UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC  20549  FORM 10-Q  (Mark One)  x
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended September 30, 2007.  or  o
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from ____________ to ____________  Commission file number 0-20028  VALENCE TECHNOLOGY, INC.(Exact Name of Registrant as Specified in Its Charter)DELAWARE
        
        77-0214673(State or Other Jurisdiction of
Incorporation or Organization)
        
        (I.R.S. Employer
Identification No.)12201TECHNOLOGY BLVD., SUITE 150,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.  Yes[ X ]   No[   ]  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  (Check one):  Large accelerated filer
        [
        ]
        Accelerated filer
        [ X ]
        Non-accelerated filer
        [
        ]
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes[   ]   No[ X ]  Common Stock, $0.001 par value
        
        115,440,428(Class)
        
        (Outstanding at November 5, 2007)
      VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES  FORM 10-Q  FOR THE QUARTER ENDED SEPTEMBER 30, 2007   INDEX  Pages
  Part I.
        Financial Information
  Item 1.
        Financial Statements (Unaudited):
  Condensed Consolidated Balance Sheets as of September 30, 2007 and March 31, 2007
        1
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three- and Six- Month Periods Ended September 30, 2007 and September 30, 2006
        2
  Condensed Consolidated Statements of Cash Flows for the Six- Month Periods  Ended September 30, 2007 and September 30, 2006
        3
  Notes to Condensed Consolidated Financial Statements
        4
  Item 2.
        Managements Discussion and Analysis of Financial
 Condition and Results of Operations
        14
  Item 3.
        Quantitative and Qualitative Disclosures about Market Risk
        34
  Item 4.
        Controls and Procedures
        35
  Part II.
        Other Information
  Item 1.
        Legal Proceedings
        36
  Item 2.
        Unregistered Sales of Equity Securities and Use of Proceeds
        36
  Item 3.
        Defaults upon Senior Securities
        36
  Item 4.
        Submission of Matters to a Vote of Security Holders
        36
  Item 5.
        Other Information
        36
  Item 6.
        Exhibits
        37
 Signature
        38
   i
    PART IFINANCIAL INFORMATION ITEM 1.
        FINANCIAL STATEMENTS (UNAUDITED)
  VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) (Unaudited) September 30, 2007
        
        March 31, 2007AssetsCurrent assets:Cash and cash equivalents
        $                                                2,517
        
        $             1,168Trade receivables, net of allowance of $220 and $169
        3,463
        
        3,955Inventory
        6,919
        
        7,915Prepaid and other current assets
        2,420
        
        1,987Total current assets
        15,319
        
        15,025Property, plant and equipment, net
        4,119
        
        3,997Intellectual property, net
        120
        
        178Total assets
        19,558
        
        19,200Liabilities and Stockholders DeficitCurrent liabilities:Accounts payable
        1,917
        
        2,904Accrued expenses
        4,957
        
        4,223Deferred revenue
        605
        
        516Total current liabilities
        7,479
        
        7,643Long-term interest payable to stockholder
        19,963
        
        18,475Long-term debt, net of debt discount
        18,724
        
        18,484Long-term debt to stockholder, net of debt discount
        34,275
        
        33,906Total liabilities
        80,441
        
        78,508Commitments and contingencies
Redeemable convertible preferred stock, $0.001 par value, 10,000,000 shares authorized, 8,610,000 issued and outstanding as of September 30, 2007 and March 31, 2007, liquidation value $8,610
        8,610
        
        8,610Stockholders deficit:Common stock, $0.001 par value, 200,000,000 shares authorized; 112,440,428 and 106,199,516 shares issued as of September 30, 2007 and March 31, 2007
        112
        
        106Additional paid-in capital
        465,505
        
        457,611Notes receivable from stockholder
        -
        
        (5,164)Treasury shares, 18,803,144 at cost
        (5,164)
        
        -Accumulated deficit
        (525,899)
        
        (516,647)Accumulated other comprehensive loss
        (4,047)
        
        (3,824)Total stockholders deficit
        (69,493)
        
        (67,918)Total liabilities, preferred stock and stockholders deficit
        $             19,558
        
        $             19,200
  The accompanying notes are an integral part of these condensed consolidated financial statements.    1
    VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except share amounts) (Unaudited) Three Months Ended September 30,
        Six Months Ended September 30,2007
        
        2006
        
        2007
        
        2006Revenue:Battery and system sales
        $             5,372
        
        $             6,186
        $            9,340
        
        $             9,176Licensing androyalty revenue
        180
        
        190
        265
        
        368Total revenues
        5,552
        
        6,376
        9,605
        
        9,544Cost of sales
        4,889
        
        5,297
        8,416
        
        8,443Gross margin
        663
        
        1,079
        1,189
        
        1,101Operating expenses:Research and product development
        912
        
        795
        1,664
        
        1,889Marketing
        460
        
        547
        886
        
        976General and administrative
        2,014
        
        2,224
        3,693
        
        4,400Share based compensation
        450
        
        442
        901
        
        706Depreciation and amortization
        280
        
        225
        453
        
        406(Gain)/Loss on disposalof assets
        (15)
        
        (13)
        6
        
        2Contract settlement charges
        -
        
        1
        -
        
        24Total operating expenses
        4,101
        
        4,221
        7,603
        
        8,403Operating loss
        (3,438)
        
        (3,142)
        (6,414)
        
        (7,302)Interest and other income
        193
        
        241
        402
        
        349Interest expense
        (1,584)
        
        (1,824)
        (3,154)
        
        (3,386)Net loss
        (4,829)
        
        (4,725)
        (9,166)
        
        (10,339)Dividends on preferred stock
        43
        
        43
        86
        
        86Net loss available to common stockholders, basic and diluted
        $             (4,872)
        
        $          (4,768)
        $         (9,252)
        
        $             (10,425)Other comprehensive loss:Net loss
        $             (4,829)
        
        $         (4,725)
        $          (9,166)
        
        $(10,339)Change in foreign currency translation adjustments
        (156)
        
        (1)
        (223)
        
        (10)Comprehensive loss
        $             (4,985)
        
        $          (4,726)
        $         (9,389)
        
        $             (10,349)Net loss per share available to common stockholders
        $                 (0.04)
        
        $             (0.05)
        $            (0.08)
        
        $                  (0.11)Shares used in computing net loss per share available to common stockholders, basic and diluted.
        111,189
        
        98,367
        109,803
        
        96,076
  The accompanying notes are an integral part of these condensed consolidated financial statements.    2
    VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands,) (Unaudited) Six Months Ended September 30,2007
        
        2006Cash flows from operating activities:Net loss
        $                      (9,166)
        
        $                     (10,339)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
        485
        
        406Loss on disposal of assets
        6
        
        2Bad debt expense
        53
        
        -Accretion of debt discount and other
        609
        
        609Share based compensation
        901
        
        706Changes in operating and other assets and liabilities:Trade receivables
        439
        
        (2,379)Inventory
        996
        
        (2,614)Prepaid and other current assets
        (433)
        
        307Accounts payable
        (987)
        
        150Accrued expenses and long-term interest
        2,135
        
        911Deferred revenue
        89
        
        (91)Net cash used in operating activities
        (4,873)
        
        (12,332)Cash flows from investing activities:Purchases of property, plant & equipment
        (555)
        
        (741)Proceeds from sale of property, plant & equipment
        -
        
        15Net cash used in investing activities
        (555)
        
        (726)Cash flows from financing activities:Proceeds from notes payable to stockholder
        -
        
        5,000Proceeds from stock option exercises
        -
        
        133Proceeds from issuance of common stock, net of issuance costs
        7000
        
        9,986Net cash provided by financing activities
        7,000
        
        15,119Effect of foreign exchange rates on cashand cash equivalents
        223
        
        10Increase in cash and cash equivalents
        1,349
        
        2,071Cash and cash equivalents, beginning of period
        1,168
        
        612Cash and cash equivalents, end of period
        $                         2,517
        
        $                           2,683Supplemental information:Conversion of notes payable to stockholder into common stock
        $                                   -
        
        $                        11,101Acquisition of treasury stock from shareholder
        5,164
        
        -Interest paid
        958
        
        932
  The accompanying notes are an integral part of these condensed consolidated financial statements.   3
    VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2007 (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 (the Company) as of September 30, 2007, its consolidated results of operations for each of the three- and six-month periods ended September 30, 2007 and September 30, 2006, and the consolidated cash flows for the six-month periods ended September 30, 2007 and September 30, 2006. Because all the disclosures required by generally accepted accounting principles are not included, these interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto in the Companys Annual Report on Form 10-K as of and for the year ended March 31, 2007. The results for the
three- and six-month periods ended September 30, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2008. The year-end condensed consolidated balance sheet data as of March 31, 2007 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. 2.  BUSINESS AND BUSINESS STRATEGY:  Valence Technology, Inc. (with its subsidiaries, the Company) was founded in 1989 and has commercialized the industrys first lithium phosphate technology. The Companys mission is to drive the wide adoption of high-performance, safe, long cycle life, environmentally friendly, low-cost energy storage systems by drawing on the numerous benefits of its latest battery technology, the extensive experience of its management team, and the significant market opportunity available to it.  In February 2002, the Company unveiled its Saphion ® technology, a lithium phosphate technology which utilizes a phosphate-based cathode material. The Company believes that lithium phosphate technology addresses the major weaknesses of existing technology while offering a solution that is competitive in cost and performance. The Company believes that by incorporating a phosphate-based cathode material, its Saphion ® technology is able to offer greater thermal and electrochemical stability than traditional lithium-ion technologies, which will facilitate its adoption in large application markets not traditionally served by lithium-ion batteries such as motive power, vehicular, portable appliances, telecommunications, and utility back-up systems. Currently, the Company offers its lithium phosphate technology in both cylindrical and polymer construction and have initiated the design
of a prismatic cell. The Companys business plan and strategy focuses on the generation of revenue from product sales, while minimizing costs through a manufacturing plan that utilizes partnerships with contract manufacturers and internal manufacturing efforts through its wholly owned subsidiaries in China. These subsidiaries initiated operations in late fiscal 2005. The market for lithium phosphate technology will be developed by offering existing and new solutions that differentiate the Companys products and its customers products in both the large-format and small-format markets through the Companys own product launches, such as the N-Charge ® Power System and U-Charge ® Power System, and through products designed by others. In addition, the Company expects to continue to pursue a licensing strategy as our lithium phosphate technology receives greater market acceptance. Going Concern: The accompanying condensed 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 $525.9 million as of September 30, 2007. For the three- and six-month periods ended September 30, 2007 the Company has incurred a net loss available to  4
    common stockholders of $4.9 million and $9.3 million, respectively. For the years ended March 31, 2007 and 2006, the Company sustained net losses of $22.4 and $32.9 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, 2007, the Company's principal sources of liquidity were cash and cash equivalents of $2.5 million. The Company expects our sources of liquidity will not be sufficient for the remaining fiscal year. The Company anticipates product sales during fiscal 2008 from the N-Charge ® Power System and the Segway pack, which are subject to seasonal fluctuations and from the sale of U-Charge ® Power Systems and royalties will be insufficient to cover the Companys operating expenses. Management depends upon our ability to periodically arrange for additional equity or debt financing to meet our liquidity requirements. Unless our product sales are greater than management currently forecasts or there are other changes to our business plan, we will need to arrange for additional financing within the next three to six months to fund operating and capital needs. This financing
could take the form of debt or equity. Given our historical operating results and the amount of our existing debt, as well as the other factors, we 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 remaining fiscal year. 3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Revenue Recognition: Revenues are generated 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 collectibility 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 Companys balance sheet. For reseller shipments where revenue recognition is deferred, the Company records revenue based upon sales to ultimate customers. For direct customers, the Company estimates a return rate percentage based upon its historical experience.
Customer rebates and other price adjustments are recognized as incurred. 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 sales of licensed products and when collectibility is reasonably assured. 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, 2007 and 2006 were as follows:  5
      Three Months Ended
September 30,
        
