nine months ended December 31,2008, rent increased by $42,000 and $92,000 respectively and relocation costsdecreased by $26,000 and $235,000 respectively, compared to these same periodsin 2007.  General and administrativeexpenses included $353,000 and $592,000 of share-based compensation expense forthe third fiscal quarter of 2009 and 2008, respectively, a decrease of$239,000. Share-based compensation was $1.0 million and $1.2 million for the firstnine months ended December 31, 2008 and 2007, respectively.

 

*Depreciationand Amortization*.. Depreciation and amortization expenses were $56,000 and $163,000 for thethird quarters of fiscal 2009 and 2008, respectively, or a 66% decrease. Theseexpenses were $703,000 and $616,000 for the nine months ended December 31, 2008and 2007, respectively, or a 14% increase. This increase was primarily due tothe $379,000 impairment charge taken against fixed assets considered obsoleteduring the nine months ended December 31, 2008. This increase was partiallyoffset by a decrease due to depreciable assets purchased in prior yearsbecoming fully depreciated.

 

  **Liquidity and Capital Resources**

 

***Liquidity***

 

At December 31, 2008, ourprincipal source of liquidity was cash and cash equivalents of $8.5 million. Wedo not expect our cash and cash equivalents will be sufficient to fund ouroperating and capital needs for the next twelve months following December 31,2008 nor do we anticipate the gross profit from product sales during theremainder of fiscal 2009 will be sufficient to cover our operating expenses.Historically, we have relied upon management’s ability to arrange foradditional equity or debt financing to meet our liquidity requirements. Unlessour product sales are greater than management currently forecasts or there areother changes to our business plan, we will need to arrange for additionalfinancing to fund operating and capital needs. This financing could take theform of debt or equity. Given our historical operating results and the amountof our existing debt, as well as the other factors, we may not be able toarrange for debt or equity financing on favorable terms or at all.

 

Our cash requirements mayvary materially from those now planned because of changes in our operationsincluding the failure to achieve expected revenues, greater than expectedexpenses, changes in OEM relationships, changes in market conditions, thefailure to timely realize our product development goals, and other adversedevelopments. These events could have a negative impact on our availableliquidity sources during the next twelve months.

 

The following tablesummarizes our statement of cash flows for the nine months ended December 31,2008 and 2007:

 
| ** **                                            | ** ** | **Nine Months Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|
| **(dollars in thousands)**                  | ** ** | **2008**                                     | ** ** | **2007** | ** ** |
| Net cash flows provided by (used in):                 |       |                                         |       |   |   |
| Operating activities                                  |       | $                                            | (10,886    | ) | $ | (8,551 | ) |
| Investing activities                                  |       | (2,664                                       | )          | (1,187 | ) |
| Financing activities                                  |       | 19,288                                       |       | 11,411 |   |
| Effect of foreign exchange rates                      |       | 115                                          |       | (4 | ) |
| Net (decrease) increase in cash and cash  equivalents |       | $                                            | 5,853      |   | $ | 1,669 |   |

 

Our use of cash fromoperations the first nine months of fiscal 2009 and fiscal 2008 was $10.9million and $8.6 million, respectively. The cash used for operating activitiesduring the first nine months of fiscal 2009 was primarily for operating lossesand working capital. Cash used for operating losses in the first nine months offiscal 2009 increased from the same period of fiscal 2008 by $2.3 millionprimarily from the impact of increases in operating expenses as described abovein the section titled “Operating Expenses.”

 

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In the first nine monthsof fiscal 2009, we had a net increase in cash used in investing activities of$1.5 million, as compared to the first nine months of fiscal 2008. Cash used ininvesting activities during the first nine months of fiscal 2009 relates to purchasesof equipment domestically and in China.

