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 June 30, 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.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                     |       | **77-0214673**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) | ** ** | (I.R.S.  EmployerIdentification  No.) |
|                                                             | ** ** |                                  |
| **12201  Technology Blvd., Suite 150, Austin, Texas**       | ** ** | **78727**                             |
| (Address  of principal executive offices)                        | ** ** | (Zip  Code)                           |

 

**(512)527-2900**

(Registrant’stelephone number, including area code)

 

 

(Formername, former address and 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.

 

Thenumber of shares of common stock, par value of $0.001 per share, outstanding atAugust 1, 2008 was 117,168,621.

 

 

 

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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 June 30, 2008 and March 31, 2008                                                              | 1      |
| Condensed Consolidated  Statements of Operations and Comprehensive Loss for the Three Month Periods Ended June 30, 2008 and  June 30, 2007 | 2      |
| Condensed Consolidated  Statements of Cash Flows for  the Three Month Periods Ended June 30, 2008 and June 30, 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                                                                             | 24     |
|                                                                                                                                                 |   |
| Item 4. Controls and Procedures                                                                                                                 | 25     |
|                                                                                                                                                 |   |
| PART II  – OTHER INFORMATION                                                                                                               |   |
|                                                                                                                                                 |   |
| Item 1. Legal  Proceedings                                                                                                                      | 26     |
|                                                                                                                                                 |   |
| Item 1A. Risk Factors                                                                                                                           | 26     |
|                                                                                                                                                 |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.                                                                           | 28     |
|                                                                                                                                                 |   |
| Item 3.  Defaults Upon Senior Securities.                                                                                                       | 28     |
|                                                                                                                                                 |   |
| Item 4.  Submission of Matters to a Vote of Security Holders.                                                                                   | 28     |
|                                                                                                                                                 |   |
| Item 5. Other  Information.                                                                                                                     | 28     |
|                                                                                                                                                 |   |
| Item 6. Exhibits.                                                                                                                               | 29     |
|                                                                                                                                                 |   |
| Signatures and Certifications                                                                                                                        | 30     |

 

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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)

 
| ** **                                                                                                                                                                                                                                         | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                         | ** ** | **2008**          | ** ** | **2008**           | ** ** |
| ** **                                                                                                                                                                                                                                         | ** ** | **(unaudited)**   | ** ** | ** **         | ** ** |
| ASSETS                                                                                                                                                                                                                                             |       |              |       |               |       |
| Current assets:                                                                                                                                                                                                                                    |       |              |       |               |       |
| Cash and cash equivalents                                                                                                                                                                                                                          |       | $                 | 2,503      |               | $          | 2,616 |   |
| Trade receivables, net of allowance of $102  and $123                                                                                                                                                                                              |       | 13,663            |       | 7,208              |       |
| Inventory, net                                                                                                                                                                                                                                     |       | 9,971             |       | 8,904              |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                          |       | 5,014             |       | 3,283              |       |
| Total current assets                                                                                                                                                                                                                               |       | 31,151            |       | 22,011             |       |
|                                                                                                                                                                                                                                               |       |              |       |               |       |
| Property, plant and equipment, net                                                                                                                                                                                                                 |       | 5,570             |       | 5,090              |       |
| Intellectual property, net                                                                                                                                                                                                                         |       | 29                |       | 57                 |       |
| Total assets                                                                                                                                                                                                                                       |       | $                 | 36,750     |               | $          | 27,158 |   |
|                                                                                                                                                                                                                                               |       |              |       |               |       |
| LIABILITIES, PREFERRED STOCK AND  STOCKHOLDERS’ DEFICIT                                                                                                                                                                                       |       |              |       |               |       |
| Current liabilities:                                                                                                                                                                                                                               |       |              |       |               |       |
| Accounts payable                                                                                                                                                                                                                                   |       | $                 | 10,289     |               | $          | 4,214 |   |
| Accrued expenses                                                                                                                                                                                                                                   |       | 6,774             |       | 5,841              |       |
| Deferred revenue                                                                                                                                                                                                                                   |       | 1,024             |       | 756                |       |
| Short term notes payable                                                                                                                                                                                                                           |       | 2,500             |       | —             |       |
| Total current liabilities                                                                                                                                                                                                                          |       | 20,587            |       | 10,811             |       |
|                                                                                                                                                                                                                                               |       |              |       |               |       |
| Long-term interest payable to stockholder                                                                                                                                                                                                          |       | 22,187            |       | 21,447             |       |
| Long-term debt, net of debt discount                                                                                                                                                                                                               |       | 19,084            |       | 18,964             |       |
| Long-term debt to stockholder, net of debt  discount                                                                                                                                                                                               |       | 34,674            |       | 34,643             |       |
|                                                                                                                                                                                                                                               |       |              |       |               |       |
| Commitments and contingencies                                                                                                                                                                                                                      |       |              |       |               |       |
|                                                                                                                                                                                                                                               |       |              |       |               |       |
| Preferred Stock:                                                                                                                                                                                                                                   |       |              |       |               |       |
| Redeemable convertible preferred stock,  $0.001 par value, 10,000,000 shares authorized, 861 issued and outstanding as  of June 30, 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, 116,915,153 shares issued and 118,718,297 shares  outstanding as of June 30, 2008 and 117,439,248 shares issued and  115,636,104 shares outstanding as of March 31, 2008 |       | 119               |       | 117                |       |
| Additional paid-in-capital                                                                                                                                                                                                                         |       | 482,029           |       | 477,657            |       |
| Treasury shares, 1,803,144 at cost                                                                                                                                                                                                                 |       | (5,164            | )          | (5,164             | )          |
| Accumulated deficit                                                                                                                                                                                                                                |       | (541,826          | )          | (536,260           | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                               |       | (3,550            | )          | (3,667             | )          |
|                                                                                                                                                                                                                                               |       |              |       |               |       |
| Total stockholders’ deficit                                                                                                                                                                                                                   |       | (68,392           | )          | (67,317            | )          |
|                                                                                                                                                                                                                                               |       |              |       |               |       |
| Total liabilities, preferred stock and  stockholders’ deficit                                                                                                                                                                                 |       | $                 | 36,750     |               | $          | 27,158 |   |

 

*The accompanyingnotes are an integral part of these condensed consolidated financialstatements.*

 

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**ValenceTechnology, Inc.**

**Condensed Consolidated Statements of Operations andComprehensive Loss**

(in thousands)

(*Unaudited*)

 
| ** **                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| Revenue:                                                                                              |       |                                            |       |   |   |
| Battery and system sales                                                                              |       | $                                               | 10,886     |   | $ | 3,967 |   |
| Licensing and royalty revenue                                                                         |       | 104                                             |       | 85 |   |
|                                                                                                  |       |                                            |       |   |   |
| Total revenues                                                                                        |       | 10,990                                          |       | 4,052 |   |
|                                                                                                  |       |                                            |       |   |   |
| Cost of sales (1)                                                                                     |       | 11,016                                          |       | 3,527 |   |
|                                                                                                  |       |                                            |       |   |   |
| Gross margin / (loss)                                                                                 |       | (26                                             | )          | 525 |   |
|                                                                                                  |       |                                            |       |   |   |
| Operating expenses:                                                                                   |       |                                            |       |   |   |
| Research and product development (1)                                                                  |       | 1,159                                           |       | 817 |   |
| Marketing (1)                                                                                         |       | 806                                             |       | 489 |   |
| General and administrative (1)                                                                        |       | 2,525                                           |       | 2,001 |   |
| Depreciation and amortization                                                                         |       | 137                                             |       | 173 |   |
| (Gain) / loss on disposal of assets                                                                   |       | (6                                              | )          | 21 |   |
|                                                                                                  |       |                                            |       |   |   |
| Total operating expenses                                                                              |       | 4,621                                           |       | 3,501 |   |
|                                                                                                  |       |                                            |       |   |   |
| Operating loss                                                                                        |       | (4,647                                          | )          | (2,976 | ) |
|                                                                                                  |       |                                            |       |   |   |
| Foreign exchange gain / (loss)                                                                        |       | 470                                             |       | 188 |   |
| Interest and other income                                                                             |       | 4                                               |       | 7 |   |
| Interest and other expense                                                                            |       | (1,350                                          | )          | (1,556 | ) |
|                                                                                                  |       |                                            |       |   |   |
| Net loss                                                                                              |       | $                                               | (5,523     | ) | $ | (4,337 | ) |
|                                                                                                  |       |                                            |       |   |   |
| Dividends on preferred stock                                                                          |       | (43                                             | )          | (43 | ) |
|                                                                                                  |       |                                            |       |   |   |
| Net loss available to common stockholders,  basic and diluted                                         |       | $                                               | (5,566     | ) | $ | (4,380 | ) |
|                                                                                                  |       |                                            |       |   |   |
| Other comprehensive loss:                                                                             |       |                                            |       |   |   |
| Net loss                                                                                              |       | $                                               | (5,523     | ) | $ | (4,337 | ) |
| Change in foreign currency translation  adjustments                                                   |       | 117                                             |       | (67 | ) |
|                                                                                                  |       |                                            |       |   |   |
| Comprehensive loss                                                                                    |       | $                                               | (5,406     | ) | $ | (4,404 | ) |
|                                                                                                  |       |                                            |       |   |   |
| Net loss per share available to common  stockholders, basic and diluted                          |       | $                                               | (0.05      | ) | $ | (0.04 | ) |
| Shares used in computing net loss per share  available to common stockholders, basic and diluted |       | 116,396                                         |       | 108,439 |   |

