UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM 10-Q





(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended September 30, 2009Oro
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      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
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)




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




(512)
527-2900


(Registrant’s
telephone number, including area code)







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










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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).    Yes    ̈    No  
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “accelerated filer”, “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





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




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




APPLICABLE
ONLY TO CORPORATE ISSUERS:




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




The
number of shares of common stock, par value of $0.001 per share, outstanding at
October 31, 2009 was 126,482,123.







VALENCE
TECHNOLOGY, INC.


FORM 10-Q


INDEX





PART I – FINANCIAL
      INFORMATIONItem 1. Financial Statements
      (Unaudited):Condensed Consolidated Balance Sheets as of
      September 30, 2009 and March 31, 2009
            
            3Condensed Consolidated Statements
      of Operations and Comprehensive Loss for the Three and Six Month Periods
      Ended September 30, 2009 and September 30, 2008
            
            4Condensed Consolidated Statements
      of Cash Flows for the Six Month Periods Ended September 30, 2009 and
      September 30, 2008
            
            5Notes to Condensed Consolidated
      Financial Statements
            
            6Item 2. Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            16Item 3. Quantitative and
      Qualitative Disclosures about Market Risk
            
            26Item 4. Controls and
      Procedures
            
            26PART II – OTHER
      INFORMATIONItem 1. Legal
      Proceedings
            
            27Item 1A. Risk
      Factors
            
            27Item 2. Unregistered Sales
      of Equity Securities and Use of Proceeds.
            
            28Item 3. Defaults Upon Senior
      Securities.
            
            28Item 4. Submission of
      Matters to a Vote of Security Holders.
            
            28Item 5. Other
      Information.
            
            29Item 6.
      Exhibits.
            
            29Signatures and
      Certifications
            
            32








2


PART I – FINANCIAL
INFORMATION




ITEM 1. FINANCIAL
      STATEMENTS (UNAUDITED)




Valence
Technology, Inc.


Condensed Consolidated Balance
Sheets


(in
thousands, except share amounts)





September 30,
            
            
            March 31,2009
            
            
            2009(unaudited)ASSETSCurrent assets:Cash
      and cash equivalents
            
            $
            2,018
            
            
            $
            4,009Trade
      receivables, net of allowance of $50 and $172,
respectively
            
            
            2,009
            
            
            
            3,592Inventory,
      net
            
            
            5,899
            
            
            
            10,736Shareholder
      receivable
            
            
            —
            
            
            
            1,062Other
      receivables
            
            
            6,488
            
            
            
            2,854Prepaid
      and other current assets
            
            
            995
            
            
            
            1,092Total
      current assets
            
            
            17,409
            
            
            
            23,345Property,
      plant and equipment, net
            
            
            5,642
            
            
            
            6,291Total
      assets
            
            $
            23,051
            
            
            $
            29,636LIABILITIES,
      PREFERRED STOCK AND STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts
      payable
            
            $
            894
            
            
            $
            1,822Accrued
      expenses
            
            
            7,594
            
            
            
            7,279Short-term
      debt, net of debt discount
            
            
            19,685
            
            
            
            —Deferred
      revenue
            
            
            57
            
            
            
            355Total
      current liabilities
            
            
            28,230
            
            
            
            9,456Long-term
      interest payable to stockholder
            
            
            25,903
            
            
            
            24,415Long-term
      debt, net of debt discount
            
            
            —
            
            
            
            19,445Long-term
      debt to stockholder, net of debt discount
            
            
            34,827
            
            
            
            34,766Other
      long-term liabilities
            
            
            142
            
            
            
            129Commitments
      and contingenciesPreferred Stock:Redeemable
      convertible preferred stock, $0.001 par value, 10,000,000 shares
      authorized, 861 issued and outstanding as of September 30, 2009 and
      March 31, 2009, liquidation value $8,610
            
            
            8,610
            
            
            
            8,610Stockholders’ deficit:Common
      stock, $0.001 par value, 200,000,000 shares authorized, 126,985,267 shares
      issued and 125,182,123 shares outstanding as of September 30, 2009
      and 125,042,793 shares issued and 123,239,649 shares outstanding as of
      March 31, 2009
            
            
            127
            
            
            
            125Additional
      paid-in-capital
            
            
            503,602
            
            
            
            498,646Treasury
      shares, 1,803,144 at cost
            
            
            (5,164
            )
            
            
            (5,164
            )Accumulated
      deficit
            
            
            (570,091
            )
            
            
            (557,657
            )Accumulated
      other comprehensive loss
            
            
            (3,135
            )
            
            
            (3,135
            )Total
      stockholders’ deficit
            
            
            (74,661
            )
            
            
            (67,185
            )Total
      liabilities, preferred stock, and stockholders’ deficit
            
            $
            23,051
            
            
            $
            29,636




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


3




Valence
Technology, Inc.


Condensed Consolidated Statements of
Operations and Comprehensive Loss




(in
thousands, except per share amounts)


( Unaudited )





Three Months Ended
            
            
            Six Month EndedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Revenue:Battery
      and system sales
            
            $
            3,257
            
            
            $
            5,114
            
            
            $
            7,887
            
            
            $
            16,000Licensing
      and royalty revenue
            
            
            90
            
            
            
            702
            
            
            
            178
            
            
            
            806Total
      revenues
            
            
            3,347
            
            
            
            5,816
            
            
            
            8,065
            
            
            
            16,806Cost
      of sales
            
            
            3,113
            
            
            
            5,987
            
            
            
            7,023
            
            
            
            17,003Gross
      margin / (loss)
            
            
            234
            
            
            
            (171
            )
            
            
            1,042
            
            
            
            (197
            )Operating
      expenses:Research
      and product development
            
            
            1,045
            
            
            
            1,198
            
            
            
            2,265
            
            
            
            2,364Marketing
            
            
            466
            
            
            
            695
            
            
            
            1,188
            
            
            
            1,501General
      and administrative
            
            
            3,077
            
            
            
            2,563
            
            
            
            6,905
            
            
            
            5,212Impairment
      on long lived assets
            
            
            —
            
            
            
            389
            
            
            
            —
            
            
            
            389Total
      operating expenses
            
            
            4,588
            
            
            
            4,845
            
            
            
            10,358
            
            
            
            9,466Operating
      loss
            
            
            (4,354
            )
            
            
            (5,016
            )
            
            
            (9,316
            )
            
            
            (9,663
            )Foreign
      exchange gain
            
            
            —
            
            
            
            149
            
            
            
            58
            
            
            
            619Interest
      and other income
            
            
            2
            
            
            
            8
            
            
            
            18
            
            
            
            12Interest
      and other expense
            
            
            (1,249
            )
            
            
            (1,323
            )
            
            
            (2,515
            )
            
            
            (2,673
            )Property
      and casualty loss
            
            
            (592
            )
            
            
            —
            
            
            
            (592
            )
            
            
            —Net
      loss
            
            $
            (6,193
            )
            
            $
            (6,182
            )
            
            $
            (12,347
            )
            
            $
            (11,705
            )Dividends
      on preferred stock
            
            
            (43
            )
            
            
            (43
            )
            
            
            (86
            )
            
            
            (86
            )Net
      loss available to common stockholders, basic and diluted
            
            $
            (6,236
            )
            
            $
            (6,225
            )
            
            $
            (12,433
            )
            
            $
            (11,791
            )Other
      comprehensive loss:Net
      loss
            
            $
            (6,193
            )
            
            $
            (6,182
            )
            
            $
            (12,347
            )
            
            $
            (11,705
            )Change
      in foreign currency translation adjustments
            
            
            (48
            )
            
            
            228
            
            
            
            —
            
            
            
            345Comprehensive
      loss
            
            $
            (6,241
            )
            
            $
            (5,954
            )
            
            $
            (12,347
            )
            
            $
            (11,360
            )Net
      loss per share available to common stockholders, basic and
      diluted
            
            $
            (0.05
            )
            
            $
            (0.05
            )
            
            $
            (0.10
            )
            
            $
            (0.10
            )Shares
      used in computing net loss per share available to common stockholders,
      basic and diluted
            
            
            124,937
            
            
            
            117,204
            
            
            
            124,302
            
            
            
            116,802




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




4


Valence
Technology, Inc.


Condensed Consolidated Statements of
Cash Flows




(in
thousands)


( Unaudited )





Six Months Ended
              September 30,2009
            
            
            2008Cash flows from operating
      activities:Net
      loss
            
            $
            (12,347
            )
            
            $
            (11,705
            )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
            
            
            598
            
            
            
            1,230Loss
      on disposal of assets
            
            
            —
            
            
            
            1Bad
      debt recoveries
            
            
            7
            
            
            
            47Accretion
      of debt discount and other
            
            
            1,785
            
            
            
            1,779Property
      and casualty loss
            
            
            592
            
            
            
            —Share-based
      compensation
            
            
            1,165
            
            
            
            1,038Changes
      in operating assets and liabilities:Trade
      receivable
            
            
            1,897
            
            
            
            3,599Inventory
            
            
            1,854
            
            
            
            (2,573
            )Prepaid
      and other current assets
            
            
            948
            
            
            
            (7,593
            )Accounts
      payable
            
            
            (928
            )
            
            
            (1,258
            )Accrued
      expenses and long-term interest
            
            
            (930
            )
            
            
            543Deferred
      revenue
            
            
            (298
            )
            
            
            324Net
      cash used in operating activities
            
            
            (5,657)
            
            
            
            (14,568
            )Cash flows from investing
      activities:Purchases
      of property, plant and equipment
            
            
            (130
            )
            
            
            (3,084
            )Proceeds
      from disposal of property, plant and equipment
            
            
            —
            
            
            
            1,029Net
      cash used in investing activities
            
            
            (130
            )
            
            
            (2,055
            )Cash flows from financing
      activities:Proceeds
      from short term loans
            
            
            —
            
            
            
            7,542Proceeds
      from stock option exercises
            
            
            132
            
            
            
            740Proceeds
      from issuance of common stock and warrants, net of issuance
      costs
            
            
            3,660
            
            
            
            8,679Net
      cash provided by financing activities
            
            
            3,792
            
            
            
            16,961Effect
      of foreign exchange rates on cash and cash equivalents
            
            
            4
            
            
            
            231Decrease
      in cash and cash equivalents
            
            
            (1,991
            )
            
            
            569Cash
      and cash equivalents, beginning of period
            
            
            4,009
            
            
            
            2,616Cash
      and cash equivalents, end of period
            
            $
            2,018
            
            
            $
            3,185Supplemental information:Notes
      payable contributed for exercise of common stock warrants
            
            $
            —
            
            
            $
            4,500Interest
      paid
            
            $
            690
            
            
            $
            696




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


5




Valence
Technology, Inc.


Notes to Condensed Consolidated
Financial Statements


September
30, 2009


(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 its
subsidiaries (“Valence” or the “Company”) as of September 30, 2009, its
consolidated results of operations for each of the three and six month periods
ended September 30, 2009 and September 30, 2008, and the consolidated cash
flows for the six month periods ended September 30, 2009 and September 30,
2008. Because all the disclosures required by accounting principles generally
accepted in the United States 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, 2009. The results for the
three and six month periods ended September 30, 2009 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
March 31, 2010. The year-end condensed consolidated balance sheet data as
of March 31, 2009 was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States.




2.
            BUSINESS AND BUSINESS
      STRATEGY:





The
Company was founded in 1989 and has commercialized the industry’s first lithium
phosphate technology. The Company develops, manufactures, and sells high-energy
power systems utilizing proprietary phosphate-based lithium-ion technology for
diverse applications, with special emphasis on portable appliances and future
generations of hybrid and electric vehicles.  The Company’s mission is to
promote the wide adoption of high-performance, safe, long cycle life,
environmentally friendly, low-cost energy storage systems. To accomplish this
mission and address the significant market opportunity that the Company believes
is available, it utilizes the numerous benefits of its latest energy storage
technology, extensive international patent estate and the experience of its
management team.





In March
2009, the Company introduced a new revision of U-Charge®, the third generation
of Lithium Iron Magnesium Phosphate Energy Storage Systems, which are expected
to be commercially available in the second half of fiscal 2010.U-Charge® features safe,
long-life lithium phosphate technology which utilizes patented lithium iron
magnesium phosphate-based cathode material manufactured with the Company’s
patented CTR (Carbothermal reduction process). The Company believes the Valence
CTR process is the only known single step process in the world that offers lower
cost and higher quality than generic multi-step manufacturing processes. The
Company believes that the improved features and functionality of the latest
U-Charge® Lithium Iron Magnesium Phosphate Energy Storage Systems are
well-suited for electric vehicle (EV), plug-in hybrid electric vehicle (PHEV)
and similar applications. U-Charge® Lithium Iron Magnesium Phosphate Energy
Storage Systems address the safety and limited life weaknesses of other lithium
technologies while offering a solution that is competitive in cost and
performance.  This revision of U-Charge® builds upon these features
and adds improvements in state of charge, balancing and field
reparability.





The
Company’s business plan and strategy is focused on complete lithium phosphate
energy storage solutions that include licensing its technology to worldwide
manufacturers, sales of its high performance cathode materials to cell
manufacturers, sales of the U-Charge® family of products and design and sales of
custom energy storage solutions such as the energy storage solution for the
Segway Personal Transporter.





The
Company has proven internal manufacturing processes on line with available
capacity to exceed its projected break-even requirements in its two wholly-owned
China subsidiaries. Business relationships with key components manufacturers and
suppliers have been established with companies that can provide the Company with
a stable supply of raw materials.




The
Company has the following subsidiaries: Valence
Technology (Nevada), Inc., Valence Technology Cayman Islands Inc., Valence
Technology N.V., Valence Technology International, Inc., Valence Technology
B.V., Valence Technology (Suzhou) Co., Ltd., and Valence Energy-Tech (Suzhou)
Co., Ltd.




