VALENCE TECHNOLOGY INC, 10-K405, 1998-06-29

VALENCE TECHNOLOGY INC
10-K405, 1998-06-29
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10K

(Mark One)
[X] Annual report to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended MARCH 29, 1998 or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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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 IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)

301 CONESTOGA WAY
HENDERSON, NEVADA 89015
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

Registrant's telephone number, including area code is (702) 558-1000

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

Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common NASDAQ

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

Common Stock
$.001 par value

------------------------

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 proceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of 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 [X]

The aggregate market value of the Registrant's voting stock held by
non-affiliates on June 5, 1998 (based upon the NASDAQ/NMS closing price on
such date) was $140,179,809.

As of June 5, 1998, there were 25,487,238 shares of the Registrant's Common
Stock outstanding.

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PART I

In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward looking statements discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in this section as well as in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Item 1
Business

OVERVIEW

Valence is engaged in research and development to produce advanced
rechargeable batteries based upon lithium ion and polymer technologies. The
Company's objective is to become a leading provider of rechargeable
batteries. The Company announced in July 1995, that it had obtained a
license to a plastic lithium battery technology from Bell Communications
Research, Inc. ("Bellcore"). Since that time, the Company has been working to
integrate the Bellcore technology with its own lithium polymer battery
technology. At the same time, the Company has continued the redesign and
modifications to its manufacturing equipment in Northern Ireland to support
the potential future commercial introduction of this new battery design.

Widespread use of a variety of portable consumer electronics such as portable
computers, cellular telephones, camcorders and handheld power tools, as well as
continued demand from conventional applications such as automobiles, have
resulted in large markets for rechargeable batteries. These new and
conventional applications are placing growing demands on existing battery
technologies to deliver increasing amounts of electricity through smaller and
lighter batteries. In some cases, current battery capabilities are a major
limitation to the introduction of enhanced electronic products.

Valence is a development stage company whose primary activities to date have
been acquiring and developing technology, implementing a production line,
manufacturing limited quantities of prototype batteries, recruiting personnel
and obtaining capital. However, its current research prototype
batteries meet some of the exacting specifications demanded by the marketplace.
Except for insubstantial revenues from limited sales of prototype lithium
polymer batteries, substantially all of the Company's revenues to date have
been derived from a completed research and development contract with the Delphi
Automotive Systems Group of General Motors Corporation ("Delphi" - formerly
Delco-Remy Division), and the Company presently has no products available for
sale. Prior to commencing volume production, the Company does not expect to
receive any significant revenues from the sale of its products. To achieve
profitable operations, the Company must successfully develop, manufacture and
market its products. There can be no assurance that any products can be
developed or manufactured at an acceptable cost and with appropriate
performance characteristics, or that such products will be successfully
marketed or achieve market acceptance.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has negative working capital and has sustained recurring losses related
primarily to the development and marketing of its products. Management
is actively pursuing additional equity and debt financing from both
institutional and corporate investors. Management has implemented
certain capital equipment reductions and is actively pursuing capital
grant advances from the Northern Ireland Industrial Development Board
(Note 6). However, the Company's fiscal 1999 operations plan places
significant reliance on obtaining outside financing. There can be no
assurance that any new debt or equity issuances could be successfully
consummated. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. The effects of any such adjustments, if necessary, could be
substantial.

In the event that the Company's research and development activities lead to
commercially viable products, the Company's strategy is to accelerate the
introduction of its batteries into the portable consumer electronics and
telecommunications markets by providing prototype batteries to a limited
number of potential OEM customers, with the expectation that, if the
Company's prototype batteries meet customer requirements, batteries
incorporating this technology will be incorporated into advance product
designs. The Company expects that customers will require an extensive
qualification period once the customer receives its first commercial product
off a production line. In working with OEMs, the Company will seek to obtain
technical assistance in designing its batteries for industry-specific
applications. To date, the Company has only been able to deliver small
quantities of handmade prototype batteries to OEMs. These prototype batteries
meet some of the requirements of these OEMs but are not necessarily
representative of the batteries that will be produced off the Company's
production equipment. There can be no assurance that the Company's
discussions with OEMs will result in any such relationships or, if such
relationships are initiated, that the relationships will achieve their goals.
The Company believes that these potential customers will continue to be
interested in advanced rechargeable batteries from the Company, should the
Company succeed in meeting their exacting requirements.

-2-

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THE BATTERY INDUSTRY

There are two types of batteries, primary and rechargeable. A primary
battery is used until discharged and then discarded. In contrast, after a
rechargeable battery is discharged, it can be recharged to near full capacity
and used again. Rechargeable batteries are generally usable in all primary
battery applications as well as other applications, such as portable
computers, cellular telephones, camcorders, automobiles and cordless tools
and appliances.

In the rechargeable battery market, the principal competitive technologies are
NiCad, lead acid, nickel metal hydride, and liquid and solid electrolyte lithium
metal and liquid lithium ion batteries. NiCad batteries are currently the most
widely used batteries in portable electronics. Lead acid batteries are
primarily used in automobiles and, to a lesser degree, are also used in a sealed
form in certain portable electronic products. Nickel metal hydride batteries,
which offer certain performance and environmental improvements over NiCad
batteries, have been introduced into the market and compete directly with
existing applications for NiCad batteries. Sony and other Japanese
manufacturers are selling liquid electrolyte lithium ion batteries. Liquid
electrolyte lithium ion batteries offer significant advantages in energy density
and cycle life over conventional rechargeable battery technologies currently in
use and are expected by the Company to be the technology of choice for high
value added applications. Sony and other manufacturers are offering liquid
electrolyte lithium ion batteries in the marketplace and to OEMs in significant
volumes. Bellcore has licensed its plastic lithium ion battery technology to as
many as eleven other companies, in addition to the Company, although their
identities have not been announced. As OEMs frequently require extensive lead
times to design new batteries into their products, the availability of these
liquid and solid electrolyte lithium ion batteries from the Company's
competitors could materially adversely affect the demand for, and market
acceptance and penetration of the Company's products, if and when developed.
Additionally, the Company will have to compete with the other Bellcore
licensees, who will have access to essentially the same base technology as the
Company.

THE COMPANY'S LITHIUM POLYMER BATTERY TECHNOLOGY

The Company's current research design is a hybrid of the Company's proprietary
battery technology and the licensed Bellcore technology. The Company's current
research design contains no metallic lithium, unlike earlier Company designs,
but rather moves lithium ions from an anode to a cathode on discharge, and from
the cathode to the anode on recharge. The lithium ions are stored in either the
cathode or anode, and do not form metallic lithium. This type of system is
often referred to as "rocking chair battery," because the lithium ions are
"rocked" back and forth between the cathode and anode, and "lithium ion" because
the lithium in the batteries is always in an ionic form rather than a metallic
form.

The Company's research prototype battery is composed of flexible solid plastic
matrixes which are formed into an anode matrix layer, a separator matrix layer,
and a cathode matrix layer. The anode matrix layer contains a carbon material
capable of holding lithium ions. The separator matrix layer is composed
primarily of the plastic matrix. The cathode matrix layer contains metal oxide
material that stores lithium ions. After the matrix layers are formed and cut
into the desired shape, they are laminated together to form a cell. The cell is
interconnected to other like cells to form a battery. Plasticizer material in
the cell matrix layers is then extracted, leaving voids throughout the matrix
layers of the cells. Finally, liquid electrolyte is absorbed into the cell,
filling the voids left by the extracted filler material, activating the cells
and the battery.

In conventional liquid electrolyte batteries, the liquid electrolyte that
permeates the battery's components is sealed in a metal container to assure its
contact with all the internal components of the battery. The liquid electrolyte
in the Company's battery is contained within the solid polymer matrix that forms
the anode, separator and cathode matrix layers. Because the liquid electrolyte
is contained in the solid polymer matrix and is therefore in intimate contact
with anode and cathode materials, it does not need to be held under pressure,
and the battery can be packaged in a thin flexible plastic/foil packaging
material, instead of a metal container, which reduces weight and volume.

The Company believes that its lithium polymer battery technology constitutes
an advance over most rechargeable battery technologies currently available in
the market, although its program is still in the preproduction phase and
therefore substantial uncertainties exist, including whether the Company will
be able to market a commercial product. The Company believes that energy
density is the most important performance characteristic for comparing
battery technologies. The Company's research prototype lithium polymer
batteries have demonstrated energy density generally superior to most other
rechargeable technologies, except for some liquid electrolyte lithium ion
batteries, although the Company has experienced variability in energy density
in its research prototype designs. Greater energy density will permit the use
of batteries for a given size or weight with energy capacity significantly
exceeding that of most batteries currently in use. Alternatively, greater
energy density will enable the use of smaller and lighter batteries with
energy capacity comparable to those currently marketed.

-3-

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In addition, form factor, or the shape of a battery, can affect the packaging
efficiency of batteries. For example, some battery technologies are best suited
to cylindrical shapes, but if cylinders must be stacked, approximately 22% loss
in packaging efficiency results. Because the Company's research prototype
battery is produced as a thin laminate, it can be shaped into a variety of form
factors, including very thin batteries. The Company is currently evaluating
the performance effects of various battery shapes with regard to energy density,
recharge cycles and safety concerns.

In addition, battery technologies vary in relative safety as a result of their
differing chemical compositions. Most battery technologies incorporate a liquid
electrolyte which, if leaked, may be dangerous. In addition, in the event of a
short circuit or other physical damage to the battery, the liquid electrolyte
may be free to flow to the reaction site and produce a continuous chemical
reaction. This reaction may result in excess heat or a gas release and, if not
properly released, may be explosive. The Company's lithium polymer battery
technology appears to avoid these risks, because the liquid electrolyte in the
Company's current research prototypes is held in the solid polymer matrix and
should not be free to leak or freely flow to a reaction site.

The Company has not fully completed safety testing and does not know whether the
advantages inherent in the Company's technology will make the battery as safe or
safer than other battery technology. As part of the Company's safety testing
program, prototype batteries of various sizes, designs, and chemical
formulations are subject to abuse testing, where the battery is subjected to
conditions outside the expected normal operating conditions of the battery.
While some prototype batteries have survived these tests, others have vented
gases, containing vaporized solvents from the electrolyte, which have caught
fire. Such results were generally expected and, until the testing is completed,
the Company cannot make a valid determination as to the safety envelope in which
the battery must be operated. Additionally, each new battery design requires
new safety testing. There can, therefore, be no assurance that safety problems
will not develop with respect to the Company's battery technology, that would
prevent commercial introduction.