 

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(1) Includes stock-based compensation asfollows:

 
| Cost of sales                    |   | $   | 9      |   | $      | — |   |
|----------------------------------|--------|-----|--------|--------|--------|--------|--------|
| Research and product development |   | 58  |   | 65     |   |
| Marketing                        |   | 122 |   | 63     |   |
| General and administrative       |   | 385 |   | 322    |   |
| Total stock-based compensation   |   | $   | 574    |   | $      | 450    |   |

 

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

 

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**ValenceTechnology, Inc.**

**Condensed Consolidated Statements of Cash Flows**

(in thousands)

(*Unaudited*)

 
| ** **                                                                  | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                       |       |                                            |       |   |   |
| Net loss                                                                    |       | $                                               | (5,523     | ) | $ | (4,337 | ) |
| Adjustments to reconcile net loss to cash  used in operating activities:    |       |                                            |       |   |   |
| Depreciation and amortization                                               |       | 402                                             |       | 253 |   |
| (Gain) / loss on disposal of assets                                         |       | (6                                              | )          | 21 |   |
| Bad debt expense (recoveries)                                               |       | (20                                             | )          | 49 |   |
| Accretion of debt discount and other                                        |       | 881                                             |       | 304 |   |
| Share-based compensation                                                    |       | 574                                             |       | 450 |   |
| Changes in operating assets and  liabilities:                               |       |                                            |       |   |   |
| Trade receivable                                                            |       | (6,436                                          | )          | 991 |   |
| Inventory                                                                   |       | (1,067                                          | )          | 326 |   |
| Prepaid and other current assets                                            |       | (1,730                                          | )          | (73 | ) |
| Accounts payable                                                            |       | 6,074                                           |       | (480 | ) |
| Accrued expenses and long-term interest                                     |       | 900                                             |       | 566 |   |
| Deferred revenue                                                            |       | 269                                             |       | (68 | ) |
|                                                                        |       |                                            |       |   |   |
| Net cash used in operating activities                                       |       | (5,682                                          | )          | (1,998 | ) |
|                                                                        |       |                                            |       |   |   |
| Cash flows from investing activities:                                       |       |                                            |       |   |   |
| Purchases of property, plant and equipment                                  |       | (776                                            | )          | (359 | ) |
| Proceeds from disposal of property, plant  and equipment                    |       | 6                                               |       | 1 |   |
|                                                                        |       |                                            |       |   |   |
| Net cash used in investing activities                                       |       | (770                                            | )          | (358 | ) |
|                                                                        |       |                                            |       |   |   |
| Cash flows from financing activities:                                       |       |                                            |       |   |   |
| Proceeds from short term loans                                              |       | 2,500                                           |       | — |   |
| Proceeds from stock option exercises                                        |       | 638                                             |       | — |   |
| Proceeds from issuance of common stock and  warrants, net of issuance costs |       | 3,162                                           |       | 4,000 |   |
|                                                                        |       |                                            |       |   |   |
| Net cash provided by financing activities                                   |       | 6,300                                           |       | 4,000 |   |
|                                                                        |       |                                            |       |   |   |
| Effect of foreign exchange rates on cash  and cash equivalents              |       | 39                                              |       | 1 |   |
|                                                                        |       |                                            |       |   |   |
| Increase / (decrease) in cash and cash  equivalents                         |       | (113                                            | )          | 1,645 |   |
| Cash and cash equivalents, beginning of  period                             |       | 2,616                                           |       | 1,168 |   |
| Cash and cash equivalents, end of period                                    |       | $                                               | 2,503      |   | $ | 2,813 |   |
|                                                                        |       |                                            |       |   |   |
| Supplemental information:                                                   |       |                                            |       |   |   |
| Interest paid                                                               |       | $                                               | 351        |   | $ | 479 |   |

 

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

 

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**ValenceTechnology, Inc.**

**Notes toCondensed Consolidated Financial Statements**

**June 30, 2008**

*(Unaudited)*

 

**1.**                         **INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:**

 

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 June 30, 2008, its consolidated results ofoperations for each of the three-month periods ended June 30, 2008 and June 30,2007, and the consolidated cash flows for the three-month periods ended June 30,2008 and June 30, 2007. Because all the disclosures required by accountingprinciples generally accepted in the United States are not included, theseinterim condensed consolidated financial statements should be read inconjunction with the audited financial statements and notes thereto in theCompany’s Annual Report on Form 10-K as of and for the year ended March 31,2008. The results for the three-month period ended June 30, 2008 are notnecessarily indicative of the results to be expected for the entire fiscal yearending March 31, 2009. The year-end condensed consolidated balance sheetdata as of March 31, 2008 was derived from audited financial statements,but does not include all disclosures required by accounting principlesgenerally accepted in the United States.

 

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

 

The Company was founded in 1989 and has commercialized the industry’sfirst lithium phosphate technology. Valence develops, manufactures and sellshigh-energy power systems utilizing its proprietary phosphate-based lithium-iontechnology for diverse applications, with special emphasis on portableappliances and future generations of hybrid and electric vehicles.  The Company’s objective is to promote thewide adoption of high-performance, safe, long cycle life, environmentally friendly,low-cost energy storage systems. To accomplish its objectives and address thesignificant market opportunity it believes is available to it, the Companyutilizes the numerous benefits of its latest energy storage technology, deepintellectual property portfolio and extensive experience of its managementteam.

 

In November 2007, Valence announced EpochTM, its third generationof Lithium Phosphate Energy Storage Systems, which are expected to becommercially available in the second quarter of fiscal 2009. EpochTM featuresthe Company’s safe, long-life lithium phosphate technology, which utilizes aphosphate-based cathode material. The Company believes that the advancedfunctionality and programmability of the EpochTM energy storage systems are wellsuited for electric vehicle (EV), plug-in hybrid electric vehicle (PHEV) andsimilar applications. EpochTM lithium phosphate energy storage systems addressesthe safety and limited life weaknesses of other lithium technologies whileoffering a solution that is competitive in cost and performance. Valencebelieves that EpochTM energy storage systems offer design and performancecapabilities that will facilitate adoption in automotive, industrial, UPS,telecommunications, aerospace and military markets not traditionally served byother lithium-ion solutions.

 

The Company’s business plan and strategy focus on the generation ofrevenue from product sales, while minimizing costs through partnerships withcontract manufacturers and internal manufacturing efforts through the Company’stwo wholly -owned subsidiaries in China. These subsidiaries initiated operations in late fiscal 2005.Valence expects to develop target markets through the sales of EpochTM Lithium Phosphate Energy Storage Systemsand custom lithium phosphate energy storage systems based on programmable EpochTM 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 TechnologyN.V., Valence Technology International, Inc., Valence Technology B.V.,Valence Technology (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 $541.8  million asof June 30, 2008. For the three-month periods ended June 30, 2008 andJune 30, 2007, the Company sustained net losses available to commonstockholders of $5.6 and $4.3 million, respectively. These factors, amongothers, indicate that the Company may be unable to continue as a going concernfor a reasonable period of time. The Company’s ability to continue as a goingconcern is contingent upon its ability to meet its liquidity requirements. Ifthe Company is unable to arrange for debt or equity financing on favorableterms or at all the Company’s ability to continue as a going concern isuncertain. These financial statements do not give effect to any adjustments tothe amounts and classifications of assets and liabilities which might benecessary should the Company be unable to continue as a going concern.

 

**Liquidityand Capital Resources:**

 

At June 30, 2008,the Company’s principal sources of liquidity were cash and cash equivalents of$2.5 million. The Company expects that its sources of liquidity will not besufficient for the remaining fiscal year. The Company anticipates product salesand royalties during fiscal 2009 will be insufficient to cover the Company’soperating expenses.  Management dependsupon their ability to periodically arrange for additional equity or debtfinancing to meet the Company’s liquidity requirements. Unless the Company’sproduct sales are greater than management currently forecasts or there areother changes to the business plan, the Company will need to arrange for additionalfinancing within the next three to six months to fund operating and capitalneeds. This financing could take the form of debt or equity. Given the Company’shistorical operating results and the amount of the Company’s existing debt, aswell as the other factors, the Company may not be able to arrange for debt orequity financing from third parties on favorable terms or at 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 remaining fiscalyear.

 

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

 

**RevenueRecognition:**

 

Revenues are generatedfrom sales of products including batteries and battery systems, and fromlicensing fees and royalties per technology license agreements. Product salesare recognized when all of the following criteria are met: persuasive evidenceof an arrangement exists, delivery has occurred, seller’s price to the buyer isfixed and determinable, and ability to collect is reasonably assured. For somesales to customers in foreign jurisdictions where retention of title is neededto perfect a security interest, the Company retains title to products shipped,similar to a lien under the U.S. Uniform Commercial Code. For these sales, allother revenue recognition criteria are met for these shipments and neither thecustomer nor the Company can rescind the transaction. Accordingly, the Companyrecognizes this revenue when the product is shipped. Product shipments that arenot recognized as revenue during the period shipped, primarily productshipments to resellers that are subject to right of return, are recorded asdeferred revenue and reflected as a liability on the Company’s balance sheet.Products shipped to resellers with right of return are included in finishedgoods inventory as the Company retains title to the products.  For reseller shipments where revenuerecognition is deferred, the Company records revenue and relieves inventory basedupon 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 time theCompany 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 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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** **

**Use of Estimates:**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the U.S. requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements, aswell as the revenues and expenses for the period. The Company has madesignificant estimates in determining the allowance for bad debt, the amount ofinventory reserves and inventory overhead absorption, warranty liabilities, andshare based compensation.  Actual resultscould differ from those estimates.

