- Annual Report (10-K)

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, 2012

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

For the transition period from to

Commission file number 0-20028

VALENCE TECHNOLOGY, INC.

(Exact name of Registrant as specified in its charter)

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

12303 TECHNOLOGY BOULEVARD, SUITE 950
AUSTIN, TEXAS		78727
(Address of principal executive offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Class	Name of Exchange on Which Registered
Common stock, $.001 par value	The NASDAQ Stock Market, LLC
	(NASDAQ Capital Market)

Securities registered pursuant to Section 12(g) of the Act:

None

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

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 $85,745,646 as of September 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter and based upon the closing price of the Registrant’s common stock on the NASDAQ Capital Market on such date. This calculation excludes 80,420,846 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 such 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 April 30, 2012, was 169,976,618.

Documents Incorporated by Reference
Document	Part of Form 10-K
Proxy Statement for the FY 2012 Annual Meeting of Stockholders	III

VALENCE TECHNOLOGY, INC.

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED MARCH 31, 2012

Table of Contents

	Page
Forward-Looking Statements	1
PART I	2
Item 1. Business	2
Item 1A. Risk Factors	9
Item 1B. Unresolved Staff Comments	23
Item 2. Properties	23
Item 3. Legal Proceedings	23
PART II	24
Item 4. Reserved	24
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
Item 6. Selected Financial Data	26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation	27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	34
Item 8. Financial Statements and Supplementary Data	36
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	37
Item 9A. Controls and Procedures	37
Item 9B. Other Information	39
PART III	39
Item 10. Directors, Executive Officers, and Corporate Governance	39
Item 11. Executive Compensation	39
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	39
Item 13. Certain Relationships and Related Transactions, and Director Independence	39
Item 14. Principal Accountant Fees and Services	39
PART IV	39
Item 15. Exhibits and Financial Statement Schedules	39
Signatures	47

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 Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 27A of the Securities Act of 1933, as amended (the "Securities Act").

The words “may,” “will,” “expect,” “intend,” “estimate,” “continue,” “anticipate,” “project,” “predict,” “believe” and similar expressions and variations thereof are intended to identify forward-looking statements. These statements appear in a number of places in this Report and include statements regarding the intent, belief or current expectations of Valence Technology, Inc., to which we refer in this Report as “Valence,” the “Company,” “we” or “us,” 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 in such forward looking statements in this Report and the documents incorporated herein by reference. Factors that could cause our actual results to differ materially from our forward looking statements 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 our targeted market segments;
·		market acceptance of our current and future products;
·		our ability to meet customer demand;
·		our ability to obtain sufficient funding to continue to pursue our business plan;
·		our ability to perform our obligations under our loan agreements;
·		a loss of one or more of our key customers, or a reduction in orders from such customers;
·		our ability to implement a long-term business strategy that will be profitable or generate sufficient cash flow;
·		the ability of our vendors to provide conforming materials for our products on a timely basis;
·		the loss of any of our key executive officers;
·		our ability to manage our foreign manufacturing and development operations;
·		international business risks;
·		our ability to attract skilled personnel;
·		our ability to protect and enforce our current and future intellectual property;
·		our need for additional financing; 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.

PART I

ITEM 1. BUSINESS

We were founded in 1989 and develop, manufacture and sell advanced energy storage systems utilizing our proprietary phosphate-based lithium-ion technology. Our mission is to promote the wide adoption of high-performance, safe, environmentally friendly energy storage systems. To accomplish our mission and address the significant market opportunity we believe is available we utilize the numerous benefits of our latest energy storage technology, worldwide intellectual property portfolio and extensive experience of our management team. We are a global leader in the development of patented lithium iron magnesium phosphate advanced energy storage systems. We have redefined lithium battery technology and performance by marketing the industry’s first safe, reliable and rechargeable lithium iron magnesium phosphate battery for diverse applications, with special emphasis on motive, back-up power, industrial/medical, and marine markets.

Valence is a diverse, vertically aligned company. From our patented cathode materials to our standard family of scalable U-Charge® systems and customs systems designed for specific applications, we offer commercially proven solutions with worldwide application and engineering services to serve our customers. For many applications our scalable U-Charge® systems, complete with programmable Battery Management Systems (“BMS”), are the logical choice to avoid the expense and long development cycles of custom systems. However, when a custom system is required, Valence has the technology, tools and experience to fulfill our customers’ requirements.

We believe that the improved features and functionality of our lithium iron magnesium phosphate energy storage systems are well suited for motive, back-up power, industrial/medical, marine, and other applications that require the safety and long life of Valence products and help assure our customers realize a positive return on their investment.

Following years of commercial use, we believe our experience is paving the way for the lower cost and higher performance solutions that will enhance the many different applications that use our products.

Markets

We are shipping commercial lithium phosphate energy storage solutions into the following four key market sectors that we believe will benefit most from the performance, long life and safety advantages of our products:

Motive

We are enabling efficient transportation solutions from all-electric and hybrid personal transporters to commercial fleet delivery vehicles and mass transit buses. These quiet, powerful, low to zero-emission vehicles need portable power solutions to operate efficiently. Our patented Lithium Iron Magnesium Phosphate Energy Storage Systems offer enhanced performance, safety, reliability and environmentally friendly characteristics and lower lifetime cost. We are working with a global customer base to deliver motive solutions for hybrid electric vehicles (“HEV”), plug-in hybrid electric vehicles (“PHEV”), electric vehicles (“EV”), and neighborhood electric vehicles (“NEV”) including car, bus, truck, and scooter applications.

Back-Up Power

Our U-Charge® family of systems is well suited to replace lead acid in back-up power applications. The long-life, safety and performance of our products not only offer significant advantages to lead acid solutions but also offer lower cost over the lifetime of the product. In addition, our U-Charge® systems do not require customer maintenance which is a significant savings for our customers.

Industrial/Medical

The industrial and medical market sector includes applications where the majority of the battery’s energy is used in cleaning and lifting, powering or handling goods or materials, rather than propelling the application. These applications include floor cleaners, forklifts, medical carts, defibrillators, wheelchairs, robotics and other industrial tools.

Marine

The Marine market sector includes applications such as hybrid yachts, ocean going tug boats, and other private and commercial vessels. Harbors are one of the most polluted areas in the world in terms of water, air and noise. Our products enable yachts to enter and exit harbors in an all-electric, non-polluting mode.

Strategy

Our business plan and strategy focuses on the generation of revenue from sales of advanced energy storage systems, while controlling costs through partnerships with contract manufacturers and internal manufacturing efforts through our two wholly-owned subsidiaries in Suzhou, China. We expect to develop target markets through the sales of our scalable U-Charge® and custom energy storage systems, complete with our programmable BMS. In addition, as alternative energy sectors mature we expect to pursue licensing or other alliance opportunities to expand our presence in the lithium phosphate sector.

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 technologies. We are committed to the improvement of our technologies, our energy storage systems, integration of our energy storage systems into customer applications and further development of worldwide suppliers to serve the rapidly expanding lithium phosphate sector. Our product development and marketing efforts are focused on large-format battery solutions, such as our scalable U-Charge® systems, and custom energy storage systems such as the next generation London hybrid double deck bus manufactured by Wrightbus. Our products are positioned to fulfill the needs of a wide variety of applications as alternative energy devices enter commercial markets.

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

Our business strategy is being implemented in phases. We have moved beyond Phase 1 and are now in Phase 2:

Phase 1: Our original business strategy was focused on developing applications that delivered improved energy storage solutions to address the desired performance goals of end users. We utilized our mature technology, the intellectual property developed during the 23 year life of Valence, and critical “on-the-road”, “on-line” experience to expand our commercial opportunities. Our scalable U-Charge® Systems are designed for a broad base of motive, back-up power, industrial/medical, marine and other applications offering improved performance, safety, long life, lower lifetime cost and no maintenance. During this phase, we achieved word-of-mouth recommendations from our early customers who enjoyed the superior performance, reliability and lower cost of our energy storage systems and our global fulfillment and engineering support.

Phase 2: We are now developing key customers in our target motive, back-up power, industrial/medical and marine markets that have experienced first-hand the superior performance, reliability and lower cost of our energy storage systems. As more customers deploy our solutions, we believe our business will expand in North America, Europe and Asia as market adoption of our products becomes a competitive requirement.

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 lower cost, high volume manufacturing. Further, we believe Valence is well positioned to form commercial joint ventures and license our technology to key component and material manufacturers and end-product manufacturers that produce commercial vehicles and other advanced energy devices.

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

Leading Technology . We believe that our phosphate-based lithium-ion technologies and manufacturing processes offer many performance and economic advantages over competing battery technologies. The safety, long life and other advantages inherent in our technology enable the design of large-format, lower cost 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 while reducing the safety concerns recently experienced by some customers of vehicles powered by oxide-based lithium-ion batteries. Consequently, our lithium phosphate technology energy and power systems can be designed into a wide variety of products and markets. In 2007 we concluded that it would be difficult to predict which markets or devices would adopt lithium solutions early and which markets or devices would follow later. Also, standards had not yet developed in the lithium sector. Based on what we knew of commercial fleet needs compared to our capabilities, we choose to pursue fleets aggressively. We felt fleets would serve as a proving ground of our technology and business economics. We believe this approach has served us well and prepared us to pursue additional opportunities as they materialize.

New Valence Market Focus . Over 20 years we have transitioned from a technology developer to a commercial provider of advanced energy storage systems. Our technology is maturing and has been tested for years in commercial applications. Our manufacturing capability has matured, is ISO 9001 certified, and can be easily expanded as markets develop. Our application engineers are recognized experts in the integration of our systems into customer applications. We have strengthened our marketing and sales resources. Our full service fulfillment services in Europe, North America and China are on-line. We have developed what we believe to be a world-class supplier base of raw materials and components to support our manufacturing, and our senior management team has extensive international technology and business experience.

Lithium Phosphate-Based Technology . We developed and commercialized the first lithium phosphate energy power systems with our lithium iron magnesium phosphate technology that we continue to improve. We have two following generations of cathode materials in our proprietary Lithium Vanadium Phosphate and Lithium Vanadium Fluorophosphates cathode applications, both positioned to advance lithium phosphate cathode applications to the next level of applications and use.

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. We have the following subsidiaries: Valence Technology Cayman Islands, Inc., Valence Technology (Suzhou) Co., Ltd., and Valence Energy-Tech (Suzhou) Co., Ltd.

Fiscal Year 2012 Highlights

Following are some of our key events and accomplishments in pursuit of our strategy during the 2012 fiscal year:

· Compared to fiscal year 2011, we experienced revenue growth outside of our two largest fiscal year 2011 customers of 93%. In fiscal year 2011, these two customers, for fiscal year 2011 accounted for over 66% of our total revenue. Revenue from these two largest customers for fiscal year 2011 was $30.3 million and $14.6 million in fiscal year 2012, whereas revenue from all other customers was $15.6 million in fiscal year 2011 and $29.8 million in fiscal year 2012.

· We successfully introduced a lead acid battery replacement solution within the industrial/medical sector, helping lead a quick transformation within the field with customers that demand long cycle life as well as a competitive return on investment.

· We were awarded 5 new patents in the U.S. and 20 worldwide

Evolution of our Battery Technology

Continuing Development of Valence Lithium Phosphate Technology & Systems

Since 2002, when we successfully introduced our first generation Lithium Iron Magnesium Phosphate material, to our current commercial scalable U-Charge® systems and custom systems, we continue to refine our current lithium iron magnesium phosphate technology and develop two next-generation lithium phosphate cathode materials: Lithium Vanadium Phosphate and Lithium Vanadium Fluorophosphate. These materials are not only intended to augment our current commercial lithium iron magnesium phosphate, but also offer improved performance with additional energy storage and higher voltage capabilities for the motive, stationary power, consumer appliance, telecommunication, utility and other industries.

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 continue to improve our scalable U-Charge® systems and custom systems. We continue to improve our programmable BMS, which provides improved control of our battery systems through better battery protection, and enhanced performance data reporting, including reporting information to a remote command center or monitoring center. We feel these unique characteristics of our BMS are an improvement over other rechargeable battery pack systems. Our BMS also reduces 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.

We offer worldwide customer application engineering support to assure that first system installations satisfy our customers’ requirements. During fiscal year 2012, we improved the performance and capabilities of our fulfillment centers in the US and Europe where our U-Charge® systems are stocked for immediate delivery.

Lithium Iron Magnesium 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/medical, uninterruptible power supplies ("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. Therefore, we believe lead acid replacement is proving to be an opportunistic market for Valence’s future growth.

We believe all of our Lithium Iron Magnesium Phosphate Energy Storage Systems, which utilize safer and more environmentally friendly phosphate-based cathode materials in place of other less stable and more costly cathode materials, address the current challenges facing the rechargeable battery industry and provide us with several competitive advantages. Key attributes of our Lithium Iron Magnesium Phosphate Energy Storage Systems include:

Increased safety . We believe that our Lithium Iron Magnesium Phosphate Energy Storage Systems significantly reduce the safety risks many have recently experienced with oxide-based lithium-ion technologies. The unique chemical properties of phosphates render them almost incombustible if mishandled during aggressive 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 during high performance operational conditions. The thermal and chemical stability inherent in our technology provides safety over lithium metal oxides, enabling large-format, high energy density lithium-ion solutions.

Performance advantages . Our Lithium Iron Magnesium Phosphate Energy Storage Systems offer several proven performance advantages over competing battery chemistries of lead-acid, nickel-cadmium, nickel metal hydride and traditional lithium-ion oxide technologies, including significantly improved safety, higher charge and discharge rate capability, longer cycle life, longer shelf life, and lower total cost of ownership. Other system advantages include lighter weight, excellent energy storage characteristics, and high-energy efficiency during charge and discharge.

·	High energy density . In its large-format application, our Lithium Iron Magnesium Phosphate Energy Storage Systems exhibit an energy density that can exceed other battery chemistries such as lead-acid, nickel metal hydride and nickel-cadmium.

Exceptional cycle life . Current testing of our Lithium Iron Magnesium Phosphate Energy Storage Systems at 50% depth of discharge has yielded a cycle life greater than 9,500 cycles which is years of service and lower cost than lead acid in most applications. At demanding 80% depth of discharge, our systems exceeded over 4,000 cycles. The proven long life of our products fulfills the return on investment that commercial fleet and other applications demand.

Maintenance-free . Our Lithium Iron Magnesium Phosphate Energy Storage Systems are maintenance-free and offer long-life solutions and predictable end of life characteristics (in contrast to lead acid solutions). As a result, our customers enjoy numerous product and field maintenance savings compared to lead acid.

Lower lifetime cost . We believe that our proprietary phosphate material used in our Lithium Iron Magnesium Phosphate Energy Storage Systems is less expensive than lead acid and cobalt-oxide batteries that have a limited life in applications that have demanding duty cycles. As our production volume increases due to greater demand for Lithium Iron Magnesium Phosphate Energy Storage Systems, material costs have decreased. For example, our cost to manufacture our patented cathode material has decreased by 50% during the last four years. Finally, the lower maintenance costs, longer cycle life and longer service life associated with Lithium Phosphate Energy Storage Systems lead to a lower total cost of ownership in numerous applications currently served by lead acid.

·	Flexibility . Our BMS is programmable and therefore can easily be applied to custom energy storage systems of various sizes for various applications such as our scalable U-Charge® Energy Storage Systems and custom pack solutions.

·	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 Lithium Iron Magnesium Phosphate Energy Storage Systems do not contain any heavy metals.

Products

The U-Charge® Energy Storage System

Our U-Charge® Energy Storage System is a family of products based on Valence’s proprietary Lithium Iron Magnesium Phosphate technology and is designed to be a direct replacement for standard-sized lead-acid energy storage systems. These 12, 19 and 36 volt energy storage systems offer twice the run-time and half the weight of lead-acid systems, expanded calendar life and greater cycle life with deep depth of discharge, resulting in significantly lower total cost of ownership. U-Charge® Energy Storage Systems are used in a variety of applications such as Segway personal transporters, hybrid and full electric commercial vehicles, electric scooters, medical devices, marine and other applications. Valence U-Charge® Energy Storage Systems are designed to offer significant performance advantages that include common communication protocol, programmable logic, advanced cell balancing and improved fuel gauge reporting

Custom Energy Storage Systems

Through partnerships with customers such as Segway, Rubbermaid Medical Solutions ("Rubbermaid") and Wrightbus, among others, we have been a leader in developing lithium phosphate energy storage systems. These systems, designed in tandem with the engineering and product design teams of our customers, offer unique, dynamic solutions to the individual needs of our customers product requirements. From the Segway personal transporter energy pack, to the Wrightbus advanced hybrid energy storage system, we have been able to manufacture our lithium phosphate technology and BMS control systems to fit within the specific and challenging form and function requirements of our customers, yielding exceptional power storage and delivery results. This performance is in conjunction with efficient system monitoring, management and reporting functions delivered by our customizable BMS system. We feel there are significant market opportunities in the motive, back-up power, industrial/medical, marine and other energy storage system areas, and we are actively working in conjunction with customers and partners to realize results from these efforts.

Operational Achievements

Valence energy storage systems are now in daily use in commercial delivery fleet, back-up power, industrial/medical, marine and other markets. Our research, development and design efforts are focused on new products utilizing our patented lithium iron magnesium phosphate materials, manufacturing process and battery management system expertise. Our patented lithium vanadium phosphate cathode materials are under development. Lithium vanadium phosphate exhibits improved performance over lithium metal phosphate cathode materials offering higher voltage and higher discharge rates, among other performance advantages. As our manufacturing volume continues to increase, significant reductions have been made in our manufacturing costs, primarily due to lower raw material costs, higher production yields, improved manufacturing efficiency and increased overhead absorption into our inventory.

Our customer base is expanding into a variety of markets. Some of our top customers include Segway, Howard Medical Solutions (“Howard”), Oxygen S.p.A. (“Oxygen”), Rubbermaid, EnovateIT, LLC (“Enovate”), PVI, Tennant Company (“Tennant”), and Wrightbus. Our battery pack, cathode material 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, increase output and lower our costs. 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 LVP cathode materials has been focused and accelerated. Recognized as the next generation of Lithium Phosphate energy solutions, we believe LVP and will offer higher performance solutions to a new generation of motive and other demanding applications while our lithium iron magnesium phosphate will continue to improve service in many current and new applications in a variety of world markets.

Competition

Competition in the rechargeable battery industry is intense. 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. Our principal competitors generally 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. 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 our principal competitors are A123 Systems, LG Chem, Matsushita Industrial Co., Ltd. (Panasonic), Sony, Toshiba, SAFT and Dow–Kokam.

The performance characteristics of lithium-ion energy storage systems have consistently improved over time as market leaders continued to improve the 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 Iron Magnesium Phosphate energy storage solutions including materials, cells and intelligent technology, 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

U-Charge® Energy Storage Systems are a family of 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 three and eighteen months. Our sales have typically been made through separately negotiated supply agreements and standard purchase orders. U-Charge® 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 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. We have not experienced seasonality in any of our revenue. We depend on a small number of customers for a significant portion of our revenues. See Risk Factors - Risks Related to Our Company and Our Business, beginning on page 9 of this Form 10-K . None of our customers are contractually committed to purchase any minimum quantities of products from us, and orders are generally cancelable prior to shipment. As a result, we do not disclose our order backlog, since we believe that our order backlog at any particular date is not necessarily indicative of actual revenue for any future period.

Sales of products are typically denominated in U.S. dollars. Consequently, sales historically have not been subject to currency fluctuation risk. For additional information, see Note 20, Segment and Geographic Information, of the Notes to the Condensed Consolidated Financial Statements.

Manufacturing and Raw Materials

Our base Lithium Iron Magnesium Phosphate Cathode Material is manufactured in one of our two Suzhou, China manufacturing plants. Our second plant manufactures both custom and standard U-Charge® Energy Storage Systems. We depend on a limited number of suppliers for certain key raw materials and components used in manufacturing and developing our power systems. We have undertaken efforts to diversify our supplier base for certain key raw materials and components, and we added second sources for several of these materials and components during fiscal year 2011 and fiscal year 2012. We plan to continue to diversify our supplier base for certain materials and components in the future, as appropriate. The quality and availability of our sourced components and materials used in our production continues to improve. We generally purchase raw materials pursuant to purchase orders placed from time to time. We have developed supply agreements with larger suppliers and continue to seek dual sourcing of critical components to guarantee continuity of supply to our customers.

Research and Product Development

We conduct materials research and development at our Las Vegas, Nevada facility, and new product development at our Austin, Texas and Suzhou, China facilities. Our battery research and development group continuously develops and improves our technology including cathode materials, cells, module, systems and our BMS. Our manufacturing processes have been developed over a number of years and deliver low cost and high quality. 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 control logic development. Our research and development efforts over the past year have focused and will continue to focus on five areas:

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

·	Development of our next generation Lithium Phosphate technology;

·	Large-format applications for Lithium Phosphate technology;

·	Development of next generation Standard and Custom Battery Packs.