 

We obtained cash fromfinancing activities in the amounts of $19.3 million and $11.4 million duringthe first nine months of fiscal 2009 and 2008, respectively. The financingactivities in the first nine months of fiscal 2009 were short term loans madeto us by Berg & Berg for working capital requirements in the total amountof $7.6 million pursuant to an agreement whereby Berg & Berg agreed toprovide for up to $10.0 million in interim working capital loans from time totime in order for Berg & Berg and/or certain of its affiliates tosupplement our working capital and other financial needs. This agreementexpired on November 15, 2008. The working capital loans were paid through thecashless exercise on September 30, 2008 of a warrant held by Berg & Berg inthe total amount of $4.5 million and through the November 15, 2008 purchase of1,666,618 shares of the Company’s common stock. As consideration for both thewarrant exercise and the common stock purchase, Berg & Berg surrenderedeach of the promissory notes related to the working capital loans describedabove. Financing activities in the first nine months of fiscal 2009 alsoinclude $9.2 million in issuances of common stock in sales to private investorsand $0.8 million for the exercise of stock options.

 

On January 14, 2008, wefiled a Form S-3 Registration Statement with the SEC utilizing a “shelf”registration process.  On January 22,2008, the Form S-3 Registration was declared effective by the SEC. Pursuant tothis “shelf” registration statement, we may sell debt or equity securitiesdescribed in the accompanying prospectus in one or more offerings up to a totalpublic offering price of $50.0 million.  We believe that this shelf registrationstatement provides us additional flexibility with regards to potentialfinancings that we may undertake when market conditions permit or our financialcondition may require.

 

On February 22, 2008, weentered into an At Market Issuance Sales Agreement with Wm. Smith & Co., assales agent (the “Sales Agent”). In accordance with terms of the At MarketIssuance Sales Agreement, we may issue and sell up to 5,000,000 shares ofcommon stock in a series of transactions over time as we may direct through theSales Agent.  Sales of shares may be madein privately negotiated transactions and/or any other method permitted by law,including sales deemed to be an “at the market” offering as defined in Rule 415under the Securities Act of 1933, which includes sales made directly on theNASDAQ Capital Market, the existing trading market for our common stock, orsales made to or through a market maker other than on an exchange.  The Sales Agent will make all sales on a bestefforts basis using commercially reasonable efforts consistent with its normaltrading and sales practices, on mutually agreed terms between the Sales Agentand us. Unless we and the Sales Agent agree to a lesser amount with respect tocertain persons or classes of persons, the compensation to the Sales Agent forsales of common stock sold pursuant to the Agreement will be 6.0% of the grossproceeds of the sales price per share.

 

During the first ninemonths of fiscal 2009, we sold 2.8 million shares with proceeds net ofcommissions of $9.2 million under the At Market Issuance Sales Agreement. As ofthe date of this Report, we have made no further decisions as to whether orwhen we may seek to make additional sales under the At Market Issuance SalesAgreement. To date, we have sold a total of 3.9 million of the 5.0 millionshares available for sale under the terms of the At Market Issuance SalesAgreement.

 

As a result of the above,we had a net increase in cash and cash equivalents of $5.9 million during thefirst nine months of fiscal 2009.

 

As a result of ourlimited cash resources and history of operating losses, our auditors haveexpressed in their report on our consolidated financial statements, included inour audited March 31, 2008 consolidated financial statements, that there issubstantial doubt about our ability to continue as a going concern. Wepresently have no commitments for financing by Mr. Carl Berg, chairman of ourBoard of Directors and our principal shareholder, and/or his affiliates, orfrom any other source. If we are unable to obtain financing from Mr. Bergand/or his affiliates, or others on terms acceptable to us, or at all, we maybe forced to cease all operations and liquidate our assets. Our cashrequirements may vary materially from those now planned because of changes inour operations, including the failure to achieve expected revenues, greaterthan expected expenses, changes in OEM relationships, market conditions, thefailure to timely realize our product development goals, and other adversedevelopments. These events could have a negative impact on our availableliquidity sources. We intend to improve our liquidity by continued monitoringand reduction of manufacturing, facility and administrative costs. However, therecan be no assurance that these efforts will be successful or that theanticipated benefits would be realized in the near term.

 

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***Capital Commitments and Debt***

 

At December 31, 2008,we had commitments for capital expenditures for the next 12 months ofapproximately $1.9 million relating to manufacturing equipment in China. We mayrequire additional capital expenditures in order to meet greater demand levelsfor our products than are currently anticipated and/or to support ouroperations in China.