The Company's products will incorporate materials containing lithium ions.
While these materials are less reactive than metallic lithium, which is known in
its metallic form to cause explosions and fires if not properly handled, it is
possible that special handling will be required. Although the Company believes
that its research prototype batteries designed for portable electronics
applications do not present safety risks substantially different from those
inherent in currently marketed non-lithium batteries or other liquid electrolyte
lithium ion batteries, there can be no assurance that safety problems will not
develop in the future. The Company is aware that if the amounts of active
materials in the anode and cathode are not properly balanced and the charge /
discharge regime is not properly managed, metallic lithium may be plated within
the battery packaging. The plating of lithium in a lithium ion battery is a
dangerous situation and other lithium ion battery manufacturers include special
safety circuitry within the battery to prevent such a condition. The Company
expects that such circuitry will have to be used by its customers.

The Company is currently conducting research to determine whether its lithium
polymer battery technology poses increased risks when used in larger sized
batteries because of the greater amount of ionic lithium contained in the
battery, and the increased amount of energy stored in the battery.

The Company incorporates safety policies in its research and development
activities and will do so in its manufacturing processes, designed to minimize
safety risks, although there can be no assurance that an accident in its
facilities will not occur. Any accident, whether occasioned by the use of a
battery or in the Company's operations, could result in significant delays or
claims for damages resulting from injuries, which would adversely affect the
Company's operations and financial condition.

MARKETS AND APPLICATIONS

The Company believes that its battery technology, if it can lead to
commercial products, will potentially be usable in a number of applications,
including as a portable, rechargeable power source for portable electronics
products, automotive SLI, electric vehicles and military equipment. To
commercialize its products in the foregoing markets, the Company will be
dependent upon obtaining assistance from OEMs into whose products the
Company's future batteries will have to be incorporated. Other than certain
completed research and development commitments from Delphi and a completed
joint research and development agreement with Eveready Battery Company
("Eveready"), to date, the Company has not received any commitments either
for the development of its technology or for the purchase of its products.
There can be no assurance that the Company will succeed in establishing
additional relationships or that the Company's products and technology will
ever receive market acceptance.

-4-

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THIRD PARTY RELATIONSHIPS

DELPHI

In 1991, to leverage its limited resources and accelerate the introduction of
its lithium polymer batteries, the Company entered into a research and
development agreement with Delphi to develop lithium polymer batteries for
the land, marine and air vehicular and load leveling markets. Under the
agreement, the Company obtained a multi-year funding commitment of
$20,000,000 and, if its batteries are successfully commercialized by Delphi,
will receive ongoing royalties. Upon completion of the 1991 agreement, the
Company and Delphi, in June 1994, extended the 1991 agreement until the end
of 1994, for an additional fee of $900,000. Both the 1991 agreement and the
June 1994 extension have been completed and the Company has received full
payment under those agreements.

In September 1994, the Company and Delphi entered into a new agreement for
Joint Research and Development for a five year period which began in
September 1994, with payments to Valence of $50,000 for a monthly research
and development access fee, of which $600,000, $650,000 and $600,000 was
recognized during fiscal year 1998, 1997 and 1996, respectively, as an offset
to research and product development expenses. Under this agreement the
Company and Delphi agreed to co-locate their research and development efforts
at an unoccupied lithium battery manufacturing facility located in Henderson,
Nevada. As of June 1995, both parties had relocated to the facility and begun
joint research efforts. Under the agreement, Delphi, in addition to the
monthly research and development access fee, is paying a majority of the
operating expenses of the facility.

Delphi is a leading manufacturer of SLI batteries in North America, producing
batteries for new General Motors Corporation vehicles and the replacement
market. Delphi is experienced in working with a number of currently-used
battery technologies and is a leader in the research and development of
innovative battery technologies. Under its agreements with the Company, Delphi
provides fundamental research assistance and manufacturing expertise. The
Company's work with Delphi has enhanced the Company's scientific and technical
understanding of its lithium polymer battery.

The Company has granted Delphi worldwide, exclusive licenses under the
Company's patents and technical information to manufacture, use and sell
lithium polymer batteries for commercial land and marine vehicles, electric
vehicles, and for electric utility load leveling, the storage of energy
produced at off peak periods for release during peak demand. Each license
converts to a non-exclusive license four years after the first commercial
sale of such a battery. Under the agreement, Delphi granted to the Company an
exclusive license under Delphi's patents and technical information to
manufacture, use and sell lithium polymer batteries, other than the vehicular
and load leveling batteries exclusively licensed to Delphi, and a
non-exclusive license under Delphi's patents and technical information to
manufacture vehicular and load leveling batteries after the termination of
Delphi's exclusive rights. The Company's exclusive license converts to a
non-exclusive license four years after the first commercial sale of a battery
by the Company. As additional compensation to the Company, Delphi agreed to
pay royalties to the Company on each battery manufactured under Delphi's
license until 2008. However, in procuring the right to sublicense Bellcore
technology to Delphi, the Company agreed to pass on to Bellcore substantially
all royalties received from Delphi. The Company hopes that its greatest
benefit from the Delphi license will be the cost leverage from Delphi's
potential substantial materials purchases from third party vendors. However,
should Delphi decide to use different materials in their products, than those
used by the Company, there would be less or no cost leverage from Delphi's
purchases. Additionally, if General Motors decided to significantly delay
commercialization or decided not to commercialize a product, then no such
cost leverage would be available.

In May 1998, the Company and Delphi announced the successful completion of their
collaboration on lithium polymer battery development. Delphi will retain a
license to use Company-developed lithium polymer technology for vehicular and
stationary load leveling / peak shaving applications. The Company will retain a
license to use Delphi-developed lithium polymer technology in all other
applications. After September 1998, the Company anticipates that it will
receive no further payments as a result of the Joint Research and Development
agreement with Delphi. It is anticipated that Delphi will continue to make
payments for activities through August 1998.

-5-

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VALTRON TECHNOLOGY PTE. LTD.

In March 1994, the Company and Goldtron Ltd. ("Goldtron") signed an agreement
to establish a joint venture company in Singapore to manufacture, package and
distribute advanced rechargeable solid polymer electrolyte batteries
utilizing the Company's solid polymer technologies. Goldtron is a worldwide
developer, manufacturer and distributor of electronic and telecommunications
products, with extensive distribution channels in the Far East, as well as
worldwide distribution capabilities. In light of the Company's refocus on
research and development, the Company and Goldtron have put the joint venture
on hold, awaiting development of a viable battery technology that Valtron may
be able to manufacture. Since the joint venture was on hold, Goldtron has
licensed a liquid lithium-ion technology and is in the process of
commercializing that technology. There can be no assurance that when the
Company desires to reactivate the joint venture, that Goldtron will still be
interested in pursuing the Company's technology.

If the joint venture is reactivated, it is anticipated that the Company will
supply the new joint venture company with its proprietary laminates, from which
the new joint venture company will manufacture batteries for certain agreed upon
applications. The parties will evaluate potential products for marketing by the
new joint venture company, including uninterruptable power supplies and personal
lighting systems. Other battery applications may also be proposed by the new
joint venture company. It should be noted, however, that selection of candidate
product opportunities will be delayed by the parties pending further research
and development activities by Valence. Uncertainty over the financial condition
of the economy in the Far East may also adversely and materially affect the
joint venture.

HANIL VALENCE CO., LTD.

In July 1996, the Company, through its Dutch subsidiary, and Hanil Telecom
Co., Ltd. ("Hanil Telecom") signed an agreement to establish a joint venture
company in Korea to manufacture, package and distribute advanced rechargeable
solid polymer electrolyte batteries utilizing the Company's solid polymer
technologies for the Korean markets. Hanil Telecom is a subsidiary of Hanil
Cement Mfg. Co., Ltd., a major conglomerate in Korea producing a wide variety
of products for the Korean market. Hanil Valence Co., Ltd. ("Hanil Valence
Co."), the joint venture company, is located in a Korean facility and has a
capitalization of $10 million. All funds have been provided to the joint
venture by Hanil Telecom. Hanil Telecom and the Company, through its Dutch
subsidiary, each hold a 50% stake of the company. Additionally, Hanil
Telecom will provide $40 million in loan guarantees to Hanil Valence Co. It
is anticipated that the Company will supply Hanil Valence Co. with its
proprietary laminates, from which Hanil Valence Co. will manufacture
batteries for the Korean market. Additionally, Valence will supply the
technology, initial equipment and product designs and technical support out
of its Northern Ireland facility. Hanil Telecom will market the joint
venture's initial products for a period of several years, depending on the
market. The Company has no experience in manufacturing in Korea or selling
into the Korean marketplace, and is dependent on its joint venture partner in
these areas. The Korean marketplace has experienced turmoil in recent months
and such activity may adversely and materially affect Hanil Valence Co. The
audit of the joint venture is attached as an exhibit to this document.

ALLIANT / VALENCE, L.L.C.

The Company and Alliant Techsystems Inc. ("Alliant") signed an agreement in
October 1996, to establish a joint venture company utilizing the Company's
battery technology and technology obtained under the Company's Bellcore
license to develop and manufacture batteries for its U.S. military customers
as well as for foreign military sales activities. Alliant / Valence, L.L.C.
("Alliant / Valence"), the joint venture company, will operate a battery
fabrication facility at Alliant's Power Sources Center in Horsham,
Pennsylvania. The Company is expected to supply the electrode laminate
materials that are key to manufacturing high performance batteries.
Alliant's Power Sources Center is a major producer of military and aerospace
batteries. In January 1997, Alliant announced receipt of a $1.2 million
contract award from the U.S. Army Communications Electronics Command
("CECOM") to develop and implement flexible manufacturing processes for
lithium ion polymer batteries to be used by the Army. The work will be
performed by Alliant / Valence. At March 29, 1998, the net assets and
operations of the joint venture are not material.

EVEREADY BATTERY COMPANY

In May 1994, the Company signed a joint development and license agreement
with Eveready for cross-licensing of all background technology, and certain
foreground technology developed during a two-year period. Under the
cross-license, Valence has access to Eveready's extensive battery technology
portfolio to apply to Valence's advanced polymer batteries, including two
patents that Eveready believes cover the Company's use of a manganese oxide,
used in the Company's current research prototypes. Eveready has access to
Valence's battery technology portfolio, including its proprietary solid state
electrolyte, to make advanced polymer round cell batteries. Under certain
conditions, including commercialization of round cell batteries by Eveready
and meeting of certain requirements to purchase non-round cell batteries from
Valence, Eveready

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may produce non-round cell batteries. In addition, if Eveready
commercializes batteries using Valence's background technology, Valence will
receive royalties.

