VLNC Valence Technology, Inc. (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from                   to                 

Commission file number 0-20028

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

Registrant’s telephone number, including area code: (512) 527-2900

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

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 and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” or “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o Accelerated Filer x Non-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 Act). Yes o No x

The aggregate market value of the Registrant’s common equity held by non-affiliates was $69,139,229 as of September 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter and based upon the average bid and asked price of the Registrant’s common stock. This calculation excludes approximately 63,055,264 shares of common stock held by directors, officers and holders of 5% or more of Registrant’s outstanding common stock and such exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant.

The number of shares outstanding of the Registrant’s common stock as of June 12, 2008 was 118,118,297.

VALENCE TECHNOLOGY, INC.

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED MARCH 31, 2008

Table of Contents

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, Form 10-K or this Report, contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Exchange Act and Section 27A  of the Securities Act.

The words “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “continue,” “predict,” and similar expressions and variations thereof are intended to identify forward-looking statements. These statements appear in a number of places in this Report and the documents incorporated by reference herein and include statements regarding the intent, belief or current expectations of Valence Technology, Inc., to which we refer in this Report and the documents incorporated by reference herein as “Valence,” “we,” “us” or the Company, 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;

· international business risks;

· our need for additional, dilutive financing or future acquisitions; and

· future economic, business and regulatory conditions.

We believe that it is important to communicate our future 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 “Item 1A - Risk Factors” or the documents incorporated by reference herein, as well as any cautionary language in this Report or the documents incorporated by reference herein, 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. Except as required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

ITEM 1. BUSINESS

The Company was founded in 1989 and has 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 our mission and address the significant market opportunity we believe is available to us we utilize the numerous benefits of our latest energy storage technology, deep intellectual property portfolio and extensive experience of our management team.

In November 2007, we introduced Epoch™, our third generation of Lithium Phosphate Energy Storage Systems, which are expected to be commercially available in the second quarter of fiscal 2009. Epoch™ features our safe, long-life lithium phosphate technology which utilizes a phosphate-based cathode material. We believe that the advanced functionality and programmability of the Epoch™ energy storage systems are well suited for electric vehicle (EV), plug-in hybrid electric vehicle (PHEV) and similar applications. Epoch™ lithium phosphate energy storage systems addresses the safety and limited life weaknesses of other lithium technologies while offering a solution that is competitive in cost and performance. We believe that Epoch™ energy storage systems offer design and performance capabilities that will facilitate adoption in automotive, industrial, UPS, telecommunications, aerospace and military markets not traditionally served by other lithium-ion solutions.

Strategy

Our business plan and strategy focus on the generation of revenue from product sales, 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 Epoch™ Lithium Phosphate Energy Storage Systems and custom lithium phosphate energy storage systems based on programmable Epoch™ Command and Control Logic. In addition, we expect to pursue a licensing strategy to supply the lithium phosphate sector with advanced Valence material and components, including lithium phosphate cathode materials to fulfill other manufacturers’ needs.

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 large-format battery solutions, such as our Epoch™ Lithium Phosphate Energy Storage Systems and U-Charge® Power System and other custom battery solutions that feature advanced performance and technological advantages. These products are targeted for a broad range of applications in the motive, power and consumer appliance, telecommunication and utility industries and as a substitute for certain applications using lead-acid batteries.

·               Manufacturing 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 phosphate materials with our patented thermo-carbon process while the second manufactures our advanced standard large-format packs such as U-Charge® and Epoch™ and custom packs such as Segway. We have arrangements with contract manufacturers for 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.

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·       Second Phase: The second phase of our business strategy is nearly complete. Throughout this phase our cell development has focused on commercializing a cylindrical Lithium Phosphate cell and advanced third generation Intelligent Energy Source Storage System (Epoch™ ^). This 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.

·       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 Phosphate Fluoride (LVPF) cathode materials into large-format, high capacity prismatic cells. These materials offer superior performance with additional energy storage and higher voltage capabilities for the automotive, industrial, UPS, aerospace, telecommunications, military and other sectors.

We believe our commercial growth strategy will allow us to expand into emerging market applications through the sales of Valence products based on our differentiated technology, design and application engineering capabilities, global fulfillment services and our proven low cost high volume manufacturing.  Further we believe Valence is uniquely positioned to license our technology to key component and material manufacturers, such as manufacturers of lithium phosphate cells and packs to further accelerate growth within the worldwide lithium phosphate sector.

We believe we are uniquely positioned for growth due to the following:

·      Leading technology . Our phosphate-based lithium-ion technology offers many performance advantages over competing battery technologies. The safety advantages inherent in our technology enable the design of large-format Epoch™ Lithium-Ion Energy Systems. As the first company in the battery industry to commercialize phosphates, we believe that we have a significant advantage in terms of time to market as well as chemistry, advanced energy storage system development and manufacturing expertise.

·      New Market Opportunities . Our technology enables the production of high energy density, large-format batteries without the safety concerns presented by oxide-based lithium-ion batteries. Consequently, our lithium phosphate technology energy and power systems can be designed into a wide variety of products in markets not served by current oxide-based lithium-ion technology. We intend to expand the market opportunity for lithium-ion by designing our technology into a wide variety of products for the automotive, commercial, UPS, telecommunications, aviation and military markets.

·      New Valence Market Focus. We are transitioning from a technology developer to a commercial provider of advanced energy storage systems.   We are expanding our manufacturing capacity, enhancing our application engineering capabilities strengthening our marketing and sales, providing full service fulfillment services in Europe, North America and China, developing worldwide suppliers of critical materials and components to serve the entire lithium phosphate sector and extending our research and development into the next generation of lithium phosphate energy storage solutions.

·      Our Goal: Given the extensive intellectual property and processes expertise we have developed, our goal is to enable emerging devices with advanced energy storage solutions and serve the entire lithium phosphate sector with high performance critical materials and component supply. We believe the lithium phosphate sector will rapidly expand and Valence is uniquely positioned to lead this expansion.

Fiscal 2008 Highlights

Following are some of the key Company events and accomplishments in pursuit of our strategy during fiscal 2008:

·      We introduced, Epoch ™ Lithium Phosphate Energy Storage Systems, its third generation of intelligent battery packs.

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·               Customer application trials are underway with approximately 100 corporations in motive, telecom, utilities, marine and military applications.

·               We signed a multi-year manufacturing agreement with the Smith Electric Vehicles division of The Tanfield Group, PLC to provide lithium phosphate energy storage products that we expect to result in up to $70 million in revenue in the first year of such contract.

·               We were awarded seven new patents in the U.S. and 21 worldwide patents during the 2008 fiscal year end.

Continuing Development of Valence Lithium Phosphate Technology

Our first generation Lithium Phosphate Material was successfully commercially produced in 2002 using our proprietary Bellcore technology and in fiscal 2004 was introduced in a cylindrical construction. Throughout fiscal 2005 our development team focused on increasing capacity of the energy cell, offering other constructions such as a large prismatic cell and designing a power cell. In late fiscal 2005, our team implemented a product change which increased the capacity of the energy cell. We continue to develop both prismatic cells and large-format cells.

We continue to develop next-generation Lithium Vanadium Phosphate (LVP) and Lithium Vanadium Phosphate Fluoride (LVPF) cathode materials.  These materials offer superior performance with additional energy storage and higher voltage capabilities for the automotive, industrial, UPS, aerospace, telecommunications, military and other sectors.

Development of Third Generation Battery Packs

We are committed to the improvement of our technologies, our energy storage systems, integration of our energy storage systems into our customer applications and further development of worldwide suppliers to serve the rapidly expanding lithium phosphate sector. We are continuing to further our development of products including our Epoch™ Energy Storage Systems that feature improved battery management, reporting capability that is superior to other rechargeable battery packs, fail soft performance, field serviceability and many other advanced features. Epoch™ Command and Control Logic is programmable and can be quickly and easily configured to a variety of custom applications. The development of the Epoch™ Command and Control Logic is expected to dramatically reduce the level of effort and technical risk required to develop customized hardware and software for new product designs, thus reducing the development cycle time and expense.

Epoch™ Lithium Phosphate Energy Storage Systems

Lithium-ion cobalt-oxide technology was originally developed to meet consumer demand for high-energy, small battery solutions to power portable electronic devices. Lithium-ion cobalt-oxide technology was a significant advancement in battery technology for the small battery market. However, due to the safety concerns associated with producing and using traditional lithium-ion cobalt-oxide technology in large-format applications, many markets today such as automotive, industrial, UPS and telecommunications markets remain served by older technologies, such as lead-acid, nickel-cadmium, and nickel metal hydride, which offer low energy density and significant maintenance costs.

We believe our Epoch™ Lithium Phosphate Energy Storage Systems that utilize safe and environmentally friendly phosphate-based cathode materials in place of other less stable and more costly cathode materials, addresses the current challenges facing the rechargeable battery industry and provides us with several competitive advantages. Key attributes of our Epoch™ Lithium Phosphate Energy Storage Systems include:

·               Increased safety . We believe that our Epoch™ Lithium Phosphate Energy Storage Systems significantly reduce the safety risks associated with oxide-based lithium-ion technologies. The unique chemical properties of phosphates render them substantially incombustible if mishandled during charging or discharging. As a result, we believe our technology is more stable under overcharge or short circuit conditions than existing lithium-ion oxide technology and has the ability to withstand higher temperatures and electrical stress. The thermal and

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chemical stability inherent in our technology enables the creation of safe, large-format, high energy density lithium-ion solutions.

·               Performance advantages .  Epoch™ Lithium Phosphate Energy Storage Systems offer several performance advantages over the competing battery chemistries of lead-acid, nickel-cadmium, nickel metal hydride and traditional lithium-ion oxide technologies, including higher rate capability, longer cycle life, longer shelf life, and lower total cost of ownership .  Other Epoch™ system advantages include a “fail soft” mode that eliminates system failure caused by a single cell, lighter weight, excellent float characteristics and high-energy efficiency during charge and discharge.