 

**Recent Accounting Pronouncements:**

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) 157, *“FairValue Measurements”*. 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 value measurements.This pronouncement applies under other accounting standards that require orpermit fair value measurements. Accordingly, this statement does not requireany new fair value measurement. This statement is effective for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears. However, SFAS 157 is amended by Financial Statement Position (“FSP”) FAS157-1, *“Application of FASB Statement 157 toFASB Statement 13 and Other Accounting Pronouncements That Address Fair ValueMeasurements 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 isalso amended by FSP FAS 157-2 “Effective Date of FASB Statement No. 157”,which delays the effective date of SFAS 157 for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis (at least annually).This FSP partially defers the effective date of Statement 157 to fiscal yearsbeginning after November 15, 2008, and interim periods within those fiscalyears for items within the scope of this FSP. The Company 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 February 2007,the FASB issued SFAS 159, *“The Fair ValueOption for Financial Assets and Financial Liabilities – including an amendmentof FASB Statement 115”.* This standard permits an entity to measuremany financial instruments and certain other assets and liabilities at fairvalue on an instrument-by-instrument basis. This statement is effective forfiscal years beginning after November 15, 2007. The Company adopted SFAS159 on April 1, 2008 as required. The adoption of SFAS 159 did not have asignificant impact on the Company’s financial position or results of operationsas the Company did not elect the fair value option for items within the scopeof this statement.

 

In December 2007,the FASB issued SFAS 141(R), *“BusinessCombinations—a replacement of FASB Statement 141”* , whichsignificantly changes the principles and requirements for how the acquirer of abusiness recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, and any non-controlling interest inthe acquiree. The statement also provides guidance for recognizing andmeasuring the goodwill acquired in the business combination and determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination. This statement iseffective prospectively, except for certain retrospective adjustments todeferred tax balances, for fiscal years beginning after December 15, 2008.The Company is currently evaluating the requirements of SFAS 141(R) andhave not yet determined the impact on the Company’s consolidated financialstatements.

 

In March 2008, theFASB issued SFAS 161, *“Disclosures aboutDerivative Instruments and Hedging Activities”*. This Statementchanges the disclosure requirements for derivative instruments and hedgingactivities. Entities are required to provide enhanced disclosures about (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under Statement 133 andits related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows. This statement is effective for fiscal years andinterim periods beginning after November 15, 2008. Early application isencouraged. The Company is currently evaluating the requirements of SFAS 161and have not yet determined the impact on the Company’s consolidated financialstatements.

 

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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-month periods ended June 30, 2008and June 30, 2007 were as follows:

 
| ** **                                                                             | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Shares reserved for conversion of Series C-1 and  Series C-2 preferred stock |       | 3,628,634                                           |       | 3,628,634 |   |
| Common stock options reserved                                                          |       | 7,500,843                                           |       | 9,945,971 |   |
| Warrants to purchase common stock                                                      |       | 2,955,643                                           |       | 2,955,643 |   |
| Total                                                                                  |       | 14,085,120                                          |       | 16,530,248 |   |

 

The number of shareslisted above as reserved for conversion of Series C-1 and Series C-2preferred stock do not include shares related to accrued dividends that areconvertible at the election of the Company, subject to certain limitations. At June 30,2008, up to $474,000 in accrued dividends would be convertible into up to106,998 shares of common stock based on the closing sales price of $4.43 pershare on June 30, 2008.

 

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

 

Inventory consisted ofthe following (in thousands) at:

 
| ** **      | ** ** | **June 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|-----------------|------------|-----------------------------|------------|------------------------------|------------|
|            |       |                        |       |                         |       |
| Raw materials   |       | $                           | 2,850      |                         | $          | 1,485 |   |
| Work in process |       | 4,338                       |       | 4,140                        |       |
| Finished goods  |       | 2,783                       |       | 3,279                        |       |
| Total inventory |       | $                           | 9,971      |                         | $          | 8,904 |   |

 

Included in inventory at June 30,2008 and March 31, 2008 were valuation allowances of $4.5 million and $2.0million to reduce their carrying values to the lower of cost or market.Management has valued overhead absorption related to work in process based onestimates of completion at June 30, 2008.

 

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

 

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

 
| ** **                      | ** ** | **June 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|---------------------------------|------------|-----------------------------|------------|------------------------------|------------|
|                            |       |                        |       |                         |       |
| Leasehold improvements          |       | $                           | 1,162      |                         | $          | 1,141 |   |
| Machinery and equipment         |       | 5,826                       |       | 5,319                        |       |
| Office and computer equipment   |       | 1,637                       |       | 1,620                        |       |
| Construction in progress        |       | 582                         |       | 407                          |       |
| Total cost                      |       | 9,207                       |       | 8,487                        |       |
| Less: accumulated depreciation  |       | (3,637                      | )          | (3,397                       | )          |
| Total cost, net of depreciation |       | $                           | 5,570      |                         | $          | 5,090 |   |

 

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**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:

 
| ** **                              | ** ** | **June 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
|                                    |       |                        |       |                         |       |
| Intellectual property before impairment |       | $                           | 13,602     |                         | $          | 13,602 |   |
| Less: accumulated amortization          |       | (5,079                      | )          | (5,051                       | )          |
| Less: impairment                        |       | (8,494                      | )          | (8,494                       | )          |
| Intellectual property, net              |       | $                           | 29         |                         | $          | 57 |   |

 

Amortization expense wasapproximately $29,000 for the three-month periods ended June 30, 2008 and June 30,2007.

 

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

 
| **(in thousands)**            | ** ** | **June 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
|                               |       |                        |       |                         |       |
| 2005 Loan balance                  |       | $                           | 20,000     |                         | $          | 20,000 |   |
| Unaccreted debt discount           |       | (916                        | )          | (1,036                       | )          |
| Balance                            |       | $                           | 19,084     |                         | $          | 18,964 |   |
|                               |       |                        |       |                         |       |
| 2001 Loan from stockholder balance |       | 20,000                      |       | $                            | 20,000     |   |
| 1998 Loan from stockholder balance |       | 14,950                      |       | 14,950                       |       |
| Unaccreted debt discount           |       | (276                        | )          | (307                         | )          |
| Balance                            |       | $                           | 34,674     |                         | $          | 34,643 |   |

 

On July 13, 2005,the Company 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 1/16th of 1.0%, plus 4.0% (6.45% as of June 30, 2008). The loan may be prepaidduring the period beginning on July 13, 2007 through July 12, 2009,with a 1.0% prepayment premium, and on July 13, 2009 and thereafter withno prepayment premium. As of June 30, 2008, no amounts have been paid onthe loan.  In connection with the loan, the Company purchased a rate capagreement to protect against fluctuations in LIBOR for the full amount of the loanfor a period of three years. The fair value of the LIBOR rate cap agreement isincluded in other assets and marked-to-market on a quarterly basis.

 

In connection with theloan, 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, 6.45% volatility,and a risk free rate of 3.88%. On April 24, 2008, Berg & Bergexercised its warrants by purchasing 600,000 shares of the Company’s commonstock for an aggregate purchase price of $1.6 million. In addition, SFT I, Inc.completed a cashless exercise of its warrants on June 4, 2008 and June 27,2008 and received a total 230,767 common stock shares upon completion of thecashless exercise. Also in connection with the loan, the Company incurred aloan commitment fee and attorney’s fees which, in addition to the interest ratecap agreement, have been recorded as a discount on the debt and will beaccreted as interest expense over the life of the loan. Through June 30,2008, a total of approximately $1.4 million has been accreted and included asinterest expense. Interest payments on the loan are currently being paid on amonthly basis.

 

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In October 2001, theCompany entered into a loan agreement (“2001 Loan”) with Berg & Berg.Under the terms of the agreement, Berg & Berg agreed to advance theCompany 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 the2001 Loan, Berg & Berg received a warrant to purchase 1,402,743 sharesof the Company’s common stock at the price of $3.208 per share. The warrantswere exercisable beginning on the date they were issued and originally expiredon August 30, 2005. In July 2005, the warrants were extended until September 30,2008. The fair value assigned to these warrants, totaling approximately $5.1million, has been reflected as additional consideration for the debt financing,recorded as a discount on the debt and accreted as interest expense over thelife of the loan. The warrants were valued using the Black-Scholes method usingthe assumptions of a life of 47 months (extended to 84 months), 100%volatility, and a risk-free rate of 5.5%. Through June 30, 2008, a totalof $5.0 million has been accreted and included as interest expense. The amountscharged to interest expense on the outstanding balance of the loan for thethree-month periods ended June 30, 2008 and June 30, 2007 were$404,000. Interest payments on the loan are currently being deferred, and arerecorded as long-term interest. The accrued interest amounts for the 2001 Loanwere $10.4 million and $10.0 million as of June 30, 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 $10.0 millionprincipal 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 June 30, 2008, the Company had an outstanding balance of$15.0 million under the 1998 Loan agreement. The loan bears interest at onepercent over lender’s borrowing rate (approximately 9.0 % at June 30,2008). 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 $11.8 million and $11.5 million as of June 30,2008 and March 31, 2008, respectively.