In August 1994, Eveready, Delphi and Valence amended the Delphi / Valence
agreement and the Eveready / Valence agreement to form a joint three-way
steering committee for the parties' research and development efforts.
Additionally, Valence sublicensed certain proprietary rights, including
patents, trade secrets and technical know-how, it had received from each
party to the other party, to form a three-way cross-license arrangement.

In June 1995, when the Company took the license to the Bellcore technology, the
Company was prohibited from sharing information regarding this technology to
non-Bellcore licensees. To date, Eveready has not taken a license to the
Bellcore technology, and the Company was prohibited from working with Eveready
on certain of its research and development efforts. In May 1996, the joint
research and development program ended, although the agreement remains in
effect.

BELL COMMUNICATIONS RESEARCH, INC.

In June 1995, the Company entered into a non-exclusive license agreement with
Bellcore, to license Bellcore's plastic lithium battery technology. Under this
agreement, the Company received rights to patents, trade secrets and know-how
developed by Bellcore. The Company is in the process of integrating the
Bellcore technology with the Company's lithium polymer technology, and believes
that the Bellcore technology provides solutions to several technical problems
the Company was facing with regard to its technology. As part of the agreement,
which includes license fees and royalty payments, Bellcore received a minority
equity position in the Company of 1,500,000 shares of common stock.
Additionally, the Company secured the right to grant, and has granted, to Delphi
a sublicense to make, have made, use and sell batteries for land, marine, and
air vehicles, including electric vehicles, and utility load-leveling
applications. In November 1997, Bellcore was acquired by Science Applications
International Corporation.

RESEARCH AND PRODUCT DEVELOPMENT

The Company's research and product development expenses in fiscal years 1998,
1997 and 1996 were approximately, $15,432,000, $10,825,000 and, $8,047,000
respectively. During the same periods, the Company received reimbursements for
research and development activities and earned development contract revenues of
$nil, nil and nil respectively.

The Company's research personnel are divided into two groups: the battery
research and development group and the battery engineering group. The Company's
battery research and development group works on developing the existing
technology, materials and processing methods and developing the Company's
battery technology. The 12 people in this group have expertise in chemical
engineering, process control, safety, and anode, cathode and electrolyte
chemistry and physics, polymer chemistry and radiation chemistry, thin film
technologies, coating technologies, and anode, cathode and electrolyte
chemistry, formulation, analytical chemistry and material science.

The battery engineering group designs products for eventual sale to customers.
Its current objectives are to provide prototypes to prospective customers and to
improve current designs and manufacturing methods. The principal objectives of
this group also include making significant improvements in battery design to
increase energy densities and cycling capabilities. The 14 people in this group
have expertise in battery design, failure analysis, packaging engineering,
process development and manufacturing engineering.

MANUFACTURING

The Company's research prototype battery is produced using thin film laminate
technology. The cathode and anode ("electrodes") matrix layers, and separator
matrix layer are manufactured utilizing coating techniques. These matrix layers
may be either cut or stamped out into various engineered configurations, which
are then laminated together to form cells. These cells can then be stacked and
connected to form a functional battery, which is finally packaged and tested.

Even if the Company's current research and development activities result in
the design of batteries with commercially desirable characteristics, to be
successful, the Company will have to manufacture in commercial quantities
products with appropriate performance characteristics at competitive costs.
At present, the Company has, at its Henderson, Nevada facility, manual and
semi-automated coating, laminating, assembly and packaging lines that produce
small quantities of prototype batteries for internal testing and customer
sampling. For coating the matrix layers, the Company is adapting existing
manufacturing technologies and processes. However, further development of
manufacturing technology may be delayed pending further research and
development activities by the Company and the definition of manufacturable
specifications with OEM customers.

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In September 1993, the Company signed an agreement to open an automated
manufacturing plant in Mallusk, Northern Ireland. The Company currently
occupies 80,000 square feet, and may add 50,000 square feet at some point in
the future. The Company, with its equipment suppliers, has designed and
constructed a high volume, automated assembly and packaging lines for the
Northern Ireland facility. The Company's high volume manufacturing equipment
was specifically designed for use with the Company's prior metallic lithium
anode technology. The Company is working with its equipment suppliers to
redesign and modify this equipment to work with the Company's newest battery
technology. The amount of redesign and modification that is required is
substantial and there can be no assurance that such redesign and
modifications will work or will be cost effective. If all or some of the
equipment in Northern Ireland cannot be effectively redesigned and modified,
the Company will have to procure new equipment at considerable expense and
loss of time.

The first automated assembly lines have been delivered to the Northern Ireland
facility. De-bugging of the lines has gone much slower than expected. The
lines' reliability and yield are predictably low, although the Company believes
that it will eventually reach its production goals. The Company expects this
line to be qualified in the second half of calendar 1998, but there can be no
assurance as to the timing or even the success of this qualification process.
Upon qualification of the lines, product samples are expected to be sent to
potential customers for evaluation. The first line is initially slated to
produce the Company's larger portable-computer cell format (approximately four
inches by four inches) battery.

The Company has been unable to meet its prior schedules regarding delivery,
installation, de-bugging and qualification of the Northern Ireland production
equipment, due to unforeseen problems. As most of the production equipment is
being custom manufactured for the Company, it is possible that further
unforeseen problems will develop and cause delay in the Company's current
schedules. Many of the manufacturing processes that are being implemented in
this production equipment are being scaled up for the first time from the
Company's laboratory scale prototype work. It is likely that some of these
scaled up processes will require refinement, adjustment or redesign. Any of
these possibilities could cause substantial delay in the qualification and/or
production start-up of this equipment. Such delays could cause the Company to
miss significant sales and marketing opportunities, as potential lithium polymer
battery customers are forced to find other vendors to meet their needs.
Additionally, even if the Company is able to qualify production equipment in
this calendar year, the reliability and/or production yields may not allow the
Company to provide sufficient qualification samples to potential customers.

From its discussion with potential customers, the Company expects that customers
will require an extensive qualification period once the customer receives its
first commercial product off a production line. To date, the Company has not
provided any such commercial product to any potential customer, and therefore,
has not started any product qualification period.

COMPETITION

Competition in the battery industry is intense. The industry consists of major
domestic and international companies, most of which have financial, technical,
marketing, sales, manufacturing, distribution and other resources substantially
greater than those of the Company. The Company believes that its lithium
polymer batteries will compete in most segments of the rechargeable battery
market.

In the rechargeable battery market, the principal competitive technologies
currently marketed are NiCad batteries, lead acid batteries, nickel metal
hydride batteries and liquid electrolyte lithium ion batteries. Eveready, Sanyo
Electric Co., Ltd., and Matsushita Industrial Co., Ltd., among others, currently
manufacture NiCad batteries. Major lead acid manufacturers include Delphi,
Johnson Controls, Exide Corp., Portable Energy Products, Inc., Hawker Energy
Products and Yuasa Battery Co., Ltd. Manufacturers of nickel metal hydride
batteries include Matsushita Industrial Co., Ltd., Toshiba, Eveready, Sanyo
Electric Co. and Sony. Sony produces a liquid electrolyte lithium ion battery
used in Sony's products, and sold to OEMs. Toshiba has a joint venture with
Asahi Chemical Industry Company to manufacture liquid electrolyte lithium ion
batteries. In addition, Saft America Inc., Ray O Vac, PolyStor Corp.,
Matsushita Industrial Co., Ltd., Moli Energy and Sanyo Electric Co., Ltd. have
developed liquid electrolyte lithium ion batteries. The capabilities of many of
these competing technologies have improved over the past year, which has
resulted in a customer perception that the Company's lithium polymer technology
may not offer as many advantages as previously anticipated. Sony has
consistently been improving the energy density of its lithium ion battery over
the last several years.

Liquid electrolyte lithium ion batteries offer significant advantages in
energy density and cycle life over the principal rechargeable battery
technologies currently in use and are expected by the Company to be the
emerging technology most competitive to the Company's technology. Sony or
other manufacturers are offering liquid electrolyte lithium ion batteries in
the marketplace and to OEMs in substantial volumes prior to the Company's
commencement of volume production. As OEMs frequently require extensive lead
times to design new batteries into their products, the availability of liquid
electrolyte

-8-

<PAGE>

lithium ion batteries could materially adversely affect the demand for, and
market acceptance and penetration of, the Company's products.

In addition to currently marketed technologies, a number of companies are
undertaking research in rechargeable battery technologies, including work on
lithium polymer technology. Reportedly, as many as eleven other companies have
taken licenses to Bellcore's battery technology, although their identities have
not been announced. Ultralife Batteries, Inc., which acquired Dowty Battery
Company in the United Kingdom in 1994, has announced shipment of prototype
lithium ion polymer batteries, and has announced plans to begin commercial
shipments in 1998. Hydro-Quebec in Canada has signed an agreement with Yuasa
Battery Co., Ltd. of Japan for technology transfer and the manufacture of
lithium ion polymer batteries. Recently, Hydro-Quebec and Yuasa have announced
the introduction of such a rechargeable lithium polymer battery. The Company
believes that other research and development activities on lithium polymer
batteries are taking place at W. R. Grace & Co., 3M, and Ray O Vac in the U.S.
and at other companies in Japan and Malaysia. In May 1995, Moltech Corp.
announced that it expected to begin production shipments of its lithium polymer
batteries in mid-to-late 1996. This was subsequently modified to 1998. In
October 1992, the United States Advanced Battery Consortium ("USABC") awarded
the first $6,300,000 of a three-year $24,500,000 contract to a group consisting
of W. R. Grace & Co., Johnson Controls and affiliated laboratories to develop a
thin-film lithium polymer bipolar battery utilizing solid polymer electrolytes.
At that time, the USABC also awarded a three-year $17,300,000 contract to Saft
America Inc. to pursue a bipolar form of the lithium iron disulfide battery
first developed at the Argonne National Laboratory. In December 1993, the USABC
announced the grant of a two-year $33,000,000 contract to a partnership formed
by 3M, Hydro-Quebec and Argonne for the development of lithium polymer batteries
for electric vehicles, for which a second phase was announced in February 1996,
for $27,400,000. The Company also believes that research is underway on zinc
air, aluminum air, sodium sulphur, zinc bromine and nickel zinc battery
technologies. No assurance can be given that such companies are not developing
batteries similar or superior to the Company's lithium polymer batteries.