        Six Months Ended
September 30,2007
        2006
        
        2007
        2006Shares reserved for conversion of Series C preferred stock
        
        3,628,634
        3,628,634
        
        3,628,634
        3,628,634Common stock options reserved
        
        9,945,971
        9,273,492
        
        9,945,971
        9,273,492Warrants to purchase common stock
        
        2,955,643
        2,955,643
        
        2,955,643
        2,955,643Total
        
        16,530,248
        15,857,769
        
        16,530,248
        15,857,769
   4.  INVENTORY  Inventory consisted of the following (in thousands) at: September 30, 2007
        
        March 31, 2007Raw materials
        
        $             1,338
        
        $                            2,210Work in process
        
        3,840
        
        3,116Finished goods
        
        1,741
        
        2,589Total inventory
        
        $             6,919
        
        $                            7,915
  Included in inventory at September 30, 2007 and March 31, 2007 were valuation allowances of $3.3 million and $4.4 million to reduce their carrying values to the lower of cost or market. Management has valued overhead absorption related to work in process based on estimates of completion at September 30, 2007. 5.  PROPERTY, PLANT AND EQUIPMENT  Property, plant and equipment, net of accumulated depreciation and impairment, consisted of the following (in thousands) at: September 30, 2007
        
        March 31, 2007Leasehold improvements
        
        $                                1,073
        
        $                          1,045Machinery and equipment
        
        4,873
        
        4,400Office and computer equipment
        
        2,101
        
        2,001Construction in progress
        
        287
        
        462Total cost
        
        8,334
        
        7,908Less: accumulated depreciation
        
        (4,177)
        
        (3,873)Less: impairment
        
        (38)
        
        (38)Total cost, net of depreciation
        
        $                                4,119
        
        $                          3,997
   6
    6.  INTELLECTUAL PROPERTY  Intellectual property consisting of stacked battery construction technology acquired from Telcordia Technologies, Inc. in December 2000 is amortized over its estimated useful life. Intellectual property, net of accumulated amortization and impairment, consisted of the following (in thousands) at: September 30, 2007
        
        March 31, 2007Intellectual property before impairment
        $                                  13,602
        
        $                                13,602Less: accumulated amortization
        (4,998)
        
        (4,930)Less: impairment
        (8,494)
        
        (8,494)Intellectual property, net
        $                                       120
        
        $                                      178
  Amortization expense for the three-month periods ended September 30, 2007 and 2006, was approximately $20,000 and $29,000, respectively.  Amortization expense for the six-month periods ended September 30, 2007 and 2006, was approximately $58,000 and $60,000, respectively. 7.  LONG TERM DEBT  (in thousands)
        September 30, 2007
        
        March 31, 20072005 Loan balance
        $                                                20,000
        
        $                     20,000Unaccreted debt discount
        (1,276)
        
        (1,516)Balance
        $                                                18,724
        
        $                     18,4842001 Loan from stockholder balance
        $                                                20,000
        
        $                     20,0001998 Loan from stockholder balance
        14,950
        
        14,950Unaccreted debt discount
        (675)
        
        (1,044)Balance
        $                                                34,275
        
        $                     33,906
  On July 13, 2005, the Company secured a $20.0 million loan (the 2005 Loan) from a third party finance company, the full amount of which has been drawn down. The loan is guaranteed by Mr. Carl Berg, chairman of the Board of Directors and the Companys principal stockholder. The 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 1/16 th of 1.0%, plus 4.0% (9.88% as of September 30, 2007). The loan may not be prepaid in whole or in part on or prior to July 12, 2007. The loan may be prepaid during the period beginning on July 13, 2007 through July 12, 2009, with a 1.0% prepayment premium, and on July 13, 2009 and thereafter with no prepayment premium. As of September 30, 2007, no amounts have been paid on the loan.  In
connection with the loan, the Company purchased a rate cap agreement to protect against fluctuations in LIBOR for the full amount of the loan for a period of three years. The fair value of the LIBOR rate cap agreement is included in other assets and marked-to-market on a quarterly basis. In connection with the loan both the third party finance company and Berg & Berg received warrants to purchase 600,000 shares of the Companys common stock at a price of $2.74 per share. The warrants are exercisable beginning on the date they were issued and will expire on July 13, 2008. The fair value assigned to these warrants, totaling approximately $2.037 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%. Also in connection with the loan, the Company incurred a loan commitment fee and attorneys 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. Through September 30, 2007, a total of approximately $1,066,000 has been accreted and included as interest expense. Interest payments on the loan are currently being paid on a monthly basis.  7
    In October 2001, the Company entered into a loan agreement (2001 Loan) with Berg & Berg Enterprises, LLC (Berg & Berg) an affiliate of Mr. Berg. Under the terms of the agreement, Berg & Berg agreed to advance the Company funds of up to $20 million between the date of the agreement and September 30, 2003. Interest on the 2001 Loan accrues at 8.0% per annum, payable from time to time. On July 13, 2005, Berg & Berg agreed to extend the maturity date for the loan principal and interest from September 30, 2006 to September 30, 2008. In conjunction with the 2001 Loan, Berg & Berg received a warrant to purchase 1,402,743 shares of the Companys common stock at the price of $3.208 per share. The warrants were exercisable beginning on the date they were issued and originally expired on August 30, 2005. In July 2005, the warrants were extended until September 30, 2008. 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, 2007, a total of $4.4 million has been accreted and included as interest expense. The amounts charged to interest
expense on the outstanding balance of the loan for the three-month periods ended September 30, 2007 and 2006 were $409,000 and $409,000. The amounts charged to interest expense on the outstanding balance of the loan for the six-month periods ended September 30, 2007 and 2006 were $813,000 and $813,000. 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 $9.1 million and $8.3 million as of September 30, 2007 and March 31, 2007, 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 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 million. As of September 30, 2007, the Company had an outstanding balance of $14.95  million under the 1998 Loan agreement. The loan bears interest at one percent over lenders borrowing rate (approximately 9.0% at September 30, 2007). On July 13, 2005, Berg & Berg agreed to extend the maturity date for the loan principal and interest from September 30, 2006 to September 30, 2008. The accrued interest amounts for the 1998 Loan were $10.8 million and $10.1 million as of September 30, 2007 and March 31, 2007, respectively. All of our assets are pledged as collateral under the 2001 Loan and the 1998 Loan to stockholder. 8.  COMMITMENTS AND CONTINGENCIES  Warranties: The Company has established a warranty reserve in connection with the sale of N-Charge ® Power Systems covering a 12-month warranty period during which the Company would provide a replacement unit to any customer returning a purchased product because of a product performance issue. The Company has also 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 $0.9 million and $1.1 million as of September 30, 2007 and March 31, 2007, 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 recently granted Canadian Patents 2,483,918 and 2,466,366. The action is in the initial pleading state. 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.  8
    On February 14, 2006, Hydro-Quebec filed a lawsuit against us in the United States District Court for the Western District of Texas (Hydro-Quebec v. Valence Technology, Civil Action No. A06CA111). In its amended complaint filed April 13, 2006, Hydro-Quebec alleges that Saphion ® Technology, the technology utilized in all of our commercial products, infringes U.S. Patent No. 5,910,382 and 6,514,640 exclusively licensed to Hydro-Quebec. Hydro-Quebecs complaint seeks injunctive relief and monetary damages. The action is in the initial pleading state and we have filed a response denying the allegations in the amended complaint. The action has been stayed by the Court until a final determination by the USPTO in either of the reexaminations of the two University of Texas patents asserted in the case. The USPTO has stated in declaring the two reexaminations that there are serious
questions as to the patentability of the two patents. We are subject to, from time to time, various claims and litigation in the normal course of business. In our opinion, all pending legal matters are either covered by insurance or, if not insured, will not have a material adverse impact on our consolidated financial statements. 9.  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 $9.416 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 were 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 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). At September 30, 2007, the Company was in arrears on the payment of $344,000 in preferred stock dividends. In connection with the issue of 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 a warrant to purchase 352,900 shares of the Companys common stock. The warrant is exercisable at a purchase price of $5.00 per share and expires in June 2008. The warrant was valued using the Black-Scholes valuation model. The warrant was recorded to additional paid in capital at its 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 ending December 2, 2004.  9
    10.  SHARE BASED COMPENSATION  The Company has a stock option plan (the 1990 Plan) under which options granted may be incentive stock options or supplemental stock options. Options are to be granted at a price not less than fair market value (incentive options) or 85% of fair market value (supplemental options) on the date of grant. The options vest as determined by the Board of Directors and are generally exercisable over a five-year period. Unvested options are canceled and returned to the 1990 Plan upon an employees termination. Generally, vested options, not exercised within three months of termination, are also canceled and returned to the Plan. The 1990 Plan terminated on July 17, 2000, and as such, options may not be granted after that date. Options granted prior to July 17, 2000 expire no later than ten years from the date of grant. In February 1996, the Board of Directors adopted a stock plan for outside Directors (the 1996 Non-Employee Directors Stock Option Plan). The 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 will receive an initial stock option of 100,000 shares on the date of the adoption of the plan. During the first six months of fiscal 2008, no shares were granted under this plan. At September 30, 2007, the Company had 167,928 shares available for grant under the 1996 Non-Employee
Directors Stock Option Plan. In October 1997, the Board of Directors adopted the 1997 Non-Officer Stock Option Plan (the 1997 Plan). The Company may grant options to non-officer employees and consultants under the 1997 Plan. Options are to be granted at a price not less than fair market value (incentive options) on the date of grant. The options vest as determined by the Board of Directors, generally quarterly over a three- or four-year period. The options expire no later than ten years from the date of grant. Unvested options are canceled and returned to the 1997 Plan upon an employees termination. Vested options, not exercised within three months of termination, also are canceled and returned to the 1997 Plan. During the first six months of fiscal 2008, no shares were granted under this plan. At September 30, 2007, the Company had 1,302,639 shares available for grant under the 1997 Plan. In January 2000, the Board of Directors adopted the 2000 Stock Option Plan (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 under the 2000 Plan. 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 2008, 480,000 shares were granted under this plan. At September 30, 2007, the Company had 1,943,908 shares available for grant under the 2000 Plan. When options are exercised the Company issues new shares to the grantee.  10
    Aggregate option activity is as follows (shares in thousands): Outstanding OptionsNumber of
Shares
        