·               High energy density . In its large-format application, our Epoch ™ Lithium Phosphate Energy Storage Systems exhibit an energy density which exceeds other battery chemistries such as lead-acid, nickel metal hydride and nickel-cadmium.

·               High rate capability . In the power cell construction, our Lithium Phosphate Energy Storage Systems offers an exceptional rate capability with sustained 10 to 15C discharges and low impedance of less than 20m Ohms. These two characteristics result in a cell that provides larger bursts of power while generating less heat than energy cells.

·               Increased exceptional cycle life . Current testing of Lithium Phosphate Energy Storage Systems has yielded cycle life of 2000 cycles at 23°C to 70% of the battery’s initial capacity, representing a longer life span compared to existing solutions.

·               Maintenance-free . Epoch™ Lithium Phosphate Energy Storage Systems are maintenance-free.

·               Lower lifetime cost . We believe that our proprietary phosphate material used in our Lithium Phosphate Energy Storage Systems is less expensive than the cobalt-oxide material used in competing lithium-ion technologies. As a result, we believe that as production volume increases due to greater demand for Lithium Phosphate Energy Storage Systems, material costs should decrease. Finally, the lower maintenance costs, longer cycle life and longer service life associated with Epoch™ Lithium Phosphate Energy Storage Systems lead to a lower total cost of ownership in numerous applications.  For example, Epoch™ Energy Storage Systems can also be field repaired, should a failure occur, and placed back into service, resulting in lower cost to the consumer in the event of failure.

·               Flexibility . The logic of Epoch™ Lithium Phosphate Energy Storage Systems is programmable and therefore can easily be applied to custom energy storage systems of various sizes for various applications.

·               Environmental friendliness . Rechargeable batteries that contain nickel metal hydride, nickel-cadmium or lead-acid are toxic and harmful to the environment. In contrast, our proprietary phosphate technologies do not contain any heavy metals. Epoch™ Lithium Phosphate Energy Storage Systems incorporate an environmentally friendly, phosphate-based cathode material that reduces the disposal issues inherent in other types of batteries.

Products

The Epoch™ Energy Storage System

Announced in November 2007 and expected to become commercially available in the second quarter of fiscal 2009, the Epoch™ Energy Storage Systems are designed to offer significant performance advantages that include fail soft operation, common communication protocol, programmable logic, state of health monitoring and reporting, advanced cell balancing, abuse protection and superior fuel gauge reporting. Epoch™ systems can also be field-repaired, should a failure occur, and placed back into service.

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The U-Charge® Energy Storage System

The U-Charge® Energy Storage System is a family of products based on Valence’s proprietary Lithium Phosphate technology and is designed to be a direct replacement for standard-sized lead-acid energy storage systems.  These 12.8 and 19.2 volt energy storage systems offer twice the run-time and a third less weight than lead-acid, expanded calendar life and greater cycle life with full depth of discharge, resulting in significantly lower total costs of ownership. U-Charge® Energy Storage System are used in a variety of applications such as hybrid and full electric vehicles, wheelchairs, scooters, robotics, marine, remote power, military, back-up and many other devices.

Product Milestones

In February 2008, we entered into a supply agreement with The Tanfield Group whereby we agreed to manufacture and supply Lithium Phosphate Energy Storage Systems to power zero emission, all-electric commercial delivery vehicles. Our battery systems will be installed in leading edge vans and trucks produced by Tanfield’s UK-based trading division, Smith Electric Vehicles. Initial purchases which began in fiscal fourth quarter ended March 31, 2008, were fulfilled with our current U-Charge® Energy Storage Systems. Subsequent purchases by Tanfield will be fulfilled by U-Charge® Energy Storage Systems and ultimately by our Epoch™ Energy Storage Systems.

In November 2007, we introduced our Epoch™ Lithium Phosphate Energy Storage Systems.  Epoch™ Energy Storage Systems are equipped with advanced battery management systems that will monitor and adjust cell performance to enable superior performance and capacity. Epoch™ Energy Storage Systems present a safer, more powerful and reliable energy storage solution designed to be low maintenance, cost competitive, and environmentally friendly.

In January 2006, we announced availability of eight new models of our large-format lithium phosphate U-Charge® XP Energy Storage Systems that feature built-in battery management electronics and power rates of 500 to 1700 continuous watts, depending on the model.

In March 2005, we announced availability of a custom lithium phosphate energy storage system for Segway Inc.’s Personal Transporters. Our energy storage system doubled the range of Segway’s Personal Transporters compared to the nickel metal hydride energy storage systems that were previously used which enabled Segway to penetrate commercial law enforcement, tour operators and other extended range applications.

In February 2004, we introduced the U-Charge® Lithium Phosphate Energy Storage Systems. U-Charge® systems have been produced in our China facilities and are designed to power a variety of motive applications from hybrid and electric vehicles to scooters and wheelchairs, and can also be used in stationary applications.

In February 2002, Valence launched the N-Charge® Lithium Phosphate Energy Storage Systems into several channels for sales and distribution, including national and regional retailers, top tier computer manufacturers, and national resellers.  We decided to discontinue the N-Charge ® Lithium Phosphate Energy Storage Systems product line during calendar year 2008 in order to focus on our Epoch™ and U-Charge ® Energy Storage Systems.

Operational Achievements

Valence energy storage systems continue to be tested and qualified by more than 100 corporations.  Our research, development and design efforts are focused on new products utilizing our Epoch™ Command and Control Logic and our patented lithium phosphate materials. Next generation patented lithium phosphate materials are currently being manufactured and tested for future energy storage solutions.  As manufacturing volume continued to expand, significant reductions were made in the manufacturing cost due to lower raw material costs, reduced scrap and improved efficiency.

Significant new alliances to develop Valence energy storage systems and customers for Valence’s Lithium Phosphate Energy Storage Products include: Smith Electric Vehicles, Enova, Wright Bus, Marlin Submarine, Kegel, Merlin Equipment, and various government and military groups. We continue to ship Lithium Phosphate Energy Storage Systems to major customers that include Segway, Smith Electric Vehicles, Enova and Energy CS.

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Our battery pack, powder, and engineering operations are conducted in our two manufacturing plants located in Suzhou, China. We continue to improve the batch-to-batch yield of our proprietary Lithium Phosphate cathode materials and increase output with continuous versus batch process improvements. Pack assembly operations have been simplified and expanded. In addition, our engineering operations have been expanded to support continuous manufacturing processes and quality control improvements.

Development of our patented next-generation Lithium Vanadium Phosphate (LVP) and Lithium Vanadium Phosphate Fluoride (LVPF) cathode materials has been focused and accelerated. Recognized as the next generation of Lithium Phosphate energy solutions, we believe LVP and LVPF will offer higher performance solutions to a new generation of vehicular and other demanding applications.

Competition

In the rechargeable battery market, the principal competitive technologies currently marketed are lead-acid, nickel-cadmium, nickel metal hydride, liquid lithium-ion and lithium-ion polymer energy storage systems. The industry consists of major domestic and international companies with substantial financial, technical, marketing, sales, manufacturing, distribution and other resources available to them.  We believe our principal competitors are Sanyo, Matsushita Industrial Co., Ltd. (Panasonic), Sony, Toshiba, SAFT, E-One Moli Energy Corp. and numerous lead-acid manufacturers around the world.

The performance characteristics of lithium-ion energy storage systems have consistently improved over time as market leaders continued to improve the technology. Other companies are undertaking research in rechargeable battery technologies, including work on lithium-ion phosphate technology. However, Valence intends to maintain competitive leadership in the lithium phosphate sector with patented Lithium Phosphate technologies and advanced energy storage solutions for today’s and tomorrow’s demanding high-energy applications.

We believe that we have several technological advantages over competitors in terms of our ability to compete in the rechargeable battery market. Our Lithium Phosphate energy storage solutions including materials, cells and Epoch™ intelligent packs and our unique ability to integrate our packs into customer applications enable us to serve a wide range of markets that do not currently use lithium-ion energy storage systems.

Sales and Marketing

To respond to the rapidly expanding European electric vehicles and plug-in hybrid market our Vice President of Sales and Marketing is based in Mallusk, Northern Ireland and leads a global team of sales and marketing specialists. Additional sales and marketing staff are located in Austin, Texas; Tarzana, California; Atlanta, Georgia; Gainesville, Florida; Shropshire, United Kingdom; and Mallusk, Northern Ireland.

Epoch™ and U-Charge® Energy Storage Systems are family standard form factor systems that can be configured to meet the energy storage needs of a wide range of customers’ applications. The customer evaluation and approval process is generally between six and twenty-four months. We anticipate sales will typically be made through separately negotiated supply agreements rather than standard purchase orders. During early fiscal 2009 we expect to transition to Epoch™ Energy Storage Systems. Both Energy Storage Systems are expected to be sold in standard and custom configurations. In addition, we expect to design and sell custom battery systems based on our Lithium Phosphate technology and programmable Epoch™ Command and Control Logic. We also provide pack level application engineering services to assist our customers with the integration of our packs into their specific applications. History to date has not shown seasonality in any of our product sales.

Sales of products are typically denominated in U.S. dollars. Consequently, sales historically have not been subject to currency fluctuation risk.

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Customers

Over the last three fiscal years, a limited number of our customers have accounted for a significant portion of our revenues as follows:

During fiscal 2008 approximately 76% of our sales were domestic and 24% international. (See Note 19 in the Notes to Consolidated Financial Statements.)

Patents, Trade Secrets and Trademarks

Our ability to compete effectively depends in part on our ability to maintain the proprietary nature of our technology and manufacturing processes through a combination of patent, trademark and trade secret protection, non-disclosure agreements and cross-licensing agreements.