PATENTS AND TRADE SECRETS

The Company's ability to compete effectively will depend in part on its ability
to maintain the proprietary nature of its technology and manufacturing processes
through a combination of patent and trade secret protection, non-disclosure
agreements and cross-licensing agreements.

As of March 29, 1998, the Company held 180 United States patents and had 48
patent applications pending in the United States. The Company was preparing 84
additional patent applications for filing in the United States. The Company
also actively pursues foreign patent protection in countries of interest to the
Company. As of March 29, 1998, the Company had been granted 18 foreign patents
and had 91 patent applications pending in foreign countries.

Patent applications in the United States are maintained in secrecy until
patents issue, and since publication of discoveries in the scientific or
patent literature tends to lag behind actual discoveries by several months,
the Company cannot be certain that it was the first creator of inventions
covered by pending patent applications or the first to file patent
applications on such inventions. There can be no assurance that the Company's
pending patent applications will result in issued patents or that any of its
issued patents will afford protection against a competitor. In addition,
patent applications filed in foreign countries are subject to laws, rules and
procedures which differ from those of the United States, and thus there can
be no assurance that foreign patent applications related to issued United
States patents will issue. Furthermore, if these patent applications issue,
some foreign countries provide significantly less patent protection than the
United States.

The status of patents involves complex legal and factual questions and the
breadth of claims allowed is uncertain. Accordingly, there can be no assurance
that patent applications filed by the Company will result in patents being
issued or that its patents, and any patents that may be issued to it in the
future, will afford protection against competitors with similar technology. In
addition, no assurances can be given that patents issued to the Company will not
be infringed upon or designed around by others or that others will not obtain
patents that the Company would need to license or design around. If existing or
future patents containing broad claims are upheld by the courts, the holders of
such patents could require companies to obtain licenses. If the Company is
found to be infringing third party patents, there can be no assurance that
licenses that might be required for the Company's products would be available on
reasonable terms, if at all.

In addition to potential patent protection, the Company relies on the laws of
unfair competition and trade secrets to protect its proprietary rights. The
Company attempts to protect its trade secrets and other proprietary information
through agreements with customers and suppliers, proprietary information
agreements with employees and consultants and other security measures. Although
the Company intends to protect its rights vigorously, there can be no assurance
that these measures will be successful.

-9-

<PAGE>

REGULATION

Prior to the commercial introduction of the Company's batteries into a number of
markets, the Company may seek to obtain approval of its products by one or more
of the organizations engaged in testing product safety. Such approvals could
require significant time and resources from the Company's technical staff and,
if redesign were necessary, could result in a delay in the introduction of the
Company's products.

Pursuant to the regulations of the United States Department of Transportation
("DOT"), a permit is required to transport lithium across state lines. The
International Air Transport Association ("IATA") similarly regulates the
international shipment of lithium. At this time, lithium ion batteries, because
they contain no metallic lithium, are not subject to these regulations and are
being freely shipped. However, due to recent safety incidents, including fires,
with the shipment of lithium-ion batteries produced by other manufacturers, the
DOT has indicated that it is reviewing this position, and there can be no
assurance that DOT or IATA will not decide to regulate the shipment of lithium
ion batteries in the future. While, in such an event, the Company believes that
DOT has granted permits for, and IATA has allowed, the transport of rechargeable
lithium-based batteries in the past, there can be no assurance that DOT and IATA
would permit the Company's batteries to be shipped or used by the general
public, or that changes in such regulations, or in their enforcement, will not
impose costly requirements or otherwise impede the transport of lithium. In
addition, the DOT and IATA approval processes would require significant time and
resources from the Company's technical staff and if redesign were necessary,
could delay the introduction of the Company's products.

The Nevada Occupational Safety and Health Administration and other regulatory
agencies have jurisdiction over the operation of the Company's Henderson, Nevada
manufacturing facilities, and similar regulatory agencies have jurisdiction over
the Company's Mallusk, Northern Ireland manufacturing facilities. Because of
the risks generally associated with the use of lithium, the Company expects
rigorous enforcement. No assurance can be given that the Company will not
encounter any difficulties in complying with applicable health and safety
regulations. Historically, lithium battery manufacturers have suffered
significant damage and losses to equipment, facilities and production from fires
and other industrial accidents. There can be no assurance that the Company will
not sustain such damage and losses.

Federal, state and local regulations impose various environmental controls on
the storage, use and disposal of certain chemicals and metals used in the
manufacture of lithium polymer batteries. Although the Company believes its
activities conform to current environmental regulations, there can be no
assurance that changes in such regulations will not impose costly equipment or
other requirements. Any failure by the Company to adequately control the
discharge of hazardous wastes could also subject it to future liabilities.

-10-

<PAGE>

HUMAN RESOURCES

As of June 5, 1998, the Company had 95 full-time employees, of whom 10 held
Ph.D. degrees. Of these employees, 12 are fully subcontracted to Delphi, and
14 are shared with Delphi. Of the total, 12 employees were engaged in
research and development, 14 in battery engineering, 54 in operations and 15
in marketing, general and administrative functions. The Company's success
will depend in large part on its ability to attract and retain skilled and
experienced employees. None of the Company's employees are covered by a
collective bargaining agreement, and the Company considers its relations with
its employees to be good. In addition to the above employees, as of June 5,
1998, the Company's Dutch subsidiary had 86 full-time employees located in
Northern Ireland.

In December 1997, the resignation of Calvin L. Reed, the Company's former
Chairman of the Board, Chief Executive Officer, and President became
effective. As had been previously announced, Mr. Lev M. Dawson then became
the Chairman of the Board, Chief Executive Officer and President. In January
1998, the Company's former Executive Vice President, Worldwide Operations
resigned and Joseph P. Hendrickson, who originally was hired as Vice
President of Administration, became Senior Vice President, Operations. In
January 1998, the Company's Vice President General Counsel, resigned. In
June 1998, the Company's former Chief Technical Officer, Tibor Kalnoki-Kis,
resigned, and Mr. Dawson assumed his responsibilities.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company and their ages as of March 29, 1998, are
as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Lev M. Dawson 59 Chairman of the Board, Chief Executive Officer, President
Joseph P. Hendrickson 54 Senior Vice President, Operations
David P. Archibald 57 Vice President and Chief Financial Officer
Robert J. Horning 55 Vice President, Engineering
Tibor Kalnoki-Kis 57 Vice President and Chief Technical Officer
</TABLE>

Mr. Dawson rejoined the Company in December 1997 as Chairman of the Board, Chief
Executive Officer and President. Mr. Dawson, a founder of the Company, served as
Chairman of the Board and Chief Executive Officer from its founding in March
1989 until April 1993. Mr. Dawson also served as President from March 1989 until
June 1991. From May 1993 to December 1997, Mr. Dawson was involved in private
family companies. From January 1988 to March 1989, Mr. Dawson devoted
significant time to the organization of the Company. From May 1978 through
January 1988, Mr. Dawson was President, Chairman, and Chief Executive Officer of
Robinton Products, Inc. ("Robinton"), a company which manufactured solid state
meters and data retrieval systems for the electric utility industry. Mr. Dawson
holds a B.S.E.E. degree in Electrical Engineering from the University of
Southwestern Louisiana.

Mr. Hendrickson rejoined the Company as Vice President of Administration and
became Secretary in January 1998. In May 1998, he was appointed Senior Vice
President of Operations. From June 1993 to December 1997, Mr. Hendrickson was an
investor consultant. From June 1990 to June 1993, Mr. Hendrickson served as the
Company's Director of Administration. From April 1988 through June 1990, he was
a management consultant in the electronics manufacturing industry, consulting in
the areas of operations and administration. From May 1978 to April 1988, Mr.
Hendrickson was Vice President of Administration and Operations of Robinton
Products, where he was responsible for management of finance and administration
and manufacturing operations.

Mr. Archibald joined the Company as Director of Finance in June 1995 and became
Vice President and Chief Financial Officer in February 1996. From February 1989
to May 1995, Mr. Archibald was Finance Director at Staveley Industries plc, a
manufacturer of high and low technology products. From June 1986 to December
1988, Mr. Archibald was controller for Handi-Kup, a division of James River
Corporation. Mr. Archibald holds a B.S.B.A. degree in Accounting and Economics
from Northeastern University and an M.B.A. from the University of Pennsylvania
Wharton Graduate School of Business.

Mr. Horning joined the Company as Director of Product Engineering in
January 1993 and became Vice President, Engineering in September 1993. From
April 1987 to January 1993, Mr. Horning was Manager of Engineering at Alliant
Techsystems Inc. (formerly a subsidiary of Honeywell Inc.), Power Sources
Center, a developer and manufacturer of special purpose liquid electrolyte
lithium batteries unrelated to the Company's current lithium polymer battery
technology. From March 1984 to April 1987, Mr. Horning was Director of Product
Engineering for Duracell Inc., a battery manufacturer. Mr. Horning holds a B.S.
in Chemical Engineering and an M.B.A. from Drexel University.

-11-

<PAGE>

Dr. Kalnoki-Kis joined the Company as Vice President and Chief Technical Officer
in February 1997. From October 1978 to January 1997, Dr. Kalnoki-Kis was
employed by Gould Electronics, Inc., a wholly owned subsidiary of Japan Energy,
Inc. In 1995, he became President and General Manager of the Powerdex Division
at Gould. Dr. Kalnoki-Kis holds a Ph.D. from the University of Maine. Dr.
Kalnoki-Kis left the Company in June 1998.

Each officer serves at the discretion of the Board of Directors. There are no
family relationships among any of the directors or officers of the Company.

-12-

<PAGE>

Item 2
Properties

The Company's corporate offices and principal laboratories are in a facility
which it owns, with approximately 55,000 square feet, located in Henderson,
Nevada. The Company also has two facilities in San Jose, California, which it
no longer occupies, under a five-year lease commencing May 1, 1993 with Berg &
Berg Developers. Carl E. Berg, a director of the Company, is a general partner
of Berg & Berg Developers. The Company has sublet, through Berg & Berg
Developers, both facilities for the entire term remaining on the lease.
Additionally, the Company's Dutch subsidiary owns a manufacturing facility in
Mallusk, Northern Ireland, with approximately 80,000 square feet.

The Company believes that its existing facilities will be adequate to meet the
Company's needs for the foreseeable future. Should the Company need additional
space, management believes that the Company will be able to secure it at
reasonable rates.