        Weighted Average
Exercise PriceBalance at March 31, 2007
        6,753
        
        $             3.84Granted
        480
        
        1.26Exercised
        -
        
        -Canceled
        (702)
        
        2.94Balance at September 30, 2007
        6,531
        
        $             3.76
  The following table summarizes information about fixed stock options outstanding at September 30, 2007 (shares in thousands): Options Outstanding
        Options ExercisableRange of
Exercise Prices
        Number
Outstanding
        Weighted Average Remaining Contractual Life (years)
        Weighted AverageExercisePrice
        Number
Exercisable
        Weighted Average
Exercise
Price$0.63 - $1.99
        3,594
        8.81
        1.57
        533
        1.47$1.99 - $4.62
        1,313
        6.66
        3.08
        800
        3.43$4.62 - $10.06
        1,400
        1.90
        6.49
        1,364
        6.52$10.06 - $15.75
        10
        3.00
        13.84
        10
        13.84$15.75 - $23.56
        113
        2.46
        20.41
        113
        20.41$23.56 - $34.62
        101
        2.42
        32.93
        101
        32.93$ 0.63 - $34.62
        6,531
        6.68
        3.76
        2,921
        6.22
  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, 2007 and September 30, 2006 $450,000 and $442,000 of share based compensation expense has been included in operating expenses in the condensed consolidated statements of operations and comprehensive loss. For the six months ended September 30, 2007 and September 30, 2006 $901,000 and $706,000 of share based compensation expense has been included in operating expenses in the condensed consolidated statements of operations and comprehensive loss. The aggregate intrinsic value of options exercisable at September 30, 2007 is $42,000. There were no option exercises during the six-month period ended September 30, 2007. As of September 30, 2007 the Company had a total of $5.0 million in compensation costs related to stock-based compensation to recognize over a remaining service period of 2.04 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 2008 and 2007: September 30, 2007
        
        March 31, 2007Risk-free interest rate
        
        4.28%
        
        4.34%Expected life
        
        5.0 years
        
        5.0 yearsVolatility
        
        79.18%
        
        82.36%Dividend yield
        
        None
        
        None
  11.  RELATED PARTY TRANSACTIONS  On September 20, 2007, Berg & Berg purchased 729,927 shares of the Companys common stock for $1.0 million. The purchase price of $1.37 per share equaled the closing bid price of the Company's common stock as of September 19, 2007.  11
    On August 16, 2007, Berg & Berg purchased 884,956 shares of the Companys common stock for $1.0 million. The purchase price of $1.13 per share equaled the closing bid price of the Company's common stock as of August 15, 2007. On July 19, 2007, Berg & Berg purchased 869,565 shares of the Companys common stock for $1.0 million. The purchase price of $1.15 per share equaled the closing bid price of the Company's common stock as of July 18, 2007. On June 21, 2007, Berg & Berg purchased 869,565 shares of the Companys common stock for $1.0 million. The purchase price of $1.15 per share equaled the closing bid price of the Company's common stock as of June 20, 2007. On May 17, 2007, Berg & Berg purchased 990,099 shares of the Companys common stock for $1.0 million. The purchase price of $1.01 per share equaled the closing bid price of the Company's common stock as of May 16, 2007. On April 19, 2007, West Coast Venture Capital purchased 925,926 shares of the Companys common stock for $1.0 million. The purchase price of $1.08 per share equaled the closing bid price of the Company's common stock as of April 18, 2007. On April 5, 2007, West Coast Venture Capital purchased 970,874 shares of the Companys common stock for $1.0 million. The purchase price of $1.03 per share equaled the closing bid price of the Company's common stock as of April 4, 2007. On January 1, 1998, the Company granted options to Mr. Dawson, the Companys then Chairman of the Board, Chief Executive Officer and President, an incentive stock option to purchase 39,506 shares, which was granted pursuant to the Companys 1990 Plan (the 1990 Plan). Also, an option to purchase 660,494 shares was granted pursuant to the Companys 1990 Plan and an option to purchase 300,000 shares was granted outside of any equity plan of the Company, neither of which were incentive stock options (the Nonstatutory Options). The exercise price of all three options is $5.0625 per share, the fair market value on the date of the grant. The Compensation Committee of the Company approved the early exercise of the Nonstatutory Options on March 5, 1998. The options permitted exercise by cash, shares, full recourse notes or non-recourse notes secured by
independent collateral. The Nonstatutory Options were exercised on March 5, 1998 with non-recourse promissory notes in the amounts of $3,343,750 (Dawson Note One) and $1,518,750 (Dawson Note Two) (collectively, the Dawson Notes) secured by the shares acquired upon exercise plus 842,650 shares previously held by Mr. Dawson. As of March 31, 2006, principal and interest amounts of $3.50 million and $1.59 million were outstanding under Dawson Note One and Dawson Note Two, respectively, and under each of the Dawson Notes, interest from the issuance date accrues on unpaid principal at the rate of 5.77% per annum, or at the maximum rate permissible by law, whichever is less. On April 20, 2005, the Company's Board of Directors approved a resolution to extend the maturity dates of each of the Dawson Notes from September 5, 2005 to September 5, 2007. Under each of the Dawson Notes, interest from the Issuance Date accrued on unpaid principal at the rate of 5.69% per annum, or at the maximum rate permissible by law, whichever is less. In accordance with the Dawson Notes, interest was due annually.  Interest was paid through March 4, 2005.  As of September 30, 2007, interest was in arrears and not expected to be collectible from Mr. Dawson.  Mr. Dawson has defaulted on the notes and surrendered his shares to the Company. 12.  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.  12
    Long-lived asset information by geographic area is as follows (in thousands): September 30, 2007
        
        March 31, 2007United States
        
        $                                     554
        
        $                             657International
        
        3,685
        
        3,518Total
        
        $                                 4,239
        
        $                         4,175
   Revenues by geographic area are as follows (in thousands):  Three Months Ended September 30
        
        Six Months Ended September 30,2007
        
        2006
        
        2007
        
        2006United States
        
        $                   5,202
        
        $                 5,242
        
        $             9,072
        
        $             8,005International
        
        350
        
        1,134
        
        532
        
        1,539Total
        
        $                   5,552
        
        $                 6,376
        
        $             9,604
        
        $             9,544
  13.  SUBSEQUENT EVENTS  On October 25, 2007, the Company sold 3,000,000 shares of its common stock at a price of $1.54 per share pursuant to an existing registration statement.   Net proceeds to the company after fees and expenses totaled approximately $4.3 million. Proceeds from the offering will be used for capital andequiptment, operating expenses, working capital and other general corporate purposes. ITEM 2.
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 This Report contains statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words expect, estimate, anticipate, 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 the Company, we or us, our directors or officers with respect to, among other things, (a) trends affecting our financial condition or results of operations, (b) our product development strategies, (c) trends affecting our manufacturing capabilities; (d) trends
affecting the commercial acceptability of our products, and (e) 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, for the reasons, among others, discussed in the sections  Managements Discussion and Analysis of Financial Condition and Results of Operations and Cautionary Statements and Risk Factors. 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 Securities and Exchange Commission, to which we refer in this Report as the Commission. 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- and six-month periods ended September 30, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2008. Overview Valence Technology, Inc. was founded in 1989 and has commercialized the industrys first lithium phosphate technology. Our mission is to drive the wide adoption of high-performance, safe, low-cost energy storage systems by drawing on the numerous benefits of our lithium phosphate battery technology, the experience of our management team and the significant market opportunity available to us.  13
    In February 2002, we unveiled our Saphion ® technology, a lithium phosphate technology which utilizes a phosphate-based cathode material. Traditional lithium-ion technology utilizes an oxide-based cathode material, which has limited its adoption to small applications such as notebook computers, cellular phones and personal digital assistants (PDAs) due to safety concerns related to its use in large applications. We believe that lithium phosphate technology addresses the major weaknesses of this existing technology while offering a solution that is competitive in cost and performance. We believe that by incorporating a phosphate-based cathode material, our Saphion® technology is able to offer greater thermal and electrochemical stability than traditional lithium-ion technologies, which will facilitate its adoption in large application markets not traditionally served by lithium-ion
batteries such as motive power, vehicular, portable appliances, telecommunications, and utility back-up systems. Currently, we offer our lithium phosphate technology in both cylindrical and polymer construction and have initiated the design of a prismatic cell. We believe offering lithium phosphate technology in multiple constructions will provide us greater flexibility in our response to the needs of the market. Key product introductions based on our Saphion® technology: 
        In February 2002, we launched the N-Charge ® Power System into several channels for sales and distribution, including national and regional retailers, top tier computer manufacturers, and national resellers.
 
        In February 2004, we also introduced a prototype of the U-Charge ® Power System family of large-format products. The U-Charge ® Power System is in production in our China facilities and is designed to power a variety of motive applications from hybrid and electric vehicles to scooters and wheelchairs, and can also be used in stationary applications.
 
        In March 2005, we announced availability of lithium phosphate powered batteries for Segway Inc.s 2005 products. Our batteries doubled the range of Segways Human Transporters compared to the nickel metal hydride batteries that were previously used.
 
        In May 2005, we launched the industrys first commercially available lithium phosphate power cell. Built with our proprietary Saphion ® technology, this cell offers the high discharge rates required of power cells with the safety features enabled by our phosphate-based cathode material. Our power cell is optimal for use in portable appliances, hybrid and electric vehicles.
 
