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 September 30, 2001.

Or

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

For the transition period from ____________ to ____________

Commission file number 0-20028

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


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


               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)


                  301 Conestoga Way, Henderson, Nevada 89015
--------------------------------------------------------------------------------
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 September 30,2001


<PAGE>


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

                                    FORM 10-Q

                    FOR THE QUARTER ENDED SEPTEMBER 30, 2001




                                      INDEX

                                                                           PAGES

PART I.    FINANCIAL INFORMATION

  Item 1.  Financial Statements (Unaudited):

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

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

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

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

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

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk........26


PART II.   OTHER INFORMATION

  Item 1.  Legal Proceedings.................................................27

SIGNATURE  ..................................................................28


                                     Page 2
<PAGE>


<TABLE>
<CAPTION>
                          VALENCE TECHNOLOGY, INC AND SUBSIDIARIES
                               (a development stage company)
                           CONDENSED CONSOLIDATED BALANCE SHEETS
                                       (in thousands)
                                                                      SEPTEMBER 30,      MARCH 31,
                                                                           2001             2001
                                                                      -------------     ------------
                                                                       (unaudited)
<S>                                                                    <C>               <C>
ASSETS
Current assets:
     Cash and cash equivalents                                         $       924       $    3,755
     Short term investments                                                    327            5,133
     Accounts receivable                                                     1,833            4,889
     Inventory                                                               3,892            4,825
     Prepaid and other current assets                                        1,125              901
                                                                       ------------      -----------
Total current assets                                                         8,101           19,503

Long term investments                                                       17,206           12,554
Property, plant and equipment, net                                          32,086           29,988
Intellectual property, net                                                  24,730           25,690
                                                                       ------------      -----------
Total assets                                                                82,123           87,735
                                                                       ============      ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current portion of long-term debt                                      16,371            1,686
     Accounts payable                                                        2,497            5,759
     Accrued expenses                                                        4,136            2,977
     Grant payable                                                           1,773            1,713
     Accrued compensation                                                      705              648
                                                                       ------------      -----------
Total current liabilities                                                   25,482           12,783

Deferred revenue                                                                 -            2,500
Long-term debt, less current portion                                         6,285            4,568
Long-term debt to stockholder                                               16,860           16,083
                                                                       ------------      -----------
Total liabilities                                                           48,627           35,934

Commitments and contingencies (Note 9)

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 September 30, 2001 and
       March 31, 2001, respectively                                              -            2,736

Stockholders' equity:
Common stock, $0.001 par value, authorized: 100,000,000 shares,
 issued and outstanding: 45,552,310 and 44,421,974 shares
     at September 30, 2001 and March 31, 2001, respectively                     46               44
Additional paid-in capital                                                 328,132          325,103
Notes receivable from stockholder                                           (4,862)          (4,862)
Deficit accumulated during the development stage                          (286,331)        (267,083)
Accumulated other comprehensive income (loss)                               (3,489)          (4,137)
                                                                       ------------      -----------
Total stockholders' equity                                                  33,496           49,065

      Total liabilities, mandatorily redeemable convertible
         preferred stock and stockholders' equity                      $    82,123       $   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               SIX MONTHS ENDED
                                             INCEPTION) TO     ----------------------------   ------------------------------
                                             SEPTEMBER 30,    SEPTEMBER 30,  SEPTEMBER 30,   SEPTEMBER 30,    SEPTEMBER 30,
                                                2001             2001            2000            2001             2000
                                             -------------    -----------    ------------    -------------    -------------
<S>                                          <C>              <C>            <C>             <C>              <C>
Revenue:
Research and development contracts           $     21,605     $        -     $         -     $          -     $          -
License and royalty revenue                         3,678             45               -            2,178
Battery and laminate sales                          9,916            482           2,101            1,207            4,101
                                             -------------    -----------    ------------    -------------    -------------
           Total revenue                           35,199            527           2,101            3,385            4,101

Cost of Sales                                      24,461          1,534           5,408            4,336            9,409
   IDB revenue grant                               (1,191)             -          (1,927)              -            (1,927)
                                             -------------    -----------    ------------    -------------    -------------
           Net cost of sales                       23,270          1,534           3,481            4,336            7,482
Gross Margin                                       11,929         (1,007)         (1,380)            (951)          (3,381)