6


Going
Concern:




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. The
Company has incurred operating losses each year since its inception in 1989 and
had an accumulated deficit of $570.1 million as of September 30, 2009. For the
three and six month periods ended September 30, 2009, the Company sustained net
losses available to common stockholders of $6.2 and $12.4 million, respectively.
For the three and six month periods ended September 30, 2008, the Company
sustained net losses available to common stockholders of $6.2 and $11.8 million,
respectively. These factors, among others, indicate that the Company may be
unable to continue as a going concern for a reasonable period of time. The
Company’s ability to continue as a going concern is contingent upon its ability
to meet its liquidity requirements. If the Company is unable to arrange for debt
or equity financing on favorable terms or at all the Company’s ability to
continue as a going concern is uncertain. These financial statements do not give
effect to any adjustments to the amounts and classifications of assets and
liabilities which might be necessary should the Company be unable to continue as
a going concern.




Liquidity
and Capital Resources:




At
September 30, 2009, the Company’s principal sources of liquidity were cash and
cash equivalents of $2.0 million. The Company expects that its sources of
liquidity will not be sufficient for the remaining fiscal year. The Company
anticipates product sales and royalties during fiscal 2010 will be insufficient
to cover the Company’s operating expenses. Management depends upon its ability
to periodically arrange for additional equity or debt financing to meet the
Company’s liquidity requirements.




On
February 22, 2008, the Company entered into an At Market Issuance Sales
Agreement with Wm. Smith & Co., as sales agent (the “Sales Agent”),
which was amended by Amendment No. 1 to At Market Issuance Sales Agreement on
July 2, 2009, under which the Company may issue and sell up to 10,000,000 shares
of common stock in a series of transactions over time as the Company may direct
through the Sales Agent. Unless the Company and the Sales Agent agree to a
lesser amount with respect to certain persons or classes of persons, the
compensation to the Sales Agent for sales of common stock sold pursuant to the
Agreement will be 6.0% of the gross proceeds of the sales price per
share.  As of September 30, 2009, we have sold approximately 4.9
million shares under this arrangement.




On
October 14, 2009 the Company entered into a Common Stock Purchase Agreement with
Seaside 88, LP, or Seaside, which provides that, upon the terms and subject to
the conditions set forth therein, the Company is required to issue and sell, and
Seaside to purchase, up to 650,000 shares of common stock once every two weeks,
subject to the satisfaction of customary closing conditions, beginning on
October 15, 2009 and ending on or about the date that is fifty-two weeks
subsequent to the initial closing, for an aggregate sale to Seaside of up to
16,900,000 shares of common stock.  The price of the shares that the
Company sells to Seaside will be at a 12% discount to the volume weighted
average trading price of the common stock for the ten consecutive trading days
immediately preceding each closing date.




Although
management has arranged these equity financing opportunities, management can not
be assured that they will effectively meet the Company’s cash requirements in
the future.  Given the Company’s historical operating results and the
amount of existing debt, as well as other factors, the Company may not be able
to arrange for debt or equity financing from third parties on favorable terms or
at all.





The
Company’s cash requirements may vary materially from those now planned because
of changes in the Company’s operations including the failure to achieve expected
revenues, greater than expected expenses, changes in OEM relationships, market
conditions, the failure to timely realize the Company’s product development
goals, and other adverse developments. These events could have a negative impact
on the Company’s available liquidity sources during the next 12
months.




3.
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES:




Revenue
Recognition:





The
Company generates revenues from sales of products including batteries and
battery systems, and from licensing fees and royalties per technology license
agreements. Product sales are recognized when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred,
seller’s price to the buyer is fixed and determinable, and collection is
reasonably assured. Product shipments that are not recognized as revenue during
the period shipped, primarily product shipments to resellers that are subject to
right of return, are recorded as deferred revenue and reflected as a liability
on the balance sheet. Products shipped with the rights of return are included in
finished goods inventory as the Company retains title to the products.  For
reseller shipments where revenue recognition is deferred, the Company records
revenue and relieves inventory based upon the reseller-supplied reporting of
sales to their end customers or their inventory reporting. For all shipments,
the Company estimates a return rate percentage based upon historical experience.
From time to time, the Company provides sales incentives in the form of rebates
or other price adjustments; these are generally recorded as reductions to
revenue on the latter of the date the related revenue is recognized or at the
time the rebate or sales incentive is offered. Licensing fees are recognized as
revenue upon completion of an executed agreement and delivery of licensed
information, and if there are no significant remaining vendor obligations and
collection of the related receivable is reasonably assured. Royalty revenues are
recognized upon licensee revenue reporting and when collection is reasonably
assured.




7


Use
of Estimates:





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the revenues and expenses for the period. The Company has
made significant estimates in determining the amount of inventory reserves and
inventory overhead absorption as discussed in Note 4, Inventory, warranty
liabilities as discussed in Note 10, Commitments and Contingencies, and share
based compensation as discussed in Note 12, Share Based Compensation. 
Actual results could differ from those estimates.




Recent
Accounting Pronouncements:





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standard Codification (“ASC”) No. 805, Business Combinations (“ASC
805”), previously referred to as Statement of Financial Accounting Standard
(“SFAS”) 141 (revised 2007), Business Combinations. ASC 805 will
significantly change current practices regarding business combinations. Among
the more significant changes, ASC 805 expands the definition of a business and a
business combination; requires the acquirer to recognize the assets acquired,
liabilities assumed and noncontrolling interests (including goodwill), measured
at fair value at the acquisition date; requires acquisition-related expenses and
restructuring costs to be recognized separately from the business combination;
and requires in-process research and development to be capitalized at fair value
as an indefinite-lived intangible asset. ASC 805 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company adopted the provisions of ASC 805 on July 1, 2009, and its adoption did
not have a material impact on its consolidated financial
statements.





In
April 2008, the FASB issued ASC No. 350-30, previously referred to as SFAS
142-3, Determination of the
Useful Life of Intangible Assets. ASC No. 350-30 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under ASC 350
Intangibles – Goodwill and Other. ASC No. 350-30 is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Effective
July 1, 2009, the Company adopted ASC No. 350-30, and its adoption did not have
a material impact on its consolidated financial statements





On June
12, 2009, the FASB issued ASC No. 810, Consolidation, previously referred to as
SFAS 167, Amendments to FASB
Interpretation No. 46(R), which significantly changes the consolidation
model for variable interest entities. ASC No. 810 requires companies to
qualitatively assess the determination of the primary beneficiary of a variable
interest entity (“VIE”) based on whether the entity (1) has the power to direct
matters that most significantly impact the activities of the VIE, and (2) has
the obligation to absorb losses or the right to receive benefits of the VIE that
could potentially be significant to the VIE. The standard shall be effective as
of the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The Company does not expect that the adoption
of ASC No. 810 will have a material impact on its financial position or results
of operations.





In June
2009, the FASB issued ASC No. 105, Generally Accepted Accounting
Principles (“GAAP”) (“ASC 105” or “FASB Codification”), previously
referred to as SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No 162(“SFAS
168”).The
effective date for use of the FASB Codification is for interim and annual
periods ending after September 15, 2009. Companies should account for the
adoption of the guidance on a prospective basis. Effective July 1, 2009, the
Company adopted the FASB Codification and its adoption did not have a material
impact on its consolidated financial statements.





The
Company has evaluated subsequent events through November 6, 2009, the date that
these financial statements were issued.




8


Net
Loss per Share Available to Common Stockholders:




Net loss
per share is computed by dividing the net loss available to common stockholders
by the weighted average shares of common stock outstanding during the period.
The dilutive effect of the options and warrants to purchase common stock are
excluded from the computation of diluted net loss per share, since their effect
is antidilutive. The antidilutive instruments excluded from the diluted net loss
per share computation for the three and six month periods ended September 30,
2009 and September 30, 2008 were as follows:





Three Months Ended
            
            
            Six Month EndedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Shares
      reserved for conversion of Series C-1 andSeries C-2
      preferred stock
            
            
            3,628,634
            
            
            
            3,628,634
            
            
            
            3,628,634
            
            
            
            3,628,634Common
      stock options reserved
            
            
            10,609,057
            
            
            
            7,345,093
            
            
            
            10,609,057
            
            
            
            7,345,093Accrued
      dividends on Series C preferred stock convertible to common
      stock
            
            
            382,929
            
            
            
            149,876
            
            
            
            382,929
            
            
            
            149,876Total
            
            
            14,620,620
            
            
            
            11,123,603
            
            
            
            14,620,620
            
            
            
            11,123,603




The
number of shares listed above as reserved for conversion of Series C-1 and
Series C-2 preferred stock does not include shares related to accrued
dividends that are convertible at the election of the Company, subject to
certain limitations. On September 30, 2009, up to $689,000 in accrued dividends
would be convertible into up to 382,929 shares of common stock based on the
closing sales price of $1.80 per share on September 30, 2009.




4.
            INVENTORY:




Inventory
consisted of the following (in thousands) at:





September
      30, 2009
            
            
            March
      31, 2009Raw
      materials
            
            $
            1,862
            
            
            $
            3,711Work
      in process
            
            
            924
            
            
            
            3,575Finished
      goods
            
            
            3,113
            
            
            
            3,450Total
      inventory
            
            $
            5,899
            
            
            $
            10,736




Included
in inventory at September 30, 2009, and March 31, 2009, were valuation
allowances of $3.5 million and $4.6 million to reduce their carrying values to
the lower of cost or market. The $4.8 million decrease in the inventory is
mainly related to a fire in an offsite warehouse which housed certain fixed
assets and inventory in the second quarter of fiscal 2010. It was determined
that $2.7 million of raw materials, work in progress, and finished goods
inventory were consumed by the fire and determined to be unrecoverable. The
additional decrease in inventory as of September 30, 2009, as compared to March
31, 2009, relates to management’s ongoing focus on reducing inventory levels to
better match expected demand. Management has valued overhead absorption related
to work in process based on estimates of completion at September 30, 2009, and
March 31, 2009.




5.
              OTHER
      RECEIVABLES




Other
receivables consisted of the following (in thousands) at:




September
      30, 2009
            
            
            March
      31, 2009Receivable
      from expected insurance recovery
            
            $
            3,483
            
            
            $
            —VAT
      tax receivable
            
            
            2,908
            
            
            
            2,558Other
      receivables
            
            
            98
            
            
            
            296Total
      other receivables
            
            $
            6,489
            
            
            $
            2,854




In the
second quarter of fiscal 2010, the Company experienced a fire at an offsite
warehouse which contained certain fixed assets and inventory in Suzhou, China.
The Company has filed a claim with its insurance carrier that covers these
materials, using the best currently available estimate available, and expects an
insurance payment of at least $3.5 million. At this time, there are
uncertainties regarding how the insurance carrier will value the items consumed
in the fire, and other uncertainties regarding potential liabilities that the
Company may face, and the receivable recognized represents management’s best
currently available estimate of the expected recovery.




9


6.
            PREPAID AND OTHER CURRENT
      ASSETS:





Prepaid
and other current assets consisted of the following (in thousands)
at:





September
      30, 2009
            
            
            March
      31, 2009Deposits
            
            $
            212
            
            
            $
            432Prepaid
      insurance
            
            
            23
            
            
            
            71Other
      prepaids
            
            
            760
            
            
            
            589Total
      prepaids and other current assets
            
            $
            995
            
            
            $
            1,092




7.
            PROPERTY, PLANT AND
      EQUIPMENT:




Property,
plant and equipment, net of accumulated depreciation and impairment, consisted
of the following (in thousands) at:





September
      30, 2009
            
            
            March
      31, 2009Leasehold
      improvements
            
            $
            1,117
            
            
            $
            1,116Machinery
      and equipment
            
            
            7,850
            
            
            
            8,021Office
      and computer equipment
            
            
            2,266
            
            
            
            2,217Construction
      in progress
            
            
            48
            
            
            
            —Total
      cost
            
            
            11,281
            
            
            
            11,354Less:
      accumulated depreciation
            
            
            (4,780
            )
            
            
            (4,204
            )Less:
      impairment
            
            
            (859
            )
            
            
            (859
            )Total
      cost, net of depreciation
            
            $
            5,642
            
            
            $
            6,291




In the
second quarter of fiscal 2010, the Company experienced a fire at an offsite
warehouse which contained certain fixed assets and inventory. As a result of
this fire, management has reduced the carrying value of certain fixed assets by
approximately $200,000 as of September 30, 2009. Depreciation expense was
approximately $233,000 and $410,000 for the three months ended September 30,
2009, and 2008, respectively, and $598,000 and $782,000 for the six months ended
September 30, 2009, and 2008, respectively.





8.
            SHORT
      TERM DEBT:





Short-term
debt, net of discount, consisted of the following (in thousands)
at:





September
      30, 2009
            
            
            March
      31, 2009Short
      term debt
            
            $
            20,000
            
            
            $
            —Less:
      unaccreted debt discount
            
            
            (315
            )
            
            
            —Short-term
      debt, net of debt discount
            
            $
            19,685
            
            
            $
            —





On
July 13, 2005, the Company secured a $20.0 million loan (the “2005 Loan”)
from SFT I, Inc., the full amount of which has been drawn down. The 2005
Loan is guaranteed by Carl E. Berg, Chairman of the Board, and matures in a lump
sum on July 13, 2010. Interest is due monthly based on a floating interest
rate. The interest rate is calculated as the greater of 6.75% or the sum of
LIBOR Rate, rounded to the nearest 1/16thof
1.0%, plus 4.0% (6.75% as of September 30, 2009). As of September 30, 2009, no
amounts have been paid on the 2005 Loan.