        In January 2006, we announced availability of eight new models of our large-format lithium phosphate U-Charge ® XP Power System batteries which feature built in battery management electronics and power rates of 500 to 1700 continuous watts, depending on the model.
 As part of our low-cost manufacturing strategy, we have successfully transitioned our powder manufacturing from Las Vegas, Nevada to Suzhou, China. This transition allows us to capitalize on lower manufacturing costs. Our research and development efforts are focused on the design of new products utilizing our lithium phosphate chemistry, the scale-up of our second generation lithium phosphate technology, the development of different cell constructions to optimize power and size for new applications, as well as developing future materials based on the lithium phosphate technology attributes. At $5.6 million, our revenue for the second quarter of fiscal 2008 was in line with our previously announced revenue guidance. Second quarter revenue for fiscal 2008 decreased $824,000, or 12.9%, from the second quarter of fiscal 2007. Gross margin profit was 11.9% for the second quarter of fiscal 2008, compared with gross margin of 16.9% for the second quarter of fiscal 2007. During the second quarter of fiscal 2008, we continued our efforts to increase production capacity at our subsidiaries in China. Our business headquarters is located in Austin, Texas, our research and development centers is in Las Vegas, Nevada, our European sales is in Mallusk, Northern Ireland and our manufacturing and product development centers is in Suzhou, China.  14
    Basis of Presentation, Critical Accounting Policies and Estimates We prepare our condensed 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. Our accounting policies are described in the Notes to Condensed Consolidated Financial Statements, Note 4, Summary of Significant Accounting Policies. The following further describes the methods and assumptions we use in our critical accounting policies and estimates: 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 collectibility 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. For reseller shipments where revenue recognition is deferred, we record revenue based upon the reseller-supplied reporting of sales to their end customers or their inventory reporting. For direct customers, we estimate a return rate percentage based upon our historical
experience. We review this estimate on a quarterly basis. From time to time we provide sales incentives in the form of rebates or other price adjustments; these are recorded as reductions to revenue as incurred. 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 collectibility is reasonably assured. Results of Operations The following table summarizes the results of our operations for the three months and six months (also referred to as the second quarter and first half) ended September 30, 2007 and September 30, 2006:  Three Months Ended
        
        Six Months EndedSeptember 30, 2007
        
        September 30, 2006
        
        September 30, 2007
        
        September 30, 2006(dollars in thousands)
        
        Total
        % of Revenue
        
        Total
        % of Revenue
        
        Total
        % of Revenue
        
        Total
        % of RevenueBattery and systems sales
        
        $5,372
        97%
        
        $6,186
        97%
        
        $9,340
        97%
        
        $9,176
        96%Licensing and royalty revenue
        
        180
        3%
        
        190
        3%
        
        265
        3%
        
        368
        4%Total revenues
        
        5,552
        100%
        
        6,376
        100%
        
        9,605
        100%
        
        9,544
        100%Gross margin profit (loss)
        
        663
        12%
        
        1,079
        17%
        
        1,189
        12%
        
        1,101
        12%Operating expenses
        
        4,101
        74%
        
        4,221
        66%
        
        7,603
        79%
        
        8,403
        88%Operating loss
        
        (3,438)
        62%
        
        (3,142)
        (49%)
        
        (6,414)
        (67%)
        
        (7,302)
        (77%)Net loss
        
        $(4,829)
        87%
        
        $(4,725)
        (74%)
        
        $(9,166)
        (95%)
        
        $(10,339)
        (108%)
   15
    Revenues and Gross Margin Battery and System Sales: Battery and system sales decreased by $814,000, or 13.2%, to $5.4 million in the second quarter of fiscal 2008 from $6.186 million in the second quarter of fiscal 2007.  The quarter to quarter decrease was due to a decrease in N-Charge ® sales.  Battery and system sales increased by $164,000 or 1.8%, in the first half of fiscal 2008 from $9.176 million in the first half of fiscal 2007.  The increase was attributable to revenue from new customers, offset by a decrease in sales of small-format products. We continue to sell the N-Charge ® product through our reseller channels with an emphasis in the healthcare and education sectors. Revenues from the sales of our small-format products accounted for 14% and 23% of our total revenue for the three months ended September 30, 2007 and 2006. Product shipments to resellers that are subject to right of
return and monies received for future obligations are recorded on the balance sheet as deferred revenue. We had $605,000 in deferred revenue on our balance sheet at September 30, 2007. Licensing and Royalty Revenue: Licensing and royalty revenues relate to revenue from licensing agreements for our battery construction technology. Fiscal second quarter 2008 licensing and royalty revenue was $180,000 compared with $190,000 for the same quarter in fiscal 2007. First half fiscal 2008 licensing and royalty revenue was $265,000 compared with $368,000 for the same six months in fiscal 2007. Licensing and royalty revenue was substantially from our license agreement with Amperex Technology Limited (ATL), which makes on-going royalty payments as sales are made using our technology. We expect to continue to pursue a licensing strategy as our lithium phosphate technology receives greater market acceptance. Gross Margin: Gross margin as a percentage of revenue was 12% for the second quarter of fiscal 2008 as compared to 17% in the second quarter of fiscal 2007. Gross margin was 12% in the first half of fiscal 2008 and was 12% in the first half of fiscal 2007. Management revised certain estimates regarding inventory reserves based on a tentative agreement with a vendor. As a result, included in the first half of fiscal 2008 is a $414,000 reduction of cost of sales which contributed to our improved gross margin. Operating Expenses The following table summarizes operating expenses for the three and six months ended September 30, 2007 and September 30, 2006: Three Months Ended September 30,
        
        Six Months Ended September 30,(dollars in thousands)
        
        2007
        
        2006
        
        Increase/(Decrease)
        
        % Change
        
        2007
        
        2006
        
        Increase/(Decrease)
        
        % ChangeResearch and product development
        
        $912
        
        $795
        
        $117
        
        15%
        
        $1,664
        
        $1,889
        
        $(225)
        
        (12%)Marketing
        
        460
        
        547
        
        (87)
        
        (16%)
        
        886
        
        976
        
        (90)
        
        (9%)General and administrative
        
        2,014
        
        2,224
        
        (210)
        
        (9%)
        
        3,693
        
        4,400
        
        (707)
        
        (16%)Depreciation and amortization
        
        280
        
        225
        
        8
        
        2%
        
        453
        
        406
        
        195
        
        28%Share based compensation
        
        450
        
        442
        
        55
        
        25%
        
        901
        
        706
        
        47
        
        12%Loss on disposal of assets
        
        (15)
        
        (13)
        
        (2)
        
        17%
        
        6
        
        2
        
        4
        
        222%Contract settlement charges
        
        -
        
        1
        
        (1)
        
        (100%)
        
        -
        
        24
        
        (24)
        
        (100%)Total operating expenses
        
        $4,101
        
        $4,221
        
        $(119)
        
        (3%)
        
        $7,603
        
        $8,403
        
        $(800)
        
        (10%)Percentage of revenues
        
        74%
        
        66%
        
        
        
        
        
        79%
        
        88%
   16
    During the second quarter of fiscal 2008, Total operating expenses were 74% of revenue compared to 66% of revenue during the same quarter last year. In the first half of fiscal 2008, operating expenses were 79% of revenue and were 88% of revenue in the first half of fiscal 2007. The decrease is primarily the result of personnel and expense reduction actions taken during the last four quarters. We reduced operating expenses by $800,000 or10% for the first six months of fiscal 2008, as compared with the first six months of fiscal 2007. 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 increased by $117,000, or 15%, to $912,000 for the second quarter of fiscal 2008 from $795,000 for the second quarter of fiscal 2007.  Research and product development expenses decreased by $225,000  or 12%, in the first half of fiscal 2008 to $1.664 million from $1.889 million in the first half of fiscal 2007.  The decrease in research and development expenses is the result of consolidation of our product research into Suzhou facility. Marketing.  Marketing expenses consist primarily of costs related to sales and marketing personnel, public relations and promotional materials. Marketing expenses of $460,000 in the second quarter of fiscal 2008 were $87,000 lower or 16% than in the comparable period of fiscal 2007. First half of fiscal 2008 marketing expenses of $886,000 were $91,000 lower than the comparable period in fiscal 2007.  We expect marketing expenses to grow as we expand and develop our channels, launch additional lithium phosphate products, and continue our branding efforts.  General and Administrative. General and administrative expenses consist primarily of salaries and other related costs for finance, human resources, facilities, accounting, information technology, legal, and corporate-related expenses, including our China initiatives. General and administrative expenses totaled $2.014 million and $2.224 million for the second fiscal quarters of 2008 and 2007, respectively. General and administrative expenses decreased by $707,000, or 16%, to $3.693 million in the first half of fiscal 2008 from $4.400 million in the first half of fiscal 2007. The decrease was largely due to cost reduction in audit related expenses and insurance premiums. Depreciation and Amortization.  Depreciation and amortization expenses were $280,000 and $225,000 for the second quarters of fiscal 2008 and 2007, respectively. Depreciation and amortization expenses were $453,000 and $406,000 in the first halves of fiscal 2008 and 2007 respectively.  The increase in depreciation expense relates to recent purchases of property, plant, and equipment in the U.S and in China. Share based compensation.  Share based compensation expenses were $450,000 and $442,000 for the second quarters of fiscal 2008 and 2007, respectively. Share based compensation expenses were $901,000 and $706,000 for the first halves of fiscal 2008 and 2007, respectively. The increase in share based compensation expense relates to option share grants during the past 12 months. Liquidity and Capital Resources Liquidity At September 30, 2007, the Company's principal sources of liquidity were cash and cash equivalents of $2.5 million. The Company expects our sources of liquidity will not be sufficient for the remaining fiscal year. The Company anticipates product sales during fiscal 2008 from the N-Charge ® Power System and the Segway pack, which are subject to seasonal fluctuations and the sale of the U-Charge ® Power System will be insufficient to cover the Companys operating expenses. Management depends upon our ability to periodically arrange for additional equity or debt financing to meet our liquidity requirements. Unless our product sales are greater than management currently forecasts or there are other changes to our business plan, we will need to arrange for additional financing within the next three to six months to fund operating and capital needs. This financing could take the form of debt or
equity. Given our historical operating results and the amount of our existing debt, as well as the other factors, we 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,  17
    and other adverse developments. These events could have a negative impact on the Companys available liquidity sources during the remaining fiscal year. 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, 2007 consolidated financial statements that there is substantial doubt about our ability to continue as a going concern. We presently have no further commitments for financing by Mr. Carl Berg, chairman of our Board of Directors and our principal shareholder, or any other source. If we are unable to obtain financing from Mr. Berg or others on terms acceptable to us, or at all, we may be forced to cease all operations and liquidate our assets. 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 fiscal 2008. The following table summarizes our statement of cash flows for the six months ended September 30, 2007 and 2006: Six Months Ended September 30,(dollars in thousands)
        2007
        
        2006Net cash flows provided by (used in)Operating activities
        $                        (4,873)
        
        $                (12,232)Investing activities
        (555)
        
        (726)Financing activities
        7,000
        
        15,119Effect of foreign exchange rates
        (223)
        
        10Net increase in cash and cash equivalents
        $                           1,349
        