Costs and expenses:
Research and product  development                 114,496          2,282           1,928            4,502            3,961
Marketing                                           6,098            651             258            1,084              360
General and administrative                         69,491          3,163           2,835            6,763            4,977
Write-off in-process technology                     8,212              -               -                -                -
Write-off investment in Danish subsidiary           3,489              -               -                -                -
Factory start-up costs                              3,171              -               -                -                -
One-time social charge                                333              -               -                -                -
Special charges                                    18,872              -               -                -                -
Depreciation and amortization                      50,679          2,463           2,740            4,853            5,233
                                             -------------    -----------    ------------    -------------    -------------
           Total costs and expenses               274,841          8,559           7,761           17,202           14,531
                                             -------------    -----------    ------------    -------------    -------------
Operating loss                                   (262,912)        (9,566)         (9,141)         (18,153)         (17,912)

Cost to settle stockholder lawsuit                (30,061)
Loss on disposal of assets                           (147)          (147)              -             (147)               -
Interest and other income                          20,042            504             415              699              714
Interest expense                                  (10,753)          (898)           (524)          (1,647)            (953)
Equity in loss of joint venture                    (2,500)            -               -                -              (345)
                                             -------------    -----------    ------------    -------------    -------------
Net loss                                     $   (286,331)       (10,107)         (9,250)         (19,248)         (18,496)
Beneficial conversion feature
  on preferred stock                                                  -              (52)              -              (105)
                                                              -----------    ------------    -------------    -------------
Net loss available to common stockholders                     $  (10,107)    $    (9,302)    $    (19,248)    $    (18,601)

Other comprehensive loss:
    Net loss                                                     (10,107)         (9,302)         (19,248)         (18,601)
Change in foreign currency
translation adjustments                                              831          (1,276)             648           (3,532)
                                                              -----------    ------------    -------------    -------------
         Comprehensive loss                                   $   (9,276)    $   (10,578)    $    (18,600)    $    (22,133)

Net loss per share available to
common stockholders                                           $    (0.22)    $     (0.25)    $      (0.42)    $      (0.50)
                                                              ===========    ============    =============    =============
Shares used in computing net loss
per share available to common
stockholders, basic and diluted                                   45,549          37,811           45,448           37,334
                                                              -----------    ------------    -------------    -------------
</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                SIX MONTHS ENDED
                                                                      INCEPTION) TO     --------------------------------
                                                                      SEPTEMBER 30,      SEPTMBER 30,      SEPTEMBER 30,
                                                                           2001             2001               2000
                                                                     ---------------    --------------     -------------
<S>                                                                  <C>                <C>                <C>
Cash Flows from operating activities:
  Net Loss                                                            $ (286,331)        $ (19,248)        $ (18,496)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
  Depreciation and amortization                                           50,679             4,853             5,233
  Accretion of debt discount                                               1,617               325               326
  Write-off property and equipment                                        15,545               155                 -
  Write-off in-process technology                                          6,211                 -                 -
  Compensation related to the issuance of stock options                    4,089               198                 -
  Non-cash charge related to acquisition of Danish subsidiary              2,245                 -                 -
  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                                                    (866)            3,086            (1,863)
     Prepaid expenses and other current assets                            (2,005)             (216)            1,008
     Inventory                                                            (3,879)              947            (2,668)
     Accounts payable                                                      3,339            (2,966)           (2,142)
     Accrued liabilities                                                  (1,365)              803             1,311
     Grant receivable                                                          -                 -            (1,926)
     Deferred revenue                                                          -            (2,500)                -
                                                                      -----------        ----------        ----------
  Net cash used in operating activities                                 (178,771)          (14,563)          (18,872)

Cash flows from investing activities:
  Purchase of investments                                               (665,789)                -                 -
  Proceeds from investments                                              661,699               154                 -
  Capital expenditures                                                   (98,659)           (5,293)           (8,544)
  Proceeds from disposal of property and equipment                         1,269                 -                 -
  Other                                                                     (222)                -                 -
                                                                      -----------        ----------        ----------
             Net cash used in investing activities                      (101,702)           (5,139)           (8,544)

Cash flows from financing activities:
  Property and equipments grants                                          12,243                 -                 -
  Acquisition of West Coast Venture Capital Assets                        11,949                 -                 -
  Proceeds from issuance of long-term debt                                37,630             2,126                 -
  Proceeds from long-term debt to stockholder                              8,687            14,860                 -
  Principal payments on long-term debt                                   (14,210)             (358)             (297)
  Proceeds from the issuance of common stock and warrants,
     net of issuance costs                                               214,955                95            13,369
  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                   285,454            16,723            13,072
Effect of foreign exchange rates on cash and cash equivalents             (4,057)              148            (1,361)
                                                                      -----------        ----------        ----------
Increase (decrease) in cash and cash equivalents                             924            (2,831)          (15,705)
Cash and cash equivalents, beginning of period                                 -             3,755            24,556
                                                                      -----------        ----------        ----------
Cash and cash equivalents, end of period                              $      924         $     924         $   8,851
                                                                      ===========        ==========        ==========
</TABLE>


