UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549










FORM 10-Q







(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended December 31, 2009Oro
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from
                 to





Commission
file number: 0-20028







VALENCE
TECHNOLOGY, INC.


(Exact
name of registrant as specified in its charter)





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





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





(512)
527-2900


(Registrant’s
telephone number, including area code)








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








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





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





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





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








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





APPLICABLE
ONLY TO CORPORATE ISSUERS:





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





The number of shares of common stock,
par value of $0.001 per share, outstanding at January 31, 2010 was
129,082,123.








VALENCE
TECHNOLOGY, INC.


FORM 10-Q


INDEX





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








2


PART I
– FINANCIAL INFORMATION





ITEM 1. FINANCIAL
      STATEMENTS (UNAUDITED)





Valence
Technology, Inc.


Condensed
Consolidated Balance Sheets




(in
thousands, except share amounts)





December
      31,
            
            
            March 31,2009
            
            
            2009(unaudited)ASSETSCurrent assets:Cash
      and cash equivalents
            
            $
            2,329
            
            
            $
            4,009Trade
      receivables, net of allowance of $47 and $172,
respectively
            
            
            1,814
            
            
            
            3,592Inventory,
      net
            
            
            6,115
            
            
            
            10,736Shareholder
      receivable
            
            
            —
            
            
            
            1,062Other
      receivables
            
            
            6,485
            
            
            
            2,854Prepaid
      and other current assets
            
            
            1,258
            
            
            
            1,092Total
      current assets
            
            
            18,001
            
            
            
            23,345Property,
      plant and equipment, net
            
            
            5,423
            
            
            
            6,291Total
      assets
            
            $
            23,424
            
            
            $
            29,636LIABILITIES,
      PREFERRED STOCK AND STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts
      payable
            
            $
            1,996
            
            
            $
            1,822Accrued
      expenses
            
            
            7,343
            
            
            
            7,279Short-term
      debt, net of debt discount
            
            
            19,805
            
            
            
            —Deferred
      revenue
            
            
            —
            
            
            
            355Total
      current liabilities
            
            
            29,144
            
            
            
            9,456Long-term
      interest payable to stockholder
            
            
            26,651
            
            
            
            24,415Long-term
      debt, net of debt discount
            
            
            —
            
            
            
            19,445Long-term
      debt to stockholder, net of debt discount
            
            
            34,858
            
            
            
            34,766Other
      long-term liabilities
            
            
            136
            
            
            
            129Commitments
      and contingenciesPreferred Stock:Redeemable
      convertible preferred stock, $0.001 par value, 10,000,000 shares
      authorized, 861 issued and outstanding as of December 31, 2009 and
      March 31, 2009, liquidation value $8,610
            
            
            8,610
            
            
            
            8,610Stockholders’ deficit:Common
      stock, $0.001 par value, 200,000,000 shares authorized, 130,235,267 shares
      issued and 128,432,123 shares outstanding as of December 31, 2009 and
      125,042,793 shares issued and 123,239,649 shares outstanding as of
      March 31, 2009
            
            
            130
            
            
            
            125Additional
      paid-in-capital
            
            
            507,913
            
            
            
            498,646Treasury
      shares, 1,803,144 at cost
            
            
            (5,164
            )
            
            
            (5,164
            )Accumulated
      deficit
            
            
            (575,715
            )
            
            
            (557,657
            )Accumulated
      other comprehensive loss
            
            
            (3,139
            )
            
            
            (3,135
            )Total
      stockholders’ deficit
            
            
            (75,975
            )
            
            
            (67,185
            )Total
      liabilities, preferred stock, and stockholders’ deficit
            
            $
            23,424
            
            
            $
            29,636





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


3


Valence
Technology, Inc.


Condensed
Consolidated Statements of Operations and Comprehensive Loss




(in
thousands, except per share amounts)


( Unaudited )





Three Months Ended
            
            
            Nine
      Months EndedDecember
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Revenue:Battery
      and system sales
            
            $
            3,998
            
            
            $
            4,455
            
            
            $
            11,885
            
            
            $
            20,454Licensing
      and royalty revenue
            
            
            115
            
            
            
            227
            
            
            
            293
            
            
            
            1,033Total
      revenues
            
            
            4,113
            
            
            
            4,682
            
            
            
            12,178
            
            
            
            21,487Cost
      of sales
            
            
            3,620
            
            
            
            4,432
            
            
            
            10,644
            
            
            
            21,435Gross
      margin / (loss)
            
            
            493
            
            
            
            250
            
            
            
            1,534
            
            
            
            52Operating
      expenses:Research
      and product development
            
            
            1,286
            
            
            
            1,046
            
            
            
            3,551
            
            
            
            3,407Marketing
            
            
            885
            
            
            
            637
            
            
            
            2,073
            
            
            
            2,138General
      and administrative
            
            
            2,650
            
            
            
            2,405
            
            
            
            9,555
            
            
            
            7,618Impairment
      on long lived assets
            
            
            —
            
            
            
            (21
            )
            
            
            —
            
            
            
            368Total
      operating expenses
            
            
            4,821
            
            
            
            4,067
            
            
            
            15,179
            
            
            
            13,531Operating
      loss
            
            
            (4,328
            )
            
            
            (3,817
            )
            
            
            (13,645
            )
            
            
            (13,479
            )Foreign
      exchange gain (loss)
            
            
            (10
            )
            
            
            (50
            )
            
            
            48
            
            
            
            568Interest
      and other income
            
            
            8
            
            
            
            13
            
            
            
            26
            
            
            
            25Interest
      and other expense
            
            
            (1,249
            )
            
            
            (1,298
            )
            
            
            (3,763
            )
            
            
            (3,971
            )Property
      and casualty loss
            
            
            (2
            )
            
            
            —
            
            
            
            (594
            )
            
            
            —Net
      loss
            
            $
            (5,581
            )
            
            $
            (5,152
            )
            
            $
            (17,928
            )
            
            $
            (16,857
            )Dividends
      on preferred stock
            
            
            (43
            )
            
            
            (43
            )
            
            
            (130
            )
            
            
            (130
            )Net
      loss available to common stockholders, basic and diluted
            
            $
            (5,625
            )
            
            $
            (5,195
            )
            
            $
            (18,058
            )
            
            $
            (16,987
            )Other
      comprehensive loss:Net
      loss
            
            $
            (5,581
            )
            
            $
            (5,152
            )
            
            $
            (17,928
            )
            
            $
            (16,857
            )Change
      in foreign currency translation adjustments
            
            
            (4
            )
            
            
            76
            
            
            
            (4
            )
            
            
            421Comprehensive
      loss
            
            $
            (5,585
            )
            
            $
            (5,076
            )
            
            $
            (17,932
            )
            
            $
            (16,436
            )Net
      loss per share available to common stockholders, basic and
      diluted
            
            $
            (0.04
            )
            
            $
            (0.04
            )
            
            $
            (0.14
            )
            
            $
            (0.14
            )Shares
      used in computing net loss per share available to common stockholders,
      basic and diluted
            
            
            126,892
            
            
            
            121,146
            
            
            
            125,168
            
            
            
            118,256





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


4


Valence
Technology, Inc.


Condensed
Consolidated Statements of Cash Flows





(in
thousands)


( Unaudited )





Nine
      Months Ended
              December
      31,2009
            
            
            2008Cash flows from operating
      activities:Net
      loss
            
            $
            (17,928
            )
            
            $
            (16,857
            )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
            
            
            906
            
            
            
            1,634Bad
      debt expense
            
            
            8
            
            
            
            65Accretion
      of debt discount and other
            
            
            2,688
            
            
            
            2,682Property
      and casualty loss
            
            
            594
            
            
            
            —Share-based
      compensation
            
            
            1,839
            
            
            
            1,513Changes
      in operating assets and liabilities:Trade
      receivables
            
            
            2,023
            
            
            
            5,968Inventory
            
            
            1,890
            
            
            
            (407
            )Prepaid
      and other current assets
            
            
            691
            
            
            
            (2,376
            )Accounts
      payable
            
            
            175
            
            
            
            (2,795
            )Accrued
      expenses and long-term interest
            
            
            (1,424
            )
            
            
            301Deferred
      revenue
            
            
            (355
            )
            
            
            (614
            )Net
      cash used in operating activities
            
            
            (8,893
            )
            
            
            (10,886
            )Cash flows from investing
      activities:Purchases
      of property, plant and equipment
            
            
            (222
            )
            
            
            (6,333
            )Proceeds
      from disposal of property, plant and equipment
            
            
            —
            
            
            
            3,669Net
      cash used in investing activities
            
            
            (222
            )
            
            
            (2,664
            )Cash flows from financing
      activities:Proceeds
      from short term loans
            
            
            —
            
            
            
            7,633Proceeds
      from stock option exercises
            
            
            132
            
            
            
            809Proceeds
      from issuance of common stock and warrants, net of issuance
      costs
            
            
            7,300
            
            
            
            10,846Net
      cash provided by financing activities
            
            
            7,432
            
            
            
            19,288Effect
      of foreign exchange rates on cash and cash equivalents
            
            
            3
            
            
            
            115Decrease
      (increase) in cash and cash equivalents
            
            
            (1,680
            )
            
            
            5,853Cash
      and cash equivalents, beginning of period
            
            
            4,009
            
            
            
            2,616Cash
      and cash equivalents, end of period
            
            $
            2,329
            
            
            $
            8,469Supplemental information:Notes
      payable contributed for exercise of common stock warrants
            
            $
            —
            
            
            $
            7,633Interest
      paid
            
            $
            1,031
            
            
            $
            1,182





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


5


Valence
Technology, Inc.


Notes
to Condensed Consolidated Financial Statements


December
31, 2009


(Unaudited)





1.
            INTERIM
      CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS:





These
interim condensed consolidated financial statements are unaudited but reflect,
in the opinion of management, all normal recurring adjustments necessary to
present fairly the financial position of Valence Technology, Inc. and its
subsidiaries (“Valence” or the “Company”) as of December 31, 2009, its
consolidated results of operations for each of the three and nine month periods
ended December 31, 2009 and December 31, 2008, and the consolidated cash flows
for the nine month periods ended December 31, 2009 and December 31, 2008.
Because all the disclosures required by accounting principles generally accepted
in the United States are not included, these interim condensed consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto in the Company’s Annual Report on Form 10-K as
of and for the year ended March 31, 2009. The results for the three and nine
month periods ended December 31, 2009 are not necessarily indicative of the
results to be expected for the entire fiscal year ending March 31, 2010.
The year-end condensed consolidated balance sheet data as of March 31, 2009 was
derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United
States.





