SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    FORM 10-Q


(Mark One)

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

For the quarterly period ended December 31, 2001.

Or

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

For the transition period from ____________ to ____________

Commission file number 0-20028

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


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


               6504 Bridge Point Parkway, Suite 415, Austin, Texas
                                      78730
            ---------------------------------------------------------
           (Address of principal executive offices including zip code)


                                 (512) 527-2900
            ---------------------------------------------------------
              (Registrant's telephone number, including area code)



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



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


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

   Common Stock $0.001 par value                      45,552,310
------------------------------------       -----------------------------------
            (Class)                        Outstanding as of December 31, 2001


<PAGE>


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

                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 2001


                                      INDEX

                                                                          PAGES

PART I.    FINANCIAL INFORMATION

  Item 1.  Financial Statements (Unaudited):

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

           Condensed Consolidated Statements of Operations and
           Comprehensive Loss for the period from March 3, 1989
           (date of inception) to December 31, 2001 and for each
           of the three-month and nine-month periods ended
           December 31, 2001 and December 31, 2000............................4

           Condensed Consolidated Statements of Cash Flows for
           the period from March 3, 1989 (date of inception) to
           December 31, 2001 and for each of the nine-month periods
           ended December 31, 2001 and December 31, 2000......................5

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

  Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations...............................14

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk........28


PART II.   OTHER INFORMATION

  Item 1.  Legal Proceedings.................................................28

  Signature..................................................................28



                                     Page 2
<PAGE>



<TABLE>
<CAPTION>
                   VALENCE TECHNOLOGY, INC AND SUBSIDIARIES
                         (a development stage company)
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)
                                                                 DECEMBER 31, 2001    MARCH 31, 2001
                                                                 -----------------    --------------
                                                                    Unaudited)
<S>                                                              <C>                  <C>
ASSETS
Current assets:
     Cash and cash equivalents                                    $    1,094            $   3,755
     Short term investments                                                -                5,133
     Accounts receivable                                               2,302                4,889
     Inventory                                                         3,118                4,825
     Prepaid and other current assets                                  1,621                  901
                                                                  -----------           ----------
Total current assets                                                   8,135               19,503

Long term investments                                                 17,533               12,554
Property, plant and equipment, net                                    14,069               29,988
Intellectual property, net                                            11,602               25,690
                                                                  -----------           ----------
Total assets                                                          51,339               87,735
                                                                  ===========           ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current portion of long-term debt                                   774                1,686
     Accounts payable                                                  1,742                5,759
     Accrued expenses                                                  7,080                2,977
     Grant payable                                                     1,757                1,713
     Accrued compensation                                                506                  648
                                                                  -----------           ----------
Total current liabilities                                             11,859               12,783

Deferred revenue                                                           -                2,500
Long-term debt, less current portion                                   6,062                4,568
Long-term debt to stockholder                                         39,465               16,083
                                                                  -----------           ----------
Total liabilities                                                     57,386               35,934

Commitments and contingencies (Note 11)

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

Stockholders' (deficit) equity:
Common stock, $0.001 par value, authorized:
  100,000,000 shares, issued and outstanding:
    45,552,310 and 44,421,974 shares at December 31, 2001
      and March 31, 2001, respectively                                    46                   44
Additional paid-in capital                                           330,924              325,103
Notes receivable from stockholder                                     (4,862)              (4,862)
Deficit accumulated during the development stage                    (328,496)            (267,083)

Accumulated other comprehensive income (loss)                         (3,659)              (4,137)
                                                                  -----------           ----------
Total stockholders' (deficit) equity                                  (6,047)              49,065

      Total liabilities, mandatorily redeemable convertible
        preferred stock and stockholders' equity                    $ 51,339             $ 87,735
                                                                  ===========           ==========
</TABLE>




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


                                     Page 3
<PAGE>


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

                                            PERIOD FROM
                                           MARCH 3, 1989
                                             (DATE OF                  THREE MONTHS ENDED                       NINE MONTHS ENDED
                                           INCEPTION) TO         ------------------------------     ------------------------------
                                            DECEMBER 31,         DECEMBER 31,      DECEMBER 31,     DECEMBER 31,      DECEMBER 31,
                                               2001                 2001              2000              2001              2000
                                            ------------         ------------      ------------     ------------      ------------
<S>                                         <C>                  <C>               <C>              <C>               <C>
Revenue:
Research and development contracts          $   21,605           $       -         $        -       $        -        $       -
License and royalty revenue                      4,681               1,003                  -            3,181
Battery and laminate sales                      10,016                 100              1,854            1,307            5,955
                                            -----------          ----------        -----------      -----------       ----------
     Total revenue                              36,302               1,103              1,854            4,488            5,955
Cost of Sales                                   26,671               2,210              4,742            6,546           14,151
IDB revenue grant                               (1,191)                 -                (190)              -            (2,117)
                                            -----------          ----------        -----------      -----------       ----------
     Net cost of sales                          25,480               2,210              4,552            6,546           12,034
Gross Margin                                    10,822              (1,107)            (2,698)          (2,058)          (6,079)
Costs and expenses:
Research and product development               116,705               2,209              1,122            6,711            5,083
Marketing                                        6,568                 470                267            1,554              627
General and administrative                      72,396               2,905              3,239            9,668            8,216
Depreciation and amortization                   53,108               2,429              2,849            7,282            8,082
Impairment charge                               31,884              31,884                  -           31,884                -
                                            -----------          ----------        -----------      -----------       ----------
     Total costs and expenses                  280,661              39,897              7,477           57,099           22,008
                                            -----------          ----------        -----------      -----------       ----------
     Operating loss                           (269,839)            (41,004)           (10,175)         (59,157)         (28,087)
Cost to settle stockholder lawsuit             (30,061)                  -                  -                -                -
Other expenses                                 (34,077)                  -                  -                -                -
Loss on disposal of assets                        (170)                (23)                 -             (170)               -
Interest and other income                       20,161                 119                191              818              905
Interest expense                               (12,010)             (1,257)              (591)          (2,904)          (1,544)
Equity in loss of joint venture                 (2,500)                  -                  -                -             (345)
                                            -----------          ----------        -----------      -----------       ----------
     Net loss                                 (328,496)            (42,165)           (10,575)         (61,413)         (29,071)
Beneficial conversion feature on
preferred stock                                                          -                (53)              -              (158)
                                                                 ----------        -----------      -----------       ----------
     Net loss available to common
     stockholders                                                $ (42,165)        $  (10,628)      $  (61,413)       $ (29,229)
Other comprehensive loss:
     Net loss                                                      (42,165)           (10,575)         (61,413)         (29,071)
Change in foreign currency translation
adjustments                                                           (170)               245              478           (3,287)
                                                                 ----------        -----------      -----------       ----------
     Comprehensive loss                                          $ (42,335)        $  (10,330)      $  (60,935)       $ (32,358)
Net loss per share available to common
stockholders                                                     $   (0.93)        $    (0.28)      $    (1.35)       $   (0.78)
                                                                 ==========        ===========      ===========       ==========
Shares used in computing net loss per
share available to common stocholders,
basic and diluted                                                   45,552             38,041           45,483           37,570
                                                                 ==========        ===========      ===========       ==========
</TABLE>




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


                                     Page 4
<PAGE>


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

                                                                        PERIOD FROM
                                                                       MARCH 3, 1989
                                                                         (DATE OF                NINE MONTHS ENDED
                                                                       INCEPTION) TO      ------------------------------
                                                                        DECEMBER 31,      DECEMBER 31,      DECEMBER 31,
                                                                            2001               2001              2000
                                                                       --------------     ------------      ------------
<S>                                                                     <C>               <C>               <C>
Cash Flows from operating activities:
    Net Loss                                                             $ (328,496)       $ (61,413)        $ (29,071)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
    Depreciation and amortization                                            53,108            7,282             8,082
    Accretion of debt discount                                                1,956              664               488
    Disposal of property and equipment                                       15,390                -                12
    Impairment charge                                                        31,884           31,884                 -
    Other expenses                                                            8,456                -                 -
    Compensation related to the issuance of stock options                     4,114              223                 -
    Non-cash charge from settlement of stockholder lawsuit                   29,450                -                 -
    Equity in losses of joint venture                                         2,500                -               345
    Changes in assets and liabilities:                                                             -
              Accounts receivable                                            (1,419)           2,533            (2,282)
              Prepaid expenses and other current assets                      (2,597)            (808)              666
              Inventory                                                      (3,388)           1,438            (4,053)
              Accounts payable                                                2,597           (3,708)           (1,213)
              Accrued liabilities                                             1,388            3,556            (1,495)
              Grant receivable                                                    -                -            (2,117)
              Deferred revenue                                                    -           (2,500)                -
                                                                         -----------       ----------        ----------
    Net cash used in operating activities                                  (185,057)         (20,849)          (30,638)

Cash flows from investing activities:
    Purchase of investments                                                (665,789)
    Proceeds from investments                                               661,699              154
    Capital expenditures                                                   (102,043)          (8,677)          (14,629)
    Proceeds from disposal of property and equipment                          1,269
    Other                                                                      (222)               -                 -
                                                                         -----------       ----------        ----------
                   Net cash used in investing activities                   (105,086)          (8,523)          (14,629)