·	Continued improvement of our BMS system.

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.

Research and product development expenses consist primarily of personnel, equipment, and materials to support our efforts to develop battery chemistry and products and improve our manufacturing processes. Research and product development expenses totaled $3.6 million in fiscal year 2012, $3.6 million in fiscal year 2011, and $4.5 million in fiscal year 2010.

We rely on a combination of patent, trade secret, copyright and trademark law, contracts and technical measures to establish and protect our proprietary rights in our products. As of March 31, 2012, we held 133 U.S. patents and 158 patents in foreign countries, and had 174 patent applications pending in the U.S. and foreign countries. Our patents generally relate to our phosphate cathode materials and cathode manufacturing processes. Our patents expire from 2013 to 2030. The expiration of any individual patent in the short term is not expected to have any significant negative impact on our business. No assurance can be given that our pending patent applications will result in the issuance of patents. We also own certain registered trademarks in the United States and abroad. See further discussion regarding risks associated with our patents in Risk Factors - Risks Related to Our Company and Our Business, beginning on page 9 of this form 10-K .

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.

National, state, local and foreign regulations impose various environmental requirements on the transportation, storage, use and disposal of lithium batteries and certain chemicals used in the manufacture of lithium batteries and energy storage systems. Although we believe that our operations are in material compliance with current applicable 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, national state, local and foreign governments may enact additional restrictions relating to the transportation, storage, use and 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 transportation, storage, use and disposal of chemicals used to manufacture batteries, or restricting disposal of batteries will not be imposed.

For example, the United States Department of Transportation, or DOT, and the International Air Transport Association, or IATA, regulate 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 U-Charge® Power Systems currently fall within the level such that they are not exempt and require a Class 9 designation for transportation. We materially comply with applicable safety-packaging requirements worldwide, as required by the DOT, IATA, and other organizations with jurisdiction over our operations, and these regulations or enforcement policies could impose costly transportation requirements. In addition, compliance with any new DOT or IATA approval regulations or requirements 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 by or changes in the regulations issued by the Nevada Occupational Safety and Health Administration, or other regulatory agencies with jurisdiction over our operations, 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. 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 costs associated with our compliance with this regulation based on our current market share are not significant.

In fiscal year 2012, we spent less than $0.2 million on environmental controls, including costs to properly dispose of potentially hazardous waste.

Employees

At March 31, 2012, we had a total of 340 regular full-time employees. In the U.S., we had a total of 45 regular full-time employees at our Austin, Texas headquarters and our Las Vegas, Nevada research and development facility. We had 11 regular full-time employees in the areas of engineering and sales located in the United Kingdom and Northern Ireland. Our China manufacturing operation had 284 regular full-time employees. 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 12303 Technology Blvd., Suite 950, 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.

ITEM 1A. RISK FACTORS

Risks Related to Our Company and Our Business

Due to our ongoing losses, lack of liquidity and debt obligations, there is doubt about our ability to continue as a going concern.

We have experienced significant operating losses in the current and prior fiscal years. At March 31, 2012, our principal sources of liquidity were cash and cash equivalents of $1.4 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 for the next 12 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 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. We have depended for financing on sales of common stock under an At Market Issuance Sales Agreement (the "At Market Agreement") with Wm. Smith & Co., but not have issued shares under this agreement since the first quarter of fiscal year 2012. If we are unable to obtain further financing under the At Market Agreement or from affiliates of Mr. Berg or others on terms acceptable to us, or at all, we will not be able to fulfill our customer commitments and/or may be forced to cease our 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 developments, and could place us at a disadvantage to our competitors.

Currently, we do not have sufficient capital resources or cash flow from operations to generate the cash flows required to meet our operating and capital needs. Our ability to raise capital may be adversely affected by a variety of risks discussed elsewhere herein, including the volatility of the stock market and our ability to raise funds via share sales under our At Market Agreement with Wm. Smith. Our inability to raise adequate funds, or any funds, via the At Market Agreement, or other capital-raising transactions, limits our financial resources and could materially adversely affect our ability to commercially exploit our technologies and products. For example, it could:

·	limit the research and development resources we are able to commit to the further development of our technology and the development of products that can be commercially exploited in our marketplace;

·	limit the sales and marketing resources that we are able to commit to the marketing of our technology;

·	have an adverse effect on our ability to attract top-tier companies as our technology and marketing partners;

·	have an adverse effect 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 $607 million as of March 31, 2012. 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 $12.9 million for the fiscal year ended March 31, 2012, a net loss available to common stockholders of $12.9 million for the fiscal year ended March 31, 2011, and a net loss available to common stockholders of $23.2 million for the fiscal year ended March 31, 2010. If we cannot achieve a competitive cost structure, achieve profitability, and acquire access to capital markets on acceptable terms, we will be unable to fund our obligations and sustain our operations, and may be required to liquidate our assets, cease operations or file for bankruptcy protection.

We depend on a small number of customers for a substantial portion of our revenues, and our results of operations and financial condition could be harmed if we were to lose all or a part of the business from 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, 2012, Segway Inc., Howard Medical Solutions, Rubbermaid Medical Solutions, PVI, and Smith Electric Vehicles represented 21%, 12%, 12%, 12% and 12% of our revenues, respectively. We have not sold product to Smith Electric Vehicles since the first quarter of fiscal year 2012, and currently do not have any open orders with them. During the fiscal year ended March 31, 2011, Smith Electric Vehicles and Segway contributed 42% and 24% 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 although the identity of our key customers has changed and may in the future change from period to period. We do not have long-term agreements with any of our key 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, or if we are not able to collect amounts owed to us by existing or former customers, our business, results of operations and financial condition would be harmed.

Any adverse economic conditions, including a future recession or credit constraints, or unfavorable economic conditions in a particular region, business or industry sector, may lead our customers to delay or forego technology investments and could have other effects, such as limiting our ability to access funds on credit and reducing the value of our equity securities, any of which could adversely affect our business, financial condition, operating results and cash flow.

Any future disruptions in the credit and financial markets could have a significant material adverse effect on the global economy. A future recession or slowdown in the financial markets or other adverse economic conditions, including but not limited to, weak consumer spending, low employment rates, weak business conditions, inflation, high fuel and energy costs, high consumer debt levels, lack of available credit, the uncertain state of the financial markets, interest rates, and tax rates may result in reduced demand for products utilizing our advanced battery technology and difficulties in us obtaining financing, which may adversely affect our growth and business prospects.

Risks we might face could include:

·	potential declines in revenues due to reduced orders or other factors caused by economic challenges faced by our customers and prospective customers;

potential adverse effects on our customers’ ability to pay, when due, amounts payable to us and related increases in our cost of capital associated with any increased working capital or borrowing needs we may have if this occurs, or to collect amounts payable to us in full (or at all) if any of our customers fail or seek protection under applicable bankruptcy or insolvency laws;

·	potential adverse effects on our ability to access credit and other financing sources (and the cost thereof), which may affect our ability to finance our operations or make significant capital expenditures relating to new products;

·	lengthening sales cycles and/or delayed or cancelled decisions to purchase our products and/or our technology; and

·	potential adverse effects on the valuation of our equity securities as a result of the volatility of global stock markets.

The occurrence of such events could adversely affect our business, financial condition, operating results and cash flow. Such a future economic slowdown or recession in the global economy is likely to materially affect the global banking system including individual institutions as well as a particular business or industry sector, which could cause further consolidations or failures in such a sector. These adverse financial events could also result in further government intervention in the United States and world markets. Any of these results could affect the manner in which we are able to conduct business including within a particular industry sector or market and could adversely affect our business, financial condition, operating results and cash flow or cash position.

Our working capital requirements may increase beyond those currently anticipated.

We have planned for an increase in sales and, if we experience sales in excess of our plan, our working capital needs and capital expenditures would likely increase from that currently anticipated. Our ability to meet this additional customer demand would depend on our ability to arrange for additional equity or debt financing since it is likely that cash flow from sales will lag behind these increased working capital requirements.

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

We have and will continue to have a significant amount of indebtedness and other obligations. As of March 31, 2012, we had approximately $71.2 million of total consolidated indebtedness. Included in this amount are $34.9 million of loans outstanding, net of discount, to an affiliate of Carl Berg, $33.3 million of accumulated interest associated with those loans and $3.0 million of principal and interest outstanding with a third party. The third party loan matures in June 2012. Our outstanding shares of Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock held by affiliates of Carl Berg are redeemable by the holders for up to $8.6 million, plus accrued dividends which, as of March 31, 2012, which were approximately $1.1 million. Our substantial indebtedness and other obligations could negatively affect our current and future operations. For example, it could:

·	limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes;

·	require us to dedicate a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the funds available to us for other purposes;

make us more vulnerable to failure to achieve our forecasted results, economic downturns, adverse industry conditions or catastrophic external events, limit our ability to withstand competitive pressures and reduce our flexibility in planning for, or responding to, changing business and economic conditions;

·	place us at a disadvantage to our competitors that have relatively less debt than we have; or

·	cause us to cease business and liquidate our assets and operations.

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:

·	timing of orders from our customers and the possibility that customers may change their order requirements with little or no notice to us;

·	rate of adoption of our energy storage systems;

·	deferral of customer orders in anticipation of new products from us or other providers of batteries and related technologies;

·	timing of deferred revenue components associated with large orders;

·	new product releases, licensing or pricing decisions by our competitors;

·	commodity and raw materials component prices;

·	lack of order backlog;

·	loss of a significant customer or distributor;

·	effect of changes to our product distribution strategy and pricing policies;

·	changes in the mix of domestic and international sales;

·	rate of growth of the markets for our products; and

·	other risks described in the Risk Factors section.

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 limited or 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, increase our 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.

Our business will be adversely affected if our Lithium Iron Magnesium Phosphate technology-based batteries are not commercially accepted.

We are researching and developing batteries based upon lithium iron 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 our lithium phosphate technology-based batteries, our business will be adversely affected. It is too early to determine if our lithium phosphate technology-based batteries will achieve significant market acceptance.

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

The process of developing our products is complex and our 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 expectations 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 are unable to develop, manufacture and market our Energy Storage Systems and gain wide customer acceptance of those systems, our business, results of operations and financial condition would be harmed.

The sales cycles of our products can be lengthy, complex and unpredictable.

Our sales cycles typically involve:

●	a significant technical evaluation period;

●	substantial time required to engineer the deployment of our technology; and

●	substantial testing and acceptance of our products.

For these and other reasons, our sales cycles can be between 6 and 24 months, but can last longer. If orders forecasted for a specific customer for a particular quarter do not occur in that quarter, our operating results for that quarter or subsequent quarters could be substantially lower than anticipated. Our quarterly and annual results may fluctuate significantly due to revenue recognition rules and the timing of the receipt of customer orders. We base our revenue forecasts on the estimated timing to complete the design, installation and integration of our customer projects and customer acceptance of those products. The systems of our customers are both diverse and complex, and our ability to configure, test and integrate our systems with other elements of our customers’ networks depends on technologies provided to our customers by third parties. As a result, the timing of our revenue related to the implementation of our solutions is difficult to predict and could result in lower than expected revenue in any particular quarter. Similarly, our ability to deploy our equipment in a timely fashion can be subject to a number of other risks, including the availability of skilled engineering and technical personnel and the availability of equipment produced by third parties.

The demand for batteries in the transportation and other markets depends on the continuation of current trends resulting from dependence on fossil fuels. Extended periods of low fuel prices, changes in government regulations and public perception of fossil fuels and developments in alternative technologies could adversely affect demand for our batteries.

We believe that much of the present and projected demand for advanced batteries in the transportation and other markets results from recent increases in the cost of oil, the dependency of the United States on oil from unstable or hostile countries, government regulations and economic incentives promoting fuel efficiency and alternate forms of energy, as well as the belief that climate change results in part from the burning of fossil fuels. Gasoline, diesel and other fuel prices have been extremely volatile, and this continuing volatility is expected to persist. Lower fuel prices over extended periods of time may lower the perception in government and the private sector that cheaper, more readily available energy alternatives should be developed and produced. Additionally, significant developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways we do not currently anticipate. For example, fuel which is abundant and relatively inexpensive in North America, such as compressed natural gas, may emerge as consumers’ preferred alternative to petroleum based propulsion. If the cost of oil decreased significantly, the outlook for the long-term supply of oil to the United States improved, the government eliminated or modified its regulations or economic incentives related to fuel efficiency and alternate forms of energy, there were significant developments in alternative technologies or if there is a change in the perception that the burning of fossil fuels negatively affects the environment, the demand for our batteries could be reduced, and our business, prospects and revenue may be harmed.

Adverse business or financial conditions affecting the automotive industry may have a material adverse effect on our development and marketing partners and our battery business.

We are seeking to enter into certain agreements with certain worldwide automotive manufacturers and tier 1 suppliers regarding their PHEV and EV development efforts. Certain of these manufacturers and suppliers have, in recent years, experienced lower than previously expected consumer demand for a variety of EV applications. As a result, automotive manufacturers may discontinue or delay their planned introduction of HEVs, PHEVs or EVs, or reduce their previously planned or forecasted production volumes of existing models as a result of reduced consumer demand or other factors. Automotive manufacturers may also seek alternative battery systems from other suppliers which may be more cost-effective or require fewer modifications in standard manufacturing processes than our products. Adverse business or financial conditions affecting individual automotive manufacturers or tier 1 suppliers or the automotive industry generally, including potential additional bankruptcies of automotive companies and their suppliers, as well as market disruption that could result from future consolidation in the automotive industry, could have a material adverse effect on our business.

Automotive manufacturers may discontinue or delay their planned introduction of PHEVs or EVs as a result of adverse changes in their financial condition or other factors. Automotive manufacturers may also seek alternative battery systems from other suppliers which may be more cost-effective or require fewer modifications in standard manufacturing processes than our products, or which such firms believe are more stable financially. We also may experience delays or losses with respect to the collection of payments due from customers in the automotive industry experiencing financial difficulties.

Problems in our production processes could limit our ability to grow revenues and maintain our customer base.

The manufacturing and assembly of our batteries and battery systems is a highly complex process that requires extreme precision and quality control throughout a number of production stages. Any defects in battery packaging, impurities in the materials used, contamination of the manufacturing environment, incorrect welding, excess moisture, equipment failure or other difficulties in the production process could reduce yields and affect our ability to produce a sufficient number of batteries to meet the demands of our customers. In the past, we have experienced production problems that limited our ability to produce a sufficient number of batteries to meet the demands of certain customers. For example, during the fourth quarter of fiscal year 2010 and the first and second quarters of fiscal year 2011, we experienced component shortages from certain manufacturing supply vendors, and we also experienced quality issues with certain components supplied by third party suppliers during fiscal year 2011. These problems resulted in the temporary postponements of certain shipments to our customers, and the problems also resulted in the return of certain products already shipped to our customers for rework or replacement. Although we identified and have taken corrective actions for these issues, if these or other production problems recur and we are unable to resolve them in a timely fashion, it could have a material adverse effect on our ability to grow revenues and maintain our customer base.

We have underutilized manufacturing capacity that may limit our ability to become profitable.

Through our wholly owned foreign entities in China, we lease and have equipped a 173,000 square foot facility for manufacturing and testing of our batteries. To be financially successful, and to fully utilize the capacity of this facility and allocate its associated overhead, we must achieve significantly higher sales volumes. We must accomplish this while also preserving the quality levels we achieved when manufacturing these products in more limited quantities. To date, we have not been successful at increasing our sales volume to a level that fully utilizes the capacity of the facility and we may never increase our sales volume to necessary levels. If we do not reach these necessary sales volume levels, or if we cannot sell our products at our suggested prices, our ability to reach profitability will be materially limited.

We have limited experience manufacturing our products in large quantities.

Achieving the necessary production levels for our products 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.

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 our 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 continuously 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 component supply issues, which in some cases have limited our ability to produce a sufficient number of batteries to fulfill our customers’ demands. For example, during the fourth quarter of fiscal year 2010 and the first quarter of fiscal year 2011, our anticipated revenue was adversely affected due to quality issues with the cylindrical cells we purchased from a third party supplier that are included in our batteries, and the temporary suspension of certain areas of production and certain 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 timely manner that allows us to meet customer demand, or if any of our manufacturing partners are unable to manufacture products in commercial quantities on a timely and cost-effective basis, we could lose our customers and adversely affect 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 further commercialize our products, which could impair our profitability.

Our dependence on a limited number of suppliers for key raw materials may delay our production of batteries.

We depend on a limited number of suppliers for our cylindrical cells, and a limited number of suppliers for certain other key raw materials, such as electrolyte anode material, cylindrical cell manufacturing, and printed circuit boards 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. For example, during the fourth quarter of fiscal year 2010 and the first quarter of fiscal year 2011, we experienced production delays as a result of quality issues with cylindrical cells supplied by our sole supplier of cylindrical cells at that time, Tianjin Lishen Battery Joint-Stock Co., Ltd. In an attempt to mitigate this type of issue in the future, we engaged Amperex Technology Ltd. as an additional cell supplier in the first quarter of fiscal year 2011. In addition, we qualified a third supplier of cylindrical cells, BAK International (TIANJIN) Limited China ("BAK"), in the fourth quarter of fiscal year 2012. Where practical, we will continue to procure like products from multiple suppliers. In the past, we have also 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.

Should we begin to sell an increasing portion of our products to customers located outside the United States, foreign government regulations, currency fluctuations and increased costs associated with international sales could make our products unaffordable in foreign markets, which would reduce our future profitability.

International sales of our products 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 our 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 where we currently conduct business and in countries where we intend to conduct additional business 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 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 our Chief Executive Officer, Robert L. Kanode, all of our other executive officers and our vice presidents, many of whom have very specialized scientific or operational knowledge regarding one or more of our key products. Such persons are in high demand and often receive competing employment offers from numerous other companies, including larger, more established competitors who have significantly greater financial resources than we do. We are still seeking a replacement for our former chief financial officer who resigned effective June 2011, and there can be no guarantee that we will find a suitable replacement in the near future. 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 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 may 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 or retain existing employees to sufficiently increase our staff or product support capabilities, or that we will not be successful in our sales and marketing efforts. Additionally, turnover in key management positions in China could impair our ability to execute our plans for growth and adversely affect our future profitability.

Product liability or other claims could cause us to incur losses or damage our reputation.

The risk of product liability claims and associated adverse publicity is inherent in the development, manufacturing, marketing and sale of our batteries and battery systems, which are incorporated in third party commercial products, such as automotive and marine vehicles, industrial products, military transport and equipment and medical equipment. Certain materials we use in our batteries, as well as our batteries and battery systems, could, if used improperly, cause injuries to persons and damage to property. We are also subject to a risk of claims for injuries and damages caused by third party products that incorporate our batteries. In addition, our business could be harmed by adverse publicity resulting from problems or accidents caused by our batteries or third party products that incorporate our batteries.

Although we maintain general liability insurance and product liability insurance, our insurance may not be adequate to cover all potential types of product liability claims to which we are exposed or may not be adequate to indemnify us for all liability that may be imposed on us. In addition, while we often seek to limit our product liability in our contracts, such limits may not be enforceable or may be subject to exceptions. Any successful product liability claim against us in excess of our coverage, or outside of our coverage, could require us to pay a substantial monetary award and could have a material adverse affect on our business, financial condition and reputation. We cannot be assured that such claims against us will not be made in the future.

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

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

The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. Accordingly, we cannot be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may be issued to us in the 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 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 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. Even where intellectual property enforcement is strong, enforcing our intellectual property against competitors and other infringers is time-consuming and extremely expensive. Financial and human resources for further enforcement efforts concurrent with those already underway are 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 on 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 have been named in a lawsuit which alleges that our patented lithium iron magnesium phosphate cathode material infringes two patents owned by the Hydro Quebec that we describe in further detail in “Item 3. “Legal Proceedings”. An adverse decision in this or any other similar litigation could force us to do one or more of the following:

·	stop selling, incorporating, or using our products that use the patented lithium iron magnesium phosphate cathode material intellectual property;

·	pay damages for the use of patented lithium iron magnesium phosphate cathode material;

·	obtain a license to sell or use the patented lithium iron magnesium phosphate cathode material, which license may not be available on reasonable terms, or at all; or

·	redesign those products or manufacturing processes that use the patented lithium iron magnesium phosphate 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.

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 patented lithium iron magnesium phosphate technology. However, we have not yet entered into any licensing agreements for our patented lithium iron magnesium phosphate technology. Our future operating results could be adversely affected by a variety of factors including:

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

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

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

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

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

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

In the past, we have identified material weaknesses in our internal control over financial reporting. Although we believe that we have remediated those material weaknesses and concluded our controls are effective as of March 31, 2012, if we fail to maintain proper and effective internal controls in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors' views of us.