2.
            BUSINESS
      AND BUSINESS STRATEGY:





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





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





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





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





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





6


Going
Concern:





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. The
Company has incurred operating losses each year since its inception in 1989 and
had an accumulated deficit of $575.7 million as of December 31, 2009. For the
three and nine month periods ended December 31, 2009, the Company sustained net
losses available to common stockholders of $5.6 and $18.1 million, respectively.
For the three and nine month periods ended December 31, 2008, the Company
sustained net losses available to common stockholders of $5.2 and $17.0 million,
respectively. These factors, among others, indicate that the Company may be
unable to continue as a going concern for a reasonable period of time. The
Company’s ability to continue as a going concern is contingent upon its ability
to meet its liquidity requirements. If the Company is unable to arrange for debt
or equity financing on favorable terms, or at all, the Company’s ability to
continue as a going concern is uncertain. These financial statements do not give
effect to any adjustments to the amounts and classifications of assets and
liabilities which might be necessary should the Company be unable to continue as
a going concern.





Liquidity
and Capital Resources:





At
December 31, 2009, the Company’s principal sources of liquidity were cash and
cash equivalents of $2.3 million. The Company expects that its cash and cash
equivalents will not be sufficient for the next 12 months. The Company
anticipates product sales and royalties during fiscal 2010 will be insufficient
to cover the Company’s operating expenses. Management depends upon its ability
to periodically arrange for additional equity or debt financing to meet the
Company’s liquidity requirements.





On
February 22, 2008, the Company entered into an At Market Issuance Sales
Agreement with Wm. Smith & Co., as sales agent (the “Sales Agent”),
which was amended by Amendment No. 1 to At Market Issuance Sales Agreement on
July 2, 2009, under which the Company may issue and sell up to 10,000,000 shares
of common stock in a series of transactions over time as the Company may direct
through the Sales Agent. Unless the Company and the Sales Agent agree to a
lesser amount with respect to certain persons or classes of persons, the
compensation to the Sales Agent for sales of common stock sold pursuant to the
Agreement will be 6.0% of the gross proceeds of the sales price per
share.  As of December 31, 2009, the Company has sold approximately
4.9 million shares under this arrangement.





On
October 14, 2009 the Company entered into a Common Stock Purchase Agreement with
Seaside 88, LP, or Seaside, which provides that, upon the terms and subject to
the conditions set forth therein, the Company is required to issue and sell, and
Seaside to purchase, up to 650,000 shares of common stock once every two weeks,
subject to the satisfaction of customary closing conditions, beginning on
October 15, 2009 and ending on or about the date that is fifty-two weeks
subsequent to the initial closing, for an aggregate sale to Seaside of up to
16,900,000 shares of common stock.  The price of the shares that the
Company sells to Seaside will be at a 12% discount to the volume weighted
average trading price of the common stock for the ten consecutive trading days
immediately preceding each closing date. If the volume weighted average trading
price of the common stock for the three consecutive trading days immediately
preceding each closing date is below $1.00, the share sale is suspended. As of
December 31, 2009, the Company has sold approximately 3.3 million shares under
this arrangement. The closings scheduled for December 24, 2009, January 7, 2010,
and February 4, 2010, were not consummated because the requirement that the
volume weighted average trading price of the Company’s common stock for the
three days prior to such closings be above $1.00 per share was not met. As a
result, the sale of 1.95 million shares was not consummated.





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





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





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES:





Revenue
Recognition:





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




7


Use
of Estimates:





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





Recent
Accounting Pronouncements:





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





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





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





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




The Company has evaluated subsequent
events through February 9, 2010, the date that these financial statements were
issued.




8


Net
Loss per Share Available to Common Stockholders:





Net loss
per share is computed by dividing the net loss available to common stockholders
by the weighted average shares of common stock outstanding during the period.
The dilutive effect of the options and warrants to purchase common stock are
excluded from the computation of diluted net loss per share, since their effect
is antidilutive. The antidilutive instruments excluded from the diluted net loss
per share computation for the three and nine month periods ended December 31,
2009, and 2008, were as follows:





Three and
      Nine Months EndedDecember
      31,2009
            
            2008Shares
      reserved for conversion of Series C-1 and  Series C-2
      preferred stock
            3,628,634
            
            
            3,628,634Common
      stock options reserved
            9,354,961
            
            
            6,649,063Accrued
      dividends on Series C preferred stock convertible to common
      stock
            805,138
            
            
            307,954Total
            13,788,733
            
            
            10,585,651





On
December 31, 2009, up to $0.7 million in accrued dividends would be convertible
into up to 805,138 shares of common stock based on the closing sales price of
$0.91 per share on December 31, 2009.





4.
            INVENTORY:





Inventory
consisted of the following (in thousands) at:





December 31, 2009
            
            
            March
      31, 2009Raw
      materials
            
            $
            1,508
            
            
            $
            3,711Work
      in process
            
            
            3,285
            
            
            
            3,575Finished
      goods
            
            
            1,322
            
            
            
            3,450Total
      inventory
            
            $
            6,115
            
            
            $
            10,736





Included
in inventory at December 31, 2009, and March 31, 2009, were valuation allowances
of $3.9 million and $4.6 million to reduce their carrying values to the lower of
cost or market. The $4.6 million decrease in the inventory is mainly related to
a fire in an offsite warehouse which housed certain fixed assets and inventory
in the second quarter of fiscal 2010. It was determined that $2.7 million of raw
materials, work in progress, and finished goods inventory were consumed by the
fire and determined to be unrecoverable. The additional decrease in inventory as
of December 31, 2009, as compared to March 31, 2009, relates to management’s
ongoing focus on reducing inventory levels to better match expected demand.
Management has valued overhead absorption related to work in process based on
estimates of completion at December 31, 2009, and March 31, 2009.





5.
            OTHER
      RECEIVABLES





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





December
      31, 2009
            
            
            March
      31, 2009Receivable
      from expected insurance recovery
            
            $
            3,483
            
            
            $
            —VAT
      tax receivable
            
            
            2,877
            
            
            
            2,558Other
      receivables
            
            
            125
            
            
            
            296Total
      other receivables
            
            $
            6,485
            
            
            $
            2,854





9


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





6.
            PREPAID
      AND OTHER CURRENT ASSETS:





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





December
      31, 2009
            
            
            March
      31, 2009Deposits
            
            $
            363
            
            
            $
            432Prepaid
      insurance
            
            
            115
            
            
            
            71Other
      prepaids
            
            
            780
            
            
            
            589Total
      prepaids and other current assets
            
            $
            1,258
            
            
            $
            1,092





7.
            PROPERTY,
      PLANT AND EQUIPMENT:





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





December 31, 2009
            
            
            March
      31, 2009Leasehold
      improvements
            
            $
            1,117
            
            
            $
            1,116Machinery
      and equipment
            
            
            7,864
            
            
            
            8,021Office
      and computer equipment
            
            
            2,289
            
            
            
            2,217Construction
      in progress
            
            
            93
            
            
            
            —Total
      cost
            
            
            11,363
            
            
            
            11,354Less:
      accumulated depreciation
            
            
            (5,081
            )
            
            
            (4,204
            )Less:
      impairment
            
            
            (859
            )
            
            
            (859
            )Total
      cost, net of depreciation
            
            $
            5,423
            
            
            $
            6,291





In the
second quarter of fiscal 2010, the Company experienced a fire at an offsite
warehouse which contained certain fixed assets and inventory. As a result of
this fire, management has reduced the carrying value of certain fixed assets by
approximately $0.2 million. Depreciation expense was approximately $0.3 million
and $0.4 million for the three months ended December 31, 2009, and 2008,
respectively, and $0.9 million and $1.2 million for the nine months ended
December 31, 2009, and 2008, respectively.





8.
            SHORT
      TERM DEBT:





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





December 31, 2009
            
            
            March
      31, 2009Short
      term debt
            
            $
            20,000
            
            
            $
            —Less:
      unaccreted debt discount
            
            
            (195
            )
            
            
            —Short-term
      debt, net of debt discount
            
            $
            19,805
            
            
            $
            —





On July 13, 2005, the Company
secured a $20.0 million loan (the “2005 Loan”) from SFT I, Inc., the full
amount of which has been drawn down. The 2005 Loan is guaranteed by Carl E.
Berg, Chairman of the Board, and matures in a lump sum on July 13, 2010.
Interest is due monthly based on a floating interest rate. The interest rate is
calculated as the greater of 6.75% or the sum of LIBOR Rate, rounded to the
nearest 1/16thof 1.0%, plus 4.0% (6.75% as of
December 31, 2009). As of December 31, 2009, the 2005 Loan is payable within
telve months of the balance sheet date, and has been classified as short term
debt. As of December 31, 2009, no amounts have been paid on the 2005
Loan.





In
connection with the 2005 Loan, both SFT I, Inc. and Berg & Berg
Enterprises, LLC (“Berg & Berg”), each received warrants to purchase 600,000
shares of the Company’s common stock at a price of $2.74 per share, the closing
price of the Company’s common stock on July 12, 2005. The fair value
assigned to these warrants, totaling approximately $2.0 million, has been
recorded as a discount on the debt and will be accreted as interest expense over
the life of the loan. The warrants were valued using the Black-Scholes valuation
method using the assumptions of a life of 36 months, 96.45% volatility, and a
risk-free rate of 3.88%. On April 24, 2008, Berg & Berg exercised
its warrants by purchasing 600,000 shares of the Company’s common stock for an
aggregate purchase price of $1.6 million. In addition, SFT I, Inc.
completed  cashless exercises of its warrants on June 4, 2008 and
June 27, 2008 and received 230,767 common stock shares upon completion of
the cashless exercises. Also in connection with the 2005 Loan, the Company
incurred a loan commitment fee and attorneys’ fees which, in addition to the
interest rate cap agreement, have been recorded as a discount on the debt and
will be accreted as interest expense over the life of the loan. The rate cap
agreement terminated on August 10, 2008. Through December 31, 2009, a total of
approximately $2.1 million has been accreted and included as interest expense.
Interest payments on the 2005 Loan are currently being paid on a monthly
basis.





10





9.
            LONG
      TERM DEBT:





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





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





On
July 13, 2005, the Company secured the 2005 Loan, the full amount of which
has been drawn down. The 2005 Loan matures in a lump sum on July 13,
2010.