 

All of the Company’sassets are pledged as collateral under the 2001 Loan and the 1998 Loan tostockholder.

 

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

 

**Warranties:**

 

TheCompanyhasestablishedawarrantyreserveinconnectionwiththesaleofN-Charge®PowerSystemscovering a 12-month warranty period during which the Company wouldprovide a replacement unit to any customers returning a purchased productbecause of a product performance issue. The Company has also established awarranty reserve in relation to the sale of U-Charge® Power Systems, and otherlarge-format power systems. The total warranty liability was $1.3 million and$1.2 million as of June 30, 2008 and March 31, 2008, respectively.

 

**Litigation:**

 

On January 31, 2007,Valence filed a claim against Phostech Lithium Inc. in the Federal Court inCanada (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, Valence filed an amended claim alleging infringement of its recentlygranted Canadian Patents 2,483,918 and 2,466,366. The action is in the initialpleading state. The Company is seeking monetary damages and injunctive relief forthe acts of Phostech in manufacturing, using and selling phosphate cathodematerial that infringes the asserted Valence Canadian Patents.

 

On February 14,2006, Hydro-Quebec filed an action against the Company in the United StatesDistrict Court for the Western District of Texas (Hydro-Quebec v. ValenceTechnology, Civil Action No. A06CA111). In its amended complaint filed April 13,2006, Hydro-Quebec alleges that Saphion ® I Technology, the technology utilizedin all of the Company’s commercial products, infringes U.S. Patent No. 5,910,382and 6,514,640 exclusively licensed to Hydro-Quebec. Hydro-Quebec’s complaintseeks injunctive relief and monetary damages. The action is in the initialpleading state and the Company has filed a response denying the allegations inthe amended complaint. The action has been stayed by the Court pending a finaldetermination of the two reexaminations by the USPTO.

 

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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 CONVERTIBLE PREFERRED 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 Series CConvertible Preferred Stock, representing $8.6 million of principal. The Series CConvertible 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$4.3 million. 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 theconversion date. The preferred shares are currently outstanding and subject toredemption or conversion at the holder’s discretion.

 

Pursuant to assignmentagreements entered into between the Company and Berg & BergEnterprises, LLC on July 14, 2005 and December 14, 2005, Berg &Berg purchased all of the outstanding Series C-1 Convertible PreferredStock and Series C-2 Convertible Preferred Stock from its original holder.Pursuant to the terms of the assignment agreement, Berg & Berg agreedthat the failure of the Company to redeem the preferred stock on December 15,2005 did not constitute a default under the certificate of designations and haswaived the accrual of any default interest applicable in such circumstance. Inexchange, the Company has agreed (i) that the Series C-1 ConvertiblePreferred Stock may be converted, at any time, into the Company’s common stockat the lower of $4.00 per share or the closing bid price of the Company’scommon stock on December 13, 2005 ($1.98) and (ii) that the Series C-2Convertible Preferred Stock may be converted, at any time, into the Company’scommon stock at the lower of $4.00 per share or the closing bid price of theCompany’s common stock on July 13, 2005 ($2.96). Berg & Berg hasagreed to allow dividends to accrue on the preferred stock.  At June 30 2008, $474,000 in preferredstock dividends had accrued.

 

In connection with theissue of the original issuance of the Series C Convertible PreferredStock, in June 2003, the Company issued to the Series C ConvertiblePreferred Stock original holder a warrant to purchase 352,900 shares of theCompany’s common stock. The warrant, which expired on June 2, 2008, had apurchase price of $5.00 per share. The warrant was valued using theBlack-Scholes valuation model. The warrant was recorded to additional paid incapital at its relative fair value to the Series C Convertible PreferredStock at $933,000. Accretion to the remaining redemption value of $8.61 millionwas recorded over the eighteen-month period of the Series C ConvertiblePreferred Stock ending December 2, 2004.

 

**10.                       SHAREBASED COMPENSATION:**

 

In February 1996,the Board of Directors adopted a stock plan for outside Directors (the “1996Non-Employee Director’s Stock Option Plan”). The plan provides that newdirectors will receive an initial stock option of 100,000 shares of commonstock upon their election to the Board. The exercise price for this initialoption will be the fair market value on the day it is granted. This initialoption will vest one-fifth on the first and second anniversaries of the grantof the option, and quarterly over the next three years. A director who had notreceived an option upon becoming a director will receive an initial stock optionof 100,000 shares on the date of the adoption of the plan. During the firstthree months of fiscal 2009, no shares were granted under this plan. At June 30,2008, the Company has 236,820 shares available for grant under the 1996Non-Employee Director’s Stock Option Plan.

 

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In January 2000, theBoard of Directors adopted the 2000 Stock Option Plan (the “2000 Plan”). TheCompany may grant incentive stock options to employees and non-statutory stockoptions to non-employee members of the Board of Directors and consultants underthe 2000 Plan. 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 2000Plan. During the first three months of fiscal 2009, 16,500 shares were grantedunder this plan. At June 30, 2008, the Company had 1,087,875 sharesavailable for grant 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**           | ** ** | **Weighted  Average** | ** ** |
| ** **                     | ** ** | **Shares**                   | ** ** | **Exercise Price** | ** ** |
| Balance at March 31, 2008 |       | 6,688                        |       | $ | 2.95 |   |
| Granted                        |       | 17                           |       | 3.17 |   |
| Exercised                      |       | (277                         | )          | 1.69 |   |
| Canceled                       |       | (252                         | )          | 3.14 |   |
| Balance at June 30, 2008  |       | 6,176                        |       | $ | 2.97 |   |

 

The following tablesummarizes information about fixed stock options outstanding at June 30,2008 (shares in thousands):

 
| ** **               | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Average**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Contractual**              | ** ** | **Average** | ** ** | ** ** | ** ** | **Average ** | ** ** |
| **Range of**        | ** ** | **Number**                   | ** ** | **Life**                     | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding**              | ** ** | **(years)**                  | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $0.63 - $1.99            |       | 4,335                        |       | 8.41                         |       | $ | 1.54 |   | 488 |   | $ | 1.45 |   |
| $1.99 - $4.62            |       | 1,015                        |       | 6.22                         |       | 3.12 |   | 680 |   | 3.44 |   |
| $4.62 - $10.06           |       | 715                          |       | 1.49                         |       | 7.03 |   | 715 |   | 7.03 |   |
| $10.06 - $15.75          |       | 10                           |       | 2.25                         |       | 13.84 |   | 10 |   | 13.84 |   |
| $15.75 - $23.56          |       | —                       |       | —                       |       | — |   | — |   | — |   |
| $23.56 - $34.62          |       | 101                          |       | 1.67                         |       | 32.93 |   | 101 |   | 32.93 |   |
| $0.63 - $34.62           |       | 6,176                        |       | 7.13                         |       | $ | 2.97 |   | 1,994 |   | $ | 5.78 |   |

 

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 June 30,2008 and June 30, 2007, $574,000 and $450,000 of share based compensationexpense has been included in operating expenses in the condensed consolidatedstatements of operations and comprehensive loss. The aggregate intrinsic valueof options exercisable at June 30, 2008 is $2.1 million. There were276,918 options exercised during the three-month period ended June 30,2008.

 

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As of June 30, 2008the Company had a total of $4.5 million in compensation costs related tostock-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:

 
| ** **                               | ** ** | **June 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Weighted average risk-free interest rate |       | 2.87                        | %          | 4.27                         | %          |
| Average expected life in years           |       | 6.1 years                   |       | 5.9 years                    |       |
| Average expected volatility              |       | 82.92                       | %          | 80.49                        | %          |
| Dividend yield                           |       | None                        |       | None                         |       |

 

**11.                       RELATEDPARTY TRANSACTIONS:**

 

On July 23, 2008, Berg & Berg advancedto the Company $3.0 million as a loan to be used to cover working capitalrequirements.  In connection therewith,the Company executed a promissory note (the “$3.0 Million Promissory Note”) inthe aggregate principal amount of $3.0 million in favor of Berg &Berg.  The $3.0 Million Promissory Noteis payable on September 15, 2008 and bears interest at a rate of 8.0% perannum.  At the election of Berg &Berg, all principal and accrued but unpaid interest then outstanding under the$3.0 Million Promissory Note may be used as full or partial, as the case maybe, satisfaction of the purchase price of the Company’s equity securities inthe event that Berg & Berg purchases any of the Company’s equitysecurities after the date of the $3.0 Million Promissory Note.  This is the second working capital loaninstallment made pursuant to an agreement between the Company and Berg &Berg discussed in the paragraph below 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 financialneeds.  Currently, the Company has up to$4.5 million in principal amount of working capital loans remaining under theagreement.