In
connection with the 2005 Loan, both SFT I, Inc. and Berg & Berg
Enterprises, LLC (“Berg & Berg”), each received warrants to purchase 600,000
shares of the Company’s common stock at a price of $2.74 per share, the closing
price of the Company’s common stock on July 12, 2005. The fair value
assigned to these warrants, totaling approximately $2.0 million, has been
recorded as a discount on the debt and will be accreted as interest expense over
the life of the loan. The warrants were valued using the Black-Scholes valuation
method using the assumptions of a life of 36 months, 96.45% volatility, and a
risk-free rate of 3.88%. On April 24, 2008, Berg & Berg exercised
its warrants by purchasing 600,000 shares of the Company’s common stock for an
aggregate purchase price of $1.6 million. In addition, SFT I, Inc.
completed  cashless exercises of its warrants on June 4, 2008 and
June 27, 2008 and received 230,767 common stock shares upon completion of
the cashless exercises. Also in connection with the 2005 Loan, the Company
incurred a loan commitment fee and attorneys’ fees which, in addition to the
interest rate cap agreement, have been recorded as a discount on the debt and
will be accreted as interest expense over the life of the loan. The rate cap
agreement terminated on August 10, 2008. Through September 30, 2009, a total of
approximately $2.0 million has been accreted and included as interest expense.
Interest payments on the 2005 Loan are currently being paid on a monthly
basis.





10


As of
September 30, 2009, the 2005 Loan is payable within twelve months of the balance
sheet date, and has been reclassified to short term debt.




9.
            LONG
      TERM DEBT:




Long-term
debt, net of discount, consisted of the following (in thousands)
at:





September
      30, 2009
            
            
            March
      31, 2009Long
      term debt
            
            $
            —
            
            
            $
            20,000Less:
      unaccreted debt discount
            
            
            —
            
            
            
            (555
            )Long-term
      debt, net of debt discount
            
            $
            —
            
            
            $
            19,445





On
July 13, 2005, the Company secured the 2005 Loan, the full amount of which
has been drawn down. The 2005 Loan matures in a lump sum on July 13, 2010.
Interest is due monthly based on a floating interest rate. The interest rate is
calculated as the greater of 6.75% or the sum of LIBOR Rate, rounded to the
nearest 1/16thof
1.0%, plus 4.0% (6.75% as of September 30, 2009). As of September 30, 2009, no
amounts have been paid on the 2005 Loan.





As of
September 30, 2009, the 2005 Loan is payable within twelve months of the balance
sheet date, and has been reclassified as short term debt.





Long-term
debt to a stockholder, net of discount, consisted of the following (in
thousands) at:





September 30, 2009
            
            
            March
      31, 20092001
      Loan
            
            
            20,000
            
            
            $
            20,0001998
      Loan
            
            
            14,950
            
            
            
            14,950Less:
      unaccreted debt discount
            
            
            (123
            )
            
            
            (184
            )Long-term
      debt to stockholder, net of debt discount
            
            $
            34,827
            
            
            $
            34,766





In
October 2001, the Company entered into a loan agreement (“2001 Loan”) with
Berg & Berg. Under the terms of the agreement, Berg & Berg
agreed to advance the Company funds of up to $20.0 million between the date of
the agreement and September 30, 2003. Interest on the 2001 Loan accrues at
8.0% per annum, payable from time to time. The maturity date of the 1990 Loan
has been extended multiple times, most recently on October 13, 2009, at which
time Berg & Berg agreed to further extend the maturity date for the
loan principal and interest from September 30, 2010 to September 30,
2012.





In
conjunction with the 2001 Loan, Berg & Berg received warrants to
purchase 1,402,743 shares of the Company’s common stock at the price of $3.208
per share. These warrants were exercised on September 30, 2008 when
Berg & Berg surrendered a short term note payable of $4.5 million to
the Company as exercise consideration. The fair value assigned to these
warrants, totaling approximately $5.1 million, has been reflected as additional
consideration for the debt financing, recorded as a discount on the debt and
accreted as interest expense over the life of the loan. The warrants were valued
using the Black-Scholes method using the assumptions of a life of 47 months
(extended to 84 months), 100% volatility, and a risk-free rate of 5.5%. Through
September 30, 2009, a total of approximately $5.0 million has been accreted and
included as interest expense. The amount charged to interest expense on the
outstanding balance of the loan for the three month periods ended September 30,
2009, and September 30, 2008 was $409,000. Interest payments on the loan
are currently being deferred, and are recorded as long-term interest. The
accrued interest amounts for the 2001 Loan were $12.4 million and $11.6 million
as of September 30, 2009, and March 31, 2009, respectively.




In
July 1998, the Company entered into an amended loan agreement (“1998 Loan”)
with Berg & Berg that allows the Company to borrow, prepay and
re-borrow up to $10.0 million principal under a promissory note on a revolving
basis. In November 2000, the 1998 Loan agreement was amended to increase
the maximum amount to $15.0 million. As of September 30, 2009, the Company had
an outstanding balance of $15.0 million under the 1998 Loan agreement. The 1998
Loan bears interest at one percent over lender’s borrowing rate (9.0 % at
September 30, 2009). The maturity date of the 1990 Loan has been extended
multiple times, most recently on October 13, 2009, at which time Berg &
Berg agreed to further extend the maturity date for the loan principal and
interest from September 30, 2010 to September 30, 2012. The accrued
interest amounts for the 1998 Loan were $13.5 million and $12.8 million as of
September 30, 2009 and March 31, 2009, respectively.




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




11


10.
            COMMITMENTS AND
      CONTINGENCIES:




Warranties:




The
Company has established a warranty reserve in relation to the sale of U-Charge®
Power Systems, and other large-format power systems. The total warranty
liability was $0.5 million and $1.0 million as of September 30, 2009 and March
31, 2009, respectively.




Litigation:





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





On
February 14, 2006, Hydro-Quebec filed an action against the Company in the
United States District Court for the Western District of Texas (Hydro-Quebec v.
Valence Technology, Civil Action No. A06CA111). An amended complaint was
filed April 13, 2006. A stay on the case was imposed pending a
reexamination of the two patents by the USPTO.  The stay imposed by
the Court has been lifted following completion of the reexaminations of the two
patents.  On January 8, 2009  Hydro-Quebec filed a second
amended complaint, wherein Hydro-Quebec alleges that Saphion ® I
Technology, the technology utilized in all of the Company’s commercial products,
infringes U.S. Reexamined Patent Nos. 5,910,382 and 6,514,640 exclusively
licensed to Hydro-Quebec.  Hydro-Quebec seeks injunctive relief and
monetary damages. The Company has filed a response denying the allegations in
the second amended complaint.  A hearing commonly referred to as a
“Markman hearing” to determine the scope of the asserted claims in the two
reexamined patents has been set for early November 2009.





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




11.
            REDEEMABLE CONVERTIBLE
      PREFERRED STOCK:





On
June 2, 2003, the Company issued 1,000 shares of Series C Convertible
Preferred Stock and warrants to purchase the Company’s common stock for $10,000
per share, raising net proceeds of $9.4 million. On January 22, 2004, the
holder of the Series C Convertible Preferred Stock converted 139 of its
1,000 shares with the principal amount of $1.39 million, including accrued and
unpaid dividends, into 327,453 shares of the Company’s common stock at the
conversion price of $4.25 per share. On November 30, 2004, the Company
entered into an amendment and exchange agreement to exchange all outstanding 861
shares of the Company’s Series C Convertible Preferred Stock, representing
$8.6 million of principal. The Series C Convertible Preferred Stock was
exchanged for 431 shares of Series C-1 Convertible Preferred Stock, with a
stated value of $4.3 million, and 430 shares of Series C-2 Convertible
Preferred Stock, with a stated value of $4.3 million. When issued, the
Series C-1 Convertible Preferred Stock and Series C-2 Convertible
Preferred Stock were convertible into common stock at $4.00 per share. Each
series carries a 2% annual dividend rate, payable quarterly in cash or shares of
common stock, and was redeemable on December 15, 2005. The Company has the
right to convert the preferred stock if the average of the dollar-volume
weighted average price of the Company’s common stock for a ten-day trading
period is at or above $6.38 per share. If the preferred shares are not redeemed
in accordance with their terms, the holder of the preferred stock shall have the
option to require the Company to convert all or part of the non-redeemed shares
at a price of 95% of the lowest closing bid price of the Company’s common stock
during the three days ending on and including the conversion date. The preferred
shares are currently outstanding and subject to redemption or conversion at the
holder’s discretion.





Pursuant
to assignment agreements entered into between the Company and Berg &
Berg on July 14, 2005 and December 14, 2005, Berg & Berg
purchased all of the outstanding Series C-1 Convertible Preferred Stock and
Series C-2 Convertible Preferred Stock from its original holder. Pursuant
to the terms of the assignment agreement, Berg & Berg agreed that the
failure of the Company to redeem the preferred stock on December 15, 2005
did not constitute a default under the certificate of designations and has
waived the accrual of any default interest applicable in such circumstance. In
exchange, the Company has agreed (i) that the Series C-1 Convertible
Preferred Stock may be converted, at any time, into the Company’s common stock
at the lower of $4.00 per share or the closing bid price of the Company’s common
stock on December 13, 2005 ($1.98) and (ii) that the Series C-2
Convertible Preferred Stock may be converted, at any time, into the Company’s
common stock at the lower of $4.00 per share or the closing bid price of the
Company’s common stock on July 13, 2005 ($2.96). Berg & Berg has
agreed to allow dividends to accrue on the preferred stock.  At September
30, 2009, $689,000 in preferred stock dividends had accrued.





In
connection with the original issuance of the Series C Convertible Preferred
Stock, in June 2003, the Company issued to the Series C Convertible
Preferred Stock original holder warrants to purchase 352,900 shares of the
Company’s common stock. The warrants, which expired on June 2, 2008, had a
purchase price of $5.00 per share. The warrants were valued using the
Black-Scholes valuation model. The warrants were recorded to additional paid in
capital at their relative fair value to the Series C Convertible Preferred
Stock at $933,000. Accretion to the remaining redemption value of $8.61 million
was recorded over the eighteen-month period of the Series C Convertible
Preferred Stock ended December 2, 2004.




12


12.
            SHARE-BASED
      COMPENSATION:




In 1990,
the Board of Directors adopted the 1990 Stock Option Plan (the “1990 Plan”). The
1990 Plan expired in 2000 and as of September 30, 2009 no shares are available
to be granted under this plan.




In
February 1996, the Board of Directors adopted the 1996 Non-Employee
Director’s Stock Option Plan for outside directors (the “1996 Plan”). The 1996
Plan provides that new directors will receive an initial stock option of 100,000
shares of common stock upon their election to the Board. The exercise price for
this initial option will be the fair market value on the day it is granted. This
initial option will vest one-fifth on the first and second anniversaries of the
grant of the option, and quarterly over the next three years. A director who had
not received an option upon becoming a director received an initial stock option
of 100,000 shares on the date of the adoption of the 1996 Plan. At September 30,
2009, the Company had 626,048 shares available for grant under the 1996
Plan.




In
October 1997, the Board of Directors adopted the 1997 Non-Officer Stock
Option Plan (the “1997 Plan”). The 1997 Plan terminated on October 3, 2007,
and as such, options may not be granted after that date.


In
January 2000, the Board of Directors adopted the 2000 Stock Option Plan
(the “2000 Plan”). Under the 2000 Plan, the Company may grant incentive stock
options to employees and non-statutory stock options to non-employee members of
the Board of Directors and consultants. Options are to be granted at a price not
less than fair market value on the date of grant. In the case of an incentive
stock option granted to an employee who owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any
affiliate, the option is to be granted at a price not less than 110% of the fair
market value on the date of grant. The options are exercisable as determined by
the Board of Directors, generally over a four-year period. The options expire no
later than ten years from the date of grant. Unvested options are canceled and
returned to the 2000 Plan upon an employee’s termination. Vested options, not
exercised within three months of termination, also are canceled and returned to
the 2000 Plan. During the first six months of fiscal 2009, 361,300 shares were
granted under this plan. At September 30, 2009, the Company had 477,497 shares
available for grant under the 2000 Plan.




On
April 30, 2009, the Board of Directors adopted the Valence
Technology, Inc. 2009 Equity Incentive Plan (the “2009 Plan”).  The
2009 Plan is a broad-based incentive plan that provides for granting stock
options, stock awards, performance awards, and other stock-based awards and
substitute awards to employees, service providers and non-employee
directors.




The
maximum number of shares of the Company’s common stock initially reserved for
issuance under the 2009 Plan with respect to awards is 3,000,000 shares. 
The 2009 Plan contains an “evergreen” provision whereby the  number of
shares of common stock available for issuance under the 2009 Plan shall
automatically increase on the first trading day of April each fiscal year
during the term of the 2009 Plan, beginning with the fiscal year ending
March 31, 2011, by an amount (the “Annual Increase Amount”) equal to the
lesser of (i) one percent (1%) of the total number of shares of common
stock outstanding on the last trading day in March of the immediately
preceding fiscal year, (ii) 1,500,000 shares and (iii) such lesser
amount if set by the Board.  The maximum number of shares of common stock
that may be issued under the 2009 Plan pursuant to the exercise of incentive
stock options is the lesser of (A) 3,000,000 shares, increased on the first
trading day of April each fiscal year during the term of the 2009 Plan,
beginning with the fiscal year ending March 31, 2011, by the Annual
Increase Amount, and (B) 16,500,000 shares.  The 2009 Plan also
contains an automatic option grant program for the Company’s non-employee
directors.  Under the automatic option grant program, each individual who
first becomes a non-employee board member at any time after the effective date
of the 2009 Plan will receive an option grant to purchase 100,000 shares of
common stock on the date such individual joins the board.  In addition, on
the date of each annual stockholders meeting held after the effective date of
the 2009 Plan, each non-employee director who continues to serve as a
non-employee director will automatically be granted an option to purchase 50,000
shares of common stock, provided such individual has served on the board for at
least six months.  All employees, service providers and directors of the
Company and its affiliates are eligible to participate in the 2009 Plan. This
plan will terminate on April 29, 2019. The 2009 Plan was approved by the
Company’s stockholders at the annual meeting of stockholders on
September 8, 2009. As of September 30, 2009, 40,000 shares have been
granted and 2,960,000 shares remain available for grant under the 2009
Plan.