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





December
      31, 2009
            
            
            March
      31, 20092001
      Loan
            
            
            20,000
            
            
            $
            20,0001998
      Loan
            
            
            14,950
            
            
            
            14,950Less:
      unaccreted debt discount
            
            
            (92
            )
            
            
            (184
            )Long-term
      debt to stockholder, net of debt discount
            
            $
            34,858
            
            
            $
            34,766





In
October 2001, the Company entered into a loan agreement (“2001 Loan”) with
Berg & Berg. Under the terms of the agreement, Berg & Berg
agreed to advance the Company funds of up to $20.0 million between the date of
the agreement and December 31, 2003. Interest on the 2001 Loan accrues at 8.0%
per annum, payable from time to time. The maturity date of the 1990 Loan has
been extended multiple times, most recently on October 13, 2009, at which time
Berg & Berg agreed to further extend the maturity date for the loan
principal and interest from September 30, 2010 to September 30,
2012.





In
conjunction with the 2001 Loan, Berg & Berg received warrants to
purchase 1,402,743 shares of the Company’s common stock at the price of $3.208
per share. These warrants were exercised on September 30, 2008 when
Berg & Berg surrendered a short term note payable of $4.5 million to
the Company as exercise consideration. The fair value assigned to these
warrants, totaling approximately $5.1 million, has been reflected as additional
consideration for the debt financing, recorded as a discount on the debt and
accreted as interest expense over the life of the loan. The warrants were valued
using the Black-Scholes method using the assumptions of a life of 47 months
(extended to 84 months), 100% volatility, and a risk-free rate of 5.5%. Through
December 31, 2009, a total of approximately $5.0 million has been accreted and
included as interest expense. The amount charged to interest expense on the
outstanding balance of the loan for the three month periods ended December 31,
2009, and December 31, 2008 was $0.4 million. Interest payments on the loan are
currently being deferred, and are recorded as long-term interest payable to
stockholder. The accrued interest amounts for the 2001 Loan were $12.8 million
and $11.6 million as of December 31, 2009, and March 31, 2009,
respectively.





In
July 1998, the Company entered into an amended loan agreement (“1998 Loan”)
with Berg & Berg that allows the Company to borrow, prepay and
re-borrow up to $10.0 million principal under a promissory note on a revolving
basis. In November 2000, the 1998 Loan agreement was amended to increase
the maximum amount to $15.0 million. As of December 31, 2009, the Company had an
outstanding balance of $15.0 million under the 1998 Loan agreement. The 1998
Loan bears interest at one percent over lender’s borrowing rate (9.0 % at
December 31, 2009). The maturity date of the 1990 Loan has been extended
multiple times, most recently on October 13, 2009, at which time Berg &
Berg agreed to further extend the maturity date for the loan principal and
interest from September 30, 2010 to September 30, 2012. Interest payments are
currently being deferred, and are recorded as long term interest payable to
stockholder on the balance sheet. The accrued interest amounts for the 1998 Loan
were $13.9 million and $12.8 million as of December 31, 2009 and March 31,
2009, respectively.





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





11


10.
            COMMITMENTS
      AND CONTINGENCIES:





Warranties:





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





Litigation:





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





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





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





11.
            REDEEMABLE
      CONVERTIBLE PREFERRED STOCK:





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





Pursuant
to assignment agreements entered into between the Company and Berg &
Berg on July 14, 2005 and December 14, 2005, Berg & Berg
purchased all of the outstanding Series C-1 Convertible Preferred Stock and
Series C-2 Convertible Preferred Stock from its original holder. Pursuant
to the terms of the assignment agreement, Berg & Berg agreed that the
failure of the Company to redeem the preferred stock on December 15, 2005
did not constitute a default under the certificate of designations and has
waived the accrual of any default interest applicable in such circumstance. In
exchange, the Company has agreed (i) that the Series C-1 Convertible
Preferred Stock may be converted, at any time, into the Company’s common stock
at the lower of $4.00 per share or the closing bid price of the Company’s common
stock on December 13, 2005 ($1.98) and (ii) that the Series C-2
Convertible Preferred Stock may be converted, at any time, into the Company’s
common stock at the lower of $4.00 per share or the closing bid price of the
Company’s common stock on July 13, 2005 ($2.96). Berg & Berg has
agreed to allow dividends to accrue on the preferred stock.  At December
31, 2009, $0.7 million in preferred stock dividends had accrued.





12


12.
            SHARE-BASED
      COMPENSATION:





In 1990, the Board of Directors adopted
the 1990 Stock Option Plan (the “1990 Plan”). The 1990 Plan expired in 2000 and
as of December 31, 2009, no shares are available to be granted under this
plan.





In
February 1996, the Board of Directors adopted the 1996 Non-Employee
Director’s Stock Option Plan for outside directors (the “1996 Plan”). The 1996
Plan effectively terminated in February 2006, and as of December 31, 2009, no
shares are available to be granted under this plan.





In
October 1997, the Board of Directors adopted the 1997 Non-Officer Stock
Option Plan (the “1997 Plan”). The 1997 Plan terminated on October 3, 2007,
and as of December 31, 2009, no shares are available to be granted under this
plan.





In
January 2000, the Board of Directors adopted the 2000 Stock Option Plan
(the “2000 Plan”). During the first nine months of fiscal 2010, 361,300 shares
were granted under the 2000 Plan. This plan will terminate in January, 2010. As
of December 31, 2009, 690,221 shares remain available for grant under the 2000
Plan..





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





The
maximum number of shares of the Company’s common stock initially reserved for
issuance under the 2009 Plan with respect to awards is 3,000,000 shares. 
The 2009 Plan contains an “evergreen” provision whereby the  number of
shares of common stock available for issuance under the 2009 Plan shall
automatically increase on the first trading day of April each fiscal year
during the term of the 2009 Plan, beginning with the fiscal year ending
March 31, 2011, by an amount (the “Annual Increase Amount”) equal to the
lesser of (i) one percent (1%) of the total number of shares of common
stock outstanding on the last trading day in March of the immediately
preceding fiscal year, (ii) 1,500,000 shares and (iii) such lesser
amount if set by the Board.  The maximum number of shares of common stock
that may be issued under the 2009 Plan pursuant to the exercise of incentive
stock options is the lesser of (A) 3,000,000 shares, increased on the first
trading day of April each fiscal year during the term of the 2009 Plan,
beginning with the fiscal year ending March 31, 2011, by the Annual
Increase Amount, and (B) 16,500,000 shares.  The 2009 Plan also
contains an automatic option grant program for the Company’s non-employee
directors.  Under the automatic option grant program, each individual who
first becomes a non-employee board member at any time after the effective date
of the 2009 Plan will receive an option grant to purchase 100,000 shares of
common stock on the date such individual joins the board.  In addition, on
the date of each annual stockholders meeting held after the effective date of
the 2009 Plan, each non-employee director who continues to serve as a
non-employee director will automatically be granted an option to purchase 50,000
shares of common stock, provided such individual has served on the board for at
least six months.  All employees, service providers and directors of the
Company and its affiliates are eligible to participate in the 2009 Plan. This
plan will terminate on April 29, 2019. The 2009 Plan was approved by the
Company’s stockholders at the annual meeting of stockholders on
September 8, 2009. As of December 31, 2009, 53,700 shares have been
granted and 2,946,300 shares remain available for grant under the 2009
Plan.





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





Outstanding OptionsNumber of
            
            
            Weighted
              AverageShares
            
            
            Exercise PriceBalance
      at March 31, 2009
            
            
            5,762
            
            
            $
            2.42Granted
            
            
            415
            
            
            
            1.89Exercised
            
            
            (76
            )
            
            
            1.75Cancelled
      and expired
            
            
            (383
            )
            
            
            2.07Balance
      at December 31, 2009
            
            
            5,718
            
            
            $
            2.42





13


The
following table summarizes information about fixed stock options outstanding at
December 31, 2009 (shares in thousands):





Options
      Outstanding
            
            Options
      ExercisableWeightedAverageRemaining
            
            Weighted
            
            
            
            WeightedRange of
            
            Number
            
            Contractual
              Life
            
            Average
              Exercise
            
            Number
            
            Average
              ExerciseExercise Prices
            
            Outstanding
            
            (years)
            
            Price
            
            Exercisable
            
            Price$
            0.63
      - $1.99
            
            4,382
            
            7.2
            
            $
            1.60
            
            3,451
            
            $
            1.59$
            1.99
      - $4.62
            
            1,087
            
            5.6
            
            3.20
            
            865
            
            3.14$
            4.62
      - $10.06
            
            187
            
            1.7
            
            7.26
            
            187
            
            7.26$
            10.06
      - $15.75
            
            10
            
            .7
            
            13.84
            
            10
            
            13.84$
            15.75
      - $34.62
            
            52
            
            .1
            
            34.11
            
            52
            
            34.11$
            0.63
      - $34.62
            
            5,718
            
            6.7
            
            $
            2.41
            
            4,565
            
            $
            2.52





Compensation
expense for stock plans has been determined based on the fair value at the grant
date for options granted in the current fiscal year. For the three months ended
December 31, 2009, and 2008, $0.7 million and $0.5 million of share-based
compensation expense has been included in cost of goods sold and operating
expenses in the condensed consolidated statements of operations and
comprehensive loss. For the nine months ended December 31, 2009, and 2008, $1.8
million and $1.5 million, respectively, of share-based compensation expense has
been included in cost of goods sold and operating expenses in the condensed
consolidated statements of operations and comprehensive loss. The aggregate
intrinsic value of options exercisable at December 31, 2009 is $4,000. A total
of 75,686 options were exercised during the nine month period ended December 31,
2009.





As of
December 31, 2009 the Company had a total of $1.1 million in compensation costs
related to share-based compensation to recognize over a remaining service period
of 1.7 years for non-vested options. The fair value of each option grant is
estimated at the date of grant using the Black-Scholes pricing model with the
following weighted average assumptions for grants in fiscal years 2010 and
2009:





December 31, 2009
            
            
            March
      31, 2009Weighted
      average risk-free interest rate
            
            
            2.96
            %
            
            
            2.67
            %Average
      expected life in years
            
            5.77
            
            
            5.9
      yearsAverage
      expected volatility
            
            
            85.98
            %
            
            
            81.49
            %Dividend
      yield
            
            None
            
            
            None





13.
            RELATED
      PARTY TRANSACTIONS:





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





On
June 11, 2009, Berg & Berg purchased 1,256,281 shares of common
stock for cash at a price per share of $1.99 for an aggregate purchase price of
$2.5 million. The purchase price per share equaled the closing bid price of the
Company’s common stock as of June 10, 2009.