Pursuant to the Sarbanes-Oxley Act of 2002, we are required to provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such internal control. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be evaluated frequently.

In connection with our financial audit in the fiscal year ended March 31, 2009, we identified material weaknesses in our internal control over financial reporting. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis by the company's internal controls. While we remediated those material weaknesses and have not had any other material weaknesses since then, we cannot assure you that material weaknesses will not occur in future periods.

Implementing any appropriate changes to our internal controls may distract our officers and employees from other matters, entail substantial costs to implement new processes and modify our existing processes and take significant time to complete. Moreover, these changes do not guarantee that we will be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business. In addition, investors' perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price and make it more difficult for us to effectively market and sell our products to new and existing customers.

Our international business operations could be disrupted.

Our headquarters is located in Austin, Texas and our research and development center is in Las Vegas, Nevada. We also operate a sales and service facility in Mallusk, Northern Ireland, and our manufacturing operations in Suzhou, China. If major disasters such as earthquakes, fires, floods, hurricanes, tsunamis, wars, terrorist attacks, computer viruses, pandemics or other events occur, or our information system or communications network breaks down or operates improperly, our facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. We may incur expenses relating to such damages. In addition, a renewed outbreak of SARS, avian flu, swine flu or another widespread public health problem in China, Northern Ireland or the United States could have a negative effect on our operations.

Risks Associated With Doing Business In China

Since our products are manufactured in China and we have significant operations in 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 affect 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 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 weak, it is often difficult to create and enforce intellectual property rights in China. Even where adequate laws exist in China, it may not be possible to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a court judgment or an arbitration award delivered in another jurisdiction, and accordingly, we may not be able to effectively protect our intellectual property rights in China.

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

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

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

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

The government of China continues to exercise substantial control over the Chinese economy which could have a negative effect 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 effect 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, our ability to conduct our business would be significantly adversely affected.

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 many 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, the material terms of an understanding are not contained in the written agreement but exist as oral agreements only. In other cases, the terms of transactions which may involve material amounts of money are not documented at all. In addition, in contrast to Western business practices where a written agreement specifically defines the terms, rights and obligations of the parties in a legally-binding and enforceable manner, the parties to a written agreement in China may view that agreement more as a starting point for an ongoing business relationship which will evolve and require ongoing modification. As a result, written agreements in China may appear to the Western reader to look more like outline agreements that precede a formal written agreement. While these documents may appear incomplete or unenforceable to a Western reader, the parties to the agreement in China may feel that they have a more complete understanding than is apparent to someone who is only reading the written agreement without having attended the negotiations. As a result, contractual arrangements in China may be more difficult to review and understand. Also, despite legal developments in China over the past 20 years, adequate laws, comparable with Western standards, do not exist in all areas and it is unclear how many of our business arrangements would be interpreted or enforced by a court in China.

Our 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 affect 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, tsunami 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. We maintain insurance in China in an attempt to minimize this risk, but we cannot be sure that such insurance will be sufficient.

In October 2009, we experienced a fire in a leased, unoccupied, offsite warehouse facility housing certain of our raw materials, finished goods inventory, and fixed assets, in Suzhou, China. Management concluded that a material charge for impairment with respect to certain inventory and fixed assets was required under GAAP, and we recorded a liability for the payment of Chinese VAT with respect to certain inventory which was consumed by the fire. Although insurance proceeds covered a significant portion of this loss, we cannot be sure that a fire or other similarly destructive event at one of our facilities in the future would not materially affect our financial position or disrupt our operations.

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. 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.

Risks Associated With Our Industry

If competing technologies 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 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 generally 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 several major and emerging 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 strong name recognition, established positions in the market, and long-standing relationships with OEMs and other customers. Further, a number of our competitors have received or may in the future receive grants, subsidies or incentives from federal, local and state governments, which may provide them with lower cost capital and a competitive advantage. 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, but are not limited to; A123 Systems, LG Chem, Matsushita Industrial Co., Ltd. (Panasonic), Sony, Toshiba, SAFT and Dow–Kokam, 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, and we may not be able to compete successfully against such manufacturers.

Laws regulating the manufacture, transportation and disposal 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 adversely impact our ability to become profitable in the future.

The transportation of lithium-ion batteries is regulated both domestically and internationally. Our U-Charge® Power System is classified as a Class 9 hazardous material for shipping purposes pursuant to regulations published by the U.S. Department of Transportation (DOT) and the International Air Transport Association (IATA). We package and offer for transport our U-Charge® Power System in compliance with all DOT and IATA regulatory requirements.

National, state, local and foreign regulations impose various environmental controls on the transportation, 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 material 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, local, and foreign governments may enact additional restrictions relating to the transportation, storage and 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 transportation, storage, use, and disposal of chemicals used to manufacture batteries, or restricting disposal of batteries will not be imposed. Satisfying these existing and any future laws or regulations not currently enacted or imposed could require significant time and resources from our technical staff, including those related to possible redesign of our products, 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.

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 March 31, 2012, our officers, directors and their affiliates as a group beneficially owned approximately 52% of our outstanding common stock, of which our Chairman Carl Berg and his affiliates beneficially owned approximately 49% 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 differ 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 non-affiliate stockholders, to issue additional shares of our preferred stock, which shares may be given superior voting, liquidation, distribution, and other rights 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.

We are not currently in compliance with the continued listing requirements of the NASDAQ Capital Market and our common stock could be de-listed if we do not regain compliance within the required time period.

On December 13, 2011, we received written notice from The NASDAQ Stock Market indicating that we were not in compliance with the $1.00 minimum bid price requirement for continued listing on The NASDAQ Capital Market, as set forth in Listing Rule 5550(a)(2). We have been provided 180 calendar days, or until June 11, 2012, to regain compliance. To regain compliance, the bid price of our common stock must close at $1.00 or higher for a minimum of 10 consecutive business days within the stated 180-day period. If we are not in compliance by June 11, 2012, we may be afforded a second 180 calendar day grace period if we meet the NASDAQ Capital Market initial listing criteria (except for the minimum bid price requirement), as set forth in Listing Rule 5810(c)(3)(A). However, we do not currently meet such initial listing criteria because of our deficit in stockholder's equity. If we do not regain compliance within the allotted compliance period, that is, by June 11, 2012, our common stock will be subject to delisting from the NASDAQ Capital Market. We would then be entitled to appeal the NASDAQ Staff’s determination to a NASDAQ Listing Qualifications Panel and request a hearing. Since December 13, 2011, our closing stock price has been mostly below $1.00 per share and we have not yet regained compliance with the NASDAQ listing requirement. Given the volatility of our stock and trends in the stock market in general, there can be no assurance that we will regain compliance with the NASDAQ listing requirement. If we are not able to regain compliance, our stock could be de-listed and it could have a materially adverse effect on the price and liquidity of our common stock.

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

The market price of our common stock has been and is likely to continue to be highly volatile. During the fiscal year ended March 31, 2012, the sales price of our common stock ranged from $0.72 to $1.60 per share. Factors that may have a significant effect on the market price of our common stock include the following:

·	fluctuation in our operating results,

·	the loss of or reduction in business from one or more of our key customers,

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

·	failure to achieve operating results projected by securities analysts or public guidance,

·	changes in governmental regulation,

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

·	our relationships with current or future collaborative partners,

·	the status of the continued listing of our common stock on the NASDAQ Stock Market, 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 shares. In addition, companies that have experienced volatility in the market price of their stock have often 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, 2012, we had 169,976,618 shares of common stock outstanding and 1,803,144 shares in treasury stock. In addition, at March 31, 2012, we had 8,533,294 shares of our common stock reserved for issuance under stock options plans and 215,000 shares of our common stock reserved for issuance upon exercise of warrants. 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 per share of $1.98 and $2.96, respectively, which is the lowest conversion price that may apply) (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 with Wm. Smith, would result in immediate ownership dilution to current equity holders and, as a result, our stock price may go down.

Future equity transactions, including the sale of shares of common stock or preferred stock, sales under our At Market Issuance Sales Agreement, or the exercise of options or warrants or other convertible securities, would result in ownership dilution and, as a result, our stock price may go down. In February 2008, we entered into an At Market Agreement with Wm. Smith & Co., which was amended in July 2009, December 2010, January 2011, and June 2011, and 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 30 million shares of our common stock. As of March 31, 2012, a total of 24.6 million of the aggregate shares authorized for sale through Wm. Smith & Co. have been sold and 5.4 million remain available for future issuance under the agreement. Further, as opportunities present themselves from time to time, we may sell restricted stock and warrants or convertible debt to investors in private placements conducted by broker-dealers, or in negotiated transactions. Because the securities may be restricted, the securities may be sold at a greater discount to market prices compared to a public securities offering, and the exercise price of the warrants may be at or even lower than market prices. These transactions cause ownership dilution to existing stockholders. Also, from time to time, options may be issued to employees and third parties. Exercise of in-the-money options, warrants and other convertible securities will result in ownership dilution to existing stockholders, and the amount of dilution will depend on the spread between market and exercise price, and the number of shares involved.

Our management team has broad discretion over the use of the net proceeds from any offering by us of our equity securities, including sales under our At Market Issuance Sales Agreement.

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

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 do not plan to pay dividends, a return on an investment in our stock 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 SEC, and NASDAQ continue to develop additional regulations and requirements in response to laws enacted by Congress, including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Our efforts to comply with these 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 control 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 control over financial reporting is not effective as defined under Section 404 of the Sarbanes-Oxley Act of 2002, there may be a material adverse effect in investor perceptions and a decline in the market price of our stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We lease approximately 24,000 square feet in Austin, Texas for our corporate offices. We also lease approximately 14,000 square feet in Las Vegas, Nevada for our research and development facility. Our two wholly owned foreign enterprises in China lease five manufacturing facilities, totaling approximately 173,000 square feet in Suzhou, China, which leases will expire during 2013 and 2014. We believe that prior to the expiration of these leases we will be able to renew the leases or secure suitable replacement facilities on reasonable terms. In addition, we lease approximately 2,000 square feet in Mallusk, Northern Ireland for our sales and OEM manufacturing support center. Currently we do not utilize the entire manufacturing capacity of our China facilities, and take charges against our cost of sales to absorb the under-utilized costs associated with these facilities. We believe that our existing facilities are suitable and will be adequate to meet our requirements for at least the next 12 months.

ITEM 3. LEGAL PROCEEDINGS

On January 31, 2007, we 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 our Canadian Patent 2,395,115 (‘115 Patent). Subsequently, on April 2, 2007, we filed an amended claim alleging additional infringement of our Canadian Patents 2,483,918 (‘918 Patent) and 2,466,366 (‘366 Patent). The trial took place in September 2010 and ended on October 1, 2010. On February 17, 2011, the Canadian Court ruled in our favor, finding that Phostech infringed our ‘115 Patent. The Appellate Court affirmed the Trial Court Decision. On October 7, 2011, we received a payment from Phostech of $532,388 for attorney's fees incurred by us during the litigation with Phostech, as determined by the Trial Court order dated September 7, 2011. This payment is reflected as a reduction of general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss during fiscal year 2012. During fiscal year 2012, we also received an additional $336,864 from Phostech as a partial payment of damages. This payment was reflected in interest and other income in our condensed consolidated statement of operations and comprehensive loss during fiscal year 2012. The determination of damages suffered by Valence due to the infringement is ongoing and a hearing to determine those damages is expected in the first part of 2013.

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). An amended complaint was filed April 13, 2006. A stay imposed due to the USPTO reexaminations of the two patents was lifted following completion of the reexaminations. On January 8, 2009, Hydro-Quebec filed a second amended complaint, wherein Hydro-Quebec alleges that the cathode technology utilized in all of our commercial products infringes U.S. Reexamined Patent Nos. 5,910,382 and 6,514,640 exclusively licensed to Hydro-Quebec. Hydro-Quebec seeks injunctive relief and monetary damages. We have filed a response denying the allegations in the second amended complaint. A Markman hearing to determine the scope of the asserted claims in the two reexamined patents was completed in January 2010. The Special Master submitted recommended findings from the Markman Hearing to the Court in August 2010 and a Court hearing was held on those findings in November 2010. On April 27, 2011, the Court issued its order adopting the report of the Special Master. The Court set a trial date for October 2012. The case is now in the discovery phase. The below-noted case filed by Hydro-Quebec in Dallas was transferred to the United States District Court for the Western District of Texas and has been incorporated into the pending case. On April 6, 2012, the Court ordered us to file a Motion for Summary Judgment in the combined case. The Motion was filed on April 26, 2012. We are finalizing additional pleadings relating to the motion and awaiting a decision by the Court.

On October 4, 2011, we were served with a complaint filed by Hydro-Quebec in the United States District Court for the Northern District of Texas (Hydro-Quebec v. A123 Systems, Inc., Valence Technology, Inc., Segway, Inc., and Texas Seg LLC., Civil Action No. 3:11-CV-1217 B). Hydro-Quebec seeks injunctive relief and monetary damages. The Complaint alleges that we are infringing five US Patents of the University of Texas. The five US Patents are all related to and continuations of the original UT Patent of Goodenough that has been asserted in the above-noted litigation in the Austin, Texas Federal District Court. We intend to vigorously defend against the allegations in the complaint and filed a Motion to Transfer the Case to the Western District of Texas in Austin, Texas. The case was transferred to the United States District Court for the Western District of Texas.

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. However, the outcome of any litigation is inherently uncertain and there can be no assurance as to the ultimate outcome of any such legal matters.

PART II

ITEM 4. RESERVED

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 May 18, 2012, we had approximately 601 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 fiscal years 2012 and 2011:

	Closing Sales Prices
	High		Low
Fiscal year 2012:
Quarter ended June 30, 2011	$	1.60	$	1.06
Quarter ended September 30, 2011		1.29		0.96
Quarter ended December 31, 2011		1.08		0.72
Quarter ended March 31, 2012		1.05		0.79

Fiscal year 2011:
Quarter ended June 30, 2010	$	1.36	$	0.65
Quarter ended September 30, 2010		1.15		0.66
Quarter ended December 31, 2010		1.70		1.06
Quarter ended March 31, 2011		1.77		1.41

The following table includes, as of March 31, 2012, information regarding common stock authorized for issuance under our equity compensation plans:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders	4,694,884	$	1.68	2,338,410
Equity compensation plans not approved by security holders (1)	1,500,000	1.61		—
Equity compensation plans not approved by security holders (2)	215,000	1.24		—
Total	6,409,884	$	1.65	2,338,410

(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 options is $1.61 per share and as of the date of this report are fully vested.
(2)	Warrants to purchase 215,000 shares of common stock were granted to a third party finance company in March 2010 and January 2011 in exchange for certain loan modifications made to an existing loan payable to that company. The exercise price of the warrants range from $1.00 per share to $1.45 per share and are exercisable through March 30, 2014 and January 11, 2015.

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 dividends 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 our Board of Directors may deem relevant.

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, 2007 to March 31, 2012.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Valence Technology, Inc., The NASDAQ Composite Index

And The NASDAQ Electronic Components Index

	3/07		3/08		3/09		3/10		3/11		3/12

Valence Technology, Inc.	$	100.00	$	373.73	$	180.51	$	72.03	$	132.20	$	68.50
NASDAQ Composite		100.00		89.92		64.23		99.43		118.58		128.96
NASDAQ Electronic Components		100.00		99.11		65.06		103.03		119.31		121.44

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

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 Report. 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 our future results:

	Fiscal Year ended March 31,
(in thousands except per share data)	2012			2011			2010			2009			2008
Statement of Operations Data
Revenue	$	44,381		$	45,882		$	16,080		$	26,157		$	20,777
Cost of sales		36,833			36,446			14,093			25,682			18,956
Gross margin		7,548			9,436			1,987			475			1,821
Operating Expenses:
Research and product development		3,616			3,622			4,464			4,333			3,772
Selling, general and administrative		13,216			14,313			15,032			11,994			12,230
Loss on disposal of assets		—			—			—			137			16
Asset impairment charge		314			502			301			731			154
Total operating expenses		17,146			18,437			19,797			17,195			16,172
Operating loss		(9,598	)		(9,001	)		(17,810	)		(16,720	)		(14,351	)
Foreign exchange gain		626			839			44			605			1,258
Interest and other income (expense), net		(3,761	)		(4,523	)		(4,950	)		(5,111	)		(6,347	)
Casualty loss		—			—			(300	)		—			—
Net Loss		(12,733	)		(12,685	)		(23,016	)		(21,226	)		(19,440	)
Dividends on preferred stock		173			172			172			172			173
Net loss available to common stockholders	$	(12,906	)	$	(12,857	)	$	(23,188	)	$	(21,398	)	$	(19,613	)

Net loss available to common stockholders per share-basic and diluted	$	(0.08	)	$	(0.09	)	$	(0.18	)	$	(0.18	)	$	(0.18	)

Weighted average shares outstanding-basic and diluted		165,241			141,655			126,211			119,370			111,593

Balance Sheet Data:
Cash and cash equivalents	$	1,428		$	2,915		$	3,172		$	4,009		$	2,616
Working capital (deficit)		12,838			5,783			(13,076	)		13,889			11,200
Total assets		31,529			36,017			18,089			29,636			27,158
Long-term debt to stockholder, net of debt discount		34,910			34,889			34,848			34,766			53,607
Redeemable convertible preferred stock		8,610			8,610			8,610			8,610			8,610
Accumulated deficit		(606,608	)		(593,702	)		(580,845	)		(557,657	)		(536,260	)
Total stockholders’ deficit		(59,716	)		(63,834	)		(79,115	)		(67,185	)		(67,317	)

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

General

We develop, manufacture and sell advanced energy storage systems utilizing our proprietary phosphate-based lithium-ion technology for diverse applications, with special emphasis on motive, industrial/medical, back-up power, and marine applications. Our mission is to promote the wide adoption of high-performance, safe, environmentally friendly energy storage systems. To accomplish our mission and address the significant market opportunity we believe is available, we utilize the numerous benefits of our latest energy storage technology, worldwide intellectual property portfolio and extensive experience of our management team.

Our revenue in fiscal year 2012 was $44.4 million, a decrease of 3% compared to the prior fiscal year. We believe revenue will grow in fiscal year 2013, compared to fiscal year 2012, from existing and new customers due to the increasing demand in the U.S. and EMEA (Europe, Middle East and Africa) markets for alternative energy solution systems.

Going Concern

As a result of our limited cash resources and history of operating losses 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. In fiscal year 2011 and the first quarter of fiscal year 2012, we depended on financing from sales of our common stock under the At Market Agreement with Wm. Smith & Co. If we are unable to obtain financing from Mr. Berg, Wm. Smith & Co, 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 effect on our available liquidity sources during fiscal year 2013.

2012 Highlights

Following are some of our key events and accomplishments in pursuit of our strategy during the 2012 fiscal year:

· We were awarded 5 new patents in the U.S. and 20 worldwide

Our research and development efforts are focused on the design of new products utilizing our lithium iron magnesium phosphate chemistry, the continuous improvement of the manufacturing process of our second and third 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 our lithium ion phosphate technology platform.