Item 3
Legal Proceedings

In May 1994, a series of class action lawsuits was filed in the United States
District Court for the Northern District of California against the Company and
certain of its present and former officers and directors. These lawsuits were
consolidated, and in September 1994 the plaintiffs filed a consolidated and
amended class action complaint. Following the Court's Orders on motions to
dismiss the complaint, which were granted in part and denied in part, the
plaintiffs filed an amended complaint in October 1995 ("Complaint"). The
Complaint alleges violations of the federal securities laws against the Company,
certain of its present and former officers and directors, and the underwriters
of the Company's public stock offerings, claiming that the defendants issued a
series of false and misleading statements, including filings with the Securities
and Exchange Commission, with regard to the Company's business and future
prospects. The plaintiffs seek to represent a class of persons who purchased
the Company's common stock between May 7, 1992 and August 10, 1994. The
Complaint seeks unspecified compensatory and punitive damages, attorney's fees
and costs.

On January 23, 1996, the Court dismissed, with prejudice, all claims against the
underwriters of the Company's public stock offerings, and one claim against the
Company and its present and former officers and directors. On April 29, 1996,
the Court dismissed with prejudice all remaining claims against a present
director and limited claims against a former officer and director to the period
when that person was an officer. In December 1996, the Company and the
individual defendants filed motions for summary judgment, which the plaintiffs
opposed. In November 1997, the Court granted the Company's motion for summary
judgment and entered a judgment in favor of all defendants. Plaintiffs have
appealed and the case is pending before the United States Court of Appeals for
the Ninth Circuit.

Item 4
Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended March 29, 1998.

-13-

<PAGE>

- -------------------------------------------------------------------------------

PART II

Item 5
Market for Registrant's Common Equity
and Related Stockholder Matters

Since May 7, 1992, Valence's common stock, par value $0.001, has been traded on
the National Association of Securities Dealers Automated Quotation National
Market Systems (NASDAQ/NMS) under the symbol "VLNC." The high and low closing
sales prices during each quarter for Valence common stock on NASDAQ/NMS for
fiscal years 1997 and 1998 were as follows:

<TABLE>
<CAPTION>
High Low
Fiscal 1997 --------- -------
-----------
<S> <C> <C>
Quarter ended June 30, 1996 $7-5/16 $ 4-1/8
Quarter ended September 29, 1996 6-1/16 3-5/8
Quarter ended December 29, 1996 5-7/8 4-1/8
Quarter ended March 30, 1997 7 4-3/16

Fiscal 1998
------------
Quarter ended June 29, 1997 $ 10 $ 5-3/4
Quarter ended September 28, 1997 9-1/8 6-7/8
Quarter ended December 28, 1997 9 4-1/4
Quarter ended March 29, 1998 6-1/2 4-1/4
</TABLE>

The approximate number of record holders of the Company's Common Stock as of
June 5, 1998, was 729.

Valence has not paid any cash dividends since its inception and does not
anticipate paying cash dividends in the foreseeable future.

On January 1, 1998, the Company granted options to Mr. Dawson, the Company's
new Chairman of the Board, Chief Executive Officer and President, an
incentive stock option to purchase 39,506 shares which was granted pursuant
to the Company's 1990 Stock Option Plan (the "1990 Plan"). Also, an option
to purchase 660,494 shares was granted pursuant to the Company's 1990 Plan
and an option to purchase 300,000 shares was granted outside of any equity
plan of the Company, neither of which are incentive stock options (the
"Nonstatutory Options"). The exercise price of all three options is $5.0625
per share, the fair market value on the date of the grant. The Compensation
Committee of the Company approved the early exercise of the Nonstatutory
Options on March 5, 1998. The options permitted exercise by cash, shares,
full recourse notes or non-recourse notes secured by independent collateral.
The Nonstatutory Options were exercised on March 5, 1998 with non-recourse
promissory notes secured by the shares acquired upon exercise plus 842,650
shares previously held by Mr. Dawson. Purchased shares for which the
underlying options have not vested are subject to repurchase by the Company.
As of March 29, 1998, none of the shares in the underlying options have
vested.

-14-

<PAGE>

Item 6
Selected Consolidated Financial Data

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(COMPANIES IN THE DEVELOPMENT STAGE)
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

------------------------

<TABLE>
<CAPTION>
Period from
March 3, 1989
(date of
inception) to
March 29, March 29, March 30, March 31, March 26, March 27,
1998 1998 1997 1996 1995 1994
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:

Research and development
contracts $ 21,605 $ - $ - $ - $ 4,150 $ 7,295
------------- --------- --------- --------- --------- ---------

Costs and expenses:

Research and product development 84,481 15,432 10,825 8,047 14,762 21,465

Marketing 3,532 855 205 486 705 767

General and administrative 39,429 7,066 6,168 5,614 6,269 6,013

Write-off of in-process
technology(1) 8,212 6,064

Investment in Danish subsidiary(2) 3,489

Special charges 18,872 18,872
------------- --------- --------- --------- --------- ---------
Total costs and expenses 158,015 23,353 17,198 20,211 40,608 28,245
------------- --------- --------- --------- --------- ---------
Operating loss (136,410) (23,353) (17,198) (20,211) (36,458) (20,950)

Interest income 14,901 1,174 2,558 3,549 3,606 2,547

Interest expense (4,290) (528) (814) (931) (777) (250)

Equity in earnings (losses) of Joint

Venture (2,213) (1,779) (434)
------------- --------- --------- --------- --------- ---------
Net loss $ (128,012) $ (24,486) $ (15,888) $ (17,593) $ (33,629) $ (18,653)
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
Net loss per share, basic and diluted - $ (1.06) $ (0.73) $ (0.83) $ (1.68) $ (1.08)
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
Shares used in computing net loss
per share(3) - 23,010 21,684 21,261 20,059 17,259
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------

March 29, March 30, March 31, March 26, March 27,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------

BALANCE SHEET DATA:

Cash and cash equivalents $ 8,400 $ 27,832 $ 24,569 $ 16,602 $ 26,188

Investments 9,556 32,282 57,869 71,312

Working capital (1,773) 26,105 41,281 45,011 48,254

Total assets 42,894 55,526 70,247 92,007 121,036

Long-term debt 4,950 5,217 6,169 8,811 7,258

Accumulated deficit (128,012) (103,526) (87,638) (70,045) (36,416)

Total stockholders' equity 22,962 38,349 53,010 66,784 99,629
</TABLE>

(1) See Note 11 of Notes to Consolidated Financial Statements
(2) See Note 12 of Notes to Consolidated Financial Statements
(3) See Note 2 of Notes to Consolidated Financial Statements

-15-

<PAGE>

Item 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations

OVERVIEW

The Company was founded in 1989 to develop and commercialize advanced
rechargeable batteries based on lithium and polymer technologies. Since its
inception, the Company has been a development stage company primarily engaged in
acquiring and developing its initial technology, manufacturing limited
quantities of prototype batteries, recruiting personnel, and acquiring capital.
To date, other than insubstantial revenues from limited sales of prototype
batteries, the Company has not received any significant revenues from the sale
of products. Substantially all revenues to date have been derived from a
completed research and development contract with the Delphi Automotive Systems
Group of General Motors Corporation ("Delphi" - formerly Delco-Remy Division).
The Company has incurred cumulative losses of $126,681,000 from its inception to
March 29, 1998.

Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, market acceptance, changing economic conditions, risks in product
and technology development, effect of the Company's accounting policies and
other risk factors detailed in this section as well as in the section entitled
"Business." Readers should also carefully review the factors set forth in other
reports or documents filed from time to time with the Securities and Exchange
Commission, particularly the quarterly reports on Form 10-Q and any other
current reports on Form 8-K.

The following discussion should be read in conjunction with the five-year
summary of selected financial data and the Company's consolidated financial
statements and the notes thereto. All references to years represent fiscal
years unless otherwise noted.

RESULTS OF OPERATIONS

FISCAL YEARS ENDED MARCH 29, 1998 (FISCAL 1998), MARCH 30, 1997 (FISCAL 1997)
AND MARCH 31, 1996 (FISCAL 1996)

During fiscal 1998, the Company continued development activities under a
research and development agreement with Delphi. That phase of a multi-year
agreement, which provided for the aggregate funding of up to $20,000,000, was
completed during the quarter ending September 25, 1994. Payments were generally
made in accordance with the achievement of certain milestones. No revenues were
recognized during fiscal 1998 and fiscal 1997.

In September 1994, the Company and Delphi signed a new five-year agreement to
combine efforts in developing the Company's rechargeable solid state lithium
polymer battery technology. Under the agreement, Delphi and the Company
combined their research and development activities in a new facility in
Henderson, Nevada. The new facility is owned by the Company, with Delphi
paying a fee of $50,000 per month over the five-year term of the new
agreement for access to the Company's research and development (of which
$600,000, $650,000 and $600,000 were recognized during fiscal 1998, fiscal
1997 and fiscal 1996, respectively, as an offset to research and product
development expenses). In addition, Delphi paid a majority of the facility's
operating costs in fiscal 1998 and is anticipated to continue to do so
through August 1998. The Company is treating both of these payments as an
offset to expenses.

Research and product development expenses were $15,432,000, $10,825,000 and
$8,047,000 during fiscal 1998, 1997 and 1996, respectively. The increase in
fiscal 1998 versus fiscal 1997 and fiscal 1997 versus fiscal 1996 reflects the
Company's increased efforts to commercialize a product in fiscal 1999.

-16-

<PAGE>

Marketing expenses were $855,000, $205,000 and $486,000 for fiscal 1998, 1997
and 1996, respectively. The increase in fiscal 1998 versus fiscal 1997
reflects the Company's increased efforts to commercialize a product and
increased severance costs. The comparative decrease from fiscal 1997 versus
fiscal 1996 is the result of a decrease in payroll, travel and relocation
expenses.

General and administrative expenses increased to $7,066,000 in fiscal 1998
from $6,168,000 in fiscal 1997 and from $5,614,000 spent in fiscal 1996.
Fiscal 1998 increase versus fiscal 1997 was due to decreased legal costs
associated with the shareholder class action lawsuit offset by compensation
expense of $1,775,000 related to the extension of certain vested options.
The fiscal 1997 to 1996 increase reflects added legal costs associated with
the shareholder class action lawsuit.

During fiscal 1996, the Company incurred a one-time charge to operations of
$6,064,000 ($0.28 per share) for the write-off of in-process technology related
to the Technology Transfer Agreement with Bellcore. Technological feasibility
of the in-process technology acquired had not been established and there was no
alternative future use.