14.
            SEGMENT
      AND GEOGRAPHIC INFORMATION:





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





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





December 31, 2009
            
            
            March
      31, 2009United
      States
            
            $
            252
            
            
            $
            236International
            
            
            5,171
            
            
            
            6,055Total
            
            $
            5,423
            
            
            $
            6,291





14


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





Three Months Ended
            
            
            Nine
      Months EndedDecember
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008United
      States
            
            $
            2,942
            
            
            $
            2,279
            
            
            $
            8,420
            
            
            $
            12,173International
            
            
            1,171
            
            
            
            2,403
            
            
            
            3,758
            
            
            
            9,314Total
            
            $
            4,113
            
            
            $
            4,682
            
            
            $
            12,178
            
            
            $
            21,487





15.
            SUBSEQUENT
      EVENTS:





None.




15


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





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





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





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





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





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





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





16


Overview





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





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





Strategy





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





Key
elements of our business strategy include:




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




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





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




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




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





17


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





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





Going
Concern





The
accompanying consolidated financial statements have been prepared assuming that
we will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. We have
incurred operating losses each year since our inception in 1989 and had an
accumulated deficit of $575.7 million as of December 31, 2009. For the nine
month periods ended December 31, 2009, and December 31, 2008, we sustained net
losses available to common stockholders of $18.1 million and $17.0 million,
respectively. These factors, among others, indicate that we may be unable to
continue as a going concern for a reasonable period of time. Our ability to
continue as a going concern is contingent upon our ability to meet our liquidity
requirements. If we are unable to arrange for debt or equity financing on
favorable terms or at all, our ability to continue as a going concern is
uncertain. These financial statements do not give effect to any adjustments to
the amounts and classifications of assets and liabilities which might be
necessary should we be unable to continue as a going concern.





At
December 31, 2009, our principal sources of liquidity were cash and cash
equivalents of $2.3 million. We expect that our cash and cash equivalents may
not be sufficient for the next 12 months. We anticipate product sales and
royalties during fiscal 2010 will be insufficient to cover our operating
expenses. Management depends upon its ability to periodically arrange for
additional equity or debt financing to meet our liquidity
requirements.





On
October 14, 2009 we entered into a Common Stock Purchase Agreement
with Seaside 88, LP, or Seaside, which provides that, upon the terms and subject
to the conditions set forth therein, we are required to issue and sell, and
Seaside to purchase, up to 650,000 shares of our common stock once every two
weeks, subject to the satisfaction of customary closing conditions, beginning on
October 15, 2009 and ending on or about the date that is 52 weeks subsequent to
the initial closing, for an aggregate sale to Seaside of up to 16,900,000 shares
of common stock.  The price of the shares that we sell to Seaside will
be at a 12% discount to the volume weighted average trading price of the common
stock for the ten consecutive trading days immediately preceding each closing
date, which will result in immediate and substantial dilution to current stock
holders.  As of December 31, 2009, the Company has sold 3,250,000
shares to Seaside pursuant to this arrangement for aggregate gross proceeds of
$3,882,450, before offering expenses and finder’s fee. The closings scheduled
for December 24, 2009, January 7, 2010, and February 4, 2010, were not
consummated because the requirement that the volume weighted average trading
price of the Company’s  common stock for the three days prior to such
closings be above $1.00 per share was not met. As a result, the sale of 1.95
million shares was not consummated.





On
February 22, 2008, we entered into an At Market Issuance Sales Agreement
with Wm. Smith & Co., as sales agent (the “Sales Agent”), which was
amended by Amendment No. 1 to At Market Issuance Sales Agreement on July 2,
2009, under which we may issue and sell up to 10,000,000 shares of common stock
in a series of transactions over time as we may direct through the Sales
Agent. Unless we and the Sales Agent agree to a lesser amount with respect
to certain persons or classes of persons, the compensation to the Sales Agent
for sales of common stock sold pursuant to the Agreement will be 6.0% of the
gross proceeds of the sales price per share.  As of December 31, 2009
we had sold approximately 4.9 million shares under this arrangement, the most
recent sale having been consummated on September 23, 2009. This Agreement will
terminate upon the sale of all shares authorized for sale thereunder, unless
earlier terminated by one or both parties as permitted thereunder.





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





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





18


Basis
of Presentation, Critical Accounting Policies and Estimates




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




Revenue
Recognition





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





19


Results
of Operations





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





Three Months Ended
            
            
            Nine
      month EndedDecember
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Battery
      and systems sales
            
            
            97
            %
            
            
            95
            %
            
            
            98
            %
            
            
            95
            %Licensing
      and royalty revenue
            
            
            3
            %
            
            
            5
            %
            
            
            2
            %
            
            
            5
            %Total
      revenues
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %Gross
      margin profit
            
            
            12
            %
            
            
            5
            %
            
            
            13
            %
            
            
            —
            %Operating
      expenses
            
            
            117
            %
            
            
            87
            %
            
            
            125
            %
            
            
            63
            %Operating
      loss
            
            
            (105
            )%
            
            
            (82
            )%
            
            
            (112
            )%
            
            
            (63
            )%Net
      loss
            
            
            (136
            )%
            
            
            (110
            )%
            
            
            (147
            )%
            
            
            (78
            )%





Revenues
and Gross Margin





Battery and System Sales.
Battery and system sales totaled $4.0 and $11.9 million for the three and nine
months ended December 31, 2009, respectively, as compared to $4.5 million and
$21.5 million for the three and nine months ended December 31, 2008,
respectively. The nine month decline in revenues in fiscal year 2010 as compared
to fiscal year 2009 period was primarily due to the reduction in shipments to
Smith Electric Vehicles U.K, a division of The Tanfield Group (“Smith U.K.”),
which were $4.2 million in the nine months ended December 31, 2008, and a
reduction in revenue from Segway, Inc. of $5.0 million in the nine months ended
December 31, 2009, as compared to the same period in the previous year. We had
no revenue from Smith U.K. in the three or nine months ended December 31,
2009. In addition, we had a reduction in revenue from Oxygen S.p.A. (or
“Oxygen”) of $1.0 million, and a reduction in revenue from Segway, Inc. of $0.8
million, in the three months ended December 31, 2009, as compared to the same
period in 2008, which was partially offset by an increase in revenue from Howard
Medical Solutions of $0.7 million and an increase in revenue from Smith Electric
Vehicles U.S. of $0.7 million in the three months ended December 31, 2009. We
had zero and $0.4 million in deferred revenue on our balance sheet at December
31, 2009 and March 31, 2009, respectively. The decrease in deferred revenue is
primarily related to the timing of shipments at the end of the third quarter of
fiscal 2010. Segway sales accounted for 18% and 33% of our total product sales
for the three and nine months ended December 31, 2009, and 36% and 45% of our
total product sales for the three and nine months ended December 31, 2008. Smith
U.K. sales accounted for zero percent of our total product sales for the three
and nine months ended December 31, 2009 and zero and 21% of our total product
sales for the three and nine months ended December 31, 2008. Sales from Oxygen
accounted for 11% and 10% of our total product sales for the three and nine
months ended December 31, 2009, and 32% and less than 10% of our total product
sales for the three and nine months ended December 31, 2008. The large-format
battery system sales represent 79% and 63% of our total revenue for the three
months ended December 31, 2009 and 2008, respectively and 57% and 52% of our
total revenue for the nine months ended December 31, 2099, and
2008,  respectively. We expect sales of the large-format battery
system to decrease slightly during the remainder of fiscal year 2010, due to the
remaining pressure of the recession on the buying power of the
economy.





Licensing and Royalty
Revenue. Licensing and royalty revenues relate to revenue from licensing
agreements for our battery construction technology. Licensing and royalty
revenues totaled $0.1 million and $0.3 million for the three and nine months
ended December 31, 2009, respectively, as compared to $0.2 million and $1.0
million for the three and nine months ended December 31, 2008, respectively. The
three and nine month decline in licensing and royalty revenues in fiscal year
2010 as compared to fiscal year 2009 period was primarily due to an amendment of
a license agreement with Varta AG in fiscal second quarter 2009. Varta AG and
Amperex Technology Limited continue to make on-going royalty payments as sales
are made using our technology. We expect our licensing and royalty revenue to
fluctuate as we continue to pursue a licensing strategy and as our lithium
phosphate technology receives greater market acceptance.





Gross Margin. Gross margin as
a percentage of revenue was 12% and 13% for the three and nine months ended
December 31, 2009, as compared to 5% and zero for the three and nine months
ended December 31, 2008. The increase in gross margin to 12% for the three
months ended December 31, 2009, from 5% for the three months ended December 31,
2008, is mainly attributable to a decrease in our reserve for returns of
approximately $0.3 million made during the three months ended December 31, 2008,
related to Segway, Inc. shipments; there was no similar adjustment made in the
three months ended December 31, 2009. The increase in gross margin to 13% for
the nine months ended December 31, 2009, from zero for the nine months ended
December 31, 2008, is mainly due to the impairment of N-Charge® inventory of
$1.6 million in the nine months ended December 31, 2008; there were no similar
impairments booked in fiscal year 2010. In addition, gross margin increased in
nine months ended December 31, 2009, because of a $0.6 million favorable
decrease in related warranty reserves due to reduced shipments to Segway in the
nine months ended December 31, 2009.





20


Operating
Expenses





The
following table presents the change in operating expenses for the three and nine
months ended December 31, 2009 and 2008, respectively (in
thousands):





Three
      Months Ended
            
            
            Nine
      Months EndedDecember
      31,
              2009
            
            
            December
      31,
              2008
            
            
            Change
            
            
            %
              Change
            
            
            December
      31,
              2009
            
            
            December
      31,
              2008
            
            
            Change
            
            
            %
              ChangeResearch
      and development
            
            $
            1,286
            
            
            $
            1,046
            
            
            $
            240
            
            
            
            23
            %
            
            $
            3,551
            
            
            $
            3,407
            
            
            $
            144
            
            
            
            4
            %Marketing
            
            
            885
            
            
            
            637
            
            
            
            248
            
            
            
            39
            
            
            
            2,073
            
            
            
            2,138
            
            
            
            (65
            )
            
            
            (3
            )General
      and administrative
            
            
            2,650
            
            
            
            2,405
            
            
            
            245
            
            
            
            10
            
            
            
            9,555
            
            
            
            7,617
            
            
            
            1,938
            
            
            
            25Impairment
      of long lived assets
            
            
            —
            
            
            
            (21
            )
            
            
            21
            
            
            
            (100
            )
            
            
            —
            
            
            
            368
            
            
            
            (368
            )
            
            
            (100
            )Total
      operating expenses
            
            $
            4,821
            
            
            $
            4,067
            
            
            $
            754
            
            
            
            19
            %
            
            $
            15,179
            
            
            $
            13,531
            
            
            $
            1,648
            
            
            
            12
            %





During
the three and nine months ended December 31, 2009, total operating expenses were
117% and 125% of revenue, respectively, compared to 87% and 63% of revenue
during the same periods last year.  For the three and nine months ended
December 31, 2009, as compared to the similar periods ended December 31, 2008,
operating expenses increased primarily as a result of additional legal expense
related to litigation, and additional share-based compensation expense. Total
operating expenses as a percentage of revenue for the three and nine months
ended December 31, 2009, increased compared to the three and nine months ended
December 31, 2008, primarily because of the decreases in revenues for both
periods.





