**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****December 31, 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 ofIncorporation or  Organization)                   |   | (I.R.S. EmployerIdentification No.) |
|                                                                              |   |   |
| **12201  TECHNOLOGY BLVD., SUITE 150**                                            |   |   |
| **AUSTIN,  TEXAS**                                                                | ** ** | **78727** |
| (Address of Principal  Executive Offices)                                         |   | (Zip Code) |
|                                                                              |   |   |
| **(512)  527-2900**                                                               |
| (Registrant’s Telephone  Number, Including Area Code)                        |
|                                                                              |
|                                                                              |
| Former Name, Former  Address and Former Fiscal year, if Changed Since Last Report |

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes   x   No   o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer  o | Accelerated filer  x | Non-accelerated filer  o |
|--------------------------------------|--------------------------------|------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   o   No   x

 

| **Common Stock, $0.001 par value** | ** ** | **113,683,950**                         |
|------------------------------------|------------|-----------------------------------------|
| (Class)                            |       | (Outstanding at  February 1, 2008) |

 

 

----

 

**VALENCETECHNOLOGY, INC. AND SUBSIDIARIES**

 

**FORM 10-Q**

 

**FOR THEQUARTER ENDED DECEMBER 31, 2007**

 

**INDEX**

 
| ** **        | ** **                                                                                                                                                             | ** ** | **Pages**  |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **Part I.**  | **Financial Information**                                                                                                                                              | ** ** | ** ** |
| ** **        | ** **                                                                                                                                                             | ** ** | ** ** |
| Item  1.          | Financial Statements  (Unaudited)                                                                                                                                      |       |       |
|              |                                                                                                                                                                   |       |       |
|              | Condensed Consolidated  Balance Sheets as of December 31, 2007 and March 31, 2007                                                                            |       | 1          |
|              |                                                                                                                                                                   |       |       |
|              | Condensed Consolidated  Statements of Operations and Comprehensive Loss for the Three- and Nine-Month  Periods Ended December 31, 2007 and December 31, 2006 |       | 2          |
|              |                                                                                                                                                                   |       |       |
|              | Condensed Consolidated  Statements of Cash Flows for the Nine-Month Periods Ended December 31,  2007 and December 31, 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                                                                                                            |       | 21         |
|              |                                                                                                                                                                   |       |       |
| Item 4.           | Controls and  Procedures                                                                                                                                               |       | 22         |
|              |                                                                                                                                                                   |       |       |
| **Part II.** | **Other Information**                                                                                                                                                  | ** ** | ** ** |
| ** **        | ** **                                                                                                                                                             | ** ** | ** ** |
| Item 1.           | Legal Proceedings                                                                                                                                                      |       | 23         |
|              |                                                                                                                                                                   |       |       |
| Item  1A.    | Risk Factors                                                                                                                                                           |       | 23         |
|              |                                                                                                                                                                   |       |       |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                           |       | 26         |
|              |                                                                                                                                                                   |       |       |
| Item 3.           | Defaults  upon Senior Securities                                                                                                                                       |       | 26         |
|              |                                                                                                                                                                   |       |       |
| Item 4.           | Submission  of Matters to a Vote of Security Holders                                                                                                                   |       | 26         |
|              |                                                                                                                                                                   |       |       |
| Item 5.           | Other Information                                                                                                                                                      |       | 26         |
|              |                                                                                                                                                                   |       |       |
| Item 6.           | Exhibits                                                                                                                                                               |       | 28         |
| ** **        |                                                                                                                                                                   |       |       |
| **Signature**     |                                                                                                                                                                   |       |       |

 

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1.**                **FINANCIAL STATEMENTS (UNAUDITED)**

 

**VALENCETECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

*(inthousands, except share amounts)*

(Unaudited)

 
| ** **                                                                                                                                                                                           | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| Assets                                                                                                                                                                                               |       |                            |       |                         |       |
| Current assets:                                                                                                                                                                                      |       |                            |       |                         |       |
| Cash and cash equivalents                                                                                                                                                                            |       | $                               | 2,837      |                         | $          | 1,168 |   |
| Trade receivables, net of allowance of $225 and $169                                                                                                                                                 |       | 1,623                           |       | 3,955                        |       |
| Inventory                                                                                                                                                                                            |       | 7,873                           |       | 7,915                        |       |
| Prepaid and other current assets                                                                                                                                                                     |       | 3,116                           |       | 1,987                        |       |
| Total current assets                                                                                                                                                                                 |       | 15,449                          |       | 15,025                       |       |
| Property, plant and equipment, net                                                                                                                                                                   |       | 4,529                           |       | 3,997                        |       |
| Intellectual property, net                                                                                                                                                                           |       | 87                              |       | 178                          |       |
| Total assets                                                                                                                                                                                         |       | $                               | 20,065     |                         | $          | 19,200 |   |
|                                                                                                                                                                                                 |       |                            |       |                         |       |
| Liabilities and Stockholders’ Deficit                                                                                                                                                           |       |                            |       |                         |       |
| Current liabilities:                                                                                                                                                                                 |       |                            |       |                         |       |
| Accounts payable                                                                                                                                                                                     |       | $                               | 1,587      |                         | $          | 3,028 |   |
| Accrued expenses                                                                                                                                                                                     |       | 5,037                           |       | 4,099                        |       |
| Deferred revenue                                                                                                                                                                                     |       | 597                             |       | 516                          |       |
| Total current liabilities                                                                                                                                                                            |       | 7,221                           |       | 7,643                        |       |
| Long-term interest payable to stockholder                                                                                                                                                            |       | 20,711                          |       | 18,475                       |       |
| Long-term debt, net of debt discount                                                                                                                                                                 |       | 18,844                          |       | 18,484                       |       |
| Long-term debt to stockholder, net of debt discount                                                                                                                                                  |       | 34,459                          |       | 33,906                       |       |
| Total liabilities                                                                                                                                                                                    |       | 81,235                          |       | 78,508                       |       |
|                                                                                                                                                                                                 |       |                            |       |                         |       |
| Commitments and contingencies                                                                                                                                                                        |       | —                          |       | —                       |       |
| Redeemable  convertible preferred stock, $0.001 par value, 10,000,000 shares authorized,  861 issued and outstanding as of December 31, 2007 and March 31,  2007, liquidation value $8,610 |       | 8,610                           |       | 8,610                        |       |
| Stockholders’ deficit:                                                                                                                                                                          |       |                            |       |                         |       |
| Common  stock, $0.001 par value, 200,000,000 shares authorized; 115,487,094 and  106,199,516 shares outstanding as of December 31, 2007 and  March 31, 2007                                |       | 115                             |       | 106                          |       |
| Additional paid-in capital                                                                                                                                                                           |       | 470,741                         |       | 457,611                      |       |
| Notes receivable from stockholder                                                                                                                                                                    |       | —                          |       | (5,164                       | )          |
| Treasury shares, 1,803,144 at cost                                                                                                                                                                   |       | (5,164                          | )          | —                       |       |
| Accumulated deficit                                                                                                                                                                                  |       | (531,645                        | )          | (516,647                     | )          |
| Accumulated other comprehensive loss                                                                                                                                                                 |       | (3,827                          | )          | (3,824                       | )          |
| Total stockholders’ deficit                                                                                                                                                                     |       | (69,780                         | )          | (67,918                      | )          |
| Total liabilities, preferred stock and stockholders’ deficit                                                                                                                                    |       | $                               | 20,065     |                         | $          | 19,200 |   |

 

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

 

1

----

 

**VALENCETECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**

(in thousands, except pershare amounts)

(Unaudited)

 
| ** **                                                                                        | ** ** | **Three Months Ended,  December 31,** | ** ** | **Nine Months Ended,  December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue:                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Battery and system sales                                                                          |       | $                                                    | 3,127      |                                                | $          | 2,085 |   | $ | 12,468 |   | $ | 11,261 |   |
| Licensing and royalty revenue                                                                     |       | 251                                                  |       | 233                                                 |       | 515 |   | 601 |   |
| Total revenues                                                                                    |       | 3,378                                                |       | 2,318                                               |       | 12,983 |   | 11,862 |   |
| Cost of sales                                                                                     |       | 3,413                                                |       | 2,782                                               |       | 11,830 |   | 11,224 |   |
| Gross margin                                                                                      |       | (35                                                  | )          | (464                                                | )          | 1,153 |   | 638 |   |
| Operating expenses:                                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Research and product development                                                                  |       | 792                                                  |       | 911                                                 |       | 2,457 |   | 2,800 |   |
| Marketing                                                                                         |       | 630                                                  |       | 663                                                 |       | 1,516 |   | 1,639 |   |
| General and administrative                                                                        |       | 1,870                                                |       | 1,885                                               |       | 5,561 |   | 6,285 |   |
| Share based compensation                                                                          |       | 828                                                  |       | 426                                                 |       | 1,729 |   | 1,132 |   |
| Depreciation and amortization                                                                     |       | 163                                                  |       | 193                                                 |       | 616 |   | 599 |   |
| Loss on disposal of assets                                                                        |       | 8                                                    |       | (84                                                 | )          | 15 |   | (82 | ) |
| Contract settlement charges                                                                       |       | —                                               |       | —                                              |       | — |   | 24 |   |
| Total operating expenses                                                                          |       | 4,291                                                |       | 3,994                                               |       | 11,894 |   | 12,397 |   |
| Operating loss                                                                                    |       | (4,326                                               | )          | (4,458                                              | )          | (10,741 | ) | (11,759 | ) |
| Interest and other income                                                                         |       | 409                                                  |       | 348                                                 |       | 812 |   | 696 |   |
| Interest expense                                                                                  |       | (1,786                                               | )          | (1,809                                              | )          | (4,939 | ) | (5,195 | ) |
| Net loss                                                                                          |       | $                                                    | (5,703     | )                                                   | $          | (5,919 | ) | $ | (14,868 | ) | $ | (16,258 | ) |
|                                                                                              |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Dividends on preferred stock                                                                      |       | (43                                                  | )          | (43                                                 | )          | (130 | ) | (130 | ) |
| Net loss available to common stockholders, basic and diluted                                      |       |                                                 |       |                                                |       |   |   |   |   |
|                                                                                              |       | $                                                    | (5,746     | )                                                   | $          | (5,962 | ) | $ | (14,998 | ) | $ | (16,388 | ) |
| Other comprehensive loss:                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss                                                                                          |       | (5,703                                               | )          | (5,919                                              | )          | (14,868 | ) | (16,258 | ) |
| Change in foreign currency translation adjustments                                                |       | 220                                                  |       | (62                                                 | )          | (4 | )  | (73 | ) |
| Comprehensive loss                                                                                |       | $                                                    | (5,483     | )                                                   | $          | (5,981 | ) | $ | (14,872 | ) | $ | (16,331 | ) |
|                                                                                              |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Net loss per share available to common stockholders                                               |       | $                                                    | (0.05      | )                                                   | $          | (0.06 | ) | $ | (0.14 | ) | $ | (0.17 | ) |
| Shares used in computing  net loss per share available to common stockholders, basic and diluted. |       | 113,100                                              |       | 101,801                                             |       | 110,758 |   | 98,053 |   |

 

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

 

2

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**VALENCETECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