Cash flows from financing activities:
    Property and equipments grants                                           12,243                              1,226
    Acquisition of West Coast Venture Capital Assets                         11,949                                  -
    Proceeds from issuance of long-term debt                                 37,630            2,126            10,071
    Proceeds from long-term debt to stockholder                              19,313           25,486                 -
    Principal payments on long-term debt                                    (15,549)          (1,697)             (476)
    Proceeds from the issuance of common stock and
      warrants, net of issuance costs                                       214,955               95            13,559
    Proceeds from the issuance of preferred stock,
      Series A, net of issuance costs                                         7,075                -                 -
    Proceeds from the issuance of preferred stock,
      Series B, net of issuance costs                                         7,125                -                 -
                                                                         -----------       ----------        ----------
                   Net cash provided by financing activities                294,741           26,010            24,380

Effect of foreign exchange rates on cash and cash equivalents                (3,504)             701            (1,658)
                                                                         -----------       ----------        ----------
Increase (decrease) in cash and cash equivalents                              1,094           (2,661)          (22,545)
Cash and cash equivalents, beginning of period                                    -            3,755            24,556
                                                                         -----------       ----------        ----------
Cash and cash equivalents, end of period                                 $    1,094        $   1,094         $   2,011
                                                                         ===========       ==========        ==========
</TABLE>


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



                                     Page 5
<PAGE>


                    VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
                      (Companies in the development stage)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1.   INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

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

     The Company is in the development stage as of December 31, 2001. Successful
     completion of the Company's development program and, ultimately the
     attainment of profitable operations is dependent on future events,
     including maintaining adequate financing to fulfill its development
     activities, and achieving a level of sales adequate to support the
     Company's cost structure.

2.   LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2001, we had cash and cash equivalents of $1.1 million. At
     that same date, we had commitments for capital expenditures for the next 12
     months of approximately $2.3 million relating to specified manufacturing
     equipment, which is included in accrued expenses at December 31, 2001.
     We may require additional capital expenditures once we commence
     manufacturing of batteries in commercial quantities. After taking into
     account our cash and cash equivalents, projected revenues and available
     borrowings under our debt agreements of $10.0 million, we expect that we
     will have sufficient financing through fiscal 2002 to meet our working
     capital, capital expenditure and investment requirements; however, without
     additional funding our liquidity will be exhausted during the first quarter
     of fiscal 2003. At our current level of operations, we are using cash from
     operations of approximately $6.0 to $8.0 million per quarter. We expect our
     cash requirements to increase as our sales increase, and we intend to
     manage our capital expenditures based on our then available sources of
     cash. We currently are seeking additional financing to satisfy our cash
     requirements for a six to nine month period, at which time, we will seek
     additional financing to continue operations at our then current levels. We
     may not be able to arrange this funding on favorable terms, or at all. If
     we are unable to arrange for additional funding during the first quarter of
     2003, we may have to cease operations as a going concern. We may have
     additional sources of cash from our licensing business. We are engaging in
     discussions to license our technology, but to date we have not entered into
     any licensing agreements. We also may have additional sources of cash from
     the commercialization of our Saphion(TM) technology into new markets and
     customers and the sale of new products announced in February 2002 which use
     the Bellcore technology. However, at this time we are not able to
     accurately forecast cash from these sources.

3.   BUSINESS AND BUSINESS STRATEGY

     The Company is a leader in the development and commercialization of
     lithium-ion polymer rechargeable batteries. The Company was founded as a
     research and development organization focused on lithium-ion technology,
     and it holds more than 790 issued and pending patents worldwide.

     The Company's business strategy is to leverage its breakthrough innovations
     in battery technology to capitalize on the significant opportunities in the
     energy solutions market. The strategy comprises the introduction of our
     "next generation" phosphate-based Saphion(TM) Lithium-ion technology; a
     balance of system sales and licensing; and a manufacturing plan that
     leverages internal capabilities as well as OEM relationships. The strategy
     has been separated into three phases: technology phase, product phase and
     customer phase, incorporating key milestones in each.


                                     Page 6
<PAGE>


     The Company has introduced its phosphate-based, Saphion(TM) Lithium-ion
     technology and has transitioned production from research and development to
     its Northern Ireland manufacturing facility. The Company believes its
     Saphion(TM) technology addresses the major weaknesses of existing
     Lithium-ion alternatives while offering a solution that is competitive in
     cost and performance.

     The system sales component of the Company's strategy involves capitalizing
     on the Company's advanced technology and understanding of certain market
     segments to design solutions that differentiate end customers' products and
     to develop new, emerging markets for its Saphion(TM) Lithium-ion technology
     solutions. The Company's systems sales strategy includes (i) continuing
     sales of its Cobalt and Manganese based stacked polymer batteries solutions
     to small to mid-sized companies where the flexibility of design and
     thinness of the stacked polymer is paramount, (ii) developing the market
     for Saphion(TM) technology through product launches, such as the
     N-Charge(TM) Power System, or through design wins, such as the Wistron deal
     announced in February 2002 and (iii) maximizing the adoption of Saphion(TM)
     technology by offering it in both polymer and cylindrical constructions.
     The Company plans to enter contracted manufacturing arrangements with
     cylindrical battery manufacturers.

     The Company's licensing strategy will be to pursue technology licenses of
     intellectual property related to patent protected manufacturing processes
     and battery chemistries. The Company's stacked polymer battery
     manufacturing process and the Company's Saphion(TM) technology are its key
     assets in the licensing arena. In addition, the Company intends to sell the
     Saphion(TM) technology raw material to its licensees and obtain royalties
     from licensees based on their sales strategy.

     The Company's manufacturing strategy involves both its own manufacturing
     capabilities in its Northern Ireland facility and OEM relationships. The
     Company intends to grow production capacity in its factory to 1 million
     units a month by the middle of this year and seek OEM partners for
     cylindrical cell construction and worldwide material production. The
     Company believes this manufacturing strategy will allow it to deliver to a
     broad range of customer needs, from low cost, high volume to highly
     customized, higher value added solutions.

     The Company has outlined its business strategy in three phases as follows:

     TECHNOLOGY PHASE: During this phase the Company intends to evangelize the
     technology, complete its management team, announce the first major design
     win from a systems sales standpoint and sign an OEM agreement. The timeline
     for this phase of the business strategy was intended to be from August 2001
     to January 2002. The Company has met or is making tangible progress on each
     of these objectives. PRODUCT PHASE: During this phase the Company expects
     to continue announcing design wins and phosphate licensees, begin to launch
     phosphate products, announce key milestones around phosphate production and
     begin phosphate product ramps from both its Northern Ireland facility and
     OEM partners. This phase began in February 2002 and is to continue through
     the summer of 2002. On February 11, 2002 the Company launched its first
     product, the N-Charge(TM) Power System, and ramped production of phosphate
     batteries out of its Northern Ireland facility. The Company also plans to
     enter contracted manufacturing arrangements with cylindrical battery
     manufacturers and to pursue using Saphion(TM) technology as a "drop in"
     lithium-ion chemistry replacement for notebook computers and communication
     devices.

     CUSTOMER PHASE: During this phase the Company intends to announce customers
     launching products using Valence's Saphion(TM) technology. This phase will
     then become the ongoing business of the Company.

     The Company has established a strategy that it believes will allow it to
     expand its market opportunity. Through the sales of its current technology
     and the licensing and market development of its Saphion(TM) technology, the
     Company believes it is equipped to serve existing Lithium-ion technology
     markets as well as open doors to new market opportunities.

4.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     PRINCIPLES OF CONSOLIDATION:

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


                                     Page 7
<PAGE>


     USE OF ESTIMATES:

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

     RECLASSIFICATIONS:

     Certain reclassifications have been made to prior period financial
     statements to conform to the current presentation. Such reclassifications
     had no effect on the results of operations or stockholder's equity.

     CASH AND CASH EQUIVALENTS:

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

     ACCOUNTS RECEIVABLE:

     Accounts receivable consists of amounts due from customers, interest due on
     cash balances and notes receivable, and Value Added Tax ("VAT") refunds
     pertaining to purchases made by the Company's Northern Ireland facility.
     The Company periodically reviews its receivable balances in order to
     determine an allowance for potential credit losses. Credit losses were
     $103,000 during the three months ended December 31, 2001 and $168,000
     during the nine months ended December 31, 2001. Accounts receivable is
     comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                    DECEMBER 31,     MARCH 31,
                                                        2001            2001
                                                    ------------   -----------
              <S>                                   <C>            <C>
              Trade receivables                      $   1,121      $  2,956
              Allowance for credit losses                 (168)            -
              Interest receivable                        1,060           851
              VAT receivable                               289         1,082
                                                     ----------     ---------
                  Total                              $   2,302      $  4,889
                                                     ==========     =========
</TABLE>

     INVENTORIES:

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

     Inventories are comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                         December 31, 2001    March 31, 2001
                                         -----------------   ----------------
             <S>                         <C>                 <C>
             Raw materials                    $  2,373           $ 3,295
             Work-in-process                       745             1,530
                                         -----------------   ----------------
             Total                            $  3,118           $ 4,825
                                         =================   ================
</TABLE>

     During the quarter ended December 31, 2001, the Company recorded a charge
     of $684,000 to cost of sales for inventory write-downs associated with the
     phase-out of certain types of products.