Research and Product
Development. Research and product development expenses consist primarily
of personnel, equipment and materials to support our efforts to develop battery
chemistry and products, as well as to improve our manufacturing processes.
Research and product development expenses increased by $0.2 million, or 23%, to
$1.3 million for the three months ended December 31, 2009, from $1.1 million for
the three months ended December 31, 2008. Research and product development
expenses remained relatively flat for the nine months ended December 31, 2009,
and 2008.  For the three months ended December 31, 2009, as compared to the
three months ended December 31, 2008, share-based compensation expense increased
by approximately $0.4 million as a result of the reclassification of certain
expenses related to employees from general and administrative expenses to
research and development expenses. In addition, there was an offsetting decrease
in research and development expenses as a result of a decrease in engineering
and design fees of approximately $0.1 million for the same period.  During
the three months ended December 31, 2009, approximately $0.4 million of
share-based compensation was allocated to research and development expenses as
compared to $0.1 million in the three months ended December 31, 2008. During the
nine months ended December 31, 2009, approximately $0.6 million of share-based
compensation was allocated to research and development expenses as compared to
$0.1 million in the nine months ended December 31, 2008. This increase is
related to the reclassification of share-based compensation expense associated
with certain employees from general and administrative expenses to research and
development expenses. We expect research and development expenses to remain
consistent for the remainder of fiscal 2010.





Marketing. Marketing expenses
consist primarily of costs related to sales and marketing personnel, public
relations and promotional materials. Marketing expenses increased by $0.3
million, or 39%, to $0.9 million for the three months ended December 31, 2009,
from $0.6 million, for the three months ended December 31, 2008. Marketing
expenses remained relatively flat at $2.1 million for the nine months ended
December 31, 2009 and December 31, 2008. The increase in marketing expenses
for the three month period ended December 31, 2009, as compared to the similar
period in 2008, is primarily related an increase in consulting expenses related
to new marketing efforts in the automotive and marine markets. During the three
and nine months ended December 31, 2009, approximately $0.1 million of
share-based compensation was allocated to marketing expenses as compared to less
than $0.1 million and $0.3 million in the three and nine months ended December
31, 2008, respectively. We expect marketing expenses to increase moderately as
we focus on growing our revenue for the remainder of fiscal year
2010.





General and Administrative.
General and administrative expenses consist primarily of salaries, share-based
compensation and other related costs for finance, human resources, facilities,
accounting, information technology, legal, and corporate-related expenses.
General and administrative expenses increased by $0.3 million, or 10%, to $2.6
million for the three months ended December 31, 2009, as compared to $2.4
million for the three months ended December 31, 2008. General and
administrative expenses increased by $2.0 million, or 25%, to $9.6 million for
the nine months ended December 31, 2009, as compared to $7.6 million for the
three months ended December 31, 2008. The increase in general and administrative
expenses for the three month period ended December 31, 2009, as compared to the
similar period in 2008, is primarily attributable to the $0.6 million increase
in legal expenses associated with litigation involving the defense of our
intellectual property. The increase in general and administrative expenses for
the nine month period ended December 31, 2009, as compared to the same period in
2008, is primarily related to a $2.0 million increase in legal expense
associated with litigation involving the defense of our intellectual property,
in addition to increased . During the three and nine months ended December 31,
2009, approximately $0.2 million and $1.1 million of share-based compensation
was allocated to general and administrative expenses, respectively, as compared
to $0.4 million and $1.0 million in the three and nine months ended December 31,
2008, respectively. We expect general and administrative expenses will remain
consistent for the remainder of fiscal year 2010.





21


Impairment of Long Lived Asset.In the nine months ended December 31, 2008, approximately $0.4 million of
impairments were recorded against various production related fixed assets due to
changes made in our manufacturing process. There were no similar impairments
made in the nine months ended December 31, 2009.





Property and Casualty Loss .
In the second quarter of fiscal 2010, we experienced a fire at an offsite
warehouse which contained certain fixed assets and inventory in Suzhou, China.
We have filed a claim with our insurance carrier that covers these materials,
using the best currently available estimates, and expect an insurance payment of
at least $3.5 million. At this time, there are uncertainties regarding the how
the insurance carrier will value the items consumed in the fire, and other
uncertainties regarding potential liabilities that we may face as a result of
the fire.  The receivable recorded represents management’s best
currently available estimate of the expected recovery. The total amount of
inventory consumed in the fire was approximately $2.7 million, and the total
amount of fixed assets consumed in the fire was approximately $0.2 million. In
addition, a Value Added Tax (“VAT”) liability was assessed on these items as
they were carried without VAT being previously assessed on them.  We
also have included this VAT expense in our insurance claim.In addition, there is a 10%
insurance deductible (approximately $0.4 million based on our claim value) which
will offset the expected recovery. The timing and actual amount of the insurance
recovery payment is uncertain at this point, but due to local practices in
China, management expects the process to take at least three to nine months to
be resolved. In December of 2009, a $0.6 million payment was made to local
Chinese authorities against the previously recorded VAT liability.





Liquidity
and Capital Resources





Liquidity





At
December 31, 2009, our principal sources of liquidity were cash and cash
equivalents of $2.3 million. We expect that these sources of liquidity may not
be sufficient for the next 12 months. We anticipate product sales and royalties
during fiscal year 2010 will be insufficient to cover our operating expenses. We
depend upon our ability to periodically arrange for additional equity or debt
financing to meet our liquidity requirements.





On
October 14, 2009, we entered into a Common Stock Purchase Agreement
with Seaside 88 LP, or Seaside, which provides that, upon the terms and subject
to the conditions set forth therein, we are required to issue and sell, and
Seaside to purchase, up to 650,000 shares of our common stock once every two
weeks, subject to the satisfaction of customary closing conditions, beginning on
October 15, 2009 and ending on or about the date that is 52 weeks subsequent to
the initial closing, for an aggregate sale to Seaside of up to 16,900,000 shares
of common stock.  The price of the shares that we sell to Seaside will
be at a 12% discount to the volume weighted average trading price of the common
stock for the ten consecutive trading days immediately preceding each closing
date, which will result in immediate and substantial dilution to current stock
holders.  As of December 31, 2009, we have sold 3,250,000 shares to
Seaside pursuant to this arrangement for aggregate gross proceeds of $3,882,450
before offering expenses and finder’s fee. The subsequent closings scheduled for
December 24, 2009, January 7, 2010, and February 4, 2010, were not consummated
because the requirement that the volume weighted average trading price of the
Company’s  common stock for the three day’s prior to such subsequent
closings be above $1.00 per share was not met. As a result, the sale of 1.95
million shares was not consummated.





On
February 22, 2008, we entered into an At Market Issuance Sales Agreement
with Wm. Smith & Co., as sales agent (the “Sales Agent”), which was
amended by Amendment No. 1 to At Market Issuance Sales Agreement on July 2,
2009, under which we may issue and sell up to 10,000,000 shares of common stock
in a series of transactions over time as we may direct through the Sales
Agent. Unless we and the Sales Agent agree to a lesser amount with respect
to certain persons or classes of persons, the compensation to the Sales Agent
for sales of common stock sold pursuant to the Agreement will be 6.0% of the
gross proceeds of the sales price per share.  As of December 31, 2009,
we had sold approximately 4.9 million shares under this arrangement, the most
recent sale having been consummated on September 23, 2009. This Agreement will
terminate upon the sale of all shares authorized for sale thereunder, unless
earlier terminated by one or both parties as permitted thereunder.





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





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





22


The
following table summarizes our statement of cash flows for the nine months ended
December 31, 2009, and 2008 (in thousands):





Nine
      Months Ended December 31,2009
            
            
            2008Net
      cash flows provided by (used in):Operating
      activities
            
            $
            (8,893
            )
            
            $
            (10,886
            )Investing
      activities
            
            
            (222
            )
            
            
            (2,664
            )Financing
      activities
            
            
            7,432
            
            
            
            19,288Effect
      of foreign exchange rates
            
            
            3
            
            
            
            115Net
      (decrease) increase in cash and cash equivalents
            
            $
            (1,680
            )
            
            $
            5,853





Our net
cash used for operations the first nine months of fiscal year  2010
and fiscal year 2009 was $8.9 million and $10.9 million, respectively. The cash
used for operating activities during the first nine months of fiscal year 2010
was primarily for operating activities and working capital. Cash used for
operating activities in the first nine months of fiscal year  2010
decreased from the same period of fiscal 2009 by $1.9 million primarily due to
the collection of accounts receivable and the reduction of inventory levels in
the nine months ended December 31, 2009, as compared to the nine months ended
December 31, 2008.





In the
first nine months of fiscal year 2010, we used approximately $0.2 million of
cash in investing activities, as compared to $2.7 million in the first nine
months of fiscal year 2009, a net decrease of $2.5 million, mainly due to the
cash used for purchases of equipment domestically and in China in the first nine
months of fiscal 2009.





We
obtained cash from financing activities in the amounts of $7.4 million and $19.2
million during the first nine months of fiscal 2010 and 2009, respectively. The
financing activities in the first nine months of fiscal year 2010 represent
approximately $2.5 million of common stock sold to Berg & Berg in the first
quarter of fiscal 2010, $3.9 million of common stock sold under the Common Stock
Purchase Agreement with Seaside, $1.2 million of common stock sold under our At
Market Issuance Sales Agreement with Wm. Smith & Co, and $0.1 million
upon the exercise of stock options. The financing activities in the first nine
months of fiscal year 2009 were short term loans made to us by Berg &
Berg for working capital requirements in the total amount of $7.5 million
pursuant to an agreement whereby Berg & Berg agreed to provide up to
$10.0 million in interim working capital loans from time to time in order for
Berg & Berg and/or certain of its affiliates to supplement our working
capital and other financial needs.  In addition Berg & Berg
exercised certain warrants by paying us the $1.6 million exercise price and by
surrendering certain of the principal and interest outstanding under promissory
notes related to the short-term loans discussed above aggregating $4.5
million.  Financing activities in the first nine months of fiscal year 2009
also include $8.7 million in issuances of common stock in sales to private
investors and $0.8 million for the exercise of stock options.