(Unaudited)

 
| ** **                                                                   | ** ** | **Nine Months Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                        |       |                                                   |       |   |   |
| Net loss                                                                     |       | $                                                      | (14,868    | ) | $ | (16,258 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                                                   |       |   |   |
| Depreciation and amortization                                                |       | 732                                                    |       | 599 |   |
| Loss on disposal of assets                                                   |       | 15                                                     |       | (82 | ) |
| Bad debt expense                                                             |       | 58                                                     |       | — |   |
| Accretion of debt discount and other                                         |       | 913                                                    |       | 913 |   |
| Interest income on stockholder note receivable                               |       | —                                                 |       | — |   |
| Share based compensation                                                     |       | 1,729                                                  |       | 1,132 |   |
| Changes in operating and other assets and liabilities:                       |       |                                                   |       |   |   |
| Trade receivables                                                            |       | 2,274                                                  |       | 115 |   |
| Inventory                                                                    |       | 42                                                     |       | (5,661 | ) |
| Prepaid and other current assets                                             |       | (1,129                                                 | )          | 443 |   |
| Accounts payable                                                             |       | (1,441                                                 | )          | 1,579 |   |
| Accrued expenses and long-term interest                                      |       | 3,043                                                  |       | 1,513 |   |
| Deferred revenue                                                             |       | 81                                                     |       | 240 |   |
| Net cash used in operating activities                                        |       | $                                                      | (8,551     | ) | $ | (15,467 | ) |
|                                                                         |       |                                                   |       |   |   |
| Cash flows from investing activities:                                        |       |                                                   |       |   |   |
| Purchases of property, plant & equipment                            |       | (1,187                                                 | )          | (1,430 | ) |
| Proceeds from sale of property, plant & equipment                   |       | —                                                 |       | 15 |   |
| Net cash used in investing activities                                        |       | $                                                      | (1,187     | ) | $ | (1,415 | ) |
|                                                                         |       |                                                   |       |   |   |
| Cash flows from financing activities:                                        |       |                                                   |       |   |   |
| Proceeds from notes payable to stockholder                                   |       | —                                                 |       | 5,000 |   |
| Proceeds from stock option exercises                                         |       | 69                                                     |       | 245 |   |
| Proceeds from issuance of common stock, net of issuance costs                |       | 11,342                                                 |       | 12,832 |   |
| Net cash provided by financing activities                                    |       | $                                                      | 11,411     |   | $ | 18,077 |   |
| Effect of foreign exchange rates on cash and cash equivalents                |       | (4                                                     | )          | 73 |   |
| Increase in cash and cash equivalents                                        |       | $                                                      | 1,669      |   | $ | 1,268 |   |
|                                                                         |       |                                                   |       |   |   |
| Cash and cash equivalents, beginning of period                               |       | 1,168                                                  |       | 612 |   |
| Cash and cash equivalents, end of period                                     |       | $                                                      | 2,837      |   | $ | 1,880 |   |
|                                                                         |       |                                                   |       |   |   |
| Supplemental information:                                                    |       |                                                   |       |   |   |
| Conversion of notes payable to stockholder into common stock                 |       | $                                                      | —     |   | $ | 11,101 |   |
| Exchange of note receivable from stockholder for treasury stock              |       | 5,164                                                  |       | — |   |
| Interest paid                                                                |       | $                                                      | 1,420      |   | $ | 1,406 |   |

 

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

 

3

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** **

**VALENCETECHNOLOGY, INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

December 31, 2007

(Unaudited)

 

**1.**                                      **INTERIM CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS:**

 

These interim condensed consolidated financialstatements are unaudited but reflect, in the opinion of management, all normalrecurring adjustments necessary to present fairly the financial position ofValence Technology, Inc. and its subsidiaries (the “Company”) as of December 31,2007, its consolidated results of operations for each of the three- andnine-month periods ended December 31, 2007 and December 31, 2006, andthe consolidated cash flows for the nine-month periods ended December 31,2007 and December 31, 2006. Because all the disclosures required bygenerally accepted accounting principles are not included, these interimcondensed consolidated financial statements should be read in conjunction withthe audited financial statements and notes thereto in the Company’s AnnualReport on Form 10-K as of and for the year ended March 31, 2007. Theresults for the three- and nine-month periods ended December 31, 2007 arenot necessarily indicative of the results to be expected for the entire fiscalyear ending March 31, 2008. The year-end condensed consolidated balancesheet data as of March 31, 2007 was derived from audited financialstatements, but does not include all disclosures required by generally acceptedaccounting principles.

 

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

 

The Company was founded in 1989 and has commercializedthe industry’s first lithium phosphate technology. The Company’s mission is todrive the wide adoption of high-performance, safe, long cycle life,environmentally friendly, low-cost energy storage systems by drawing on thenumerous benefits of its latest battery technology, the extensive experience ofits management team, and the significant market opportunity available to it.

 

In February 2002, the Company introduced itsSaphion® technology, a lithium phosphatetechnology which utilizes a phosphate-based cathode material. The Companybelieves that lithium phosphate technology addresses the major weaknesses ofexisting technology while offering a solution that is competitive in cost andperformance. The Company believes that by incorporating a phosphate-based cathodematerial, its Saphion technology is able to offer greater thermal andelectrochemical stability than traditional lithium-ion technologies, which willfacilitate its adoption in large application markets not traditionally servedby lithium-ion batteries such as motive power, vehicular, portable appliances,telecommunications, and utility back-up systems. Currently, the Company offersits lithium phosphate technology in both cylindrical and polymer constructionand have initiated the design of a prismatic cell.

 

The Company’s business plan and strategy focuses onthe generation of revenue from product sales, while minimizing costs through amanufacturing plan that utilizes partnerships with contract manufacturers andinternal manufacturing efforts through its wholly owned subsidiaries in China.These subsidiaries initiated operations in late fiscal 2005. The market forlithium phosphate technology will be developed by offering existing and newsolutions that differentiate the Company’s products and its customers’ productsin both the large-format and small-format markets through the Company’s ownproduct 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 continueto pursue a licensing strategy as our lithium phosphate technology receivesgreater market acceptance. In November 2007, the company introduced theEpochTM battery, a new generation of phosphate-based lithium-ion battery.  The Epoch batteries are equipped with anadvanced management system that will monitor and adjust cell performance, sobattery packs will operate at their optimum performance capacity.  Epoch batteries present a safe, powerful, andreliable energy source storage solution designed to be low maintenance, costcompetitive, and environmentally friendly.

 

**Going Concern:**

 

The accompanying condensed consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern, which contemplates the realization of assets and satisfaction ofliabilities in the normal course of business. The Company has incurredoperating losses each year since its inception in 1989 and had an accumulateddeficit of $531.6 million as of December 31, 2007. 

 

4

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For the three- and nine-month periods ended December 31,2007 the Company has incurred a net loss available to common stockholders of$5.7 million and $14.9 million, respectively. For the years ended March 31,2007 and 2006, the Company sustained net losses of $22.3 million and $32.7million, respectively. These factors, among others, indicate that the Companymay 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 itsability to meet its liquidity requirements. If the Company is unable to arrangefor debt or equity financing on favorable terms or at all the Company’s abilityto continue as a going concern is uncertain. These financial statements do notgive effect to any adjustments to the amounts and classifications of assets andliabilities which might be necessary should the Company be unable to continueas a going concern.

 

**Liquidity and Capital Resources:**

 

At December 31, 2007, the Company’s principalsources of liquidity were cash and cash equivalents of $2.8 million. TheCompany expects that its sources of liquidity will not be sufficient for theremaining fiscal year. The Company anticipates product sales during fiscal 2008from the N-Charge Power System and the Segway pack, which are subject toseasonal fluctuations and from the sale of U-Charge Power Systems, Epochbatteries, and royalties will be insufficient to cover the Company’s operatingexpenses. Management depends upon their ability to periodically arrange foradditional equity or debt financing to meet our liquidity requirements. Unlessour product sales are greater than management currently forecasts or there areother changes to the business plan, the Company will need to arrange foradditional financing within the next three to six months to fund operating andcapital needs. This financing could take the form of debt or equity. Given theCompany’s historical operating results and the amount of our existing debt, as wellas the other factors, the Company may not be able to arrange for debt or equityfinancing from third parties on favorable terms or at all.

 

The Company’s cash requirements may vary materiallyfrom those now planned because of changes in the Company’s operations includingthe failure to achieve expected revenues, greater than expected expenses,changes in OEM relationships, market conditions, the failure to timely realizethe Company’s product development goals, and other adverse developments. Theseevents could have a negative impact on the Company’s available liquiditysources during the remaining fiscal year.

 

**3.**                                      **SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**Revenue Recognition:**

 

Revenues are generated from sales of productsincluding batteries and battery systems, and from licensing fees and royaltiesper technology license agreements. Product sales are recognized when all of thefollowing 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 notrecognized as revenue during the period shipped, primarily product shipments toresellers that are subject to right of return, are recorded as deferred revenueand reflected as a liability on the Company’s balance sheet. For resellershipments where revenue recognition is deferred, the Company records revenuebased upon sales to ultimate customers. For direct customers, the Companyestimates 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 executedagreement and delivery of licensed information, if there are no significantremaining vendor obligations and collection of the related receivable isreasonably assured. Royalty revenues are recognized upon sales of licensedproducts and when collectibility is reasonably assured.

 

**Net Loss per Share Available toCommon Stockholders:**

 

Net loss per share is computed by dividing the netloss available to common stockholders by the weighted average shares of commonstock outstanding during the period. The dilutive effect of the options andwarrants to purchase common stock are excluded from the computation of dilutednet loss per share, since their effect is antidilutive. The antidilutiveinstruments excluded from the diluted net loss per share computation for thethree- and nine-month periods ended December 31, 2007 and 2006 were asfollows:

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                             | ** ** | **December 31,**            | ** ** | **December 31,**           | ** ** |
| ** **                                                                             | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Shares reserved for  conversion of Series C-1 and Series C-2 preferred stock |       | 3,628,634                        |       | 3,628,634                       |       | 3,628,634 |   | 3,628,634 |   |
| Common stock options reserved                                                          |       | 9,643,881                        |       | 9,199,365                       |       | 9,643,881 |   | 9,199,365 |   |
| Warrants to purchase  common stock                                                     |       | 2,955,643                        |       | 2,955,643                       |       | 2,955,643 |   | 2,955,643 |   |
| Total                                                                                  |       | 16,228,158                       |       | 15,783,642                      |       | 16,228,158 |   | 15,783,642 |   |

 

The number of shares listed above as reserved forconversion of Series C-1 and Series C-2 preferred stock do notinclude shares related to accrued dividends that are convertible at theelection of the Company, subject to certain limitations. At December 31, 2007,up to $388,000 in accrued dividends would be convertible into up to 194,975shares of common stock based on the closing sales price of $1.99 on December31, 2007. 

 

5

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

 

Inventory consisted of the following (in thousands)at:

 
| ** **      | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|-----------------|------------|---------------------------------|------------|------------------------------|------------|
|            |       |                            |       |                         |       |
| Raw materials   |       | $                               | 671        |                         | $          | 2,210 |   |
| Work in process |       | 4,671                           |       | 3,116                        |       |
| Finished goods  |       | 2,531                           |       | 2,589                        |       |
| Total inventory |       | $                               | 7,873      |                         | $          | 7,915 |   |

 

Included in inventory at December 31, 2007 and March 31,2007 were valuation allowances of $5,502,000 and $4,432,000 to reduce theircarrying values to the lower of cost or market. Management has valued overheadabsorption related to work in process based on estimates of completion at December 31,2007.

 

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

 

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

 
| ** **                      | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|---------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                            |       |                            |       |                         |       |
| Leasehold improvements          |       | $                               | 1,097      |                         | $          | 1,045 |   |
| Machinery and equipment         |       | 4,998                           |       | 4,400                        |       |
| Office and computer equipment   |       | 2,242                           |       | 2,001                        |       |
| Construction in progress        |       | 477                             |       | 462                          |       |
| Total cost                      |       | $                               | 8,814      |                         | $          | 7,908 |   |
| Less: accumulated depreciation  |       | (4,247                          | )          | (3,873                       | )          |
| Less: impairment                |       | (38                             | )          | (38                          | )          |
| Total cost, net of depreciation |       | $                               | 4,529      |                         | $          | 3,997 |   |

 

**6.**                                      **INTELLECTUAL PROPERTY:**

 

Intellectual property consisting of stacked batteryconstruction technology acquired from Telcordia Technologies, Inc. in December 2000is amortized over its estimated useful life. Intellectual property, net ofaccumulated amortization and impairment, consisted of the following (inthousands) at:

 
| ** **                              | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| Intellectual property before impairment |       | $                               | 13,602     |                         | $          | 13,602 |   |
| Less: accumulated amortization          |       | (5,021                          | )          | (4,930                       | )          |
| Less: impairment                        |       | (8,494                          | )          | (8,494                       | )          |
| Intellectual property, net              |       | $                               | 87         |                         | $          | 178 |   |

 

Amortization expense for the three-month periods endedDecember 31, 2007 and 2006, was approximately $29,000 and $29,000,respectively.  Amortization expense forthe nine-month periods ended December 31, 2007 and 2006, was approximately$86,000 and $88,000, respectively.