        $                       2,071
  Our use of cash from operations the first six months of fiscal 2008 and fiscal 2007 was $5.096 million and $12.332 million, respectively. The cash used for operating activities during the first six months of our fiscal 2008 operating activities was primarily for operating losses and working capital. Cash used for operating losses in the first six months of fiscal 2008 decreased from the same period of fiscal 2007 by $7.459 million. Working capital in the first six months of fiscal 2008 was less than working capital in the first six months of fiscal 2007 by $1.1 million. The increase in working capital was primarily due to an increase in manufacturing of inventory from increased production volumes. In the first six months of fiscal 2008, we had a net decrease in cash used in investing activities of $171,000, as compared to the first six months of fiscal 2007. Cash used in investing activities during the first six months of fiscal 2008 relates to purchases of equipment domestically and in China. We obtained cash from financing activities of $7.000 million and $15.119 million during the first six months of fiscal 2008 and 2007, respectively. The financing activities in the first six months of fiscal 2008 were from issuances of common stock totaling $7.0 million to West Coast Venture Capital and Berg and Berg Enterprises, LLC., affiliates of Mr. Berg. As a result of the above, we had a net increase in cash and cash equivalents of $1.349 million during the first six months of fiscal 2008. Capital Commitments and Debt At September 30, 2007, we had commitments for capital expenditures for the next 12 months of approximately $637,000 relating to manufacturing equipment. We may require additional capital expenditures in order to meet greater demand levels for our products than are currently anticipated and/or to support our operations in China.  18
    Our cash obligations for short-term, long-term debt and interest, gross of unaccreted discount, consisted of the following: (Dollars in thousands)
        September 30, 20071998 long-term debt to Berg & Berg
        $                                                14,9502001 long-term debt to Berg & Berg
        20,0002005 long-term debt to third-party
        20,000Interest on long-term debt
        19,963Current portion of interest on long-term debt
        121Total
        $                                                75,034
   Repayment obligations of short-term and long-term debt principal as of September 30, 2007 are: Fiscal year(Dollars in thousands)
        2008
        
        2009
        
        2010
        
        2011
        
        2012
        
        Thereafter
        
        TotalPrincipal repayment
        $   -
        
        $34,950
        
        $   -
        
        $20,000
        
        $   -
        
        -
        
        $54,950
  If not converted to common stock, the redemption obligation for the Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock is $8.6 million. 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. The preferred shares are currently outstanding and subject to redemption or conversion at the holders discretion. If cash flow from operations is not adequate to meet debt obligations, additional debt or equity financing will be required. There can be no assurance that we could obtain the additional financing. 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, 2007 our scheduled principal, interest and other contractual annual cash obligations due for each of the periods indicated below (in thousands): Payment Due by PeriodContractual Obligations
        
        Total
        
        Less than One Year
        
        1-2 Years
        
        3-5 Years
        
        More than 5 YearsLong-term debt obligations
        
        $ 75,034
        
        $121
        
        $  54,913
        
        $20,000
        
        $                  -Operating lease obligations
        
        1,313
        
        565
        
        683
        
        64
        
        1Purchase obligations
        
        8,857
        
        8,857
        
        -
        
        -
        
        -Redemption of Convertible Preferred Stock
        
        8,610
        
        8,610
        
        -
        
        -
        
        -Total
        
        $ 93,814
        
        $ 18,153
        
        $  55,596
        
        $ 20,064
        
        $                   1
   19
     CAUTIONARY STATEMENTS AND RISK FACTORS Several of the matters discussed in this Report contain forward-looking statements that involve risks and uncertainties. Factors associated with the forward-looking statements that could cause actual results to differ from those projected or forecasted in this Report are included in the statements below. In addition to other information contained in this Report, you should carefully consider the following cautionary statements and risk factors. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, financial condition, and results of operations could suffer. In that event, the trading price of our common stock could decline, and you may lose all or part of your
investment in our common stock. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. RISKS RELATED TO OUR BUSINESS There is doubt about our ability to continue as a going concern We have experienced significant operating losses in the current and prior years. At September 30, 2007 our principal sources of liquidity were cash and cash equivalents of $2.5 million. Although Mr. Berg may continue to fund the Companys operations he is under no obligation to do so. We intend to improve our liquidity by the continued monitoring and reduction of manufacturing, facility and administrative costs. However, notwithstanding these efforts, we do not expect that our cash on hand and cash generated by operations will be sufficient to fund our operating and capital needs beyond the next three months. 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, 2007 consolidated financial statements that there is substantial doubt about our ability to continue as
a going concern. We presently have no further commitments for financing by Mr. Berg or any other source. If we are unable to obtain financing from Mr. Berg or others on terms acceptable to us, or at all, we may be forced to cease all operations and liquidate our assets. We have encountered problems in our production processes that have limited our ability at times to produce sufficient batteries to meet the demands of our customers. If these issues recur and we are unable to timely resolve these problems, our inability to produce batteries will have a material adverse impact on our ability to grow revenues and maintain our customer base. During fiscal 2006 we experienced problems in our production processes that limited our ability to produce a sufficient number of batteries to meet the demands of our customers. These production issues have had a negative impact on gross margins as manufacturing yields have suffered. Any inability to timely produce batteries may have a material adverse impact on our ability to grow revenues and maintain our customer base. Our limited financial resources could materially affect our business, our ability to commercially exploit our technology and our ability to respond to unanticipated development, and could place us at a disadvantage to our competitors. Currently, we do not have sufficient capital resources, sales and gross profit to generate the cash flows required to meet our operating and capital needs. As a consequence, one of our primary objectives has been to reduce expenses and overhead, thus limiting the resources available to the development and commercialization of our technology. Our limited financial resources could materially affect our ability, and the pace at which, we are able to commercially exploit our lithium phosphate technology. For example, it could: 
        limit the research and development resources we are able to commit to the further development of our technology and the development of products that can be commercially exploited in our marketplace;
 
        limit the sales and marketing resources that we are able to commit to the marketing of our technology;
  20
    
        have an adverse impact on our ability to attract top-tier companies as our technology and marketing partners;
 
        have an adverse impact on our ability to employ and retain qualified employees with the skills and expertise necessary to implement our business plan;
 
        make us more vulnerable to failure to achieve our forecasted results, economic downturns, adverse industry conditions or catastrophic external events;
 
        limit our ability to withstand competitive pressures and reduce our flexibility in planning for, or responding to, changing business and economic conditions; and
 
        place us at a disadvantage to our competitors that have greater financial resources than we have.
 We have a history of losses and an accumulated deficit and may never achieve or sustain significant revenues or profitability. We have incurred operating losses each year since our inception in 1989 and had an accumulated deficit of $530 million as of September 30, 2007. We have sustained recurring losses related primarily to the research and development and marketing of our products combined with the lack of sufficient sales to provide for these needs. We anticipate that we will continue to incur operating losses and negative cash flows during fiscal 2008. We may never achieve or sustain sufficient revenues or profitability in the future. If we continue to experience significant losses we may be unable to maintain sufficient liquidity to provide for our operating needs. We reported a net loss available to common stockholders of $5.0 million and $9.4 million for the three- and six-month periods ended September 30, 2007, respectively.  We have reported a net loss available to common stockholders of $22.4 million for the fiscal year ended March 31, 2007 and a net loss available to common stockholders of $32.9 million for the fiscal year ended March 31, 2006. If we cannot achieve a competitive cost structure, achieve profitability and access the capital markets on acceptable terms, we will be unable to fund our obligations and sustain our operations and may be required to liquidate our assets. Our working capital requirements may increase beyond those currently anticipated. We have planned for an increase in sales and, if we experience sales in excess of our plan, our working capital needs and capital expenditures would likely increase from that currently anticipated. Our ability to meet this additional customer demand would depend on our ability to arrange for additional equity or debt financing since it is likely that cash flow from sales will lag behind these increased working capital requirements. Our indebtedness and other obligations are substantial and could materially affect our business and our ability to incur additional debt to fund future needs. We have and will continue to have a significant amount of indebtedness and other obligations. As of September 30, 2007, we had approximately $73.1 million of total consolidated indebtedness. Included in this amount are $34.3 million of loans outstanding to an affiliate, $20 million of accumulated interest associated with those loans and $18.8 million of principal and interest outstanding with a third party finance company. Our substantial indebtedness and other obligations could negatively impact our operations in the future. For example, it could: 
        limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes;
 
        require us to dedicate a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the funds available to us for other purposes;
  21
    
        make us more vulnerable to failure to achieve our forecasted results, economic downturns, adverse industry conditions or catastrophic external events, limit our ability to withstand competitive pressures and reduce our flexibility in planning for, or responding to, changing business and economic conditions; and
 
        place us at a disadvantage to our competitors that have relatively less debt than we have.
 All of our assets are pledged as collateral under our loan agreements. Our failure to meet the obligations under our loan agreements could result in foreclosure of our assets. All of our assets are pledged as collateral under various loan agreements with Mr. Berg or related entities. If we fail to meet our obligations pursuant to these loan agreements, these lenders may declare all amounts borrowed from them to be due and payable together with accrued and unpaid interest. If this were to occur, we would not have the financial resources to repay our debt and these lenders could proceed against our assets. We depend on a small number of customers for our revenues, and our results of operations and financial condition could be harmed if we were to lose the business of any one of them. To date, our existing purchase orders in commercial quantities are from a limited number of customers. During the three-month period ended September 30, 2007, Segway Inc., D&H Distributing Co., Inc., and Enova Systems contributed 64%, 9%, and 4%, of our revenues, respectively. We anticipate that sales of our products to a limited number of key customers will continue to account for a significant portion of our total revenues. We do not have long-term agreements with any of our customers and do not expect to enter into any long-term agreements in the near future. As a result, we face the substantial risk that one or more of the following events could occur: 
        reduction, delay or cancellation of orders from a customer;
 
        development by a customer of other sources of supply;
 
        selection by a customer of devices manufactured by one of our competitors for inclusion in future product generations;
 