Aggregate
option activity is as follows (shares in thousands):





Outstanding OptionsNumber of
            
            
            Weighted
              AverageShares
            
            
            Exercise PriceBalance
      at March 31, 2009
            
            
            5,762
            
            
            $
            2.42Granted
            
            
            401
            
            
            
            1.91Exercised
            
            
            (76
            )
            
            
            1.75Cancelled
      and expired
            
            
            (168
            )
            
            
            2.88Balance
      at September 30, 2009
            
            
            5,919
            
            
            $
            2.38




13


The
following table summarizes information about fixed stock options outstanding at
September 30, 2009 (shares in thousands):





Options
      Outstanding
            
            Options
      ExercisableWeightedAverageRemaining
            
            Weighted
            
            
            
            WeightedRange of
            
            Number
            
            Contractual
              Life
            
            Average
              Exercise
            
            Number
            
            Average
              ExerciseExercise Prices
            
            Outstanding
            
            (years)
            
            Price
            
            Exercisable
            
            Price$ 0.63
      - $1.99
            
            4,578
            
            7.6
            
            $
            1.60
            
            624
            
            $
            1.56$ 1.99
      - $4.62
            
            1,090
            
            5.8
            
            3.20
            
            733
            
            3.09$ 4.62
      - $10.06
            
            188
            
            2.1
            
            7.24
            
            186
            
            7.27$ 10.06
      - $15.75
            
            10
            
            1.0
            
            13.84
            
            10
            
            13.84$ 15.75
      - $34.62
            
            52
            
            0.4
            
            34.11
            
            52
            
            34.11$ 0.63
      - $34.62
            
            5,919
            
            7.0
            
            $
            2.38
            
            1,605
            
            $
            4.06




Compensation
expense for stock plans has been determined based on the fair value at the grant
date for options granted in the current fiscal year. For the three months ended
September 30, 2009 and September 30, 2008, $353,000 and $464,000 of
share-based compensation expense has been included in cost of goods sold and
operating expenses in the condensed consolidated statements of operations and
comprehensive loss. For the six months ended September 30, 2009 and
September 30, 2008, $1.2 million and $1.0 million of share-based
compensation expense has been included in cost of goods sold and operating
expenses in the condensed consolidated statements of operations and
comprehensive loss. The aggregate intrinsic value of options exercisable at
September 30, 2009 is $155,000. There were 75,686 options exercised during the
six month period ended September 30, 2009.




As of
September 30, 2009 the Company had a total of $2.1 million in compensation costs
related to share-based compensation to recognize over a remaining service period
of 2.0 years for non-vested options. The fair value of each option grant is
estimated at the date of grant using the Black-Scholes pricing model with the
following weighted average assumptions for grants in fiscal years 2010 and
2009:





September
      30, 2010
            
            
            March
      31, 2009Weighted
      average risk-free interest rate
            
            
            2.35
            %
            
            
            2.67
            %Average
      expected life in years
            
            5.9
      years
            
            
            5.9
      yearsAverage
      expected volatility
            
            
            85.5
            %
            
            
            81.49
            %Dividend
      yield
            
            None
            
            
            None




13.
            RELATED PARTY
      TRANSACTIONS:





On
October 13, 2009, Berg & Berg agreed to further extend the maturity
date for the loan principal and interest for the 1998 Loan and the 2001 Loan
from September 30, 2010 to September 30, 2012.





On
June 11, 2009, Berg & Berg purchased 1,256,281 shares of common
stock for cash at a price per share of $1.99 for an aggregate purchase price of
$2,500,000. The purchase price per share equaled the closing bid price of the
Company’s common stock as of June 10, 2009.




14.
            SEGMENT AND GEOGRAPHIC
      INFORMATION:




The
Company’s chief operating decision maker is its Chief Executive Officer, who
reviews operating results to make decisions about resource allocation and to
assess performance. The Company’s chief operating decision maker views results
of operations of a single operating segment, the development and marketing of
the Company’s lithium phosphate technology. The Company’s Chief Executive
Officer has organized the Company functionally to develop, market, and
manufacture lithium phosphate products.




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





September
      30, 2009
            
            
            March
      31, 2009United
      States
            
            $
            255
            
            
            $
            236International
            
            
            5,387
            
            
            
            6,055Total
            
            $
            5,642
            
            
            $
            6,291




14


Revenues
by geographic area are as follows (in thousands):





Three Months Ended
            
            
            Six Month EndedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008United
      States
            
            $
            2,277
            
            
            $
            4,044
            
            
            $
            5,479
            
            
            $
            9,894International
            
            
            1,070
            
            
            
            1,772
            
            
            
            2,586
            
            
            
            6,912Total
            
            $
            3,347
            
            
            $
            5,816
            
            
            $
            8,065
            
            
            $
            16,806




15.
            SUBSEQUENT
      EVENTS:





On
October 13, 2009, the Company and Berg & Berg extended the
maturity dates for the principal and interest of the 2001 Loan, in aggregate
principal amount of $20.0 million at 8.0% interest per annum, and the 1998 Loan,
in aggregate principal amount of $15.0 million bearing interest at one percent
over lender’s borrowing rate (9.0% at September 30, 2009), from
September 30, 2010 to September 30, 2012.





On
October 13, 2009, management of the Company concluded that, as a
result of damage caused by a fire in a leased, unoccupied, offsite warehouse
facility housing certain of its raw materials, finished goods inventory, and
fixed assets, in Suzhou, China, a material charge for impairment with respect to
certain inventory and fixed assets is required under generally accepted
accounting principles in the United States.  The Company has filed a
claim with its insurance carrier that covers these materials, using the best
currently available estimates.  There remain uncertainties regarding
how the insurance carrier will value the items consumed in the fire, and other
uncertainties regarding potential liabilities that the Company may face as a
result of the fire.  The total amount of inventory consumed in the
fire was approximately $2.7 million, and the total amount of fixed assets
consumed in the fire was approximately $200,000.  In addition a Value
Added Tax liability of approximately $0.9 million must be assessed and there is
a 10% insurance deductible (approximately $0.4 million based on the Company's
claim value) which will offset the expected recovery.





On
October 14, 2009, the Company entered into a Common Stock Purchase
Agreement with Seaside 88, LP, or Seaside, which provides that, upon the terms
and subject to the conditions set forth therein, the Company is required to
issue and sell, and Seaside to purchase, up to 650,000 shares of common stock
once every two weeks, subject to the satisfaction of customary closing
conditions, beginning on October 15, 2009 and ending on or about the date that
is 52 weeks subsequent to the initial closing, for an aggregate sale to Seaside
of up to 16,900,000 shares of common stock.  The price of the shares
that the Company will sell to Seaside will be at a 12% discount to the volume
weighted average trading price of the common stock for the ten consecutive
trading days immediately preceding each closing date, which will result in
immediate and substantial dilution to current stock holders.  As of
the date hereof, the Company has sold 1,300,000 shares to Seaside pursuant to
this arrangement for aggregate gross proceeds of $1,844,152, before offering
expenses and finder’s fee.  Please refer to the discussion of this
arrangement in Item 2 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Going Concern.”





The
employment of Alastair Johnston, the Company’s Vice President, Worldwide Sales
& Marketing, terminated effective October 21, 2009.  In
connection with Mr. Johnston’s departure, the Company and Mr. Johnston entered
into a settlement and release agreement.





15


ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





This
Quarterly Report on Form 10-Q, which we refer to as this “Report,” contains
statements that constitute “forward-looking statements” within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. The words “may,”
“will,” “expect,” “intend,” “estimate,” “continue,” “anticipate,” “project,”
“predict,” “believe” and similar expressions and variations thereof are intended
to identify forward-looking statements. These statements appear in a number of
places in the Report and include statements regarding the intent, belief or
current expectations of Valence Technology, Inc., to which we refer in this
Report as “Valence,” the “Company,” “we” or “us,” our directors or officers with
respect to, among other things:





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





You are
cautioned not to put undue reliance on forward-looking statements.
Forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and actual results may differ materially from those
projected in this Report and the documents incorporated herein by
reference.  Factors that could cause actual results to differ
materially include those discussed under “Risk Factors,” which include, but are
not limited to the following:





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





We
believe that it is important to communicate our future expectations to
investors. However, there may be events in the future that we are not able to
accurately predict or control. The factors discussed under “Risk Factors” in
this Report or the documents incorporated by reference herein, as well as any
cautionary language in this Report, any of our other reports or filings or the
documents incorporated by reference herein or therein, including our Annual
Report on Form 10-K, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations we
described in our forward-looking statements.





The
following discussion should be read in conjunction with our financial statements
and related notes, which are a part of this Report or incorporated by reference
to our reports filed with the SEC. We undertake no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. The results for the three month period ended September
30, 2009 are not necessarily indicative of the results to be expected for the
entire fiscal year ending March 31, 2010, or any other
period.





16


Overview





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





In March
2009, we introduced a new revision of U-Charge®, our third generation of Lithium
Iron Magnesium Phosphate Energy Storage Systems, which are expected to be
commercially available in the second half of fiscal 2010.U-Charge® features our
safe, long-life lithium phosphate technology which utilizes a patented lithium
iron magnesium phosphate-based cathode material manufactured with our patented
CTR (Carbothermal reduction process). We believe the Valence CTR process is the
only know single step process in the world that offers lower cost and higher
quality than generic multi-step manufacturing processes. We believe that the
improved features and functionality of the latest U-Charge® Lithium Iron
Magnesium Phosphate Energy Storage Systems are well suited for electric vehicle
(EV), plug-in hybrid electric vehicle (PHEV) and similar applications. U-Charge®
Lithium Iron Magnesium Phosphate Energy Storage Systems address the safety and
limited life weaknesses of other lithium technologies while offering a solution
that is competitive in cost and performance.  This revision of
U-Charge® builds upon these features and adds improvements in state of charge,
balancing and field reparability.





Strategy





Our
business plan and strategy focuses on the generation of revenue from product
sales and licensing, while minimizing costs through partnerships with contract
manufacturers and internal manufacturing efforts through our two wholly-owned
subsidiaries in China. These subsidiaries initiated operations in late fiscal
2005. We expect to develop target markets through the sales of patented cathode
materials, U-Charge® systems and custom energy storage systems based on
programmable EpochTM Command and Control Logic.





Key
elements of our business strategy include:





•
            Develop and market
      differentiated battery solutions for a wide array of applications that
      leverage the advantages of our technology. Our product development
      and marketing efforts are focused on licensing and sales of patented
      cathode materials, large-format battery solutions, such as our U-Charge®
      Lithium Iron Magnesium Phosphate Energy Storage Systems and other custom
      battery solutions that feature advanced performance and technological
      advantages. These products are targeted for a broad range of applications
      in the automotive, stationary power, marine, industrial, and military
      sectors.





•
            Manufacture high-quality,
      cost-competitive products using a combination of Company-owned and
      contract manufacturing facilities. Our products are manufactured in
      China, using both internal and contract manufacturing resources. Our
      company-owned China facility includes two plants: one manufactures our
      advanced lithium iron magnesium phosphate materials with our patented
      carbon-thermal reduction process, and the second manufactures our advanced
      standard large-format packs such as U-Charge® and custom packs for
      customers such as Segway Inc. We have arrangements with contract
      manufacturers for cylindrical cell production. We believe this
      manufacturing strategy will allow us to directly control our intellectual
      property and operations management as well as deliver high-quality
      products that meet the needs of a broad range of customers and
      applications.





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





•
            Initial Phase: The
      initial phase of our strategy, now complete, focused on the first
      generation of our technology in our patented polymer construction. During
      this phase, we introduced the N-Charge® Power System which has been sold
      through national and regional retailers, top-tier computer manufacturers
      and national resellers. We discontinued this product line during fiscal
      2009 to focus on our U-Charge® Lithium Iron Magnesium Phosphate Energy
      Storage Systems and custom energy storage
  systems.





•
            Second Phase: The
      second phase of our business strategy is also complete. Throughout this
      phase our cell development has focused on commercializing a cylindrical
      Lithium Iron Magnesium Phosphate cell and advanced third generation
      Intelligent Energy Source Storage System. This new family of products is
      designed for motive applications such as hybrid and electric vehicles,
      scooters and wheelchairs and has the same dimensions as the most popular
      lead acid batteries but with significant increases in performance related
      to safety, energy cycle life and
weight.





17


•
            Third Phase : The third
      phase of our business strategy will entail the development and
      commercialization of our patented Lithium Vanadium Phosphate (LVP) and
      Lithium Vanadium Fluorophosphates (LVFP) cathode materials into
      large-format, high capacity cells. These materials offer superior
      performance with additional energy storage and higher voltage capabilities
      for the automotive, industrial, uninterruptible power supply (UPS),
      aerospace, telecommunications, military and other
  sectors.