 

6

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

 
| **(in thousands)**            | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                               |       |                            |       |                         |       |
| 2005 Loan balance                  |       | $                               | 20,000     |                         | $          | 20,000 |   |
| Unaccreted debt discount           |       | (1,156                          | )          | (1,516                       | )          |
| Balance                            |       | $                               | 18,844     |                         | $          | 18,484 |   |
|                               |       |                            |       |                         |       |
| 2001 Loan from stockholder balance |       | 20,000                          |       | 20,000                       |       |
| 1998 Loan from stockholder balance |       | 14,950                          |       | 14,950                       |       |
| Unaccreted debt discount           |       | (491                            | )          | (1,044                       | )          |
| Balance                            |       | $                               | 34,459     |                         | $          | 33,906 |   |

 

On July 13, 2005, the Company secured a$20,000,000 loan (the “2005 Loan”) from a third party finance company, the fullamount of which has been drawn down. The loan is guaranteed by Mr. CarlBerg, chairman of the Board of Directors and the Company’s principalstockholder. The loan matures in a lump sum on July 13, 2010. Interest isdue monthly based on a floating interest rate. The interest rate is calculatedas the greater of 6.75% or the sum of LIBOR Rate, rounded to the nearest 1/16th of 1.0%, plus 4.0% (9.25% as of December 31,2007). 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, 2007through July 12, 2009, with a 1.0% prepayment premium, and on July 13,2009 and thereafter with no prepayment premium. As of December 31, 2007,no amounts have been paid on the loan. In connection with the loan, the Company purchased a rate cap agreementto protect against fluctuations in LIBOR for the full amount of the loan for aperiod of three years. The fair value of the LIBOR rate cap agreement isincluded in other assets and marked-to-market on a quarterly basis.

 

In connection with the loan, both the third partyfinance company and Berg & Berg received warrants to purchase 600,000shares of the Company’s common stock at a price of $2.74 per share. Thewarrants are exercisable beginning on the date they were issued and will expireon July 13, 2008. The fair value assigned to these warrants, totaling approximately$2,037,000, has been recorded as a discount on the debt and will be accreted asinterest expense over the life of the loan. The warrants were valued using theBlack-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 theloan, the Company incurred a loan commitment fee and attorney’s fees which, inaddition to the interest rate cap agreement, have been recorded as a discounton the debt and will be accreted as interest expense over the life of the loan.Through December 31, 2007, a total of approximately $1,186,000 has beenaccreted and included as interest expense. Interest payments on the loan arecurrently being paid on a monthly basis.

 

In October 2001, the Company entered into a loanagreement (“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 $20,000,000 between the dateof the agreement and September 30, 2003. Interest on the 2001 Loan accruesat 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 interestfrom 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 commonstock at the price of $3.208 per share. The warrants were exercisable beginningon the date they were issued and originally expired on August 30, 2005. InJuly 2005, the warrants were extended until September 30, 2008. Thefair value assigned to these warrants, totaling approximately $5,100,000, hasbeen reflected as additional consideration for the debt financing, recorded as adiscount on the debt and accreted as interest expense over the life of theloan. The warrants were valued using the Black-Scholes method using theassumptions of a life of 47 months (extended to 84 months), 100% volatility,and a risk-free rate of 5.5%. Through December 31, 2007, a total of$4,609,000 million has been accreted and included as interest expense. Theamounts charged to 

 

7

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interest expense on the outstanding balance of theloan for the three-month periods ended December 31, 2007 and 2006 were$409,000. The amounts charged to interest expense on the outstanding balance ofthe loan for the nine-month periods ended December 31, 2007 and 2006 were$1,222,222. Interest payments on the loan are currently being deferred, and arerecorded as long-term interest. The accrued interest amounts for the 2001 Loanwere $9,553,000 and $8,330,000 as of December 31, 2007 and March 31,2007, respectively.

 

In July 1998, the Company entered into an amendedloan agreement (“1998 Loan”) with Berg & Berg that allows the Companyto borrow, prepay and re-borrow up to $10,000,000 principal under a promissorynote on a revolving basis. In November 2000, the 1998 Loan agreement wasamended to increase the maximum amount to $15,000,000. As of December 31,2007, the Company had an outstanding balance of $14,950,000 under the 1998 Loanagreement. The loan bears interest at one percent over lender’s borrowing rate(approximately 9.0% at December 31, 2007). On July 13, 2005, Berg &Berg agreed to extend the maturity date for the loan principal and interestfrom September 30, 2006 to September 30, 2008. The accrued interestamounts for the 1998 Loan were $11,158,000 and $10,144,000 as of December 31,2007 and March 31, 2007, respectively.

 

All of our assets are pledged as collateral under the2001 Loan and the 1998 Loan from Berg & Berg.

 

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

 

**Warranties:**

 

The Company has established a warranty reserve inconnection with the sale of N-Charge® Power Systems covering a 12-month warrantyperiod during which the Company would provide a replacement unit to anycustomer returning a purchased product because of a product performance issue.The Company also has established a warranty reserve in relation to the sale ofU-Charge® Power Systems and other large format powersystems. The total warranty liability was $1,018,000 and $1,072,000 as of December 31,2007 and March 31, 2007, respectively.

 

**Litigation:**

 

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

 

On February 14, 2006, Hydro-Quebec filed alawsuit against us in the United States District Court for the Western Districtof Texas (Hydro-Quebec v. Valence Technology, Civil Action No. A06CA111).In its amended complaint filed April 13, 2006, Hydro-Quebec alleges thatSaphion® Technology, the technology utilized in all ofour commercial products, infringes U.S. Patent No. 5,910,382 and 6,514,640exclusively licensed to Hydro-Quebec. Hydro-Quebec’s complaint seeks injunctiverelief and monetary damages. The action is in the initial pleading state and wehave filed a response denying the allegations in the amended complaint. Theaction has been stayed by the Court until a final determination by the USPTO ineither of the reexaminations of the two University of Texas patents asserted inthe case. The USPTO has stated in declaring the two reexaminations that thereare serious questions as to the patentability of these two patents.

 

We are subject to, from time to time, various claimsand litigation in the normal course of business. In our opinion, all pendinglegal matters are either covered by insurance or, if not insured, will not havea material adverse impact on our consolidated financial statements.

 

8

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**9.**                                      **REDEEMABLE CONVERTIBLE PREFERREDSTOCK:**

 

On June 2, 2003, the Company issued 1,000 sharesof Series C Convertible Preferred Stock and warrants to purchase theCompany’s common stock for $10,000 per share, raising net proceeds of$9,416,000. On January 22, 2004, the holder of the Series CConvertible Preferred Stock converted 139 of its 1,000 shares with theprincipal amount of $1,390,000, including accrued and unpaid dividends, into327,453 shares of the Company’s common stock at the conversion price of $4.25per share. On November 30, 2004, the Company entered into an amendment andexchange agreement to exchange all outstanding 861 shares of the Company’s Series CConvertible Preferred Stock, representing $8,610,000 of principal. The Series CConvertible Preferred Stock was exchanged for 431 shares of Series C-1Convertible Preferred Stock, with a stated value of $4,300,000, and 430 sharesof Series C-2 Convertible Preferred Stock, with a stated value of$4,300,000. When issued, the Series C-1 Convertible Preferred Stock and Series C-2Convertible Preferred Stock were convertible into common stock at $4.00 pershare. Each series carries a 2% annual dividend rate, payable quarterly in cashor shares of common stock (which requirement has been waived, as describedbelow), and were redeemable on December 15, 2005. The Company has theright to convert the preferred stock if the average of the dollar-volumeweighted average price of the Company’s common stock for a ten-day tradingperiod is at or above $6.38 per share. If the preferred shares are not redeemedin accordance with their terms, the holder of the preferred stock shall havethe option to require the Company to convert all or part of the redeemed sharesat a price of 95% of the lowest closing bid price of the Company’s common stockduring the three days ending on and including the conversion date. Thepreferred shares are currently outstanding and subject to redemption orconversion at the holder’s discretion.

 

Pursuant to assignment agreements entered into betweenthe Company and Berg & Berg on July 14, 2005 and December 14,2005, Berg & Berg purchased all of the outstanding Series C-1Convertible Preferred Stock and Series C-2 Convertible Preferred Stockfrom its original holder. Pursuant to the terms of the assignment agreement,Berg & Berg agreed that the failure of the Company to redeem thepreferred stock on December 15, 2005 did not constitute a default underthe certificate of designations and has waived the accrual of any defaultinterest applicable in such circumstance. In exchange, the Company has agreed (i) thatthe 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 closingbid price of the Company’s common stock on December 13, 2005 ($1.98) and (ii) thatthe 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 closingbid price of the Company’s common stock on July 13, 2005 ($2.96). Berg &Berg also agreed to waive the requirement that cumulative dividends be paidquarterly. On December 21, 2007, the Company received for its records aletter from Berg & Berg memorializing the agreement between theCompany and Berg & Berg reached at the time Berg & Bergpurchased the outstanding Series C-1 Convertible Preferred Stock and Series C-2Convertible Preferred Stock. The letter confirms that the parties originally agreedthat dividends would continue to accrue (without interest) on the Series C-1Convertible Preferred Stock and the Series C-2 Convertible Preferred Stockaccording to the terms of the applicable certificates of designation, but thatsuch dividends are not payable until such time as the parties mutually agree,or upon redemption or conversion in accordance with the terms of the applicablecertificates of designation. A copy of this letter is filed as Exhibit 4.1to this Report. At December 31, 2007, the Company has accrued $388,000 inpreferred stock dividends.

 

In connection with the issue of the original issuanceof the Series C Convertible Preferred Stock, in June 2003, theCompany issued to the original holder of the Series C ConvertiblePreferred Stock a warrant to purchase 352,900 shares of the Company’s commonstock. The warrant is exercisable at a purchase price of $5.00 per share andexpires in June 2008. The warrant was valued using the Black-Scholesvaluation model. The warrant was recorded to additional paid in capital at itsrelative fair value to the Series C Convertible Preferred Stock at$933,000. Accretion to the remaining redemption value of $8,610,000 wasrecorded over the eighteen-month period of the Series C ConvertiblePreferred Stock ending December 2, 2004.

 

**10.**                               **SHARE BASED COMPENSATION**

 

The Company has a stock option plan (the “1990 Plan”)under which options granted may be incentive stock options or supplementalstock options. Options are to be granted at a price not less than fair marketvalue (incentive options) or 85% of fair market value (supplemental options) onthe date of grant. The options vest as determined by the Board of Directors andare generally exercisable over a five-year period. Unvested options arecanceled 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 assuch, 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.

 

9

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In February 1996, the Board of Directors adopteda stock plan for outside Directors (the “1996 Non-Employee Director’s StockOption Plan”). The plan provides that new directors will receive an initialstock option of 100,000 shares of common stock upon their election to theBoard. The exercise price for this initial option will be the fair market valueon the day it is granted. This initial option will vest one-fifth on the firstand second anniversaries of the grant of the option, and quarterly over thenext three years. A director who had not received an option upon becoming adirector will receive an initial stock option of 100,000 shares on the date ofthe adoption of the plan. During the first nine months of fiscal 2008, noshares were granted under this plan. At December 31, 2007, the Company had167,928 shares available for grant under the 1996 Non-Employee Director’s StockOption Plan.