Result of Operations

Fiscal Years Ended March 31, 2012 (Fiscal Year 2012), March 31, 2011 (Fiscal Year 2011) and March 31, 2010 (Fiscal Year 2010)

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

	Fiscal Year Ended
				Change Increase/ (Decrease)									Change Increase/ (Decrease)
	3/31/2012			$			%			3/31/2011			$			%			3/31/2010

Revenue	$	44,381			(1,501	)		(3	)%	$	45,882			29,802			185	%	$	16,080
Cost of products sold		36,833			387			1	%		36,446			22,353			159	%		14,093
Gross margin		7,548			(1,888	)		(20	)%		9,436			7,449			375	%		1,987
Operating and other expenses		16,832			(1,103	)		(6	)%		17,935			(1,561	)		(8	)%		19,496
Asset impairment charge		314			(188	)		(37	)%		502			201			67	%		301
Total operating expenses		17,146			(1,291	)		(7	)%		18,437			(1,360	)		(7	)%		19,797
Operating loss		(9,598	)		(597	)		7	%		(9,001	)		8,809			(50	)%		(17,810	)
Other expense, net		(3,135	)		549			(15	)%		(3,684	)		1,522			(30	)%		(5,206	)
Net loss		(12,733	)		(48	)		—	%		(12,685	)		(10,331	)		(45	)%		(23,016	)
Dividends on preferred stock		173			1			1	%		172			—			—	%		172
Net loss available to common stockholders	$	(12,906	)		(49	)		—	%	$	(12,857	)	$	(10,331	)		(45	)%	$	(23,188	)
Net loss per share available to common stockholders, basic and diluted	$	(0.08	)		(0.01	)		(11	)%	$	(0.09	)	$	0.09			(51	)%	$	(0.18	)
Shares used in computing net loss per share available to common stockholders, basic and diluted		165,241			23,586			17	%		141,655			15,444			12	%		126,211

Revenue and Gross Margin

Revenue . Revenue totaled $44.4 million for the fiscal year 2012, a $1.5 million, or 3% decrease, compared to $45.9 million in revenue for the fiscal year 2011. Revenue for fiscal year 2011 was $45.9 million, which was an increase of $29.8 million, or a 185% increase, compared to $16.1 million in revenue for the fiscal year 2010. The decrease in revenue during fiscal year 2012, compared to fiscal year 2011, was primarily the result of decreased sales to Segway Inc. ("Segway") and Smith Electric Vehicles ("Smith"). Revenue for Segway and Smith were $9.3 million and $5.1 million, respectively, in fiscal year 2012, compared to $11.2 million and $19.1 million, respectively, in fiscal year 2011. These decreases in revenue in fiscal year 2012 compared to fiscal year 2011 were partially offset by increases in sales to Rubbermaid Medical Solutions ("Rubbermaid"), Howard Technology Solutions ("Howard"), and PVI. Revenues for Rubbermaid, Howard, and PVI were $5.5 million, $5.3 million, and $5.2 million in fiscal year 2012, and less than 10% each in fiscal year 2011. The increase in revenue during fiscal year 2011, compared to fiscal year 2010, is primarily the result of increased sales to Smith Electric Vehicles, and Segway. Smith Electric Vehicles and Segway sales in fiscal year 2011 were $19.1 million and $11.2 million, respectively, as compared to $2.0 million and $4.1 million, respectively, in fiscal year 2010.

Segway sales accounted for 21%, 24%, and 25% of our total revenue in fiscal years 2012, 2011, and 2010, respectively. Smith Electric Vehicles sales accounted for 12%, 42%, and 12% of our total revenue in fiscal years 2012, 2011, and 2010, respectively. Rubbermaid sales accounted for 12% of our total revenue in fiscal year 2012, and less than 10% of our total revenue in each of fiscal years 2011 and 2010, respectively. Howard sales accounted for 12% of our total revenue in fiscal year 2012, and less than 10% of our total revenue in each of fiscal years 2011 and 2010, respectively. PVI sales accounted for 12% of our total revenue in fiscal year 2012, and less than 10% of our total revenue in each of fiscal years 2011 and 2010, respectively. Large-format battery system sales represented 78%, 74%, and 65%, of our total revenue for fiscal years 2012, 2011, and 2010, respectively. We expect sales of our large-format battery system to increase during fiscal year 2013, due to the growing demand of alternative energy storage systems and the fulfillment of current sales agreements. We believe the increase in demand in alternative energy solutions is being driven largely by the sustained high cost of fossil fuels and a market focus on environmentally friendly energy solutions. We expect sales of our large-format battery systems and custom packs to increase during the upcoming fiscal year due to anticipated continued strong demand for our products from a variety of customers. We did not experience any material effect of inflation on our revenues in the three most recent fiscal years. During fiscal year 2012, we recognized $4.1 million in revenue from EVI, a customer affiliated with Carl Berg, our largest shareholder and Chairman of Board of Directors.

Gross Margin. Gross margin was $7.5 million, $9.4 million, and $2.0 million during fiscal years 2012, 2011, and 2010, respectively. Gross margin as a percentage of revenue was 17%, 21%, and 12% for fiscal year 2012, 2011, and 2010, respectively. During fiscal year 2012, gross margin decreased in dollars and as a percentage of revenue primarily due to decreased manufacturing efficiencies and to the decreased absorption of fixed overhead associated with our production facility in China compared to fiscal year 2011, and a charge recorded for obsolete inventory related to a discontinued product line in fiscal year 2012. In fiscal year 2011, gross margin in dollars and as a percentage of revenue increased mainly due to improved manufacturing efficiencies and to the increased absorption of fixed overhead associated with our production facility in China and reduced raw material costs in fiscal year 2011 compared to fiscal year 2010.

We expect our cost of sales, as a percentage of sales, to be higher in fiscal year 2013, compared to fiscal year 2012, due to increased pricing pressure, which we expect to negatively impact our gross margins as we compete for additional business and continue to keep the existing business we have from our current customers. We did not experience any material effect of inflation on our gross margin or operating expenses in the three most recent fiscal years.

Operating Expenses

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

	Fiscal Year Ended
				Change Increase/ (Decrease)									Change Increase/ ( Decrease)
	3/31/2012			$			%			3/31/2011			$			%			3/31/2010
Operating expenses
Research and product development	$	3,616			(6	)		—	%	$	3,622		$	(842	)		(19	)%	$	4,464
Sales and marketing		2,308			(357	)		(13	)%		2,665			51			2	%		2,614
General and administrative		10,908			(740	)		(6	)%		11,648			(769	)		(6	)%		12,418
Asset impairment charge		314			(188	)		(37	)%		502			201			67	%		301
Total operating expenses	$	17,146			(1,291	)		(7	)%	$	18,437			(1,360	)		(7	)%	$	19,797
Total operating expenses as a percent of total revenue		39	%								40	%								123	%

Operating expenses as a percentage of revenue were 39%, 40%, and 123% in fiscal years 2012, 2011, and 2010, respectively. The dollar and percentage decrease in operating expense in fiscal year 2012 compared to fiscal year 2011 was primarily due to a decrease of litigation expense in fiscal year 2012 compared to fiscal year 2011, and reduced sales and marketing costs in fiscal year 2012 compared to fiscal year 2011.The dollar decrease in operating expenses in fiscal year 2011 is mainly due to reductions in research and development expense and general and administrative expenses, and the decrease in operating expenses as a percentage of revenue is due to higher recorded revenue in fiscal year 2011 compared to fiscal year 2010.

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 $3.6 million in each of fiscal years 2012 and 2011, and $4.5 million in fiscal year 2010. During fiscal year 2011, research and development decreased by $0.8 million, or 19%, compared to fiscal year 2010, primarily due to decreased wage and salary expenses, and reduced share-based compensation expenses in fiscal year 2011. During fiscal years 2012 and 2011, approximately $0.1 million of share based compensation was allocated to research and development expenses. During fiscal year 2010, approximately $0.6 million of share based compensation was allocated to research and development expenses. We expect research and development expenses to remain relatively steady as we create and develop new products during fiscal year 2013.

Sales and Marketing . Sales and marketing expenses consist primarily of costs related to sales and marketing personnel, public relations and promotional materials. Sales and marketing expenses totaled $2.3 million, $2.7 million, and $2.6 million in fiscal years 2012, 2011, and 2010 respectively. During fiscal year 2012, sales and marketing expenses decreased by approximately $0.4 million compared to fiscal year 2011, primarily related to decreased wage and salary expenses as less sales commissions were earned, and reduced employee relocation costs in fiscal year 2012, compared to fiscal year 2011. During fiscal year 2011 and fiscal year 2010, sales and marketing expenses remained relatively flat. During fiscal year 2012, and fiscal year 2011, approximately $0.1 million of share based compensation expenses was allocated to sales and marketing expense. During fiscal year 2010, $0.2 million of share based compensation was allocated to sales and marketing expense. We expect sales and marketing expenses could increase moderately as we focus on growing our revenue during fiscal year 2013.

General and Administrative . General and administrative expenses consist primarily of wage and salary expenses, share based compensation expense, and other related costs for finance, human resources, facilities, information technology, legal, audit, insurance and corporate-related expenses. General and administrative expenses totaled $10.9 million, $11.6 million, and $12.4 million during fiscal years 2012, 2011, and 2010, respectively. General and administrative expenses decreased $0.7 million, or 6% during fiscal year 2012, compared to fiscal year 2011, primarily as a result of reduced litigation expenses associated with the defense of intellectual property. General and administrative expenses decreased during fiscal year 2011, compared to fiscal year 2010, primarily as a result of reduced share-based compensation expense in fiscal year 2011, and a reduction in compensation related expenses as the result of the release of a liability for accrued foreign employment taxes related to our Ireland operations. During fiscal years 2012, 2011, and 2010, approximately $0.4 million, $0.6 million, and $1.4 million of share based compensation was allocated to general and administrative expenses, respectively. We expect general and administrative expenses to remain relatively consistent in fiscal year 2013, with the exception of our litigation expenses, which we expect to increase as our pending litigation matters continue and advance to trial.

Impairment Charge . Impairment charges of approximately $0.3 million, $0.5 million, and $0.3 million were recorded during fiscal years 2012, 2011 and 2010, respectively. The fiscal year 2012 and 2010 impairment charges were the result of our annual fixed asset inventory count and audit for idle or damaged assets in our China production facility. The fiscal year 2011 impairment charge related to fixed assets that were purchased for the expansion of our production facilities in China. These production assets were deemed to be impaired since the additional capacity provided by the acquisition of these assets was determined not to be necessary to meet expected demand.

Interest and Other Income, Expense and Other Expense

Interest and Other Expense. Interest expense relates to our long-term debt with a stockholder and a third party creditor. Interest expense was $4.2 million, $4.5 million, and $5.0 million for fiscal years 2012, 2011, and 2010, respectively. Interest expense fluctuations are a result of changes in the principal balances of the loans.

Interest and Other Income. During fiscal year 2012, we received a $0.3 million payment for damages as the result of our lawsuit against Phostech, which was included in Interest and Other Income in fiscal year 2012.

Casualty Loss

Property and Casualty Loss . In the second quarter of fiscal year 2010, we experienced a fire at an offsite warehouse in Suzhou, China, which contained certain fixed assets and inventory. Based upon our initial estimates of the casualty loss and expected insurance recoveries from this incident we recorded a casualty loss of $0.6 million in the quarter ended September 30, 2009, a receivable for the expected insurance recoveries of $3.5 million, a reduction of inventory and fixed assets of approximately $3.0 million, and related accrued liabilities for VAT taxes and expected clean up costs of approximately $1.0 million. We settled a claim with our insurance carrier during the fourth quarter of fiscal year 2010 for $3.2 million related to this fire, and recorded a $0.3 million reduction of the casualty loss previously recorded.

Liquidity and Capital Resources

At March 31, 2012, our principal source of liquidity was cash and cash equivalents of $1.4 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, 2012, nor do we anticipate that revenue during fiscal year 2013 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 revenues 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 our failure to achieve expected revenues, changes in OEM relationships, market conditions, the failure to timely realize our product development goals, our stock price, and other adverse developments. These events could have a negative effect on our available liquidity sources during the next twelve months.

We filed a Form S-3 Registration Statement with the SEC utilizing a “shelf” registration process, which Registration Statement was declared effective on January 21, 2011 (the “New Registration Statement”). Pursuant to the new Registration Statement, we may sell debt or equity securities described in the accompanying prospectus in one or more offerings up to a total public offering price of $50.0 million. The New Registration Statement replaced our Form S-3 Registration Statement that expired on January 22, 2011 (the “Expired Registration Statement”). We believe that the New Registration Statement provides us additional flexibility with regard to potential financings that we may undertake when market conditions permit or that our financial condition may require.

On February 22, 2008, we entered into an At Market Agreement with Wm. Smith & Co., as sales agent (the “Sales Agent”), which has been amended several times, most recently on June 17, 2011, pursuant to Amendment No. 4 to At Market Agreement (the “Amendment”), under which we may issue and sell up to 30,000,000 shares of common stock in a series of transactions over time as we may direct through the Sales Agent. Unless we and the Sales Agent agree to a lesser amount with respect to certain persons or classes of persons, the compensation to the Sales Agent for sales of common stock sold pursuant to the At Market Agreement will be 6.0% of the gross proceeds of the sales price per share. During fiscal year 2012, we sold 11.1 million shares for net proceeds of $12.3 million under the At Market Agreement. As of March 31, 2012, we had sold a total of 24.6 million shares under this arrangement for aggregate gross proceeds of $42.2 million. As of March 31, 2012, 5.4 million shares of common stock remain available for issuance and sale under the At Market Agreement. We have sold no shares under this agreement since the first quarter of fiscal year 2012.The At Market Agreement will terminate upon the sale of all shares authorized for sale thereunder, unless earlier terminated by one or both parties as permitted thereunder.

On October 14, 2009, we entered into a Common Stock Purchase Agreement with Seaside 88 LP, which provides that, upon the terms and subject to the conditions set forth therein, we are required to issue and sell, and Seaside to purchase, up to 650,000 shares of our common stock once every two weeks, subject to the satisfaction of customary closing conditions, beginning on October 15, 2009 and ending on or about the date that is 52 weeks subsequent to the initial closing, for an aggregate sale to Seaside of up to 16,900,000 shares of common stock. This agreement terminated on October 15, 2010, and we had sold 7.2 million shares to Seaside pursuant to this arrangement for aggregate gross proceeds of $7.6 million before offering expenses and finder’s fee.

At March 31, 2012, 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, 2012 totaled approximately $1.1 million. The preferred shares are currently subject to redemption or conversion at the holder’s discretion. We do not have sufficient resources to effect this redemption; however, Berg & Berg has agreed that our failure to redeem the Series C-1 Convertible Preferred Stock and the Series C-2 Convertible Preferred Stock does not constitute a default under the certificate of designations for either the Series C-1 Convertible Preferred Stock or the Series C-2 Convertible Preferred Stock and has waived the accrual of any default interest applicable. Berg & Berg also has agreed to defer the payment of dividends on the Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock. According to our agreement with Berg & Berg, dividends will continue to accrue (without interest) on the Series C-1 Convertible Preferred Stock and the Series C-2 Convertible Preferred Stock according to the terms of the applicable certificates of designation; and such dividends are not payable until such time as the parties mutually agree, or upon redemption or conversion in accordance with the terms of the applicable certificates of designation. We have no present intention to pay dividends on this preferred stock, including the accrued dividends. The Series C-1 Convertible Preferred Stock may be converted, at any time, into shares of our common stock at the lower of $4.00 or the closing price of our common stock on the conversion date, provided the conversion price can be no lower than $1.98, the closing price of the common stock on December 13, 2005. The Series C-2 Convertible Preferred Stock may be converted, at any time, into shares of our common stock at the lower of $4.00 or the closing price of our common stock on the conversion date, provided the conversion price can be no lower than $2.96, the closing bid price of our common stock on July 13, 2005. However, because the shares are redeemable in cash, it is likely that any redemption would result in us selling common stock at the current market price to settle such redemption.

As a result of our limited cash resources and history of operating losses, our auditors have expressed in their report on our consolidated financial statements, included in our audited March 31, 2012 consolidated financial statements, that there is substantial doubt about our ability to continue as a going concern. Our cash requirements may vary materially from those now planned because of changes in our operations, including the failure to achieve expected revenues, greater than expected expenses, changes in OEM relationships, market conditions, the failure to timely realize our product development goals, our stock price, and other adverse developments. These events could have a negative effect on our available liquidity sources. We intend to attempt to improve our liquidity by continued monitoring and reduction of manufacturing, facility and administrative costs. However, there can be no assurance that these efforts will be successful or that the anticipated benefits would be realized in the near term.

The following table summarizes our statement of cash flows for the fiscal years ended March 31, 2012, 2011, and 2010 (in thousands):

	Year ended March 31,
Net cash flows provided by (used in)	2012			2011			2010
Operating activities	$	(8,669	)	$	(17,968	)	$	(9,618	)
Investing activities		(1,245	)		(473	)		(231	)
Financing activities		8,344			18,134			9,013
Effect of foreign exchange rates		83			50			(1	)
Net increase in cash and cash equivalents	$	(1,487	)	$	(257	)	$	(837	)

Cash used by operating activities during fiscal years 2012, 2011 and 2010 was $8.7 million, $18.0 million, and $9.6 million, respectively. The cash used for operating activities during each of the fiscal years was primarily for operating losses and working capital requirements. Cash used by operations decreased by $9.2 million in fiscal year 2012 compared to fiscal year 2011 primarily due to a decreased use of cash for accounts receivable and inventory in fiscal year 2012 compared to fiscal year 2011. Cash used by operations increased during fiscal year 2011 compared to fiscal year 2010 due to an $11.5 million increase in cash used in our accounts receivable and a $12.2 million increase in cash used in our inventory. The increased use of cash for our accounts receivable and inventory in fiscal year 2011, compared to fiscal year 2010, was due to our increased sales and inventory production necessary to support the increased demand of our customers.

Cash used by investing activities during fiscal years 2012, 2011 and 2010 was $1.2 million, $0.5 million and $0.2 million, respectively. The cash used by investing activities in all fiscal years was primarily for the acquisition of capital equipment for our China facilities.

We obtained net cash from financing activities during fiscal years 2012, 2011 and 2010 of $8.3 million, $18.1 million and $9.0 million, respectively. Net cash provided by financing activities in fiscal year 2012 consisted of selling approximately 11.1 million shares of our common stock with proceeds net of commissions totaling $12.3 million under the At Market Agreement with Wm. Smith & Co. In addition, we obtained $4.0 million in cash from Carl Berg, an affiliate, in exchange for two promissory notes during fiscal year 2012. Those promissory notes were surrendered in exchange for shares of common stock during August 2011 and January 2012, as discussed in more detail in Note 19 Related Party Transactions, of Notes to the Consolidated Financial Statements. In addition, we made payments on our short term debt to a third party financing company totaling $8.0 million in fiscal year 2012. Net cash provided by financing activities in fiscal year 2011 consisted of $2.9 million of common stock sold under the Common Stock Purchase Agreement with Seaside, $12.0 million in sales of our common stock to Carl Berg, which consisted of cash payments and the settlements of certain promissory notes, as discussed in more detail in Note 19 Related Party Transactions, of Notes to the Consolidated Financial Statements, and $12.1 million of common stock sold under our At Market Agreement with Wm. Smith & Co. In addition, we made payments on our short term debt to a third party financing company totaling $9.0 million in fiscal year 2011. Net cash provided by financing activities in fiscal year 2010 includes $4.3 million of common stock sold under the Common Stock Purchase Agreement with Seaside, $3.5 million in sales of our common stock to Carl Berg, $1.2 million of common stock sold under our At Market Agreement with Wm. Smith & Co, and $0.1 million received from the exercise of stock options by employees.

Short-Term and Long-Term Principal and Interest Repayment Obligations

At March 31, 2012, our cash obligations for short-term and long-term debt principal, gross of accreted debt discount, and interest consisted of (in thousands):

	March 31, 2012
Short-term debt	$	3,000
Current portion of interest on short-term debt		17
1998 long-term debt to stockholder		14,950
2001 long-term debt to stockholder		20,000
Long term portion of interest on debt		33,322
Total	$	71,289

At March 31, 2012, our repayment obligations of short-term and long-term debt principal are (in thousands):

	Fiscal Year ended March 31,
	2013		2014		2015		2016		2017		Thereafter		Total
Principal repayments	$	3,000	$	—	$	—	$	34,950	$	—	$	—	$	37,950

We have and will continue to have a significant amount of indebtedness and other obligations. As of March 31, 2012, we had approximately $71.2 million of total consolidated indebtedness, including accrued interest. Included in this amount are $35.0 million of loans outstanding to an affiliate of Carl Berg, $33.3 million of accumulated interest associated with those loans and $3.0 million of principal and interest outstanding with a third party. The $3.0 million principal balance was previously held by iStar, a third party finance company. In March 2012, the loan was transferred to a third party individual, and that individual extended the maturity date of the remaining principal balance of $3.0 million to June 30, 2012.

The terms of the certificates of designation for our Series C-1 Convertible Preferred Stock and 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, and were approximately $1.1 million as of March 31, 2012.

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

Contractual Obligations

At March 31, 2012, our contractual obligations and payments due by period are as follows (in thousands):

	Payments Due by Period
	Total		Less than 1 year		1-3 Years		4-5 Years		More than 5 Years
Contractual obligations:
Short-term debt, net of discount	$	2,984	$	2,984	$	—	$	—	$	—
Current portion of interest payable on short-term debt		17		17		—		—		—
Long-term debt to stockholder, net of discount		34,910		—		—		34,910		—
Long-term interest payable to stockholder		33,322		—		—		33,322		—
Operating lease obligations		1,354		815		539		—		—
Purchase obligations		14,863		14,863		—		—		—
Total	$	87,450	$	18,679	$	539	$	68,232	$	—

Lease Commitments

We have no capital leases.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Basis of Presentation, Critical Accounting Policies and Estimates

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

Revenue Recognition

We generate revenues from sales of products including batteries and battery systems. Product sales are recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery or transfer of title and risk of loss has occurred, seller’s price to the buyer is fixed and determinable, and collection is reasonably assured. For shipments where the transfer of title and risk of loss does not occur until the customer has accepted the product, we rely upon third party shipper notifications and notices of acceptance from the customer to recognize revenue. For all shipments, we estimate a return rate percentage based upon historical experience. From time to time, we provide sales incentives in the form of rebates or other price adjustments; these are generally recorded as reductions to revenue on the later of the date the related revenue is recognized or at the time the rebate or sales incentive is offered.