We rely on patent protection for certain designs and products. We hold approximately 133 U.S. patents, which have expiration dates through 2026 and have about 41 patent applications pending in the U.S. We continually prepare new patent applications for filing in the U.S. We also actively pursue patent protection in certain foreign countries.

In addition to potential patent protection, we rely on the laws of unfair competition and trade secrets to protect our proprietary rights. We attempt to protect our trade secrets and other proprietary information through agreements with customers and suppliers, proprietary information agreements with employees and consultants and other security measures.

We are engaged in certain legal proceedings related to our intellectual property, including certain legal proceedings related to our Saphion® I Technology.  Please see Item 3 — Legal Proceedings for further discussion .

We own the registered trademarks of VALENCE, N-CHARGE, U-CHARGE and the common law trademark EPOCH in the United States and abroad.  All other trademarks, service marks or trade names referred to in this Report are the property of their respective owners.

Manufacturing and Raw Materials

Our base Lithium Phosphate Cathode Material is manufactured in a plant operated by one of our wholly owned foreign enterprises (or WOFEs) in Suzhou, China. Cylindrical cells are manufactured for us by Tianjin Lishen Battery Joint-Stock Co., Ltd. Our Energy Storage Systems or Packs are manufactured in a second plant of our WOFE in Suzhou, China. We depend on a limited number of suppliers for certain key raw materials used in manufacturing and developing our power systems. We generally purchase raw materials pursuant to purchase orders placed from time to time and have no long-term contracts or other guaranteed supply arrangements with our limited source suppliers. With these relationships we believe that we will have sufficient capacity to meet or exceed expected demands in fiscal 2009.

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Research and Product Development

We conduct materials research and development at our Las Vegas, Nevada facility and product development at our China facility. Our battery research and development group develops and improves the existing technology, materials and processing methods and develops the next generation of our energy storage systems. Our areas of expertise include: chemical engineering; process control; safety; anode, cathode, and electrolyte chemistry and physics; polymer and radiation chemistries; thin film technologies; coating technologies; analytical chemistry; material science and energy storage system command and control logic development. Our research and development efforts over the past year have focused and will continue to focus on four areas:

·  Continuing development of our Lithium Phosphate technology in multiple constructions.

·  Development of second generation Lithium Phosphate technology.

·  Large-format applications for Lihium Phosphate technology.

·  Development of next generation Epoch ™ Custom Battery Packs.

We continuously seek to improve our technology, and are currently focusing on improving the energy density of our products and advancing these improvements into production. We also are working with new materials to make further improvements to the performance of our products. We believe the safety features of our technology and the ongoing improvements in the performance of our batteries will allow us to maintain our competitive advantage.

Safety; Regulatory Matters; Environmental Considerations

Before we commercially introduce our batteries into certain markets, we may be required, or may voluntarily determine to obtain approval of our materials and/or products from one or more of the organizations engaged in regulating product safety. These approvals could require significant time and resources from our technical staff, and, if redesign were necessary, could result in a delay in the introduction of our products in those markets.

The United States Department of Transportation, or DOT, and the International Air Transport Association, or IATA, regulates the shipment of hazardous materials. The United Nations Committee of Experts for the Transportation of Dangerous Goods has adopted amendments to the international regulations for “lithium equivalency” tests to determine the aggregate lithium content of lithium-ion polymer batteries. In addition, IATA has adopted special size limitations for applying exemptions to these batteries. Under IATA, our N-Charge® Power System (65) is exempt from Class 9 designation for transportation. Our N-Charge® Power System (130), and U-Charge® Power System currently fall within the level such that they are not exempt and require a Class 9 designation for transportation. We comply with all safety-packaging requirements worldwide and future DOT or IATA regulations or enforcement policies could impose costly transportation requirements. In addition, compliance with any new DOT or IATA approval process could require significant time and resources from our technical staff and if redesign were necessary, could delay the introduction of new products.

The Nevada Occupational Safety and Health Administration and other regulatory agencies have jurisdiction over the operations of our Las Vegas, Nevada facility. Because of the risks generally associated with the use of flammable solvents and other hazardous materials, we expect rigorous enforcement of applicable health and safety regulations. In addition, we currently are regulated by the State Fire Marshall’s office and local Fire Departments. Frequent audits or changes in their regulations may cause unforeseen delays and require significant time and resources from our technical staff.

China’s “Management Methods for Controlling Pollution Caused by Electronic Information Products Regulation” (“China RoHS”) provides a broad regulatory framework including similar hazardous substance restrictions as are imposed by the European RoHS Directive, and applies to methods for the control and reduction of pollution and other public hazards to the environment caused during the production, sale, and import of electronic information products in China affecting a broad range of electronic products and parts, with an effective implementation date of March 1, 2007. However, these methods do not apply to the production of products destined for export. Our compliance system is sufficient to meet such requirements. Our current estimated costs associated with our compliance with this regulation based on our current market share are not significant. However, we continue to evaluate the impact of this regulation, and actual costs could differ from our current estimates.

National, state and local regulations impose various environmental controls on the storage, use and disposal of lithium batteries and of certain chemicals used in the manufacture of lithium batteries. Although we believe that our operations are in substantial compliance with current environmental regulations, there can be no assurance that changes in such laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. Moreover, state and local governments may enact additional restrictions relating to the disposal of lithium batteries used by our customers that could adversely affect the demand for our products. There can be no assurance that additional or modified regulations relating to the storage, use and disposal of chemicals used to

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manufacture batteries, or restricting disposal of batteries will not be imposed. In 2008, we spent approximately $145,000 on environmental controls, including costs to properly dispose of potentially hazardous waste.

Employees

At June 2, 2008, we had a total of 490 regular full-time employees. In the U.S., we had a total of 44 employees at our Austin, Texas headquarters and our Las Vegas, Nevada research and development facility. We had 10 regular full-time employees in the areas of engineering and sales located in the United Kingdom and Northern Ireland. Our China operations, consisting of two WOFEs, had 434 regular full-time employees and 2 ex-patriots. None of our employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be good.

Available Information

We make available on our website (www.valence.com) under “Investor Relations - SEC Filings,” free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission.  We will provide copies of these reports upon written request to 12201 Technology Blvd., Suite 150, Austin, Texas 78727.  Our filings with the SEC are also available through the SEC website at www.sec.gov or at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330.

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ITEM 1A. RISK FACTORS

Risks Related to Our Company and Our Business

There is doubt about our ability to continue as a going concern.

We have experienced significant operating losses in the current and prior years. At March 31, 2008, our principal sources of liquidity were cash and cash equivalents of $2.6 million. We do not expect that our cash on hand and cash generated by operations will be sufficient to fund our operating and capital needs beyond the next three months. As a result of our limited cash resources and history of operating losses, our auditors have expressed in their report on our consolidated financial statements that there is substantial doubt about our ability to continue as a going concern. We presently have no further commitments for financing by affiliates of our Chairman Carl Berg or any other source. If we are unable to obtain financing from affiliates of Mr. Berg or others on terms acceptable to us, or at all, we may not be able to fulfill our customer commitments and/or be forced to cease all operations and liquidate our assets.

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 limited financial resources could materially affect our ability, and the pace at which, we are able 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.

We have a history of losses and an accumulated deficit and may never achieve or sustain significant revenues or profitability.

We have incurred operating losses each year since our inception in 1989 and had an accumulated deficit of $536.3 million as of March 31, 2008. We have sustained recurring losses related primarily to the research and development and marketing of our products combined with the lack of sufficient sales to provide for these needs. We anticipate that we will continue to incur operating losses and negative cash flows over the next fiscal year. We may never achieve or sustain sufficient revenues or profitability in the future.

We reported a net loss available to common stockholders of $19.6 million for the fiscal year ended March 31, 2008.  We have reported a net loss available to common stockholders of $22.4 million for the fiscal year ended March 31, 2007 and a net loss available to common stockholders of $32.9 million for the fiscal year ended March 31, 2006. If we cannot achieve a competitive cost structure, achieve profitability and access the capital markets on acceptable

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terms, we will be unable to fund our obligations and sustain our operations and may be required to liquidate our assets.

Our working capital requirements may increase beyond those currently anticipated.

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

Our indebtedness and other obligations are substantial and could materially affect our business and our ability to incur additional debt to fund future needs.

We have and will continue to have a significant amount of indebtedness and other obligations. As of March 31, 2008, we had approximately $75.1 million of total consolidated indebtedness. Included in this amount are $34.6 million of loans outstanding, net of discount, to an affiliate of Carl Berg, $21.5 million of accumulated interest associated with those loans and $19.0 million of principal and interest outstanding with a third party finance company. We also have an upcoming obligation to redeem our outstanding shares of Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock held by affiliates of Carl Berg for up to $8,610,000, plus accrued dividends which, as of March 31, 2008, were $431,000. Our substantial indebtedness and other obligations could negatively impact our current and future operations. For example, it could:

All of our assets are pledged as collateral under various loan agreements with Mr. Berg or related entities. If we fail to meet our obligations pursuant to these loan agreements, these lenders may declare all amounts borrowed from them, together with accrued and unpaid interest thereon, to be due and payable. If this were to occur, we would not have the financial resources to repay our debt and these lenders could proceed against our assets.

Our financial results may vary significantly from quarter to quarter.

Our product revenue, operating expenses and quarterly operating results have varied in the past and may fluctuate significantly from quarter to quarter in the future due to a variety of factors, many of which are outside of our control. As a result you should not rely on our operating results during any particular quarter as an indication of our future performance in any quarterly period or fiscal year. These factors include, among others:

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The market for our products is evolving and it is difficult to predict its potential size or future growth rate. Many of the organizations that may purchase our products have invested substantial resources in their existing power systems and, as a result, have been reluctant or slow to adopt a new approach, particularly during a period of reduced capital expenditures. Moreover, our current products are alternatives to existing systems and may never be accepted by our customers or may be made obsolete by other advances in related technologies.