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


                                     Page 5
<Page>


                    VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
                        (Companies in 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
        September 30, 2001, its consolidated results of operations for the
        period from March 3, 1989 (date of inception) to September 30, 2001 and
        for each of the three and six month periods ended September 30, 2001 and
        September 30, 2000, and the consolidated cash flows for each of the six
        month periods ended September 30, 2001 and September 30, 2000, and for
        the period from March 3, 1989 (date of inception) to September 30, 2001.
        Because all the disclosures required by generally accepted accounting
        principles are not included, these interim condensed consolidated
        financial statements should be read in conjunction with the audited
        financial statements and notes thereto in the Company's Annual Report on
        Form 10-K as of and for the year ended March 31, 2001. The results for
        the three and six month periods ended September 30, 2001 are not
        necessarily indicative of the results to be expected for the entire
        fiscal year ending March 31, 2002. The year-end condensed consolidated
        balance sheet data as of March 31, 2001 was derived from audited
        financial statements, but does not include all disclosures required by
        generally accepted accounting principles.

        The Company is in the development stage as of September 30, 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.      BUSINESS

        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 strategy includes the introduction of its "next generation"
        phosphate-based chemistry; a balance of licensing and system sales; and
        a manufacturing plan that leverages internal capabilities as well as OEM
        relationships.


3.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

        PRINCIPLES OF CONSOLIDATION:

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

        USE OF ESTIMATES:

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

        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.


                                     Page 6
<PAGE>


        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. No
        allowance for credit losses was deemed necessary during the three months
        ended September 30, 2001. Accounts receivable is comprised of the
        following (in thousands):

<TABLE>
<CAPTION>
                                              SEPTEMBER 30,      MARCH 31,
                                                   2001            2001
                                              -------------     ------------
        <S>                                   <C>               <C>
        Trade receivables                     $       605       $    2,956
        Allowance for credit losses                   (65)               -
        Interest receivable                           990              851
        VAT receivable                                303            1,082
                                              ------------      ------------
            Total                             $     1,833       $    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>
                                              SEPTEMBER 30,      MARCH 31,
                                                   2001            2001
                                              -------------     ------------
        <S>                                   <C>               <C>
        Raw materials                         $      2,612      $     3,295
        Work-in-process                              1,280            1,530
                                              -------------     -------------
        Total                                 $      3,892      $     4,825
                                              =============     =============
</TABLE>

        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.

        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


                                     Page 7
<PAGE>


        loss has occurred, the impairment loss is measured as the difference
        between the amount of the discounted cash flows and the carrying amount
        of the asset. The Company had no impairment losses for the three-month
        period ended September 30, 2001.

        INTELLECTUAL PROPERTIES:

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

        REVENUE RECOGNITION:

        Revenue from battery and laminate sales is recognized when the sale is
        complete, generally upon shipment to the customer. License and royalty
        revenue are recognized 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.

        DEFERRED REVENUE:

        Deferred revenue related to payments received from the Company's joint
        venture partner in Hanil Valence Co., Ltd. See Note 8, 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


                                     Page 8
<PAGE>


        effect was antidilutive were 6,686,939 and 5,272,302 for the three and
        six-month periods ended September 30, 2001 and September 30, 2000,
        respectively.

4.      INVESTMENTS:

        During the fourth quarter of fiscal 2001, the Company completed the
        acquisition of the assets of West Coast Venture Capital, Inc., which
        included investment equivalent instruments, in the form of mortgage
        assets. These instruments have a value of $17.5 million as of September
        30, 2001 and are presented as short-term investments of $0.3 million and
        long-term investments of $17.2 million on the balance sheet depending
        upon scheduled maturity. The mortgages have maturities ranging from 2001
        to 2028. The investments are classified as held-to-maturity securities
        and are recorded at amortized cost, which approximates fair value.