Interest income was $1,174,000, $2,558,000 and $3,549,000 in fiscal 1998,
1997 and 1996, respectively. This decrease is a result of lower interest
rates and fewer funds available for investment during fiscal 1998 due to
ongoing losses.

Interest expense decreased to $528,000 from $814,000 and $931,000 during
fiscal 1998, 1997 and 1996, respectively. The decrease in fiscal 1998 is a
result of a reduction in long-term debt associated with capital equipment
leases. The increase in fiscal 1997 versus fiscal 1996 is the result of
additional long-term debt acquired in fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company used $16,650,000 net cash for operating activities during fiscal
1998, whereas it used $9,971,000 during fiscal 1997 and $12,135,000 during
fiscal 1996, an increase between fiscal 1998 and fiscal 1997 of $6,679,000.
This net increase primarily resulted from increased losses associated with
the commercialization efforts. Net cash used in fiscal 1997 decreased by
$2,164,000 from fiscal 1996 as the result of a reduction in losses partially
offset by acquisition of the Bellcore technology in fiscal 1996.

During fiscal 1998, the Company used $6,739,000 net cash from investing
activities compared to net cash provided by investing activities of
$15,537,000 during fiscal 1997, and $23,281,000 provided during fiscal 1996,
a decrease of $22,276,000 between fiscal 1998 and 1997. The decrease was a
result of increased capital equipment expenditures of $12,916,000 and
shortening of maturities to support fiscal 1998 capital expenditures. There
were $9,556,000 net maturities during fiscal 1998, as compared to $18,482,000
net maturities during fiscal 1997 and $25,587,000 net maturities during
fiscal 1996.

The Company provided $5,065,000 of net cash from financing activities as
compared to using $1,399,000 and $2,679,000 during fiscal 1997 and fiscal
1996 respectively. This increase of $6,464,000 resulted from reductions in
long-term debt and proceeds from issuance of common stock. In fiscal 1997
versus fiscal 1996 the Company had increased funds as the result of reduced
long-term debt.

As a result of the above, the Company had a net decrease in cash and cash
equivalents of $19,432,000 during fiscal 1998 versus an increase of $3,263,000
during fiscal 1997, whereas it had a net increase of $7,967,000 during fiscal
1996.

The Company's $2,000,000 working capital line of credit was available through
June 15, 1998. The working capital line collateralizes outstanding letters
of credit, which reduce borrowings otherwise available under the line. As of
March 29, 1998, there were no outstanding letters of credit.

During fiscal 1994, the Company, through its Dutch subsidiary, signed an
agreement with the Northern Ireland Industrial Development Board (the "IDB") to
open an automated manufacturing plant in Northern Ireland in exchange for
capital and revenue grants from the IDB. The Company has also received offers
from the IDB to receive additional grants. The grants available under the
agreement and offers, for an aggregate of up to L27,555,000, generally become
available over a five-year period through October 31, 2001. As of March 29,
1998, the Company had received grants aggregating L4,035,000 reducing remaining
grants available to L23,520,000 (US$39,572,400 as of March 29, 1998).

As a condition to receiving funding from the IDB, the subsidiary must
maintain a minimum of L12,000,000 in debt or equity financing from the
Company. Aggregate funding under the grants is limited to L4,035,000 until
the Company has recognized $4,000,000 in aggregate revenue from the sale of
its batteries produced in Northern Ireland. Given that the Company has no
agreements to supply batteries using its current technology, there are no
assurances that the Company will be able to meet the agreement's revenue
test.

In July 1997, the Company entered into an amended loan agreement with a
shareholder which allows the Company to borrow, prepay and re-borrow up to
the full $10,000,000 principal under the promissory note on a revolving basis
and provided that the lender will subordinate its security interest to other
lenders when the loan balance is at zero. As of March 29 1998, the Company
had no outstanding balance under the Loan Agreement. The loan bears interest
at one percent over lender's principal line of credit (8.50% at March 29,
1998) and is available through August 30, 2002.

-17-

<PAGE>

There can be no assurance that the Company will be able to meet the
requirements necessary for it to receive and retain grants under the IDB
agreement and offers.

The Company expects that its existing funds as of March 29, 1998, together
with the interest earned thereon, will be sufficient to fund the Company's
operations through first quarter fiscal 1999. The Company anticipates that
it may need substantial additional funds in the future (probably as early as
the second or third quarter of fiscal 1999) for capital expenditures,
research and product development, marketing and general and administrative
expenses and to pursue joint venture opportunities. The Company's cash
requirements, however, may vary materially from those now planned because of
changes in the Company's operations, including changes in OEM relationships
or market conditions. There can be no assurance that funds for these
purposes, whether from equity or debt financing agreements with strategic
partners or other sources, will be available on favorable terms, if at all.
These factors raise substantial doubts about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. The effects of such adjustments, if necessary, could be material.

RECENT ACCOUNTING PRONOUNCEMENTS

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.130, "REPORTING COMPREHENSIVE
INCOME"

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as " the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners." SFAS 130 is effective for fiscal years beginning
after December 15, 1997, and reclassification of financial statements for
earlier periods provided for comparative purposes is required. The impact of
its implementation on the consolidated financial statements of the Company
has not yet been determined.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION"

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS 131 generally
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise." Under SFAS 131, operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on
the basis that is used internally. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997, and restatement of
comparative information for earlier years is required. However, SFAS 131 is
not required to be applied to interim financial statements in the initial
year of application. The Company has not determined the impact, if any, on
the reporting of segment information.

-18-

<PAGE>

YEAR 2000 COMPLIANCE

The Company is in the process of formulating and implementing a program
designed to ensure that all software used in connection with the Company's
computer systems and testing and other equipment will manage and manipulate
data involving the transition of dates from 1999 to 2000 without functional
or data abnormality and without inaccurate results related to such dates.
The Company currently anticipates that this program will not require
additional significant manpower, although there can be no assurances that
this will be the case or that the Company will not incur additional costs in
connection with such program. There can be no assurances that the vendors of
the Company will be in compliance, and the Company has no control over
whether such vendors will be in compliance, with year 2000 requirements. Any
failure on the part of the Company to ensure that its software complies with
year 2000 requirements or any similar failure on the part of the Company's
vendors could have a material adverse effect on the Company, its financial
condition and its results of operations.

Item 8
Financial Statements and Supplementary Data

The Company's Consolidated Financial Statements and notes thereto appear on
pages F-1 to F-20 of this Form 10-K Annual Report.

Item 9
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures

There have been no changes in, or disagreements with accountants, on accounting
and financial disclosures.

-19-

<PAGE>

- -------------------------------------------------------------------------------

PART III

Item 10

DIRECTORS OF THE REGISTRANT

The names of the Company's directors and certain information about them are set
forth below; such information for executive officers of the Company is contained
in Part I, Item 1 of the report.

The directors of the Company and their ages as of June 5, 1998, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION HELD WITH THE COMPANY
- --------------------------------------------------------------------------------
<S> <C> <C>
Lev M. Dawson 59 Chairman of the Board, Chief Executive Officer,
President

Carl E. Berg(1)(2) 60 Director

Alan F. Shugart(1)(2) 67 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

Mr. Dawson rejoined the Company in December 1997 as Chairman of the Board,
Chief Executive Officer and President. Mr. Dawson, a founder of the Company,
served as Chairman of the Board and Chief Executive Officer from its founding
in March 1989 until April 1993. Mr. Dawson also served as President from
March 1989 until June 1991. From May 1993 to December 1997, Mr. Dawson was
involved in private family companies. From January 1988 to March 1989, Mr.
Dawson devoted significant time to the organization of the Company. From May
1978 through January 1988, Mr. Dawson was President, Chairman, and Chief
Executive Officer of Robinton Products, Inc. ("Robinton"), a company which
manufactured solid state meters and data retrieval systems for the electric
utility industry.

Mr. Berg helped found the Company and has served on the Board of Directors
since September 1991. For more than the past five years, Mr. Berg has been a
major Silicon Valley industrial real estate developer and a private venture
capital investor. Mr. Berg also serves as a director of Integrated Device
Technology, Inc., Videonics, Inc., and Systems Integrated Research.

Mr. Shugart joined the Company as a director in March 1992. Mr. Shugart has
been the Chief Executive Officer and a director of Seagate since its
inception in 1979. Mr. Shugart also served as Seagate's President from 1979
to 1983 and from September 1991 to the present. Additionally, Mr. Shugart
served as Chairman of the Board of Seagate from 1979 until September 1991,
and from October 1992 to the present. Mr. Shugart currently serves as a
director of Sandisk Corporation and Inktomi Corporation.

BOARD COMMITTEES AND MEETINGS

During the fiscal year ended March 29, 1998, the Board of Directors held
three meetings. The Board has an Audit Committee, a Compensation Committee
and a Non-Officer Stock Option Administration Committee. The Board at large
serves as the Nominating Committee.

The Audit Committee meets with the Company's independent accountants to
review the results of the annual audit and discuss the financial statements;
recommends to the Board the independent accountants to be retained and
receives and considers the accountants' comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls. The Audit Committee met once during the 1998 fiscal
year. It currently is composed of two non-employee directors: Messrs. Berg
and Shugart.

The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants
under the Company's stock option plans and otherwise determines compensation
levels and performs such other functions regarding compensation as the Board
may delegate. The Compensation Committee is composed of two non-employee
directors: Messrs. Berg and Shugart. It met once during fiscal 1998.

-20-
<PAGE>

The Non-Officer Stock Option Administration Committee administers the
Company's 1990 Stock Option Plan only for non-officer employees and makes
grants to such employees not in excess of 14,500 shares to any individual.
All option grants in excess of this limit and all grants to officers must be
approved by the Compensation Committee or the Board at large. The Non-Officer
Stock Option Committee is composed of Mr. Dawson.

During the fiscal year ended March 29, 1998, each Board member attended all of
the meetings of the Board and of the committees on which he served, held during
the period for which he was a director or committee member, respectively.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
directors and executive officers, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file with the
Commission initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Officers,
directors and greater than ten percent stockholders are required by
Commission regulation to furnish the Company with copies of all Section 16(a)
forms they file.

To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 29, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.

Item 11
Executive Compensation

COMPENSATION OF DIRECTORS

The Company's non-employee directors receive no cash compensation, but are
eligible for reimbursement for their expenses incurred in connection with
attendance at Board meetings in accordance with Company policy. Directors who
are employees of the Company do not receive separate compensation for their
services as directors, but are eligible to receive stock options under the
Company's 1990 Plan.