                                     Page 8
<PAGE>


     INVESTMENTS:

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

     CAPITAL AND REVENUE GRANTS:

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

     DEPRECIATION AND AMORTIZATION:

     Property and equipment are stated at cost and depreciated on the
     straight-line method over their estimated useful lives, generally three to
     six years. Building improvements are amortized over the lesser of their
     estimated useful life, generally five years, or the remaining lease term.
     In the period assets are retired or otherwise disposed of, the costs and
     accumulated depreciation or amortization are removed from the accounts, and
     any gain or loss on disposal is included in results of operations. All
     balances reported as property, plant and equipment or intellectual property
     are being depreciated or amortized as described above with the exception of
     the new high speed assembly line, with a carrying value of approximately
     $8.4 million. The Company began to take delivery of this equipment during
     the quarter, as such, the equipment had not been placed in service as of
     December 31, 2001. The Company is in the process of installing this
     equipment and expects it to be placed in service during the first quarter
     of the fiscal year beginning April 1, 2002.

     LONG-LIVED ASSETS:

     The Company assesses the recoverability of property, plant and equipment
     and evaluates such assets for impairment whenever events or changes in
     circumstances indicate that the carrying amount of an asset may not be
     recoverable. Asset impairment (including intangible assets) is determined
     to exist if estimated future cash flows, undiscounted and without interest
     charges, are less than the carrying amount of the asset. If it is
     determined that an impairment loss has occurred, the impairment loss is
     measured as the difference between the amount of the discounted cash flows
     and the carrying amount of the asset. See Note 10 Impairment Charge.

     INTELLECTUAL PROPERTIES:

     Intellectual properties acquired consist of patents and are recorded at
     cost based on the market value of the common stock used in their
     acquisition. The costs are amortized over the estimated remaining life of
     the patents, which was reassessed during the period and changed from 13.67
     years to 8 years. Intellectual property developed in-house is expensed as
     incurred. See Note 10 Impairment Charge.

     REVENUE RECOGNITION:

     Revenue is recognized when the sale is complete, generally upon shipment
     and when all of the following criteria are met:

     o    Persuasive evidence of an arrangement exists,

     o    Delivery has occurred or services have been rendered,

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

     o    Collectibility is reasonably assured.


                                     Page 9
<PAGE>


     DEFERRED REVENUE:

     Deferred revenue related to payments received from the Company's joint
     venture partner in Hanil Valence Co., Ltd. See Note 9, Joint Venture
     Agreement.

     RESEARCH AND DEVELOPMENT:

     Research and development costs are expensed as incurred.

     FOREIGN CURRENCY TRANSLATION:

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

     INCOME TAXES:

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

     FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

     BASIC EARNINGS PER SHARE:

     Basic Earnings (Loss) per Share is computed by dividing net loss available
     to common stockholders by the weighted average number of common shares
     outstanding for that period. Diluted earnings per share is similar to basic
     earnings per share except that it is based on the weighted average number
     of common and potentially dilutive shares from dilutive stock options and
     warrants to purchase common stock outstanding during each period. The
     dilutive effect of options and warrants to purchase common stock are
     excluded from the computation of diluted net loss per share, since their
     effect is antidilutive. Shares excluded from the calculation of diluted
     earnings per share, as their effect was antidilutive were 8,146,248 and
     5,491,549 for the three and nine-month periods ended December 31, 2001 and
     December 31, 2000, respectively.

5.   INVESTMENTS:

     During the fourth quarter of fiscal 2001, the Company completed the
     acquisition of the assets of West Coast Venture Capital, Inc., which
     included investment equivalent instruments, in the form of mortgage assets.
     These instruments have a value of $17.5 million as of December 31, 2001 and
     are presented as long-term investments on the balance sheet. The mortgages
     have maturities ranging from 2003 to 2028. The investments are classified
     as held-to-maturity securities and are recorded at amortized cost, which
     approximates fair value.

6.   LONG-TERM DEBT (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                 December 31,     March 31,
                                                    2001            2001
                                                 ------------    ------------
        <S>                                      <C>             <C>
        Facility loans                              $ 6,836         $ 6,254
        Less amounts due within one year               (774)         (1,686)
                                                 ------------    ------------
        Long-term debt due after one year           $ 6,062         $ 4,568
                                                 ============    ============
</TABLE>


                                    Page 10
<PAGE>


     During fiscal 1995, a bank provided the Company a $2,500,000 facility term
     loan under which drawdowns were available for the purchase and improvement
     of a facility in Henderson, Nevada. The facility term loan was paid in its
     entirety during quarter ended December 31, 2001 out of proceeds from the
     Company's October 2001 loan agreement with Berg & Berg Enterprises.

     In April 2000, the Company obtained a 15-year facility loan for its
     Northern Ireland main factory building. The loan is payable in equal
     monthly principal payments of $20,000 plus accrued interest. This facility
     term loan bears interest at an adjustable rate (6.875% during the
     three-month period ended December 31, 2001) on the outstanding principal.
     The outstanding principal balance as of December 31, 2001 was $2,236,000.
     In August 2000, the Company borrowed an additional $2,874,000 for the
     construction of a factory extension. The terms on the factory extension
     loan are essentially the same as the main factory loan. The outstanding
     principal balance on the additional borrowing as of December 31, 2001 was
     $2,572,000.

     In May 2001, the Company obtained an additional building, adjacent to the
     existing Northern Ireland facility, for a purchase price of $2,090,000.
     This 10-year facility term loan bears interest at an adjustable interest
     rate (5.75% at December 31, 2001) on the outstanding principal. The Company
     makes monthly principal payments of $25,000 plus accrued interest. The
     outstanding principal balance as of December 31, 2001 was $2,028,000. The
     related building is collateral for the loan.

     Principal payments on facility loans at December 31, 2001 are due as
     follows (in thousands):

                   Fiscal Year                      Loans
                -----------------                 ----------
                Remainder of 2002                  $   164
                     2003                              774
                     2004                              774
                     2005                              774
                     2006                              774
                  Thereafter                         3,576
                                                   --------
                                                    $6,836
                                                   ========

7.   DEBT TO STOCKHOLDER:

<TABLE>
<CAPTION>
                                               DECEMBER 31,      MARCH 31,
                                                   2001            2001
                                               ------------     -----------
                                                       (in thousands)
                  <S>                          <C>              <C>
                  Loan agreement balance          $14,950         $14,950
                  Line of credit balance           17,500           2,000
                  Loan agreement balance            9,986               -
                  Unaccreted debt discount         (2,971)           (867)
                                               ------------     ----------
                  Balance                         $39,465         $16,083
                                               ============     ==========
</TABLE>

     In July 1998, the Company entered in to an amended loan agreement with a
     stockholder and director which allows the Company to borrow, prepay and
     re-borrow up to $10,000,000 principal under a promissory note on a
     revolving basis. In November 2000, the loan agreement was amended to
     increase the maximum amount to $15,000,000. As of December 31, 2001, the
     Company had an outstanding balance of $14,950,000 under the loan agreement.
     The loan bears interest at one percent over lender's borrowing rate
     (approximately 9.00% at December 31, 2001). Effective December 31, 2001 the
     Company and the lender agreed to extend the loan's maturity date from
     August 30, 2002 to September 30, 2005. As of December 31, 2001, accrued
     interest on the loan totaled $3,074,125, which is included in accrued
     expenses.

     In fiscal 1999, the Company issued warrants to purchase 594,031 shares of
     common stock to Carl Berg in conjunction with the amended loan agreement.
     The warrants were valued using the Black Scholes valuation method and had
     an average weighted fair value of approximately $3.63 per warrant at the
     time of issuance. The fair value of these warrants, totaling approximately
     $2,158,679, has been reflected as additional consideration for the debt


                                    Page 11
<PAGE>


     financing, recorded as a discount on the debt and accreted as interest
     expense to be amortized over the life of the line of credit. As of December
     31, 2001, a total of $1,779,165 has been accreted. The amounts charged to
     interest expense for the three-month periods ended December 31, 2001 and
     December 31, 2000 were $162,636 for each period.

     During June 2000 the Company entered into a private placement funding
     arrangement with Carl E. Berg, a principal stockholder and director of the
     Company, for an equity investment commitment totaling $12.5 million. On
     February 13, 2001, the Company replaced this $12.5 million commitment from
     Mr. Berg with the acquisition of approximately $30.0 million of assets from
     West Coast Venture Capital, Inc. consisting of cash and investment
     equivalent instruments in exchange for approximately 3.5 million shares of
     the Company's common stock. The investment instruments have maturities that
     run from less than one year to over ten years. In February 2001, Mr. Berg
     provided a line of credit in the amount of up to $20 million secured by the
     investment instruments. The line of credit bears interest at the rate 8%.
     All accrued interest and unpaid principal is payable on or before January
     31, 2006. As of December 31, 2001, a total of $17,500,000 had been drawn on
     this line of credit.