On
October 14, 2009 we entered into a Common Stock Purchase Agreement
with Seaside 88, LP, or Seaside, which provides that, upon the terms and subject
to the conditions set forth therein, we are required to issue and sell, and
Seaside to purchase, up to 650,000 shares of our common stock once every two
weeks, subject to the satisfaction of customary closing conditions, beginning on
October 15, 2009 and ending on or about the date that is 52 weeks subsequent to
the initial closing, for an aggregate sale to Seaside of up to 16,900,000 shares
of common stock.  The price of the shares that we sell to Seaside will
be at a 12% discount to the volume weighted average trading price of the common
stock for the ten consecutive trading days immediately preceding each closing
date, which will result in immediate and substantial dilution to current stock
holders.  As of December 31, 2009, the Company has sold 3,250,000
shares to Seaside pursuant to this arrangement for aggregate gross proceeds of
$3,882,450, before offering expenses and finder’s fee. The sale of an aggregate
of 1,300,000 shares in two subsequent closings was not, and will not ever be,
consummated because the requirement that the volume weighted average price of
our common stock for the three days prior to each subsequent closing be above
$1.00 per share was not met. The closings scheduled for December 24, 2009,
January 7, 2010, and February 4, 2010, were not consummated because the
requirement that the volume weighted average trading price of the
Company’s  common stock for the three days prior to such closings be
above $1.00 per share was not met. As a result, the sale of 1.95 million shares
was not consummated.





On
February 22, 2008, the Company entered into an At Market Issuance Sales
Agreement with Wm. Smith & Co., as sales agent (the “Sales Agent”),
which was amended by Amendment No. 1 to At Market Issuance Sales Agreement on
July 2, 2009, under which the Company may issue and sell up to 10,000,000 shares
of common stock in a series of transactions over time as the Company may direct
through the Sales Agent. Unless the Company and the Sales Agent agree to a
lesser amount with respect to certain persons or classes of persons, the
compensation to the Sales Agent for sales of common stock sold pursuant to the
Agreement will be 6.0% of the gross proceeds of the sales price per
share.  As of September 30, 2009, we have sold approximately 4.9
million shares under this arrangement, the most recent sale having been
consummated on September 23, 2009. This Agreement will terminate upon the sale
of all shares authorized for sale thereunder, unless earlier terminated by one
or both parties as permitted thereunder.










23


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




Capital
Commitments and Debt





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





(Dollars in thousands)
            
            December31,
              20092005
      short-term debt
            
            $
            20,000Current
      portion of interest on short-term debt
            
            
            791998
      long-term debt to stockholder
            
            
            14,9502001
      long-term debt to stockholder
            
            
            20,000Long
      term portion of interest on debt
            
            
            26,651Total
            
            $
            81,680





Repayment
obligations of short-term and long-term debt principal as of December 31, 2009,
are:





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





At
December 31, 2009, the redemption obligation for our Series C-1 Convertible
Preferred Stock and Series C-2 Convertible Preferred Stock, all of which is
currently held by Berg & Berg, is $8.6 million, plus accrued dividends,
which as of December 31, 2009, totaled $0.7 million.  The preferred shares
are currently subject to redemption or conversion at the holder’s
discretion.  We do not have sufficient resources to effect this redemption;
however, Berg & Berg has agreed that our failure to redeem the
Series C-1 Convertible Preferred Stock and the Series C-2 Convertible
Preferred Stock does not constitute a default under the certificate of
designations for either the Series C-1 Convertible Preferred Stock or the
Series C-2 Convertible Preferred Stock and has waived the accrual of any
default interest applicable.  Berg & Berg also has agreed to defer
the payment of dividends on the Series C-1 Convertible Preferred Stock and
Series C-2 Convertible Preferred Stock.  According to our agreement
with Berg & Berg, dividends will continue to accrue (without interest)
on the Series C-1 Convertible Preferred Stock and the Series C-2
Convertible Preferred Stock according to the terms of the applicable
certificates of designation; and such dividends are not payable until such time
as the parties mutually agree, or upon redemption or conversion in accordance
with the terms of the applicable certificates of designation.  We have no
present intention to pay dividends on this preferred stock, including the
accrued dividends.  The Series C-1 Convertible Preferred Stock may be
converted, at any time, into shares of our common stock at the lower of $4.00 or
the closing price of our common stock on the conversion date, provided the
conversion price can be no lower than $1.98, the closing price of the common
stock on December 13, 2005.  The Series C-2 Convertible Preferred
Stock may be converted, at any time, into shares of our common stock at the
lower of $4.00 or the closing price of our common stock on the conversion date,
provided the conversion price can be no lower than $2.96, the closing bid price
of our common stock on July 13, 2005.





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




The $20.0
million 2005 Loan from SFT I, Inc., matures in a lump sum on July 13,
2010. Interest is due monthly based on a floating interest rate. The interest
rate is calculated as the greater of 6.75% or the sum of LIBOR Rate, rounded to
the nearest 1/16th of 1.0%, plus 4.0% (6.75%
as of December 31, 2009). As of December 31, 2009, no amounts have been paid on
the 2005 Loan.




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





Inflation





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





24


Tabular
Disclosure of Contractual Obligations





The
following table sets forth, as of December 31, 2009, our scheduled principal,
interest and other contractual annual cash obligations due for each of the
periods indicated below (in thousands):





Payment Due by PeriodLess than
            
            
            
            
            
            
            
            
            More thanTotal
            
            
            One Year
            
            
            1-2 Years
            
            
            3-5 Years
            
            
            5 YearsContractual obligations:Short-term
      debt, net of discount
            
            $
            19,805
            
            
            $
            19,805
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Long-term
      debt to stockholder, net of discount
            
            
            34,858
            
            
            
            —
            
            
            
            34,858
            
            
            
            —
            
            
            
            —Current
      and long-term interest payable
            
            
            26,729
            
            
            
            79
            
            
            
            26,650
            
            
            
            —
            
            
            
            —Operating
      lease obligations
            
            
            1,449
            
            
            
            625
            
            
            
            564
            
            
            
            260
            
            
            
            —Purchase
      obligations
            
            
            5,890
            
            
            
            5,890
            
            
            
            —
            
            
            
            —
            
            
            
            —Redemption
      of convertible preferred stock
            
            
            9,343
            
            
            
            9,343
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            $
            98,074
            
            
            $
            35,742
            
            
            $
            62,072
            
            
            $
            260
            
            
            $
            —





The terms
of the certificates of designation for the Series C-1 Convertible Preferred
Stock and the Series C-2 Convertible Preferred Stock initially
provided that the deadline for redemption was December 15, 2005. Pursuant
to assignment agreements entered into between us and Berg & Berg,
Berg & Berg waived the requirement that the Series C-1 Convertible
Preferred Stock and Series C-2 Convertible Preferred Stock be redeemed on
this date. There currently are no redemption deadlines, but the preferred shares
are subject to redemption or conversion at the holder’s discretion. As set forth
above, although dividends are not due, they are continuing to accrue (currently
$0.7 million as of December 31, 2009). The total above for Redemption of
Convertible Preferred Stock includes accrued dividends.





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





The $20.0
million 2005 Loan from SFT I, Inc., matures in a lump sum on July 13,
2010. Interest is due monthly based on a floating interest rate. The interest
rate is calculated as the greater of 6.75% or the sum of LIBOR Rate, rounded to
the nearest 1/16th of 1.0%, plus 4.0% (6.75%
as of December 31, 2009). As of December 31, 2009, no amounts have been paid on
the 2005 Loan.





25


ITEM 3.
       QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




We
considered the provisions of Financial Reporting Release No. 48,
“Disclosures of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments.” On July 13, 2005, in connection with a $20.0 million loan
agreement with a third party finance company, the 2001 Loan, which has an
adjustable interest rate equal to the greater of 6.75%, or the sum of the LIBOR
rate plus 4.0% (6.75% as of December 31, 2009), we entered into a rate cap
agreement which caps the LIBOR rate at 5.5%. This agreement terminated effective
August 10, 2008. In July 1998, the Company entered into an amended loan
agreement, the 1998 Loan, with Berg & Berg that allows the Company to
borrow, prepay and re-borrow up to $10.0 million principal under a promissory
note on a revolving basis. In November 2000, the 1998 Loan agreement was
amended to increase the maximum amount to $15.0 million. As of December 31,
2009, the Company had an outstanding balance of $15.0 million under the 1998
Loan agreement. The 1998 Loan bears interest at one percent over lender’s
borrowing rate (9.0 % at December 31, 2009). In addition, we are exposed to
financial market risks, including changes in foreign currency exchange rates and
interest rates.





We are
exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates. The following table presents the principal
cash flows by year of maturity for our total debt obligations held at December
31, 2009 (in thousands):





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





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





ITEM 4. 
CONTROLS AND
PROCEDURES








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





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of our
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15(b) as of the end of the period covered by this
Report.  Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that, as of December 31, 2009, our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic reports with the
SEC.  There have been no significant changes in our internal controls or in
other factors that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





26


PART II
- OTHER INFORMATION





ITEM 1.
         LEGAL PROCEEDINGS








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





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





ITEM 1A.
       RISK FACTORS





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





At
any given time we might not meet the continued listing requirements of the
NASDAQ Capital Market.





Given the
volatility of our stock and trends in the stock market in general, at any given
time we might not meet the continued listing requirements of The NASDAQ Capital
Market. Among other requirements, NASDAQ requires the minimum bid price of a
company’s registered shares to be $1.00. Recently, our stock traded below $1.00
per share, with the closing bid price of our common stock ranging between a low
of $0.77 per share and a high of $1.09 per share from December 14, 2009, to
February 8, 2010. If we are not able to maintain the requirements for continued
listing on The NASDAQ Capital Market, we could be de-listed and it could have a
materially adverse effect on the price and liquidity of our common
stock.





Our
limited financial resources could materially affect our business, our ability to
commercially exploit our technology and our ability to respond to unanticipated
development, and could place us at a disadvantage to our
competitor.