Each non-employee director of the Company also receives stock option grants
pursuant to the 1996 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). Only non-employee directors of the Company or an affiliate of such
directors (as defined in the Code) are eligible to receive options under the
Directors' Plan. The plan provides that new directors will receive an initial
stock option of 100,000 shares of common stock upon their election to the Board.
The exercise price for this initial option will be the fair market value on the
day it is granted. This initial option will vest one-fifth on the first and
second anniversaries of the grant of the option, and quarterly over the next
three years. On each anniversary of the director's election to the Board, the
director will receive an annual stock option in the amount of 100,000 shares
less the total amount of unvested shares remaining in the initial option and any
annual options previously granted. The exercise price for this new option will
be the fair market value on the day it is granted. This annual option will vest
quarterly over a three year period. A director who had been granted an option
prior to the adoption of the Directors' Plan will start receiving annual grants
on the anniversary date of that director's prior grant. A director who had not
received an option upon becoming a director will receive an initial stock option
of 100,000 shares on the date of the adoption of the plan, and then receive
annual options on the anniversary dates of that grant.

During the last fiscal year, the Company granted options covering 26,668 shares
to Carl Berg, at an exercise price per share of $6.50, and 42,224 shares to Alan
Shugart, at an exercise price per share of $5.12, non-employee directors of the
Company, under the Directors' Plan. The fair market value of such Common Stock
on the dates of grant was $6.50 and $5.12, respectively, per share (based on the
closing sales price reported in the NASDAQ National Market for the date of
grant). As of June 5, 1998, no options had been exercised under the Directors'
Plan.

-21-

<PAGE>

EXECUTIVE COMPENSATION

Executive officers are eligible to receive stock options under the 1990 Plan.

In June 1996, the Compensation Committee of the Board passed a resolution which
provides for the automatic granting of stock options to the officers of the
Company. According to this resolution, each quarter, each officer receives a
grant of options under the 1990 plan in an amount necessary to keep the amount
of unvested options held by that officer at a predetermined level. These levels
are 360,000 shares for the CEO, 180,000 shares for an executive vice president,
and 120,000 shares for a vice president. The resolution was effective when
passed, and the Company's officers have been receiving such grants since that
time. The resolution further provided that in the event the Company ever grants
a bonus to any officer, that one half of any such bonus would be held by the
Company for use by the officer only for exercising his or her stock options. To
date, no bonuses have been granted to any officer.

Calvin L. Reed was employed by the Company through December 31, 1997. He
received severance pay equivalent to one year's salary and accelerated vesting
of several stock option grants. On his last day with the Company, the following
stock option amounts vested: thirty thousand (30,000) shares of Mr. Reed's
second stock option grant, dated June 17, 1994; fifteen thousand (15,000) shares
of his third stock option grant, dated June 17, 1994; twenty-one thousand
seventy-two (21,072) shares of his eighth stock option grant, dated December 30,
1996; three thousand seven hundred fifty (3,750) shares of Mr. Reed's fourth
stock option grant, dated March 25, 1996; thirty-five thousand three hundred
fifty-six (35,356) shares of his thirteenth stock option grant, dated December
29, 1997; seven thousand seven hundred thirty-three (7,733) shares of his sixth
stock option grant, dated July 1, 1996; and thirty-seven thousand eighty-nine
(37, 089) shares of his fifth stock option grant, dated June 7, 1996.

William J. Masuda was employed by the Company through January 9, 1998. He
received severance pay equivalent to six months' salary and accelerated vesting
of several stock option grants. On his last day with the company, the following
stock option amounts vested: twenty-two thousand five hundred (22,500) shares of
Mr. Masuda's second stock option grant, dated June 17, 1994; thirteen thousand
five hundred twenty-four (13,524) shares of his seventh stock option grant,
dated December 30, 1996; one thousand eight hundred seventy-five (1,875) shares
of his third stock option grant, dated March 25, 1996; seventeen thousand three
hundred eighty-one (17,381) shares of Mr. Masuda's eleventh stock option grant,
dated December 29, 1997; three thousand five hundred thirteen (3,513) shares of
his fifth stock option grant, dated July 1, 1996; and fifty-one thousand two
hundred seven (51,207) shares of his fourth stock option grant, dated June 7,
1996.

Bradley A. Perkins was employed by the Company through January 16, 1998. The
vesting of several of his stock option grants was accelerated. On his last
day of with the Company, the following stock option amounts vested: nineteen
thousand nine hundred fifty (19,950) shares of Mr. Perkins' fourth stock
option grant, dated September 2, 1994; twelve thousand (12,000) shares of his
third stock option grant, dated June 17, 1994; three thousand four hundred
seventy-two (3,472) shares of his ninth stock option grant, dated December
30, 1996; one thousand two hundred fifty (1,250) shares of Mr. Perkins' fifth
stock option grant, dated March 25, 1996; and eleven thousand three hundred
twenty-eight (11,328) shares of his thirteenth stock option grant, dated
December 29, 1997.

-22-

<PAGE>

The following table shows for the fiscal years ended March 29, 1998, March
30, 1997 and March 31, 1996, certain compensation awarded or paid to, or
earned by the Company's Chief Executive Officer and its other four most
highly compensated executive officers at March 29, 1998 (the "Named Executive
Officers"):

SUMMARY COMPENSATION TABLE

Other Long Term
Annual Annual Compen- All Other
Compensation Compen- sation Awards Compen-
-------------------- sation ------------- sation
Fiscal Salary Bonus ------- Options(1) -------------
Name and Principal Position Year ($) ($) ($) (#) ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lev M. Dawson 1998 82,923 -- -- 1,000,000(11) --
Chairman of the Board, Chief 1997 -- -- -- -- --
Executive Officer and President 1996 -- -- -- -- --

Calvin L. Reed(7) 1998 182,692 -- -- 123,415 258,108(5,6)
Former.Chairman of the Board, Chief 1997 250,000 -- -- 297,630 7,540(5)
Executive Officer and President 1996 250,000 -- -- 30,000 4,854(5,3)

William J. Masuda(8) 1998 141,346 -- -- 68,894 87,500(6)
Former Executive Vice President, 1997 175,000 -- -- 136,000 --
Worldwide Operations 1996 175,000 -- -- -- 476(3)

Tibor Kalnoki-Kis(9) 1998 175,000 -- 60,464(4) -- 83(3)
Vice President and Chief 1997 10,769 -- 5,233(4) 150,000 --
Technical Officer 1996 -- -- -- -- --

R. Joseph Horning 1998 145,600 -- -- 44,762 42(3)
Vice President, 1997 145,600 -- -- 44,442
Engineering 1996 145,600 -- 12,500(4) 10,000 48,531(2)

David P. Archibald 1998 133,599 -- 19,896(4) 39,560 --
Vice President and Chief Financial 1997 130,000 -- 21,104(4) 34,134 --
Officer 1996 62,183 -- 11,014(4) 110,000 47,323(2)

Bradley A. Perkins(10) 1998 102,500 -- 13,926(4) 42,811 --
Former Vice President and 1997 130,000 -- 13,520(4) 69,117 --
General Counsel 1996 130,000 -- 11,898(4) 10,000 7,679(2,3)
</TABLE>
- ------------------------
(1) The Company has no stock appreciation rights ("SARs").
(2) Relocation expenses (moving expenses, tax gross-up payments related to sale
of home, meals, relocation payment, travel expenses, etc.) related to the
Company's move to Henderson, Nevada.
(3) Patent award payments. Patent awards are granted to employees of the
Company for inventions made by employees for which they have submitted
invention disclosures to the Company, for which the Company has filed a
patent application with the United States Patent and Trademark Office, or
for which a patent has been issued by the United States Patent and
Trademark Office.
(4) Amounts forgiven under loans provided to the Named Executive Officer by the
Company.
(5) Life insurance premium payments.
(6) Severance payments.
(7) Calvin L. Reed was employed by the Company through December 31, 1997.
(8) William J. Masuda was employed by the Company through January 9, 1998.
(9) Tibor Kalnoki-Kis was employed by the Company through June 8, 1998.
(10) Bradley A. Perkins was employed by the Company through January 16, 1998.
(11) The shares are exercisable over a period of eighteen (18) months.

-23-

<PAGE>

STOCK OPTION GRANTS AND EXERCISES

The following tables show for the fiscal year ended March 29, 1998, certain
information regarding options granted to, exercised by, and held at year end by
the Named Executive Officers:

OPTION GRANTS IN LAST FISCAL YEAR

Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term(3)
-------------------------- -----------------------------
Percent of
Total Options
Options Granted to Exercise
Granted Employees in Price Expira-
Name (#)(1) Fiscal Year(2) ($/Sh) tion Date 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lev M. Dawson(4) 39,506 2.3% 5.06 12/31/07 125,799 318,799
660,494 37.9% 5.06 12/31/07 2,103,219 5,329,939
300,000 17.2% 5.06 12/31/07 955,294 2,420,888

Calvin L. Reed 29,855 1.7% 6.31 3/30/07 118,541 300,405
29,854 1.7% 8.88 10/2/07 166,656 422,337
28,350 1.6% 8.88 10/2/07 158,260 401,060
35,356 2.0% 4.63 12/28/07 102,855 260,653

William J. Masuda 19,161 1.1% 6.31 3/30/07 76,080 192,800
19,161 1.1% 8.88 10/2/07 106,964 271,066
13,191 0.8% 8.88 10/2/07 73,637 186,610
17,381 1.0% 4.63 12/28/07 50,564 128,137

R. Joseph Horning 10,829 0.6% 6.31 3/30/07 42,997 108,963
10,828 0.6% 8.88 10/2/07 60,446 153,181
10,280 0.6% 8.88 10/2/07 57,387 145,429
12,825 0.7% 4.63 12/28/07 37,310 94,549

David P. Archibald 6,135 0.4% 6.31 3/30/07 24,359 61,731
15,134 0.9% 8.88 10/2/07 84,484 214,097
8,072 0.5% 8.88 10/2/07 45,061 114,193
10,219 0.6% 4.63 12/28/07 29,728 75,337

Bradley A. Perkins 10,422 0.6% 6.31 3/30/07 41,381 104,867
10,421 0.6% 8.88 10/2/07 58,174 147,423
9,640 0.6% 8.88 10/2/07 53,814 136,375
12,328 0.7% 4.63 12/28/07 35,864 90,885
</TABLE>
- ------------------------
(1) Options granted in fiscal 1998 generally vest over four years, with 1/16 of
the shares vesting each quarter and with full vesting occurring on the
fourth anniversary date. See "Executive Compensation" for a description of
severance agreements and how they affect the vesting of options for Mr.
Reed, Mr. Masuda and Mr. Perkins.
(2) Based on an aggregate of 1,742,832 options granted to employees, including
the Named Executive Officers, in fiscal year 1998.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant, 10 years, compounded annually. It is
calculated by assuming that the stock price on the date of grant
appreciates at the indicated annual rate, compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price. No gain to the
optionee is possible unless the stock price increases over the option term,
which will benefit all stockholders.
(4) Mr. Dawson's options vest over eighteen months from date of grant.