        loss of a customer or a disruption in our sales and distribution channels; or
 
        failure of a customer to make timely payment of our invoices.
 If we were to lose one or more customers, or if we were to lose revenues due to a customers inability or refusal to continue to purchase our batteries, our business, results of operations and financial condition could be harmed. Our business will be adversely affected if our Saphion ® technology batteries are not commercially accepted. We are researching and developing batteries based upon phosphate chemistry. Our batteries are designed and manufactured as components for other companies and end-user customers. Our success depends on the acceptance of our batteries and the products using our batteries in their markets. Technical issues may arise that may affect the acceptance of our products by our customers. Market acceptance may also depend on a variety of other factors, including educating the target market regarding the benefits of our products. Market acceptance and market share are also affected by the timing of market introduction of competitive products. If we, or our customers, are unable to gain any significant market acceptance for lithium phosphate technology-based batteries, our business will be adversely affected. It is too early to determine if lithium phosphate technology-based batteries will achieve significant market acceptance. If we are unable to develop, manufacture and market products that gain wide customer acceptance, our business will be adversely affected.  22
    The process of developing our products is complex and failure to anticipate our customers changing needs and to develop products that receive widespread customer acceptance could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will eventually result in products that the market will accept. After a product is developed, we must be able to manufacture sufficient volumes quickly and at low costs. To accomplish this, we must accurately forecast volumes, mix of products and configurations that meet customer requirements, and we may not succeed. If our products fail to perform as expected, we could lose existing and future business, and our ability to develop, market and sell our batteries could be harmed. If our products, when introduced, do not perform as expected, our reputation could be severely damaged, and we could lose existing or potential future business. This performance failure may have the long-term effect of harming our ability to develop, market and sell our products. Our failure to cost-effectively manufacture our technologically complex batteries in commercial quantities which satisfy our customers product specifications and their expectations for product quality and delivery could damage our customer relationships and result in significant lost business opportunities for us. To be successful, we must cost-effectively manufacture commercial quantities of our technologically complex batteries that meet our customer specifications for quality and timely delivery. To facilitate commercialization of our products, we will need to further reduce our manufacturing costs, which we intend to do through the effective utilization of manufacturing partners and continuous improvement of our manufacturing and development operations in our wholly foreign owned enterprises in China. We currently manufacture our batteries and assemble our products in China. We are dependent on the performance of our manufacturing partners, as well as our own manufacturing operations to manufacture and deliver our products to our customers. We have experienced production process issues, which have limited our ability to produce a sufficient number of batteries to meet current demand. If we fail to correct these
issues in a manner that allows us to meet customer demand, or if any of our manufacturing partners are unable to manufacture products in commercial quantities on a timely and cost-effective basis, we could lose our customers and adversely impact our ability to attract future customers. In addition to being used in our own product lines, our battery cells are intended to be incorporated into other products. If we do not form effective arrangements with OEMs to commercialize these products, our profitability could be impaired. Our business strategy contemplates that we will be required to rely on assistance from OEMs to gain market acceptance for our products. We therefore will need to identify acceptable OEMs and enter into agreements with them. Once we identify acceptable OEMs and enter into agreements with them, we will need to meet these companies requirements by developing and introducing new products and enhanced or modified versions of our existing products on a timely basis. OEMs often require unique configurations or custom designs for batteries, which must be developed and integrated into their product well before the product is launched. This development process not only requires substantial lead-time between the commencement of design efforts for a customized power system and the commencement of volume shipments of the power systems to the customer, but also requires the cooperation and assistance of the OEMs
for purposes of determining the requirements for each specific application. We may have technical issues that arise that may affect the acceptance of our product by OEMs. If we are unable to design, develop, and introduce products that meet OEMs requirements, we may lose opportunities to enter into additional purchase orders and our reputation may be damaged. As a result, we may not receive adequate assistance from OEMs or pack assemblers to successfully commercialize our products, which could impair our profitability. Failure to implement an effective licensing business strategy will adversely affect our revenue, cash flow and profitability.  23
    Our long-term business strategy anticipates achieving significant revenue from the licensing of our intellectual property assets, such as our lithium phosphate technology. We have not entered into any licensing agreements for our lithium phosphate technology. Our future operating results could be adversely affected by a variety of factors including: 
        our ability to secure and maintain significant licensees of our proprietary technology;
 
        the extent to which our future licensees successfully incorporate our technology into their products;
 
        the acceptance of new or enhanced versions of our technology;
 
        the rate at which our licensees manufacture and distribute their products to OEMs; and
 
        our ability to secure one-time license fees and ongoing royalties for our technology from licensees.
 Our future success will also depend on our ability to execute our licensing operations simultaneously with our other business activities. If we fail to substantially expand our licensing activities while maintaining our other business activities, our results of operations and financial condition will be adversely affected. The fact that we depend on a sole source supplier or a limited number of suppliers for key raw materials may delay our production of batteries. We depend on a sole source supplier or a limited number of suppliers for certain key raw materials used in manufacturing and developing our power systems. We generally purchase raw materials pursuant to purchase orders placed from time to time and have no long-term contracts or other guaranteed supply arrangements with our sole or limited source suppliers. As a result, our suppliers may not be able to meet our requirements relative to specifications and volumes for key raw materials, and we may not be able to locate alternative sources of supply at an acceptable cost. In the past, we have experienced delays in product development due to the delivery of nonconforming raw materials from our suppliers. If in the future we are unable to obtain high quality raw materials in sufficient quantities, on competitive pricing terms and on a timely basis, it may delay battery production, impede our ability to fulfill
existing or future purchase orders and harm our reputation and profitability. We have four key executives, the loss of any of which could harm our business. Without qualified executives, we face the risk that we will not be able to effectively run our business on a day-to-day basis or execute our long-term business plan. We do not have key man life insurance policies with respect to any of our key members of management. Our ongoing manufacturing and development operations in China are complex and having these remote operations may divert managements attention, lead to disruptions in operations and delay implementation of our business strategy. We have relocated most of our manufacturing and development operations to China. We may not be able to find or retain suitable employees in China and we may have to train personnel to perform necessary functions for our manufacturing, senior management and development operations. This may divert managements attention, lead to disruptions in operations and delay implementation of our business strategy, all of which could negatively impact our profitability. We expect to sell a significant portion of our products to and derive a significant portion of our licensing revenues from customers located outside the United States. Foreign government regulations, currency fluctuations and increased costs associated with international sales could make our products and licenses unaffordable in foreign markets, which would reduce our future profitability.  24
    We expect that international sales of our product and licenses, as well as licensing royalties, represent a significant portion of our sales potential. International business can be subject to many inherent risks that are difficult or impossible for us to predict or control, including: 
        changes in foreign government regulations and technical standards, including additional regulation of rechargeable batteries, technology, or the transport of lithium or phosphate, which may reduce or eliminate our ability to sell or license in certain markets;
 
        foreign governments may impose tariffs, quotas, and taxes on our batteries or our import of technology into their countries;
 
        requirements or preferences of foreign nations for domestic products could reduce demand for our batteries and our technology;
 
        fluctuations in currency exchange rates relative to the U.S. dollar could make our batteries and our technology unaffordable to foreign purchasers and licensees or more expensive compared to those of foreign manufacturers and licensors;
 
        longer payment cycles typically associated with international sales and potential difficulties in collecting accounts receivable, which may reduce the future profitability of foreign sales and royalties;
 
        import and export licensing requirements in Europe and other regions, including China, where we intend to conduct business, which may reduce or eliminate our ability to sell or license in certain markets; and
 
        political and economic instability in countries, including China, where we intend to conduct business, which may reduce the demand for our batteries and our technology or our ability to market our batteries and our technology in those countries
 These risks may increase our costs of doing business internationally and reduce our sales and royalties or future profitability. We may need to expand our employee base and operations in order to effectively distribute our products commercially, which may strain our management and resources and could harm our business. To implement our growth strategy successfully, we have had to increase our staff in China, with personnel in manufacturing, engineering, sales, marketing, and product support capabilities, as well as third party and direct distribution channels. However, we face the risk that we may not be able to attract new employees to sufficiently increase our staff or product support capabilities, or that we will not be successful in our sales and marketing efforts. Failure in any of these areas could impair our ability to execute our plans for growth and adversely affect our future profitability. Competition for personnel, in particular for product development and product implementation personnel, is intense, and we may have difficulty attracting the personnel necessary to effectively operate our business. We believe that our future success will depend in large part on our ability to attract and retain highly skilled technical, managerial, and marketing personnel who are familiar with and experienced in the battery industry. If we cannot attract and retain experienced sales and marketing executives, we may not achieve the visibility in the marketplace that we need to obtain purchase orders, which would have the result of lowering our sales and earnings. We compete in the market for personnel against numerous companies, including larger, more established competitors who have significantly greater financial resources than we do. We cannot be certain that we will be successful in attracting and retaining the skilled personnel necessary to operate our business effectively in the future. International political events and the threat of ongoing terrorist activities could interrupt manufacturing of our batteries and our products at our OEM facilities or our own facilities and cause us to lose sales and marketing opportunities.  25
    The terrorist attacks that took place in the United States on September 11, 2001, along with the U.S. military campaigns against terrorism in Iraq, Afghanistan, and elsewhere, and continued violence in the Middle East have created many economic and political uncertainties, some of which may materially harm our business and revenues. International political instability resulting from these events could temporarily or permanently disrupt manufacturing of our batteries and products at our OEM facilities or our own facilities in Asia and elsewhere, and have an immediate adverse impact on our business. Since September 11, 2001, some economic commentators have indicated that spending on capital equipment of the type that use our batteries has been weaker than spending in the economy as a whole, and many of our customers are in industries that also are viewed as under-performing in the overall economy, such as
the telecommunications, industrial, and utility industries. The long-term effects of these events on our customers, the market for our common stock, the markets for our products, and the U.S. economy as a whole are uncertain. Terrorist activities could temporarily or permanently interrupt our manufacturing, development, sales and marketing activities anywhere in the world. Any delays also could cause us to lose sales and marketing opportunities, as potential customers would find other vendors to meet their needs. The consequences of any additional terrorist attacks, or any expanded armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets or our business. If we are sued on a product liability claim, our insurance policies may not be sufficient. Although we maintain general liability insurance and product liability insurance, our insurance may not cover all potential types of product liability claims to which manufacturers are exposed or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could harm our business. Our patent applications may not result in issued patents, which would have a material adverse effect on our ability to commercially exploit our products. Patent applications in the United States are maintained in secrecy until the patents are issued or are published. Since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we are the first creator of inventions covered by pending patent applications or the first to file patent applications on these inventions. We also cannot be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford protection against a competitor. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S. patents will be issued. Furthermore, if these patent applications issue, some foreign countries provide
significantly less effective patent enforcement than in the United States. The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. Accordingly, we cannot be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may be issued to us in the near future will afford protection against competitors with similar technology. In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our operations. If we cannot protect or enforce our existing intellectual property rights or if our pending patent applications do not result in issued patents, we may lose the advantages of our research and manufacturing systems.  26
    Our ability to compete successfully will depend on whether we can protect our existing proprietary technology and manufacturing processes. We rely on a combination of patent and trade secret protection, non-disclosure agreements and cross-licensing agreements. These measures may not be adequate to safeguard the proprietary technology underlying our batteries. Employees, consultants, and others who participate in the development of our products may breach their non-disclosure agreements with us, and we may not have adequate remedies in the event of their breaches. In addition, our competitors may be able to develop products that are equal or superior to our products without infringing on any of our intellectual property rights. We currently manufacture and export some of our products from China. The legal regime protecting intellectual property rights in China is weak. Because the Chinese legal system in
general, and the intellectual property regime in particular, are relatively weak, it is often difficult to enforce intellectual property rights in China. In addition, there are other countries where effective copyright, trademark and trade secret protection may be unavailable or limited. Accordingly, we may not be able to effectively protect our intellectual property rights outside of the United States. Intellectual property infringement claims brought against us could be time-consuming and expensive to defend, and if any of our products or processes is found to be infringing, we may not be able to procure licenses to use patents necessary to our business at reasonable terms, if at all. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. While we are currently engaged in one intellectual property proceeding alleging the Companys SAPHION ® I cathode material infringes two patents owned by the University of Texas, while the Company believes it has strong defenses to such allegations, an adverse decision could force us to do one or more of the following: 
        stop selling, incorporating, or using our products that use the SAPHION ® I cathode material challenged intellectual property;
 