Significant portions of our expenses are not variable in the short term and cannot be quickly reduced to respond to decreases in revenue. Therefore, if our revenue is below our expectations, our operating results are likely to be adversely and disproportionately affected. In addition, we may change our prices, modify our distribution strategy and policies, accelerate our investment in research and development, sales or marketing efforts in response to competitive pressures or to pursue new market opportunities. Any one of these activities may further limit our ability to adjust spending in response to revenue fluctuations. We use forecasted revenue to establish our expense budget. Because most of our expenses are fixed in the short term or incurred in advance of anticipated revenue, any shortfall in revenue may result in significant losses.

We have encountered problems in our production process that have limited our ability at times to produce sufficient batteries to meet the demands of our customers. If these issues recur and we are unable to timely resolve these problems, our inability to produce batteries will have a material adverse impact on our ability to grow revenues and maintain our customer base.

Problems in our production processes could limit our ability to produce a sufficient number of batteries to meet the demands of our customers. Production issues likely will have a negative impact on gross margins as manufacturing yields will suffer. Any inability to timely produce batteries and other products would have a material adverse impact on our ability to grow revenues and maintain our customer base.

Our business will be adversely affected if our Saphion technology – based batteries are not commercially accepted.

We are researching and developing batteries based upon phosphate chemistry. Our batteries are designed and manufactured as components for other companies and end-user customers. Our success depends on the acceptance of our batteries and the products using our batteries in their markets. Technical issues may arise that may affect the acceptance of our products by our customers. Market acceptance may also depend on a variety of other factors, including educating the target market regarding the benefits of our products. Market acceptance and market share are also affected by the timing of market introduction of competitive products. If we, or our customers, are unable to gain any significant market acceptance for Saphion technology-based batteries, our business will be adversely affected. It is too early to determine if Saphion technology-based batteries will achieve significant market acceptance.

If we are unable to develop, manufacture and market products that gain wide customer acceptance, our business will be adversely affected.

The process of developing our products is complex and failure to anticipate our customers’ changing needs and to develop products that receive widespread customer acceptance could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will eventually result in products that the market will accept. After a product is developed, we must be able to manufacture sufficient volumes quickly and at low costs. To accomplish this, we must accurately forecast volumes, mix of products and configurations that meet customer requirements, and we may not succeed.  For example, if we

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are unable to develop, manufacture and market our Epoch ^TM Energy Storage Systems and gain wide customer acceptance of those systems, our business, results of operations and financial condition could be harmed.

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

To date, our existing purchase orders in commercial quantities are from a limited number of customers. During the fiscal year ended March 31, 2008, Segway Inc., The Tanfield Group, PLC and D&H Distributing Co., Inc. contributed 55%, 12%, and 6%, of our revenues, respectively.  We anticipate that sales of our products to a limited number of key customers will continue to account for a significant portion of our total revenues. We do not have long-term agreements with any of these customers committing them to purchase any specified amount of our products. As a result, we face the substantial risk that one or more of the following events could occur:

· reduction, delay or cancellation of orders from a customer;

· development by a customer of other sources of supply;

· selection by a customer of devices manufactured by one of our competitors for inclusion in future product generations;

· loss of a customer or a disruption in our sales and distribution channels; or

· failure of a customer to make timely payment of our invoices.

If we were to lose one or more customers, or if we were to lose revenues due to a customer’s inability or refusal to continue to purchase our batteries, our business, results of operations and financial condition could be harmed.

If our products fail to perform as expected, we could lose existing and future business, and our ability to develop, market and sell our batteries could be harmed.

The market perception of our products and related acceptance of the products is highly dependent upon the quality and reliability of the products that we build. Any quality problems attributable to our product lines may substantially impair our revenue prospects. Moreover, quality problems for our product lines could cause us to delay or cease shipments of products or have to recall or field upgrade products, thus adversely affecting our ability to meet revenue or cost targets. In addition, while we seek to limit our liability as a result of product failure or defects through warranty and other limitations, if one of our products fails, a customer could suffer a significant loss and seek to hold us responsible for that loss.

Our failure to cost-effectively manufacture our technologically-complex batteries in commercial quantities which satisfy our customers’ product specifications and their expectations for product quality and delivery could damage our customer relationships and result in significant lost business opportunities for us.

To be successful, we must cost-effectively manufacture commercial quantities of our technologically-complex batteries that meet our customer specifications for quality and timely delivery. To facilitate commercialization of our products, we will need to further reduce our manufacturing costs, which we intend to do through the effective utilization of manufacturing partners and continuous improvement of our manufacturing and development operations in our wholly owned foreign enterprises in China. We currently manufacture our batteries and assemble our products in China. We are dependent on the performance of our manufacturing partners, as well as our own manufacturing operations to manufacture and deliver our products to our customers. We have experienced production process issues, which have limited our ability to produce a sufficient number of batteries to meet current demand. For example, during the third quarter of fiscal 2008, our anticipated revenue was adversely affected due to the temporary suspension of production and shipments at our China facility in order to implement a component change on a circuit board.  If we fail to correct these issues in a manner that allows us to meet customer demand, or

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if any of our manufacturing partners are unable to manufacture products in commercial quantities on a timely and cost-effective basis, we could lose our customers and adversely impact our ability to attract future customers.

In addition to being used in our own product lines, our battery cells are intended to be incorporated into other products. If we do not form effective arrangements with OEMs to commercialize these products, our profitability could be impaired.

Our business strategy contemplates that we will be required to rely on assistance from OEMs to gain market acceptance for our products. We therefore will need to identify acceptable OEMs and enter into agreements with them. Once we identify acceptable OEMs and enter into agreements with them, we will need to meet these companies’ requirements by developing and introducing new products and enhanced or modified versions of our existing products on a timely basis. OEMs often require unique configurations or custom designs for batteries, which must be developed and integrated into their product well before the product is launched. This development process not only requires substantial lead-time between the commencement of design efforts for a customized power system and the commencement of volume shipments of the power systems to the customer, but also requires the cooperation and assistance of the OEMs for purposes of determining the requirements for each specific application. We may have technical issues that arise that may affect the acceptance of our product by OEMs. If we are unable to design, develop, and introduce products that meet OEMs’ requirements, we may lose opportunities to enter into additional purchase orders and our reputation may be damaged. As a result, we may not receive adequate assistance from OEMs or pack assemblers to successfully commercialize our products, which could impair our profitability.

Failure to implement an effective licensing business strategy will adversely affect our revenue, cash flow and profitability.

Our long-term business strategy anticipates achieving significant revenue from the licensing of our intellectual property assets, such as our Saphion technology. We have not entered into any licensing agreements for our Saphion technology. Our future operating results could be adversely affected by a variety of factors including:

· our ability to secure and maintain significant licensees of our proprietary technology;

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

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

· the rate at which our licensees manufacture and distribute their products to OEMs; and

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

Our future success will also depend on our ability to execute our licensing operations simultaneously with our other business activities. If we fail to substantially expand our licensing activities while maintaining our other business activities, our results of operations and financial condition will be adversely affected.

The fact that we depend on a sole supplier or a limited number of suppliers for key raw materials may delay our production of batteries.

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

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We have limited experience manufacturing our products in large quantities.

Achieving the necessary production levels presents a number of technological and engineering challenges for us.  We have limited experience manufacturing our products in high volume.  We do not know whether or when we will be able to develop efficient, low-cost manufacturing capability and processes that will enable us to meet the quality, price, engineering, design and product standards or production volumes required to successfully manufacture large quantities of our products.  Even if we are successful in developing our manufacturing capability and processes, we do not know whether we will do so in time to meet our product commercialization schedule or to satisfy the requirements of our customers.

We expect to sell an increasing portion of our products to, and derive a significant portion of our licensing income from, customers located outside the United States. Foreign government regulations, currency fluctuations and increased costs associated with international sales could make our products and licenses unaffordable in foreign markets, which would reduce our future profitability.

We expect that international sales of our product and licenses, as well as licensing royalties, represent a significant portion of our sales potential. International business can be subject to many inherent risks that are difficult or impossible for us to predict or control, including:

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

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

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

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

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

· import and export licensing requirements in Europe and other regions, including China, where we intend to conduct business, which may reduce or eliminate our ability to sell or license in certain markets; and

· political and economic instability in countries, including China, where we intend to conduct business, which may reduce the demand for our batteries and our technology or our ability to market our batteries and our technology in those countries.

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

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 all of our 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

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competitors who have significantly greater financial resources than we do. We do not maintain key-person life insurance on any of our employees. 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.

We may need to expand our employee base and operations in order to effectively distribute our products commercially, which may strain our management and resources and could harm our business.

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

International political events and the threat of ongoing terrorist activities could interrupt manufacturing of our batteries and our products at our OEM facilities or our own facilities and cause us to lose sales and marketing opportunities.

The terrorist attacks that took place in the United States on September 11, 2001, along with the U.S. military campaigns against terrorism in Iraq, Afghanistan and elsewhere, and continued violence in the Middle East have created many economic and political uncertainties, some of which may materially harm our business and revenues. International political instability resulting from these events could temporarily or permanently disrupt manufacturing of our batteries and products at our OEM facilities or our own facilities in Asia and elsewhere, and have an immediate adverse impact on our business. Since September 11, 2001, some economic commentators have indicated that spending on capital equipment of the type that use our batteries has been weaker than spending in the economy as a whole, and many of our customers are in industries that also are viewed as under-performing in the overall economy, such as the telecommunications, industrial and utility industries. The long-term effects of these events on our customers, the market for our common stock, the markets for our products, and the U.S. economy as a whole are uncertain. Terrorist activities could temporarily or permanently interrupt our manufacturing, development, sales and marketing activities anywhere in the world. Any delays also could cause us to lose sales and marketing opportunities, as potential customers would find other vendors to meet their needs. The consequences of any additional terrorist attacks, or any expanded armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets or our business.

If we are sued on a product liability claim, our insurance policies may not be sufficient.