 

On June 26, 2008, Berg & Berg advancedto the Company $2.5 million as a loan to be used to cover working capitalrequirements.  Subsequently, Berg &Berg and the Company entered into an agreement whereby Berg & Bergagreed to provide for up to $10.0 million in such interim working capital loansfrom time to time in order for Berg & Berg and/or certain of itsaffiliates to supplement the Company’s working capital and other financialneeds.  In connection therewith, on July 2,2008, the Company executed a promissory note (the “$2.5 Million Promissory Note”)in aggregate principal amount of $2.5 million in favor of Berg & Bergfor the initial advance.  The $2.5Million Promissory Note is payable on September 15, 2008 and bearsinterest at a rate of 8.0% per annum.  Atthe election of Berg & Berg, all principal and accrued but unpaidinterest then outstanding under the $2.5 Million Promissory Note may be used asfull or partial, as the case may be, satisfaction of the purchase price of theCompany’s equity securities in the event Berg & Berg purchases any ofthe Company’s equity securities after the date of the $2.5 Million PromissoryNote.

 

On April 24,2008, Berg & Berg exercised a warrant to purchase 600,000 shares ofthe Company’s common stock.  The purchaseprice was $2.74 per share as set forth in the warrant.  On July 13, 2005, the Company enteredinto an agreement with SFT I, Inc., providing for a $20.0 million loan tothe Company.  In exchange for entry intothe loan agreement and the guaranty of the loan, SFT I, Inc. and Berg &Berg were each issued three -year warrants to purchase 600,000 shares of theCompany’s common stock, at $2.74 per share, the closing price of the Company’scommon stock on July 12, 2005.

 

**12.                       SEGMENTAND GEOGRAPHIC INFORMATION:**

 

The Company’s chiefoperating decision maker is its Chief Executive Officer, who reviews operatingresults to make decisions about resource allocation and to assess performance.The Company’s chief operating decision maker views results of operations of asingle operating segment, the development and marketing of the Company’slithium phosphate technology. The Company’s Chief Executive Officer hasorganized the Company functionally to develop, market and manufacture lithiumphosphate products.

 

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

 
| ** **    | ** ** | **June 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|---------------|------------|-----------------------------|------------|------------------------------|------------|
| United States |       | $                           | 385        |                         | $          | 340 |   |
| International |       | 5,185                       |       | 4,807                        |       |
| Total         |       | $                           | 5,570      |                         | $          | 5,147 |   |

 

Revenues by geographicarea are as follows (in thousands):

 
| ** **    | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------|------------|-----------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| United States |       | $                                                   | 5,850      |   | $ | 3,870 |   |
| International |       | 5,140                                               |       | 182 |   |
| Total         |       | $                                                   | 10,990     |   | $ | 4,052 |   |

 

**13.                       SUBSEQUENTEVENTS:**

 

During June 2008,certain accounts receivable from The Tanfield Group, PLC (“Tanfield”), a U. K.customer, aggregating approximately $5.7 million, became significantly pastdue. On July 1, 2008, Tanfield announced a marked slowdown in theirmarkets and therefore revised their strategy to expect significantly lowergrowth than previously forecasted. On July 30, 2008, the Company signed anagreement (the “Agreement”) with Tanfield that provided for the amounts owedplus interest thereon to be repaid in installments of $1.7 million on July 31,2008, $1.6 million on August 14, 2008, $1.6 million on September 6,2008, and $1.1 million on September 27, 2008. On July 31, 2008, asper the agreement, Tanfield paid $1.7 million to the Company. After the $1.7million payment received July 31, 2008, Tanfield owed the Companyapproximately $4.0 million.

 

The agreement alsoprovides for reclamation of the goods sold to Tanfield by the Company in theevent of default. This agreement further perfected a security interest in theevent of default on the payments.  TheCompany could incur a loss if Tanfield does not make the remaining agreed uponpayments, which could be mitigated by the reclamation of the related inventory.However, the Company is unable to reasonably estimate the amount of loss, ifany, due to default on these payments or the offsetting value of reclaimedinventory. Accordingly, as of June 30, 2008, the Company has not accrued areserve against the remaining unpaid $4.0 million receivable balance.

 

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**ITEM 2.****                                      ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This Report containsstatements that 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;                                             |
| · |   | international  business risks;                                                                                           |
| · |   | our ability to  attract skilled personnel;                                                                               |
| · |   | our ability to  protect and enforce our current and future intellectual property;                                        |
| · |   | international  business risks;                                                                                           |
| · |   | our need for  additional, dilutive financing or future acquisitions; and                                                 |
| · |   | future economic,  business and regulatory conditions.                                                                    |

 

**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, as well as any cautionary language in this Report or any of ourother reports or filings, including our Annual Report on Form 10-K,provide examples of risks, uncertainties and events that may cause our actualresults to differ materially from the expectations we described in ourforward-looking statements.**

 

**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 monthperiod ended June 30, 2008 are not necessarily indicative of the resultsto be expected for the entire fiscal year ending March 31, 2009 or anyother period.**

 

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**Overview**

 

We were founded in1989 and have commercialized the industry’s first lithium phosphate technology.We develop, 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 topromote the wide adoption of high-performance, safe, long cycle life,environmentally friendly, low-cost energy storage systems. To address thesignificant market opportunity we believe is available, we utilize the numerousbenefits of our latest energy storage technology, deep intellectual propertyportfolio and extensive experience of our management team.

 

In November 2007,we announced EpochTM, our third generation of Lithium Phosphate Energy StorageSystems, which are expected to be commercially available in the second quarterof fiscal 2009. EpochTM features our safe, long-life lithium phosphatetechnology which utilizes a phosphate-based cathode material. We believe thatthe advanced functionality and programmability of the EpochTM energy storagesystems are well suited for electric vehicle (EV), plug-in hybrid electricvehicle (PHEV) and similar applications. EpochTM lithium phosphate energy storagesystems addresses the safety and limited life weaknesses of other lithiumtechnologies while offering a solution that is competitive in cost andperformance. We believe that EpochTM energy storage systems offer design andperformance capabilities that will facilitate adoption in automotive,industrial, UPS, telecommunications, aerospace and military markets nottraditionally served by other lithium-ion solutions.

 

**Strategy**

 

Our business planand strategy 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 EpochTM Lithium Phosphate Energy StorageSystems and custom lithium phosphate energy storage systems based onprogrammable EpochTM Command and Control Logic. In addition, we expect to pursuea licensing strategy to supply the lithium phosphate sector with advancedValence material and components, including lithium phosphate cathode materialsto fulfill other manufacturers’ needs.

 

Key elements ofour business strategy include:

 

·                  *Develop and market differentiatedbattery solutions for a wide array of applications that leverage the advantagesof our technology.*Our product development and marketing efforts are focused on large-formatbattery solutions, such as our EpochTM Lithium Phosphate Energy Storage Systemsand U-Charge® Power System and other custom battery solutions that featureadvanced performance and technological advantages. These products are targetedfor a broad range of applications in the motive, power and consumer appliance,telecommunication and utility industries and as a substitute for certainapplications using lead-acid batteries.

 

·                  *Manufacturing high-quality,cost-competitive products using a combination of Company owned and contractmanufacturing facilities*. Our products are manufactured in China, using both internal andcontract manufacturing resources. Our company-owned China facility includes twoplants; one manufactures our advanced lithium phosphate materials with ourpatented thermo-carbon process while the second manufactures our advancedstandard large-format packs such as U-Charge® and EpochTM and custom packs suchas 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 businessstrategy is being implemented in three phases, each building on the previousone:

 

·                  Initial Phase: The initial phase of our strategy, nowcomplete, focused on the first generation of our technology in our patentedpolymer construction. During this phase, we introduced the N-Charge® PowerSystem which has been sold through national and regional retailers, top-tiercomputer manufacturers and national resellers. We have discontinued the sale of our N-Charge products.

 

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·                  Second Phase: The second phase of our businessstrategy is nearly complete. Throughout this phase our cell development hasfocused on commercializing a cylindrical Lithium Phosphate cell and advancedthird generation Intelligent Energy Source Storage System (EpochTM). This familyof products is designed for motive applications such as hybrid and electricvehicles, scooters and wheelchairs and has the same dimensions as the mostpopular lead acid batteries but with significant increases in performance relatedto safety, energy cycle life and weight.

 

·                  Third Phase: The third phase of our business strategywill entail the development and commercialization of our patented LithiumVanadium Phosphate (LVP) and Lithium Vanadium Phosphate Fluoride (LVPF) cathodematerials into large-format, high capacity prismatic cells. These materialsoffer superior performance with additional energy storage and higher voltagecapabilities for the automotive, industrial, UPS, aerospace,telecommunications, military and other sectors.

 

Our businessheadquarters is in Austin, Texas. Our materialsresearch and development center is in Las Vegas, Nevada. Our European sales andOEM manufacturing support center is in Mallusk, Northern Ireland. Ourmanufacturing and product development center is in Suzhou, China.  We have the following 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.

 

**GoingConcern**

 

As a result of ourlimited cash resources and history of operating losses that there issubstantial doubt about our ability to continue as a going concern. Wepresently have no further commitments for financing by our Chairman Carl Bergand/or his affiliates or any other source. If we are unable to obtain financingfrom Mr. Berg or others on terms acceptable to us, or at all, we may beforced to cease all operations and liquidate our assets. Our cash requirementsmay vary materially from those now planned because of changes in ouroperations, including the failure to achieve expected revenues, greater thanexpected expenses, changes in OEM relationships, market conditions, the failureto timely realize our product development goals, and other adversedevelopments. These events could have a negative impact on our availableliquidity sources during fiscal 2009.