     In October 2001, the Company entered into a loan agreement with Berg & Berg
     Enterprises, LLC ("Berg & Berg"). Under the terms of the agreement, Berg
     and Berg agreed to advance Valence funds of up to $20 million between the
     date of the agreement and September 30, 2003. Interest on the loans accrues
     at 8.0% per annum, payable from time to time, and all outstanding amounts
     with respect to the loans are due and payable on September 30, 2005. As of
     December 31, 2001, a total of $9,986,000 had been drawn on this loan
     agreement. In conjunction with the loan agreement, Berg & Berg received a
     warrant to purchase 1,402,743 shares of the Company's common stock at the
     price of $3.208 per share. The warrants were exercisable beginning on the
     date they were issued and expire on August 30, 2005. The fair value
     assigned to these warrants, totaling approximately $2,767,823 has been
     reflected as additional consideration for the debt financing, recorded as a
     discount on the debt and accreted as interest expense to be amortized over
     the life of the line of credit. As of December 31, 2001, a total of
     $176,670 has been accreted and included as interest expense. The amount
     charged to interest expense on the outstanding balance of the loan for the
     three-month period ended December 31, 2001 was $106,647.

8.   STOCKHOLDERS' EQUITY:

     In April 2001, investors in the Series B Mandatorily Redeemable Convertible
     Preferred Stock elected to convert 3,500 shares into 1,109,512 shares of
     the Company's common stock.

9.   JOINT VENTURE AGREEMENT:

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

10.  IMPAIRMENT CHARGE:

     During the quarter ended December 31, 2001, the Company refined its
     business strategy to focus its efforts on the development of its
     Saphion(TM) technology and solidified its manufacturing plan and product
     mix, accordingly. As a result the Company evaluated the ongoing value of
     the property, plant and equipment in its Northern Ireland manufacturing
     facility and the intellectual property acquired in the Telcordia
     transaction in December 2000. The Company determined that assets with a
     carrying amount of approximately $53.2 million were impaired and wrote them
     down by approximately $31.9 million to their fair value. Fair value was
     based on estimated future cash flows to be generated by these assets,
     discounted at the Company's market rate of interest.


                                    Page 12
<PAGE>


11.  COMMITMENTS AND CONTINGENCIES:

     LITIGATION:

     The Company received notification that 23 former employees of the Mallusk,
     Northern Ireland facility filed claims against the Company in connection
     with the reduction in work force at the facility in March 2001. The time
     period for filing such claims expired July 6, 2001, although the Tribunal
     may accept late claims. The Company has successfully settled 18 of the
     claims for a total of $12,000. The Company is pursuing settlement of the
     final 5 claims and does not expect the potential charge to be material.

     IDB GRANTS:

     Resulting from the reduction of Northern Ireland manufacturing activity at
     the end of the fiscal year ended March 31, 2001, the employment levels
     specified by the IDB have not been maintained. Consequently, the Company is
     in default of its agreement with the IDB. The IDB is not seeking repayment
     and on the advice of counsel, on the basis that successful negotiations
     will be concluded, Management does not believe that the IDB will bring any
     legal action pursuant to the Letter of Offer. Management has begun
     discussions with the IDB to end the current agreement and enter into a new
     agreement more closely aligned to current business conditions. Although it
     is unlikely, the IDB could demand repayment of a portion of the total
     amounts received, which include revenue grants of $ 1.2 million and
     equipment grants of $ 12.2 million.

12.  SEGMENT INFORMATION:

     The Company conducts its business in two operating segments and uses only
     one measurement of profitability. During the first three quarters of fiscal
     2002, the Company recorded battery and laminate sales of $1.3 million and
     license and royalty fees of $3.2 million.

     Long-lived asset information by geographic area at December 31, 2001 and
     March 31, 2001 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                  December 31,     March 31,
                                                      2001           2001
                                                 -------------    -----------
               <S>                               <C>              <C>
               United States                        $ 4,339         $  4,741
               International (primarily
                 Northern Ireland)                    9,730           25,247
                                                  -----------      ----------
               Total long-lived assets             $ 14,069         $ 29,988
                                                  ===========      ==========
</TABLE>

        Revenues by geographic area for the nine-month periods ended December
        31, 2001 and December 31, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                 December 31,    December 31,
                                                     2001             2000
                                                 ------------    ------------
               <S>                               <C>            <C>
               United States                        $ 1,634        $ 3,885
               International                          2,854          2,070
                                                 ------------    ------------
               Total revenues                       $ 4,488        $ 5,955
                                                 ============    ============
</TABLE>

13.  RECENT ACCOUNTING PRONOUNCEMENTS:

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

     In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
     SFAS No. 142, "Goodwill and Other Intangible Assets". These statements
     require that the purchase method of accounting be used for all business
     combinations initiated after June 30, 2001 and prohibit the
     pooling-of-interest method and change the accounting for other intangible
     assets from an amortization method to an impairment-only approach.
     Management is required to


                                    Page 13
<PAGE>


     adopt the new method of accounting for goodwill and other intangible assets
     on April 1, 2002. The new method of accounting for goodwill and other
     intangible assets applies to all existing and future unamortized balances
     at the time of adoption. As part of the adoption of these standards,
     Management must reassess the useful lives of its intangible assets and
     perform impairment tests. An assessment of the value of the Company's
     intellectual property was performed during the period ended December 31,
     2001 under SFAS No. 121. An impairment charge was deemed appropriate and
     recorded during the three-month period ended December 31, 2001, as
     described in Note 10 Impairment Charge, and the useful life of the
     Company's intellectual property was reduced as described in Note 4 Summary
     of Significant Accounting Policies. The Company does not expect an
     additional impairment charge or change in the useful life of its
     intellectual property upon adoption of SFAS No. 141.

     In June 2001, the FASB issued SFAS No.143 ("SFAS 143"), "Accounting for
     Asset Retirement Obligations" which address financial accounting and
     reporting for obligations associated with the retirement of tangible
     long-lived assets and the associated asset retirement costs and applies to
     legal obligations associated with the retirement of long-lived assets that
     result from the acquisition, construction, development and (or) the normal
     operation of a long-lived asset, except for certain obligations of lessees.
     SFAS No.143 is effective for all financial statements issued for fiscal
     years beginning after June 15, 2002. The Company will adopt SFAS No. 143 on
     April 1, 2002.

     In August 2001, the FASB issued SFAS No. 144 ("SFAS 144") "Accounting for
     the Impairment or Disposal of Long-Lived Assets" which address the
     financial accounting and reporting for the impairment of long-lived assets.
     This statement supersedes SFAS No. 121, "Accounting for the Impairment of
     Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
     accounting and reporting provisions of APB Opinion No. 30, "Reporting the
     Results of Operations-Reporting the Effects of Disposal of a Segment of a
     Business, and Extraordinary, Unusual and Infrequently Occurring Events and
     Transactions", for the disposal of a segment of a business. SFAS No.144 is
     effective for all financial statements issued for fiscal years beginning
     after December 15, 2001. The Company will adopt SFAS No. 144 on April 1,
     2002. As discussed above, an impairment charge was deemed appropriate and
     recorded during the three-month period ended December 31, 2001, as
     described in Note 10 Impairment Charge. The Company does not expect an
     additional impairment charge upon adoption of SFAS No. 144.

14.  SUPPLEMENTAL CASH FLOW INFORMATION

     In April 2001, investors in the Series B Mandatorily Redeemable Convertible
     Preferred Stock elected to convert 3,500 shares into 1,109,512 shares of
     the Company's common stock, resulting in a non-cash transaction of $2.7
     million.


                                    Page 14
<PAGE>


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

This report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions and variations of
such words are intended to identify forward-looking statements. Such statements
appear in a number of places in this report and include statements regarding our
intent, belief or current expectations with respect to, among other things, the
progress of our research and development activities, trends affecting our
liquidity position, including, but not limited to, our access to additional
equity or debt financing and our rate of expenditures, our joint venture
relationships, the status of the development of our products and their
anticipated performance and customer acceptance and our business and liquidity
strategies. We caution you not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of our future
performance and involve risks and uncertainties. Our actual results may differ
materially from those projected in this report, for the reasons, among others,
our limited available working capital, uncertain market acceptance of our
products, risks inherent in establishing a new manufacturing capability, risks
in product and technology development, the effect of the Company's accounting
policies and the other risks discussed below under the caption, "Risk Factors,"
and in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission. We undertake no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date of this
report. In addition to the risks and uncertainties discussed above, our other
filings with the Securities and Exchange Commission contain additional
information concerning risks and uncertainties that may cause actual results to
differ materially from those projected or suggested in our forward-looking
statements. You should carefully review the risk factors discussed in our Annual
Report on Form 10-K and the other documents we have filed with the Securities
and Exchange Commission.