Although we maintain general liability insurance and product liability insurance, our insurance may not cover all potential types of product liability claims to which manufacturers are exposed or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could harm our business, including our relationships with current customers and our ability to attract and retain new customers for our products and technology.

Our patent applications may not result in issued patents, which would have a material adverse effect on our ability to commercially exploit our products.

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

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The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. Accordingly, we cannot be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may be issued to us in the near future will afford protection against competitors with similar technology. In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our operations.

If we cannot protect or enforce our existing intellectual property rights or if our pending patent applications do not result in issued patents, we may lose the advantages of our research and manufacturing systems.

Our ability to compete successfully will depend on whether we can protect our existing proprietary technology and manufacturing processes. We have filed a lawsuit against a company in Canada alleging infringement of certain Canadian patents, as described in further detail in “Item 3-Legal Proceedings.” We rely on a combination of patent and trade secret protection, non-disclosure agreements and cross-licensing agreements. These measures may not be adequate to safeguard the proprietary technology underlying our batteries. Employees, consultants, and others who participate in the development of our products may breach their non-disclosure agreements with us, and we may not have adequate remedies in the event of their breaches. Furthermore, our competitors may be able to develop products that are equal or superior to our products without infringing on any of our intellectual property rights. We currently manufacture and export some of our products from China. The legal regime protecting intellectual property rights in China is weak. Because the Chinese legal system in general, and the intellectual property regime in particular, are relatively weak, it is often difficult to enforce intellectual property rights in China. Moreover, there are other countries where effective copyright, trademark and trade secret protection may be unavailable or limited. Accordingly, we may not be able to effectively protect our intellectual property rights outside of the United States.

Intellectual property infringement claims brought against us could be time-consuming and expensive to defend, and if any of our products or processes is found to be infringing, we may not be able to procure licenses to use patents necessary to our business at reasonable terms, if at all.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. For example, we were recently named in a lawsuit which alleges that the Company’s Saphion I cathode material infringes two patents owned by the University of Texas that we describe in further detail in “Item 3-Legal Proceedings.” An adverse decision in this litigation could force us to do one or more of the following:

· stop selling, incorporating, or using our products that use the Saphion I cathode material challenged intellectual property;

· pay damages for the use of Saphion I cathode material;

· obtain a license to sell or use the Saphion I cathode material, which license may not be available on reasonable terms, or at all; or

· redesign those products or manufacturing processes that use the Saphion I cathode material, which may not be economically or technologically feasible.

We may become involved in additional litigation and proceedings in the future. Likewise, we may in the future be subject to claims or an inquiry regarding our alleged unauthorized use of a third party’s intellectual property. An adverse outcome in such future litigation could result in similar risks as noted above with respect to the third party’s intellectual property. Whether or not an intellectual property litigation claim is valid, the cost of responding to it, in terms of legal fees and expenses and the diversion of management resources, could be expensive and harm our business.

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Risks Associated With Doing Business In China

Since our products are manufactured in China and we have transferred additional operations to China, we face risks if China loses normal trade relations status with the United States.

We manufacture and export our products from China. Our products sold in the United States are currently not subject to U.S. import duties. On September 19, 2000, the United States Senate voted to permanently normalize trade with China, which provides a favorable category of United States import duties. In addition, on December 11, 2001, China was accepted into the World Trade Organization, or WTO, a global international organization that regulates international trade. As a result of opposition to certain policies of the Chinese government and China’s growing trade surpluses with the United States, there has been, and in the future may be, opposition to the extension of Normal Trade Relations, or NTR, status for China. The loss of NTR status for China, changes in current tariff structures or adoption in the United States of other trade policies adverse to China could have an adverse affect on our business.

Furthermore, our business may be adversely affected by the diplomatic and political relationships between the United States and China. These influences may adversely affect our ability to operate in China. If the relationship between the United States and China were to materially deteriorate, it could negatively impact our ability to control our operations and relationships in China, enforce any agreements we have with Chinese manufacturers or otherwise deal with any assets or investments we may have in China.

Because the Chinese legal system in general, and the intellectual property regime in particular, are relatively weak, we may not be able to enforce intellectual property rights in China and elsewhere.

We currently manufacture and export our products from China. The legal regime protecting intellectual property rights in China is weak. Because the Chinese legal system in general, and the intellectual property regime in particular, are relatively weak, it is often difficult to enforce intellectual property rights in China.

Enforcing agreements and laws in China is difficult or may be impossible as China does not have a comprehensive system of laws.

We are dependent on our agreements with our Chinese manufacturing partners. Enforcement of agreements may be sporadic and implementation and interpretation of laws may be inconsistent. The Chinese judiciary is relatively inexperienced in interpreting agreements and enforcing the laws, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate law exists in China, it may be impossible to obtain swift and equitable enforcement of such law, or to obtain enforcement of a judgment by a court of another jurisdiction.

The government of China may change or even reverse its policies of promoting private industry and foreign investment, in which case our assets and operations may be at risk.

China is a socialist state, which since 1949 has been, and is expected to continue to be, controlled by the Communist Party of China. Our existing and planned operations in China are subject to the general risks of doing business internationally and the specific risks related to the business, economic and political conditions in China, which include the possibility that the central government of China will change or even reverse its policies of promoting private industry and foreign investment in China. Many of the current reforms which support private business in China are unprecedented or experimental. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities of per capita wealth among citizens of China and between regions within China, could also lead to further readjustment of the government’s reform measures. It is not possible to predict whether the Chinese government will continue to be as supportive of private business in China, nor is it possible to predict how future reforms will affect our business.

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The government of China continues to exercise substantial control over the Chinese economy which could have a negative impact on our business.

The government of China has exercised and continues to exercise substantial control over virtually every section of the Chinese economy through regulation and state ownership. China’s continued commitment to reform and the development of a vital private sector in that country have, to some extent, limited the practical effects of the control currently exercised by the government over individual enterprises. However, the economy continues to be subject to significant government controls, which, if directed towards our business activities, could have a significant adverse impact on us. For example, if the government were to limit the number of foreign personnel who could work in the country, substantially increase taxes on foreign businesses or impose any number of other possible types of limitations on our operations, the impact would be significant.

Changes in China’s political and economic policies could harm our business.

The economy of China has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development of China, we cannot predict the future direction of these economic reforms or the effects these measures may have on our business, financial position or results of operations. In addition, the Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD. These differences include:

· economic structure;

· level of government involvement in the economy;

· level of development;

· level of capital reinvestment;

· control of foreign exchange;

· methods of allocating resources; and

· balance of payments position.

As a result of these differences, our operations, including our current manufacturing operations in China, may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to the OECD member countries.

Business practices in China may entail greater risk and dependence upon the personal relationships of senior management than is common in North America and therefore some of our agreements with other parties in China could be difficult or impossible to enforce.

The business structure of China is, in most respects, different from the business culture in Western countries and may present some difficulty for Western investors reviewing contractual relationships among companies in China and evaluating the merits of an investment. Personal relationships among business principals of companies and business entities in China are very significant in the business culture. In some cases, because so much reliance is based upon personal relationships, written contracts among businesses in China may be less detailed and specific than is commonly accepted for similar written agreements in Western countries. In some cases, material terms of an understanding are not contained in the written agreement but exist as oral agreements only. In other cases, the terms of transactions which may involve material amounts of money are not documented at all. In addition, in contrast to Western business practices where a written agreement specifically defines the terms, rights and obligations of the parties in a legally-binding and enforceable manner, the parties to a written agreement in China may view that agreement more as a starting point for an ongoing business relationship which will evolve and require ongoing

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modification. As a result, written agreements in China may appear to the Western reader to look more like outline agreements that precede a formal written agreement. While these documents may appear incomplete or unenforceable to a Western reader, the parties to the agreement in China may feel that they have a more complete understanding than is apparent to someone who is only reading the written agreement without having attended the negotiations. As a result, contractual arrangements in China may be more difficult to review and understand. Also, despite legal developments in China over the past 20 years, adequate laws, comparable with Western standards, do not exist in all areas and it is unclear how many of our business arrangements would be interpreted or enforced by a court in China.

Our ongoing manufacturing and development operations in China are complex and having these remote operations may divert management’s attention, lead to disruptions in operations and delay implementation of our business strategy.

We have relocated most of our manufacturing and development operations to China. We may not be able to find or retain suitable employees in China and we may have to train personnel to perform necessary functions for our manufacturing, senior management and development operations. This may divert management’s attention, lead to disruptions in operations and delay implementation of our business strategy, all of which could negatively impact our profitability.

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

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

The system of taxation in China is uncertain and subject to unpredictable change that could affect our profitability.

Many tax rules are not published in China and those that are published can be ambiguous and contradictory, leaving a considerable amount of discretion to local tax authorities. China currently offers tax and other preferential incentives to encourage foreign investment. However, the country’s tax regime is undergoing review and there is no assurance that such tax and other incentives will continue to be made available.  If we no longer receive such preferential incentives, our business, prospects and results of operations would be adversely affected.

It is uncertain whether we will be able to recover value-added taxes imposed by the Chinese taxing authority.

China’s turnover tax system consists of value-added tax, or VAT, consumption tax and business tax. Export sales are exempted under VAT rules and an exporter who incurs VAT on purchase or manufacture of goods should be able to claim a refund from Chinese tax authorities. However, due to a reduction in the VAT export refund rate of some goods, exporters might bear part of the VAT they incurred in conjunction with the exported goods. In 2003, changes to the Chinese value-added tax system were announced affecting the recoverability of input VAT beginning January 1, 2004. Our VAT expense will depend on the reaction of both our suppliers and customers. Continued efforts by the Chinese government to increase tax revenues could result in revisions to tax laws or their interpretation, which could increase our VAT and various tax liabilities.

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Any recurrence of Severe Acute Respiratory Syndrome (SARS), avian flu, or other widespread public health problem, could adversely affect our business and results of operations.