 

Our cash obligations forshort-term, long-term debt and interest, gross of unaccreted discount,consisted of the following:

 
| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                     | ** ** | **2008**              | ** ** |
|                                                     |       |                  |       |
| 1998 long-term debt to Berg & Berg              |       | $                     | 14,950     |   |
| 2001 long-term debt to Berg & Berg              |       | 20,000                |       |
| 2005 long-term debt to third-party                       |       | 20,000                |       |
| Interest on short and long-term debt                     |       | 23,683                |       |
| Current portion of interest on short and  long-term debt |       | 79                    |       |
| Total                                                    |       | $                     | 78,712     |   |

 

Repayment obligations ofshort-term and long-term debt principal as of December 31, 2008 are:

 
| ** **                           | ** ** | **Fiscal year** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| **(Dollars in thousands)** | ** ** | **2009**             | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Principal repayment                  |       | $                    | —     |   | $ | — |   | $ | 54,950 |   | $ | — |   | $ | — |   | $ | — |   | $ | 54,950 |   |
|                                      |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At December 31, 2008,the redemption obligation for our Series C-1 Convertible Preferred Stockand Series C-2 Convertible Preferred Stock, all of which is currently heldby Berg & Berg, is $8.6 million, plus accrued dividends, which as of December31, 2008 totaled $560,000.  The preferredshares are currently subject to redemption or conversion at the holder’sdiscretion.  We do not have sufficientresources to effect this redemption; however, Berg & Berg has agreedthat our failure to redeem the Series C-1 Convertible Preferred Stock and the Series C-2Convertible Preferred Stock does not constitute a default under the certificateof designations for either the Series C-1 Convertible Preferred Stock orthe Series C-2 Convertible Preferred Stock and has waived the accrual ofany default interest applicable.  Berg & Berg also has agreed todefer the payment of dividends on the Series C-1 Convertible PreferredStock and Series C-2 Convertible Preferred Stock.  According to our agreement with Berg &Berg, dividends will continue to accrue (without interest) on the Series C-1Convertible Preferred Stock and the Series C-2 Convertible Preferred Stockaccording to the terms of the applicable certificates of designation; and suchdividends are not payable until such time as the parties mutually agree, orupon redemption or conversion in accordance with the terms of the applicablecertificates of designation.  We have nopresent intention to pay dividends on this preferred stock, including theaccrued dividends.  The Series C-1 Convertible Preferred Stock may beconverted, at any time, into shares of our common stock at the lower of $4.00or the closing price of our common stock on the conversion date, provided theconversion price can be no lower than $1.98, the closing price of the commonstock on December 13, 2005.  The SeriesC-2 Convertible Preferred Stock may be converted, at any time, into shares ofour common stock at the lower of $4.00 or the closing price of our common stockon the conversion date, provided the conversion price can be no lower than$2.96, the closing bid price of our common stock on July 13, 2005.

 

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If cash flow from operationsis not adequate to meet our debt obligations, or to support inventory, capitalequipment or other working capital needs, we will be required to seekadditional debt or equity financing. There can be no assurance that we couldobtain the additional financing or that such financing will not be substantiallydilutive to current shareholders.

 

***Inflation***

 

Historically, our operationshave not been materially affected by inflation. However, our operations may beaffected by inflation in the future.

 

***Tabular Disclosure of Contractual Obligations***

 

The following table setsforth, as of December 31, 2008 our scheduled principal, interest and othercontractual annual cash obligations due for each of the periods indicated below(in thousands):

 
| ** **                                | ** ** | **Payment Due by Period** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | ** **                               | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                                | ** ** | **Total**                                | ** ** | **One Year** | ** ** | **1-2 Years** | ** ** | **3-5 Years** | ** ** | **5 Years** | ** ** |
| Contractual obligations:             |       |                                     |       |   |   |   |   |   |   |   |   |
| Long-term debt obligations                |       | $                                        | 78,712     |   | $ | 79 |   | $ | 78,633 |   | $ | — |   | $ | — |   |
| Operating lease obligations               |       | 1,871                                    |       | 166 |   | 946 |   | 759 |   | — |   |
| Purchase obligations                      |       | 9,292                                    |       | 9,292 |   | — |   | — |   | — |   |
| Redemption of convertible preferred stock |       | 9,170                                    |       | 9,170 |   | — |   | — |   | — |   |
| Total                                     |       | $                                        | 99,045     |   | $ | 18,707 |   | $ | 79,579 |   | $ | 759 |   | $ | — |   |

 

The terms of thecertificates of designation for the series C-1 preferred stock and the Series C-2 preferredstock initially provided that the deadline for redemption was December 15,2005. Pursuant to assignment agreements entered into between us and Berg &Berg, Berg & Berg waived the requirement that the Series C-1preferred stock and Series C-2 preferred stock be redeemed on this date.There currently are no redemption deadlines, but the preferred shares aresubject to redemption or conversion at the holder’s discretion. As set forthabove, although dividends are not due, they are continuing to accrue (currently$560,000 as of December 31, 2008). The total above for Redemption ofConvertible Preferred Stock includes accrued dividends.