 

In October 1997, the Board of Directors adoptedthe 1997 Non-Officer Stock Option Plan (the “1997 Plan”). The Company may grantoptions to non-officer employees and consultants under the 1997 Plan. Options areto be granted at a price not less than fair market value (incentive options) onthe 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 nolater than ten years from the date of grant. Unvested options are canceled andreturned to the 1997 Plan upon an employee’s termination. Vested options, notexercised within three months of termination, also are canceled and returned tothe 1997 Plan. During the first nine months of fiscal 2008, no shares weregranted under this plan. At December 31, 2007, the Company had 1,697,757shares available for grant under the 1997 Plan.

 

In January 2000, the Board of Directors adoptedthe 2000 Stock Option Plan (the “2000 Plan”). The Company may grant incentivestock options to employees and non-statutory stock options to non-employeemembers of the Board of Directors and consultants under the 2000 Plan. Optionsare to be granted at a price not less than fair market value on the date ofgrant. In the case of an incentive stock option granted to an employee who ownsstock possessing more than 10% of the total combined voting power of allclasses of stock of the Company or any affiliate, the option is to be grantedat 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, generallyover a four-year period. The options expire no later than ten years from thedate of grant. Unvested options are canceled and returned to the 2000 Plan uponan employee’s termination. Vested options, not exercised within three months oftermination, also are canceled and returned to the 2000 Plan. During the firstnine months of fiscal 2008, 1,601,562 shares were granted under this plan. At December 31,2007, the Company had 898,565 shares available for grant under the 2000 Plan.

 

When options are exercised the Company issues newshares to the grantee.

 

Aggregate option activity is as follows (shares inthousands):

 
| ** **                        | ** ** | **Outstanding Options** | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Number of**           | ** ** | **Weighted Average** | ** ** |
|                              |       | **Shares**                   | ** ** | **Exercise  Price** |   |
| Balance at March 31, 2007    |       | 6,753                        |       | $ | 3.84 |   |
| Granted                           |       | 1,602                        |       | $ | 1.43 |   |
| Exercised                         |       | (47                          | )          | $ | 1.47 |   |
| Canceled                          |       | (1,428                       | )          | $ | 5.46 |   |
| Balance at December 31, 2007 |       | 6,880                        |       | $ | 2.97 |   |

 

The following table summarizes information about fixedstock options outstanding at December 31, 2007 (shares in thousands):

 
| ** **            | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **            | ** ** | ** **              | ** ** | **Weighted**            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | ** **              | ** ** | **Average**             | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **            | ** ** | ** **              | ** ** | **Remaining**           | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**          | ** ** | **Number**              | ** ** | **Contractual Life**    | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise Prices**   | ** ** | **Outstanding**         | ** ** | **(years)**             | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $0.63 - $1.99         |       | 4,604                   |       | 8.86                    |       | $ | 1.54 |   | 548 |   | $ | 1.46 |   |
| $ 1.99 - $4.62   |       | 1,246                   |       | 6.64                    |       | 3.02 |   | 731 |   | 3.41 |   |
| $ 4.62 - $10.06  |       | 919                     |       | 1.60                    |       | 6.61 |   | 883 |   | 6.67 |   |
| $ 10.06 - $15.75 |       | 10                      |       | 2.75                    |       | 13.84 |   | 10 |   | 13.84 |   |
| $ 15.75 - $23.56 |       | 0                       |       | 0.00                    |       | 0.00 |   | 0 |   | 0.00 |   |
| $ 23.56 - $34.62 |       | 101                     |       | 2.16                    |       | 32.93 |   | 101 |   | 32.93 |   |
| $ 0.63 - $34.62  |       | 6,880                   |       | 7.38                    |       | $ | 2.97 |   | 2,273 |   | $ | 5.56 |   |

 

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Compensation expense for stock plans has beendetermined based on the fair value at the grant date for options granted in thecurrent fiscal year. For the three months ended December 31, 2007 and December 31,2006, $828,000 and $426,000 of share based compensation expense has beenincluded in operating expenses in the condensed consolidated statements ofoperations and comprehensive loss. For the nine months ended December 31,2007 and December 31, 2006, $1,729,000 and $1,132,000 of share basedcompensation expense has been included in operating expenses in the condensedconsolidated statements of operations and comprehensive loss. The aggregateintrinsic value of options exercisable at December 31, 2007 is $288,000.There were 46,666 options exercised during the nine-month period ended December 31,2007.

 

As of December 31, 2007 the Company had a totalof $5,508,000 in compensation costs related to stock-based compensation torecognize over a remaining service period of 2.10 years for non-vested options.The fair value of each option grant is estimated at the date of grant using theBlack-Scholes pricing model with the following weighted average assumptions forgrants in fiscal years 2008 and 2007:

 
| ** **              | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|-------------------------|------------|---------------------------------|------------|------------------------------|------------|
| Risk-free interest rate |       | 4.32                            | %          | 4.34                         | %          |
| Expected life           |       | 5.0  years                      |       | 5.0  years                   |       |
| Volatility              |       | 76.59                           | %          | 82.36                        | %          |
| Dividend yield          |       | None                            |       | None                         |       |

 

**11.**                               **RELATED PARTY TRANSACTIONS:**

 

On September 20, 2007, Berg & Berg, anaffiliate of our chairman, Carl Berg, purchased 729,927 shares of the Company’scommon stock for $1.0 million. The purchase price of $1.37 per share equaledthe closing bid price of the Company’s common stock as of September 19,2007.

 

On August 16, 2007, Berg & Bergpurchased 884,956 shares of the Company’s common stock for $1.0 million. Thepurchase price of $1.13 per share equaled the closing bid price of the Company’scommon stock as of August 15, 2007.

 

On July 19, 2007, Berg & Berg purchased869,565 shares of the Company’s common stock for $1.0 million. The purchaseprice of $1.15 per share equaled the closing bid price of the Company’s commonstock as of July 18, 2007.

 

On June 21, 2007, Berg & Berg purchased869,565 shares of the Company’s common stock for $1.0 million. The purchaseprice of $1.15 per share equaled the closing bid price of the Company’s commonstock as of June 20, 2007.

 

On May 17, 2007, Berg & Berg purchased990,099 shares of the Company’s common stock for $1.0 million. The purchaseprice of $1.01 per share equaled the closing bid price of the Company’s commonstock as of May 16, 2007.

 

On April 19, 2007, West Coast Venture Capital, anaffiliate of our chairman, Carl Berg, purchased 925,926 shares of the Company’scommon stock for $1.0 million. The purchase price of $1.08 per share equaledthe closing bid price of the Company’s common stock as of April 18, 2007.

 

On April 5, 2007, West Coast Venture Capitalpurchased 970,874 shares of the Company’s common stock for $1.0 million. Thepurchase price of $1.03 per share equaled the closing bid price of the Company’scommon stock as of April 4, 2007.

 

On January 1, 1998, the Company granted optionsto Mr. Dawson, the Company’s then Chairman of the Board, Chief ExecutiveOfficer 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 1990Plan and an option to purchase 300,000 shares was granted outside of any equityplan of the Company, neither of which were 

 

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incentive stock options (the “Nonstatutory Options”).The exercise price of all three options is $5.0625 per share, the fair marketvalue on the date of the grant. The Compensation Committee of the Companyapproved the early exercise of the Nonstatutory Options on March 5, 1998.The options permitted exercise by cash, shares, full recourse notes ornon-recourse notes secured by independent collateral. The Nonstatutory Optionswere exercised on March 5, 1998 with non-recourse promissory notes in theamounts of $3,343,750 (“Dawson Note One”) and $1,518,750 (“Dawson Note Two”)(collectively, the “Dawson Notes”) secured by the shares acquired upon exerciseplus 842,650 shares previously held by Mr. Dawson. As of March 31,2006, principal and interest amounts of $3,550,313 and $1,613,458 wereoutstanding under Dawson Note One and Dawson Note Two, respectively, and undereach of the Dawson Notes, interest from the issuance date accrues on unpaidprincipal at the rate of 5.77% per annum, or at the maximum rate permissible bylaw, whichever is less. On April 20, 2005, the Company’s Board ofDirectors approved a resolution to extend the maturity dates of each of theDawson Notes from September 5, 2005 to September 5, 2007.

 

Under each of the Dawson Notes, interest from theIssuance Date accrued on unpaid principal at the rate of 5.69% per annum, or atthe maximum rate permissible by law, whichever is less. In accordance with theDawson Notes, interest was due annually. Interest was paid through March 4, 2005.  As of September 30, 2007, interest wasin arrears and not expected to be collectible from Mr. Dawson.  On September 5, 2007, Mr. Dawsondefaulted on the notes and surrendered his shares to the Company.

 

**12.**                               **SEGMENT AND GEOGRAPHIC INFORMATION:**

 

The Company’s chief operating decision maker is itsChief Executive Officer, who reviews operating results to make decisions aboutresource allocation and to assess performance. The Company’s chief operatingdecision maker views results of operations of a single operating segment, thedevelopment and marketing of the Company’s lithium phosphate technology. TheCompany’s Chief Executive Officer has organized the Company functionally todevelop, market and manufacture lithium phosphate products.

 

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

 
| ** **    | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|---------------|------------|---------------------------------|------------|------------------------------|------------|
| United States |       | $                               | 544        |                         | $          | 657 |   |
| International |       | 4,072                           |       | 3,518                        |       |
| Total         |       | $                               | 4,616      |                         | $          | 4,175 |   |

 

Revenues by geographic area are as follows (inthousands):

 
| ** **    | ** ** | **Three Months Ended December 31,** | ** ** | **Nine Months Ended December 31,** | ** ** |
|---------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
|          |       | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** |   |
| United States |       | $                                                       | 2,146      |                                                   | $          | 1,843 |   | $ | 11,612 |   | $ | 9,835 |   |
| International |       | 1,232                                                   |       | 475                                                    |       | 1,371 |   | 2,027 |   |
| Total         |       | $                                                       | 3,378      |                                                   | $          | 2,318 |   | $ | 12,983 |   | $ | 11,862 |   |

 

**13.**                               **SUBSEQUENT EVENTS:**

 

Form S-3Registration Statement

 

On January 14, 2008,the Company filed a Form S-3 Registration Statement with the Securities andExchange Commission, or SEC, utilizing a “shelf’ registration process.  On January 22, 2008, the Form S-3Registration Statement was declared effective by the SEC.  Pursuant to this “shelf” registrationstatement, the Company may sell debt or equity securities described in theaccompanying prospectus in one or more offerings up to a total public offeringprice of $50,000,000.

 

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Tanfield Contract

 

On February 6, 2008, the Company and The TanfieldGroup Plc (LN: TAN) entered into a supply agreement whereby the Company agreedto manufacture and supply Lithium Phosphate energy storage systems to powerzero emission, all-electric commercial delivery vehicles. The Company’s batterysystems will be installed in leading-edge vans and trucks produced by Tanfield’sUK-based trading division, Smith Electric Vehicles.

 

A copy of this agreement will be filed with the SEC onForm 8-K subsequent to the filing of this Report, with certain termsredacted pursuant to a simultaneous request for confidential treatment. 

 

Equity Financing

 

On February 8, 2008, Berg & Berg Enterprises, anaffiliate of our Chairman Carl Berg, purchased 492,611 shares of the Company’scommon stock for $1.0 million. The purchase price of $2.03 per share equaledthe closing bid price of the Company’s common stock as of February 7,2008. An announcement of this stock sale will be filed with the SEC on Form 8-ksubsequent to the filing of this Report. Proceeds of this sale will be used forgeneral capital and working capital purposes.