A renewed outbreak of SARS, avian flu, or another widespread public health problem in China, where we have moved our manufacturing operations, some engineering operations and may move additional operations, could have a negative effect on our operations. Our operations may be impacted by a number of health-related factors, including the following:

· quarantines or closures of some of our manufacturing or other facilities which would severely disrupt our operations, or

· the sickness or death of key officers or employees of our manufacturing or other facilities.

Any of the foregoing events or other unforeseen consequences of public health problems in China could adversely affect our business and results of operations.

Risks Associated With Our Industry

If competing technologies that outperform our batteries were developed and successfully introduced, then our products might not be able to compete effectively in our targeted market segments.

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

We have invested in research and development of next-generation technology in energy solutions. If we are not successful in developing and commercially exploiting new energy solutions based on new materials, or we experience delays in the development and exploitations of new energy solutions compared to our competitors, our future growth and revenues will be adversely affected.

Our principal competitors have greater financial and marketing resources than we do and they may therefore develop batteries similar or superior to ours or otherwise compete more successfully than we do.

Competition in the rechargeable battery industry is intense. The industry consists of major domestic and international companies, most of which have financial, technical, marketing, sales, manufacturing, distribution and other resources substantially greater than ours. There is a risk that other companies may develop batteries similar or superior to ours. In addition, many of these companies have name recognition, established positions in the market, and long-standing relationships with OEMs and other customers. We believe that our primary competitors are existing suppliers of cylindrical lithium-ion, nickel cadmium, nickel metal-hydride and in some cases, non-SLI lead-acid batteries. These suppliers include Sanyo, Matsushita Industrial Co., Ltd. (Panasonic), Sony, Toshiba, SAFT, E-One Moli Energy Corp., as well as numerous lead-acid manufacturers throughout the world. Most of these companies are very large and have substantial resources and market presence. We expect that we will compete against manufacturers of other types of batteries in our targeted application segments. There is also a risk that we may not be able to compete successfully against manufacturers of other types of batteries in any of our targeted applications.

Laws regulating the manufacture or transportation of batteries may be enacted which could result in a delay in the production of our batteries or the imposition of additional costs that could harm our ability to be profitable.

At the present time, international, federal, state and local laws do not directly regulate the storage, use and disposal of the component parts of our batteries. However, laws and regulations may be enacted in the future which could impose environmental, health and safety controls on the storage, use and disposal of certain chemicals and metals used in the manufacture of lithium polymer batteries. Satisfying any future laws or regulations could require significant time and resources from our technical staff, including those related to possible redesign which may result in substantial expenditures and delays in the production of our product, all of which could harm our business and reduce our future profitability.

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The transportation of lithium and lithium-ion batteries is regulated both domestically and internationally. Under recently revised United Nations recommendations and as adopted by the International Air Transport Association, our N-Charge Power System (Model VNC-65) is exempt from a Class 9 designation for transportation, while our N-Charge Power System (Model VNC-130), and U-Charge Power System currently fall within the level such that they are not exempt and require a Class 9 designation for transportation. The revised United Nations recommendations are not U.S. law until such time as they are incorporated into the Department of Transportation Hazardous Material Regulations. However, DOT has proposed new regulations harmonizing with the U.N. guidelines. At present it is not known if or when the proposed regulations would be adopted by the United States. While we fall under the equivalency levels for the United States and comply with all safety packaging requirements worldwide, future DOT or IATA regulations or enforcement policies could impose costly transportation requirements. In addition, compliance with any new DOT and IATA approval process could require significant time and resources from our technical staff and, if redesign were necessary, could delay the introduction of new products.

Risks Associated With Ownership of Our Stock

Corporate insiders or their affiliates will be able to exercise significant control over matters requiring stockholder approval that might not be in the best interests of our stockholders as a whole.

As of June 12, 2008, our officers, directors and their affiliates as a group beneficially owned approximately 55% of our outstanding common stock, of which our Chairman Carl Berg and his affiliates beneficially owned approximately 47% of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. The interest of our officers and directors, when acting in their capacity as stockholders, may lead them to:

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

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

Some provisions of our charter documents may make takeover attempts difficult, which could depress the price of our stock and limit the price that potential acquirers may be willing to pay for our common stock.

Our Board of Directors has the authority, without any action by the outside stockholders, to issue additional shares of our preferred stock, which shares may be given superior voting, liquidation, distribution, and other rights as compared to those of our common stock. The rights of the holders of our capital stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of additional shares of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. These provisions may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price, may decrease the market price and may infringe upon the voting and other rights of the holders of our common stock.

At any given time we might not meet the continued listing requirements of the NASDAQ 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. On May 16, 2007, the closing price of our common stock was $1.00. 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.

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Our stock price is volatile, which could result in a loss of your investment.

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

· fluctuation in our operating results,

· announcements of technological innovations or new commercial products by us or our competitors,

· failure to achieve operating results projected by securities analysts,

· governmental regulation,

· developments in our patent or other proprietary rights or our competitors’ developments,

· our relationships with current or future collaborative partners, and

· other factors and events beyond our control.

In addition, the stock market in general has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance. As a result of this potential stock price volatility, investors may be unable to sell their shares of our common stock at or above the cost of their purchase prices. In addition, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were the subject of securities class action litigation, this could result in substantial costs, a diversion of our management’s attention and resources and harm to our business and financial condition.

Future sales of currently outstanding shares could adversely affect our stock price.

The market price of our common stock could drop as a result of sales of a large number of shares in the market or in response to the perception that these sales could occur. In addition, these sales might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. As of March 31, 2008, we had issued 119,242,392 shares of common stock and have 1,803,144 shares in treasury stock.  In addition, at March 31, 2008, we had 10,733,404 shares of our common stock reserved for issuance under warrants and stock options plans. In connection with the potential conversion of the Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock, issued on December 1, 2004, we may need to issue up to 2,174,242 and 1,454,392 shares, respectively, of our common stock (based on a conversion price of $1.98 and $2.96, respectively) (in addition to any shares that may be issued with respect to the conversion of accrued dividends).

Equity transactions occurring in the future, including sales under our At Market Issuance Sales Agreement, 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, 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. For example, in February 2008 we entered into an At Market Issuance Sales Agreement with Wm. Smith & Co., 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 5 million shares of our common stock.  In addition, 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

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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.

We do not intend to pay dividends on our common stock, and therefore stockholders will be able to recover their investment in our common stock, if at all, only by selling the shares of stock that they hold.

Some investors favor companies that pay dividends on common stock. We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and we do not anticipate paying cash dividends on our common stock in the foreseeable future. Because we may not pay dividends, a return on an investment in our stock likely depends on the ability to sell our stock at a profit.

Our business is subject to changing regulations relating to corporate governance and public disclosure that has increased both our costs and the risk of noncompliance .

Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the Commission, and NASDAQ, have recently issued new requirements and regulations and continue to develop additional regulations and requirements in response to recent laws enacted by Congress, most notably Section 404 of the Sarbanes-Oxley Act of 2002. Our efforts to comply with these new regulations have resulted in, and are likely to continue to result in, materially increased general and administrative expenses and a significant diversion of management time and attention from revenue-generating and cost-reduction activities to compliance activities.

In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our independent registered public accounting firm’s audit of that assessment has required, and continues to require, the commitment of significant financial and managerial resources. There is no assurance that these efforts will be completed on a timely and successful basis. Because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.

In the event that our Chief Executive Officer, Chief Financial Officer, or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404 of the Sarbanes-Oxley Act of 2002, there may be a material adverse impact in investor perceptions and a decline in the market price of our stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate offices are located in a leased facility in Austin, Texas. We also have a leased research and development facility in Las Vegas, Nevada. Our two wholly owned foreign enterprises in China lease two separate facilities, totaling 151,000 square meters in Suzhou, China. Our sales and OEM manufacturing support center is located in Mallusk, Northern Ireland.

ITEM 3. 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 recently granted Canadian Patents 2,483,918 and 2,466,366. The action is in the initial pleading state. The Company

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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 us in the United States District Court for the Western District of Texas (Hydro-Quebec v. Valence Technology, Civil Action No. A06CA111). In its amended complaint filed April 13, 2006, Hydro-Quebec alleges that Saphion® I Technology, the technology utilized in all of our commercial products, infringes U.S. Patent Nos. 5,910,382 and 6,514,640 exclusively licensed to Hydro-Quebec. Hydro-Quebec’s complaint seeks injunctive relief and monetary damages. The action is in the initial pleading state and we have filed a response denying the allegations in the amended complaint. The action has been stayed by the Court pending a final determination of the two reexaminations by the USPTO.

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

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

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is quoted on the NASDAQ Capital Market under the symbol “VLNC.” As of June 12, 2008, we had approximately 650 holders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company, or DTC. All of the shares of our common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are therefore considered to be held of record by Cede & Co. as one stockholder.

The following table sets forth the quarterly high and low closing sales prices of our common stock during 2007 and 2008:

The following table includes, as of March 31, 2008, information regarding common stock authorized for issuance under our equity compensation plans:

(1)    Options to purchase 1,500,000 shares were granted to Robert L. Kanode in March 2007 pursuant to his employment agreement. The exercise price of his shares is $1.61 per share and they vest as follows: 250,000 shares vested on September 13, 2007 and the remaining 1,250,000 shares monthly over the remaining two and a half years.

Recent Sales of Unregistered Securities

None, except as has been previously disclosed in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission.

Dividends

We have never declared or paid any cash dividend on our common stock. We intend to retain earnings, if any, to finance future operations and expansion and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Any future payment of dividends will depend upon our financial condition, capital requirements and earnings, as well as upon other factors that the Board of Directors may deem relevant.

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Performance Graph

The graph below compares the cumulative 5-year total return of holders of Valence Technology, Inc.’s common stock with the cumulative total returns of the NASDAQ Composite index and the NASDAQ Electronic Components index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from March 31, 2003 to March 31, 2008.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Valence Technology, Inc., The NASDAQ Composite Index

And The NASDAQ Electronic Components Index

* $100 invested on 3/31/03 in stock or index-including reinvestment of dividends.