Currently,
we do not have sufficient capital resources or cash flow from operations to
generate the cash flows required to meet our operating and capital
needs.  Our ability to raise capital may be impacted by a variety of
risks discussed elsewhere herein, including the volatility of the stock market
and our ability to raise funds via equity sales under our arrangement with
Seaside 88, LP, or Seaside. In October 2009 we entered into a Common Stock
Purchase Agreement with Seaside which provides that, upon the terms and subject
to the conditions set forth therein, we are required to issue and sell, and
Seaside to purchase, up to 650,000 shares of our common stock once every two
weeks, subject to the satisfaction of customary closing conditions, beginning on
October 15, 2009 and ending on or about the date that is 52 weeks subsequent to
the initial closing, for an aggregate sale to Seaside of up to 16,900,000 shares
of common stock.  Although we have sold a total of 3.9 million shares
to Seaside as of the filing date of this Report, February 9, 2010, and
11,050,000 shares remain available for future issuance, the sale of an aggregate
of 1.95 million shares in three closings was not, and will not ever be,
consummated because the requirement that the volume weighted average price of
our common stock for the three trading days prior to each such closings be above
$1.00 per share was not met.  In addition, since the date of the
initial closing of the Seaside agreement, our stock price has declined, such
that for each subsequent closing we do effect, we are raising less money on more
dilutive terms than we had anticipated.  Our inability to raise
adequate funds, or any funds, via the Seaside agreement or other capital-raising
transactions limits our financial resources and could materially affect our
ability to commercially exploit our technologies and products. For example, it
could:





·
            
            limit
      the research and development resources we are able to commit to the
      further development of our technology and the development of products that
      can be commercially exploited in our marketplace;·
            
            limit
      the sales and marketing resources that we are able to commit to the
      marketing of our technology;·
            
            have
      an adverse impact on our ability to attract top-tier companies as our
      technology and marketing partners;·
            
            have
      an adverse impact on our ability to employ and retain qualified employees
      with the skills and expertise necessary to implement our business
      plan;·
            
            make
      us more vulnerable to failing to achieve our forecasted results, economic
      downturns, adverse industry conditions or catastrophic external
      events;·
            
            limit
      our ability to withstand competitive pressures and reduce our flexibility
      in planning for, or responding to, changing business and economic
      conditions; and·
            
            place
      us at a disadvantage to our competitors that have greater financial
      resources than we have.




27




Equity
transactions occurring in the future, including sales under our At Market
Issuance Sales Agreement and sales of stock at a discount under our Common Stock
Purchase Agreement with Seaside88, LP,
would result in immediate dilution to current equity holders and, as a result,
our stock price may go down.





Future
equity transactions, including the sale of shares of common stock or preferred
stock, sales under our Common Stock Purchase Agreement with Seaside88, LP, sales under our At Market Issuance
Sales Agreement, or the exercise of options or warrants or other convertible
securities, would result in dilution and, as a result, our stock price may go
down. In October 2009 we entered into a Common Stock Purchase Agreement with Seaside 88, LP, orSeaside, which provides that, upon the terms
and subject to the conditions set forth therein, we are required to issue and
sell, andSeaside to purchase, up to
650,000 shares of our common stock once every two weeks, subject to the
satisfaction of customary closing conditions, beginning on October 15, 2009 and
ending on or about the date that is 52 weeks subsequent to the initial closing,
for an aggregate sale to Seasideof up to
16,900,000 shares of common stock.  The price of the shares that we
sell toSeaside will be at a 12% discount
to the volume weighted average trading price of the common stock for the ten
consecutive trading days immediately preceding each closing date, which will
result in immediate and substantial dilution to current holders.  As
of the date of this report, February 9, 2010, a total of 3.9 million shares
authorized for sale to Seaside have been sold and 11,050,000 remain available
for future issuance under the agreement.  The sale of an aggregate of
1.3 million shares in two of the subsequent closings was not, and will not ever
be, consummated because the requirement that the volume weighted average price
of our common stock for the three trading days prior to each such subsequent
closing be above $1.00 per share was not met.  In addition, since the
date of the initial closing of the Seaside agreement, our stock price has
declined, such that for each subsequent closing we do effect, we are raising
less money on more dilutive terms than we had anticipated.  In
addition, in February 2008 we entered into an At Market Issuance Sales Agreement
with Wm. Smith & Co., amended in July 2009, which provides that, upon the
terms and subject to the conditions set forth therein, we may, through Wm. Smith
& Co. acting as sales agent, issue and sell up to 10 million shares of our
common stock.  To date, a total of 4,898,907 of the aggregate shares
authorized for sale through Wm. Smith & Co. have been sold and 5,101,093
remain available for future issuance under the agreement.  Further, as
opportunities present themselves from time to time, we may sell restricted stock
and warrants or convertible debt to investors in private placements conducted by
broker-dealers, or in negotiated transactions.  Because the securities
may be restricted, the securities may be sold at a greater discount to market
prices compared to a public securities offering, and the exercise price of the
warrants may be at or even lower than market prices. These transactions cause
dilution to existing stockholders. Also, from time to time, options may be
issued to employees and third parties, with exercise prices equal to market.
Exercise of in-the-money options, warrants and other convertible securities will
result in dilution to existing stockholders; the amount of dilution will depend
on the spread between market and exercise price, and the number of shares
involved.  Our inability to sell shares to Seaside should the volume
weighted average of our stock price again fall below $1.00 per share during the
three trading days prior to a subsequent closing with Seaside, or for any other
reason, could require us to raise capital through other transactions that could
cause additional and substantial dilution to our existing
stockholders.  In addition, if we are forced to raise funds through
certain other transactions other than the At-Market Issuance Agreement, Seaside
may be able to terminate the Seaside agreement and we may be forced to pay
Seaside a termination fee of $500,000.





Our
business depends on certain key personnel, the loss of whom could weaken our
management team, and on attracting and retaining qualified
personnel.





The
growth of our business and our success depends in large part on our ability to
attract and retain highly-skilled management, technical, research and
development, manufacturing, sales and marketing and other operating and
administrative personnel, particularly those who are familiar with and
experienced in the battery industry. If we cannot attract and retain experienced
sales and marketing executives, we may not achieve the visibility in the
marketplace that we need to obtain purchase orders, which would have the result
of lowering our sales and earnings. Our key personnel include Chief Executive
Officer, Robert L. Kanode, all of our other executive officers and vice
presidents, many of whom have very specialized scientific or operational
knowledge regarding one or more of our key products. Such persons are in high
demand and often receive competing employment offers from numerous other
companies, including larger, more established competitors who have significantly
greater financial resources than we do. We do not maintain key-person life
insurance on any of our employees.  In October 2009, we announced the
departure of our Vice President Worldwide Sales &
Marketing.  Since his departure, our Chief Executive Officer, Mr.
Kanode, with the assistance of our sales and marketing staff, has filled this
role.  We are currently seeking a new Vice President of Sales and
Marketing, and our failure to fill this position with a suitable person could
harm our business and prospects.  The loss of the services of one or
more of our key personnel or the inability to attract and retain additional
personnel and develop expertise as needed could limit our ability to develop and
commercialize our existing and future products.





28


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





None.





ITEM 3. 
DEFAULTS UPON SENIOR
SECURITIES





None.





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





None.




ITEM 5. 
OTHER
INFORMATION





None.





29


ITEM
6. EXHIBITS





Number
            
            Description
      of Exhibit
            
            Method
      of Filing3.1
            
            Second
      Restated Certificate of Incorporation of the Company
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed
      with the Securities and Exchange Commission on March 27,
      1992.3.2
            
            Amendment
      to the Second Restated Certificate of Incorporation of the
      Company
            
            Incorporated
      by reference to Exhibit A to the Company’s Schedule 14A filed with the
      Securities and Exchange Commission on January 28,
    2000.3.3
            
            Certificate
      of Designations, Preferences and Rights of Series C-1 Convertible
      Preferred Stock
            
            Incorporated
      by reference to Exhibit 3.1 to the Company’s Current Report on
      Form 8-K dated November 30, 2004, filed with the Securities and
      Exchange Commission on December 1, 2004.3.4
            
            Certificate
      of Designations, Preferences and Rights of Series C-2 Convertible
      Preferred Stock
            
            Incorporated
      by reference to Exhibit 3.2 to the Company’s Current Report on
      Form 8-K dated November 30, 2004, filed with the Securities and
      Exchange Commission on December 1, 2004.3.5
            
            Fourth
      Amended and Restated Bylaws of the Company
            
            Incorporated
      by reference to Exhibit 3.1 to the Company’s Current Report on
      Form 8-K, dated January 18, 2008, filed with the Securities and
      Exchange Commission on January 22, 2008.4.1
            
            Warrant
      dated January 4, 2002 to Berg & Berg Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, filed with the
      Securities and Exchange Commission on February 19,
2002.4.2
            
            Warrant
      to Purchase Common Stock, issued June 2, 2003 to Riverview Group
      LLC
            
            Incorporated
      by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
      dated June 2, 2003, and filed with the Securities and Exchange Commission
      on June 3, 2003.4.3
            
            Warrant
      to Purchase Common Stock, issued July 13, 2005 (SFT I,
    Inc.)
            
            Incorporated
      by reference to Exhibit 4.1 to  the Company’s Current Report on
      Form 8-K, dated July 13, 2005, filed with the Securities and Exchange
      Commission on July 15, 2005.4.4
            
            Warrant
      to Purchase Common Stock, issued July 13, 2005 (Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K,
      dated July 13, 2005, filed with the Securities and Exchange Commission on
      July 15, 2005.4.5
            
            Option
      Agreement, dated as of July 8, 2005, by and between Valence Technology,
      Inc. and James R. Akridge
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 15, 2005, filed with the Securities and Exchange Commission on
      July 18, 2005.4.6
            
            Loan
      Agreement between the Company and Baccarat Electronics, Inc., dated July
      17, 1990
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.7
            
            Amendment
      No. 1 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 15, 1991 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.8
            
            Amendment
      No. 2 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 24, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27,
  1992.





30


4.9
            
            Amendment
      No. 3 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated August 17, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.10
            
            Amendment
      No. 4 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated September 1, 1997 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.11 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.11
            
            Amendment
      No. 5 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated July 17, 1998 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 10.50 to the Company’s Current Report on Form 8-K
      dated July 27, 1998, and filed with the Securities and Exchange Commission
      on August 4, 1998.4.12
            
            Amendment
      No. 6 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated November 27, 2000 (subsequently transferred to Berg & Berg
      Enterprises LLC)
            
            Incorporated
      by reference to Exhibit 4.13 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.13
            
            Second
      Amended Promissory Note dated November 27, 2000 issued by the Company to
      Baccarat Electronics, Inc. (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.14 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.14
            
            Amendment
      No. 7 to Original Loan Agreement between the Company and Berg & Berg
      Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated
      October 10, 2001
            
            Incorporated
      by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.15
            
            Amendment
      No. 8 to Original Loan Agreement and Amendment to Second Amended
      Promissory Note between the Company and Berg & Berg Enterprises, LLC
      (previously with Baccarat Electronics, Inc.), dated February 11,
      2002
            
            Incorporated
      by reference to Exhibit 4.12 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2002, filed with the Securities and
      Exchange Commission on July 1, 2002.4.16
            
            Loan
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.17
            
            Security
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.18
            
            Promissory
      Note dated October 5, 2001 issued by the Company to Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.19
            
            Amendment
      to Loan Agreements with Berg & Berg dated November 8, 2002 (Amendment
      No. 1 to October 5, 2001 Loan Agreement and Amendment No. 9 to 1990
      Baccarat Loan Agreement)
            
            Incorporated
      by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2002, filed with the
      Securities and Exchange Commission on November 14,
2002.4.20
            
            Amendment
      to Loan Agreements with Berg & Berg dated October 21, 2004 (Amendment
      No. 2 to October 5, 2001 Loan Agreement and Amendment No. 10 to 1990
      Baccarat Loan Agreement)
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated November 3, 2004, filed with the Securities and Exchange Commission
      on November 5, 2004.