 

Press Release Reconciliation

 

In the Company’s pressrelease issued February 7, 2008 to report its results of operations for the fiscalquarter and the nine months ended December 31, 2007, the net loss per shareavailable to common stockholders for the fiscal nine-month period endedDecember 31, 2007 was incorrectly reported as $(0.13). The correct net lossavailable to common stockholders rounds up to $(0.14). This $(.01) increase isthe result of rounding up the $(.0055) impact of calculating the net loss pershare after reducing the weighted average of common shares outstanding by theweighted average of treasury common shares. The Company does not view this $(.0055)modification as a material adjustment and does not intend to issue a correctedearnings release nor amend the Form 8-K with which the earnings release wasfurnished. 

 

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

 

This Report containsstatements that constitute “forward-looking statements” within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended, and Section 27A of theSecurities Act of 1933, as amended. The words “may,” “will,” “expect,” “intend,”“estimate,” “continue,” “anticipate,” “predict,” “believe” and similarexpressions and variations thereof are intended to identify forward-looking statements.These statements appear in a number of places in the Report and includestatements regarding the intent, belief or current expectations of ValenceTechnology, Inc., to which we refer in this Report as the “Company,” “we”or “us,” our directors or officers with respect to, among other things:

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

 

You are cautioned not toput undue reliance on forward-looking statements. Forward-looking statementsare not guarantees of future performance and involve risks and uncertainties,and actual results may differ materially from those projected in this Report,for the reasons, among others, discussed in the sections – “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “RiskFactors.” Factors that could cause actual results to differ materially includethose discussed under “Cautionary Statements and Risk Factors,” which include,but are not limited to the following:

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

 

**We believe that it is important to communicate our future expectationsto investors. However, there may be events in the future that we are not ableto accurately predict or control. The factors discussed under “Risk Factors” inthis Report, as well as any cautionary language in this Report or any of ourother reports or filings, including our Annual Report on Form 10-K, provideexamples of risks, uncertainties and events that may cause our actual resultsto differ materially from the expectations we described in our forward-lookingstatements.**

 

**The following discussion should be read in conjunctionwith our financial statements and related notes, which are a part of thisReport or incorporated by reference to our reports filed with the Securitiesand Exchange Commission, to which we refer in this Report as the Commission. Weundertake no obligation to publicly revise these forward-looking statements toreflect events or circumstances that arise after the date hereof. The resultsfor the three- and nine-month periods ended December 31, 2007 are notnecessarily indicative of the results to be expected for the entire fiscal yearending March 31, 2008 or any other period.**

 

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**Overview**

 

Valence Technology, Inc. was founded in 1989 andhas commercialized the industry’s first lithium phosphate technology. Ourmission is to drive the wide adoption of high-performance, safe, low-costenergy storage systems by drawing on the numerous benefits of our lithiumphosphate battery technology, the experience of our management team and thesignificant market opportunity available to us.

 

In February 2002, we introduced our Saphiontechnology, a lithium phosphate technology which utilizes a phosphate-basedcathode material. We believe that lithium phosphate technology addresses themajor weaknesses of this existing technology while offering a solution that iscompetitive in cost and performance. We believe that by incorporating aphosphate-based cathode material, our Saphion technology is able to offergreater thermal and electrochemical stability than traditional lithium-iontechnologies, which will facilitate its adoption in large application marketsnot traditionally served by lithium-ion batteries such as motive power,vehicular, portable appliances, telecommunications, and utility back-upsystems. Currently, we offer our lithium phosphate technology in bothcylindrical and polymer construction and have initiated the design of aprismatic cell.

 

Key product introductions and milestones based on ourSaphion technology include:

 
| · | 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. We continue to sell the N-Charge product through our  reseller channels with an emphasis in the healthcare and education sectors.                                                                                                                                                                                                                                                         |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | 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 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 designed 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.                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | In November 2007, we introduced the Epoch  battery, our new generation of phosphate-based lithium-ion battery. The Epoch  batteries are equipped with an advanced management system that will monitor  and adjust cell performance, so battery packs will operate at their optimum  performance capacity. Epoch batteries present a safer and more powerful and  reliable energy source storage solution designed to be low maintenance, cost  competitive, and environmentally friendly.                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | In February 2008, we entered into a supply agreement  with The Tanfield Group whereby we agreed to manufacture and supply Lithium  Phosphate energy storage systems to power zero emission, all-electric  commercial delivery vehicles. Our battery systems will be installed in  leading edge vans and trucks produced by Tanfield’s UK-based trading  division, Smith Electric Vehicles. Initial purchases will be fulfilled with  our current U-Charge brand of energy storage systems. Subsequent purchases by  Tanfield will be fulfilled by our third generation lithium phosphate Epoch technology. |

 

As part of our low-cost manufacturing strategy, wehave transitioned our powder manufacturing from Las Vegas, Nevada to Suzhou,China in order to capitalize on lower manufacturing costs. During the thirdquarter of fiscal 2008, we continued our efforts to increase productioncapacity at our subsidiaries in China. Our research and development efforts arefocused on the design of new products utilizing our lithium phosphatechemistry, the scale-up of our second generation lithium phosphate technology,the development of different cell constructions to optimize power and size fornew applications, as well as developing future materials based on the lithiumphosphate technology attributes.

 

Our business headquarters are located in Austin,Texas, our research and development center is in Las Vegas, Nevada, ourEuropean sales center is Mallusk, Northern Ireland, and our manufacturing andproduct development center is in Suzhou, China.

 

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**Basis ofPresentation, Critical Accounting Policies and Estimates**

 

We prepare our condensed consolidated financialstatements in conformity with generally accepted accounting principles in theUnited States. The preparation of our financial statements requires us to makeestimates and assumptions that affect reported amounts. We believe our mostcritical accounting policies and estimates relate to revenue recognition. Ouraccounting policies are described in the Notes to Condensed ConsolidatedFinancial Statements, Note 4, Summary of Significant Accounting Policies. Thefollowing further describes the methods and assumptions we use in our criticalaccounting policies and estimates:

 

***Revenue Recognition***

 

We generate revenues from sales of products includingbatteries and battery systems, and from licensing fees and royalties pertechnology license agreements. Product sales are recognized when all of thefollowing 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 notrecognized as revenue during the period shipped, primarily product shipments toresellers that are subject to right of return, are recorded as deferred revenueand reflected as a liability on our balance sheet. For reseller shipments whererevenue recognition is deferred, we record revenue based upon thereseller-supplied reporting of sales to their end customers or their inventoryreporting. For direct customers, we estimate a return rate percentage basedupon our historical experience. We review this estimate on a quarterly basis.From time to time, we provide sales incentives in the form of rebates or otherprice adjustments; these are recorded as reductions to revenue as incurred.Licensing fees are recognized as revenue upon completion of an executedagreement and delivery of licensed information, if there are no significantremaining vendor obligations and collection of the related receivable isreasonably assured. Royalty revenues are recognized upon licensee revenuereporting and when collectibility is reasonably assured.

 

**Resultsof Operations**

 

The following table summarizes the results of ouroperations for the three months and nine months (also referred to as the thirdquarter) ended December 31, 2007 and December 31, 2006:

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **December 31, 2007**  | ** ** | **December 31, 2006** | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
| **(dollars in thousands)** | ** ** | **Total**                        | ** ** | **%of Revenue**            | ** ** | **Total** | ** ** | **%of Revenue** | ** ** | **Total** | ** ** | **%of Revenue** | ** ** | **Total** | ** ** | **%of Revenue** | ** ** |
| Battery and  systems sales           |       | $                                | 3,127      |                            | 93         | % | $ | 2,085 |   | 90 | % | $ | 12,468 |   | 96 | % | $ | 11,261 |   | 95 | % |
| Licensing and  royalty               |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| revenue                              |       | 251                              |       | 7                               | %          | 233 |   | 10 | % | 515 |   | 4 | % | 601 |   | 5 | % |
| Total revenues                       |       | 3,378                            |       |                            |       | 2,318 |   |   |   | 12,983 |   |   |   | 11,862 |   |   |   |
|                                 |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross margin  profit (loss)          |       | (35                              | )          | -1                              | %          | (464 | ) | -20 | % | 1,153 |   | 9 | % | 638 |   | 5 | % |
| Operating  expenses                  |       | 4,291                            |       | 127                             | %          | 3,994 |   | 172 | % | 11,894 |   | 92 | % | 12,397 |   | 105 | % |
| Operating loss                       |       | (4,326                           | )          | -128                            | %          | (4,458 | ) | -192 | % | (10,740 | ) | -83 | % | (11,759 | ) | -99 | % |
| Net loss                             |       | $                                | (5,703     | )                               | -169       | % | $ | (5,919 | ) | -255 | % | $ | (14,868 | ) | -115 | % | $ | (16,258 | ) | -137 | % |

 

***Revenues and Gross Margin***

 

*Battery and System Sales*. Battery and system sales revenuesconsist of sales of the N-charge, U-Charge and Segway batteries, battery cells,and custom manufactured packs. Battery and system sales increased by $1,042,000,or 50.0%, to $3,127,000 in the third quarter of fiscal 2008 from $2,085,000 inthe third quarter of fiscal 2007. The increase was due to additional sales ofthe large format batteries, which include U-Charge and Segway batteries.  Battery and system sales increased by $1,207,000or 10.7%, in the first nine months of fiscal 2008 from $11,261,000 in the firstnine months of fiscal 2007. The increase was attributable to revenue fromSegway and revenue from new customers for our U-Charge batteries. Revenues fromthe sales of our large-format products accounted for 89% and 62% of our totalrevenue for the three months ended December 31, 2007 and December 31,2006. We expect battery systems revenue to increase as the market expands, ifSegway and The Tanfield Group continue to place new orders, and as new marketsemerge for our Lithium-Phosphate energy storage systems.

 

Product shipments to resellers that are subject toright of return and monies received for future obligations are recorded on thebalance sheet as deferred revenue. We had $597,000 in deferred revenue on ourbalance sheet at December 31, 2007.

 

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*Licensing and Royalty Revenue*. Licensing and royalty revenues relateto revenue from licensing agreements for our battery construction technology.Fiscal third quarter 2008 licensing and royalty revenue was $251,000 comparedwith $233,000 for the same quarter in fiscal 2007. First nine months of fiscal2008, licensing and royalty revenue was $515,000 compared with $601,000 for thesame nine months in fiscal 2007. Licensing and royalty revenue was substantiallyfrom our license agreement with Amperex Technology Limited, which makeson-going royalty payments as sales are made using our technology. We expect tocontinue to pursue a licensing strategy as our lithium phosphate technologyreceives greater market acceptance.We expect licensing and royalty revenues toremain relatively flat.

 

*Gross Margin*. Our gross margin is determined bysubtracting the production cost of battery systems consisting of raw material,cell production costs, battery pack components, assembly labor, facilityexpense, depreciation, amortization, inventory reserves and warranty expensefrom total revenue from battery and system sales plus licensing and royaltyrevenue. Gross margin as a percentage of revenue was (1.0)% for the thirdquarter of fiscal 2008 as compared to (20%) in the third quarter of fiscal2007. Gross margin was 9% in the first nine months of fiscal 2008 and was 5% inthe first nine months of fiscal 2007. Management revised certain estimatesregarding inventory reserves based on a tentative agreement with a vendor. As aresult, included in the first nine months of fiscal 2008 is a $414,000reduction of cost of sales which contributed to our improved gross margin.