Impairment of Long-Lived Assets

We perform a review of long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows that the assets are expected to generate. If long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value and is recorded in the period the determination was made.

Inventory

Inventory is stated at the lower of cost (determined using the first-in, first-out method) or market. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolete or impaired balances.

Warranty

We record warranty liabilities at the time of sale for the estimated costs that may be incurred under our basic limited warranty. The warranty terms and conditions generally provide for replacement of defective products. Factors that affect the warranty liability calculations include the number of units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy the warranty obligation. Each quarter, we re-evaluate the estimate to assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

Share Based Compensation

We measure share-based compensation expense for all share-based awards granted based on the estimated fair value of those awards at grant-date. The fair values of stock option awards are estimated using a Black-Scholes valuation model. The compensation costs are recognized net of any estimated forfeitures on a straight-line basis over either the employee’s requisite service period, or other such vesting requirements as are stipulated in the stock option award agreements. Forfeiture rates are estimated at grant date based on historical experience and adjusted in subsequent periods for any differences in actual forfeitures from those estimates. See Note 15, Share-Based Compensation, of Notes to Condensed Consolidated Financial Statements, for further discussion of share-based compensation.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The amendments in this ASU require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2011, with early adoption permitted. The Company has not chosen to early adopt the provisions of this update. The future adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and disclosure Requirements in U. S. GAAP & IFRS,” which results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The future adoption of ASU 2011-04 is not expected to have a material impact on the Company’s consolidated financial statements.

We have implemented all new accounting pronouncements that are in effect and that may impact our consolidated financial statements and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our consolidated financial position or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk . We are exposed to financial market risks, including changes in foreign currency exchange rates.

As a result of our foreign operations, we have significant expenses, assets and liabilities that are denominated in foreign currencies. A significant number of our employees are located in Asia. Therefore, a substantial portion of our payroll as well as certain other operating expenses are paid in the China RMB. Additionally, we purchase materials and components from suppliers in Asia. While we pay many of these suppliers in U.S. dollars, their costs are typically based upon the local currency of the country in which they operate. The majority of our revenues are received in U.S. dollars.

As a consequence, our gross profit, operating results, profitability and cash flows are adversely affected when the dollar depreciates relative to other foreign currencies. We have a particularly significant currency rate exposure to changes in the exchange rate between the RMB and the U.S. dollar. For example, to the extent that we need to convert U.S. dollars for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the amount we receive from the conversion.

We feel that a 10% change in foreign currency exchange rates would not have a material affect on our financial statements.

We have not used any forward contracts, currency borrowings or derivative financial instruments for purposes of reducing our exposure to adverse fluctuations in foreign currency exchange rates.

Interest Rate Sensitivity . We are exposed to financial market risks, including changes in interest rates.

Our exposure to interest rate risk primarily relates to a $20.0 million loan agreement (with a $3.0 million principal balance as of March 31, 2012) we entered into on July 13, 2005, with iStar, (the loan was transferred from iStar to a third party individual effective March 2012), with an adjustable interest rate equal to the greater of 6.75% or the sum of the LIBOR rate plus 4.0% (LIBOR was less than 1% at March 31, 2012). In addition, we have a loan payable to Berg & Berg, a company whose managing director is Carl E. Berg, our largest stockholder and Chairman of our Board of Directors. The loan is dated July 1998 (the "1998 Loan"), and is payable on September 30, 2015. The 1998 Loan bears interest at one percent over lender’s borrowing rate (approximately 9.0 % at March 31, 2012). Berg & Berg has never changed the interest rate on the 1998 Loan since the loan was made.

We feel that a 10% change in interest rates would not have a material affect on our financial statements.

The following table presents the principal cash flows by year of maturity for our total debt obligations held at March 31, 2012 (in thousands):

	Expected Maturity Date by Fiscal Year
	2013		2014		2015		2016		2017		Thereafter		Total
Fixed rate debt	$	—	$	—	$	—	$	20,000	$	—	$	—	$	20,000
Variable rate debt	$	3,000	$	—	$	—	$	14,950	$	—	$	—	$	17,950

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of March 31, 2012 and 2011	F-2
Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2012, 2011, and 2010	F-3
Consolidated Statements of Stockholders’ Deficit for the years ended March 31, 2012, 2011, and 2010	F-4
Consolidated Statements of Cash Flows for the years ended March 31, 2012, 2011, and 2010	F-5
Notes to Consolidated Financial Statements	F-6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Valence Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Valence Technology, Inc. and subsidiaries (collectively, the “Company”) as of March 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for each of the three fiscal years in the period ended March 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2012 and 2011, and the results of its operations and comprehensive loss and its cash flows for each of the three fiscal years in the period ended March 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s recurring losses from operations, negative cash flows from operations and net stockholders’ capital deficiency raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 23, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

PMB HELIN DONOVAN, LLP

Austin, Texas

May 23, 2012

F-1

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)

	March 31,
	2012			2011
Assets
Current assets:
Cash and cash equivalents	$	1,428		$	2,915
Trade receivables, net of allowance of zero and $361 respectively		11,270			13,615
Inventory, net		12,718			12,491
Prepaid and other current assets		1,793			2,661
Total current assets		27,209			31,682

Property, plant and equipment, net		3,914			4,192
Other long-term assets		406			143
Total assets	$	31,529		$	36,017

Liabilities, Preferred Stock and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	6,659		$	9,150
Accrued expenses		4,728			6,063
Short-term debt, net of debt discount		2,984			10,686
Total current liabilities		14,371			25,899

Long-term interest payable to stockholder		33,322			30,350
Long-term debt to stockholder, net of debt discount		34,910			34,889
Other long-term liabilities		32			103

Commitments and contingencies

Preferred Stock
Redeemable convertible preferred stock, $0.001 par value, 10,000,000 shares authorized, 861 issued and outstanding at March 31, 2012 and 2011, liquidation value $8,610		8,610			8,610

Stockholders’ deficit:
Common stock, $0.001 par value, 200,000,000 shares authorized, 171,779,762 shares issued and 169,976,618 shares outstanding, respectively, as of March 31, 2012, and 156,762,353 shares issued and 154,959,209 shares outstanding, respectively, as of March 31, 2011		172			157
Additional paid-in capital		555,013			537,957
Treasury shares, 1,803,144 at cost		(5,164	)		(5,164	)
Accumulated deficit		(606,608	)		(593,702	)
Accumulated other comprehensive loss		(3,129	)		(3,082	)
Total stockholders’ deficit		(59,716	)		(63,834	)
Total liabilities, preferred stock, and stockholders’ deficit	$	31,529		$	36,017

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

F-2

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)

	Year ended March 31,
	2012			2011			2010
Revenue	$	44,381		$	45,882		$	16,080
Cost of sales		36,833			36,446			14,093
Gross margin		7,548			9,436			1,987
Operating expenses:
Research and product development		3,616			3,622			4,464
Sales and marketing		2,308			2,665			2,614
General and administrative		10,908			11,648			12,418
Asset impairment charge		314			502			301
Total operating expenses		17,146			18,437			19,797
Operating loss		(9,598	)		(9,001	)		(17,810	)
Foreign exchange gain		626			839			44
Interest and other income		402			15			30
Interest and other expense		(4,163	)		(4,538	)		(4,980	)
Casualty loss		—			—			(300	)
Net loss		(12,733	)		(12,685	)		(23,016	)
Dividends on preferred stock		173			172			172
Net loss available to common stockholders, basic and diluted	$	(12,906	)	$	(12,857	)	$	(23,188	)
Other comprehensive loss:
Net loss	$	(12,733	)	$	(12,685	)	$	(23,016	)
Change in foreign currency translation adjustments		(47	)		66			(12	)
Comprehensive loss	$	(12,780	)	$	(12,619	)	$	(23,028	)
Net loss per share available to common stockholders, basic and diluted	$	(0.08	)	$	(0.09	)	$	(0.18	)
Shares used in computing net loss per share available to common stockholders, basic and diluted		165,241			141,655			126,211

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

F-3

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(IN THOUSANDS)

	Common Stock				Treasury Stock					Additional					Accumulated			Total
	Number of Shares		Amount		Number of Shares		Amount			Paid-In Capital		Accumulated Deficit			Comprehensive Loss			Stockholders’ Deficit
Balance at March 31, 2009		125,043	$	125		1,803	$	(5,164	)	$	498,646	$	(557,657	)	$	(3,135	)	$	(67,185	)
Sale of stock to private investors		4,511		4		—		—			5,376		—			—			5,381
Sale of stock to a related party		2,342		2		—		—			3,498		—			—			3,500
Exercise of stock options		76		1		—		—			132		—			—			133
Dividends on preferred stock		—		—		—		—			—		(172	)		—			(172	)
Share based compensation		—		—		—		—			2,184		—			—			2,184
Issuance of warrants		—		—		—		—			73		—			—			73
Net loss		—		—		—		—			—		(23,016	)		—			(23,016	)
Change in translation adjustment		—		—		—		—			—		—			(12	)		(12	)
Balance at March 31, 2010		131,972	$	132		1,803	$	(5,164	)	$	509,909	$	(580,845	)	$	(3,147	)	$	(79,115	)
Sale of stock to private investors		11,860		12		—		—			15,104		—			—			15,115
Sale of stock to a related party		12,930		13		—		—			12,007		—			—			12,020
Dividends on preferred stock		—		—		—		—			—		(172	)		—			(172	)
Share based compensation		—		—		—		—			828		—			—			828
Issuance of warrants		—		—		—		—			110		—			—			110
Net loss		—		—		—		—			—		(12,685	)		—			(12,685	)
Change in translation adjustment		—		—		—		—			—		—			65			65
Balance at March 31, 2011		156,762	$	157		1,803	$	(5,164	)	$	537,957	$	(593,702	)	$	(3,082	)	$	(63,834	)
Sale of stock to private investors		11,065		10		—		—			12,301		—			—			12,311
Sale of stock to a related party		3,911		4		—		—			4,030		—			—			4,034
Exercise of stock options		42		1		—		—			32		—			—			33
Dividends on preferred stock		—		—		—		—			—		(173	)		—			(173	)
Share based compensation		—		—		—		—			674		—			—			674
Issuance of warrants		—		—		—		—			19		—			—			19
Net loss		—		—		—		—			—		(12,733	)		—			(12,733	)
Change in translation adjustment		—		—		—		—			—		—			(47	)		(47	)
Balance at March 31, 2012		171,780	$	172		1,803	$	(5,164	)	$	555,013	$	(606,608	)	$	(3,129	)	$	(59,716	)

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

F-4

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

	Year ended March 31,
	2012			2011			2010
Cash flows from operating activities:
Net loss	$	(12,733	)	$	(12,685	)	$	(23,016	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,059			1,060			1,155
Bad debt expense, net of recoveries		290			324			4
Accretion of debt discount and other		319			(126	)		490
Asset impairment charge		314			502			301
Casualty loss		—			—			300
Foreign exchange gain		(626	)		(839	)		(44	)
Share based compensation		681			828			2,185
Provision for obsolete inventory		1,227			1,876			908
Changes in operating assets and liabilities:
Trade receivables		2,055			(11,101	)		404
Inventory		(973	)		(8,560	)		3,640
Prepaid and other current assets		1,210			(1,011	)		596
Long-term assets		(174	)		(143	)		—
Accounts payable		(2,661	)		7,255			(8	)
Accrued expenses and long-term interest		1,343			4,652			3,467
Net cash used in operating activities		(8,669	)		(17,968	)		(9,618	)

Cash flows from investing activities:
Purchases of property, plant, and equipment		(1,245	)		(473	)		(231	)
Net cash used in investing activities		(1,245	)		(473	)		(231	)

Cash flows from financing activities:
Proceeds from short-term debt to stockholder		4,000			5,000			—
Proceeds from stock option exercises		33			—			132
Proceeds from issuance of common stock, net of issuance costs		12,311			22,134			8,881
Payment of short-term debt		(8,000	)		(9,000	)		—
Net cash provided by financing activities		8,344			18,134			9,013

Effect of foreign exchange rates on cash and cash equivalents		83			50			(1	)

Decrease in cash and cash equivalents		(1,487	)		(257	)		(837	)
Cash and cash equivalents, beginning of year		2,915			3,172			4,009
Cash and cash equivalents, end of year	$	1,428		$	2,915		$	3,172

Supplemental information:
Income taxes paid	$	120		$	—		$	—
Interest paid	$	413		$	1,166		$	1,377
Cancellation of debt from stockholder in exchange for common shares	$	4,034		$	5,020		$	—
Accrual of dividends in accrued expenses	$	173		$	172		$	172

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

F-5

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND BUSINESS STRATEGY:

Valence Technology, Inc. and subsidiaries (the "Company”) was founded in 1989 and has commercialized the industry’s first lithium phosphate technology. The Company develops, manufactures and sells advanced, high-energy power systems utilizing its proprietary phosphate-based lithium-ion technology for diverse applications, with special emphasis on fleet hybrid and electric vehicles, portable appliances and other industry and consumer applications. The Company’s mission is to promote the wide adoption of high-performance, safe, long cycle life, environmentally friendly, low-cost energy storage systems. To accomplish this mission and address the significant market opportunity the Company believes is available, the Company plans to utilize the numerous benefits of its latest energy storage technology, deep intellectual property portfolio and extensive experience of its management team.

The Company believes that the improved features and functionality of its latest U-Charge® lithium phosphate energy storage systems are well suited for electric vehicle (“EV”), plug-in hybrid electric vehicle (“PHEV”) and similar applications. U-Charge® lithium phosphate energy storage systems address the safety and limited life weaknesses of other lithium technologies while offering a solution that is competitive in cost and performance. The Company’s latest U-Charge® system builds upon these features and adds improvements in state of charge monitoring, cell and pack balancing, battery monitoring and diagnostics, and certain field reparability.

The Company’s business plan and strategy focus on the generation of revenue from product sales, while controlling costs through partnerships with contract manufacturers and internal manufacturing efforts through the Company’s two wholly owned subsidiaries in China. The Company expects to develop target markets through the sales of its latest U-Charge® system lithium phosphate energy storage systems and custom lithium phosphate energy storage systems based on programmable Command and Control Logic.

2. GOING CONCERN AND LIQUIDITY AND CAPITAL RESOURCES:

GOING CONCERN:

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred operating losses each year since its inception in 1989 and had an accumulated deficit of $607 million as of March 31, 2012. For the years ended March 31, 2012, 2011, and 2010, the Company sustained net losses available to common stockholders of $12.9 million, $12.9 million, and $23.2 million, respectively. These factors, among others, indicate that the Company may be unable to continue as a going concern for the next twelve months. The Company’s ability to continue as a going concern is contingent upon its ability to meet its working capital requirements. If the Company is unable to arrange for debt or equity financing on favorable terms or at all, the Company’s ability to continue as a going concern is uncertain. These financial statements do not give effect to any adjustments to the amounts and classifications of assets and liabilities which might be necessary should the Company be unable to continue as a going concern.

LIQUIDITY AND CAPITAL RESOURCES:

At March 31, 2012, the Company’s principal sources of liquidity were cash and cash equivalents of $1.4 million. The Company does not expect that its cash and cash equivalents will be sufficient to fund its operating and capital needs for the next twelve months following March 31, 2012, nor does the Company anticipate revenue during fiscal year 2013 will be sufficient to cover its operating expenses. Historically, the Company has relied upon management’s ability to periodically arrange for additional equity or debt financing to meet the Company’s liquidity requirements.

Unless the Company’s revenues are greater than management currently forecasts or there are other changes to the Company’s business plan, the Company will need to arrange for additional financing within the next three to six months to fund operating and capital needs. This financing could take the form of debt or equity. Given the Company’s historical operating results and the amount of existing debt, as well as other factors, the Company may not be able to arrange for debt or equity financing from third parties on favorable terms or at all.

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

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

USE OF ESTIMATES:

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenues and expenses for the period. The Company has made significant estimates in determining the amount of allowance for doubtful accounts, inventory valuation adjustments and inventory overhead absorption as discussed in Note 7, Inventory, of Notes to the Consolidated Financial Statements, warranty liabilities as discussed in Note 13, Commitments and Contingencies, of Notes to the Consolidated Financial Statements, and share based compensation as discussed in Note 15, Share Based Compensation, of Notes to the Consolidated Financial Statements. Actual results could differ from those estimates.

F-6

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company has the following subsidiaries:

Valence Technology Cayman Islands Inc., Valence Technology (Suzhou) Co., Ltd., and Valence Energy-Tech (Suzhou) Co., Ltd.

Intercompany balances and transactions are eliminated upon consolidation.

RECLASSIFICATIONS:

Where appropriate, the prior years’ financial statements have been reclassified to conform to current year presentation. For the consolidated statement of cash flows for the fiscal years ended March 31, 2011 and 2010, changes in the long-term debt interest accruals were reclassified from the Accretion of debt discount and other line item to the Accrued expenses and long term interest line item.

None of the changes impact the Company’s previously reported consolidated net revenue, loss from operations, net loss, net loss per share, or net cash used in operating activities.

CASH AND CASH EQUIVALENTS:

The Company considers all highly liquid investments that are readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates to be cash equivalents.

CONCENTRATION OF CREDIT RISK:

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily accounts receivable and cash and cash equivalents. The Company provides an allowance for doubtful accounts based upon its expected ability to collect accounts receivable. The Company makes estimates about the uncollectability of its accounts receivable. The Company specifically analyzes accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. The need to write off a receivable balance depends on the age, size and a determination of collectability of the receivable. Credit losses to date have been within the Company’s estimates.

Cash and cash equivalents are invested in deposits with a major financial institution. As of March 31, 2012, the Company had approximately $0.7 million, denominated in the Chinese Yuan, in banks registered in the People’s Republic of China, which are not insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses on its deposits of cash and cash equivalents. Management believes that the financial institution is financially sound and, accordingly, minimal credit risk exists.

INVENTORY:

FAIR VALUE:

Fair value is determined to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.

The Company follows a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The three values of the fair value hierarchy are the following:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

F-7

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – Inputs that are not based on observable market data.

Financial instruments that potentially subject the Company to an interest and credit risk consist of cash and cash equivalents, trade receivables, accounts payable and accrued expenses, the carrying values of which are a reasonable estimate of their fair values due to their short maturities. Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximates fair value.

PROPERTY, PLANT AND EQUIPMENT:

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives, generally three to five years. Leasehold improvements are amortized over the lesser of their estimated useful life or the remaining lease term.

Expenditures for renewals and betterments are capitalized; repairs and maintenance are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss thereon is reflected in operations.

IMPAIRMENT OF LONG-LIVED ASSETS:

The Company performs a review of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows that the assets are expected to generate. If long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair value and is recorded in the period the determination was made.

COMMON STOCK:

Common stock refers to the $0.001 par value capital stock as designated in the Company’s Certificate of Incorporation. Treasury stock is accounted for using the cost method. When treasury stock is issued, the value is computed and recorded using a weighted-average basis.

REVENUE RECOGNITION:

The Company generates revenues from sales of products including batteries and battery systems. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery or transfer of title and risk of loss has occurred, seller’s price to the buyer is fixed and determinable, and collection is reasonably assured. For shipments where the transfer of title and risk of loss does not occur until the customer has accepted the product, the Company relies upon third party shipper notifications and notices of acceptance from the customer to recognize revenue. For all shipments, the Company estimates a return rate percentage based upon historical experience. From time to time, the Company provides sales incentives in the form of rebates or other price adjustments; these are generally recorded as reductions to revenue on the latter of the date the related revenue is recognized or at the time the rebate or sales incentive is offered.

RESEARCH AND DEVELOPMENT:

Research and development costs are expensed as incurred.

WARRANTY:

The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its basic limited warranty and extended warranty programs. The warranty terms and conditions generally provide for replacement of defective products. Factors that affect the Company’s warranty liability include the number of units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy the Company’s warranty obligation. Each quarter, the Company re-evaluates its estimates to assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

SHIPPING AND HANDLING COSTS:

The Company recognizes as revenue amounts billed to customers related to shipping and handling with related expenses recorded as a component of cost of sales.

ADVERTISING COSTS:

Advertising costs are charged to expense as incurred. Advertising expenses for each of fiscal years 2012, 2011 and 2010 were less than $0.1 million.

F-8

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOREIGN CURRENCY:

The assets and liabilities of the Company’s foreign subsidiaries have been translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Results of operations and cash flows have been translated using the average exchange rate during the year. Resulting translation adjustments have been recorded as a separate component of stockholders’ deficit as accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in the consolidated statement of operations as they occur.