31


4.21
            
            Amendment
      No. 11 and Amendment No. 3 to Loan Agreements, dated as of July 1,
      2005
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 1, 2005, filed with the Securities and Exchange Commission on
      July 6, 2005.4.22
            
            Amendment
      No. 12 and Amendment No. 4 to Loan Agreements, dated as of July 13,
      2005
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K,
      dated July 13, 2005, filed with the Securities and Exchange Commission on
      July 15, 2005.4.23
            
            Amendment
      No. 13 and Amendment No. 5 to Loan Agreements, dated as of June 12,
      2008
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated June 12, 2008, filed with the Securities and Exchange Commission on
      June 16, 2008.4.24
            
            Amendment
      No. 14 and Amendment No. 6 to Loan Agreements, dated as of October 13,
      2009
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated October 13, 2009, filed with the Securities and Exchange Commission
      on October 13, 2009.10.1
            
            Valence
      Technology, Inc. 2009 Equity Incentive Plan
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K,
      dated May 6, 2009, filed with the Securities and Exchange Commission on
      May 6, 2009.10.2
            
            At
      Market Issuance Sales Agreement, dated February 22, 2008, by and between
      Valence Technology, Inc. and Wm Smith & Co.
            
            Incorporated
      by reference to the Exhibit 10.1 to the Company’s Current Report on Form
      8-K, dated February 22, 2008, filed with the Securities and Exchange
      Commission on February 22, 2008.10.3
            
            Amendment
      No. 1 to At Market Issuance Sales Agreement, dated July 2, 2009, by and
      between Valence Technology, Inc. and Wm Smith & Co.
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 6, 2009, filed with the Securities and Exchange Commission on
      July 6, 2009.10.4
            
            Common
      Stock Purchase Agreement, dated October 14, 2009, by and between Valence
      Technology, Inc. and Seaside 88, LP
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated October 15, 2009, filed with the Securities and Exchange Commission
      on October 15, 2009.31.1
            
            Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
            
            Filed
      herewith.31.2
            
            Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
            
            Filed
      herewith.32.1
            
            Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
            
            Filed
      herewith.32.2
            
            Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
            
            Filed
      herewith.





32


SIGNATURE





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








VALENCE
      TECHNOLOGY, INC.Date:
      February 9, 2010
            By:
            /s/ Robert L. KanodeRobert L. Kanode
              Chief
      Executive Officer
















33


EXHIBIT
INDEX





Number
            
            Description
      of Exhibit
            
            Method
      of Filing3.1
            
            Second
      Restated Certificate of Incorporation of the Company
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed
      with the Securities and Exchange Commission on March 27,
      1992.3.2
            
            Amendment
      to the Second Restated Certificate of Incorporation of the
      Company
            
            Incorporated
      by reference to Exhibit A to the Company’s Schedule 14A filed with the
      Securities and Exchange Commission on January 28,
    2000.3.3
            
            Certificate
      of Designations, Preferences and Rights of Series C-1 Convertible
      Preferred Stock
            
            Incorporated
      by reference to Exhibit 3.1 to the Company’s Current Report on
      Form 8-K dated November 30, 2004, filed with the Securities and
      Exchange Commission on December 1, 2004.3.4
            
            Certificate
      of Designations, Preferences and Rights of Series C-2 Convertible
      Preferred Stock
            
            Incorporated
      by reference to Exhibit 3.2 to the Company’s Current Report on
      Form 8-K dated November 30, 2004, filed with the Securities and
      Exchange Commission on December 1, 2004.3.5
            
            Fourth
      Amended and Restated Bylaws of the Company
            
            Incorporated
      by reference to Exhibit 3.1 to the Company’s Current Report on
      Form 8-K, dated January 18, 2008, filed with the Securities and
      Exchange Commission on January 22, 2008.4.1
            
            Warrant
      dated January 4, 2002 to Berg & Berg Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, filed with the
      Securities and Exchange Commission on February 19,
2002.4.2
            
            Warrant
      to Purchase Common Stock, issued June 2, 2003 to Riverview Group
      LLC
            
            Incorporated
      by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
      dated June 2, 2003, and filed with the Securities and Exchange Commission
      on June 3, 2003.4.3
            
            Warrant
      to Purchase Common Stock, issued July 13, 2005 (SFT I,
    Inc.)
            
            Incorporated
      by reference to Exhibit 4.1 to  the Company’s Current Report on
      Form 8-K, dated July 13, 2005, filed with the Securities and Exchange
      Commission on July 15, 2005.4.4
            
            Warrant
      to Purchase Common Stock, issued July 13, 2005 (Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K,
      dated July 13, 2005, filed with the Securities and Exchange Commission on
      July 15, 2005.4.5
            
            Option
      Agreement, dated as of July 8, 2005, by and between Valence Technology,
      Inc. and James R. Akridge
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 15, 2005, filed with the Securities and Exchange Commission on
      July 18, 2005.4.6
            
            Loan
      Agreement between the Company and Baccarat Electronics, Inc., dated July
      17, 1990
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.7
            
            Amendment
      No. 1 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 15, 1991 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.8
            
            Amendment
      No. 2 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 24, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27,
  1992.





4.9
            
            Amendment
      No. 3 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated August 17, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.10
            
            Amendment
      No. 4 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated September 1, 1997 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.11 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.11
            
            Amendment
      No. 5 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated July 17, 1998 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 10.50 to the Company’s Current Report on Form 8-K
      dated July 27, 1998, and filed with the Securities and Exchange Commission
      on August 4, 1998.4.12
            
            Amendment
      No. 6 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated November 27, 2000 (subsequently transferred to Berg & Berg
      Enterprises LLC)
            
            Incorporated
      by reference to Exhibit 4.13 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.13
            
            Second
      Amended Promissory Note dated November 27, 2000 issued by the Company to
      Baccarat Electronics, Inc. (subsequently transferred to Berg & Berg
      Enterprises, LLC)
            
            Incorporated
      by reference to Exhibit 4.14 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2003, filed with the Securities and
      Exchange Commission on June 30, 2003.4.14
            
            Amendment
      No. 7 to Original Loan Agreement between the Company and Berg & Berg
      Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated
      October 10, 2001
            
            Incorporated
      by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.15
            
            Amendment
      No. 8 to Original Loan Agreement and Amendment to Second Amended
      Promissory Note between the Company and Berg & Berg Enterprises, LLC
      (previously with Baccarat Electronics, Inc.), dated February 11,
      2002
            
            Incorporated
      by reference to Exhibit 4.12 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended March 31, 2002, filed with the Securities and
      Exchange Commission on July 1, 2002.4.16
            
            Loan
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.17
            
            Security
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.18
            
            Promissory
      Note dated October 5, 2001 issued by the Company to Berg & Berg
      Enterprises, LLC
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2001, and filed with the
      Securities and Exchange Commission on February 19,
2002.4.19
            
            Amendment
      to Loan Agreements with Berg & Berg dated November 8, 2002 (Amendment
      No. 1 to October 5, 2001 Loan Agreement and Amendment No. 9 to 1990
      Baccarat Loan Agreement)
            
            Incorporated
      by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-Q for the fiscal quarter ended December 31, 2002, filed with the
      Securities and Exchange Commission on November 14,
2002.4.20
            
            Amendment
      to Loan Agreements with Berg & Berg dated October 21, 2004 (Amendment
      No. 2 to October 5, 2001 Loan Agreement and Amendment No. 10 to 1990
      Baccarat Loan Agreement)
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated November 3, 2004, filed with the Securities and Exchange Commission
      on November 5, 2004.








4.21
            
            Amendment
      No. 11 and Amendment No. 3 to Loan Agreements, dated as of July 1,
      2005
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 1, 2005, filed with the Securities and Exchange Commission on
      July 6, 2005.4.22
            
            Amendment
      No. 12 and Amendment No. 4 to Loan Agreements, dated as of July 13,
      2005
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K,
      dated July 13, 2005, filed with the Securities and Exchange Commission on
      July 15, 2005.4.23
            
            Amendment
      No. 13 and Amendment No. 5 to Loan Agreements, dated as of June 12,
      2008
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated June 12, 2008, filed with the Securities and Exchange Commission on
      June 16, 2008.4.24
            
            Amendment
      No. 14 and Amendment No. 6 to Loan Agreements, dated as of October 13,
      2009
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated October 13, 2009, filed with the Securities and Exchange Commission
      on October 13, 2009.10.1
            
            Valence
      Technology, Inc. 2009 Equity Incentive Plan
            
            Incorporated
      by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K,
      dated May 6, 2009, filed with the Securities and Exchange Commission on
      May 6, 2009.10.2
            
            At
      Market Issuance Sales Agreement, dated February 22, 2008, by and between
      Valence Technology, Inc. and Wm Smith & Co.
            
            Incorporated
      by reference to the Exhibit 10.1 to the Company’s Current Report on Form
      8-K, dated February 22, 2008, filed with the Securities and Exchange
      Commission on February 22, 2008.10.3
            
            Amendment
      No. 1 to At Market Issuance Sales Agreement, dated July 2, 2009, by and
      between Valence Technology, Inc. and Wm Smith & Co.
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated July 6, 2009, filed with the Securities and Exchange Commission on
      July 6, 2009.10.4
            
            Common
      Stock Purchase Agreement, dated October 14, 2009, by and between Valence
      Technology, Inc. and Seaside 88, LP
            
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
      dated October 15, 2009, filed with the Securities and Exchange Commission
      on October 15, 2009.31.1
            
            Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
            
            Filed
      herewith.31.2
            
            Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
            
            Filed
      herewith.32.1
            
            Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
            
            Filed
      herewith.32.2
            
            Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
            
            Filed
      herewith.