        pay damages for the use of SAPHION ® I cathode material;
 
        obtain a license to sell or use the SAPHION ® I cathode material, which license may not be available on reasonable terms, or at all; or
 
        redesign those products or manufacturing processes that use the SAPHION ® I cathode material, which may not be economically or technologically feasible.
 We may become involved in more litigation and proceedings in the future. In the future we may be subject to claims or an inquiry regarding our alleged unauthorized use of a third partys intellectual property. An adverse outcome in such future litigation could result in similar risks as noted above with respect to the third partys intellectual property. Whether or not an intellectual property litigation claim is valid, the cost of responding to it, in terms of legal fees and expenses and the diversion of management resources, could be expensive and harm our business. Risks Associated with Doing Business in China Since our products are manufactured in China and we have transferred additional operations to China, we face risks if China loses Normal Trade Relations status with the United States. We manufacture and export our products from China. Our products sold in the United States are currently not subject to U.S. import duties. On September 19, 2000, the United States Senate voted to permanently normalize trade with China, which provides a favorable category of United States import duties. In addition, on December 11, 2001, China was accepted into the World Trade Organization (WTO), a global international organization that regulates international trade. As a result of opposition to certain policies of the Chinese government and Chinas growing trade surpluses with the United States, there has been, and in the future may be, opposition to the extension of Normal Trade Relations (NTR) status for China. The loss of NTR status for China, changes in current tariff structures or adoption in the United States of other trade policies adverse to China could have an adverse
affect on our business.  27
    Furthermore, our business may be adversely affected by the diplomatic and political relationships between the United States and China. These influences may adversely affect our ability to operate in China. If the relationship between the United States and China were to materially deteriorate, it could negatively impact our ability to control our operations and relationships in China, enforce any agreements we have with Chinese manufacturers or otherwise deal with any assets or investments we may have in China. Because the Chinese legal system in general, and the intellectual property regime in particular, are relatively weak, we may not be able to enforce intellectual property rights in China and elsewhere. We currently manufacture and export our products from China. The legal regime protecting intellectual property rights in China is weak. Because the Chinese legal system in general, and the intellectual property regime in particular, are relatively weak, it is often difficult to enforce intellectual property rights in China. Enforcing agreements and laws in China is difficult or may be impossible as China does not have a comprehensive system of laws. We are dependent on our agreements with our Chinese manufacturing partners. Enforcement of agreements may be sporadic and implementation and interpretation of laws may be inconsistent. The Chinese judiciary is relatively inexperienced in interpreting agreements and enforcing the laws, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate law exists in China, it may be impossible to obtain swift and equitable enforcement of such law, or to obtain enforcement of a judgment by a court of another jurisdiction. The government of China may change or even reverse its policies of promoting private industry and foreign investment, in which case our assets and operations may be at risk. China is a socialist state, which since 1949 has been, and is expected to continue to be, controlled by the Communist Party of China. Our existing and planned operations in China are subject to the general risks of doing business internationally and the specific risks related to the business, economic and political conditions in China, which include the possibility that the central government of China will change or even reverse its policies of promoting private industry and foreign investment in China. Many of the current reforms which support private business in China are unprecedented or experimental. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities of per capita wealth among citizens of China and between regions within China, could also lead to further readjustment of the governments
reform measures. It is not possible to predict whether the Chinese government will continue to be as supportive of private business in China, nor is it possible to predict how future reforms will affect our business. The government of China continues to exercise substantial control over the Chinese economy which could have a negative impact on our business. The government of China has exercised and continues to exercise substantial control over virtually every section of the Chinese economy through regulation and state ownership. Chinas continued commitment to reform and the development of a vital private sector in that country have, to some extent, limited the practical effects of the control currently exercised by the government over individual enterprises. However, the economy continues to be subject to significant government controls, which, if directed towards our business activities, could have a significant adverse impact on us. For example, if the government were to limit the number of foreign personnel who could work in the country, substantially increase taxes on foreign businesses or impose any number of other possible types of limitations on our operations, the impact would be significant.  28
    Changes in Chinas political and economic policies could harm our business. The economy of China has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development of China, we cannot predict the future direction of these economic reforms or the effects these measures may have on our business, financial position or results of operations. In addition, the Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development (OECD). These differences include: 
        economic structure,
 
        level of government involvement in the economy,
 
        level of development,
 
        level of capital reinvestment,
 
        control of foreign exchange,
 
        methods of allocating resources, and
 
        balance of payments position.
 As a result of these differences, our operations, including our current manufacturing operations in China, may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to the OECD member countries. Business practices in China may entail greater risk and dependence upon the personal relationships of senior management than is common in North America and therefore some of our agreements with other parties in China could be difficult or impossible to enforce. The business structure of China is, in some respects, different from the business culture in Western countries and may present some difficulty for Western investors reviewing contractual relationships among companies in China and evaluating the merits of an investment. Personal relationships among business principals of companies and business entities in China are very significant in the business culture. In some cases, because so much reliance is based upon personal relationships, written contracts among businesses in China may be less detailed and specific than is commonly accepted for similar written agreements in Western countries. In some cases, material terms of an understanding are not contained in the written agreement but exist as oral agreements only. In other cases, the terms of transactions which may involve material amounts of money are not documented at all. In addition, in contrast to
Western business practices where a written agreement specifically defines the terms, rights and obligations of the parties in a legally-binding and enforceable manner, the parties to a written agreement in China may view that agreement more as a starting point for an ongoing business relationship which will evolve and require ongoing modification. As a result, written agreements in China may appear to the Western reader to look more like outline agreements that precede a formal written agreement. While these documents may appear incomplete or unenforceable to a Western reader, the parties to the agreement in China may feel that they have a more complete understanding than is apparent to someone who is only reading the written agreement without having attended the negotiations. As a result, contractual arrangements in China may be more difficult to review and understand. Also, despite legal developments in China over the past 20 years, adequate laws, comparable with Western standards,
do not exist in all areas and it is unclear how many of our business arrangements would be interpreted or enforced by a court in China. Our operations could be materially interrupted, and we may suffer a large amount of loss, in the case of fire, casualty or theft at one of our manufacturing or other facilities.  29
    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 those disaster. The Company has obtained insurance in China to minimize this risk. The system of taxation in China is uncertain and subject to unpredictable change that could affect our profitability. Many tax rules are not published in China and those that are published can be ambiguous and contradictory leaving a considerable amount of discretion to local tax authorities. China currently offers tax and other preferential incentives to encourage foreign investment. However, the countrys tax regime is undergoing review and there is no assurance that such tax and other incentives will continue to be made available. It is uncertain whether we will be able to recover value-added taxes imposed by the Chinese taxing authority. Chinas turnover tax system consists of value-added tax (VAT), consumption tax and business tax. Export sales are exempted under VAT rules and an exporter who incurs VAT on purchase or manufacture of goods should be able to claim a refund from Chinese tax authorities. However, due to a reduction in the VAT export refund rate of some goods, exporters might bear part of the VAT they incurred in conjunction with the exported goods. In 2003, changes to the Chinese value-added tax system were announced affecting the recoverability of input VAT beginning January 1, 2004. Our VAT expense will depend on the reaction of both our suppliers and customers. Continued efforts by the Chinese government to increase tax revenues could result in revisions to tax laws or their interpretation, which could increase our VAT and various tax liabilities. Any recurrence of severe acute respiratory syndrome (SARS), avian flu, or another widespread public health problem, could adversely affect our business and results of operations. A renewed outbreak of SARS, avian flu, or another widespread public health problem in China, where we have moved our manufacturing operations and may move additional operations, could have a negative effect on our operations. Our operations may be impacted by a number of health-related factors, including the following: 
        quarantines or closures of some of our manufacturing or other facilities which would severely disrupt our operations, or
 