5.      LONG-TERM DEBT (IN THOUSANDS):

<TABLE>
<CAPTION>
                                               September 30,     March 31,
                                                   2001            2001
                                               -------------    -----------
        <S>                                    <C>              <C>
        Facility loans                           $ 8,248          $ 6,254
        Less amounts due within one year          (1,963)          (1,686)
                                               -------------     ---------
        Long-term debt due after one year        $ 6,285          $ 4,568
                                               =============     =========
</TABLE>

FACILITY LOANS:

During fiscal 1995, a bank provided the Company a $2,500,000 facility term loan
under which drawdowns were available for the purchase and improvement of a
facility in Henderson, Nevada. The facility term loan of $1,189,000 at September
30, 2001 bears interest at 10.4% and is collateralized by the related building.
The Company makes monthly principal payments of $14,000 plus accrued interest
through November 2001, and a final principal payment of $1,161,000 is due
December 2001.

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
September 30, 2001) on the outstanding principal. The outstanding principal
balance as of September 30, 2001 was $2,381,000. 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 as of September 30, 2001 was
$2,598,000.

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 (6.50%
at September 30, 2001) on the outstanding principal. The Company makes monthly
principal payments of $24,000 plus accrued interest. The outstanding principal
balance as of September 30, 2001 was $2,080,000. The related building is
collateral for the loan.

Principal payments on facility loans at September 30, 2001 are due as follows
(in thousands):

                        FISCAL YEAR                     LOANS
                --------------------------            ---------
                    Remainder of 2002                  $ 1,576
                           2003                            774
                           2004                            774
                           2005                            774
                           2006                            774
                        Thereafter                       3,576
                                                      ---------
                                                       $ 8,248
                                                      =========

                                     Page 9
<PAGE>


6.      DEBT TO STOCKHOLDER:

<TABLE>
<CAPTION>

                                                SEPTEMBER 30,       MARCH 31,
                                                    2001              2001
                                                --------------     ------------
                                                        (in thousands)
                  <S>                           <C>                <C>
                  Loan balance                       $14,950          $14,950
                  Line of credit balance              16,860            2,000
                  Unaccreted debt discount              (542)            (867)
                                                --------------     ------------
                  Balance                            $31,268          $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 September 30, 2001,
        the Company had an outstanding balance of $14,950,000 under the loan
        agreement. The loan bears interest at one percent over lender's
        borrowing rate (approximately 9.00% at September 30, 2001) and is
        available through August 30, 2002. As of September 30, 2001, accrued
        interest on the loan totaled $2,734,984, which is included in accrued
        expenses.

        In conjunction with the amended loan agreement in fiscal 1999, the
        Company issued warrants to purchase 594,031 shares of common stock. The
        warrants were valued using the Black Scholes valuation method and had an
        average weighted fair value of approximately $3.63 per warrant at the
        time of issuance. The fair value of these warrants, totaling
        approximately $2,158,679, has been reflected as additional consideration
        for the debt financing, recorded as a discount on the debt and accreted
        as interest expense to be amortized over the life of the line of credit.
        As of September 30, 2001, a total of $1,616,529 has been accreted. The
        amounts charged to interest expense for the three-month periods ended
        September 30, 2001 and September 30, 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 September 30, 2001, a
        total of $16,860,000 had been drawn on this line of credit.

7.      STOCKHOLDERS' EQUITY:

        MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:

        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.

8.      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.


                                    Page 10
<PAGE>


9.      COMMITMENTS AND CONTINGENCIES:

        LITIGATION:

        The Company received notification that 28 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 Tribunal scheduled a
        hearing for November 23, 2001 after which the Company expects to be able
        to estimate potential losses, if any, associated with the claims. At
        this time the Company contests the claims and plans to defend its
        position.

        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.

10.     SEGMENT INFORMATION:

        The Company conducts its business in two operating segments and uses
        only one measurement of profitability. During the first two quarters of
        fiscal 2002, the Company recorded battery and laminate sales of $1.2
        million and license and royalty fees of $2.2 million. If the licensing
        and royalty revenue grows as a percentage of total sales, the Company
        will separate the revenue and related costs.

        Long-lived asset information by geographic area at September 30, 2001
        and March 31, 2001 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                              September 30,      March 31,
                                                                   2001            2001
                                                              -------------    -----------
               <S>                                            <C>              <C>
               United States                                    $  4,624         $  4,741
               International (primarily Northern Ireland)         27,462           25,247
                                                              -------------    -----------
               Total long-lived assets                          $ 32,086         $ 29,988
                                                              =============    ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                              September 30,    September 30,
                                                                   2001            2000
                                                              -------------    -------------
               <S>                                            <C>              <C>
               United States                                     $ 1,570         $ 2,285
               International                                       1,815           1,816
                                                              -------------    -----------
               Total long-lived assets                           $ 3,385         $ 4,101
                                                              =============    ============
</TABLE>


11.     RECENT ACCOUNTING PRONOUNCEMENTS:

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

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


                                    Page 11
<PAGE>


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

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

        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.