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

DEVELOPMENT STAGE

The Company continues to consider itself a development stage company as it has
not sustained consistent revenues from its existing products and has developed a
new chemistry to be included in its manufacturing process. The Company expects
to remain a development stage company until it achieves significant revenue from
internal manufacturing capabilities, external OEM relationships or license
agreements.

The Company was founded in 1989 to develop and commercialize advanced
rechargeable batteries based on lithium and polymer technologies. Since its
inception, the Company has been a development stage company primarily engaged in
acquiring and developing its initial technology, manufacturing limited
quantities of prototype batteries, recruiting personnel, and acquiring capital.
In the first quarter of fiscal 2001, the Company recorded its first significant
commercial sales. Previously, other than immaterial revenues from limited sales
of prototype batteries, the Company had not received any significant revenues
from the sale of products. Substantially all revenues prior to the first quarter
of fiscal 2001, have been derived from a research and development contract with
the Delphi Automotive Systems Group ("Delphi," formerly the Delco Remy
Division), an operating group of the General Motors Corporation, which expired
in May 1998. The Company has incurred cumulative losses of $ 328 million from
its inception to December 31, 2001.

BUSINESS AND BUSINESS STRATEGY

The Company is a leader in the development and commercialization of lithium-ion
polymer rechargeable batteries. The Company was founded as a research and
development organization focused on lithium-ion technology, and it holds more
than 790 issued and pending patents worldwide.

The Company's business strategy is to leverage its breakthrough innovations in
battery technology to capitalize on the significant opportunities in the energy
solutions market. The strategy comprises the introduction of our "next
generation" phosphate-based Saphion(TM) Lithium-ion technology; a balance of
system sales and licensing; and a manufacturing plan that leverages internal


                                    Page 15
<PAGE>


capabilities as well as OEM relationships. The strategy has been separated into
three phases: technology phase, product phase and customer phase, incorporating
key milestones in each.

The Company has introduced its phosphate-based, Saphion(TM) Lithium-ion
technology and has transitioned production from research and development to its
Northern Ireland manufacturing facility. The Company believes its Saphion(TM)
technology addresses the major weaknesses of existing Lithium-ion alternatives
while offering a solution that is competitive in cost and performance.

The system sales component of the Company's strategy involves capitalizing on
the Company's advanced technology and understanding of certain market segments
to design solutions that differentiate end customers' products and to develop
new, emerging markets for its Saphion(TM) Lithium-ion technology solutions. The
Company's systems sales strategy includes (i) continuing sales of its Cobalt and
Manganese based stacked polymer batteries solutions to small to mid-sized
companies where the flexibility of design and thinness of the stacked polymer is
paramount, (ii) developing the market for Saphion(TM) technology through product
launches, such as the N-Charge(TM) Power System, or through design wins, such as
the Wistron deal announced in February 2002 and (iii) maximizing the adoption of
Saphion(TM) technology by offering it in both polymer and cylindrical
constructions. The Company plans to enter contracted manufacturing arrangements
with cylindrical battery manufacturers.

The Company's licensing strategy will be to pursue technology licenses of
intellectual property related to patent protected manufacturing processes and
battery chemistries. The Company's stacked polymer battery manufacturing process
and the Company's Saphion(TM) technology are its key assets in the licensing
arena. In addition, the Company intends to sell the Saphion(TM) technology raw
material to its licensees and obtain royalties from licensees based on their
sales strategy.

The Company's manufacturing strategy involves both its own manufacturing
capabilities in its Northern Ireland facility and OEM relationships. The Company
intends to grow production capacity in its factory to 1 million units a month by
the middle of this year and seek OEM partners for cylindrical cell construction
and worldwide material production. The Company believes this manufacturing
strategy will allow it to deliver to a broad range of customer needs, from low
cost, high volume to highly customized, higher value added solutions.

The Company has outlined its business strategy in three phases as follows:

TECHNOLOGY PHASE: During this phase the Company intends to evangelize the
technology, complete its management team, announce the first major design win
from a systems sales standpoint and sign an OEM agreement. The timeline for this
phase of the business strategy was intended to be from August 2001 to January
2002. The Company has met or is making tangible progress on these objectives.

PRODUCT PHASE: During this phase the Company expects to continue announcing
design wins and phosphate licensees, begin to launch phosphate products,
announce key milestones around phosphate production and begin phosphate product
ramps from both its Northern Ireland facility and OEM partners. This phase began
in February 2002 and is to continue through the summer of 2002. On February 11,
2002 the Company launched its first product, the N-Charge(TM) Power System, and
ramped production of phosphate batteries out of its Northern Ireland facility.
The Company also plans to enter contracted manufacturing arrangements with
cylindrical battery manufacturers and to pursue using Saphion(TM) technology as
a "drop in" lithium-ion chemistry replacement for notebook computers and
communication devices.

CUSTOMER PHASE: During this phase the Company intends to announce customers
launching products using Valence's Saphion(TM) technology. This phase will then
become the ongoing business of the Company.

The Company has established a strategy that it believes will allow it to expand
its market opportunity. Through the sales of its current technology and the
licensing and market development of its Saphion(TM) technology, the Company
believes it is equipped to serve existing Lithium-ion technology markets as well
as open doors to new market opportunities.


                                    Page 16
<PAGE>


RESULTS OF OPERATIONS

THREE-MONTH AND NINE-MONTH PERIODS ENDED DECEMBER 31, 2001 (THIRD QUARTER OF
FISCAL 2002) AND DECEMBER 31, 2000 (THIRD QUARTER OF FISCAL 2001).

REVENUE

Revenue from battery and laminate sales totaled $0.1 million for the three-month
period ended December 31, 2001. For the corresponding period of fiscal 2001,
revenue from battery and laminate sales totaled $1.9 million. This decrease is
the result of the combination of long qualification cycles by potential
customers of systems solutions and the strategic shift from battery and laminate
sales to licensing and royalty revenues that took place after the acquisition of
technology rights from Telcordia Technologies, Inc. in December 2000. Licensing
and royalty revenue totaled $1 million for the three-month period ended December
31, 2001. There were no licensing or royalty revenues during the corresponding
period of fiscal 2001.

Revenue from battery and laminate sales for the nine-month period ended December
31, 2001 totaled $1.3 million compared to $6.0 million during the corresponding
period during fiscal 2001. The decrease results from the depletion of the sales
order backlog due to the strategic shift to licensing as discussed above. For
the nine-month period ended December 31, 2001 licensing and royalty revenues
totaled $3.2 million, of which $1.6 million related to the conversion of the
Hanil Joint Venture to a license agreement. There were no license or royalty
revenues during the nine-month period ended December 31, 2000. The Company has
adopted a dual strategy for revenue generation, which includes both systems
solutions and licensing. Due to the long qualification by potential customers
sales from these strategies are not expected to generate significant results
until the second half of fiscal 2003.

COST OF SALES

Cost of sales consists primarily of expenses incurred to manufacture battery and
laminate products. Net cost of sales for the three-month period ended December
31, 2001 was $2.2 million. The net cost of sales in the same period in fiscal
2001 was $4.6 million. Net cost of sales for the nine-month period ended
December 31, 2001 were $6.5 million compared to $12 million recorded during the
same period in fiscal 2001. Cost of sales during the 2001 period includes a
charge of $684,000 for inventory write-downs associated with the phase out of
certain of our products. The substantial decrease in fiscal 2002 results from
the reduction in battery and laminate production, personnel and continued
automation improvements in our Northern Ireland manufacturing facility.

RESEARCH AND PRODUCT DEVELOPMENT

Research and development expenses consist primarily of personnel, equipment and
materials to support the Company's Saphion(TM) technology chemistry and battery
research and development. Research and development expenses were $2.2 million
and $1.1 million for the three-month periods ended December 31, 2001 and 2000,
respectively. During the nine-month periods ended December 31, 2001 and 2000,
research and development expense was $6.7 million and $5.1 million,
respectively. The increased expense in fiscal 2002 is due to expanded product
development initiatives associated with the Saphion(TM) technology chemistry and
systems engineering.

MARKETING

Marketing expenses consist primarily of costs related to sales and marketing
personnel, travel, public relations, and marketing materials. Marketing expenses
were $0.5 million and $0.3 million for the three-month periods ended December
31, 2001 and 2000, respectively. During the nine-month periods ended December
31, 2001 and 2000, marketing expenses were $1.6 million and $0.6 million,
respectively. The increased expenditures during fiscal 2002 resulted from
increased personnel and increased investment in marketing initiatives such as
the launch of a new corporate web site and creation of a new investor
information package.

GENERAL AND ADMINISTRATIVE

General and administrative expenses consist primarily of salaries and other
related costs for finance, human resources, accounting, information technology,
legal and facilities related expenses. General and administrative expense was
$2.9 million and $3.2 million for the three-month periods ended December 31,
2001 and 2000, respectively. The decrease between comparable periods is due
primarily to the Company's continued efforts to control expenses such as travel
and other general and administrative expenses.