 

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**ITEM 3.**                       **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We considered the provisionsof Financial Reporting Release No. 48, *“Disclosures of Accounting Policies for DerivativeFinancial Instruments and Derivative Commodity Instruments, and Disclosures ofQuantitative and Qualitative Information about Market Risk Inherent inDerivative Commodity Instruments*.” On July 13, 2005, inconnection with a $20.0 million loan agreement with a third party financecompany with an adjustable interest rate equal to the greater of 6.75% or thesum of the LIBOR rate plus 4.0% (6.75% at December 31, 2008), we enteredinto a rate cap agreement which caps the LIBOR rate at 5.5% (On January 10,2009, the most recent adjustment date, the LIBOR rate was 0.41%) In addition,we are exposed to financial market risks, including changes in foreign currencyexchange rates and interest rates.

 

We also have long-term debtin the form of two loans from a stockholder, which mature in September 2010,and one loan from a third party finance company which matures in July 2010.The first loan from the stockholder has an adjustable rate of interest at 1.0%above the lender’s borrowing rate (9.0% at December 31, 2008) and thesecond loan from the stockholder has a fixed interest rate of 8.0%. The loanfrom the third party finance company has a monthly floating interest rate asdescribed above. Each 0.25% increase in interest on the adjustable rate loanwould increase our annual interest expense by approximately $87,000. The tablebelow presents principal amounts by fiscal year for our long-term andshort-term debt:

 
| **(dollars in thousands)** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Liabilities:                         |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |
| Fixed rate debt                      |       | $        | —     |     | —     |     | $          | 20,000   |       | —   |       | —         |       | —    |       | $ | 20,000 |   |
| Variable rate debt                   |       | —   |       | —   |       | $        | 34,950     |     | —     |     | —     |           | —     |      | $          | 34,950 |   |
|                                      |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |  |  |  |

 

Based on borrowing ratescurrently available to us for loans with similar terms, the carrying value ofour debt obligations approximates fair value.

 

**ITEM 4.**                       **CONTROLSAND PROCEDURES**

 

The term “disclosurecontrols and procedures” refers to the controls and other procedures of acompany that are designed to ensure that information required to be disclosedby the company in the reports that it files under the Securities Exchange Actof 1934 (“Exchange Act”) is recorded, processed, summarized and reported,within required time periods. Disclosure controls and procedures, include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed in the reports the Company files or submits under theExchange Act is accumulated and communicated to our management, including ourChief Executive Officer and Principal Financial Officer as appropriate to allowtimely decisions regarding required disclosure. Our management, with theparticipation of our Chief Executive Officer and our Principal FinancialOfficer, carried out an evaluation of the effectiveness of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15(b) forthe period covered by this Report.

 

Based on this evaluation,our Chief Executive Officer and our Principal Financial Officer has eachconcluded that, as of December 31, 2008, our disclosure controls andprocedures are effective in timely alerting him to material informationrequired to be included in our periodic reports with the Commission. Subsequent to the date of his evaluation, there have been no significantchanges in our internal controls or in other factors that could significantlyaffect these controls.

 

On November 17, 2008,Ross A. Goolsby joined the Company as our Chief Financial Officer and PrincipalFinancial Officer. Due to compensating controls, there were no changes in theeffectiveness of our internal controls during the nine months of fiscal 2009that have materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1.**                       **LEGALPROCEEDINGS**

 

On January 31, 2007, wefiled a claim against Phostech Lithium Inc. in the Federal Court in Canada(Valence Technology, Inc. v. Phostech Lithium Inc. Court File No. T-219-07)alleging infringement of Valence Canadian Patent 2,395,115. Subsequently, on April 2,2007, we filed an amended claim alleging infringement of its Canadian Patents2,483,918 and 2,466,366. The action is in the discovery phase. We are seekingmonetary damages and injunctive relief for the acts of Phostech inmanufacturing, using and selling phosphate cathode material that infringes theasserted Valence Canadian Patents.