12.     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.

13.     SUBSEQUENT EVENTS:

        In October 2001, the Company entered into 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 will accrue 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. 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 will be recorded at
        their fair value using the Black Scholes valuation method at the time of
        issuance. The fair value of these warrants will be 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.


                                    Page 12
<PAGE>


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

This report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions and variations of
such words are intended to identify forward-looking statements. Such statements
appear in a number of places in this report and include statements regarding our
intent, belief or current expectations with respect to, among other things, the
progress of our research and development activities, trends affecting our
liquidity position, including, but not limited to, our access to additional
equity or debt financing and our rate of expenditures, our joint venture
relationships, the status of the development of our products and their
anticipated performance and customer acceptance and our business and liquidity
strategies. We caution you not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of our future
performance and involve risks and uncertainties. Our actual results may differ
materially from those projected in this report, for the reasons, among others,
our limited available working capital, uncertain market acceptance of our
products, changing economic conditions, risks in product and technology
development, the effect of the Company's accounting policies and the other risks
discussed 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 six month periods ended September 30,
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 expects to begin to recognize significant revenues from
its new chemistry by the first or second quarter of fiscal 2003.

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 $ 286 million from
its inception to September 30, 2001.

RESULTS OF OPERATIONS

THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2001 (SECOND QUARTER OF FISCAL
2002) AND SEPTEMBER 30, 2000 (SECOND QUARTER OF FISCAL 2001).

REVENUE

Revenue from battery and laminate sales totaled $0.5 million for the three-month
period ended September 30, 2001. For the corresponding period of fiscal 2001,
revenue from battery and laminate sales totaled $2.1 million. This decrease is
the result of the strategic shift from battery and laminate sales to licensing
and royalty revenues subsequent to the acquisition of technology rights


                                    Page 13
<PAGE>


from Telcordia Technologies, Inc. in December 2000. Licensing and royalty
revenue totaled $45,000 for the three-month period ended September 30, 2001.
There were no licensing or royalty revenues during the corresponding period of
fiscal 2001.

Revenue from battery and laminate sales for the six-month period ended September
30, 2001 totaled $1.2 million compared to $4.1 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 six-month period ended September 30, 2001 licensing and royalty revenues
totaled $2.2 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 six-month period ended September 30, 2000.

COST OF SALES

Net cost of sales for the three-month period ended September 30, 2001 was $1.5
million. The net cost of sales in the same period in fiscal 2001 was $3.4
million. Net cost of sales for the six-month period ended September 30, 2001
were $4.3 million compared to $7.5 million recorded during the same period in
fiscal 2001. The substantial decrease in fiscal 2002 results from the reduction
in battery and laminate production, personnel and continued automation
improvements in our manufacturing facility.

RESEARCH AND PRODUCT DEVELOPMENT

Research and development expenses were $2.3 million and $1.9 million for the
three-month period ended September 30, 2001 and 2000, respectively. During the
six-month period ended September 30, 2001 and 2000, research and development
expense was $4.5 million and $4.0 million, respectively. The increased
expenditures during fiscal 2002 resulted from product development initiatives
associated with the phosphate chemistry and systems engineering.

MARKETING

Marketing expenses were $0.7 million and $0.3 million for the three-month period
ended September 30, 2001 and 2000, respectively. During the six-month period
ended September 30, 2001 and 2000, marketing expenses were $1.1 million and $0.4
million, respectively. The increased expenditures during fiscal 2002 resulted
from increased personnel and outsourced services.

GENERAL AND ADMINISTRATIVE

General and administrative expense was $3.2 million and $2.8 million for the
three-month period ended September 30, 2001 and 2000, respectively. The increase
between comparable periods is due primarily to relocating the corporate office
to Austin, Texas and legal costs associated with a patent review program.

For the six-month period ended September 30, 2001, general and administrative
expense was $6.7 million compared to $5.0 million recorded during the six-month
period ended September 30, 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 $2.5 million and $2.7 million for the
three-month period ended September 30,2001 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 September 30, 2001.