                                    Page 17
<PAGE>


For the nine-month period ended December 31, 2001, general and administrative
expense was $9.7 million compared to $8.2 million recorded during the nine-month
period ended December 31, 2000. The increase between comparable periods is due
primarily to increased legal cost associated with patent reviews, increased
recruiting efforts, severance packages, and relocation of the coporate office to
Austin, Texas.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $2.4 million and $2.8 million for the
three-month periods ended December 31, 2001 and 2000, respectively. The decrease
between periods was the result of the full amortization or disposal of certain
assets prior to and during the three-month period ended December 31, 2001.

For the nine-month period ended December 31, 2001, depreciation and amortization
expense was $7.3 million compared to $8.1 million recorded during the same
period in fiscal 2001. The decrease between periods results from full
amortization or disposal of certain assets prior to and during the nine-month
period ended December 31, 2001.

IMPAIRMENT CHARGE

An impairment charge of $31.9 million was recorded during the period ended
December 31, 2001. The charge was recorded pursuant to FASB Statement No. 121
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." During the period the Company refined its business strategy and
solidified its manufacturing plan and product mix. As a result, the Company
determined that the future cash flows expected to be generated from older
manufacturing equipment in its Northern Ireland facility and intellectual
property acquired in the Telcordia transaction in December 2000 did not exceed
their carrying value. This determination resulted in the net impairment charge
against property, plant, and equipment and intellectual property to record these
assets at their fair value.

INTEREST EXPENSE.

Interest expense was $1.3 million and $0.6 million during the three-month
periods ending December 31, 2001 and December 31, 2000, respectively. For the
nine month period ended December 31, 2001, interest expense was $2.9 million
compared to $1.5 million recorded during the same period in fiscal 2001. This
increase is primarily a result of increased borrowings from stockholder.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2001, we had cash and cash equivalents of $1.1 million. At that
same date, we had commitments for capital expenditures for the next 12 months of
approximately $2.3 million relating to specified manufacturing equipment, which
is included in accrued expenses at December 31, 2001. We may require additional
capital expenditures once we commence manufacturing of batteries in commercial
quantities. After taking into account our cash and cash equivalents, projected
revenues and available borrowings under our debt agreements of $10.0 million, we
expect that we will have sufficient financing through fiscal 2002 to meet our
working capital, capital expenditure and investment requirements; however,
without additional funding our liquidity will be exhausted during the first
quarter of fiscal 2003. At our current level of operations, we are using cash
from operations of approximately $6.0 to $8.0 million per quarter. We expect our
cash requirements to increase as our sales increase, and we intend to manage our
capital expenditures based on our then available sources of cash. We currently
are seeking additional financing to satisfy our cash requirements for a six to
nine month period, at which time, we will seek additional financing to continue
operations at our then current levels. We may not be able to arrange this
funding on favorable terms, or at all. If we are unable to arrange for
additional funding during the first quarter of 2003, we may have to cease
operations as a going concern. We may have additional sources of cash from our
licensing business. We are engaging in discussions to license our technology,
but to date we have not entered into any licensing agreements. We also may have
additional sources of cash from he commercialization of our Saphion(TM)
technology into new markets and customers and the sale of new products announced
in February 2002 which use the Bellcore technology. However, at this time we are
not able to accurately forecast cash from these sources.

The Company used $20.8 million net cash from operating activities during the
first nine months of fiscal year 2002 compared to using $30.6 million during the
first nine months of fiscal year 2001. The cash used in our fiscal 2002
operating activities was primarily due to net loss and the add back of non-cash
expenses, including depreciation and amortization, write-off of inventory,
write-off of accounts receivable, write-off of property and equipment, accretion
of debt discount, and compensation related to issuance of stock


                                    Page 18
<PAGE>


options. The decrease in operating cash outflows was substantially due to
operational improvements, lower production levels and inventory utilization in
our Northern Ireland facility.

During the nine-month period ended December 31, 2001, the Company used $8.5
million net cash from investing activities compared to $14.6 million during the
nine-month period ended December 31, 2000, a decreased usage of $6.1 million
between comparable periods. The difference was primarily comprised of a decrease
in capital expenditures.

The Company obtained $26.0 million net cash from financing activities during the
nine-month period ended December 31, 2001 compared to $24.4 million during the
nine-month period ended December 31, 2000. This increase of $1.6 million
resulted primarily from increased long-term borrowings in fiscal year 2002.

As a result of the above, the Company had a net decrease in cash and cash
equivalents of $2.7 million during the nine-month period ended December 31,
2001, whereas it had a net decrease in cash and cash equivalents of $22.5
million during the nine-month period ended December 31, 2000.

As of December 31, 2001, all of the Company's short term and long term debt
obligations were $774,000 and $45.5 million respectively. Effective December 31,
2001 the Company and Mr. Berg agreed to extend the maturity date of the loan
agreement with the loan balance of $14.95 million and accrued interest of $2.7
million from August 30, 2002 to September 30, 2005.

During fiscal year 1994, the Company, through our Dutch subsidiary, signed an
agreement with the Northern Ireland Industrial Development Board (the "IDB"), to
open an automated manufacturing plant in Northern Ireland in exchange for
capital and revenue grants from the IDB. The grants available under the
agreement and offers for an aggregate of up to (pound)25.6 million, generally
became available over a five-year period through October 31, 2001.As a condition
to receiving funding from IDB, the subsidiary must maintain a minimum of
(pound)12.0 million (approximately $16.9 million) in debt or equity financing
from the Company. As of December 31, 2001, we had received grants aggregating
(pound)9.0 million ($12.7 million). The amount of the grants available under the
agreement and offers depends primarily on the level of capital expenditures that
are made by the Company. Substantially all of the funding received under the
grants is repayable to the IDB if the subsidiary is in default under the
agreement and offers, which includes the permanent cessation of business in
Northern Ireland. Funding received under the grants to offset capital
expenditures is repayable if related equipment is sold, transferred or otherwise
disposed of during a four-year period after the date of grant. In addition, a
portion of funding received under the grants may also be repayable if the
subsidiary fails to maintain specified employment levels for the two-year period
immediately after the end of the five-year grant period. As a result of the
temporary reduction of Northern Ireland business activity, specified employment
levels have not been maintained, but the IDB is not seeking repayment and on the
advice of counsel, on the basis that successful negotiations will be concluded,
we do not believe that the IDB will bring any legal action pursuant to the
Letter of Offer. We have begun discussion with the IDB to end the current
agreement and enter into a new agreement more closely aligned to current
business conditions. We may not be able to meet the requirements necessary to
retain grants under the IDB agreement. Although it is unlikely, the IDB could
demand repayment of a portion of the total amounts received, which include
revenue grants of $1.2 million and equipment grants of $12.2 million.

                                  RISK FACTORS

CAUTIONARY STATEMENTS AND RISK FACTORS

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


                                    Page 19
<PAGE>


                          RISKS RELATED TO OUR BUSINESS

WE HAVE A NEED FOR ADDITIONAL CAPITAL. IF WE ARE UNABLE TO SATISFY OUR CAPITAL
REQUIREMENTS, WE MAY HAVE TO CEASE OPERATING AS A GOING CONCERN.

At December 31, 2001, we had cash and cash equivalents of $1.1 million and the
ability to utilize approximately $10.0 million under a loan agreement with Berg
& Berg Enterprises, LLC, an affiliate of Mr. Carl Berg, a director and
stockholder in the Company. After taking into account our cash and cash
equivalents, projected revenues and available borrowings under our debt
agreements of $10.0 million, we expect that we will have sufficient financing
through fiscal 2002 to meet our working capital, capital expenditure and
investment requirements; however, without additional funding our liquidity will
be exhausted during the first quarter of fiscal 2003. At our current level of
operations, we are using cash from operations of approximately $6.0 to $8.0
million per quarter. We are seeking additional financing to satisfy our cash
requirements for a six to nine month period, at which time, we will seek
additional financing to continue operations at our then current levels. Our cash
requirements may vary materially from those now planned because of changes in
our operations, including changes in original equipment manufacturer
relationships, market conditions, joint venture and business opportunities, or a
request for repayment of our existing IDB grants. In that event, we may need to
raise funding through debt or equity financing in addition to the funding we
currently anticipate. We may not be able to arrange for funding on favorable
terms, or at all. If we are unable to arrange for additional funding during the
first fiscal quarter of 2003, it may delay further development and production of
our batteries or otherwise delay our execution of our business plan, and we may
have to cease operations as a going concern.

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

We have incurred operating losses each year since inception in 1989 and had an
accumulated deficit of $328.5 million as of December 31, 2001. We have working
capital of negative $3.7 million as of December 31, 2001, and have sustained
recurring losses related primarily to the research and development and marketing
of our products. We expect to continue to incur operating losses and negative
cash flows through fiscal 2002, as we continue our product development, begin to
build inventory and continue our marketing efforts. We may never achieve or
sustain significant revenues or profitability in the future.

OUR BUSINESS MAY BE ADVERSELY AFFECTED IF OUR SAPHION(TM) TECHNOLOGY BATTERIES
ARE NOT COMMERCIALLY ACCEPTED.