Our
business headquarters and product development center is in Austin, Texas. Our
materials research and development center is in Las Vegas, Nevada. Our European
sales and OEM manufacturing support center is in Mallusk, Northern Ireland. Our
manufacturing and product development center is in Suzhou, China.  We have
the following subsidiaries:  Valence Technology (Nevada), Inc.,
Valence Technology Cayman Islands, Inc., Valence Technology N.V., Valence
Technology International, Inc., Valence Technology B.V., Valence Technology
(Suzhou) Co., Ltd., and Valence Energy-Tech (Suzhou) Co., Ltd.





Going
Concern





The
accompanying consolidated financial statements have been prepared assuming that
we will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. We have
incurred operating losses each year since its inception in 1989 and had an
accumulated deficit of $570.1 million as of September 30, 2009. For the
six-month periods ended September 30, 2009 and September 30, 2008, we sustained
net losses available to common stockholders of $12.4 million and $11.8 million,
respectively. These factors, among others, indicate that we may be unable to
continue as a going concern for a reasonable period of time. Our ability to
continue as a going concern is contingent upon our ability to meet our liquidity
requirements. If we are unable to arrange for debt or equity financing on
favorable terms or at all, our ability to continue as a going concern is
uncertain. These financial statements do not give effect to any adjustments to
the amounts and classifications of assets and liabilities which might be
necessary should we be unable to continue as a going concern.




At
September 30, 2009, our principal sources of liquidity were cash and cash
equivalents of $2.0 million. We expect that our sources of liquidity may not be
sufficient for the remaining fiscal year. We anticipate product sales and
royalties during fiscal 2010 may be insufficient to cover our operating
expenses. Management depends upon its ability to periodically arrange for
additional equity or debt financing to meet our liquidity
requirements.





On
October 14, 2009 we entered into a Common Stock Purchase Agreement
with Seaside 88, LP, or Seaside, which provides that, upon the terms and subject
to the conditions set forth therein, we are required to issue and sell, and
Seaside to purchase, up to 650,000 shares of our common stock once every two
weeks, subject to the satisfaction of customary closing conditions, beginning on
October 15, 2009 and ending on or about the date that is 52 weeks subsequent to
the initial closing, for an aggregate sale to Seaside of up to 16,900,000 shares
of common stock.  The price of the shares that we sell to Seaside will
be at a 12% discount to the volume weighted average trading price of the common
stock for the ten consecutive trading days immediately preceding each closing
date, which will result in immediate and substantial dilution to current stock
holders.  As of the date hereof, the Company has sold 1,300,000 shares
to Seaside pursuant to this arrangement for aggregate gross proceeds of
$1,844,152, before offering expenses and finder’s fee.





On
February 22, 2008, we entered into an At Market Issuance Sales Agreement
with Wm. Smith & Co., as sales agent (the “Sales Agent”), which was
amended by Amendment No. 1 to At Market Issuance Sales Agreement on July 2,
2009, under which we may issue and sell up to 10,000,000 shares of common stock
in a series of transactions over time as we may direct through the Sales
Agent. Unless we and the Sales Agent agree to a lesser amount with respect
to certain persons or classes of persons, the compensation to the Sales Agent
for sales of common stock sold pursuant to the Agreement will be 6.0% of the
gross proceeds of the sales price per share.  As of September 30, 2009
we had sold approximately 4.9 million shares under this
arrangement.




Although
we have arranged these equity financing opportunities, we cannot be assured that
they will effectively meet our cash requirements in the future. Given the our
historical operating results and the amount of existing debt, as well as other
factors, we may not be able to arrange for debt or equity financing from third
parties in the future on favorable terms or at all.




Our cash
requirements may vary materially from those now planned because of changes in
the our operations, including the failure to achieve expected revenues, greater
than expected expenses, changes in OEM relationships, market conditions, the
failure to timely realize our product development goals, and other adverse
developments. These events could have a negative impact on our available
liquidity sources during the next 12 months.




Basis
of Presentation, Critical Accounting Policies and Estimates





We
prepare our consolidated financial statements in conformity with generally
accepted accounting principles in the United States.  The preparation
of our financial statements requires us to make estimates and assumptions that
affect reported amounts. We believe our most critical accounting policies and
estimates relate to revenue recognition, impairment of long-lived assets,
inventory reserves, inventory overhead absorption, warranty liabilities, and
share based compensation expense. Our accounting policies are described in the
Notes to Condensed Consolidated Financial Statements, Note 3, Summary of
Significant Accounting Policies. The following further describes the methods and
assumptions we use in our critical accounting policies and
estimates.





18


Revenue
Recognition





We
generate revenues from sales of products including batteries and battery
systems, and from licensing fees and royalties per technology license
agreements. Product sales are recognized when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred,
seller’s price to the buyer is fixed and determinable, and collection is
reasonably assured. Product shipments that are not recognized as revenue during
the period shipped, primarily product shipments to resellers that are subject to
right of return, are recorded as deferred revenue and reflected as a liability
on our balance sheet. Products shipped with the right of return are included in
finished goods inventory as we retain title to the products.  For reseller
shipments where revenue recognition is deferred, we record revenue and relieve
inventory based upon the reseller-supplied reporting of sales to their end
customers or their inventory reporting. For all shipments, we estimate a return
rate percentage based upon our historical experience. From time to time we
provide sales incentives in the form of rebates or other price adjustments;
these are generally recorded as reductions to revenue on the latter of the date
the related revenue is recognized or at the time the rebate or sales incentive
is offered. Licensing fees are recognized as revenue upon completion of an
executed agreement and delivery of licensed information, if there are no
significant remaining vendor obligations and collection of the related
receivable is reasonably assured. Royalty revenues are recognized upon licensee
revenue reporting and when collection is reasonably assured.




19


Results
of Operations




The
following table sets forth, for the periods indicated, the percentages of net
sales represented by certain items reflected in our condensed consolidated
statements of operations:





Three Months Ended
            
            
            Six Month EndedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Battery
      and systems sales
            
            
            97
            %
            
            
            88
            %
            
            
            98
            %
            
            
            95
            %Licensing
      and royalty revenue
            
            
            3
            %
            
            
            12
            %
            
            
            2
            %
            
            
            5
            %Total
      revenues
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %Gross
      margin profit (loss)
            
            
            7
            %
            
            
            (3
            )%
            
            
            13
            %
            
            
            (1
            )%Operating
      expenses
            
            
            137
            %
            
            
            83
            %
            
            
            128
            %
            
            
            56
            %Operating
      loss
            
            
            (130
            )%
            
            
            (86
            )%
            
            
            (116
            )%
            
            
            (57
            )%Net
      loss
            
            
            (185
            )%
            
            
            (106
            )%
            
            
            (153
            )%
            
            
            (70
            )%




Revenues
and Gross Margin




Battery and System Sales.
Battery and system sales totaled $3.3 and $7.9 million for the three and six
months ended September 30, 2009, respectively, as compared to $5.1 and $16.0
million for the three and six months ended September 30, 2008,
respectively. The three and six month decline in revenues from the fiscal year
2009 period to the comparable fiscal year 2010 period was primarily due to the
reduction in shipments to The Tanfield Group, which were $4.2 million in the six
months ended September 30, 2008. We had no revenue from Tanfield in the three or
six months ended September 30, 2009. In addition, we had a reduction in
revenue to Segway of $1.7 million in the three months ended September 30, 2009,
and a reduction in revenue to Segway of $4.1 million in the six months ended
September 30, 2009, as compared to the same periods in the previous fiscal year.
We had $57,000 and $0.4 million in deferred revenue on our balance sheet at
September 30, 2009 and March 31, 2009, respectively. The decrease in deferred
revenue is primarily related to the overall decrease in sales in the second
quarter of fiscal 2010 compared to the second quarter in fiscal 2009. Segway
sales accounted for 51% and 41% of our total product sales for the three and six
months ended September 30, 2009 and 67% and 47% of our total product sales for
the three and six months ended September 30, 2008. Tanfield sales accounted
for zero percent of our total product sales for the three and six months ended
September 30, 2009 and zero and 26% of our total product sales for the three and
six months ended September 30, 2008. Sales to Oxygen S.p.A. accounted for
20% and less than 10% of our total product sales for the three and six months
ended September 30, 2009, and 10% and less than 10% of our total product sales
for the three and six months ended September 30, 2008. The large-format battery
system sales represent 45% and 31% of our total revenue for the second fiscal
quarter in 2010 and 2009, respectively and 45% and 49% of our total revenue for
the first six months of fiscal 2010 and 2009, respectively. We expect sales of
the large-format battery system to decrease slightly during fiscal 2010, due to
the remaining pressure of the recession on the buying power of the
economy.




Licensing and Royalty
Revenue. Licensing and royalty revenues relate to revenue from licensing
agreements for our battery construction technology. Fiscal second quarter 2010
licensing and royalty revenue was $90,000 compared with $702,000 for the same
quarter in fiscal 2009. Licensing and royalty revenue for the first six months
of fiscal 2010 and 2009 was $178,000 and $806,000, respectively. Licensing and
royalty revenue decreased in the three and six months ended September 30, 2009,
as compared to the same periods last year, primarily due to an amendment of a
license agreement with Varta AG in fiscal second quarter 2009. Varta AG and
Amperex Technology Limited continue to make on-going royalty payments as sales
are made using our technology. We expect our licensing and royalty revenue to
fluctuate as we continue to pursue a licensing strategy and as our lithium
phosphate technology receives greater market acceptance.




Gross Margin. Gross margin as
a percentage of revenue was 7% and 13% for the three and six months ended
September 30, 2009, as compared to negative 3% and negative 1% for the three and
six months ended September 30, 2008. The increase in gross margin is
attributable to impairments that were booked in the three and six months ended
September 30, 2008, for the discontinued N-Charge product line, of which there
were no similar impairments booked in fiscal year 2010, and a favorable
adjustment to the warranty reserve made during the first and second quarter of
fiscal year 2010. The increase in gross margin to 7% for the three months ended
September 30, 2009, from negative 3% for the three months ended September 30,
2008, is mainly due to the impairment of N-Charge® inventory of $0.6 million in
the second fiscal quarter of 2009, of which there were no similar impairments
booked in the second fiscal quarter of 2010. The increase in gross margin to
12.9% for the six months ended September 30, 2009, from negative 1% for the six
months ended September 30, 2008, is mainly due to the impairment N-Charge®
inventory of $1.5 million in the six months ended September 30, 2008, of which
there were no similar impairments booked in fiscal year 2010. In addition, gross
margin increased in fiscal year 2010 because of $0.3 million favorable
decrease in related warranty reserves made in the first quarter of fiscal 2010,
and a $0.3 million decrease in related warranty reserves made in the second
quarter of fiscal 2010.




20


Operating
Expenses




The
following table presents the change in operating expenses for the three and six
months ended September 30, 2009 and 2008, respectively:





Three Months Ended
            
            Six Month EndedSeptember 30,
      2009
            
            September 30,
      2009Increase /
              (Decrease)
            
            % Change
            
            Increase /
              (Decrease)
            
            % ChangeResearch
      and development
            
            $
            (153
            )
            (13
            )%
            $
            (99
            )
            (4
            )%Marketing
            
            (229
            )
            (33
            )%
            (313
            )
            (21
            )%General
      and administrative
            
            514
            
            20
            %
            1,693
            
            32
            %Impairment
      of long lived assets
            
            (389
            )
            (100
            )%
            (389
            )
            (100
            )%Total
      operating expenses
            
            $
            (257
            )
            (5
            )%
            $
            892
            
            9
            %




During
the three and six months ended September 30, 2009, total operating expenses were
137% and 128% of revenue, respectively, compared to 83% and 56% of revenue
during the same periods last year.  For the three months ended September
30, 2009, as compared to September 30, 2008, operating expenses were relatively
flat. For the six months ended September 30, 2009, there was an increase in
operating expenses of approximately $892,000, primarily related to additional
legal expense related to litigation and stock-based compensation expense, as
compared to the six month period ended September 30, 2008. Total operating
expenses as a percentage of revenue for the three and six months ended September
30, 2009, increased compared to the three and six months ended September 30,
2008, primarily because of the decreases in revenues for these
periods.




Research and Product
Development. Research and product development expenses consist primarily
of personnel, equipment and materials to support our efforts to develop battery
chemistry and products, as well as to improve our manufacturing processes.
Research and product development expenses decreased by $153,000, or 13%, to $1.0
million for the three months ended September 30, 2009, from $1.2 million for the
three months ended September 30, 2008. Research and product development
expenses decreased by $99,000, or 4%, to $2.3 million for the six months ended
September 30, 2009, from $2.4 million for the six months ended
September 30, 2009. Engineering and design fees related to third-party
consulting services decreased by $54,000 and $73,000 for the three and six
months ended September 30, 2009, respectively from the same periods last year,
along with decreases in depreciation expenses allocated to research and
development during the same periods in fiscal year 2010 as compared to fiscal
year 2009.  During the three and six months ended September 30, 2009,
approximately $64,000 and $133,000 of share-based compensation was allocated to
research and development expenses as compared to $86,000 and $144,000 in the
three and six months ended September 30, 2008, respectively. We expect
research and development expenses to remain relatively flat for the remainder of
fiscal 2010.




Marketing. Marketing expenses
consist primarily of costs related to sales and marketing personnel, public
relations and promotional materials. Marketing expenses of $466,000 for the
three months ended September 30, 2009, were $229,000, or 33%, lower than the
$695,000 for the three months ended September 30, 2008. Marketing expenses
of $1.2 million for the first six months ended September 30, 2009 were $313,000,
or 21%, lower than the $1.5 million for the six months ended September 30,
2008. During the three and six months ended September 30, 2009, approximately
$40,000 and $117,000, respectively, of share-based compensation was allocated to
marketing expenses as compared to $123,000 and $245,000 in the three and six
months, respectively, ended September 30, 2008. Salary expenses decreased
by $115,000 and $134,000 in the three and six months ended September 30, 2009
compared to the same periods in fiscal 2009, primarily due to a reduction in
marketing staff during the three and six month periods in fiscal year 2010, as
compared to the same periods in fiscal year 2009. We expect marketing expenses
could increase moderately as we focus on growing our revenue for the remainder
of fiscal year 2010.