SHARE-BASED COMPENSATION:

The Company measures share-based compensation expense for all share-based awards granted based on the estimated fair value of those awards at grant-date. The fair values of stock option awards are estimated using a Black- Scholes valuation model. The compensation costs are recognized net of any estimated forfeitures on a straight-line basis over the employee requisite service period. Forfeiture rates are estimated at grant date based on historical experience and adjusted in subsequent periods for any differences in actual forfeitures from those estimates. See Note 15, Share Based Compensation, of Notes to the Consolidated Financial Statements for further discussion of share-based compensation.

COMPREHENSIVE INCOME/LOSS:

Comprehensive income/loss is the change in stockholder’s deficit from foreign currency translation gains and losses.

INCOME TAXES:

The Company accounts for income taxes in accordance with the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company has provided a full valuation allowance against its deferred tax assets because the realization of the related tax benefits is not considered more likely than not.

The Company accounts for uncertain tax positions in accordance with the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Pursuant to the authoritative guidance, the Company recognizes the tax benefit from an uncertain tax position only if it meets the “more likely than not” threshold that the position will be sustained upon examination by the taxing authority, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company includes interest and penalties related to uncertain tax positions, if any, as part of income tax expense within its consolidated statement of operations.

NET LOSS PER SHARE:

Net loss per share is computed by dividing the net loss by the weighted average shares of common stock outstanding during the periods. The dilutive effect of options and warrants to purchase common stock are excluded from the computation of diluted net loss per share, since their effect is antidilutive. The antidilutive instruments excluded from the diluted net loss per share computation were as follows at:

	March 31,
	2012		2011		2010
Shares reserved for conversion of Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock		3,628,634		3,628,634		3,628,634
Common stock options outstanding		6,194,884		6,283,313		5,545,652
Warrants to purchase common stock		215,000		215,000		115,000
Total		10,038,518		10,126,947		9,289,286

The number of shares listed above as reserved for conversion of Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock do not include shares related to accrued dividends that are convertible into shares of the Company’s stock at the election of the Company, subject to certain limitations. At March 31, 2012, up to approximately $1.1 million in accrued dividends would be convertible into up to 1,448,910 shares of common stock based on the closing sales price of $0.77 per share on March 31, 2012.

F-9

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS:

The Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its consolidated financial position or results of operations.

4. IMPAIRMENT CHARGE:

Impairment charges of approximately $0.3 million, $0.5 million, and $0.3 million were recorded during fiscal years 2012, 2011 and 2010, respectively. The fiscal year 2012 and 2010 impairment charges were the result of the Company's annual fixed asset inventory count and audit for idle or damaged assets in the Company's China production facility. In fiscal year 2011, the Company determined that fixed assets that were purchased for the expansion of production facilities in China were impaired, as the additional capacity provided by acquisition of these assets was determined to be unnecessary to meet expected demand. The fair value measurements used in the Company’s impairment analyses fall within Level 3 of the fair value hierarchy (inputs that are not based on observable market data), as they were based on the future expected cash flows that the assets were expected to generate.

5. CASUALTY LOSS:

In the second quarter of fiscal year 2010, the Company experienced a fire at an offsite warehouse in Suzhou, China, which contained certain fixed assets and inventory. Based upon initial estimates of the casualty loss and expected insurance recoveries from this incident, the Company recorded a casualty loss of $0.6 million in the quarter ended September 30, 2009, a receivable for the expected insurance recoveries of $3.5 million, a reduction of inventory and fixed assets of approximately $3.0 million, and related accrued liabilities for VAT taxes and expected clean up costs of approximately $1.0 million. The Company settled a claim with its insurance carrier during the fourth quarter of fiscal year 2010 for $3.2 million related to this fire, and recorded a $0.3 million reduction of the casualty loss previously recorded.

6. ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company provides an allowance for doubtful accounts based upon its expected ability to collect accounts receivable. The Company makes estimates about the uncollectability of its accounts receivable.

The allowance for doubtful accounts is as follows at (in thousands):

	March 31,
	2012			2011
Beginning balance	$	361		$	43
Add: reserves		2,714			361
Less: recoveries		(2,442	)		(43	)
Less: write-offs		(633	)		—
Ending balance	$	—		$	361

F-10

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INVENTORY:

Inventory consisted of the following at (in thousands):

	March 31,
	2012		2011
Raw materials	$	1,988	$	2,962
Work-in-process		2,988		6,282
Finished goods		7,742		3,247
Total Inventory	$	12,718	$	12,491

Included in inventory at March 31, 2012, and 2011, respectively, were valuation allowances of $2.1 million and $1.3 million, respectively, to reduce their carrying values to the lower of cost or market. Management has valued overhead absorption related to work in process based on estimates of completion at March 31, 2012 and 2011.

8. PREPAID AND OTHER CURRENT ASSETS:

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

	March 31,
	2012		2011
Other receivables	$	382	$	904
Deposits		833		733
Prepaid insurance		373		46
Other prepaid expenses		205		978
Total prepaid and other current assets	$	1,793	$	2,661

9. PROPERTY, PLANT AND EQUIPMENT:

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

	March 31,
	2012			2011
Leasehold improvements	$	1,457		$	992
Machinery and equipment		8,456			7,768
Office and computer equipment		2,433			2,324
Construction in progress		—			104
Property, plant, and equipment, gross		12,346			11,188
Less: accumulated depreciation and amortization		(7,255	)		(6,000	)
Less: impairment charges		(1,177	)		(996	)
Total property, plant, and equipment, net	$	3,914		$	4,192

Impairment charges of approximately $0.3 million, $0.5 million, and $0.3 million were recorded during fiscal years 2012, 2011, and 2010, respectively. The fiscal year 2012 and 2010 impairment charges were the result of the Company's annual fixed asset inventory count and audit for idle or damaged assets in its China production facility. The fiscal year 2011 impairment charge relates to fixed assets that were purchased for the expansion of the Company's production facilities in China. These production assets were deemed to be impaired since the additional capacity provided by these acquisition of these assets were determined not to be necessary to meet expected demand.

Depreciation expense was approximately $1.1 million, $1.1 million, and $1.2 million for the fiscal years end March 31, 2012, 2011, and 2010, respectively.

F-11

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. ACCRUED EXPENSES:

Accrued expenses consisted of the following (in thousands) at:

	March 31,
	2012		2011
Accrued compensation	$	686	$	1,217
Professional services		375		222
Warranty reserve		1,384		1,653
Inventory received, not invoiced		397		893
Accrued dividends on preferred stock		1,120		947
Other accrued expenses		766		1,131
Total accrued expenses	$	4,728	$	6,063

11. DEBT:

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

	March 31,
	2012			2011
Short term debt	$	3,000		$	11,000
Less: unaccreted debt discount		(16	)		(314	)
Short-term debt, net of debt discount	$	2,984		$	10,686

On July 13, 2005, the Company secured a $20.0 million loan (the “2005 Loan”) from SFT I, Inc., the full amount of which has been drawn down. The 2005 Loan is guaranteed by Carl E. Berg, Chairman of the Board of Directors of the Company. Interest is due monthly based on a floating interest rate equal to the greater of 6.75% or the sum of the LIBOR rate plus 4.0%. LIBOR was less than one percent at March 31, 2012, and the interest payable on the loan was at a rate of 6.75% at March 31, 2012. As of March 31, 2012, a total of $17.0 million in principal payments have been made on the 2005 Loan and the remaining principal balance was $3.0 million as of March 31, 2012.

In connection with the 2005 Loan, SFT I, Inc. and Berg & Berg Enterprises, LLC (“Berg & Berg”) each received warrants to purchase 600,000 shares of the Company’s common stock at a price of $2.74 per share, the closing price of the Company’s common stock on July 12, 2005. The fair value assigned to these warrants, totaling approximately $2.0 million, has been recorded as a discount on the debt and is being accreted as interest expense over the life of the loan. April 24, 2008, Berg & Berg exercised its warrants by purchasing 600,000 shares of the Company’s common stock for an aggregate purchase price of $1.6 million. In addition, SFT I, Inc. completed cashless exercises of its warrants on June 4, 2008 and June 27, 2008 and received a total of 230,767 common stock shares upon completion of the cashless exercises. Also, in connection with the 2005 Loan, the Company incurred a loan commitment fee and attorneys’ fees which, in addition to the interest rate cap agreement, have been recorded as a discount on the debt and will be accreted as interest expense over the life of the loan. The rate cap agreement terminated on August 10, 2008. Through March 31, 2012, a total of approximately $2.8 million has been accreted and included as interest expense.

The 2005 Loan has been amended several times since its origination, most recently on December 22, 2011, when the Company entered into an Amendment No. 4 to Loan and Security Agreement and Other Loan Documents (the “Amendment No. 4”) with iStar Tara LLC, a Delaware limited liability company (“iStar”), and Carl E. Berg (as amended to date, the “Original Loan Agreement”) among the Company, iStar and Mr. Berg. Amendment No. 4 extended the maturity date of the three remaining principal payments of $1 million each (due in December 2011, January 2012 and February 2012) such that $1.5 million was due on March 10, 2012 and the final $1.5 million was due on April 10, 2012 (“New Maturity Dates”). In March 2012, a third party individual purchased the loan from iStar, and extended the maturity date to June 30, 2012. The full amount of unpaid principal and interest is due and payable on June 30, 2012.

In connection with the 2005 Loan, the Company had previously issued to iStar two Warrants to Purchase Common Stock of Valence Technology, Inc. (the “Warrants”), pursuant to which iStar may purchase up to 100,000 shares of the Company’s common stock (the “Common Stock”), at an exercise price of $1.45 per share and up to 115,000 shares of the Company’s Common Stock at an exercise price of $1.00 per share on or before January 11, 2014 and March 30, 2013, respectively. Under the terms in Amendment No. 4, the exercise periods of the two warrants that iStar or its affiliates hold have each been extended for one year to January 11, 2015 and March 30, 2014, respectively.

The fair value assigned to these warrants, totaling approximately $0.1 million, has been recorded as a discount on the debt and will be accreted as interest expense over the remaining life of the loan. The 2011 Warrants were valued using the Black-Scholes valuation method using the assumptions of a life of 36 months, 100.5% volatility, and a risk-free rate of 1.0%.

12. NOTES PAYABLE TO STOCKHOLDER:

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

	March 31,
	2012			2011
2001 Loan	$	20,000		$	20,000
1998 Loan		14,950			14,950
Less: unaccreted debt discount		(40	)		(61	)
Long-term debt to stockholder, net of debt discount	$	34,910		$	34,889

F-12

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In October 2001, the Company entered into a loan agreement (“2001 Loan”) with Berg & Berg. Under the terms of the agreement, Berg & Berg agreed to advance the Company funds of up to $20.0 million between the date of the agreement and September 30, 2003. Interest on the 2001 Loan accrues at 8.0% per annum, payable from time to time. The maturity date of the 2001 Loan has been extended multiple times, most recently on July 27, 2011, at which time Berg & Berg agreed to further extend the maturity date for the loan principal and interest from September 30, 2012 to September 30, 2015. Interest payments are currently being deferred, and are recorded as long term interest payable to stockholder on the consolidated balance sheet.

In conjunction with the 2001 Loan, Berg & Berg received a warrant to purchase 1,402,743 shares of the Company’s common stock at the price of $3.208 per share. These warrants were exercised on September 30, 2008 when Berg & Berg surrendered a short term note payable of $4.5 million to the Company as exercise consideration. The fair value assigned to these warrants, totaling approximately $5.1 million, has been reflected as additional consideration for the debt financing, recorded as a discount on the debt and accreted as interest expense over the life of the loan. Through March 31, 2012, a total of $5.1 million has been accreted and included as interest expense. The amount charged to interest expense on the outstanding balance of the loan for each of the fiscal years 2012, 2011, and 2010 was $1.6 million. Interest payments on the loan are currently being deferred, and are recorded as long-term interest. The accrued interest amounts for the 2001 Loan were $16.5 million and $14.8 million as of March 31, 2012 and March 31, 2011, respectively.

In July 1998, the Company entered into an amended loan agreement (“1998 Loan”) with Berg & Berg that allows the Company to borrow, prepay and re-borrow up to $10.0 million principal under a promissory note on a revolving basis. In November 2000, the 1998 Loan agreement was amended to increase the maximum amount to $15.0 million. The 1998 Loan bears interest at one percent over lender’s borrowing rate (approximately 9.0 % at March 31, 2012). The maturity date of the 1998 Loan has been extended multiple times, most recently on July 27, 2011, at which time Berg & Berg agreed to further extend the maturity date for the loan principal and interest from September 30, 2012 to September 30, 2015. The amount charged to interest expense on the outstanding balance of the loan for each of the fiscal years 2012, 2011, and 2010 was $1.3 million. Interest payments are currently being deferred, and are recorded as long term interest payable to stockholder on the consolidated balance sheet. The accrued interest amounts for the 1998 Loan were $16.8 million and $15.5 million as of March 31, 2012 and March 31, 2011, respectively.

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

13. COMMITMENTS AND CONTINGENCIES:

LEASES:

The Company leases office space in the United States and Ireland to support its research and development activities, sales and marketing activities, and general and administrative activities. In addition, the Company leases manufacturing facilities in China to support its inventory production activities.

Total rent expense for the fiscal years 2012, 2011 and 2010, was approximately $0.7 million, $0.7 million and $0.8 million, respectively. Future minimum payments on operating leases for fiscal years following March 31, 2012 are (in thousands):

2013	$	815
2014		437
2015		102
2016		—
2017 and thereafter		—
Total minimum payments	$	1,354

At March 31, 2012, the Company's contractual obligations and payments due by period are as follows (in thousands):

			Payments Due by Fiscal Year
	Total		2013		2014		2015		2016		Thereafter
Contractual obligations:
Short-term debt, net of discount	$	2,984	$	2,984	$	—	$	—	$	—	$	—
Current portion of interest payable on short-term debt		17		17		—		—		—		—
Long-term debt to stockholder, net of discount		34,910		—		—		—		34,910		—
Long-term interest payable to stockholder		33,322		—		—		—		33,322		—
Operating lease obligations		1,354		815		437		102		—		—
Purchase obligations		14,863		14,863		—		—		—		—
Total	$	87,450	$	18,679	$	437	$	102	$	68,232	$	—

F-13

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

WARRANTIES:

The Company has established a warranty reserve in relation to the sale of U-Charge ® Power Systems, custom packs, and other large-format power systems. The total warranty liability was $1.4 million and $1.7 million as of March 31, 2012 and 2011, respectively.

Product warranty liabilities are as follows at (in thousands):

	March 31,
	2012			2011
Beginning balance	$	1,653		$	641
Less: claims		(463	)		(164	)
Add: accruals and (adjustments)		194			1,176
Ending balance	$	1,384		$	1,653

LITIGATION :

On January 31, 2007, the Company 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 the Company's Canadian Patent 2,395,115 (‘115 Patent). Subsequently, on April 2, 2007, the Company filed an amended claim alleging additional infringement of the Company's Canadian Patents 2,483,918 (‘918 Patent) and 2,466,366 (‘366 Patent). The trial took place in September 2010 and ended on October 1, 2010. On February 17, 2011, the Canadian Court ruled in the Company's favor, finding that Phostech infringed the Company's ‘115 Patent. The Appellate Court affirmed the Trial Court Decision. On October 7, 2011, the Company received a payment from Phostech of $532,388 for attorney's fees incurred by the Company during the litigation with Phostech, as determined by the Trial Court order dated September 7, 2011. This payment is reflected as a reduction of general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss during fiscal year 2012. During fiscal year 2012, the Company received an additional $336,864 from Phostech as a partial payment of damages. This payment was reflected in interest and other income in our condensed consolidated statement of operations and comprehensive loss during fiscal year 2012. The determination of damages suffered by Valence due to the infringement is ongoing and a hearing to determine those damages is expected in the first part of 2013.

On February 14, 2006, Hydro-Quebec filed an action against the Company in the United States District Court for the Western District of Texas (Hydro-Quebec v. Valence Technology, Civil Action No. A06CA111). An amended complaint was filed April 13, 2006. A stay imposed due to the USPTO reexaminations of the two patents was lifted following completion of the reexaminations. On January 8, 2009, Hydro-Quebec filed a second amended complaint, wherein Hydro-Quebec alleges that the cathode technology utilized in all of the Company's commercial products infringes U.S. Reexamined Patent Nos. 5,910,382 and 6,514,640 exclusively licensed to Hydro-Quebec. Hydro-Quebec seeks injunctive relief and monetary damages. The Company has filed a response denying the allegations in the second amended complaint. A Markman hearing to determine the scope of the asserted claims in the two reexamined patents was completed in January 2010. The Special Master submitted recommended findings from the Markman Hearing to the Court in August 2010 and a Court hearing was held on those findings in November 2010. On April 27, 2011, the Court issued its order adopting the report of the Special Master. The Court set a trial date for October 2012. The case is now in the discovery phase. The below-noted case filed by Hydro-Quebec in Dallas was transferred to the United States District Court for the Western District of Texas and has been incorporated into the pending case. On April 6, 2012, the Court ordered the Company to file a Motion for Summary Judgment in the combined case. The Motion was filed on April 26, 2012. The Company is finalizing additional pleadings relating to the motion and awaiting a decision by the Court.

On October 4, 2011, the Company was served with a complaint filed by Hydro-Quebec in the United States District Court for the Northern District of Texas (Hydro-Quebec v. A123 Systems, Inc., Valence Technology, Inc., Segway, Inc., and Texas Seg LLC., Civil Action No. 3:11-CV-1217 B). Hydro-Quebec seeks injunctive relief and monetary damages. The Complaint alleges that the Company is infringing five US Patents of the University of Texas. The five US Patents are all related to and continuations of the original UT Patent of Goodenough that has been asserted in the above-noted litigation in the Austin, Texas Federal District Court. The Company intends to vigorously defend against the allegations in the complaint and filed a Motion to Transfer the Case to the Western District of Texas in Austin, Texas. The case was transferred to the United States District Court for the Western District of Texas.

The Company is subject, from time to time, to various claims and litigation in the normal course of business. In the Company’s opinion, all pending legal matters will not have a material adverse impact on its consolidated financial statements. However, the outcome of any litigation is inherently uncertain and there can be no assurance as to the ultimate outcome of any such legal matters.

F-14

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

On November 30, 2004, the Company issued 431 shares of Series C-1 Convertible Preferred Stock, with a stated value of $4.3 million, and 430 shares of Series C-2 Convertible Preferred Stock, with a stated value of $4.3 million. When issued, the Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock were convertible into common stock at $4.00 per share. Each series carries a 2% annual dividend rate, payable quarterly in cash or shares of common stock, and were redeemable on December 15, 2005. The preferred shares are currently outstanding and subject to redemption or conversion at the holder’s discretion.

Pursuant to assignment agreements entered into between the Company and Berg & Berg Enterprises, LLC. on July 14, 2005 and December 14, 2005, Berg & Berg purchased all of the outstanding Series C-1 Convertible Preferred Stock and Series C-2 Convertible Preferred Stock from its original holder. Pursuant to the terms of the assignment agreement, Berg & Berg agreed that the failure of the Company to redeem the preferred stock on December 15, 2005 did not constitute a default under the certificate of designations and has waived the accrual of any default interest applicable in such circumstance. In exchange, the Company has agreed (i) that the Series C-1 Convertible Preferred Stock may be converted, at any time, into the Company’s common stock at the lower of $4.00 per share or the closing bid price of the Company’s common stock on December 13, 2005, which was $1.98 per share, and (ii) that the Series C-2 Convertible Preferred Stock may be converted, at any time, into the Company’s common stock at the lower of $4.00 per share or the closing bid price of the Company’s common stock on July 13, 2005, which was $2.96 per share. Berg & Berg has agreed to allow dividends to accrue on the preferred stock. However, because the shares are redeemable in cash, it is likely that any redemption would result in the Company selling common stock at the current market price to settle such redemption. At March 31, 2012, $1.1 million in preferred stock dividends had accrued.

15. SHARE BASED COMPENSATION:

In October 1997, the Board of Directors adopted the 1997 Non-Officer Stock Option Plan (the “1997 Plan”). The 1997 Plan terminated on October 3, 2007, and as of March 31, 2012, a total of 28,900 shares had been issued and are outstanding under this plan, and no shares were available to be granted under this plan.

In January 2000, the Board of Directors adopted the 2000 Stock Option Plan (the “2000 Plan”). The plan terminated in January 2010, and as of March 31, 2012, a total of 2,546,059 shares had been issued and are outstanding under this plan, and no shares were available to be granted under this plan.