We are researching and developing batteries based upon phosphate chemistry. Our
batteries are designed and manufactured as components for other companies and
end-user customers. Our success is dependent on the acceptance of our batteries
and the products using our batteries in their markets. Market acceptance may
depend on a variety of factors, including educating the target market regarding
the benefits of our products. Market acceptance and market share are also
affected by the timing of market introduction of competitive products. If we or
our customers are unable to gain any significant market acceptance for the
Saphion(TM) technology based batteries we plan to develop and manufacture, our
business will be adversely affected. It is too early to determine if Saphion(TM)
technology based batteries will achieve significant market acceptance.

BECAUSE OUR BATTERIES ARE PRIMARILY INTENDED TO BE INCORPORATED INTO OTHER
PRODUCTS, WE WILL NEED TO RELY ON ORIGINAL EQUIPMENT MANUFACTURERS TO
COMMERCIALIZE OUR PRODUCTS. WE MAY NOT OBTAIN ADEQUATE ASSISTANCE FROM THESE
THIRD PARTIES TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.

Our business strategy contemplates that we will be required to rely heavily on
assistance from original equipment manufacturers to gain market acceptance for
our products. We therefore will need to identify acceptable original equipment
manufacturers and enter into agreements with them. As of February 19, 2002, we
had not entered into any agreements with original equipment manufacturers. Once
we identify acceptable original equipment manufacturers and enter into
agreements with them, we will need to meet these companies' requirements by
developing and introducing new products and enhanced, or modified, versions of
our existing products on a timely basis. Original equipment manufacturers often
require unique configurations or custom designs for batteries, which must be
developed and integrated into their product well before the product is launched.
This development process not only requires substantial lead-time between the
commencement of design efforts for a customized battery system and the
commencement of volume shipments of the battery system to the customer, but also
requires the cooperation and assistance of the original equipment manufacturers
for purposes of determining the battery requirements for each specific
application. If we are unable to design, develop and introduce products that
meet original equipment manufacturers' requirements, we may lose opportunities
to enter into additional


                                    Page 20
<PAGE>


purchase orders and our reputation may be damaged. As a result, we may not
receive adequate assistance from original equipment manufacturers or battery
pack assemblers to successfully commercialize our products, which could impair
our profitability.

FAILURE TO IMPLEMENT AN EFFECTIVE LICENSING BUSINESS STRATEGY COULD ADVERSELY
AFFECT OUR REVENUE AND PROFITABILITY.

In December 2000, we acquired the intellectual property assets of Telcordia
Technologies, Inc. As a result of the acquisition of these intellectual property
assets and the internal development of our Saphion(TM) technology, we
significantly increased the role of licensing in our business activities. We
have not entered into any licensing agreements for our Saphion(TM) technology.
Our future operating results could be affected by a variety of factors
including:

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

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

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

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

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

Our future success will depend on our ability to integrate successfully our
licensing operations with our other business activities. The degree to which we
can successfully integrate these operations will depend on a number of factors,
including our ability to expand the scope of our operations beyond the design,
development, manufacture and marketing of our rechargeable lithium polymer
batteries to include substantially increased technology licensing activities. If
we fail to substantially expand our licensing activities, our results of
operations and financial condition will be adversely affected.

OUR FAILURE TO DEVELOP OEM RELATIONSHIPS WITH OTHER BATTERY MANUFACTURERS WILL
LIMIT OUR ABILITY TO WIDELY INTRODUCE OUR PHOSPHATE CHEMISTRY TECHNOLOGY INTO
THE MARKETPLACE AND COULD SIGNIFICANTLY IMPACT OUR SALES AND PROFITABILITY IN
FUTURE PERIODS.

To successfully implement our business strategy of broadly disseminating the
Saphion(TM) technology, we intend to develop relationships with manufacturers of
lithium ion batteries using stacked polymer technology as well as cylindrical
battery manufacturers. Our failure to develop these relationships will limit our
ability to widely introduce our phosphate chemistry technology into the
marketplace and could significantly impact our sales and profitability in future
periods.

FAILURE TO DEVELOP SALES CHANNELS FOR OUR CURRENT AND FUTURE END-USER PRODUCTS
WOULD SIGNIFICANTLY IMPACT OUR FUTURE REVENUE AND PROFITABILITY.

We introduced the N-Charge(TM), our first end-user product in February 2002. We
must develop reliable sales channels for distribution of our N-Charge(TM)
product, and any future end-user products. We cannot assure you that our
N-Charge(TM) product will be commercially accepted. In addition, failure to
develop effective sales channels will significantly impact our future revenue
and profitability.

FAILURE TO OBTAIN UNITED STATES AND INTERNATIONAL REGULATORY APPROVAL FOR
COMMERCIAL SHIPMENTS OF THE MATERIAL WOULD CAUSE DELAYS IN THE PRODUCTION RAMP
PLAN FOR OUR BATTERY TECHNOLOGY AND RESULT IN DELAYS OR LOSSES OF REVENUES
ASSOCIATED WITH THAT PLAN.

We currently are shipping material from our facility in Henderson, Nevada to our
manufacturing facility in Mallusk, Northern Ireland as research and development
material. We must receive regulatory approval from the United States and
appropriate international regulatory entities to ship commercial quantities of
the material. Failure to obtain the appropriate regulatory approvals in the
United


                                    Page 21
<PAGE>


States and internationally would cause delays in the production ramp plan for
our battery technology and result in delays or losses of revenue associated with
that plan.

OUR FAILURE TO COST-EFFECTIVELY MANUFACTURE BATTERIES IN COMMERCIAL QUANTITIES
WHICH SATISFY OUR CUSTOMERS' PRODUCT SPECIFICATIONS COULD DAMAGE OUR CUSTOMER
RELATIONSHIPS AND RESULT IN SIGNIFICANT LOST BUSINESS OPPORTUNITIES FOR US.

To be successful, we must cost-effectively manufacture commercial quantities of
our batteries that meet customer specifications. To facilitate commercialization
of our products, we will need to reduce our manufacturing costs, which includes
substantially raising and maintaining battery yields of commercial quality in a
cost-effective manner. If we fail to substantially increase yields in our
manufacturing process and reduce unit-manufacturing costs, we will not be able
to offer our batteries at a competitive price, and we will lose our current
customers and fail to attract future customers.

FAILURE TO SCALE UP OUR MANUFACTURING FACILITY WILL HARM OUR CUSTOMER RELATIONS
AND THREATEN FUTURE PROFITS.

We have begun to manufacture batteries on a commercial scale to fulfill purchase
orders and we are able to produce sufficient quantities of batteries for short
term needs. We continue to install, de-bug and qualify specified equipment used
in our high speed assembly line. If we fail to develop and efficiently operate a
large scale manufacturing facility capable of cost-effectively producing
significant quantities of batteries according to customer specifications, our
ability to serve the needs of our customers will be harmed and our future sales
and profits will be threatened.

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

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

The status of patents involves complex legal and factual questions and the
breadth of claims allowed is uncertain. Accordingly, we cannot be certain that
patent applications we file will result in patents being issued, or that our
patents and any patents that may be issued to us in the future will afford
protection against competitors with similar technology. In addition, we cannot
assure you that patents issued to us will not be infringed upon or designed
around by others or that others will not obtain patents that we would need to
license or design around. If existing or future patents containing broad claims
are upheld by the courts, the holders of such patents could require companies to
obtain licenses. If we are found to be infringing on third party patents, we
cannot be certain that we could obtain the necessary licenses for our products
on reasonable terms, if at all.

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

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

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

     o    successfully develop improved processes;

     o    implement multiple production lines; or


                                    Page 22
<PAGE>


     o    successfully operate the Mallusk facility.

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

CONTINUED DELAYS IN QUALIFYING THE EQUIPMENT USED IN OUR HIGH SPEED ASSEMBLY
LINE COULD SIGNIFICANTLY DELAY OUR BRINGING COMMERCIAL QUANTITIES OF PRODUCT TO
MARKET AND INTERFERE WITH OUR ABILITY TO GENERATE THE REVENUE AND CASH FLOW
NEEDED TO SUSTAIN OUR BUSINESS.

We may be unable to meet our schedules regarding installation, de-bugging and
qualification of the equipment used in the new high speed assembly line in our
Northern Ireland facility, and face the prospect of further delays or problems
related to facility qualification because:

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

     o    qualification by the manufacturer of our equipment depends on the
          availability and timing of that manufacturer; and

     o    we are modifying and updating many of the manufacturing processes
          which use this production equipment and we may need to further refine
          these processes.

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

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

We are actively soliciting additional purchase orders. We presently have limited
quantities of batteries available for sale and do not have all of the necessary
equipment in operation to manufacture a significant volume of products. We are
installing additional automated equipment at our facility in Mallusk, Northern
Ireland which will provide us with sufficient capacity to assemble batteries in
high volumes. We expect this production facility to be fully operational by the
middle of calendar 2002. If we cannot rapidly increase our production
capabilities to make sufficient quantities of commercially acceptable batteries,
we may not be able to fulfill purchase orders in a timely manner, if at all. In
addition, we may not be able to procure additional purchase orders, which could
cause us to lose existing and future customers, purchase orders, revenue and
profits.