        the sickness or death of key officers or employees of our manufacturing or other facilities.
 Any of the foregoing events or other unforeseen consequences of public health problems in China could adversely affect our business and results of operations. Risks Associated with Our Industry If competing technologies that outperform our batteries were developed and successfully introduced, then our products might not be able to compete effectively in our targeted market segments. Rapid and ongoing changes in technology and product standards could quickly render our products less competitive, or even obsolete. Other companies who are seeking to enhance traditional battery technologies, such as lead-acid and nickel-cadmium, have recently introduced or are developing batteries based on nickel metal-hydride, liquid lithium phosphate and other emerging and potential technologies. These competitors are engaged in significant development work on these various battery systems, and we believe that much of this effort is focused on achieving higher energy densities for low power applications such as portable electronics. One or more new, higher energy rechargeable battery technologies could be introduced which could be directly competitive with, or superior to, our technology. The capabilities of many of these competing technologies have improved over the past several years. Competing
technologies that outperform our batteries could be developed and successfully introduced, and as a result, there is a risk that our products may not be able to compete effectively in our targeted market segments.  30
    We have invested in research and development of next-generation technology in energy solutions. If we are not successful in developing and commercially exploiting new energy solutions based on new materials, or we experience delays in the development and exploitations of new energy solutions, compared to our competitors, our future growth and revenues will be adversely affected. Our principal competitors have greater financial and marketing resources than we do and they may therefore develop batteries similar or superior to ours or otherwise compete more successfully than we do. Competition in the rechargeable battery industry is intense. The industry consists of major domestic and international companies, most of which have financial, technical, marketing, sales, manufacturing, distribution and other resources substantially greater than ours. There is a risk that other companies may develop batteries similar or superior to ours. In addition, many of these companies have name recognition, established positions in the market, and long-standing relationships with OEMs and other customers. We believe that our primary competitors are existing suppliers of cylindrical lithium-ion, nickel cadmium, nickel metal-hydride and in some cases, non-SLI lead-acid batteries. These suppliers include Sanyo, Matsushita Industrial Co., Ltd. (Panasonic), Sony, Toshiba, SAFT E-One Moli Energy, as well as numerous lead-acid manufacturers throughout the world. Most of these companies are very large and
have substantial resources and market presence. We expect that we will compete against manufacturers of other types of batteries in our targeted application segments. There is also a risk that we may not be able to compete successfully against manufacturers of other types of batteries in any of our targeted applications. Laws regulating the manufacture or transportation of batteries may be enacted which could result in a delay in the production of our batteries or the imposition of additional costs that could harm our ability to be profitable. At the present time, international, federal, state or local laws do not directly regulate the storage, use and disposal of the component parts of our batteries. However, laws and regulations may be enacted in the future which could impose environmental, health and safety controls on the storage, use and disposal of certain chemicals and metals used in the manufacture of lithium polymer batteries. Satisfying any future laws or regulations could require significant time and resources from our technical staff and possible redesign which may result in substantial expenditures and delays in the production of our product, all of which could harm our business and reduce our future profitability. The transportation of lithium phosphate and lithium-ion batteries is regulated both domestically and internationally. Under recently revised United Nations recommendations and as adopted by the International Air Transport
Association (IATA), our N-Charge ® Power System (Model VNC-65) and N-Charge ® Power System II are exempt from a Class 9 designation for transportation, while our N-Charge ® Power System (Model VNC-130), and U-Charge ® Power System currently fall within the level such that they are not exempt and require a Class 9 designation for transportation. The revised United Nations recommendations are not U.S. law until such time as they are incorporated into the Department of Transportation (DOT) Hazardous Material Regulations. However, DOT has proposed new regulations harmonizing with the U.N. guidelines. At present it is not known if or when the proposed regulations would be adopted by the United States. While we fall under the equivalency levels for the United States and comply with all safety packaging requirements worldwide, future DOT or IATA regulations or enforcement policies could impose costly transportation requirements. In addition, compliance
with any new DOT and IATA approval process could require significant time and resources from our technical staff and, if redesign were necessary, could delay the introduction of new products. General Risks Associated with Stock Ownership Corporate insiders or their affiliates will be able to exercise significant control over matters requiring stockholder approval that might not be in the best interests of our stockholders as a whole. As of November 5, 2007, our officers, directors and their affiliates as a group beneficially owned approximately 55.4% of our outstanding common stock. Carl Berg, our chairman of the board, beneficially owns approximately 47.4% of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. The interest of our officers and directors, when acting in their capacity as stockholders, may lead them to:  31
    
        vote for the election of directors who agree with the incumbent officers or directors preferred corporate policy; or
 
        oppose or support significant corporate transactions when these transactions further their interest as incumbent officers or directors, even if these interests diverge from their interests as stockholders per se and thus from the interests of other stockholders.
 Some provisions of our charter documents may make takeover attempts difficult, which could depress the price of our stock and limit the price that potential acquirers may be willing to pay for our common stock. Our board of directors has the authority, without any action by the outside stockholders, to issue additional shares of our preferred stock, which shares may be given superior voting, liquidation, distribution, and other rights as compared to those of our common stock. The rights of the holders of our capital stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of additional shares of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. These provisions may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price, may decrease the market price and may infringe upon the voting and other rights of the holders of our common stock. At any given time we might not meet the continued listing requirements of The Nasdaq SmallCap Market. Given the volatility of our stock and trends in the stock market in general, at any given time we might not meet the continued listing requirements of The Nasdaq SmallCap Market. Among other requirements, Nasdaq requires the minimum bid price of a companys registered shares to be $1.00. On November 5, 2007, the closing price of our common stock was $2.27. If we are not able to maintain the requirements for continued listing on The Nasdaq SmallCap Market, it could have a materially adverse effect on the price and liquidity of our common stock. Our stock price is volatile, which could result in a loss of your investment. The market price of our common stock has been and is likely to continue to be highly volatile. Factors that may have a significant effect on the market price of our common stock include the following: 
        fluctuation in our operating results,
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        announcements of technological innovations or new commercial products by us or our competitors,
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        failure to achieve operating results projected by securities analysts,
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        governmental regulation,
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        developments in our patent or other proprietary rights or our competitors developments,
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        our relationships with current or future collaborative partners, and
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        other factors and events beyond our control.
 In addition, the stock market in general has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance. As a result of this potential stock price volatility, investors may be unable to sell their shares of our common stock at or above the cost of their purchase prices. In addition, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were the subject of securities class action litigation, this could result in substantial costs, a diversion of our managements attention and resources and harm to our business and financial condition.  32
    Future sales of currently outstanding shares could adversely affect our stock price. The market price of our common stock could drop as a result of sales of a large number of shares in the market or in response to the perception that these sales could occur. In addition, these sales might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. We had outstanding 112,440,428 shares of common stock as of September 30, 2007 and have 1,803,144 shares in treasury stock. The net of shares issued and outstanding as of September 30, 2007 is 110,637,284. In addition, at September 30, 2007, we had 12,901,614 shares of our common stock reserved for issuance under warrants and stock options plans. In connection with the potential conversion of the Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock, issued on December 1, 2004, we may need to issue up to 2,174,242 and 1,454,392 shares,
respectively, of our common stock (based on a conversion price of $1.98 and $2.96, respectively). We do not intend to pay dividends on our common stock, and therefore stockholders will be able to recover their investment in our common stock, if at all, only by selling the shares of our stock that they hold. Some investors favor companies that pay dividends on common stock. We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and we do not anticipate paying cash dividends on our common stock in the foreseeable future. Because we may not pay dividends, a return on an investment in our stock likely depends on the ability to sell our stock at a profit. Our business is subject to changing regulations relating to corporate governance and public disclosure that has increased both our costs and the risk of noncompliance. Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the Commission, and NASDAQ, have recently issued new requirements and regulations and continue to develop additional regulations and requirements in response to recent laws enacted by Congress, most notably Section 404 of the Sarbanes-Oxley Act of 2002. Our efforts to comply with these new regulations have resulted in, and are likely to continue to result in, materially increased general and administrative expenses and a significant diversion of management time and attention from revenue-generating and cost-reduction activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our independent registered public accounting firm's audit of that assessment has required, and continues to require, the commitment of significant financial and managerial resources. There is no assurance that these efforts will be completed on a timely and successful basis. Because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. In the event that our Chief Executive Officer, Chief Financial Officer, or independent registered public accounting firm determine that our internal controls over financial reporting are not effective as defined under Section 404 of the Sarbanes-Oxley Act of 2002, there may be a material adverse impact in investor perceptions and a decline in the market price of our stock.  33
    ITEM 3QUANTITATIVE 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 with an adjustable interest rate equal to the greater of 6.75% or the sum of the LIBOR rate plus 4.0% (9.88% at September 30, 2007), we entered into a rate cap agreement which caps the LIBOR rate at 5.5% (On October 8, 2007, the most recent adjustment date, the LIBOR rate was 5.12%) In addition, we are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. We also have long-term debt in the form of two loans to a stockholder, which mature in September 2008, and one loan to a third party finance company which matures in July 2010. The first loan to the stockholder has an adjustable rate of interest at 1.0% above the lender's borrowing rate (9% at September 30, 2007) and the second loan to the stockholder has a fixed interest rate of 8.0%. The loan to the third party finance company has a monthly floating interest rate as described above. Each 0.25% increase in interest on the adjustable rate loan would increase our annual interest expense by approximately $74,000. The table below presents principal amounts by fiscal year for our long-term and short-term debt:  (dollars in thousands)
        
        2008
        2009
        2010
        2011
        2012
        Thereafter
        TotalLiabilities:Fixed rate debt
        
        $             -
        20,000
        -
        -
        -
        -
        
        $         20,000Variable rate debt
        
        $             -
        14,950
        -
        -
        -
        -
        
        $         14,950Variable 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 Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported, within required time periods. Disclosure controls and procedures, include, without limitation, controls and procedures designed to ensure that 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). Material weakness in internal control over financial reporting A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control. Based upon this evaluation the Company concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports with the Commission.  34
    Changes in internal controls There was no change in our internal controls during the fiscal first six months of fiscal 2008 that has materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.  35
    PART IIOTHER INFORMATION ITEM 1LEGAL PROCEEDINGS  On January 31, 2007, Valence filed a lawsuit 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 recently granted Canadian Patents 2,483,918 and 2,466,366. The action is in the initial pleading state. 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 a lawsuit against us in the United States District Court for the Western District of Texas (Hydro-Quebec v. Valence Technology, Civil Action No. A06CA111). In its amended complaint filed April 13, 2006, Hydro-Quebec alleges that Saphion ® Technology, the technology utilized in all of our commercial products, infringes U.S. Patent No. 5,910,382 and 6,514,640 exclusively licensed to Hydro-Quebec. Hydro-Quebecs complaint seeks injunctive relief and monetary damages. The action is in the initial pleading state and we have filed a response denying the allegations in the amended complaint. The action has been stayed by the Court until a final determination by the USPTO in either of the reexaminations of the two University of Texas patents asserted in the case. The USPTO has stated in declaring the two reexaminations that there are serious questions as to the
patentability of the two patents. We are subject to, from time to time, various claims and litigation in the normal course of business. In our opinion, all pending legal matters are either covered by insurance or, if not insured, will not have a material adverse impact on our consolidated financial statements.  ITEM 1A.RISK FACTORS  Information regarding risk factors appears in Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations, and various risk factors faced by us are also discussed elsewhere in Item 2 of this report. In addition, risk factors are included in Item 1A of our Annual Report on Form 10-K for our fiscal year ending March 31, 2007, filed with the Commission on June 14, 2007. There are no material changes from the risk factors previously disclosed on our Annual Report on Form 10-K for the fiscal year ending March 31, 2007. 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  None. ITEM 5.OTHER INFORMATION  None. ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K  36
    (a)
        Exhibits
 EXHIBIT NO. 31.1
        
        Certification of Robert L. Kanode, Principal Executive Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.31.2
        
        Certification of Thomas F. Mezger, Principal Financial Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 193432.1
        
        Certification of Robert L. Kanode, Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
        
        Certification of Thomas F. Mezger, Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   37
    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.  Dated:  November 8, 2007
        
        By:/s/ Robert L. KanodeRobert L. KanodeChief Executive Officer (PrincipalExecutive Officer)By:/s/ Thomas F. MezgerThomas F. MezgerChief Financial Officer and AssistantSecretary (Principal Financial Officer)
    38
    EXHIBIT INDEX EXHIBIT NO. 31.1
        
        Certification of Robert L. Kanode, Principal Executive Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.31.2
        
        Certification of Thomas F. Mezger, Principal Financial Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 193432.1
        
        Certification of Robert L. Kanode, Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
        
        Certification of Thomas F. Mezger, Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.