 

***Operating Expenses***

 

The following table summarizes operating expenses forthe three and nine months ended December 31, 2007 and December 31,2006:

 
| ** **                           | ** ** | **Three Months Ended December 31,** | ** ** | **Nine Months Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                           | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | **Increase/** | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** | **%** | ** ** |
| **(dollars in thousands)** | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **(Decrease)** | ** ** | **Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and product development     |       | $                                                       | 792        |                                                   | $          | 911 |   | $ | (119 | ) | -13 | % | $ | 2,457 |   | $ | 2,800 |   | $ | (343 | ) | -12 | % |
| Marketing                            |       | 630                                                     |       | 663                                                    |       | (33 | ) | -5 | % | 1,516 |   | 1,639 |   | (123 | ) | -7 | % |
| General and administrative           |       | 1,870                                                   |       | 1,885                                                  |       | (15 | ) | -1 | % | 5,561 |   | 6,285 |   | (724 | ) | -12 | % |
| Depreciation and amortization        |       | 163                                                     |       | 193                                                    |       | (30 | ) | -16 | % | 616 |   | 599 |   | 17 |   | 3 | % |
| Share based compensation             |       | 828                                                     |       | 426                                                    |       | 402 |   | 94 | % | 1,729 |   | 1,132 |   | 597 |   | 53 | % |
| Loss on disposal of assets           |       | 8                                                       |       | (84                                                    | )          | 92 |   | -110 | % | 15 |   | (82 | ) | 97 |   | -118 | % |
| Contract settlement charges          |       | 0                                                       |       | 0                                                      |       | 0 |   | 0 | % | 0 |   | 24 |   | (24 | ) | -100 | % |
| Total operating expenses             |       | $                                                       | 4,291      |                                                   | $          | 3,994 |   | $ | 297 |   | 7 | % | $ | 11,894 |   | $ | 12,397 |   | $ | (503 | ) | -4 | % |
| Percentage of revenues               |       | 126                                                     | %          | 172                                                    | %          |   |   |   |   | 92 | % | 105 | % |   |   |   |   |

 

During the third quarter of fiscal 2008, totaloperating expenses were 126% of revenue compared to 172% of revenue during thesame quarter last year. In the first nine months of fiscal 2008, operatingexpenses were 92% of revenue and were 105% of revenue in the first nine monthsof fiscal 2007. The decrease is primarily the result of personnel and expensereduction actions taken during the last six quarters. We reduced operatingexpenses by $503,000 or 4% for the first nine months of fiscal 2008, ascompared with the first nine months of fiscal 2007.

 

*Research and Product Development*. Research and product developmentexpenses consist primarily of personnel, equipment and materials to support ourefforts to develop battery chemistry and products, as well as to improve ourmanufacturing processes. Research and product development expenses decreased by$119,000, or 13%, to $792,000 for the third quarter of fiscal 2008 from$911,000 for the third quarter of fiscal 2007. Research and product development expenses decreased by $343,000, or 12%,in the first nine months of fiscal 2008 to $2,457,000 from $2,800,000 in thefirst nine months of fiscal 2007.  Thedecrease in research and development expenses is the result of consolidation ofour product research into the Suzhou, China facility. We expect research anddevelopment expenses to increase as we create and develop new products.

 

*Marketing*. Marketing expenses consist primarily ofcosts related to sales and marketing personnel, public relations andpromotional materials. Marketing expenses of $630,000 in the third quarter offiscal 2008 were $33,000, or 5%, lower than in the comparable period of fiscal2007. The first nine months of fiscal 2008 marketing expenses of $1,516,000were $123,000, or 7%, lower than the comparable period in fiscal 2007.  We expect marketing expenses to grow as weexpand and develop our channels, launch additional lithium phosphate products,and continue our branding efforts.

 

*General and Administrative*. General and administrative expensesconsist primarily of salaries and other related costs for finance, humanresources, facilities, accounting, information technology, legal, andcorporate-related expenses, including our China initiatives. General andadministrative expenses totaled $1,870,000 and $1,885,000 for the third fiscalquarters of 2008 

 

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and 2007, respectively. General and administrativeexpenses decreased by $724,000, or 12%, to $5,561,000 in the first nine monthsof fiscal 2008 from $6,285,000 in the first nine months of fiscal 2007. Thedecrease was largely due to the cost reduction in audit related expenses and insurance premiums. We expect general andadministrative costs to increase as our business expands.

 

*Depreciation and Amortization*. Depreciation and amortization expenseswere $163,000 and $193,000 for the third quarters of fiscal 2008 and 2007,respectively. Depreciation and amortization expenses were $616,000 and $599,000in the first nine months of fiscal 2008 and 2007, respectively.  The increase in depreciation expense relatesto recent purchases of property, plant, and equipment in the U.S and in China.

 

*Share based compensation.* Share based compensation expenses were$828,000 and $426,000 for the third quarters of fiscal 2008 and 2007, respectively.Share based compensation expenses were $1,729,000 and $1,132,000 for the firstnine months of fiscal 2008 and 2007, respectively. The increase in share basedcompensation expense relates to option share grants during the past 15 months.

 

**Liquidityand Capital Resources**

 

***Liquidity***

 

At December 31, 2007, the Company’s principalsources of liquidity were cash and cash equivalents of $2,837,000. The Companyexpects our sources of liquidity will not be sufficient for the remainingfiscal year. The Company anticipates product sales during fiscal 2008 from theN-Charge Power System and the Segway pack, which are subject to seasonalfluctuations and the sale of the U-Charge Power System will be insufficient tocover the Company’s operating expenses. Management depends on our ability toperiodically arrange for additional equity or debt financing to meet ourliquidity requirements. Unless our product sales are greater than managementcurrently forecasts or there are other changes to our business plan, we will needto arrange for additional financing within the next three to six months to fundoperating and capital needs. This financing could take the form of debt orequity. Given our historical operating results and the amount of our existingdebt, as well as the other factors, we may not be able to arrange for debt orequity financing from third parties on favorable terms or at all.

 

The following tablesummarizes our statement of cash flows for the nine months ended December 31,2007 and 2006:

 
| ** **                                | ** ** | **Nine Months Ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------|------------|
| **(dollars in thousands)**      | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| Net cash flows provided by (used in):     |       |                                                   |       |   |   |
| Operating activities                      |       | $                                                      | (8,551     | ) | $ | (15,467 | ) |
| Investing activities                      |       | (1,187                                                 | )          | (1,415 | ) |
| Financing activities                      |       | 11,411                                                 |       | 18,077 |   |
| Effect of foreign exchange rates          |       | (4                                                     | )     | 73 |   |
| Net increase in cash and cash equivalents |       | $                                                      | 1,669      |   | $ | 1,268 |   |

 

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Our use of cash from operations the first nine monthsof fiscal 2008 and fiscal 2007 was $8,551,000 and $15,467,000, respectively.The cash used for operating activities during the first nine months of ourfiscal 2008 operating activities was primarily for operating losses and workingcapital. Cash used for operating losses in the first nine months of fiscal 2008decreased from the same period of fiscal 2007 by $6,916,000. Working capital inthe first nine months of fiscal 2008 was greater than working capital in thefirst nine months of fiscal 2007 by $797,000. The increase in working capitalwas primarily due to the increase in cash from financing activities.

 

In the first nine months of fiscal 2008, we had a netdecrease in cash used in investing activities of $228,000, as compared to thefirst nine months of fiscal 2007. Cash used in investing activities during thefirst nine months of fiscal 2008 relates to purchases of equipment domesticallyand in China.

 

We obtained cash from financing activities in theamounts of $11,411,000 and $18,077,000 million during the first nine months offiscal 2008 and 2007, respectively. The financing activities in the first ninemonths of fiscal 2008 were from issuances of common stock totaling $7,068,000to West Coast Venture Capital and Berg and Berg Enterprises, LLC, affiliates ofour Chairman Carl Berg.  In addition, on October 25,2007, the Company sold 3,000,000 shares of its common stock at a price of $1.54per share pursuant to an existing registration statement. Net proceeds to thecompany after fees and expenses totaled approximately $4,300,000. Proceeds fromthis offering are being used for capital equipment, operating expenses, workingcapital and other general corporate purposes.

 

As a result of the above, we had a net increase incash and cash equivalents of $1,669,000 during the first nine months of fiscal2008.

 

Please also see “subsequentfinancing events” below in this section for additional financing-relatedactivities that have occurred subsequent to December 31, 2007.

 

The Company’s cash requirements may vary materiallyfrom those now planned because of changes in the Company’s operations,including the failure to achieve expected revenues, greater than expectedexpenses, changes in OEM relationships, market conditions, the failure totimely realize the Company’s product development goals, and other adversedevelopments. These events could have a negative impact on the Company’savailable liquidity sources during the remaining fiscal year.

 

As a result of ourlimited cash resources and history of operating losses, our auditors haveexpressed in their report on our consolidated financial statements, included inour audited March 31, 2007 consolidated financial statements, that thereis substantial doubt about our ability to continue as a going concern. Wepresently have no further commitments for financing by Mr. Carl Berg, chairmanof our Board of Directors and our principal shareholder, and/or his affiliates,or from any other source. If we are unable to obtain financing from Mr. Bergand/or his affiliates, or others on terms acceptable to us, or at all, we maybe forced to cease all operations and liquidate our assets. Our cashrequirements may vary materially from those now planned because of changes inour operations, including the failure to achieve expected revenues, greaterthan expected expenses, changes in OEM relationships, market conditions, thefailure to timely realize our product development goals, and other adversedevelopments. These events could have a negative impact on our availableliquidity sources. We intend to improve our liquidity by continued monitoringand reduction of manufacturing, facility and administrative costs. However,there can be no assurance that these efforts will be successful or that theanticipated benefits would be realized in the near term.

 

***Capital Commitments and Debt***

 

At December 31, 2007, we had commitments forcapital expenditures for the next 12 months of approximately $1,367,000relating to manufacturing equipment. We may require additional capitalexpenditures in order to meet greater demand levels for our products than arecurrently anticipated and/or to support our operations in China. In particular,we anticipate the need for additional working capital in the fiscal fourth quarterand beyond to support our obligations in fulfilling our recently executedsupply contract with The Tanfield Group. 

 

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

 
| **(Dollars in thousands)**          | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| 1998 long-term debt to Berg & Berg   |       | $                               | 14,950     |   |
| 2001 long-term debt to Berg & Berg   |       | 20,000                          |       |
| 2005 long-term debt to third-party            |       | 20,000                          |       |
| Interest on long-term debt                    |       | 20,711                          |       |
| Current portion of interest on long-term debt |       | 122                             |       |
| Total                                         |       | $                               | 75,783     |   |

 

Repayment obligations of short-term and long-term debtprincipal as of December 31, 2007 are:

 
| ** **                           | ** ** | **Fiscal year** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| **(Dollars in thousands)** | ** ** | **2008**             | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Principal repayment                  |       | $                    | —     |   | $ | 34,950 |   | $ | — |   | $ | 20,000 |   | $ | — |   | $ | — |   | $ | 54,950 |   |

 

If not converted to common stock, the redemptionobligation for the Series C-1 Convertible Preferred Stock and Series C-2Convertible Preferred Stock is $8,610,000, plus accrued dividends, which as ofDecember 31, 2007 totaled $388,000. The Series C-1 Convertible PreferredStock may be converted, at any time, into shares of our common stock at thelower of $4.00 or the closing price of our common stock on the conversion date,provided the conversion price can be no lower than $1.98, the closing price ofthe common stock on December 13, 2005. The Series C-2 ConvertiblePreferred Stock may be converted, at any time, into shares of our common stockat the lower of $4.00 or the closing price of our common stock on theconversion date, provided the conversion price can be no lower than $2.96, theclosing bid price of our common stock on July 13, 2005. The preferredshares are currently outstanding and subject to redemption or conversion at theholder’s discretion. On December 21, 2007, the Company received for itsrecords a letter from Berg & Berg memorializing the 

 

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agreement between the Company and Berg & Bergreached at the time Berg & Berg purchased the outstanding Series C-1Convertible Preferred Stock and Series C-2 Convertible Preferred Stock. Theletter confirms that the parties originally agreed that dividends wouldcontinue to accrue (without interest) on the Series C-1 ConvertiblePreferred Stock and the Series C-2 Convertible Preferred Stock accordingto the terms of the applicable certificates of designation, but that suchdividends are not payable until such time as the parties mutually agree, orupon redemption or conversion in accordance with the terms of the applicablecertificates of designation. A copy of this letter is filed as Exhibit 4.1to this Report.