 

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**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 has occurred, seller’s price to the buyer isfixed and determinable, and collection is reasonably assured. For some sales tocustomers in foreign jurisdictions where retention of title is needed toperfect a security interest, we retain title to products shipped, similar to alien under the U.S. Uniform Commercial Code. For these sales, all other revenuerecognition criteria is met for these shipments and neither we nor the customercan rescind the transaction. Accordingly, we recognize this revenue when theproduct is shipped. Product shipments that are not recognized as revenue duringthe period shipped, primarily product shipments to resellers that are subjectto right of return, are recorded as deferred revenue and reflected as aliability on our balance sheet. Products shipped with right of return areincluded in finished goods inventory as we retain title to the products.  For reseller shipments where revenue recognitionis 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.

 

**Resultsof Operations**

 

The following tablesummarizes the results of our operations for the three months (also referred toas the first quarter) ended June 30, 2008 and June 30, 2007:

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| **(dollars in thousands)** | ** ** | **Total**                                           | ** ** | **% of  Revenue** | ** ** | **Total** | ** ** | **% of  Revenue** | ** ** |
| Battery and systems sales            |       | $                                                   | 10,886     |   | 99 | % | $ | 3,967 |   | 98 | % |
| Licensing and royalty revenue        |       | 104                                                 |       | 1 | % | 85 |   | 2 | % |
| Total revenues                       |       | 10,990                                              |       | 100 | % | 4,052 |   | 100 | % |
|                                 |       |                                                |       |   |   |   |   |   |   |
| Gross margin profit (loss)           |       | (26                                                 | )          | 0 | % | 525 |   | 13 | % |
| Operating expenses                   |       | 4,621                                               |       | 42 | % | 3,501 |   | 86 | % |
| Operating loss                       |       | (4,647                                              | )          | (42 | )% | (2,976 | ) | (73 | )% |
| Net loss                             |       | $                                                   | (5,523     | ) | (50 | )% | $ | (4,337 | ) | (107 | )% |

 

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***Revenues and Gross Margin***

 

*Batteryand System Sales*.. Battery and systems sales totaled $10.9 million for the three months ended June 30,2008, as compared to $4.0 million for the three months ended June 30,2007. The increase in revenues was primarily due to sales to a new customer,Tanfield, of $4.2 million as well as an increase in sales to Segway of $1.6million ($4.2 million compared to $2.5 million in the same period last year).We had $1,024,000 and $756,000 in deferred revenue on our balance sheet at June 30,2008 and March 31, 2008, respectively, primarily related to sales shippingin the end of the quarter. Tanfield sales accounted for 38% and 0% of ourproduct sales for the first fiscal quarter in 2009 and 2008, respectively. Asdiscussed in Note 13, Subsequent Events, to the accompanying financialstatements, Tanfield has revised their strategy to expect significantly lowergrowth than previously forecasted. We halted shipments to Tanfield in June andhow much, if any, future revenues we may receive from sales to Tanfield isuncertain.  Segway sales accounted for38% and 62% of our total product sales for the first fiscal quarter in 2009 and2008, respectively. We expect sales of the large-format battery system toincrease during fiscal 2009, due to the growing demand of the new EpochTMLithium Phosphate Energy Storage Systems and the fulfillment of our currentback orders and sales agreements.  Weexpect sales of the N-Charge® Power System to be reduced in fiscal 2009 as wediscontinue the product. The large-format battery system sales represent 57%and 12% of our total revenue for the first fiscal quarter in 2009 and 2008,respectively.  The growth in large-formatbattery systems sales are due to the increase in demand in alternative energysolutions driven by the rising costs of fossil fuels.

 

*Licensingand Royalty Revenue*.. Licensing and royalty revenues relate to revenue from licensing agreementsfor our battery construction technology. Fiscal first quarter 2009 licensingand royalty revenue was $104,000 compared with $85,000 for the same quarter infiscal 2008. Licensing and royalty revenue was substantially from our licenseagreement with Amperex Technology Limited, which makes on-going royaltypayments as sales are made using our technology. We expect to continue topursue a licensing strategy as our lithium phosphate technology receivesgreater market acceptance. We expect licensing and royalty revenues to remainrelatively flat.

 

*GrossMargin* . Grossmargin as a percentage of revenue was 0% for the three months ending June 30,2008 as compared to 13% in the three months ending June 30, 2007.Management revised certain estimates regarding inventory reserves, therebyincreasing reserves by $2.5 million for the three months ended June 30,2008 and decreasing reserves by $414,000 for the three months ended June 30,2007. The majority of the reserve adjustment for the first fiscal quarter in2009 was related to the discontinuation of the N-Charge product line. Wereduced the carrying value of our N-Charge inventory from $2.1 million to $0.6million, which is the estimated net realizable value, as of June 30, 2008.

 

***Operating Expenses***

 

The following tablesummarizes operating expenses for the three months ended June 30:

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | **Increase/** | ** ** | ** ** | ** ** |
| **(dollars in thousands)** | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
|                                 |       |                                                |       |   |   |   |   |   |   |
| Research and product development     |       | $                                                   | 1,159      |   | $ | 817 |   | $ | 342 |   | 42 | % |
| Marketing                            |       | 806                                                 |       | 489 |   | 317 |   | 65 | % |
| General and administrative           |       | 2,525                                               |       | 2,001 |   | 524 |   | 26 | % |
| Depreciation and amortization        |       | 137                                                 |       | 173 |   | (36 | ) | (21 | )% |
| Loss on disposal of assets           |       | (6                                                  | )          | 21 |   | (27 | ) | (129 | )% |
| Total operating expenses             |       | $                                                   | 4,621      |   | $ | 3,501 |   | $ | 1,120 |   | 32 | % |
| Percentage of revenues               |       | 42                                                  | %          | 86 | % |   |   |   |   |

 

During the three monthsending June 30, 2008, total operating expenses were 42% of revenuecompared to 86% of revenue during the same quarter last year.  The dollar increase is primarily due toincreased wages, legal expenses and travel costs and the percentage decrease isdue to the increases in revenue for the three months ended June 30, 2008.

 

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*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 $342,000, or 42%, to$1,159,000 for the three months ending June 30,2008 from $817,000 for thethree months ending June 30,2007. The increase in research and development expenses is the result ofincrease expenses related to the development of the new EpochTM  line. Engineering and design fees related to third -party consulting servicesincreased by $104,000.  Salary expensesincreased by $153,000, primarily due to the hiring of two application engineerssince the same period last year, in addition to standard annual salaryincreases for current employees. Expenses related to components, parts and software used in testing ourproducts increased by $159,000.  Duringthe three months ending June 30,2008, approximately $58,000 of share basedcompensation was allocated to research and development expenses as compared to$65,000 in the three months ending June 30,2007. We expect research anddevelopment expenses to increase as we create and develop new products.

 

*Marketing* . Marketing expenses consist primarilyof costs related to sales and marketing personnel, public relations andpromotional materials. Marketing expenses of $806,000 in the three monthsending June 30,2008 were $317,000, or 65%, higher than the $489,000 forthe three months ending June 30,2007. During the three months ending June 30,2008,approximately $122,000 of share based compensation was allocated to marketingexpenses as compared to $63,000 in the three months ending June 30,2007,an increase of $59,000.  Salary expensesincreased by $34,000 primarily due to the hiring of seven additional marketingemployees compared to four in the quarter ending June 30,2007.  Expenses related to software used inmarketing increased $39,000.  We expectmarketing expenses to increase moderately as we focus on our new EpochTMgeneration and raising our profits as an effective global supplier in theremainder of fiscal 2009.

 

*General and Administrative* . General and administrative expensesconsist primarily of salaries, share based compensation and other related costsfor finance, human resources, facilities, accounting, information technology,legal, and corporate-related expenses. General and administrative expensestotaled $2.5 million and $2.0 million for the three months ending June 30,2008 and 2007, respectively, or a 26% increase. Legal expenses increased $175,000 primarily for legal billings relatedto SEC filings for the prior fiscal year. Bonuses and severance pay increased by $138,000.  Travel expenses increased by $27,000 as aresult of increased travel to and from our manufacturing and productdevelopment center in China.  Softwareexpenses increased by $68,000 due to the purchase of certain Axapta userlicenses.  General and administrativeexpenses included $385,000 and $322,000 of share based compensation expense forthe first three months ended June 30, 2008 and June 30, 2007,respectively, an increase of $63,000.

 

*Depreciationand Amortization*.. Depreciation and amortization expenses were $137,000 and $173,000 for thefirst quarters of fiscal 2009 and 2008, respectively, or a 21% decrease.  This decrease was due to depreciable assetspurchased in prior years becoming fully depreciated.

 

**Liquidityand Capital Resources**

 

***Liquidity***

 

At June 30, 2008,our principal source of liquidity was cash and cash equivalents of $2.5million. We do not expect our cash and cash equivalents will be sufficient tofund our operating and capital needs for the next twelve months following June 30,2008 nor do we anticipate product sales during the remainder of fiscal 2009will be sufficient to cover our operating expenses. Historically, we haverelied upon management’s ability to periodically arrange for additional equityor debt financing to meet our liquidity requirements. Unless our product salesare greater than management currently forecasts or there are other changes toour business plan, we will need to arrange for additional financing to fundoperating and capital needs. This financing could take the form of debt orequity. Given our historical operating results and the amount of our existingdebt, as well as the other factors, we may not be able to arrange for debt orequity 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, market conditions, the failure totimely realize our product development goals, and other adverse developments.These events could have a negative impact on our available liquidity sourcesduring the remaining fiscal year.