General and Administrative.
General and administrative expenses consist primarily of salaries, share-based
compensation and other related costs for finance, human resources, facilities,
accounting, information technology, legal, and corporate-related expenses.
General and administrative expenses increased by $514,000, or 20%, to $3.1
million for the three months ended September 30, 2009, as compared to $2.6
million for the three months ended September 30, 2008. This increase is
primarily attributable to the $600,000 increase in legal expenses associated
with litigation involving the defense of our intellectual property, which was
offset by a decrease in our audit and contracted accounting related services of
$104,000 in the three months ended September 30, 2009, as compared to the three
months ended September 30, 2008. General and administrative expenses increased
by $1.7 million, or 32%, to $6.9 million for the six months ended September 30,
2009, as compared to $5.2 million for the three months ended September 30,
2008.  This increase is primarily attributable to the $1.3 million increase
in legal expenses associated with litigation involving the defense of our
intellectual property, and the $417,000 increase in share-based compensation
expense for the awards granted to board members in the six months ended
September 30, 2009, as compared to the six months ended September 30, 2008.
During the three and six months ended September 30, 2009, approximately $238,000
and $897,000, respectively, of share-based compensation was allocated to general
and administrative expenses as compared to $270,000 and $655,000 in the three
and six months, respectively, ended September 30, 2008.




21


Depreciation and
Amortization. Depreciation and amortization expenses were $233,000 and
$410,000 for the three months ended September 30, 2009, and 2008, respectively,
or a 43% decrease of $177,000. Depreciation and amortization expenses were
$598,000 and $782,000 for the six months ended September 30, 2009, and 2008,
respectively, or an 24% decrease of $184,000. This decrease in depreciation
expense in the three and six months ended September 30, 2009, as compared to the
same period in the prior year, was a result of the reduction in depreciable
fixed assets after the $731,000 impairment charge taken against production
related fixed assets that were deemed to have carrying values in excess of their
fair values during fiscal year 2009.




Property and Casualty Loss.
In the second quarter of fiscal 2010, we experienced a fire at an offsite
warehouse which contained certain fixed assets and inventory in Suzhou, China.
We have filed a claim with our insurance carrier that covers these materials,
using the best currently available estimates, and expect an insurance payment of
at least $3.5 million. At this time, there are uncertainties regarding the how
the insurance carrier will value the items consumed in the fire, and other
uncertainties regarding potential liabilities that we may face as a result of
the fire.  The receivable recorded represents management’s best
currently available estimate of the expected recovery. The total amount of
inventory consumed in the fire was approximately $2.7 million, and the total
amount of fixed assets consumed in the fire was approximately $200,000. In
addition, a Value Added Tax (“VAT”) liability must be assessed on these items as
they were carried without VAT being previously assessed on them.  We
also have included this VAT expense in our insurance claim. The total VAT
liability is approximately $0.9 million. In addition, there is a 10% insurance
deductible (approximately $0.4 million based on our claim value) which will
offset the expected recovery. The timing and actual amount of the insurance
recovery payment is uncertain at this point, but due to local practices in
China, management expects the process to take at least three to six months to be
resolved.




Liquidity
and Capital Resources




Liquidity




At
September 30, 2009, our principal sources of liquidity were cash and cash
equivalents of $2.0 million. We expect that these sources of liquidity may not
be sufficient for the remaining fiscal year. We anticipate product sales and
royalties during fiscal 2010 will be insufficient to cover our operating
expenses. We depend upon our ability to periodically arrange for additional
equity or debt financing to meet our liquidity requirements.





On
October 14, 2009, we entered into a Common Stock Purchase Agreement
with Seaside 88 LP, or Seaside, which provides that, upon the terms and subject
to the conditions set forth therein, we are required to issue and sell, and
Seaside to purchase, up to 650,000 shares of our common stock once every two
weeks, subject to the satisfaction of customary closing conditions, beginning on
October 15, 2009 and ending on or about the date that is 52 weeks subsequent to
the initial closing, for an aggregate sale to Seaside of up to 16,900,000 shares
of common stock.  The price of the shares that we sell to Seaside will
be at a 12% discount to the volume weighted average trading price of the common
stock for the ten consecutive trading days immediately preceding each closing
date, which will result in immediate and substantial dilution to current stock
holders.  As of the date hereof, we have sold 1,300,000 shares to
Seaside pursuant to this arrangement for aggregate gross proceeds of $1,844,152,
before offering expenses and finder’s fee.





On
February 22, 2008, we entered into an At Market Issuance Sales Agreement
with Wm. Smith & Co., as sales agent (the “Sales Agent”), which was
amended by Amendment No. 1 to At Market Issuance Sales Agreement on July 2,
2009, under which we may issue and sell up to 10,000,000 shares of common stock
in a series of transactions over time as we may direct through the Sales
Agent. Unless we and the Sales Agent agree to a lesser amount with respect
to certain persons or classes of persons, the compensation to the Sales Agent
for sales of common stock sold pursuant to the Agreement will be 6.0% of the
gross proceeds of the sales price per share.  As of September 30,
2009, we had sold approximately 4.9 million shares under this
arrangement.




Although
management has arranged these equity financing opportunities, we cannot be
assured that they will effectively meet our cash requirements in the future.
Given our historical operating results and the amount of existing debt, as well
as other factors, we may not be able to arrange for debt or equity financing
from third parties in the future on favorable terms or at all.




Our cash
requirements may vary materially from those now planned because of changes in
our operations, including the failure to achieve expected revenues greater than
expected expenses, changes in OEM relationships, market conditions, the failure
to timely realize our product development goals, and other adverse developments.
These events could have a negative impact on our available liquidity sources
during the next 12 months.




22


The
following table summarizes our statement of cash flows for the six months ended
September 30, 2009 and 2008:





Six Months Ended September 30,(dollars in thousands)
            
            2009
            
            
            2008Net
      cash flows provided by (used in):Operating
      activities
            
            $
            (5,657
            )
            
            $
            (14,568
            )Investing
      activities
            
            
            (130
            )
            
            
            (2,055
            )Financing
      activities
            
            
            3,792
            
            
            
            16,961Effect
      of foreign exchange rates
            
            
            4
            
            
            
            231Net
      (decrease) increase in cash and cash equivalents
            
            $
            (1,991
            )
            
            $
            569




Our net
cash used for operations the first six months of fiscal 2010 and fiscal 2009 was
$5.7 million and $14.6 million, respectively. The cash used for operating
activities during the first six months of fiscal 2010 was primarily for
operating activities and working capital. Cash used for operating activities in
the first six months of fiscal 2010 decreased from the same period of fiscal
2009 by $8.9 million primarily due to the collection of accounts receivable,
reduction of inventory levels, and the reduction in prepaid and other current
assets in the six months ended September 30, 2009, as compared to the six months
ended September 30, 2008.




In the
first six months of fiscal 2010, we used approximately $130,000 of cash in
investing activities, as compared to $2.1 million in the first six months of
fiscal 2009, a net decrease of $1.8 million, mainly due to the cash used for
purchases of equipment domestically and in China in the first six months of
fiscal 2009.




We
obtained cash from financing activities in the amounts of $3.8 million and $17.0
million during the first six months of fiscal 2010 and 2009, respectively. The
financing activities in the first six months of fiscal 2010 represent
approximately $3.7 million of common stock sold under our At Market Issuance
Sales Agreement with Wm. Smith & Co, and $0.1 million for the exercise
of stock options. The financing activities in the first six months of fiscal
2009 were short term loans made to us by Berg & Berg for working
capital requirements in the total amount of $7.5 million pursuant to an
agreement whereby Berg & Berg agreed to provide for up to $10.0 million
in interim working capital loans from time to time in order for Berg &
Berg and/or certain of its affiliates to supplement our working capital and
other financial needs.  In addition Berg & Berg exercised certain
warrants by paying us the $1.6 million exercise price and by surrendering
certain of the principal and interest outstanding under promissory notes related
to the short-term loans discussed above aggregating $4.5 million. 
Financing activities in the first six months of fiscal 2009 also include $8.7
million in issuances of common stock in sales to private investors and $0.7
million for the exercise of stock options.




On
January 14, 2008, we filed a Form S-3 Registration Statement with the
SEC utilizing a “shelf” registration process.  On January 22, 2008,
the Form S-3 Registration was declared effective by the SEC. Pursuant to
this shelf registration statement, we may sell debt or equity securities
described in the accompanying prospectus in one or more offerings up to a total
public offering price of $50.0 million.  We believe that this shelf
registration statement currently provides us additional flexibility with regard
to potential financings that we may undertake when market conditions permit or
our financial condition may require.  However, based on the value of
sales of common stock to Seaside and/or under our At Market Issuance Sales
Agreement, we may re-evaluate the sufficiency of this shelf registration
statement.




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





In
accordance with terms of the At Market Issuance Sales Agreement, we may issue
and sell up to 5,000,000 shares of common stock in a series of transactions over
time as we may direct through the Sales Agent.  Sales of shares may be made
in privately negotiated transactions and/or any other method permitted by law,
including sales deemed to be an “at the market” offering as defined in
Rule 415 under the Securities Act of 1933, which includes sales made
directly on the NASDAQ Capital Market, the existing trading market for our
common stock, or sales made to or through a market maker other than on an
exchange.  The Sales Agent will make all sales on a best efforts basis
using commercially reasonable efforts consistent with its normal trading and
sales practices, on mutually agreed terms between the Sales Agent and us. Unless
we and the Sales Agent agree to a lesser amount with respect to certain persons
or classes of persons, the compensation to the Sales Agent for sales of common
stock sold pursuant to the Agreement will be 6.0% of the gross proceeds of the
sales price per share.
..





In the
second fiscal quarter of 2010, we entered into Amendment No. 1 to At Market
Issuance Sales Agreement with the Sales Agent on July 2,
2009.  Amendment No. 1 to At Market Issuance Sales Agreement increased
the number of shares which may be sold thereunder from 5.0 million to 10.0
million.




23


During
the first six months of fiscal 2010, we sold 611,000 shares with gross proceeds
of $1.2 million under the At Market Issuance Sales Agreement. As of the date of
this Report, we have made no further decisions as to whether or when we may seek
to make additional sales under the At Market Issuance Sales Agreement. To date,
we have sold a total of 4.9 million of the 10.0 million shares available for
sale under the terms of the At Market Issuance Sales Agreement.




As a
result of our limited cash resources and history of operating losses, our
auditors have expressed in their report on our consolidated financial
statements, included in our audited March 31, 2009 consolidated financial
statements, that there is substantial doubt about our ability to continue as a
going concern. Our cash requirements may vary materially from those now planned
because of changes in our operations, including the failure to achieve expected
revenues, greater than expected expenses, changes in OEM relationships, market
conditions, the failure to timely realize our product development goals, and
other adverse developments. These events could have a negative impact on our
available liquidity sources. We intend to improve our liquidity by continued
monitoring and reduction of manufacturing, facility and administrative costs.
However, there can be no assurance that these efforts will be successful or that
the anticipated benefits would be realized in the near term.




Capital
Commitments and Debt




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





(Dollars in thousands)
            
            September30,
              20092005
      short-term debt
            
            $
            20,000Current
      portion of interest on short-term debt
            
            
            761998
      long-term debt to stockholder
            
            
            14,9502001
      long-term debt to stockholder
            
            
            20,000Long
      term portion of interest on debt
            
            
            25,903Total
            
            $
            80,929




Repayment
obligations of short-term and long-term debt principal as of September 30, 2009
are:





Fiscal year(Dollars in thousands)
            
            2010
            
            
            2011
            
            
            2012
            
            
            2013
            
            
            2014
            
            
            Thereafter
            
            
            TotalPrincipal
      repayment
            
            $
            —
            
            
            $
            20,000
            
            
            $
            —
            
            
            $
            34,950
            
            
            $
            —
            
            
            $
            —
            
            
            $
            54,950




At
September 30, 2009, the redemption obligation for our Series C-1
Convertible Preferred Stock and Series C-2 Convertible Preferred Stock, all
of which is currently held by Berg & Berg, is $8.6 million, plus
accrued dividends, which as of September 30, 2009, totaled $689,000. 
The preferred shares are currently subject to redemption or conversion at the
holder’s discretion.  We do not have sufficient resources to effect this
redemption; however, Berg & Berg has agreed that our failure to redeem
the Series C-1 Convertible Preferred Stock and the Series C-2
Convertible Preferred Stock does not constitute a default under the certificate
of designations for either the Series C-1 Convertible Preferred Stock or
the Series C-2 Convertible Preferred Stock and has waived the accrual of
any default interest applicable.  Berg & Berg also has agreed to
defer the payment of dividends on the Series C-1 Convertible Preferred
Stock and Series C-2 Convertible Preferred Stock.  According to our
agreement with Berg & Berg, dividends will continue to accrue (without
interest) on the Series C-1 Convertible Preferred Stock and the
Series C-2 Convertible Preferred Stock according to the terms of the
applicable certificates of designation; and such dividends are not payable until
such time as the parties mutually agree, or upon redemption or conversion in
accordance with the terms of the applicable certificates of designation. 
We have no present intention to pay dividends on this preferred stock, including
the accrued dividends.  The Series C-1 Convertible Preferred Stock may
be converted, at any time, into shares of our common stock at the lower of $4.00
or the closing price of our common stock on the conversion date, provided the
conversion price can be no lower than $1.98, the closing price of the common
stock on December 13, 2005.  The Series C-2 Convertible Preferred
Stock may be converted, at any time, into shares of our common stock at the
lower of $4.00 or the closing price of our common stock on the conversion date,
provided the conversion price can be no lower than $2.96, the closing bid price
of our common stock on July 13, 2005.