 

If cash flow from operations is not adequate to meetour debt obligations, or to support inventory, capital equipment or otherworking capital needs, we will be required to seek additional debt or equityfinancing. There can be no assurance that we could obtain the additionalfinancing or that such financing will not be substantially dilutive to currentshareholders.

 

***Inflation***

 

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

 

***Tabular Disclosure of Contractual Obligations***

 

The following table sets forth, as of December 31,2007 our scheduled principal, interest and other contractual annual cashobligations due for each of the periods indicated below (in thousands):

 
| ** **                                | ** ** | **Payment Due by Period** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | ** **                               | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                                | ** ** | **Total**                                | ** ** | **One Year** | ** ** | **1-2 Years** | ** ** | **3-5 Years** | ** ** | **5 Years** | ** ** |
| Contractual Obligations:             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt obligations                |       | $                                        | 75,783     |   | $ | 122 |   | $ | 55,661 |   | $ | 20,000 |   | $ | — |   |
| Operating lease obligations               |       | 1,354                                    |       | 531 |   | 711 |   | 112 |   | 1 |   |
| Purchase obligations                      |       | 10,953                                   |       | 10,953 |   |   |   |   |   |   |   |
| Redemption of Convertible Preferred Stock |       | 8,998                                    |       | 8,998 |   |   |   |   |   |   |   |
|                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| Total                                     |       | $                                        | 97,088     |   | $ | 20,605 |   | $ | 56,372 |   | $ | 20,112 |   | $ | 1 |   |

 

The terms of thecertificates of designation for the series C-1 preferred stock and theSeries C-2 preferred stock initially provided that the deadline forredemption was December 15, 2005. Pursuant to assignment agreements enteredinto between the Company and Berg & Berg, Berg & Berg waived therequirement that the Series C-1 preferred stock and Series C-2 preferred stockbe redeemed on this date. There currently are no redemption deadlines. As setforth above, although dividends are not due, they are continuing to accrue (currently$388,000 as of December 31, 2007). The total above for Redemption ofConvertible Preferred Stock includes accrued dividends.

 

20

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***Subsequent Financing - Related Events***

 

FormS-3 Registration Statement

OnJanuary 14, 2008, the Company filed a Form S-3 Registration Statement with theSEC utilizing a “shelf” registration process. On January 22, 2008, the Form S-3Registration was declared effective by the SEC. Pursuant to this “shelf”registration statement, the Company may sell debt or equity securitiesdescribed in the accompanying prospectus in one or more offerings up to a totalpublic offering price of $50,000,000. This provides us additional flexibilitywith regards to potential financing that we may undertake.

 

EquityFinancing

OnFebruary, 8, 2007, Berg & Berg Enterprises, an affiliate of our ChairmanCarl Berg, purchased 492,611 shares of the Company’s common stock for $1.0million. The purchase price of $2.03 per share equaled the closing bid price ofthe Company’s common stock as of February 7, 2008. An announcement of thisstock sale will be filed with the SEC on Form 8-K subsequent to the filing ofthis report. Proceeds from this stock sale will be used for general capital andworking capital purposes.

 

**ITEM3.**                  **QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We considered the provisions of Financial ReportingRelease No. 48, “Disclosures of Accounting Policies for DerivativeFinancial Instruments and Derivative Commodity Instruments, and Disclosures ofQuantitative and Qualitative Information about Market Risk Inherent inDerivative Commodity Instruments.” On July 13, 2005, in connection with a$20,000,000 loan agreement with a third party finance company with an adjustableinterest rate equal to the greater of 6.75% or the sum of the LIBOR rate plus4.0% (9.25% at December 31, 2007), we entered into a rate cap agreementwhich caps the LIBOR rate at 5.5% (On January 7, 2008, the most recentadjustment date, the LIBOR rate was 4.44%) In addition, we are exposed tofinancial market risks, including changes in foreign currency exchange ratesand interest rates.

 

We also have long-term debt in the form of two loansfrom a stockholder, which mature in September 2008, and one loan from athird party finance company which matures in July 2010. The first loanfrom the stockholder has an adjustable rate of interest at 1.0% above thelender’s borrowing rate (9% at December 31, 2007) and the second loan fromthe stockholder has a fixed interest rate of 8.0%. The loan from the thirdparty finance company has a monthly floating interest rate as described above.Each 0.25% increase in interest on the adjustable rate loan would increase ourannual interest expense by approximately $74,000. The table below presentsprincipal amounts by fiscal year for our long-term and short-term debt:

 
| **(dollars in thousands)** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Liabilities:                         |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |
| Fixed rate debt                      |       | —   |       | 20,000   |       | —   |       | —   |       | —   |       | —         |       | $         | 20,000     |   |
| Variable rate debt                   |       | —   |       | 14,950   |       | —   |       | —   |       | —   |       | —         |       | $         | 14,950     |   |
| Variable rate debt                   |       | —   |       | —   |       | —   |       | 20,000   |       | —   |       | —         |       | $         | 20,000     |   |

 

Based on borrowing rates currently available to us forloans with similar terms, the carrying value of our debt obligations approximatesfair value.

 

21

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**ITEM4.**                  **CONTROLS AND PROCEDURES**

 

The term “disclosure controls and procedures” refersto the controls and other procedures of a company that are designed to ensurethat information required to be disclosed by the company in the reports that itfiles under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded,processed, summarized and reported, within required time periods. Disclosurecontrols and procedures, include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed in the reports theCompany files or submits under the Exchange Act is accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer as appropriate to allow timely decisions regarding required disclosure.Our management, with the participation of our Chief Executive Officer and ChiefFinancial Officer carried out an evaluation of the effectiveness of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15(b) forthe period covered by this Report.

 

Based on this evaluation, the Chief Executive Officerand Chief Financial Officer have concluded that, as of December 31, 2007,our disclosure controls and procedures are effective in timely alerting them tomaterial information required to be included in our periodic reports with theCommission.  Subsequent to the date oftheir evaluation, there have been no significant changes in our internalcontrols or in other factors that could significantly affect these controls.

 

In addition, there were no changes in our internalcontrols during the nine months of fiscal 2008 that have materially affected,or are reasonably likely to materially affect, our internal controls overfinancial reporting.

 

22

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**PART II- OTHER INFORMATION**

 

**ITEM1.**                  **LEGAL PROCEEDINGS**

 

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

 

On February 14, 2006, Hydro-Quebec filed alawsuit against us in the United States District Court for the Western Districtof Texas (Hydro-Quebec v. Valence Technology, Civil Action No. A06CA111).In its amended complaint filed April 13, 2006, Hydro-Quebec alleges thatSaphion® Technology, the technology utilized in all ofour commercial products, infringes U.S. Patent No. 5,910,382 and 6,514,640exclusively licensed to Hydro-Quebec. Hydro-Quebec’s complaint seeks injunctiverelief and monetary damages. The action is in the initial pleading state and wehave filed a response denying the allegations in the amended complaint. Theaction has been stayed by the Court until a final determination by the USPTO ineither of the reexaminations of the two University of Texas patents asserted inthe case. The USPTO has stated in declaring the two reexaminations that thereare serious questions as to the patentability of the two patents.

 

We are subject to, from time to time, various claimsand litigation in the normal course of business. In our opinion, all pendinglegal matters are either covered by insurance or, if not insured, will not havea material adverse impact on our consolidated financial statements.

 

**ITEM1A.**               **RISK FACTORS**

 

In addition to the risk factors included in Item 1A ofour Annual Report on Form 10-K for our fiscal year ending March 31,2007, filed with the Commission on June 14, 2007, the following additionaland/or updated risk factors are applicable:

 

**There is doubt about our ability tocontinue as a going concern.**

 

We have experienced significant operating losses inthe current and prior years. At December 31, 2007, our principal sourcesof liquidity were cash and cash equivalents of $2,837,000. We do not expectthat our cash on hand and cash generated by operations will be sufficient tofund our operating and capital needs beyond the next three months. As a resultof our limited cash resources and history of operating losses, our auditorshave 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 goingconcern. We presently have no further commitments for financing by affiliatesof our Chairman Carl Berg or any other source. If we are unable to obtainfinancing from affiliates of Mr. Berg or others on terms acceptable to us,or at all, we may not be able to fulfill our customer commitments and/or beforced to cease all operations and liquidate our assets.

 

**We have encountered problems in ourproduction processes that have limited our ability at times to producesufficient batteries to meet the demands of our customers. If these issuesrecur and we are unable to timely resolve these problems, our inability toproduce batteries will have a material adverse impact on our ability to growrevenues and maintain our customer base.**

 

Problems in our production processes could limit ourability to produce a sufficient number of batteries to meet the demands of ourcustomers. Production issues likely will have a negative impact on grossmargins as manufacturing yields will suffer. Any inability to timely producebatteries and other products would have a material adverse impact on our abilityto grow revenues and maintain our customer base. For example, during the thirdquarter of fiscal 2008, our anticipated revenue was adversely affected due to thetemporary suspension of production and shipments at our China facility in orderto implement a component change on a circuit board.

 

23

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**We have a history of losses and anaccumulated deficit and may never achieve or sustain significant revenues orprofitability.**

 

We have incurred operating losses each year since ourinception in 1989 and had an accumulated deficit of $531.6 million of December 31,2007. We have sustained recurring losses related primarily to the research anddevelopment and marketing of our products combined with the lack of sufficientsales to provide for these needs. We anticipate that we will continue to incuroperating losses and negative cash flows during fiscal 2008. We may neverachieve or sustain sufficient revenues or profitability in the future.

 

**If we continue to experiencesignificant losses we may be unable to maintain sufficient liquidity to providefor our operating needs.**

 

We reported a net loss available to commonstockholders of $5.6 million and $14.8 million for the three- and nine-monthperiods ended December 31, 2007, respectively.  We have reported a net loss available tocommon 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 thefiscal year ended March 31, 2006. If we cannot achieve a competitive coststructure, achieve profitability and access the capital markets on acceptableterms, we will be unable to fund our obligations and sustain our operations andmay be required to liquidate our assets.

 

**Our working capital requirementsmay increase beyond those currently anticipated.**

** **

We have planned for anincrease in sales and, if we experience sales in excess of our plan, ourworking capital needs and capital expenditures would likely increase from thatcurrently anticipated. In particular, our recently announced contract with TheTanfield Group will require us to expend additional amounts for inventory andcapital equipment, in advance of any revenues. Our ability to meet thisadditional customer demand would depend on our ability to arrange foradditional equity or debt financing since it is likely that cash flow fromsales will lag behind these increased working capital requirements.

 

**Our indebtedness and otherobligations are substantial and could materially affect our business and ourability to incur additional debt to fund future needs.**

 

We have and will continue to have a significant amountof indebtedness and other obligations. As of December 31, 2007, we hadapproximately $74 million of total consolidated indebtedness. Included in thisamount are $34.5 million of loans outstanding to an affiliate, $20.7 million ofaccumulated interest associated with those loans and $18.8 million of principaland interest outstanding with a third party finance company. We also have anupcoming obligation to redeem our outstanding shares of Series C-1 ConvertiblePreferred Stock and Series C-2 Convertible Preferred Stock for up to $8,610,000,plus accrued dividends which, as of December 31, 2007, were $388,000. Oursubstantial indebtedness and other obligations could negatively impact our currentand future operations. 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;                                                                                                       |
| · | 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; |
| · | place us at a disadvantage to our competitors that  have relatively less debt than we have; and/or                                                                                                                                                                                                                       |
| · | cause us to cease business and liquidate our assets  and operations.                                                                                                                                                                                                                                                     |

 

**We depend on a small number ofcustomers for our revenues, and our results of operations and financialcondition could be harmed if we were to lose the business of any one of them.**

 

To date, our existing purchase orders in commercialquantities are from a limited number of customers. During the three-monthperiod ended December 31, 2007, Segway Inc., D&H Distributing Co., Inc.,and Oxygen contributed 59%, 6%, and 5%, of our revenues, respectively. Weanticipate that sales of our products to a limited number of key customers willcontinue to account for a significant portion of our total revenues. We do nothave long-term agreements with any of these customers committing them topurchase any specified amount of our products. As a result, we face thesubstantial risk that one or more of the following events could occur:

 
| · | reduction, delay or cancellation of 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 wewere to lose revenues due to a customer’s inability or refusal to continue topurchase our batteries, our business, results of operations and financialcondition would be harmed.