For the six-month period ended September 30, 2001, depreciation and
amortization expense was $4.9 million compared to $5.2 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 six-month
period ended September 30, 2001.


                                    Page 14
<PAGE>


INTEREST AND OTHER INCOME

Interest and other income was $0.5 million for the six-month period ended
September 30, 2001 as compared to $0.4 million for the same period in fiscal
2001. The increase primarily results from interest earned on the investments
acquired from West Coast Venture Capital in February 2001.

INTEREST EXPENSE.

Interest expense was $0.9 million and $0.5 million during the three month
periods ending September 30, 2001 and September 30, 2000, respectively. This
increase is a result of increased borrowings from stockholder.

For the six-month period ended September 30, 2001, interest expense was $1.6
million compared to $1.0 million recorded during the same period in fiscal 2001.
The increased expense resulted from increase borrowings from stockholder and
other increases in debt balances.

LIQUIDITY AND CAPITAL RESOURCES

The Company used $14.6 million net cash from operating activities during the
first six months of fiscal year 2002 compared to using $18.9 million during the
first six 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 options.

During the six months ended September 30, 2001, the Company used $5.1 million
net cash from investing activities compared to $8.5 million during the six
months ended September 30, 2000, a decreased usage of $3.4 million between
comparable periods. The difference was primarily comprised of a decrease in
capital expenditures.

The Company provided $16.7 million net cash from financing activities during the
second quarter of fiscal year 2002 compared to $13.1 million during the second
quarter of fiscal year 2001. This increase of $3.6 million resulted primarily
from increased long-term borrowing in fiscal year 2002.

As a result of the above, the Company had a net decrease in cash and cash
equivalents of $2.8 million during the six months ended September 30, 2001,
whereas it had a net decrease in cash and cash equivalents of $15.7 million
during the six months ended September 30, 2000.

At September 30, 2001, we had cash and cash equivalents of $0.9 million and the
ability to utilize approximately $0.6 million under a line of credit secured by
investments acquired from West Coast Venture Capital, Inc. In addition, the
Company entered into a loan agreement on October 5, 2001 with Berg & Berg
Enterprises, LLC ("Berg & Berg"), an affiliate of Mr. Carl Berg, a director and
stockholder in the Company. Under the terms of the agreement, Berg and Berg
agreed to advance the Company funds of up to $20 million between the date of the
agreement and September 30, 2003. Interest on the loans will accrue at 8.0% per
annum and all outstanding amounts with respect to the loans are due and payable
on 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 of
September 30, 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 we make.
Substantially all of the funding received under the grants is repayable to the
IDB if the subsidiary is in default under the agreement and offers, which
includes the permanent cessation of business in Northern Ireland. Funding
received under the grants to offset capital expenditures is repayable if related
equipment is sold, transferred or otherwise disposed of during a four-year
period after the date of grant. In addition, a portion of funding received under
the grants may also be repayable if the subsidiary fails to maintain specified
employment levels for the two-year period immediately after the end of the
five-year grant period. As a result of the temporary reduction of Northern
Ireland business activity, specified employment levels have not been maintained,
but the IDB is not seeking repayment and on the advice of counsel, on the basis
that successful negotiations will be


                                    Page 15
<PAGE>


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

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. At September 30, 2001, we had
cash and cash equivalents of $0.9 million. After taking into account our cash
and cash equivalents, projected revenues, receipt of funds, and financial
commitments, we expect that we will have sufficient financing through fiscal
2002 to complete funding of required capital expansion, research and product
development, marketing, general and administrative expenses and the costs of
integrating the Telcordia licensing activities. Our cash requirements, however,
may vary materially from those now planned because of changes in our operations,
including changes in original equipment manufacturer relationships, market
conditions, joint venture and business opportunities, or a request for repayment
of our existing IDB grants. In such event, we may need to raise additional
funding through debt or equity financing through fiscal 2002. If we require
additional funding, we may not be able to arrange such funding on favorable
terms, if at all.


                                  RISK FACTORS

CAUTIONARY STATEMENTS AND RISK FACTORS

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

                          RISKS RELATED TO OUR BUSINESS

WE MAY HAVE A NEED FOR ADDITIONAL CAPITAL.

At September 30, 2001, we had cash and cash equivalents of $0.9 million and the
ability to utilize approximately $0.6 million under a line of credit secured by
investments acquired from West Coast Venture Capital, Inc. In addition, the
Company entered into a loan agreement with Berg & Berg Enterprises, LLC, an
affiliate of Mr. Carl Berg, a director and stockholder in the Company. Under the
terms of the agreement, Berg and Berg agreed to advance the Company funds of up
to $20 million between the date of the agreement and September 30, 2003.
Interest on the loans will accrue at 8.0% per annum and all outstanding amounts
with respect to the loans are due and payable on September 30, 2005.