On
October 13, 2009, the Company and Berg & Berg extended the
maturity dates for the principal and interest of the 1998 and 2001 long-tem debt
to stockholder referenced above from September 30, 2010 to
September 30, 2012.




The $20.0
million 2005 Loan from SFT I, Inc., matures in a lump sum on July 13,
2010. Interest is due monthly based on a floating interest rate. The interest
rate is calculated as the greater of 6.75% or the sum of LIBOR Rate, rounded to
the nearest 1/16thof
1.0%, plus 4.0% (6.75% as of September 30, 2009). As of September 30, 2009, no
amounts have been paid on the 2005 Loan.




24


If cash
flow from operations is not adequate to meet our debt obligations, or to support
inventory, capital equipment or other working capital needs, we will be required
to seek additional debt or equity financing. There can be no assurance that we
could obtain the additional financing or that such financing will not be
substantially dilutive to current shareholders.




Inflation




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




Tabular
Disclosure of Contractual Obligations




The
following table sets forth, as of September 30, 2009 our scheduled principal,
interest and other contractual annual cash obligations due for each of the
periods indicated below (in thousands):





Payment Due by PeriodLess than
            
            
            
            
            
            
            
            
            More thanTotal
            
            
            One Year
            
            
            1-2 Years
            
            
            3-5 Years
            
            
            5 YearsContractual obligations:Short-term
      debt, net of discount
            
            $
            19,685
            
            
            $
            19,685
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Long-term
      debt to stockholder, net of discount
            
            
            34,827
            
            
            
            —
            
            
            
            34,827
            
            
            
            —
            
            
            
            —Current
      and long-term interest payable
            
            
            25,977
            
            
            
            76
            
            
            
            25,902
            
            
            
            —
            
            
            
            —Operating
      lease obligations
            
            
            1,924
            
            
            
            725
            
            
            
            735
            
            
            
            465
            
            
            
            —Purchase
      obligations
            
            
            6,317
            
            
            
            6,317
            
            
            
            —
            
            
            
            —
            
            
            
            —Redemption
      of convertible preferred stock
            
            
            9,299
            
            
            
            9,299
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            $
            98,029
            
            
            $
            36,102
            
            
            $
            61,464
            
            
            $
            465
            
            
            $
            —




The terms
of the certificates of designation for the series C-1 Convertible Preferred
Stock and the Series C-2 Convertible Preferred Stock initially
provided that the deadline for redemption was December 15, 2005. Pursuant
to assignment agreements entered into between us and Berg & Berg,
Berg & Berg waived the requirement that the Series C-1 Convertible
Preferred Stock and Series C-2 Convertible Preferred Stock be redeemed on
this date. There currently are no redemption deadlines, but the preferred shares
are subject to redemption or conversion at the holder’s discretion. As set forth
above, although dividends are not due, they are continuing to accrue (currently
$689,000 as of September 30, 2009). The total above for Redemption of
Convertible Preferred Stock includes accrued dividends.




On
October 13, 2009, the Company and Berg & Berg extended the
maturity dates for the principal and interest of the 1998 and 2001 long-tem debt
to stockholder referenced above from September 30, 2010 to
September 30, 2012.




The $20.0
million 2005 Loan from SFT I, Inc., matures in a lump sum on July 13,
2010. Interest is due monthly based on a floating interest rate. The interest
rate is calculated as the greater of 6.75% or the sum of LIBOR Rate, rounded to
the nearest 1/16thof
1.0%, plus 4.0% (6.75% as of September 30, 2009). As of September 30, 2009, no
amounts have been paid on the 2005 Loan.




25


ITEM 3.QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK






We
considered the provisions of Financial Reporting Release No. 48,
“Disclosures of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments.” On July 13, 2005, in connection with a $20.0 million loan
agreement with a third party finance company, the 2001 Loan, which has an
adjustable interest rate equal to the greater of 6.75%, or the sum of the LIBOR
rate plus 4.0% (6.75% as of September 30, 2009), we entered into a rate cap
agreement which caps the LIBOR rate at 5.5%. This agreement terminated effective
August 10, 2008. In July 1998, the Company entered into an amended loan
agreement, the 1998 Loan, with Berg & Berg that allows the Company to
borrow, prepay and re-borrow up to $10.0 million principal under a promissory
note on a revolving basis. In November 2000, the 1998 Loan agreement was
amended to increase the maximum amount to $15.0 million. As of September 30,
2009, the Company had an outstanding balance of $15.0 million under the 1998
Loan agreement. The 1998 Loan bears interest at one percent over lender’s
borrowing rate (9.0 % at September 30, 2009). In addition, we are exposed to
financial market risks, including changes in foreign currency exchange rates and
interest rates.





We are
exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates. The following table presents the principal
cash flows by year of maturity for our total debt obligations held at September
30, 2009 (in thousands):





Expected Maturity Date
      (Fiscal Year)2010
            
            
            2011
            
            
            2012
            
            
            2013
            
            
            2014
            
            
            Thereafter
            
            
            TotalVariable
      rate debt
            
            $
            —
            
            
            $
            20,000
            
            
            $
            —
            
            
            $
            14,950
            
            
            $
            —
            
            
            $
            —
            
            
            $
            34,950Fixed
      rate debt
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            20,000
            
            
            $
            —
            
            
            $
            —
            
            
            $
            20,000




Based on
borrowing rates currently available to us for loans with similar terms, the
carrying value of our debt obligations approximates fair value.




ITEM 4.CONTROLS AND
PROCEDURES






The term
“disclosure controls and procedures” refers to the controls and other procedures
of a company that are designed to ensure that information required to be
disclosed by the company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported, within required time periods.
Disclosure controls and procedures, include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in the
reports the Company files or submits under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of our
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15(b) as of the end of the period covered by this
Report.  Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that, as of September 30, 2009, our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic reports with the
SEC.  There have been no significant changes in our internal controls or in
other factors that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.




26


PART II - OTHER
INFORMATION




ITEM 1.LEGAL
PROCEEDINGS






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





On
February 14, 2006, Hydro-Quebec filed an action against the Company in the
United States District Court for the Western District of Texas (Hydro-Quebec v.
Valence Technology, Civil Action No. A06CA111). An amended complaint was
filed April 13, 2006. A stay on the case was imposed pending a
reexamination of the two patents by the USPTO.  The stay imposed by
the Court has been lifted following completion of the reexaminations of the two
patents.  On January 8, 2009  Hydro-Quebec filed a second
amended complaint, wherein Hydro-Quebec alleges that Saphion ® I
Technology, the technology utilized in all of the Company’s commercial products,
infringes U.S. Reexamined Patent Nos. 5,910,382 and 6,514,640 exclusively
licensed to Hydro-Quebec.  Hydro-Quebec seeks injunctive relief and
monetary damages. The Company has filed a response denying the allegations in
the second amended complaint.  A hearing commonly referred to as a
“Markman hearing” to determine the scope of the asserted claims in the two
reexamined patents has been set for early November 2009.





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




ITEM
1A.      RISK FACTORS




In
addition to the risk factors included in Item 1A of our Annual Report on
Form 10-K for our fiscal year ended March 31, 2009, filed with the SEC on
June 5, 2009, the following additional and/or updated risk factors are
applicable:





Our
operations could be materially interrupted, and we may suffer significant loss,
in the case of fire, casualty or theft at one of our manufacturing or other
facilities.





Firefighting
and disaster relief or assistance in China is substandard by Western standards.
In the event of any material damage to, or loss of, the manufacturing plants
where our products are or will be produced due to fire, casualty, theft, severe
weather, flood or other similar causes, we would be forced to replace any assets
lost in such disaster and could incur additional costs, including those related
to facility repair and taxes. Thus our financial position could be materially
compromised or we might have to cease doing business. The Company has obtained
insurance in China to minimize this risk, but we cannot be sure that such
insurance will be sufficient.





In
October 2009, the Company experienced a fire in a leased, unoccupied, offsite
warehouse facility housing certain of its raw materials, finished goods
inventory, and fixed assets, in Suzhou China.  Management concluded
that a material charge for impairment with respect to certain inventory and
fixed assets was required under GAAP and the Company expects to incur a
liability for the payment of Chinese VAT with respect to certain inventory which
was consumed by the fire.  Although, the Company expects anticipated
insurance proceeds to cover a significant portion of this loss, it cannot
determine at this time whether the insurance proceeds will be sufficient to
cover its losses and expenditures related to this fire, nor can it be sure that
a fire or other similarly destructive event at one of its facilities in the
future would not materially affect the Company’s financial position or disrupt
its operations.




Equity
transactions occurring in the future, including sales under our At Market
Issuance Sales Agreement and sales of stock at a discount under our Common Stock
Purchase Agreement with Seaside 88, LP, would result in immediate dilution to
current equity holders and, as a result, our stock price may go
down.




Future
equity transactions, including the sale of shares of common stock or preferred
stock, sales under our Common Stock Purchase Agreement with Seaside 88, LP,
sales under our At Market Issuance Sales Agreement, or the exercise of options
or warrants or other convertible securities, would result in dilution and, as a
result, our stock price may go down. In October 2009 we entered into a Common
Stock Purchase Agreement with Seaside 88, LP, or Seaside, which provides that,
upon the terms and subject to the conditions set forth therein, we are required
to issue and sell, and Seaside to purchase, up to 650,000 shares of our common
stock once every two weeks, subject to the satisfaction of customary closing
conditions, beginning on October 15, 2009 and ending on or about the date that
is 52 weeks subsequent to the initial closing, for an aggregate sale to Seaside
of up to 16,900,000 shares of common stock.  The price of the shares
that we sell to Seaside will be at a 12% discount to the volume weighted average
trading price of the common stock for the ten consecutive trading days
immediately preceding each closing date, which will result in immediate and
substantial dilution to current holders.  In addition, in February
2008 we entered into an At Market Issuance Sales Agreement with Wm. Smith &
Co., amended in July 2009, which provides that, upon the terms and subject to
the conditions set forth therein, we may, through Wm. Smith & Co. acting as
sales agent, issue and sell up to 10 million shares of our common
stock.  To date, a total of 4,898,907 of the aggregate shares
authorized for sale through Wm. Smith & Co. have been sold and 5,101,093
remain available for future issuance under the agreement.  Further, as
opportunities present themselves from time to time, we may sell restricted stock
and warrants or convertible debt to investors in private placements conducted by
broker-dealers, or in negotiated transactions.  Because the securities
may be restricted, the securities may be sold at a greater discount to market
prices compared to a public securities offering, and the exercise price of the
warrants may be at or even lower than market prices. These transactions cause
dilution to existing stockholders. Also, from time to time, options may be
issued to employees and third parties, with exercise prices equal to market.
Exercise of in-the-money options, warrants and other convertible securities will
result in dilution to existing stockholders; the amount of dilution will depend
on the spread between market and exercise price, and the number of shares
involved.




27


Our management team has broad
discretion over the use of the net proceeds from any offering by us of our
equity securities, including sales under our Common Stock Purchase Agreement
with Seaside 88, LP and our At Market Issuance Sales
Agreement.




Our
management will use its discretion to direct the net proceeds from any offering
of our equity securities.  We intend to use all of the net proceeds of
our equity offerings under our Common Stock Purchase Agreement with Seaside 88,
LP, and, to the extent of any additional sales thereunder, our At Market
Issuance Sales Agreement, together with cash on hand, for general corporate
purposes, although we could use the proceeds for other purposes as
well.  General corporate purposes may include working capital, capital
expenditures, development costs, strategic investments or possible
acquisitions.  Our management’s judgments may not result in positive
returns on shareholders’ investments and our shareholders will not have an
opportunity to evaluate the economic, financial or other information upon which
our management bases its decisions.




ITEM 2.UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS






None.




ITEM 3.DEFAULTS UPON SENIOR
SECURITIES






None.




ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS






On
September 8, 2009, the Company held its Annual Meeting of Stockholders (the
“Annual Meeting”). At the Annual Meeting, stockholders elected each director
nominee to the Board of Directors by the following votes:




Director
            In
      Favor
            WithheldCarl
      E. Berg
            110,420,461
            4,691,939Robert
      L. Kanode
            110,754,192
            4,358,208Vassilis
      G. Keramidas
            113,187,572
            1,924,828Bert
      C. Roberts
            113,027,222
            2,085,178Donn
      V. Tognazzini
            113,187,040
            1,925,360




At the
Annual Meeting, the stockholders also acted on the following
matters:





•
            
            Stockholders
      voted to approve the adoption of the Valence Technology, Inc. 2009 Equity
      Incentive Plan by the following votes: 71,301,549 shares voting for,
      12,940,781 shares voting against, and 157,774 shares
      abstaining.





•
            
            Stockholders
      ratified the appointment of PMB Helin Donovan, LLP, as the independent
      auditors for the Company for the fiscal year ending March 31, 2010 by the
      following votes: 114,445,037 shares voting for, 512,994 shares voting
      against, and 154,369 shares
abstaining.




28


ITEM 5.OTHER
INFORMATION






None.