 

On February 14, 2006,Hydro-Quebec filed an action against us in the United States District Court forthe Western District of Texas (Hydro-Quebec v. Valence Technology, Civil ActionNo. A06CA111). In its amended complaint filed April 13, 2006,Hydro-Quebec alleges that Saphion ® I Technology, the technology utilized in allof our commercial products, infringes U.S. Patent Nos. 5,910,382 and 6,514,640exclusively licensed to Hydro-Quebec. Hydro-Quebec’s complaint seeks injunctiverelief and monetary damages. The action is in the initial pleading state and wehave filed a response denying the allegations in the amended complaint. Theaction has been stayed by the Court pending a final determination ofreexaminations of the two patents by the USPTO.

 

We are subject, from time totime, to various claims and litigation in the normal course of business. In ouropinion, all pending legal matters will not have a material adverse impact onour consolidated financial statements.

 

**ITEM 1A.**           **RISK FACTORS**

 

In addition to the riskfactors included in Item 1A of our Annual Report on Form 10-K for ourfiscal year ended March 31, 2008, filed with the Commission on June 16,2008, the following additional and/or updated risk factors are applicable:

 

**General negative economic conditions,including concerns regarding a potential global recession and creditconstraints, or unfavorable economic conditions in a particular region,business or industry sector, may lead our customers to delay or foregotechnology investments and could have other impacts, including but not limitedto our ability to access funds on credit and the valuation of our equitysecurities, any of which could adversely affect our business, financialcondition, operating results and cash flow.**

 

Unprecedented disruptions in the current credit andfinancial markets have had a significant material adverse impact on a number offinancial institutions and have limited access to capital and credit for manycompanies.  Failure or material businessdeterioration of investment banks, commercial banks and other intermediaries inthe United States and elsewhere around the world, and significant reductions inasset values across businesses, households and individuals, combined with otherfinancial and economic indicators, have had a profound impact onthe global economy.

 

Many industries areimpacted by these market conditions. Some of the key impacts of the current financial market turmoil includecontraction in credit markets resulting in a widening of credit risk,devaluations and high volatility in global equity, commodity and foreignexchange markets, and a lack of market liquidity.  A continued or worsened slowdown in thefinancial markets or other economic conditions, including but not limited to,consumer spending, employment rates, business conditions, inflation, fuel andenergy costs, consumer debt levels, lack of available credit, the state of thefinancial markets, interest rates, and tax rates may result in reduced demand for productsutilizing our advanced battery technology and difficulties in obtainingfinancing, which may adversely affect the Company’sgrowth and business prospects.

 

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Risks we might face could include:

 

·                  potential declines in revenues due to reduced ordersor other factors caused by economic challenges faced by our customers andprospective customers;

 

·                  potential adverse impacts on our customers’ ability topay, when due, amounts payable to us and related increases in our cost ofcapital associated with any increased working capital or borrowing needs we mayhave if this occurs, or to collect amounts payable to us in full (or at all) ifany of our customers fail or seek protection under applicable bankruptcy orinsolvency laws;

 

·                  potential adverse impacts on our ability to accesscredit and other financing sources (and the cost thereof).  This may impact our ability to finance ouroperations or make significant capital expenditures relating to new products;

 

·                  lengthening sales cycles and/or delayed or cancelleddecisions to purchase our products and/or our technology; and

 

·                  potential adverse impacts on the valuation of ourequity securities as a result of the devaluation and volatility of global stockmarkets.

 

Any such impacts could adversely affect our business,financial condition, operating results and cash flow.  Such a general slowdown or recession in theglobal economy may also materially impact the global banking system includingindividual institutions as well as a particular business or industry sector,which could cause further consolidations or failures in such a sector. Theseadverse financial events could also result in further government interventionin the United States and world markets. Any of these results could impact the manner in which we are able toconduct business including within a particular industry sector or market andcould adversely affect our business, financial condition, operating results andcash flow or cash position.