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

OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE OR OUR CUSTOMERS ARE UNABLE TO GAIN
MARKET ACCEPTANCE FOR THE "NEXT GENERATION" BATTERIES WE DEVELOP AND
MANUFACTURE.

We are researching and developing "next generation" 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


                                    Page 16
<PAGE>


introduction of competitive products. If we or our customers are unable to gain
any significant market acceptance for the phosphate based batteries we plan to
develop and manufacture, our business will be adversely affected. It is too
early to determine if phosphate based batteries will achieve significant market
acceptance.

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

To be successful, we must cost-effectively manufacture commercial quantities of
our batteries that meet customer specifications. Until recently, batteries with
our new phosphate chemistry had only been manufactured on our pilot
manufacturing line, which is able to produce prototype batteries in quantities
sufficient to enable customer sampling and testing and product development. Our
manufacturing facilities will require additional development to enable us to
produce batteries cost-effectively, according to customer specifications and on
a commercial scale. To facilitate commercialization of our products, we will
need to reduce our manufacturing costs. This includes being able to
substantially raise and maintain battery yields of commercial quality in a
cost-effective manner. If we fail to substantially increase yields of our
batteries and reduce unit-manufacturing costs, we will not be able to offer our
batteries at a competitive price, 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 our
first significant purchase orders. The redesign and modification of the Mallusk
manufacturing facility, including its customized manufacturing equipment, will
continue to require engineering work and capital expenses and is subject to
significant risks, including risks of cost overruns and significant delays. In
automating, redesigning and modifying the manufacturing processes, we continue
to depend on several developers of automated production lines, all of whom have
limited experience in producing equipment for the manufacture of batteries. If
we fail to develop and implement a large scale manufacturing facility capable of
cost-effectively producing commercial quantities of batteries according to
customer specifications, it will harm our ability to serve the needs of our
customers and threaten our future sales and profits.

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

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

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

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

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

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

o       successfully develop improved processes;

o       design required production equipment;


                                    Page 17
<PAGE>


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

o       obtain timely delivery of required production equipment;

o       implement multiple production lines; or

o       successfully operate the Mallusk facility.

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

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

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

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

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

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

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

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

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

We currently have several outstanding unfilled purchase orders for our batteries
and actively are soliciting additional purchase orders. We presently have
limited quantities of batteries available for sale and do not have the necessary
equipment in operation to manufacture a commercially adequate volume of
products. We are installing additional automated equipment at our facilities in
Mallusk, Northern Ireland, and expect this production facility to be fully
operational by the end of calendar 2001, which will provide us with sufficient
capacity to manufacture and ship batteries in high volumes. In 1993, we
ultimately were unable to fulfill a purchase order for batteries that
incorporated a previous technology due to our inability to produce our batteries
on a commercial scale. If we cannot rapidly increase our production capabilities
to make sufficient quantities of commercially acceptable batteries, we may not
be able to fulfill existing purchase orders in a timely manner, if at all. In
addition, we may not be able to procure additional purchase orders, which could
cause us to lose existing and future customers, purchase orders, revenue and
profits.

WE 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 $286 million as of September 30, 2001. We have working
capital of negative $17.5 million as of September 30, 2001, and have sustained
recurring losses related primarily to the research and development and marketing
of our products. We expect to continue to incur operating losses and negative
cash flows through fiscal 2002, as we continue our product development, begin to
build inventory and continue our marketing efforts. We may never achieve or
sustain significant revenues or profitability in the future.


                                    Page 18
<PAGE>


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;

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.

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

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

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

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

We rely heavily on assistance from original equipment manufacturers and battery
pack assemblers to gain market acceptance for our products. We therefore will
need to meet these companies' requirements by developing and introducing new
products and enhanced, or modified, versions of our existing products on a
timely basis. Original equipment manufacturers and battery pack assemblers often


                                    Page 19
<PAGE>


require unique configurations or custom designs for batteries, which must be
developed and integrated into their product well before the product is launched.
This development process not only requires substantial lead-time between the
commencement of design efforts for a customized battery system and the
commencement of volume shipments of the battery system to the customer, but also
requires the cooperation and assistance of the original equipment manufacturers
or battery pack assemblers for purposes of determining the battery requirements
for each specific application. If we are unable to design, develop and introduce
products that meet original equipment manufacturers' and battery pack
assemblers' requirements, we may not be able to fulfill our obligations under
existing purchase orders, we may lose opportunities to enter into additional
purchase orders and our reputation may be damaged. As a result, we may not
receive adequate assistance from original equipment manufacturers or battery
pack assemblers to successfully commercialize our products, which could impair
our profitability.