On April 30, 2009, the Board of Directors adopted the Valence Technology, Inc. 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan is a broad-based incentive plan that provides for granting stock options, stock awards, performance awards, and other stock-based awards and substitute awards to employees, service providers and non-employee directors. Option awards granted under the 2009 Plan typically have required vesting periods between three and four years, and all options granted under this plan have 10 year contractual lives, unless otherwise specified. When awards are exercised, the Company settles the awards by issuing shares of the Company’s common stock. The 2009 Plan also has provisions for the granting of performance based awards, where certain milestones or conditions, as determined by the Company’s Compensation Committee or management, are required to be achieved or met in order for the option award to vest. The maximum number of shares of the Company’s common stock initially reserved for issuance under the 2009 Plan is 3,000,000 shares. The 2009 Plan contains an “evergreen” provision whereby the number of shares of common stock available for issuance under the 2009 Plan shall automatically increase on the first trading day of April of each fiscal year during the term of the 2009 Plan, beginning with the fiscal year ending March 31, 2011, by an amount (the “Annual Increase Amount”) equal to the lesser of (i) one percent (1%) of the total number of shares of common stock outstanding on the last trading day in March of the immediately preceding fiscal year, (ii) 1,500,000 shares and (iii) such lesser amount if set by the Board. On April 1, 2012, an additional 1.5 million shares were added to the 2009 Plan pursuant to the Annual Increase Amount. The maximum number of shares of common stock that may be issued under the 2009 Plan pursuant to the exercise of incentive stock options is the lesser of (A) 3,000,000 shares, increased on the first trading day of April of each fiscal year during the term of the 2009 Plan, beginning with the fiscal year ending March 31, 2011, by the Annual Increase Amount, and (B) 16,500,000 shares. The 2009 Plan also contains an automatic option grant program for the Company’s non-employee directors. Under the automatic option grant program, each individual who first becomes a non-employee board member at any time after the effective date of the 2009 Plan will receive an option grant to purchase 100,000 shares of common stock on the date such individual joins the board. In addition, on the date of each annual stockholders meeting held after the effective date of the 2009 Plan, each non-employee director who continues to serve as a non-employee director will automatically be granted an option to purchase 50,000 shares of common stock, provided such individual has served on the board for at least six months. All employees, service providers and directors of the Company and its affiliates are eligible to participate in the 2009 Plan. This plan will terminate on April 29, 2019. The 2009 Plan was approved by the Company’s stockholders at the annual meeting of stockholders on September 8, 2009.

In fiscal year 2012, the Compensation Committee granted 222,220 performance based restricted stock units ("RSUs") to a certain executive. This award has performance based vesting conditions, which are based on the Company obtaining certain quarterly revenue targets in order for pre-specified amounts of the stock units to vest. During fiscal year 2012, certain minimum performance targets for this award were not met, and a total of 153,845 RSUs expired. Other performance targets were met, and a total of 12,820 RSUs vested. As of March 31, 2012, a total of 68,375 RSUs remain outstanding and 55,555 RSUs are subject to vesting if the pre-specified performance targets are achieved in the upcoming quarter.

In fiscal year 2012, the Compensation Committee granted stock appreciation rights ("SARs") to certain China employees. These SARs vest in equal annual installments over a five year service period, and they entitle the recipient to receive a cash settlement equal to any increase in the Company's stock price, as quoted on the NASDAQ Capital Market. A total of 84,600 SARs were granted during fiscal year 2012, and 80,700 SARs remain outstanding as of March 31, 2012.

In fiscal year 2012, a total of 41,665 stock options were exercised for net proceeds of $32,498. In fiscal year 2012, the Company granted 1,296,470 stock options and RSUs under the 2009 Plan, and as of March 31, 2012, 2,119,925 total stock options and RSUs are outstanding and 2,338,410 shares remain available for grant under the 2009 Plan.

F-15

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Aggregate stock option activity is as follows (shares and aggregate intrinsic value in thousands):

	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Contractual Life		Aggregate Intrinsic Value
						(in years)
Outstanding at March 31, 2009		5,762		$	2.42
Granted		718			1.46
Exercised		(76	)		1.75
Canceled		(858	)		3.86
Outstanding at March 31, 2010		5,546			2.08
Granted		1,048			0.95
Exercised		—			—
Canceled		(311	)		4.33
Outstanding at March 31, 2011		6,283			1.78
Granted		1,074			1.45
Exercised		(42	)		0.78
Canceled		(1,189	)		2.12
Outstanding at March 31, 2012		6,126			1.66
Vested and expected to vest at March 31, 2012		5,758			1.69		5.9		*
Exercisable at March 31, 2012		4,560			1.79		5.2		*

* less than $0.1 million

The following table summarizes information about stock options outstanding at March 31, 2012 (shares in thousands):

					Options Outstanding						Options Exercisable
Range of Exercise Prices					Number Outstanding		Average Remaining Contractual Life		Weighted- Average Exercise Price		Number Exercisable		Weighted- Average Exercise Price
							(in years)
$	0.70	-	$	1.00		960		8.2	$	0.89		463	$	0.87
$	1.01	-	$	2.00		4,339		6.0		1.57		3,285		1.61
$	2.01	-	$	3.00		385		3.4		2.50		383		2.51
$	3.01	-	$	4.00		428		4.8		3.49		415		3.50
$	4.01	-	$	5.25		14		3.3		4.80		14		4.83
$	0.70	-	$	5.25		6,126		6.1	$	1.66		4,560	$	1.79

F-16

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Compensation expense for stock plans has been determined based on the fair value at the grant date for options granted in the current fiscal year.

Share-based compensation expenses included in total cost of sales and operating expenses for the years ended March 31, 2012, 2011, and 2010 are summarized as follows (in thousands):

	Year ended March 31,
	2012		2011		2010
Cost of sales	$	68		16		38
Research and development		84		149		633
Sales and marketing		110		82		154
General and administrative		419		581		1,359
Total share based compensation expense	$	681		828		2,184

The aggregate intrinsic value of options exercisable at March 31, 2012 is less than $0.1 million and 41,665 options were exercised during the fiscal year ended March 31, 2012. The aggregate intrinsic value of the options exercised in each of the fiscal years 2012 and 2011 was less than $0.1 million, and the aggregate intrinsic value of the options exercised in fiscal year 2010 was $0.3 million. As of March 31, 2012, the Company had a total of $0.8 million in unrecognized compensation costs related to share-based compensation that is expected to be recognized over a weighted average remaining service period of 2.1 years for non-vested options. The weighted-average grant-date fair value per share of the options granted during each of the fiscal years ended March 31, 2012, 2011 and 2010 was $1.05, $0.68, and $1.06, respectively. The fair value of each option grant is estimated at the date of grant using the Black-Scholes pricing model with the following weighted average assumptions for grants in fiscal years 2012, 2011 and 2010:

	Year ended March 31,
	2012			2011			2010
Average expected life	5.9 years			5.4 years			5.8 years
Average expected volatility		87.4	%		89.8	%		87.1	%
Weighted average risk-free interest rate		1.9	%		1.7	%		2.8	%
Dividend yield	None			None			None

16. SIGNIFICANT CUSTOMERS:

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

	Year ended March 31,
	2012			2011			2010
Segway, Inc.		21	%		24	%		25	%
Rubbermaid Medical Solutions		12			**			**
Howard Technology Solutions		12			**			**
PVI		12			**			**
Smith Electric Vehicles*		12			42			12

* Previous periods listed Tanfield PLC as a separate customer, but it is now included in Smith Electric Vehicles.

** less than 10%

Over the last two fiscal years, a limited number of the Company’s customers have accounted for a significant portion of accounts receivable as follows:

	Year ended March 31,
	2012			2011
Electric Vehicles International		34	%		—	%
Segway, Inc.		23			17
Howard Technology Solutions		12			**
PVI		11			**
Smith Electric Vehicles*		—			50

* Previous periods listed Tanfield PLC as a separate customer, but it is now included in Smith Electric Vehicles.

** less than 10%

F-17

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. INCOME TAXES:

Income taxes included in interest and other expense in the consolidated statement of operations consisted of the following (in thousands):

	Year ended March 31,
	2012		2011		2010
Current provision:	$
Federal		—		—		—
State		—		—		—
Foreign		55		80		—
Deferred provision
Federal		—		—		—
State		—		—		—
Foreign		—		—		—
Total Provision for income taxes	$	55	$	80	$	—

The provision for income taxes due to continuing operations differs from the amount computed by applying the federal statutory rate of 34% to the loss before income taxes as follows (in thousands):

	Year ended March 31,
	2012			2011			2010
Federal tax benefit at statutory rate	$	(4,329	)	$	(4,286	)	$	(7,825	)
Effect of foreign operations		(167	)		(1,573	)		1,918
State tax provision		(229	)		(270	)		2
Permanent items and other		2,685			105			(18	)
Stock compensation		196			140			152
Research and experimentation credit		(65	)		(37	)		(53	)
Change in tax treatment of Cayman subsidiary		—			(111,948	)		—
Expired net operating losses		2,185			45,769			4,575
Change in valuation allowance		(221	)		72,180			1,249
Tax provision	$	55		$	80		$	—

The components of the net deferred tax asset were as follows at (in thousands):

	March 31,
	2012			2011
Deferred tax assets:
Current deferred tax assets:
Accrued liabilities and other	$	1,079		$	1,022
Valuation allowance for current deferred tax assets		(1,075	)		(1,019	)
Net current deferred tax assets		4			3
Non-current deferred tax assets:
Stock compensation		1,369			1,324
Research and experimentation credit carryforwards		2,129			2,064
Deferred rent		24			35
Net operating loss carryforwards — federal and state		176,941			178,069
Net operating loss carryforwards — foreign		3,586			3,586
Impairment reserve		733			724
State tax credits		328			329
Accrued interest		6,195			5,109
Valuation allowance for non-current deferred tax assets		(190,699	)		(190,975	)
Net non-current deferred tax assets		606			265
Deferred tax liabilities:
Non-current deferred tax liabilities:
Depreciation and amortization		(610	)		(268	)
Total non-current deferred tax liability		(610	)		(268	)
Net current deferred tax asset (liability)	$	4		$	3
Net non-current deferred tax asset (liability)	$	(4	)	$	(3	)

F-18

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At March 31, 2012, the Company had federal net operating loss carryforwards available to reduce future taxable income of approximately $518 million. The valuation allowance decreased by approximately $0.2 million during the year ended March 31, 2012 primarily due to operating losses not benefited. A portion of the valuation allowance relates to tax benefits for stock option deductions included in the net operating loss carryforward, which when realized, will be allocated directly to contributed capital.

The federal carryforwards expire from 2012 to 2032, if not used before such time to offset future taxable income.

For federal tax purposes, the Company’s net operating loss carryforwards are subject to certain limitations on annual utilization because of changes in ownership, as defined by federal tax law. The Company also has foreign operating loss carryforwards available to reduce future foreign income of approximately $12.8 million.

The major jurisdictions in which the Company files income tax returns include the United States, China, and the United Kingdom. The Company’s income tax returns are not currently under examination by the Internal Revenue Service or other tax authorities. As of March 31, 2012, the earliest year that the Company was subject to examination was 2007. At March 31, 2012, 2011, and 2010, the Company had no material unrecognized tax benefits.

The tax years 2007 through 2011 remain open to examination by the major taxing jurisdictions to which the Company is subject.

18. EMPLOYEE BENEFIT PLAN:

Valence has a 401(k) plan as allowed under Section 401(k) of the Internal Revenue Code. The 401(k) Plan provides for the tax deferral of compensation by all eligible employees. All U.S. employees meeting certain minimum age and service requirements are eligible to participate under the 401(k) Plan. Under the 401(k) Plan, participants may voluntarily defer up to 25% of their paid compensation, subject to specified annual limitations. The 401(k) Plan does not provide for contributions by the Company.

19. RELATED PARTY TRANSACTIONS:

During fiscal year 2012, the Company recognized $4.1 million in revenue from EVI, a customer affiliated with Carl Berg, the Company's largest shareholder and Chairman of the Board of Directors. As of March 31, 2012, EVI has an accounts receivable balance of $3.8 million.

On December 22, 2011, the Company entered into an Amendment No. 4 with iStar and Carl Berg to amend the Original Loan Agreement among the Company, iStar and Mr. Berg. Amendment No. 4 extended the maturity date of the three remaining principal payments of $1 million each (due in December 2011, January 2012 and February 2012) such that $1.5 million was due on March 10, 2012 and the final $1.5 million was due on April 10, 2012. The remainder of the principal and any other outstanding obligations under the Loan were payable in full on the New Maturity Dates. In March 2012, a third party individual purchased the loan from iStar, and extended the maturity date to June 30, 2012. The full amount of unpaid principal and interest is due and payable on June 30, 2012.

In connection with the Loan, the Company had previously issued to iStar two Warrants pursuant to which iStar may purchase up to 100,000 shares of the Company’s Common Stock, at an exercise price of $1.45 per share and up to 115,000 shares of the Company’s Common Stock at an exercise price of $1.00 per share on or before January 11, 2014 and March 30, 2013, respectively. Under the terms in Amendment No. 4, the exercise periods of the two warrants that iStar or its affiliates hold have each been extended for one year to January 11, 2015 and March 30, 2014, respectively.

On October 25, 2011, Berg & Berg loaned $2.0 million to the Company in exchange for a promissory note issued by the Company. The promissory note was payable on January 15, 2012, and bore interest at 3.5% per annum. On January 13, 2012, that loan, plus accrued interest of $15,726 was surrendered by Berg & Berg in exchange for 2,078,068 shares of the Company’s common stock.

On May 25, 2011, Berg & Berg loaned $2.0 million to the Company. In connection with the loan, the Company executed a promissory note in favor of Berg & Berg. The promissory note was payable on August 15, 2011 and bore interest at a rate of 3.5% per annum. On August 15, 2011, that loan, plus accrued interest of $15,917 was surrendered by Berg & Berg in exchange for 1,832,653 shares of the Company’s common stock.

F-19

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On January 11, 2011, the Company, entered into an Amendment No. 3 to Loan and Security Agreement and Other Loan Documents (the “Amendment”) with iStar, and Carl E. Berg, to amend the Original Loan Agreement among the Company, iStar and Mr. Berg. The Amendment extended the maturity date of the Loan from February 13, 2011 to March 10, 2012 (the “New Maturity Date”). The Company was obligated continue to make monthly interest payments to iStar, as set forth in the Original Loan Agreement; provided that the Company was also obligated to continue to make monthly principal payments equal to $1,000,000, commencing with the monthly principal payment scheduled for February 2011. The remainder of the principal and any other outstanding obligations under the Loan were payable in full on the New Maturity Date. Additionally, in connection with the Amendment, the Company issued to iStar a Warrant to Purchase Common Stock of Valence Technology, Inc., pursuant to which iStar may purchase up to 100,000 shares of the Company’s common stock at an exercise price of $1.45 per share on or before January 11, 2014. Additionally, in connection with the Amendment, the Company paid iStar an extension fee of $260,000 upon the execution of the Amendment.

On December 3, 2010, Berg & Berg purchased 3,759,789 shares of the Company’s common stock at a price per share of $1.20, the closing bid price of the Company’s common stock on December 2, 2010. The aggregate purchase price for the shares was $4,511,747. Payment of the purchase price consisted of $2,000,000 in cash and surrender of the promissory note issued on October 15, 2010 to Berg and Berg, under which $2,500,000 in principal and $11,747 in accrued interest was outstanding.

On October 26, 2010, the Company’s Board of Directors authorized the Company to engage in financing transactions (including either loans or the sale of shares of its common stock) with Berg & Berg, Carl E. Berg, or their affiliates from time to time in an aggregate amount of up to $10.0 million when needed by the Company, and as may be mutually agreed. As of the date of this report, a total of $6.0 million of this authorization has been utilized, and $4.0 million remains available for use.

On October 15, 2010, Berg & Berg loaned $2.5 million to the Company. In connection with the loan, the Company executed a promissory note in favor of Berg & Berg. The promissory note was payable on February 15, 2011, and bears interest at a rate of 3.5% per annum. On December 23, 2010, Berg & Berg surrendered the loan and paid an additional $2.0 million in cash in exchange for 3,759,789 shares of the Company’s common stock at a price per share of $1.20.

On September 28, 2010, Berg & Berg purchased 1,923,077 shares of the Company’s common stock at a price per share of $1.04, the closing bid price of the Company’s common stock on the purchase date. The aggregate purchase price for the shares was $2.0 million, which was paid in cash.

On August 26, 2010, Berg & Berg purchased 7,247,882 shares of the Company’s common stock at a price per share of $0.76, the closing bid price of the Company’s common stock on the purchase date. The aggregate purchase price for the shares was approximately $5.5 million. Payment of the purchase price consisted of $3.0 million in cash and surrender of the promissory note issued on July 23, 2010 to Berg and Berg, under which approximately $2.5 million in principal and accrued interest was outstanding.

On June 8, 2010, the Company established a letter of credit with Silicon Valley Bank in the amount of $1.1 million for the purpose of purchasing inventory materials from a certain supplier. A condition of this letter of credit was that the Company maintain an encumbered bank account for the full amount of the letter of credit. This letter of credit was used to pay the Company’s supplier as they delivered materials to the Company. The letter of credit was drawn down in full in August 2010. On September 2, 2010, in lieu of the requirement for a second letter of credit by the supplier, the Company's chairman and principal shareholder, Carl Berg, gave a personal guaranty to the supplier in the amount of $2.5 million.

On July 27, 2010, the Company’s Board of Directors authorized the Company to engage in financing transactions (including either loans or the sale of shares) with Berg & Berg, Carl E. Berg, or their affiliates from time to time in an aggregate amount of up to $10.0 million when needed by the Company, and as may be mutually agreed. The total amount of $10.0 million has been fully utilized by the Company as of the date of this report.

On July 23, 2010, Berg & Berg loaned $2.5 million to the Company. In connection with the loan, the Company executed a promissory note (the “Promissory Note”) in favor of Berg & Berg. The Promissory Note was payable on November 15, 2010, and on August 26, 2010, Berg & Berg surrendered the promissory note and paid an additional $3.0 million in cash in exchange for 7,247,882 shares of the Company’s common stock at a price per share of $0.76.

On February 22, 2010, Berg & Berg purchased 1,086,957 shares of common stock for cash at a price per share of $0.92 for an aggregate purchase price of $1.0 million. The purchase price per share equaled the closing bid price of the Company’s common stock as of February 22, 2010.

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

F-20

VALENCE TECHNOLOGY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. SEGMENT AND GEOGRAPHIC INFORMATION:

The Company’s chief operating decision makers are its Chairman and Chief Executive Officer, who review operating results to make decisions about resource allocation and to assess performance. The Company’s chief operating decision makers view results of operations as a single operating segment which is the development and marketing of the Company’s battery technology. The Company’s Chairman and Chief Executive Officer have organized the Company functionally to develop, market, and manufacture battery systems. The Company conducts its business primarily in three geographic regions.

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

	March 31,
	2012		2011
United States	$	256	$	301
Asia		3,645		3,885
Other		13		6
Total	$	3,914	$	4,192

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

	Year Ended March 31,
	2012		2011		2010
United States	$	33,610	$	38,885	$	10,548
Europe		10,342		6,317		3,020
Other		429		680		2,512
Total	$	44,381	$	45,882	$	16,080

21. QUARTERLY FINANCIAL DATA (UNAUDITED):

The following tables present selected unaudited consolidated statement of operation and balance sheet information for each of the quarters in the years ended March 31, 2012 and 2011 (in thousands, except per share data):

	Fiscal Year Ended March 31, 2012,
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Fiscal Year
Revenue	$	14,085		$	8,463		$	8,505		$	13,328		$	44,381
Gross margin		2,849			1,758			673			2,268			7,548
Operating loss		(2,249	)		(3,762	)		(1,643	)		(1,944	)		(9,598	)
Net loss available to common stockholders		(3,134	)		(4,606	)		(2,460	)		(2,706	)		(12,906	)
Basic and diluted EPS (1)	$	(0.02	)	$	(0.03	)	$	(0.01	)	$	(0.02	)	$	(0.08	)

	Fiscal Year Ended March 31, 2011,
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Fiscal Year
Revenue	$	5,572		$	12,651		$	13,754		$	13,905		$	45,882
Gross margin		925			2,783			2,799			2,929			9,436
Operating loss		(3,529	)		(2,731	)		(1,220	)		(1,521	)		(9,001	)
Net loss available to common stockholders		(4,654	)		(3,624	)		(2,044	)		(2,535	)		(12,857	)
Basic and diluted EPS (1)	$	(0.04	)	$	(0.03	)	$	(0.01	)	$	(0.01	)	$	(0.09	)

(1) The sum of Basic and Diluted EPS for the four quarters may differ from the annual EPS due to the required method of computing weighted average number of shares in the respective periods.