 

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The following tablesummarizes our statement of cash flows for the three months ended June 30,2008 and 2007:

 
| ** **                                            | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(dollars in thousands)**                  | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Net cash flows provided by (used in):                 |       |                                                |       |   |   |
| Operating activities                                  |       | $                                                   | (5,682     | ) | $ | (1,998 | ) |
| Investing activities                                  |       | (770                                                | )          | (358 | ) |
| Financing activities                                  |       | 6,300                                               |       | 4,000 |   |
| Effect of foreign exchange rates                      |       | 39                                                  |       | 1 |   |
| Net (decrease) increase in cash and cash  equivalents |       | $                                                   | (113       | ) | $ | 1,645 |   |

 

Our use of cash fromoperations the first three months of fiscal 2009 and fiscal 2008 was $5.7million and $2.0 million, respectively. The cash used for operating activitiesduring the first three months of our fiscal 2008 was primarily for operatinglosses and working capital. Cash used for operating losses in the first threemonths of fiscal 2009 increased from the same period of fiscal 2008 by $3.7million primarily from the impact of increases in some of the operatingexpenses as described above in the section titled “Operating Expenses.”

 

In the first three monthsof fiscal 2009, we had a net increase in cash used in investing activities of$412,000, as compared to the first three months of fiscal 2008. Cash used ininvesting activities during the first three months of fiscal 2009 relates topurchases of equipment domestically and in China.

 

We obtained cash fromfinancing activities in the amounts of $6.3 million and $4.0 million during thefirst three months of fiscal 2009 and 2008, respectively. Berg & BergEnterprises provided a $2.5 million short-term loan, described below, and $1.6million from conversion of warrants into common stock. Financing activities inthe first three months of fiscal 2009 also include $1.5 million in issuances ofcommon stock in sales to private investors and $638,000 for the exercise ofstock options.

 

On June 26, 2008, Berg & Berg advancedto us $2.5 million as a loan to be used to cover working capitalrequirements.  Subsequently, Berg &Berg and we entered into an agreement whereby Berg & Berg agreed toprovide for up to $10.0 million in such interim working capital loans from timeto time in order for Berg & Berg and/or certain of its affiliates tosupplement our working capital and other financial needs.  In connection therewith, on July 2,2008, we executed a promissory note (the “$2.5 Million Promissory Note”) inaggregate principal amount of $2.5 million in favor of Berg & Berg forthe initial advance.  The $2.5 MillionPromissory Note is payable on September 15, 2008 and bears interest at arate of 8.0% per annum.  At the electionof Berg & Berg, all principal and accrued but unpaid interest thenoutstanding under the $2.5 Million Promissory Note may be used as full orpartial, as the case may be, satisfaction of the purchase price of our equitysecurities in the event Berg & Berg purchases any of our equitysecurities after the date of the $2.5 Million Promissory Note.

 

On January 14, 2008, we filed a Form S-3 RegistrationStatement with the SEC utilizing a “shelf” registration process.  On January 22, 2008, the Form S-3Registration was declared effective by the SEC. Pursuant to this “shelf”registration statement, we may sell debt or equity securities described in theaccompanying prospectus in one or more offerings up to a total public offeringprice of $50.0 million.  We believe thatthis shelf registration statement provides us additional flexibility withregards to potential financings that we may undertake when market conditionspermit or our financial condition may require.

 

On February 22, 2008, we entered into an At Market Issuance SalesAgreement with Wm. Smith & Co., as sales agent (the “Sales Agent”).  Concurrent with entering into this At MarketIssuance Sales Agreement, we provided notice of termination of the ControlledEquity Offering Sales Agreement dated April 13, 2006 that we previously enteredinto with Cantor Fitzgerald & Co.

 

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In accordance with terms of the At Market Issuance Sales Agreement , wemay issue and sell up to 5,000,000 shares of common stock in a series oftransactions over time as we may direct through the Sales Agent.  Sales of shares may be made in privatelynegotiated transactions and/or any other method permitted by law, includingsales 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 three months of fiscal 2009, we had sold 393,500shares with proceeds net of commissions of $1.5 million under the At MarketIssuance Sales Agreement. As of the date of this Report, we have made nofurther decisions as to whether or when we may seek to make additional salesunder the At Market Issuance Sales Agreement.

 

As a result of the above,we had a net decrease in cash and cash equivalents of $113,000 during the firstthree 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 thereis substantial doubt about our ability to continue as a going concern. We presently have no further commitments forfinancing by Mr. Carl Berg, chairman of our Board of Directors and ourprincipal shareholder, and/or his affiliates, or from any other source. If weare unable to obtain financing from Mr. Berg and/or his affiliates, orothers on terms acceptable to us, or at all, we may be forced to cease alloperations and liquidate our assets. Our cash requirements may vary materiallyfrom those now planned because of changes in our operations, including thefailure to achieve expected revenues, greater than expected expenses, changesin OEM relationships, market conditions, the failure to timely realize ourproduct development goals, and other adverse developments. These events couldhave a negative impact on our available liquidity sources. We intend to improveour liquidity by continued monitoring and reduction of manufacturing, facilityand administrative costs. However, there can be no assurance that these effortswill be successful or that the anticipated benefits would be realized in thenear term.

 

*Subsequent Event*

 

On July 23, 2008, Berg & Berg advancedto us $3.0 million as a loan to be used to cover working capitalrequirements.  In connection therewith, weexecuted a promissory note (the “$3.0 Million Promissory Note”) in theaggregate principal amount of $3 million in favor of Berg & Berg.  The $3.0 Million Promissory Note is payableon September 15, 2008 and bears interest at a rate of 8.0% per annum.  At the election of Berg & Berg, allprincipal and accrued but unpaid interest then outstanding under the $3.0Million Promissory Note may be used as full or partial, as the case may be,satisfaction of the purchase price of our equity securities in the event thatBerg & Berg purchases any of our equity securities after the date ofthe $3.0 Million Promissory Note.  Thisis the second working capital loan installment made pursuant to an agreementbetween us and Berg & Berg discussed above, whereby Berg &Berg agreed to provide up to $10.0 million in interim working capital loansfrom time to time in order to supplement our working capital and otherfinancial needs.  Currently, we have upto $4.5 million in principal amount of working capital loans remaining underthe agreement.

 

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*** ***

***Capital Commitments and Debt***

 

At June 30, 2008, wehad commitments for capital expenditures for the next 12 months ofapproximately $3.3 million relating to manufacturing equipment. We may requireadditional capital expenditures in order to meet greater demand levels for ourproducts than are currently anticipated and/or to support our operations inChina.

 

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

 
| **(Dollars in thousands)**                     | ** ** | **June 30,  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                  |       |
| 2008 short-term debt to Berg & Berg             |       | 2,500                   |       |
| Interest on short and long-term debt                     |       | 22,187                  |       |
| Current portion of interest on short and long-term  debt |       | 78                      |       |
| Total                                                    |       | $                       | 79,715     |   |

 

Repayment obligations ofshort-term and long-term debt principal as of June 30, 2008 are:

 
| ** **                           | ** ** | **Fiscal year** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| **(Dollars in thousands)** | ** ** | **2009**             | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Principal repayment                  |       | $                    | 2,500      |   | $ | — |   | $ | 54,950 |   | $ | — |   | $ | — |   | $ | — |   | $ | 57,450 |   |
|                                      |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At June 30, 2008, the redemption obligation for our Series C-1Convertible Preferred Stock and Series C-2 Convertible Preferred Stock,all of which is currently held by Berg & Berg, is $8.6 million, plusaccrued dividends, which as of June 30, 2008 totaled $474,000.  The preferred shares are currently subject toredemption or conversion at the holder’s discretion.  We do not have sufficient resources to effectthis redemption; however, Berg & Berg has agreed that our failure toredeem 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 to defer the payment of dividends on the Series C-1Convertible Preferred Stock and Series C-2 Convertible PreferredStock.  According to our agreement withBerg & Berg, dividends will continue to accrue (without interest) onthe Series C-1 Convertible Preferred Stock and the Series C-2Convertible Preferred Stock according to the terms of the applicablecertificates of designation; and such dividends are not payable until such timeas the parties mutually agree, or upon redemption or conversion in accordancewith the terms of the applicable certificates of designation.  We have no present intention to pay dividendson this preferred stock, including the accrued dividends.  The Series C-1 Convertible PreferredStock may be converted, at any time, into shares of our common stock at thelower of $4.00 or the closing price of our common stock on the conversion date,provided the conversion price can be no lower than $1.98, the closing price ofthe common stock on December 13, 2005. The Series C-2 Convertible Preferred Stock may be converted, at anytime, into shares of our common stock at the lower of $4.00 or the closingprice of our common stock on the conversion date, provided the conversion pricecan be no lower than $2.96, the closing bid price of our common stock on July 13,2005.

 

If cash flow fromoperations is not adequate to meet our debt obligations, or to supportinventory, capital equipment or other working capital needs, we will berequired to seek additional debt or equity financing. There can be no assurancethat we could obtain the additional financing or that such financing will notbe substantially dilutive to current shareholders.

 

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*** ***

***Inflation***

 

Historically, ouroperations have not been materially affected by inflation. However, ouroperations may be affected by inflation in the future.