 

24

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**If we cannot protect or enforce ourexisting intellectual property rights or if our pending patent applications donot result in issued patents, we may lose the advantages of our research andmanufacturing systems.**

 

Our ability to compete successfully will depend onwhether we can protect our existing proprietary technology and manufacturingprocesses. We recently filed a lawsuit against a company in Canada alleginginfringement of certain Canadian patents, as described in further detail in“Legal Proceedings” in Item 1 of Part II above. We rely on a combinationof patent and trade secret protection, non-disclosure agreements andcross-licensing agreements. These measures may not be adequate to safeguard theproprietary technology underlying our batteries. Employees, consultants, andothers who participate in the development of our products may breach theirnon-disclosure agreements with us, and we may not have adequate remedies in theevent of their breaches. Furthermore, our competitors may be able to developproducts that are equal or superior to our products without infringing on anyof our intellectual property rights. We currently manufacture and export someof our products from China. The legal regime protecting intellectual propertyrights in China is weak. Because the Chinese legal system in general, and theintellectual property regime in particular, are relatively weak, it is oftendifficult to enforce intellectual property rights in China. Moreover, there areother countries where effective copyright, trademark and trade secretprotection may be unavailable or limited. Accordingly, we may not be able toeffectively protect our intellectual property rights outside of the UnitedStates.

 

**Intellectual property infringementclaims brought against us could be time-consuming and expensive to defend, andif any of our products or processes is found to be infringing, we may not beable to procure licenses to use patents necessary to our business at reasonableterms, if at all.**

 

In recent years, there has been significant litigationin the United States involving patents and other intellectual property rights.For example, we were recently named in a lawsuit which alleges that the Company’sSAPHION® Icathode material infringes two patents owned by the University of Texas that wedescribe in further detail in “Legal Proceedings” in Item 1 of Part IIabove. An adverse decision in this litigation could force us to do one or moreof 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 additional litigation andproceedings in the future. Likewise, we may in the future be subject to claimsor an inquiry regarding our alleged unauthorized use of a third party’sintellectual property. An adverse outcome in such future litigation couldresult in similar risks as noted above with respect to the third party’sintellectual property. Whether or not an intellectual property litigation claimis valid, the cost of responding to it, in terms of legal fees and expenses andthe diversion of management resources, could be expensive and harm ourbusiness.

 

**Corporate insiders or theiraffiliates will be able to exercise significant control over matters requiringstockholder approval that might not be in the best interests of ourstockholders as a whole.**

 

As of February 1, 2008 and before giving effect tothe February 8, 2007 purchase of 492,611 shares of the Company’s common stockby Berg & Berg Enterprises, an affiliate of our Chairman Carl Berg, ourofficers, directors and their affiliates as a group beneficially ownedapproximately 55.3% of our outstanding common stock and Mr. Berg and hisaffiliates beneficially owned approximately 46.7% of our outstanding commonstock. As a result, these stockholders will be able to exercise significantcontrol over all matters requiring stockholder approval, including the electionof directors and the approval of significant corporate transactions, whichcould delay or prevent someone from acquiring or merging with us. The interestof our officers and directors, when acting in their capacity as stockholders,may lead them to:

 
| · | vote for the election of directors who agree with  the incumbent officers’ or directors’ preferred corporate policy; or |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

 

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| · | 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. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Future sales of currently outstandingshares could adversely affect our stock price.**

 

The market price of our common stock could drop as aresult of sales of a large number of shares in the market or in response to theperception that these sales could occur. In addition, these sales might make itmore difficult for us to sell equity or equity-related securities in the futureat a time and price that we deem appropriate. As of December 31, 2007, wehad issued 115,487,094 shares of common stock and have 1,803,144 shares intreasury stock.  The net of shares issuedand outstanding as of December 31, 2007 is 113,683,950.  In addition, at December 31, 2007, wehad 12,599,524 shares of our common stock reserved for issuance under warrantsand stock options plans. In connection with the potential conversion of the Series C-1Convertible Preferred Stock and Series C-2 Convertible Preferred Stock,issued on December 1, 2004, we may need to issue up to 2,174,242 and1,454,392 shares, respectively, of our common stock (based on a conversionprice of $1.98 and $2.96, respectively) (in addition to any shares that may beissued with respect to the conversion of accrued dividends).

 

**Certain equity transactions occurring in thefuture could result in dilution to current equity holders.**

 

Future equity transactions, including the sale ofshares of common stock or preferred stock, or the exercise of options orwarrants or other convertible securities, could result in dilution. From timeto time, we may sell restricted stock and warrants or convertible debt toinvestors in private placements conducted by broker-dealers, or in negotiatedtransactions. Because the securities may be restricted, the securities may besold at a greater discount to market prices compared to a public securitiesoffering, and the exercise price of the warrants may be at or even lower thanmarket prices. These transactions cause dilution to existing shareholders.Also, from time to time, options may be issued to employees and third parties,with exercise prices equal to market. Exercise of in-the-money options,warrants and other convertible securities will result in dilution to existingshareholders; the amount of dilution will depend on the spread between marketand exercise price, and the number of shares involved.

 

**ITEM2.**                  **UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

Please refer to Part II, Item 5 below for adescription of the recent sale of the Company’s common stock to Berg & BergEnterprises, which occurred after the completion of the fiscal quarter to whichthis Report relates, but before this filing.

 

**ITEM3.**                  **DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM4.**                  **SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM5.**                  **OTHER INFORMATION**

 

Letter Dated December 21, 2007

 

On December 21, 2007, the Company received forits records a letter from Berg & Berg memorializing the agreementbetween the Company and Berg & Berg reached at the time Berg &Berg purchased the outstanding Series C-1 Convertible Preferred Stock and Series C-2Convertible Preferred Stock. The letter confirms that the parties originallyagreed that dividends would continue to accrue (without interest) on the Series C-1Convertible Preferred Stock and the Series C-2 Convertible Preferred Stockaccording to the terms of the applicable certificates of designation, but thatsuch dividends are not payable until such time as the parties mutually agree,or upon redemption or conversion in accordance with the terms of the applicablecertificates of designation. A copy of this letter is filed as Exhibit 4.1to this Report.

 

Tanfield Contract

 

On February 6, 2008, the Company and The TanfieldGroup Plc (LN: TAN) entered into a supply agreement whereby the Company agreedto manufacture and supply Lithium Phosphate energy storage systems to powerzero emission, all-electric commercial delivery vehicles. The Company’s batterysystems will be installed in leading-edge vans and trucks produced by Tanfield’sUK-based trading division, Smith Electric Vehicles.

 

Equity Financing

 

On February 8, 2008, Berg& Berg Enterprises, an affiliate of our Chairman Carl Berg, purchased492,611 shares of the Company’s common stock for $1.0 million. The purchase priceof $2.03 per share equaled the closing bid price of the Company’s commonstock as of February 7, 2008. An announcement of this stock sale will be filedwith the SEC on Form 8-K subsequent to the filing of this Report. Proceeds ofthis sale will be used for general capital and working capital purposes.

 

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A copy of this agreement will be filed with the SEC onForm 8-K subsequent to the filing of this Report, with certain termsredacted pursuant to a simultaneous request for confidential treatment of suchterms.

 

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**ITEM 6.**  **EXHIBITS**

 
| **EXHIBIT NO.** | ** ** | ** **                                                                                                                                                                                                                                                                |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                      |
| 3.1                  |       | Second Restated Certificate of Incorporation of the  Company (incorporated by reference to the exhibit so described in the  Company’s Registration Statement on Form S-1 (File No. 33-46765), as amended,  filed with the SEC on March 27, 1992)                     |
| 3.2                  |       | Amendment to the Second Restated Certificate of Incorporation  of the Company (incorporated by the reference to the exhibit so described in  the Company’s Schedule 14A filed with the SEC on January 28, 2000)                                                      |
| 3.3                  |       | Fourth Amended and Restated Bylaws of the Company  (incorporated by reference to the exhibit so described in the Company’s  Current Report on Form 8-K filed with the SEC on January 22, 2008)                                                                       |
| 4.1                  |       | Certificate of Designations, Preferences and Rights  of Series C-1 Convertible Preferred Stock (incorporated by reference to the  exhibit so described in the Company’s current Report on Form 8-K dated  November 30, 2004, filed with the SEC on December 1, 2004) |
| 4.2                  |       | Certificate of Designations, Preferences and Rights  of Series C-2 Convertible Preferred Stock (incorporated by reference to the  exhibit so described in the Company’s current Report on Form 8-K dated  November 30, 2004, filed with the SEC on December 1, 2004) |
| 4.3                  |       | Letter Agreement, dated December 21, 2007 by  and between Valence Technology, Inc. and Berg & Berg  Enterprises, LLC.                                                                                                                                  |
| 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 1934                                                                                                                          |
| 32.1                 |       | Certification of Robert L. Kanode, Principal  Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                     |
| 32.2                 |       | Certification of 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.                                                                                     |

 

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereto duly authorized.

 

VALENCE TECHNOLOGY, INC.

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

 

 
|   | By:    | /s/ Thomas F. Mezger     |   |
|--------|--------|-----------------------------------------|--------|
|   |   | Thomas F. Mezger                        |
|   |   | Chief Financial Officer and Assistant   |
|   |   | Secretary (Principal Financial Officer) |

 

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EXHIBIT INDEX

 
| **EXHIBIT NO.** | ** ** | ** **                                                                                                                                                                                                                                                                |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                      |
| 3.1                  |       | Second Restated Certificate of Incorporation of the  Company (incorporated by reference to the exhibit so described in the  Company’s Registration Statement on Form S-1 (File No. 33-46765), as amended,  filed with the SEC on March 27, 1992)                     |
| 3.2                  |       | Amendment to the Second Restated Certificate of  Incorporation of the Company (incorporated by the reference to the exhibit so  described in the Company’s Schedule 14A filed with the SEC on January 28,  2000)                                                     |
| 3.3                  |       | Fourth Amended and Restated Bylaws of the Company  (incorporated by reference to the exhibit so described in the Company’s  Current Report on Form 8-K filed with the SEC on January 22, 2008)                                                                       |
| 4.1                  |       | Certificate of Designations, Preferences and Rights  of Series C-1 Convertible Preferred Stock (incorporated by reference to the  exhibit so described in the Company’s current Report on Form 8-K dated  November 30, 2004, filed with the SEC on December 1, 2004) |
| 4.2                  |       | Certificate of Designations, Preferences and Rights  of Series C-2 Convertible Preferred Stock (incorporated by reference to the  exhibit so described in the Company’s current Report on Form 8-K dated  November 30, 2004, filed with the SEC on December 1, 2004) |
| 4.3                  |       | Letter Agreement, dated December 21, 2007 by  and between Valence Technology, Inc. and Berg & Berg  Enterprises, LLC.                                                                                                                                  |
| 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 1934                                                                                                                          |
| 32.1                 |       | Certification of Robert L. Kanode, Principal  Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                     |
| 32.2                 |       | Certification of 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.                                                                                     |

 

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