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

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

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

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

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

WE MUST EFFICIENTLY INTEGRATE THE TELCORDIA ASSETS INTO OUR BUSINESS.

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

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

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

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

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

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


                                    Page 20
<PAGE>


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

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

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

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

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

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

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

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

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

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. While we currently are
not engaged in any intellectual property litigation or proceedings, we may
become involved in these proceedings in


                                    Page 21
<PAGE>


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

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. There can be no assurance that these permits would continue to
be effective at the current location if the facility were destroyed and rebuilt,
or that we would be able to obtain similar permits to


                                    Page 22
<PAGE>


operate at another location. There can be no assurance that the occurrence of
these or any other operational problems at our Northern Ireland facility would
not harm our business.

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

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

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

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

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

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

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

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

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

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

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

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

                       RISKS ASSOCIATED WITH OUR INDUSTRY

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

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


                                    Page 23
<PAGE>


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

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

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

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

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


                                    Page 24
<PAGE>


deferring or preventing a change in control, may discourage bids for our common
stock at a premium over its market price and may decrease the market price, and
infringe upon the voting and other rights of the holders, of our common stock.

OUR STOCK PRICE IS VOLATILE.

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

o       fluctuation in our operating results;

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

o       failure to achieve operating results projected by securities analysts;

o       governmental regulation;

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

o       our relationships with current or future collaborative partners; and

o       other factors and events beyond our control.


                                    Page 24
<PAGE>


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

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

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

The market price of our common stock could drop as a result of sales of a large
number of shares in the market or in response to the perception that these sales
could occur. In addition these sales might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. We had outstanding 45,552,310 shares of common stock as of
September 30, 2001. In addition, we have filed registration statements on Form
S-8 under the Securities Act that cover 1,414,526 shares of common stock
pursuant to outstanding but unexercised vested options to acquire our common
stock.

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.

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.


                                    Page 25
<PAGE>


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has long-term debt, in the form of four building mortgages, one of
which has a balloon payoff in calendar 2001. One note bears interest at a fixed
rate of 10.4%, the second and third notes bear interest at an annually
adjustable published interest rate index (6.875% at September 30, 2001), and the
fourth note bears interest at an adjustable rate (6.5% at September 30, 2001).
The Company also has long-term debt in the form of a loan, which matures in
August 2002, to a stockholder at a fixed interest rate of 9% and a line of
credit from the same stockholder, which matures in January 2006, at a fixed
interest rate of 8%. The table below presents principal amounts by fiscal year
for the Company's long-term debt.

<TABLE>
<CAPTION>
                        2002      2003      2004      2005      2006    THEREAFTER    TOTAL
                      --------  --------  --------  --------  --------  ----------   --------
                                               (dollars in  thousands)
<S>                    <C>      <C>       <C>       <C>        <C>       <C>          <C>
Liabilities:
Fixed rate debt:       $1,189   $14,950                        $16,860                $32,999
Variable rate debt        387       774      $774      $774        774    $3,576        7,059
</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 September 30, 2001, the weighted average interest rate on the
Company's long-term debt is 8.23%. 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 28 former employees of the
        Mallusk, Northern Ireland facility filed claims against the Company in
        connection with the reduction in work force in March 2001 at the
        facility. The time period for filing such claims expired July 6, 2001,
        although the Tribunal may accept late claims. The Tribunal has set a
        hearing for November 23, 2001 at which time the Company expects to be
        able to estimate any potential losses associated with the claims. At
        this time the Company contests the claims and plans to defend its
        position.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        a.   None.

        b.   The Company filed a report on Form 8-K on August 30, 2001
             relating to two press releases published August 23, 2001
             announcing the Company's new business strategy and the
             appointment of two new officers.


                                    Page 26
<PAGE>


                                    SIGNATURE


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



                                       VALENCE TECHNOLOGY, INC.
                                       (Registrant)


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


                                        By: /s/ Kevin Mischnick
                                            -----------------------------------
                                            Kevin Mischnick
                                            Vice-President Finance


                                    Page 27