 

***Tabular Disclosure of Contractual Obligations***

 

The following table setsforth, as of June 30, 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:             |       |                                     |       |   |   |   |   |   |   |   |   |
| Short term notes payable                  |       | $                                        | 2,502      |   | $ | 2,502 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt obligations                |       | 77,213                                   |       | 76 |   | 77,137 |   | — |   | — |   |
| Operating lease obligations               |       | 1,900                                    |       | 562 |   | 829 |   | 509 |   | — |   |
| Purchase obligations                      |       | 22,903                                   |       | 22,903 |   | — |   | — |   | — |   |
| Redemption of convertible preferred stock |       | 9,084                                    |       | 9,084 |   | — |   | — |   | — |   |
|                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| Total                                     |       | $                                        | 113,602    |   | $ | 35,127 |   | $ | 77,966 |   | $ | 509 |   | $ | — |   |

 

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 currentlyare no redemption deadlines, but the preferred shares are subject to redemptionor conversion at the holder’s discretion. As set forth above, although dividends are not due,they are continuing to accrue (currently $474,000 as of June 30, 2008).The total above for Redemption of Convertible Preferred Stock includes accrueddividends.

 

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**ITEM 3.**                 **QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We considered the provisionsof Financial Reporting Release No. 48, “*Disclosuresof Accounting Policies for Derivative Financial Instruments and DerivativeCommodity Instruments, and Disclosures of Quantitative and QualitativeInformation about Market Risk Inherent in Derivative Commodity Instruments*.”On July 13, 2005, in connection with a $20.0 million loan agreement with athird party finance company with an adjustable interest rate equal to thegreater of 6.75% or the sum of the LIBOR rate plus 4.0% (6.45% at June 30,2008), we entered into a rate cap agreement which caps the LIBOR rate at 5.5%(On July 15, 2008, the most recent adjustment date, the LIBOR rate was 2.45%)In addition, we are exposed to financial market risks, including changes inforeign currency exchange 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 June 30, 2008) and the secondloan from the stockholder has a fixed interest rate of 8.0%. The loan from thethird party finance company has a monthly floating interest rate as describedabove. Each 0.25% increase in interest on the adjustable rate loan wouldincrease our annual interest expense by approximately $87,000. The table belowpresents principal amounts by fiscal year for our long-term and short-termdebt:

 
| **(dollars in thousands)** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Liabilities:                         |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |
| Fixed rate debt                      |       | $        | 2,500      |     | —     |     | $          | 20,000   |       | —   |       | —         |       | —    |       | $ | 22,500 |   |
| Variable rate debt                   |       | —   |       | —   |       | $        | 14,950     |     | —     |     | —     |           | —     |      | $          | 14,950 |   |
| Variable rate debt                   |       | —   |       | —   |       | $        | 20,000     |     | —     |     | —     |           | —     |      | $          | 20,000 |   |
|                                      |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |  |  |  |

 

Based on borrowing rates currentlyavailable to us for loans with similar terms, the carrying value of our debtobligations approximates fair value.

 

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**ITEM 4.**                 **CONTROLS AND 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 Principal Financial Officer,carried out an evaluation of the effectiveness of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-15(b) for the periodcovered by this Report.

 

Based on this evaluation,the Chief Executive Officer and Principal Financial Officer has concluded that,as of June 30, 2008, our disclosure controls and procedures are effectivein timely alerting him to material information required to be included in ourperiodic reports with the Commission.  Subsequent to the date of hisevaluation, there have been no significant changes in our internal controls orin other factors that could significantly affect these controls.

 

On July 9,2008, Galen H. Fischer, our Chief Financial Officer, announced his resignation,effective July 23, 2008. Due to compensating controls, there were no changes in our internalcontrols during the three months ended June 30, 2008 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1.**                 **LEGAL PROCEEDINGS**

 

On January 31, 2007,Valence filed a claim against Phostech Lithium Inc. in the Federal Court inCanada (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, Valence filed an amended claim alleging infringement of its recentlygranted Canadian Patents 2,483,918 and 2,466,366. The action is in the initialpleading state. We are seeking monetary damages and injunctive relief for theacts of Phostech in manufacturing, using and selling phosphate cathode materialthat infringes the asserted 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 of the tworeexaminations 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 ending March 31, 2008, filed with the Commission on June 16,2008, the following additional and/or updated risk factors are applicable:

 

**Our working capital requirements may increase beyond those currentlyanticipated.**

 

Wehave planned for an increase in sales and, if we experience sales in excess ofour plan, our working capital needs or capital expenditures would likelyincrease from that currently anticipated. In particular, due to the financialconcerns at The Tanfield Group, PLC we have recently agreed with Tanfield toaccept scheduled installment payments for $4.0 million of past due accountsreceivable during the second fiscal quarter of 2009 for prior productshipments.  The last scheduled payment isdue September 27, 2008.  Our abilityto meet this additional customer demand would depend on our ability to arrangefor additional equity or debt financing since it is likely that cash flow fromsales will lag behind these increased working capital requirements.

 

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**We depend on a small number of customers for our revenues, and ourresults of operations and financial condition could be harmed if we were tolose the business of any one of them, or if we fail to expand our customerbase.**

 

Todate, our existing purchase orders in commercial quantities are from a limitednumber of customers. During the fiscal year ended March 31, 2008, SegwayInc., The Tanfield Group, PLC and D&H Distributing Co., Inc.contributed 55%, 12%, and 6%, of our revenues., respectively; and in the fiscalquarter ended June 30, 2008, these customers contributed 38%, 38% and 5%of our revenue, respectively.  Weanticipate that sales of our products to a limited number of key customers willcontinue to account for a significant portion of our total revenues. We do nothave long-term agreements with any of these customers committing them topurchase any specified amount of our products. As a result, we face thesubstantial risk that one or more of the following events could occur:

 

·                  reduction, delay or cancellation of ordersfrom a customer;

 

·                  development by a customer of other sources ofsupply; selection by a customer of devices manufactured by one of ourcompetitors for inclusion in future product generations;

 

·                  loss of a customer or a disruption in oursales and distribution channels;

 

·                  or failure of a customer to make timely paymentof our invoices.

 

Ifwe are unable to expand our customer base, if we were to lose one or morecustomers, or if we were to lose revenues due to a customer’s inability orrefusal to continue to purchase our batteries, our business, results ofoperations and financial condition could be harmed.  For example, on July 1, 2008, Tanfieldissued a press release regarding its significant financial difficulties.  Due to its financial situation, Tanfield hadfallen behind to us in payments for previously shipped products, and had failedto update its product demand requirements under our supply agreement.  Accordingly, we ceased any further shipmentsto Tanfield in the first fiscal quarter. We have recently reached an agreement with Tanfield to pay us in installments,the last of which is due September 27, 2008, for approximately $4.0million in past due accounts receivable for product shipped to Tanfield but forwhich payment has not yet been received. If Tanfield is unable to fulfill its payment obligations for priororders that we have recognized as revenue, our operating results and financialcondition would be harmed.  In addition,if Tanfield’s financial difficulties persist, or if we are unable to locateadditional customers to take the place of the lost demand from Tanfield, ourbusiness, financial condition and growth prospects would be harmed.

 

**We currently have no Chief Financial Officer and our Chief ExecutiveOfficer is currently also our principal financial officer.**

 

Theperson who served as our Chief Financial Officer commencing in February 2008resigned in July 2008.  We have beenengaged in a search for a new Chief Financial Officer since that time but, todate, have not located a suitable candidate. We have engaged independent consultants to perform many of the duties ofthe Chief Financial Officer.  In theabsence of a full-time Chief Financial Officer, other senior executives havehad to devote portions of their time to the financial affairs of the Company,including matters relating to internal financial controls.  For example, Robert L. Kanode, our ChiefExecutive Officer, is currently also performing the role of our principalfinancial officer.  This has resulted inincreased costs to us and dilution of the efforts of the senior executives ofthe Company, including our Chief Executive Officer, on our business, and thisis expected to continue until a suitable candidate for Chief Financial Officerhas been hired.  The continuing absenceof a Chief Financial Officer may adversely affect our ability to fulfill itspublic company financial reporting and disclosure obligations.  Because our principal executive officer isalso acting as our principal financial officer, internal check on our financialreporting may be compromised.

 

RobertL. Kanode, our Chief Executive Officer, has no meaningful financial reportingeducation or experience outside his role as our Chief Executive Officer and asa senior executive and consultant prior to joining us.  He is and will remain heavily dependent onfinancial advisors and consultants.  Assuch, there is risk about our ability to comply with all public companyfinancial reporting requirements accurately and on a timely basis.

 

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**ITEM 2.**                 **UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

None.

 

**ITEM 3.**                 **DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.**                 **SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

**ITEM 5.**                 **OTHER INFORMATION**

 

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 Robert L. Kanode, 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 Robert L.  Kanode, 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: August 11, 2008 | By:    | /s/ Robert L. Kanode                                                                   |
|----------------------------|--------|-------------------------------------------------------------------------------------------------------|
|                       |   | Robert L. Kanode                                                                                      |
|                       |   | President and Chief  Executive Officer  (Principal Executive Officer and Principal Financial Officer) |

 

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EXHIBITINDEX

 
| **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 Robert L.  Kanode, 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 Robert L.  Kanode, 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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