 

**Adversebusiness or financial conditions affecting the automotive industry may have amaterial adverse effect on our development and marketing partners and ourbattery business.**

 

We are seeking to enter intocertain agreements with certain worldwide automotive manufacturers and tier 1suppliers regarding their PHEV and EV development efforts. Certain of thesemanufacturers and suppliers have in recent years experienced static or reducedrevenues, increased costs, net losses, loss of market share, labor issues andother business and financial challenges, which have substantially worsened as aresult of the current U.S. and global economic slowdown. There is uncertaintywith respect to the impact of the recent U.S. government bailout of the threelargest U.S. auto makers and possible restructuring of those companies. Adversebusiness or financial conditions affecting individual automotive manufacturersor tier 1 suppliers or the automotive industry generally, including potentialbankruptcies, as well as market disruption that could result from futureconsolidation in the automotive industry, could have a material adverse effecton our business. Automotive manufacturers may discontinue or delay theirplanned introduction of PHEVs or EVs as a result of adverse changes in theirfinancial condition or other factors. Automotive manufacturers may also seekalternative battery systems from other suppliers which may be morecost-effective or require fewer modifications in standard manufacturingprocesses than our products. We may also experience delays or losses withrespect to the collection of payments due from customers in the automotiveindustry experiencing financial difficulties.

 

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**We haveencountered problems in our production process that have limited our ability attimes to produce sufficient batteries to meet the demands of our customers. Ifthese issues recur and we are unable to timely resolve these problems, ourinability to produce batteries will have a material adverse impact on ourability to grow revenues and maintain our customer base.**

 

Problems in our productionprocesses could limit our ability to produce a sufficient number of batteries tomeet the demands of our customers. Production issues likely will have anegative impact on gross margins as manufacturing yields will suffer. Anyinability to timely produce batteries and other products would have a materialadverse impact on our ability to grow revenues and maintain our customer base.

 

**The factthat we depend on a sole supplier or a limited number of suppliers for key rawmaterials and components may delay our production of batteries.**

 

We depend on a sole supplieror a limited number of suppliers for certain key raw materials and componentsused in manufacturing and developing our power systems. We generally purchaseraw materials and components pursuant to purchase orders placed from time totime and have no long-term contracts or other guaranteed supply arrangementswith our sole or limited source suppliers. As a result, our suppliers may notbe able to meet our requirements relative to specifications and volumes for keyraw materials and components, and we may not be able to locate alternativesources of supply at an acceptable cost. In the past, we have experienceddelays in product development due to the delivery of nonconforming rawmaterials from our suppliers. If in the future we are unable to obtain highquality raw materials and components in sufficient quantities, on competitivepricing terms and on a timely basis, it may delay battery production, impedeour ability to fulfill existing or future purchase orders and harm ourreputation and profitability.

 

**ITEM 2.**                       **UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

On November 15, 2008,Berg & Berg purchased 1,666,618 shares of the Company’s common stockfor an aggregate purchase price of $3.1 million. The purchase price equaled theclosing bid price of the Company’s common stock as of November 15, 2008. Aspayment of the purchase price, Berg & Berg surrendered certainpromissory notes in the aggregate amount of $3.1 million, including principaland accrued interest.

 

**ITEM 3.**                       **DEFAULTSUPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.**                       **SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.**                       **OTHERINFORMATION**

 

None.

 