Fiscal year ending March 31.

The stock price performance included in this graph is not necessarily indicative of future stock price performance .

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ITEM 6.  SELECTED FINANCIAL DATA

This section presents selected historical financial data of Valence Technology, Inc. The information should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto contained elsewhere in this document.  Our financial data as of and for the periods indicated is derived from our audited financial statements for such periods.  The following is not necessarily indicative of future results:

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

General

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 and address the significant market opportunity we believe is available to us by drawing on the numerous benefits of our Epoch ™ Lithium Phosphate Energy Storage Systems battery technology, deep intellectual property portfolio, and the extensive experience of our management team.

Total revenue in fiscal 2008 was $20.8 million, an increase of 25% compared to the prior fiscal year. We believe revenue will continue to grow in fiscal year 2009 from new customer sales from the increasing demand in the U.S. and EMEA (Europe, Middle East and Africa) markets for alternative energy solution systems.  Our gross margin continues to increase as sales grow and the manufacturing costs decrease from continued improvements in quality and efficiency.  We are continuing to expand the capacity of China manufacturing and support operations in our two wholly-owned subsidiaries.

Going Concern

As a result of our limited cash resources and history of operating losses that there is substantial doubt about our ability to continue as a going concern. We presently have no further commitments for financing by our Chairman Carl Berg and/or his affiliates or any other source. If we are unable to obtain financing from Mr. Berg or others on terms acceptable to us, or at all, we may be forced to cease all operations and liquidate our assets. Our cash requirements may vary materially from those now planned because of changes in our operations, including the failure to achieve expected revenues, greater than expected expenses, changes in OEM relationships, market conditions, the failure to timely realize our product development goals, and other adverse developments. These events could have a negative impact on our available liquidity sources during fiscal 2009.

2008 Highlights

Key product introductions and milestones based on our Epoch™ and Lithium Phosphate technology during the current year include:

·                  In February 2008, we entered into a supply agreement with The Tanfield Group, PLC (“Tanfield”) whereby we agreed to manufacture and supply Lithium Phosphate energy storage systems to power zero emission, all-electric commercial delivery vehicles. Our battery systems will be installed in leading edge vans and trucks produced by Tanfield’s UK-based trading division, Smith Electric Vehicles.  Initial purchases, which began in the fiscal fourth quarter ended March 31, 2008 were fulfilled with our current U-Charge® brand of energy storage systems. Subsequent purchases by Tanfield will be fulfilled by our U-Charge® Energy Storage Systems and ultimately by our third generation lithium phosphate Epoch™ Energy Storage Systems.

·                  In November 2007, we introduced the Epoch™ Lithium Phosphate Energy Storage System, our new generation of phosphate-based lithium-ion battery. The Epoch™Lithium Phosphate Energy Storage Systems are equipped with an advanced management system that will monitor and adjust cell performance, so battery packs will operate at their optimum performance capacity. Epoch™ Lithium Phosphate Energy Storage Systems present a safer and more powerful and reliable energy source storage solution designed to be low maintenance, cost competitive, and environmentally friendly.

During the third and fourth quarter of fiscal 2008, we continued our efforts to increase production capacity at our subsidiaries in China. We also continue to explore other ways of expanding capacity, including partnerships with other companies.  Our research and development efforts are focused on the design of new products utilizing our lithium phosphate chemistry, the continuous improvement of the manufacturing process of our second generation lithium phosphate technology, the development of different cell constructions to optimize power and size for new applications, as well as developing future materials based on the lithium phosphate technology platform.

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Our business headquarters 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.

Result of Operations

Fiscal Years Ended March 31, 2008 (Fiscal 2008), March 31, 2007 (Fiscal 2007) and March 31, 2006 (Fiscal 2006)

The following table summarizes the results of our operations for the past three fiscal years (in thousands) :

Revenues and Gross Margin

Battery and system sales : Battery and systems sales totaled $ 20.2 million for the year ended March 31, 2008, as compared to $16.0 million for the year ended March 31, 2007, and $16.5 million for the year ended March 31, 2006. The increase in revenues in fiscal 2008 compared to fiscal 2007 was primarily due to additional sales of the large-format batteries, which include U-Charge® and custom batteries designed for Segway, and to new and existing customers. The decrease in revenues in fiscal 2007 compared to fiscal 2006 was primarily attributable to decreased sales of N-Charge® Power Systems as a result of ceasing sales through our retail channels. We expect sales of the N-Charge® Power System to be reduced in fiscal 2009 as we discontinue the product. We had $756,000 and $516,000 in deferred revenue on our balance sheet at March 31, 2008 and March 31, 2007, respectively, primarily related to sales shipping in the end of the fourth quarter. In fiscal 2006, we launched our long range battery pack for use in Segway’s human transporter as well as further expansions of our U-Charge® family of products. Segway sales accounted for 55%, 60% and 53% of our total product sales in 2008, 2007 and 2006. We expect sales of the large-format battery system to increase during fiscal 2009, due to the growing demand of the new Epoch ^TM Lithium Phosphate Energy Storage Systems and the fulfillment of our current back orders and sales agreements.  The large-format battery system sales represent 30%, 16%, and 4% of our total revenue for fiscal 2008, 2007 and 2006.  The growth in large-format battery systems sales are due to the increase in demand in alternative energy solutions driven by the rising costs of fossil fuels.

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Licensing And Royalty Revenue : Licensing and royalty revenues relate to revenue from licensing agreements for our battery construction technology. Fiscal 2008 licensing and royalty revenue was $586,000 compared to $703,000 in fiscal 2007 and $724,000 in fiscal 2006. Licensing and royalty revenue was substantially from our license agreement with Amperex Technology Limited, which makes on-going royalty payments as sales are made using our technology. We expect to continue to pursue a licensing strategy as our lithium phosphate technology receives greater market acceptance. We expect licensing and royalty revenues to remain relatively flat.

Gross Margin/(Loss) : Gross margin as a percentage of revenue was 9% for the fiscal year ended March 31, 2008 as compared to 2% for the fiscal year ended March 31, 2007 and a gross margin loss of (48%) for the fiscal year ended March 31, 2006. Fiscal year 2006 margin improvements were offset by inventory valuation adjustments of $5.3 million as of March 31, 2006, related to valuation of our work in process cell inventory and lower of cost or market tests for our early launch and U.S.-sourced large-format products. During fiscal 2006, we had significant expenses due to issues with our powder manufacturing. During fiscal 2008, a vendor agreed to provide a credit of $414,000 for defective inventory that had been received and written off by the Company in fiscal 2007.  As a result, included in fiscal 2008 is a $414,000 reduction of cost of goods which contributes to our improved gross margin.  The gross margin increased during fiscal 2007 as we worked to reduce the amount of scrap material in the production process. In fiscal 2008, the improvement in our manufacturing efficiency has increased our gross margin. During fiscal 2008, $0.1 million of share based compensation was allocated to manufacturing overhead expenses. We expect cost of sales, as a percentage of sales, to continue to decrease during fiscal 2009 as production volumes increase, we continue to implement our lower-cost manufacturing strategy and our efficiency improves.

Operating Expenses

The following table summarizes our operating expenses during each of the past three fiscal years (in thousands):

We continued to focus on our operating expense management throughout fiscal 2008. Operating expenses as a percentage of revenue decreased to 78% in fiscal 2008 versus 99% in fiscal 2007 and 113% in fiscal 2006. The decrease is the result of increased revenues, as well as our focus on expense reductions during fiscal 2008.

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 totaled $ 3.7 million in fiscal 2008, $3.7 million in fiscal 2007 and $5.1 million in fiscal 2006. We achieved year over year decreases in research and development in fiscal 2008 and 2007 of 1% and 30%, respectively. Decreases in research and development expenses from 2006 to 2007 were the result of cessation of process development work in our Northern Ireland facility and reductions in research headcount, temporary staff, consulting expenses and material costs in our Las Vegas, Nevada facility.  During fiscal year 2008, $0.3 million of share based compensation was allocated to research and development expenses as compared to $0.2 million in fiscal 2007 and none in fiscal 2006.  We expect research and development expenses to remain steady as we create and develop new products.

Marketing: Marketing expenses consist primarily of costs related to sales and marketing personnel, public relations and promotional materials. Marketing expenses of $2.5 million in fiscal 2008 were $86,000 or 4% higher

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than fiscal 2007.  During fiscal 2008, $0.3 million of share based compensation was allocated to marketing expenses as compared to $0.2 million in fiscal 2007 and none in fiscal 2006.  We expect marketing expenses to increase moderately as we focus on our new Epoch ^TM generation and raising our profits as an effective global supplier in fiscal 2009.

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, audit, insurance, and corporate-related expenses. General and administrative expenses include share based compensation of $1.7 million in fiscal year 2008, $1.1 million in fiscal year 2007 and $0.2 million in fiscal year 2006. General and administrative expenses of $9.3 million in fiscal 2008 represented a 4% decrease over fiscal 2007. This was largely due to reductions made in facilities, personnel, insurance, auditing related costs and administrative expenses. Fiscal 2007 general and administrative expenses of $9.7 million represented a decrease of $2.0 million, or 17%, over fiscal 2006 expenses.

Other Costs Related to Our Manufacturing Transition

Impairment Charge:   There were impairment charges of $154,000, $52,000 and $170,000 recorded during fiscal years 2008, 2007 and 2006 respectively. The fiscal 2008 and 2007 impairment charges relate to write-downs of machinery and equipment. In 2006, we reduced the carrying value of certain software related to our manufacturing cost and accounting processes.