22. SUBSEQUENT EVENTS:

None.

F-21

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation and Conclusion of Disclosure Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e), as amended) as of March 31, 2012.

Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this Report were effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management’s assessment of the effectiveness of our disclosure controls and procedures is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

Management’s Report on Internal Controls

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f), as amended). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of March 31, 2012 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

The effectiveness of our internal control over financial reporting as of March 31, 2012 has been audited by PMB Helin Donovan, LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2012, there was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations over Internal Controls

Our system of controls is designed to provide reasonable, not absolute, assurance regarding the reliability and integrity of accounting and financial reporting. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. These inherent limitations include the following:

●

Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes.

●

Controls can be circumvented by individuals, acting alone or in collusion with each other, or by management override.

●

The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

●

Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures.

●

The design of a control system must reflect the fact that resources are constrained, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders of Valence Technology, Inc.:

We have audited the internal control over financial reporting of Valence Technology, Inc. and its subsidiaries (collectively, the "Company”) as of March 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended March 31, 2012, and our report dated May 23, 2012 expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph concerning substantial doubt about the Company's ability to continue as a going concern.

PMB Helin Donovan, LLP

Austin, Texas

May 23, 2012

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference to our definitive proxy statement for our 2012 Annual Meeting of Stockholders, which will be filed no later than 120 days after the end of the fiscal year ended March 31, 2012.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain information regarding related party transactions may be found in Note 19, Related Party Transactions, of Notes to the Consolidated Financial Statements, pursuant to Financial Reporting Release No. 61, “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this report:

(1) Financial Statements:

The following consolidated financial statements of Valence Technology, Inc. and Subsidiaries contained under Item 8 of this Annual Report on Form 10-K are incorporated herein by reference:

Consolidated Balance Sheets as of March 31, 2012 and 2011, Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2012, 2011, and 2010, Consolidated Statements of Stockholders’ Deficit for the years ended March 31, 2012, 2011, and 2010, and Consolidated Statements of Cash Flows for the years ended March 31, 2012, 2011, and 2010.

(2) Financial Statement Schedules:

All financial statement schedules have been omitted because they are not applicable or are not required, or because the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

(3) Exhibits:

EXHIBIT INDEX

The following exhibits are included as part of this filing and incorporated herein by this reference:

Number	Description of Exhibit	Method of Filing

3.1	Second Restated Certificate of Incorporation of the Registrant	Incorporated by reference to the exhibit so described in the Registrant’s Form S-1 Registration Statement (Registration No. 33-46765), as amended, filed with the Securities and Exchange Commission on March 27, 1992.

3.2	Certificate of Amendment to the Second Restated Certificate of Incorporation of the Registrant as filed with the Secretary of State of the State of Delaware on June 14, 2001	Incorporated by reference to the exhibit so described in the Registrant’s Schedule 14A filed with the Securities and Exchange Commission on January 28, 2000.

3.3	Certificate of Amendment to the Second Restated Certificate of Incorporation of the Registrant as filed with the Secretary of State of the State of Delaware on November 5, 2004	Incorporated by reference to the exhibit so described in the Registrant’s Form S-3 Registration Statement (File No. 333-171663) filed with the Securities and Exchange Commission on January 12, 2011.

3.4	Fourth Amended and Restated Bylaws of the Registrant, as currently in effect	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K dated January 18, 2008, filed with the Securities and Exchange Commission on January 22, 2008.

4.1	Specimen Common Stock Certificate of the Registrant	Incorporated by reference to the exhibit so described in the Registrant’s Form S-1 Registration Statement (Registration No. 33-46765), as amended, filed with the Securities and Exchange Commission on March 27, 1992.

4.2	Certificate of Designations, Preferences and Rights of Series C-1 Convertible Preferred Stock of the Registrant	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K dated November 30, 2004, filed with the Securities and Exchange Commission on December 1, 2004.

4.3	Certificate of Designations, Preferences and Rights of Series C-2 Convertible Preferred Stock of the Registrant	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K dated November 30, 2004, filed with the Securities and Exchange Commission on December 1, 2004.

4.4	Warrant to Purchase Common Stock, issued March 30, 2010 to iStar Tara LLC	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated April 5, 2010, filed with the Securities and Exchange Commission on April 5, 2010.

4.5	Warrant to Purchase Common Stock, issued January 11, 2011 to iStar Tara LLC	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated January 11, 2011, filed with the Securities and Exchange Commission on January 12, 2011.

4.6	First Amendment to Warrant to Purchase Common Stock, issued March 30, 2010 to iStar Tara LLC, dated December 9, 2011	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated December 22, 2011, filed with the Securities and Exchange Commission on December 23, 2011.

4.7	First Amendment to Warrant to Purchase Common Stock, issued January 11, 2011 to iStar Tara LLC, dated December 9, 2011	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated December 22, 2011, filed with the Securities and Exchange Commission on December 23, 2011.

Number		Description of Exhibit	Method of Filing

10.1		Loan Agreement between the Registrant and Baccarat Electronics, Inc., dated July 17, 1990	Incorporated by reference to the exhibit so described in the Registrant’s Form S-1 Registration Statement (Registration No. 33-46765), as amended, filed with the Securities and Exchange Commission on March 27, 1992.

10.2		Amendment No. 1 to Loan Agreement between the Registrant and Baccarat Electronics, Inc., dated March 15, 1991 (subsequently transferred to Berg & Berg Enterprises, LLC)	Incorporated by reference to the exhibit so described in the Registrant’s Form S-1 Registration Statement (Registration No. 33-46765), as amended, filed with the Securities and Exchange Commission on March 27, 1992.

10.3		Amendment No. 2 to Loan Agreement between the Registrant and Baccarat Electronics, Inc., dated March 24, 1992 (subsequently transferred to Berg & Berg Enterprises, LLC)	Incorporated by reference to the exhibit so described in the Registrant’s Form S-1 Registration Statement (Registration No. 33-46765), as amended, filed with the Securities and Exchange Commission on March 27, 1992.

10.4		Amendment No. 3 to Loan Agreement between the Registrant and Baccarat Electronics, Inc., dated August 17, 1992 (subsequently transferred to Berg & Berg Enterprises, LLC)	Incorporated by reference to the exhibit so described in the Registrant’s Form S-1 Registration Statement (Registration No. 33-46765), as amended, filed with the Securities and Exchange Commission on March 27, 1992.

10.5		Amendment No. 4 to Loan Agreement between the Registrant and Baccarat Electronics, Inc., dated September 1, 1997 (subsequently transferred to Berg & Berg Enterprises, LLC)	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2003, filed with the Securities and Exchange Commission on June 30, 2003.

10.6	*	1996 Non-Employee Directors’ Stock Option Plan as amended on October 3, 1997	Incorporated by reference to the exhibit so described in the Registrant’s Registration Statement on Form S-8 (File No 333-43203) filed with the Securities and Exchange Commission on December 24, 1997.

10.7	*	Notice of Grant of Stock Option and Stock Option Agreement under 1996 Stock Option Plan	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed with the Securities and Exchange Commission on May 26, 2011.

10.8	*	1997 Non-Officer Stock Option Plan	Incorporated by reference to the exhibit so described in the Registrant’s Registration Statement on Form S-8 (File No. 333-67693) filed with the Securities and Exchange Commission on November 20, 1998.

10.9		Amendment No. 5 to Loan Agreement between the Registrant and Baccarat Electronics, Inc., dated July 17, 1998 (subsequently transferred to Berg & Berg Enterprises, LLC)	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K dated July 27, 1998, filed with the Securities and Exchange Commission on August 4, 1998.

10.10	*	Amended and Restated 2000 Stock Option Plan	Incorporated by reference to the exhibit so described in the Registrant’s Registration Statement on Form S-8 (File No. 333-101708) filed with the Securities and Exchange Commission on December 6, 2002.

10.11	*	Notice of Grant of Stock Option and Stock Option Agreement under 2000 Stock Option Plan	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed with the Securities and Exchange Commission on May 26, 2011.

Number	Description of Exhibit	Method of Filing

10.12	Amendment No. 6 to Loan Agreement between the Registrant and Baccarat Electronics, Inc., dated November 27, 2000 (subsequently transferred to Berg & Berg Enterprises LLC)	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2003, filed with the Securities and Exchange Commission on June 30, 2003.

10.13	Second Amended Promissory Note dated November 27, 2000 issued by the Registrant to Baccarat Electronics, Inc. (subsequently transferred to Berg & Berg Enterprises, LLC)	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2002, filed with the Securities and Exchange Commission on July 1, 2002.

10.14	Registration Rights Agreement with West Coast Venture Capital, Inc. (the 1981 Kara Ann Berg Trust) dated January 13, 2001	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001, filed with the Securities and Exchange Commission on July 2, 2001.

10.15	Amendment No. 7 to Original Loan Agreement between the Registrant and Berg & Berg Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated October 10, 2001	Incorporated by reference to the exhibit so described in the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2001, filed with the Securities and Exchange Commission on February 19, 2002.

10.16	Amendment No. 8 to Original Loan Agreement and Amendment to Second Amended Promissory Note between the Registrant and Berg & Berg Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated February 11, 2002	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2002, filed with the Securities and Exchange Commission on July 1, 2002.

10.17	Loan Agreement dated October 5, 2001 between the Registrant and Berg & Berg Enterprises, LLC	Incorporated by reference to the exhibit so described in the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2001, filed with the Securities and Exchange Commission on February 19, 2002.

10.18	Security Agreement dated October 5, 2001 between the Registrant and Berg & Berg Enterprises, LLC	Incorporated by reference to the exhibit so described in the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2001, filed with the Securities and Exchange Commission on February 19, 2002.

10.19	Promissory Note dated October 5, 2001 issued by the Registrant to Berg & Berg Enterprises, LLC	Incorporated by reference to the exhibit so described in the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2001, filed with the Securities and Exchange Commission on February 19, 2002.

10.20	Amendment to Loan Agreements with Berg & Berg Enterprises, LLC dated November 8, 2002 (Amendment No. 1 to October 5, 2001 Loan Agreement and Amendment No. 9 to 1990 Baccarat Loan Agreement)	Incorporated by reference to the exhibit so described in the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002, filed with the Securities and Exchange Commission on November 14, 2002.

10.21	Amendment to Loan Agreements with Berg & Berg Enterprises, LLC dated October 21, 2004 (Amendment No. 2 to October 5, 2001 Loan Agreement and Amendment No. 10 to 1990 Baccarat Loan Agreement)	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated November 3, 2004, filed with the Securities and Exchange Commission on November 5, 2004.

10.22	Amendment to Loan Agreements with Berg and Berg Enterprises, LLC dated July 1, 2005 (Amendment No. 3 to October 5, 2001 Loan Agreement and Amendment No. 11 to 1990 Baccarat Loan Agreement)	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated July 1, 2005, filed with the Securities and Exchange Commission on July 6, 2005.

Number		Description of Exhibit	Method of Filing

10.23		Loan Agreement dated July 13, 2005, by and between the Registrant and SFT I, Inc.	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange Commission on July 15, 2005.

10.24		Registration Rights Agreement dated July 13, 2005 by and between the Registrant and SFT I, Inc.	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange Commission on July 15, 2005.

10.25		Amendment to Loan Agreements with Berg and Berg Enterprises, LLC dated July 13, 2005 (Amendment No. 4 to October 5, 2001 Loan Agreement and Amendment No. 12 to 1990 Baccarat Loan Agreement)	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange Commission on July 15, 2005.

10.26		Assignment Agreement, dated July 14, 2005, by and between the Registrant and Berg & Berg Enterprises, LLC	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange Commission on July 15, 2005.

10.27		Assignment Agreement, dated December 14, 2005, by and between the Registrant and Berg & Berg Enterprises, LLC	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated December 14, 2005, filed with the Securities and Exchange Commission on December 16, 2005.

10.28		Letter Agreement, effective March 13, 2007, by and between the Registrant and Robert L. Kanode	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated March 13, 2007, filed with the Securities and Exchange Commission on March 14, 2007.

10.29	*	FY 2011 Incentive Compensation and Stock Option Incentive Awards (Robert L. Kanode)	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed with the Securities and Exchange Commission on May 26, 2011.

10.30		Supply Agreement dated February 6, 2008 by and between The Tanfield Group PLC and Valence Technology, Inc (portions of this contract have been omitted pursuant to a request for confidential treatment)	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated February 6, 2008, filed with the Securities and Exchange Commission on February 12, 2008.

10.31		At Market Issuance Sales Agreement, dated February 22, 2008, by and between the Registrant and Wm Smith & Co.	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated February 22, 2008, filed with the Securities and Exchange Commission on February 22, 2008.

10.32		Amendment to Loan Agreements with Berg and Berg Enterprises, LLC dated June 12, 2008 (Amendment No. 5 to October 5, 2001 Loan Agreement and Amendment No. 13 to 1990 Baccarat Loan Agreement)	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated June 12, 2008, filed with the Securities and Exchange Commission on June 16, 2008.

10.33		Employment Letter Agreement, dated October 1, 2008, by and between Valence Technology Inc., and Koon Cheng Lim	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated November 4, 2008, filed with the Securities and Exchange Commission on November 4, 2008.

10.34	*	2009 Equity Incentive Plan	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated May 6, 2009, filed with the Securities and Exchange Commission on May 6, 2009.

Number		Description of Exhibit	Method of Filing

10.35	*	Notice of Grant of Stock Option and Stock Option Agreement under 2009 Equity Incentive Plan	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-Kfor the fiscal year ended March 31, 2011, filed with the Securities and Exchange Commission on May 26, 2011.

10.36	*	Notice of Grant of Non-Employee Director Automatic Stock Option and Automatic Stock Option Agreement under 2009 Equity Incentive Plan	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed with the Securities and Exchange Commission on May 26, 2011.

10.37	*	Notice of Grant of Restricted Stock and Restricted Stock Issuance Agreement under 2009 Equity Incentive Plan	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed with the Securities and Exchange Commission on May 26, 2011.

10.38	*	Addendum to Stock Option Agreement regarding Involuntary Termination Following a Change of Control under 2009 Equity Incentive Plan	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed with the Securities and Exchange Commission on May 26, 2011.

10.39	*	Addendum to Restricted Stock Issuance Agreement regarding Involuntary Termination Following a Change of Control under 2009 Equity Incentive Plan	Incorporated by reference to the exhibit so described in the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed with the Securities and Exchange Commission on May 26, 2011.

10.40		Form of Indemnification Agreement entered into between the Registrant and its Directors and Officers	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated May 6, 2009, filed with the Securities and Exchange Commission on May 6, 2009.

10.41		Amendment No. 1 to At Market Issuance Sales Agreement, dated July 2, 2009, by and between the Registrant and Wm Smith & Co.	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated July 6, 2009, filed with the Securities and Exchange Commission on July 6, 2009.

10.42		(Omnibus) Amendment No. 14 to Loan Agreement dated July 17, 1990 between the Registrant and Baccarat Electronics, Inc. (subsequently transferred to Berg & Berg Enterprises, LLC) and Amendment No. 6 to Loan Agreement dated October 5, 2001 between the Registrant and Berg & Berg Enterprises, LLC, each dated as of October 13, 2009	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated October 13, 2009, filed with the Securities and Exchange Commission on October 14, 2009.

10.43		Employment Letter Agreement by and between the Registrant and Randall J. Adleman	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, effective March 1, 2010, filed with the Securities and Exchange Commission on February 17, 2010.

10.44		Letter Agreement, dated February 22, 2010, by and between the Registrant and Berg & Berg Enterprises, LLC	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated February 24, 2010, filed with the Securities and Exchange Commission on February 24, 2010.

10.45		Amendment No. 2 to Loan and Security Agreement and Other Loan Documents dated March 30, 2010 by and among the Registrant, Carl Berg and iStar Tara LLC, successor in interest to SFT I, Inc.	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated April 5, 2010, filed with the Securities and Exchange Commission on April 5, 2010.

10.46		Letter Agreement, dated August 26, 2010, by and between the Registrant and Berg & Berg Enterprises, LLC	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated August 26, 2010, filed with the Securities and Exchange Commission on August 30, 2010.

Number		Description of Exhibit	Method of Filing

10.47		Letter Agreement, dated September 28, 2010, by and between the Registrant and Berg & Berg Enterprises, LLC	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated September 28, 2010, filed with the Securities and Exchange Commission on September 30, 2010.

10.48		Letter Agreement, dated December 3, 2010, by and between the Registrant and Berg & Berg Enterprises, LLC	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated December 3, 2010, filed with the Securities and Exchange Commission on December 6, 2010.

10.49		Amendment No. 2 to At Market Issuance Sales Agreement, dated December 30, 2010, by and between the Registrant and Wm Smith & Co.	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated December 30, 2010, filed with the Securities and Exchange Commission on December 30, 2010.

10.50		Amendment No. 3 to Loan and Security Agreement and Other Loan Documents dated January 11, 2011 by and among the Registrant, Carl Berg and iStar Tara LLC, successor in interest to SFT I, Inc.	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated January 11, 2011, filed with the Securities and Exchange Commission on January 12, 2011.

10.51		Amendment No. 3 to At Market Issuance Sales Agreement, dated January 22, 2011, by and between the Registrant and Wm Smith & Co.	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated January 22, 2011, filed with the Securities and Exchange Commission on January 24, 2011.

10.52		Amendment No. 4 to Loan and Security Agreement and Other Loan Documents dated December 22, 2011 by and among the Registrant, Carl Berg and iStar Tara LLC, successor in interest to SFT I, Inc.	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated December 22, 2011, filed with the Securities and Exchange Commission on December 23, 2011.

10.53		Amendment No. 4 to At Market Issuance Sales Agreement, dated June 17, 2011, by and between the Registrant and Wm Smith & Co.	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated June 17, 2011, filed with the Securities and Exchange Commission on June 20, 2011.

10.54		(Omnibus) Amendment No. 15 to Loan Agreement dated July 17, 1990 between the Registrant and Baccarat Electronics, Inc. (subsequently transferred to Berg & Berg Enterprises, LLC) and Amendment No. 7 to Loan Agreement dated October 5, 2001 between the Registrant and Berg & Berg Enterprises, LLC, each dated as of July 27, 2011	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated July 27, 2011, filed with the Securities and Exchange Commission on July 28, 2011.

10.55		Letter Agreement, dated January 13, 2012, by and between the Registrant and Berg & Berg Enterprises, LLC	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated January 13, 2012, filed with the Securities and Exchange Commission on January 18, 2012.

10.56	*	Performance Based Restricted Stock Unit Award Agreement under 2009 Equity Incentive Plan	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated September 15, 2011, filed with the Securities and Exchange Commission on September 21, 2011.

10.57	*	Restricted Stock Unit Award Agreement under 2009 Equity Incentive Plan	Incorporated by reference to the exhibit so described in the Registrant’s Current Report on Form 8-K, dated September 15, 2011, filed with the Securities and Exchange Commission on September 21, 2011.

Number	Description of Exhibit	Method of Filing

21.1	List of subsidiaries of the Registrant	Filed herewith.

23.1	Consent of PMB Helin Donovan, LLP, an Independent Registered Public Accounting Firm	Filed herewith.

24.1	Power of Attorney	Contained on the signature page hereto.

31.1	Certification of Robert L. Kanode, Principal Executive Officer, pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith.

31.2	Certification of Donald E. Gottschalk, Principal Financial Officer, pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith.

32.1	Certification of Robert L. Kanode, Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith.

32.2	Certification of Donald E. Gottschalk, Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation

101.DEF		XBRL Taxonomy Extension Definition

101.LAB		XBRL Taxonomy Extension Label

101.PRE		XBRL Taxonomy Extension Presentation

* Compensation plans or arrangements in which directors or executive officers are eligible to participate.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		VALENCE TECHNOLOGY, INC.

	Dated: May 23, 2012

		/s/ Robert L. Kanode

		Robert L. Kanode
		President and Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Robert L. Kanode and Donald E. Gottschalk, and each of them, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated.

Name	Position	Date

/s/ Robert L. Kanode	President and Chief Executive Officer	May 23, 2012
Robert L. Kanode	(Principal Executive Officer) and Director

/s/ Donald E. Gottschalk	Acting Chief Financial Officer (Principal Financial	May 23, 2012
Donald E. Gottschalk	and Accounting Officer)

/s/ Carl E. Berg	Director and Chairman of the Board	May 23, 2012
Carl E. Berg

/s/ Vassilis G. Keramidas	Director	May 23, 2012
Vassilis G. Keramidas

/s/ Bert C. Roberts, Jr.	Director	May 23, 2012
Bert C. Roberts, Jr.

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