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**ITEM 6.**    **EXHIBITS**

 
| **EXHIBIT NO.** |   |                                                                                                                                                                                                                                                                                                                                  |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                  |
| 3.1             |   | Second Restated  Certificate of Incorporation of the Company (incorporated by reference to the  exhibit so described in the Company’s Registration Statement on Form S-1  (File No. 33-46765), as amended, filed with the SEC on March 27,  1992)                                                                 |
| 3.2             |   | Amendment to the Second  Restated Certificate of Incorporation of the Company (incorporated by the  reference to the exhibit so described in the Company’s Schedule 14A filed  with the SEC on January 28, 2000)                                                                                                            |
| 3.3             |   | Fourth Amended and  Restated Bylaws of the Company (incorporated by reference to the exhibit so  described in the Company’s Current Report on Form 8-K filed with the SEC  on January 22, 2008)                                                                                                                        |
| 4.1             |   | Certificate of  Designations, Preferences and Rights of Series C-1 Convertible Preferred  Stock (incorporated by reference to the exhibit so described in the Company’s  current Report on Form 8-K dated November 30, 2004, filed with the  SEC on December 1, 2004)                                        |
| 4.2             |   | Certificate of  Designations, Preferences and Rights of Series C-2 Convertible Preferred  Stock (incorporated by reference to the exhibit so described in the Company’s  current Report on Form 8-K dated November 30, 2004, filed with the  SEC on December 1, 2004)                                        |
| 4.3             |   | Letter Agreement, dated  December 21, 2007 by and between Valence Technology, Inc. and  Berg & Berg Enterprises, LLC (incorporated by reference to the  exhibit so described in the Company’s quarterly Report on Form 10-Q  dated February 11, 2008, filed with the SEC on February 11, 2008) |
| 31.1            |   | Certification of Robert L.  Kanode, Principal Executive Officer, pursuant to Rule 13a-14 and 15d-14  of the Securities Exchange Act of 1934.                                                                                                                                                                                     |
| 31.2            |   | Certification of Ross A.  Goolsby, Principal Financial Officer, pursuant to Rule 13a-14 and 15d-14  of the Securities Exchange Act of 1934                                                                                                                                                                                       |
| 32.1            |   | Certification of Robert L.  Kanode, Principal Executive Officer, pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                 |
| 32.2            |   | Certification of Ross A.  Goolsby, Principal Financial Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                 |

 

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereto duly authorized.

 

VALENCE TECHNOLOGY, INC.

 

| Date: February 9,  2009 |   | By:    | /s/ Ross A. Goolsby       |
|------------------------------|--------|--------|--------------------------------|
|                         |   |   | Ross A. Goolsby                |
|                         |   |   | Chief Financial Officer        |
|                         |   |   | (Principal Financial  Officer) |

 

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EXHIBIT INDEX

 
| **EXHIBIT NO.** | ** ** | ** **                                                                                                                                                                                                                                                                                                                            |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                  |
| 3.1             |       | Second Restated  Certificate of Incorporation of the Company (incorporated by reference to the  exhibit so described in the Company’s Registration Statement on Form S-1  (File No. 33-46765), as amended, filed with the SEC on March 27,  1992)                                                                 |
| 3.2             |       | Amendment to the Second  Restated Certificate of Incorporation of the Company (incorporated by the  reference to the exhibit so described in the Company’s Schedule 14A filed  with the SEC on January 28, 2000)                                                                                                            |
| 3.3             |       | Fourth Amended and  Restated Bylaws of the Company (incorporated by reference to the exhibit so  described in the Company’s Current Report on Form 8-K filed with the SEC  on January 22, 2008)                                                                                                                        |
| 4.1             |       | Certificate of  Designations, Preferences and Rights of Series C-1 Convertible Preferred  Stock (incorporated by reference to the exhibit so described in the Company’s  current Report on Form 8-K dated November 30, 2004, filed with the  SEC on December 1, 2004)                                        |
| 4.2             |       | Certificate of Designations,  Preferences and Rights of Series C-2 Convertible Preferred Stock  (incorporated by reference to the exhibit so described in the Company’s  current Report on Form 8-K dated November 30, 2004, filed with the  SEC on December 1, 2004)                                        |
| 4.3             |       | Letter Agreement, dated  December 21, 2007 by and between Valence Technology, Inc. and  Berg & Berg Enterprises, LLC (incorporated by reference to the  exhibit so described in the Company’s quarterly Report on Form 10-Q  dated February 11, 2008, filed with the SEC on February 11, 2008) |
| 31.1            |       | Certification of Robert L.  Kanode, Principal Executive Officer, pursuant to Rule 13a-14 and 15d-14  of the Securities Exchange Act of 1934.                                                                                                                                                                                     |
| 31.2            |       | Certification of Ross A.  Goolsby, Principal Financial Officer, pursuant to Rule 13a-14 and 15d-14  of the Securities Exchange Act of 1934                                                                                                                                                                                       |
| 32.1            |       | Certification of Robert L.  Kanode, Principal Executive Officer, pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                 |
| 32.2            |       | Certification of Ross A.  Goolsby, Principal Financial Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                 |

 

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