Gain/Loss on Sale of Assets: Loss on sales of assets amounted to $16,000 and $62,000 in fiscal years 2008 and 2007, respectively, and resulted primarily from consolidating our China operations into two plants in Suzhou, China. Additionally, we determined that some equipment was not required in our manufacturing and development operations in Suzhou, China and was sold for fair value.  Gain on sales of the facility and production and development equipment from our former Mallusk, Northern Ireland facility was $445,000 in fiscal year 2006. The majority of the gain is related to the sales of our Northern Ireland facility.

Depreciation and Amortization, Interest Expense

Depreciation and Amortization: Depreciation and amortization expense totaled $616,000, $666,000 and $722,000 for fiscal years ended March 31, 2008, 2007 and 2006, respectively.  Our ERP system was fully depreciated during fiscal 2008, resulting in the decrease of $50,000 for depreciation and amortization expense for the year.

Interest Expense: Interest expense relates to our long-term debt with a stockholder and third party. Interest expense was $6.4 million, $6.4 million, and $5.1 million for the fiscal years 2008, 2007 and 2006, respectively. Interest expense fluctuations are a result of changes in the underlying interest rate on one of the loans, which is indexed to the Libor rate.

Liquidity and Capital Resources

At March 31, 2008, our principal source of liquidity was cash and cash equivalents of $2.6 million. We do not expect our cash and cash equivalents will be sufficient to fund our operating and capital needs for the next twelve months following March 31, 2008 nor do we anticipate product sales during fiscal 2009 will be sufficient to cover our operating expenses. Historically, we have relied upon management’s ability to periodically arrange for additional equity or debt financing to meet our liquidity requirements. Unless our product sales are greater than management currently forecasts or there are other changes to our business plan, we will need to arrange for additional financing to fund operating and capital needs. This financing could take the form of debt or equity. Given our historical operating results and the amount of our existing debt, as well as the other factors, we may not be able to arrange for debt or equity financing 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

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conditions, the failure to timely realize the Company’s product development goals, and other adverse developments. These events could have a negative impact on our available liquidity sources during the remaining fiscal year.

The following table summarizes our statement of cash flows for the fiscal years ended March 31, 2008, 2007 and 2006 (in thousands):

Our use of cash from operations during fiscal 2008, fiscal 2007 and fiscal 2006 was $14.7 million, $20.3 million and $33.1 million, respectively. The cash used for operating activities during all periods was primarily for operating losses and working capital. Cash used for operating activities in fiscal 2008 was lower than in fiscal 2007 and 2006 primarily from the impact of decreases in some of the operating expenses as described above in the section titled “Operating Expenses.”

In fiscal 2008, we spent net cash from investing activities of $1.6 million primarily on property, plant, and equipment for our China facilities.

We obtained net cash from financing activities of $17.7 million and $23.2 million during the fiscal 2008 and 2007, respectively. The 2008 financing includes $8.2 million in sales of common stock to private investors and $9.0 million in sales of common stock to Carl Berg and his affiliates. Cash from the 2007 financing includes $8.4 million in sales of common stock to private investors, $9.5 million in sales of common stock to a related party, and $5.0 million in short term convertible notes payable to a stockholder. Cash from the 2006 financing included $20.0 million from Berg & Berg Enterprises, LLC (Berg & Berg), an affiliate of Carl Berg, the Company Chairman of the board and managing member of Berg & Berg in equity lines, including $6.0 million in convertible notes to stockholder, and approximately $5.9 million in common stock sales.

As a result of the above, we had a net increase in cash and cash equivalents of $1.4 million during fiscal 2008, a net increase of $556,000 during fiscal 2007, and a net decrease of $1.9 million during fiscal 2006.

On January 14, 2008, we filed a Form S-3 Registration Statement with the SEC utilizing a “shelf” registration process.  On January 22, 2008, the Form S-3 Registration was declared effective by the SEC. Pursuant to this “shelf” registration statement, the Company may sell debt or equity securities described in the accompanying prospectus in one or more offerings up to a total public offering price of $50,000,000.  We believe that this shelf registration statement provides us additional flexibility with regards to potential financings that we may undertake when market conditions permit or our financial condition may require.

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

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

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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.

Through March 31, 2008, we had sold 1,028,900 shares with proceeds net of commissions of $3.9 million under the At Market Issuance Sales Agreement.  As of the date of this Report, we have made no further decisions as to whether or when we may seek to make additional sales under the At Market Issuance Sales Agreement.

At March 31, 2008, 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 March 31, 2008 totaled $431,000.  The preferred shares are currently subject to redemption or conversion at the holder’s discretion.  We do not have sufficient resources to effect this redemption; however, Berg & Berg has agreed that our failure to redeem the Series C-1 Convertible Preferred Stock and the Series C-2 Convertible Preferred Stock does not constitute a default under the certificate of designations for either the Series C-1 Convertible Preferred Stock or the Series C-2 Convertible Preferred Stock and has waived the accrual of any default interest applicable.  Berg & Berg also has agreed to defer the payment of dividends on the Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock.  According to our agreement with Berg & Berg, dividends will continue to accrue (without interest) on the Series C-1 Convertible Preferred Stock and the Series C-2 Convertible Preferred Stock according to the terms of the applicable certificates of designation; and such dividends are not payable until such time as the parties mutually agree, or upon redemption or conversion in accordance with the terms of the applicable certificates of designation.  We have no present intention to pay dividends on this preferred stock, including the accrued dividends.  The Series C-1 Convertible Preferred Stock may be converted, at any time, into shares of our common stock at the lower of $4.00 or the closing price of our common stock on the conversion date, provided the conversion price can be no lower than $1.98, the closing price of the common stock on December 13, 2005.  The Series C-2 Convertible Preferred Stock may be converted, at any time, into shares of our common stock at the lower of $4.00 or the closing price of our common stock on the conversion date, provided the conversion price can be no lower than $2.96, the closing bid price of our common stock on July 13, 2005.

Related Party Transactions

On April 24, 2008, Berg & Berg, an affiliate of our Chairman, Carl Berg, exercised a warrant to purchase 600,000 shares of the Company’s common stock.  The purchase price was $ 2.74 per share as set forth in the warrant.  On July 13, 2005, we entered into an agreement with SFT I, Inc., providing for a $20 million loan to Valence.  In exchange for entry into the Loan Agreement and the guaranty of the loan, SFT 1, Inc. and Berg & Berg were each issued three year warrants to purchase 600,000 shares of our common stock, at $2.74 per share, the closing price of our common stock on July 12, 2005.

On February 21, 2008, Berg & Berg purchased 280,112 shares of the Company’s common stock for $1.0 million.  The purchase price of $3.57 per share equaled the closing bid price of the Company’s common stock as of February 27, 2008.

On February 22, 2008, Berg & Berg purchased 330,033 shares of the Company’s common stock for $1.0 million. The purchase price of $3.03 per share equaled the closing bid price of the Company’s common stock as of February 21, 2008.

On February 8, 2008, Berg & Berg purchased 492,611 shares of the Company’s common stock for $1.0 million. The purchase price of $2.03 per share equaled the closing bid price of the Company’s common stock as of February 7, 2008.

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

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

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On July 19, 2007, Berg & Berg purchased 869,565 shares of the Company’s common stock for $1.0 million. The purchase price of $1.15 per share equaled the closing bid price of the Company’s common stock as of July 18, 2007.

On June 21, 2007, Berg & Berg purchased 869,565 shares of the Company’s common stock for $1.0 million. The purchase price of $1.15 per share equaled the closing bid price of the Company’s common stock as of June 20, 2007.

On May 17, 2007, Berg & Berg purchased 990,099 shares of the Company’s common stock for $1.0 million. The purchase price of $1.01 per share equaled the closing bid price of the Company’s common stock as of May 16, 2007.

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

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

On January 1, 1998, the Company granted to Mr. Lev M. Dawson, the Company’s then Chairman of the Board, Chief Executive Officer and President, an incentive stock option to purchase 39,506 shares, pursuant to the Company’s 1990 Plan and a nonstatutory option to purchase 660,494 shares pursuant to the Company’s 1990 Plan; Mr. Dawson was granted a nonstatutory option to purchase 300,000 shares outside of any equity plan of the Company. The exercise price of all three options was $5.0625 per share, the fair market value on the date of the grant. The Compensation Committee of the Company approved the early exercise of the nonstatutory options on March 5, 1998. The options permitted exercise by cash, shares, full recourse notes or non-recourse notes secured by independent collateral. The nonstatutory options were exercised on March 5, 1998 with non-recourse promissory notes in the amounts of $3,343,750 and $1,518,750 secured by the shares acquired upon exercise plus 842,650 shares previously held by Mr. Dawson. Under each of the notes, interest from the issuance date accrued on unpaid principal at the rate of 5.69% per annum, or at the maximum rate permissible by law, whichever was less. Interest was due annually and paid through March 4, 2005. On April 20, 2005, the Company’s Board of Directors approved a resolution to extend the maturity dates of the notes from September 5, 2005 to September 4, 2007.  As of September 5, 2007, principal and interest amounts of $4.9 million and $301,000.   On September 5, 2007, Mr. Dawson defaulted on the notes and surrendered his shares to the Company.

Capital Commitments and Debt

At March 31, 2008, we had no commitments for capital expenditures relating to manufacturing equipment. We anticipate that we will be required to make additional capital expenditures in order to meet greater demand levels for our products than are currently anticipated and/or to support our transition of operations to China.

At March 31, 2008, our cash obligations for short-term and long-term debt (principal & interest) consisted of (in thousands):

At March 31, 2008, our repayment obligations of short-term and long-term debt principal are (in thousands):

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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 the Company 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.  As set forth above, although dividends are not due, they are continuing to accrue (currently $431,000 as of March 31, 2008). The total below for Redemption of Convertible Preferred Stock includes accrued dividends.

If cash flow from operations is not adequate to meet debt obligations, additional debt or equity financing will be required. There can be no assurance that we could obtain the additional financing.

Contractual Obligations

At March 31, 2008, our contractual obligations and payments due by period are as follows (in thousands):