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

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

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

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

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

     o    development by a customer of other sources of supply;

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


                                    Page 23
<PAGE>


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

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


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

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

To implement our growth strategy successfully, we will have to increase our
staff, including personnel in sales and marketing, engineering, development and
product support capabilities, as well as third party and direct distribution
channels. However, we face the risk that we may not be able to attract new
employees to sufficiently increase our staff or product support capabilities, or
that we will not be successful in our sales and marketing efforts. Failure in
any of these areas could impair our ability to execute our plans for growth and
adversely affect our future profitability.

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

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

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

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

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

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

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

We expect to generate income from license fees as well as ongoing royalties
based on sales by licensees that design, manufacture and sell batteries
incorporating our technology. License fees will be nonrefundable and may be paid
in one or more installments. Ongoing royalties will be nonrefundable and
generally based upon a percentage of the selling price of the batteries that
incorporate our


                                    Page 24
<PAGE>


technology sold by the licensee. Because we expect to derive a portion of our
future revenues from royalties on shipments by our licensees, our future success
depends upon the ability of our licensees to develop and introduce high volume
batteries that achieve and sustain market acceptance. We cannot assure you that
our licensees will be successful or that the demand for lithium-ion polymer
batteries Saphion(TM) technology batteries or devices utilizing these batteries
will continue to increase. In addition, our license fee revenues depend on our
ability to gain additional licensees within existing and new markets. A
reduction in the demand for lithium-ion polymer batteries, Saphion(TM)
technology batteries, our loss of key existing licensees or our failure to gain
additional licensees could have a material adverse effect on our business.

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

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

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

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

We have established a program for intellectual property documentation and
protection in order to safeguard our technology base. We intend to vigorously
pursue enforcement and defense of our patents and our other proprietary rights.
We could incur significant expenses in preserving our proprietary rights, and
these costs could harm our financial condition. We also are attempting to expand
our intellectual property rights through our applications for new patents.
Patent applications in the United States are maintained in secrecy until the
patents that are applied for are ultimately issued. Since publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries by several months, we cannot be certain that we were the first
creator of inventions covered by pending patent applications or the first to
file patent applications on such inventions. Therefore, our pending patent
applications may not result in issued patents and our issued patents may not
afford protection against a competitor. Our failure to protect our existing
proprietary technologies or to develop new proprietary technologies may
substantially impair our financial condition and results of operations.

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

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

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

     o    pay significant damages to third parties;

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


                                    Page 25
<PAGE>


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

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

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

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

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

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

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

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

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

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

Our revenues are dependent upon the continued operation of our manufacturing
facility in Northern Ireland. The operation of a manufacturing plant involves
many risks, including potential damage from fire or natural disasters. In
addition, we have obtained permits to conduct our business as currently operated
at the facility. We cannot assure you that these permits would continue to be
effective at the current location if the facility were destroyed and rebuilt, or
that we would be able to obtain similar permits to operate at another location.
We cannot assure you that the occurrence of these or any other operational
problems at our Northern Ireland facility would not harm our business.


                                    Page 26
<PAGE>


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

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

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

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

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

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

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

     o    import and export licensing requirements in Northern Ireland or other
          countries where we intend to conduct business may reduce or eliminate
          our ability to sell or license in certain markets; and

     o    political and economic instability in Northern Ireland or other
          countries where we intend to conduct business may reduce the demand
          for our batteries and our technology or our ability to market our
          batteries and our technology in those countries.

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

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

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

                       RISKS ASSOCIATED WITH OUR INDUSTRY

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

The battery industry has experienced rapid technological change which we expect
to continue. Rapid and ongoing changes in technology and product standards could
quickly render our products less competitive, or even obsolete. Other companies
are seeking to enhance traditional battery technologies, such as lead acid and
nickel cadnium or have recently introduced or are developing batteries based on
nickel metal hydride, liquid lithium ion and other emerging and potential
technologies. These competitors are engaged in significant development work on
these various battery systems and we believe that much of this effort is focused
on achieving higher energy densities for low power applications such as portable
electronics. One or more new, higher energy rechargeable battery technologies
could be introduced which could be directly competitive with, or be superior to,
our technology. The capabilities of many of these competing technologies have
improved over the past several years. Competing technologies that


                                    Page 27
<PAGE>


outperform our batteries could be developed and successfully introduced and, as
a result, there is a risk that our products may not be able to compete
effectively in our targeted market segments.

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

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

Competition in the rechargeable battery industry is intense. The industry
consists of major domestic and international companies, most of which have
financial, technical, marketing, sales, manufacturing, distribution and other
resources substantially greater than ours. There is a risk that other companies
may develop batteries similar or superior to ours. In addition, many of these
companies have name recognition, established positions in the market, and long
standing relationships with original equipment manufacturers and other
customers. We believe that our primary competitors are existing suppliers of
liquid lithium ion, competing polymer and, in some cases, nickel metal hydride
batteries. These suppliers include Sanyo, Matsushita Industrial Co., Ltd.
(Panasonic), Sony, Toshiba and SAFT America, Inc. All of these companies are
very large and have substantial resources and market presence. We expect that we
will compete against manufacturers of other types of batteries in our targeted
application segments, which include laptops, cellular telephones and personal
digital assistant products, on the basis of performance, size and shape, cost
and ease of recycling. There is also a risk that we may not be able to compete
successfully against manufacturers of other types of batteries in any of our
targeted applications.

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

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

                  GENERAL RISKS ASSOCIATED WITH STOCK OWNERSHIP

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

As of December 31, 2001, our officers, directors, and their affiliates as a
group beneficially owned approximately 17.1% of our outstanding common stock.
Carl Berg, one of our directors, owns a substantial portion of that amount. As a
result, these stockholders will be able to exercise significant control over all
matters requiring stockholder approval, including the election of directors and
the approval of significant corporate transactions, which could delay or prevent
someone from acquiring or merging with us. The interest of our officers and
directors, when acting in their capacity as stockholders, may lead them to:

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

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


                                    Page 28
<PAGE>


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

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

OUR STOCK PRICE IS VOLATILE.

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

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

     o    failure to achieve operating results projected by securities analysts;

     o    governmental regulation;

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

     o    our relationships with current or future collaborative partners; and

     o    other factors and events beyond our control.

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

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

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

The market price of our common stock could drop as a result of sales of a large
number of shares in the market or in response to the perception that these sales
could occur. In addition these sales might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. We had outstanding 45,552,310 shares of common stock as of
December 31, 2001. In addition, we have filed registration statements on Form
S-8 under the Securities Act that cover 1,414,526 shares of common stock
pursuant to outstanding but unexercised vested options to acquire our common
stock.

SALES OF SHARES ELIGIBLE FOR FUTURE SALE COULD IMPAIR OUR STOCK PRICE.

Sales of a substantial number of shares of common stock in the public market, or
the perception that sales could occur, could adversely affect the market price
for our common stock. This offering will result in additional shares of our
common stock being available on the public market. These factors could also make
it more difficult to raise funds through future offerings of common stock.


                                    Page 29
<PAGE>


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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has long-term debt, in the form of three building mortgages. Two
notes bear interest at an annually adjustable published interest rate index
(6.875% at December 31, 2001), and the third note bears interest at an
adjustable rate (5.75% at December 31, 2001). The Company also has long-term
debt in the form of a loan, which matures in August 2002, to a stockholder at a
fixed interest rate of 9% and a line of credit from the same stockholder, which
matures in January 2006, at a fixed interest rate of 8%. The table below
presents principal amounts by fiscal year for the Company's long-term debt.

<TABLE>
<CAPTION>
                         2002       2003        2004       2005       2006     THEREAFTER    TOTAL
                       --------   --------   ---------   --------   --------   ----------   --------
                             (dollars in thousands)
<S>                    <C>        <C>        <C>         <C>        <C>        <C>          <C>
Liabilities:
Fixed rate debt:                   $14,950                           $27,486                 $42,436
Variable rate debt         164         774        $774       $774        774     $3,576        6,836
</TABLE>

Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its debt obligations approximates fair
value. At December 31, 2001, the weighted average interest rate on the Company's
long-term debt is 8.13%. An increase or decrease in interest rates would affect
the interest costs relating to the Company's variable interest rate debt.

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company received notification that 23 former employees of the Mallusk,
Northern Ireland facility filed claims against the Company in connection with
the reduction in work force at the facility in March 2001. The time period for
filing such claims expired July 6, 2001, although the Tribunal may accept late
claims. The Company has successfully settled 18 of the claims for a total of
$12,000. The Company is pursuing settlement of the final 5 claims and does not
expect the potential charge to be material.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

          a.   None.

          b.   None.


                                    Page 30
<PAGE>


                                    SIGNATURE


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



                                       VALENCE TECHNOLOGY, INC.
                                       (Registrant)


Date: February 19, 2001                 By:  /S/ STEPHAN B. GODEVAIS
                                           ------------------------------------
                                            Stephan B. Godevais
                                            President, Chief Executive Officer


                                        By: /S/ KEVIN MISCHNICK
                                           ------------------------------------
                                            Kevin Mischnick
                                            Vice-President Finance


                                    Page 31