ITEM
6.EXHIBITS





Number
            
            Description
      of Exhibit
            
            Method
      of Filing3.1
            
            Second
      Restated Certificate of Incorporation of the Company
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed
      with the Securities and Exchange Commission on March 27,
      1992.3.2
            
            Amendment
      to the Second Restated Certificate of Incorporation of the
      Company
            
            Incorporated
      by reference to Exhibit A to the Company’s Schedule 14A filed with the
      Securities and Exchange Commission on January 28,
    2000.3.3
            
            Certificate
      of Designations, Preferences and Rights of Series C-1 Convertible
      Preferred Stock
            
            Incorporated
      by reference to Exhibit 3.1 to the Company’s Current Report on
      Form 8-K dated November 30, 2004, filed with the Securities and
      Exchange Commission on December 1, 2004.3.4
            
            Certificate
      of Designations, Preferences and Rights of Series C-2 Convertible
      Preferred Stock
            
            Incorporated
      by reference to Exhibit 3.2 to the Company’s Current Report on
      Form 8-K dated November 30, 2004, filed with the Securities and
      Exchange Commission on December 1, 2004.3.5
            
            Fourth
      Amended and Restated Bylaws of the Company
            
            Incorporated
      by reference to Exhibit 3.1 to the Company’s Current Report on
      Form 8-K, dated January 18, 2008, filed with the Securities and
      Exchange Commission on January 22, 2008.4.1
            
            Warrant
      dated January 4, 2002 to Berg & Berg Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, filed with the
      Securities and Exchange Commission on February 19,
2002.4.2
            
            Warrant
      to Purchase Common Stock, issued June 2, 2003 to Riverview Group
      LLC
            
            Incorporated
      by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
      dated June 2, 2003, and filed with the Securities and Exchange Commission
      on June 3, 2003.4.3
            
            Warrant
      to Purchase Common Stock, issued July 13, 2005 (SFT I,
    Inc.)
            
            Incorporated
      by reference to Exhibit 4.1 to  the Company’s Current Report on
      Form 8-K, dated July 13, 2005, filed with the Securities and Exchange
      Commission on July 15, 2005.4.4
            
            Warrant
      to Purchase Common Stock, issued July 13, 2005 (Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K,
      dated July 13, 2005, filed with the Securities and Exchange Commission on
      July 15, 2005.4.5
            
            Option
      Agreement, dated as of July 8, 2005, by and between Valence Technology,
      Inc. and James R. Akridge
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 15, 2005, filed with the Securities and Exchange Commission on
      July 18, 2005.4.6
            
            Loan
      Agreement between the Company and Baccarat Electronics, Inc., dated July
      17, 1990
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.7
            
            Amendment
      No. 1 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 15, 1991 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.8
            
            Amendment
      No. 2 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 24, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27,
  1992.  29
 4.9
            
            Amendment
      No. 3 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated August 17, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.10
            
            Amendment
      No. 4 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated September 1, 1997 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.11 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.11
            
            Amendment
      No. 5 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated July 17, 1998 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 10.50 to the Company’s Current Report on Form 8-K
      dated July 27, 1998, and filed with the Securities and Exchange Commission
      on August 4, 1998.4.12
            
            Amendment
      No. 6 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated November 27, 2000 (subsequently transferred to Berg & Berg
      Enterprises LLC)
            
            Incorporated
      by reference to Exhibit 4.13 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.13
            
            Second
      Amended Promissory Note dated November 27, 2000 issued by the Company to
      Baccarat Electronics, Inc. (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.14 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.14
            
            Amendment
      No. 7 to Original Loan Agreement between the Company and Berg & Berg
      Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated
      October 10, 2001
            
            Incorporated
      by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.15
            
            Amendment
      No. 8 to Original Loan Agreement and Amendment to Second Amended
      Promissory Note between the Company and Berg & Berg Enterprises, LLC
      (previously with Baccarat Electronics, Inc.), dated February 11,
      2002
            
            Incorporated
      by reference to Exhibit 4.12 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2002, filed with the Securities and
      Exchange Commission on July 1, 2002.4.16
            
            Loan
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.17
            
            Security
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.18
            
            Promissory
      Note dated October 5, 2001 issued by the Company to Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.19
            
            Amendment
      to Loan Agreements with Berg & Berg dated November 8, 2002 (Amendment
      No. 1 to October 5, 2001 Loan Agreement and Amendment No. 9 to 1990
      Baccarat Loan Agreement)
            
            Incorporated
      by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended September 30, 2002, filed with the
      Securities and Exchange Commission on November 14,
2002.4.20
            
            Amendment
      to Loan Agreements with Berg & Berg dated October 21, 2004 (Amendment
      No. 2 to October 5, 2001 Loan Agreement and Amendment No. 10 to 1990
      Baccarat Loan Agreement)
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated November 3, 2004, filed with the Securities and Exchange Commission
      on November 5, 2004.  30
 4.21
            
            Amendment
      No. 11 and Amendment No. 3 to Loan Agreements, dated as of July 1,
      2005
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 1, 2005, filed with the Securities and Exchange Commission on
      July 6, 2005.4.22
            
            Amendment
      No. 12 and Amendment No. 4 to Loan Agreements, dated as of July 13,
      2005
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K,
      dated July 13, 2005, filed with the Securities and Exchange Commission on
      July 15, 2005.4.23
            
            Amendment
      No. 13 and Amendment No. 5 to Loan Agreements, dated as of June 12,
      2008
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated June 12, 2008, filed with the Securities and Exchange Commission on
      June 16, 2008.4.24
            
            Amendment
      No. 14 and Amendment No. 6 to Loan Agreements, dated as of October 13,
      2009
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated October 13, 2009, filed with the Securities and Exchange Commission
      on October 13, 2009.10.1
            
            Valence
      Technology, Inc. 2009 Equity Incentive Plan
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K,
      dated May 6, 2009, filed with the Securities and Exchange Commission on
      May 6, 2009.10.2
            
            At
      Market Issuance Sales Agreement, dated February 22, 2008, by and between
      Valence Technology, Inc. and Wm Smith & Co.
            
            Incorporated
      by reference to the Exhibit 10.1 to the Company’s Current Report on Form
      8-K, dated February 22, 2008, filed with the Securities and Exchange
      Commission on February 22, 2008.10.3
            
            Amendment
      No. 1 to At Market Issuance Sales Agreement, dated July 2, 2009, by and
      between Valence Technology, Inc. and Wm Smith & Co.
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 6, 2009, filed with the Securities and Exchange Commission on
      July 6, 2009.10.4
            
            Common
      Stock Purchase Agreement, dated October 14, 2009, by and between Valence
      Technology, Inc. and Seaside 88, LP
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated October 15, 2009, filed with the Securities and Exchange Commission
      on October 15, 2009.31.1
            
            Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
            
            Filed
      herewith.31.2
            
            Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
            
            Filed
      herewith.32.1
            
            Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
            
            Filed
      herewith.32.2
            
            Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
            
            Filed
      herewith.







31


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.Date:
      November 6, 2009
            By:
            /s/ Robert L. KanodeRobert L. Kanode
              Chief
      Executive Officer







32


EXHIBIT
INDEX





Number
            
            Description
      of Exhibit
            
            Method
      of Filing3.1
            
            Second
      Restated Certificate of Incorporation of the Company
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed
      with the Securities and Exchange Commission on March 27,
      1992.3.2
            
            Amendment
      to the Second Restated Certificate of Incorporation of the
      Company
            
            Incorporated
      by reference to Exhibit A to the Company’s Schedule 14A filed with the
      Securities and Exchange Commission on January 28,
    2000.3.3
            
            Certificate
      of Designations, Preferences and Rights of Series C-1 Convertible
      Preferred Stock
            
            Incorporated
      by reference to Exhibit 3.1 to the Company’s Current Report on
      Form 8-K dated November 30, 2004, filed with the Securities and
      Exchange Commission on December 1, 2004.3.4
            
            Certificate
      of Designations, Preferences and Rights of Series C-2 Convertible
      Preferred Stock
            
            Incorporated
      by reference to Exhibit 3.2 to the Company’s Current Report on
      Form 8-K dated November 30, 2004, filed with the Securities and
      Exchange Commission on December 1, 2004.3.5
            
            Fourth
      Amended and Restated Bylaws of the Company
            
            Incorporated
      by reference to Exhibit 3.1 to the Company’s Current Report on
      Form 8-K, dated January 18, 2008, filed with the Securities and
      Exchange Commission on January 22, 2008.4.1
            
            Warrant
      dated January 4, 2002 to Berg & Berg Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, filed with the
      Securities and Exchange Commission on February 19,
2002.4.2
            
            Warrant
      to Purchase Common Stock, issued June 2, 2003 to Riverview Group
      LLC
            
            Incorporated
      by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
      dated June 2, 2003, and filed with the Securities and Exchange Commission
      on June 3, 2003.4.3
            
            Warrant
      to Purchase Common Stock, issued July 13, 2005 (SFT I,
    Inc.)
            
            Incorporated
      by reference to Exhibit 4.1 to  the Company’s Current Report on
      Form 8-K, dated July 13, 2005, filed with the Securities and Exchange
      Commission on July 15, 2005.4.4
            
            Warrant
      to Purchase Common Stock, issued July 13, 2005 (Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K,
      dated July 13, 2005, filed with the Securities and Exchange Commission on
      July 15, 2005.4.5
            
            Option
      Agreement, dated as of July 8, 2005, by and between Valence Technology,
      Inc. and James R. Akridge
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 15, 2005, filed with the Securities and Exchange Commission on
      July 18, 2005.4.6
            
            Loan
      Agreement between the Company and Baccarat Electronics, Inc., dated July
      17, 1990
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.7
            
            Amendment
      No. 1 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 15, 1991 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.8
            
            Amendment
      No. 2 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 24, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27,
  1992.  33
 4.9
            
            Amendment
      No. 3 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated August 17, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.10
            
            Amendment
      No. 4 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated September 1, 1997 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.11 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.11
            
            Amendment
      No. 5 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated July 17, 1998 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 10.50 to the Company’s Current Report on Form 8-K
      dated July 27, 1998, and filed with the Securities and Exchange Commission
      on August 4, 1998.4.12
            
            Amendment
      No. 6 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated November 27, 2000 (subsequently transferred to Berg & Berg
      Enterprises LLC)
            
            Incorporated
      by reference to Exhibit 4.13 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.13
            
            Second
      Amended Promissory Note dated November 27, 2000 issued by the Company to
      Baccarat Electronics, Inc. (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.14 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.14
            
            Amendment
      No. 7 to Original Loan Agreement between the Company and Berg & Berg
      Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated
      October 10, 2001
            
            Incorporated
      by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.15
            
            Amendment
      No. 8 to Original Loan Agreement and Amendment to Second Amended
      Promissory Note between the Company and Berg & Berg Enterprises, LLC
      (previously with Baccarat Electronics, Inc.), dated February 11,
      2002
            
            Incorporated
      by reference to Exhibit 4.12 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2002, filed with the Securities and
      Exchange Commission on July 1, 2002.4.16
            
            Loan
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.17
            
            Security
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.18
            
            Promissory
      Note dated October 5, 2001 issued by the Company to Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.19
            
            Amendment
      to Loan Agreements with Berg & Berg dated November 8, 2002 (Amendment
      No. 1 to October 5, 2001 Loan Agreement and Amendment No. 9 to 1990
      Baccarat Loan Agreement)
            
            Incorporated
      by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended September 30, 2002, filed with the
      Securities and Exchange Commission on November 14,
2002.4.20
            
            Amendment
      to Loan Agreements with Berg & Berg dated October 21, 2004 (Amendment
      No. 2 to October 5, 2001 Loan Agreement and Amendment No. 10 to 1990
      Baccarat Loan Agreement)
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated November 3, 2004, filed with the Securities and Exchange Commission
      on November 5, 2004.  34
 4.21
            
            Amendment
      No. 11 and Amendment No. 3 to Loan Agreements, dated as of July 1,
      2005
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 1, 2005, filed with the Securities and Exchange Commission on
      July 6, 2005.4.22
            
            Amendment
      No. 12 and Amendment No. 4 to Loan Agreements, dated as of July 13,
      2005
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K,
      dated July 13, 2005, filed with the Securities and Exchange Commission on
      July 15, 2005.4.23
            
            Amendment
      No. 13 and Amendment No. 5 to Loan Agreements, dated as of June 12,
      2008
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated June 12, 2008, filed with the Securities and Exchange Commission on
      June 16, 2008.4.24
            
            Amendment
      No. 14 and Amendment No. 6 to Loan Agreements, dated as of October 13,
      2009
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated October 13, 2009, filed with the Securities and Exchange Commission
      on October 13, 2009.10.1
            
            Valence
      Technology, Inc. 2009 Equity Incentive Plan
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K,
      dated May 6, 2009, filed with the Securities and Exchange Commission on
      May 6, 2009.10.2
            
            At
      Market Issuance Sales Agreement, dated February 22, 2008, by and between
      Valence Technology, Inc. and Wm Smith & Co.
            
            Incorporated
      by reference to the Exhibit 10.1 to the Company’s Current Report on Form
      8-K, dated February 22, 2008, filed with the Securities and Exchange
      Commission on February 22, 2008.10.3
            
            Amendment
      No. 1 to At Market Issuance Sales Agreement, dated July 2, 2009, by and
      between Valence Technology, Inc. and Wm Smith & Co.
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 6, 2009, filed with the Securities and Exchange Commission on
      July 6, 2009.10.4
            
            Common
      Stock Purchase Agreement, dated October 14, 2009, by and between Valence
      Technology, Inc. and Seaside 88, LP
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated October 15, 2009, filed with the Securities and Exchange Commission
      on October 15, 2009.31.1
            
            Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
            
            Filed
      herewith.31.2
            
            Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
            
            Filed
      herewith.32.1
            
            Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
            
            Filed
      herewith.32.2
            
            Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
            
            Filed
      herewith.







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