-24-

<PAGE>

The following table shows the number and value of the unexcercised options held
by each of the Named Executive Officers on March 29, 1998:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUES

<TABLE>
<CAPTION>
Shares
Acquired Number of Unexercised Options Value of Unexercised In-the-
on Value at FY-End (#) Money Options at FY-End ($)(1)
Exercise Realized ----------------------------- ------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lev M. Dawson 960,494(2) 0 0 39,506 0 0

Calvin L. Reed 338,500 1,656,208 382,740 0 702,185 0

William J. Masuda 47,500 295,015 256,661 0 239,107 0

Tibor Kalnoki-Kis 0 0 37,500 112,500 0 0

R. Joseph Horning 25,000 119,380 127,511 153,815 107,693 69,435

David P. Archibald 0 0 73,100 110,594 58,562 56,136

Bradley A. Perkins 24,000 192,130 127,216 0 115,647 0
</TABLE>
- ------------------------
(1) Based on the fair market value of the Company's Common Stock as of March
29, 1998 ($4.938) minus the exercise price of the options multiplied by the
number of shares underlying the option.
(2) See "Market for Registrant's Common Equity and related stockholder
Matters."

EMPLOYMENT AGREEMENTS

In May 1991, the Company entered into an agreement with Mr. Reed pursuant to
which Mr. Reed joined the Company as its President and Chief Operating
Officer for an annual salary of $250,000. The Company also granted Mr. Reed
an option to purchase 700,000 shares of common stock at an exercise price of
$0.25 per share, with 20% vested immediately and the remainder vesting over a
four-year period.

In January 1993, the Company entered into an employment agreement with Mr.
Horning pursuant to which the Company retained Mr. Horning as its Director of
Product Engineering for an annual salary of $125,000. The Company granted
Mr. Horning an option to purchase 22,000 shares of common stock at an
exercise price of $22.75 per share, vesting over a five-year period. In
addition, the Company agreed to pay Mr. Horning's relocation expenses. The
Company also loaned Mr. Horning $45,000 pursuant to a loan agreement, in
which the Company forgave the loan at a rate of $15,000 per year of his
employment. Mr. Horning became a Vice President of the Company in September
1993.

In February 1997, the Company entered into an employment agreement with Dr.
Kalnoki-Kis pursuant to which the Company retained Dr. Kalnoki-Kis as its
Vice President and Chief Technical Officer at an annual salary of $175,000.
The Company granted Dr. Kalnoki-Kis an option to purchase 150,000 shares of
common stock at an exercise price of $5.88 per share, vesting over a
four-year period. In addition, the Company agreed to pay Dr. Kalnoki-Kis's
relocation expenses. The Company also loaned Dr. Kalnoki-Kis $200,000
pursuant to a loan agreement, in which the Company will forgive the principle
and interest over the first four years of his employment. Dr. Kalnoki-Kis
left the Company in June 1998.

In January 1998, the Company entered into an employment agreement with Lev M.
Dawson pursuant to which the Company retained Mr. Dawson as its Chairman of
the Board, Chief Executive Officer and President at an annual salary of
$280,000. The Company granted Mr. Dawson an option to purchase 1,000,000
shares of common stock at an exercise price of $5.06 per share, vesting over
a period of eighteen months. The Company agreed to pay Mr. Dawson's
relocation expenses.

-25-

<PAGE>

In January 1998, the Company entered into an employment agreement with Joseph
P. Hendrickson pursuant to which the Company retained Mr. Hendrickson as its
Vice President of Administration at an annual salary of $175,000.
Subsequently, Mr. Hendrickson was promoted to Senior Vice President of
Operations at an annual salary of $200,000. The Company granted Mr.
Hendrickson an option to purchase 150,000 shares of common stock at an
exercise price of $5.31 per share, vesting over a period of eighteen months.
The Company agreed to pay Mr. Hendrickson's relocation expenses.

-26-

<PAGE>

OPTION REPRICING INFORMATION

The following table shows certain information concerning option repricings
received by any Named Officer during the last ten years.

TEN YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
Length of
Number of Original
Options/ Market Price Option Term
SARs of Stock at Exercise Price Remaining at
Repriced or Time of at Time of New Date of
Amended Repricing or Repricing or Exercise Repricing or
Amendment Amendment Price Amendment
Name Date (#) ($) ($) ($) (years)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R. Joseph Horning 01/18/93 22,000 11.50 22.75 11.50 4.75
Vice President,
Engineering
</TABLE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

During the fiscal year ended March 29, 1998, the Compensation Committee
consisted of Messrs. Shugart and Berg.

In July 1990, Mr. Berg loaned the Company $520,000 for a seven year term at an
interest rate of 10% per annum and the Company issued a warrant exercisable for
an aggregate of 130,000 shares of common stock to Mr. Berg. This warrant was
exercised on March 31, 1992 at $4.40 per share by cancellation of indebtedness
under such loan. From July 1990 to March 1992 the Company issued additional
warrants exercisable for an aggregate of 1,222,825 shares of common stock to
Baccarat Electronics, Inc., an entity affiliated with Mr. Berg, at an exercise
price of $4.00 per share, in consideration for a loan agreement in which such
entity agreed to lend the Company an aggregate of up to $5,000,000 (the "Loan
Agreement"), all of which were exercised in July 1997. Under the terms of the
Loan Agreement, the Company executed a promissory note payable in full in July
1995 with 9% interest per annum through July 1993 and the prime rate thereafter.
In addition, to secure its obligations under the promissory note, the Company
granted to the entity a security interest in all of the Company's assets. In
August 1992, the Company entered into an amendment to the Loan Agreement which
allows the Company to borrow, prepay and re-borrow up to the full $10,000,000
principal under the promissory note on a revolving basis and provided that the
lender will subordinate its security interest to other lenders when the loan
balance is at zero. In September 1992, the Company paid in full all interest and
principal outstanding under the Loan Agreement. As of March 29 1998, the Company
had no outstanding balance under the Loan Agreement.

The Company had two facilities in San Jose, California, which it no longer
occupies, under a five-year lease commencing May 1, 1993 with Berg & Berg
Developers. Carl E. Berg, a director of the Company, is a general partner of
Berg & Berg Developers. The Company has sublet, through Berg & Berg Developers,
both facilities for the entire term remaining on the lease, thereby releasing
the Company from any further obligation.

In September 1990, the Company issued an aggregate of 500,000 shares of common
stock to four stockholders affiliated with the then majority holder of Innocell
in exchange for payments aggregating $5,000. As partial consideration for the
settlement of the Company's disagreements with the holders of the other 55%
interest in Innocell and with the four stockholders, in March 1992, Mr. Berg
obtained for a cash payment of $131,250 irrevocable options to repurchase an
aggregate of 375,000 shares of common stock from the four stockholders
exercisable at $5.00 per share. Because of certain Danish tax considerations,
the four stockholders would not grant the options to the Company. Mr. Berg
agreed to hold such options for the benefit of the Company. The Company
exercised such options in October 1993 for an aggregate of $1,875,000. The
Company has reimbursed Mr. Berg for all of his costs (including the $131,250
option payment) and indemnified him for any liability incurred in connection
with this transaction. In connection with the acquisition of the options from
the four stockholders, Mr. Berg obtained letters of credit aggregating
$1,875,000 to support the option exercise price. The Company has paid $1,875,000
as substitute collateral for the collateral made available by Mr. Berg.

In March 1992, in connection with the acquisition of the remaining interests in
its Danish subsidiary, the Company borrowed an additional $1,100,000 from Mr.
Berg at the prime rate plus 2%, payable on the earlier of September 30, 1992 or
10 days after the closing of an underwritten public offering. Such amount plus
interest was repaid in May 1992.

-27-
<PAGE>

During fiscal year 1993, the Company purchased $134,000 of computer equipment
from Actrix Computers, Inc. During fiscal year 1994, the Company purchased an
additional $114,129 of computer equipment from Actrix Computers, Inc. Mr. Berg
is President and substantial owner of Actrix Computers, Inc. The Company
believes that the prices it has paid for the computer equipment are comparable
to prices generally available in the market.

-28-
<PAGE>

ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership of
the Company's common stock as of June 5, 1998 by: (i) each director and nominee
for director; (ii) each of the executive officers in the Summary Compensation
table; (iii) all executive officers and directors of the Company as a group; and
(iv) all those known by the Company to be beneficial owners of more than five
percent (5%) of its common stock.

BENEFICIAL OWNERSHIP(1)
<TABLE>
<CAPTION>
Beneficial Owner Number of Shares Percent of Total
- --------------------------------------------------------------------------------
<S> <C> <C>
Carl E. Berg(2) 4,103,380 16.1%
10050 Bandley Drive, Cupertino, CA 95014

Lev M. Dawson(3) 1,813,020 7.1
301 Conestoga Way, Henderson, NV 89015

Bell Communications Research, Inc. 1,500,000 5.9
445 South Street, Morristown, NJ 07960

Calvin L. Reed(4) 382,740 1.5

William J. Masuda(4) 256,661 1.0

Alan F. Shugart(4) 182,996 *

Bradley A. Perkins(4) 127,216 *

R. Joseph Horning(4)
301 Conestoga Way, Henderson, NV 89015 123,113 *

David P. Archibald(5)
301 Conestoga Way, Henderson, NV 89015 100,316 *

Tibor Kalnoki-Kis(4) 46,875 *

All directors and executive officers
as a group (10 persons)(6) 7,136,287 26.7%
</TABLE>
_______________________________
* Less than one percent (1%)

(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13G filed with the Securities and
Exchange Commission (the "Commission"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting
and investment power with respect to the shares indicated as beneficially
owned. Applicable percentage ownership is based on 26,662,367 shares of
common stock outstanding on June 5, 1998, adjusted as required by rules
promulgated by the Commission.

(2) Includes 150,000 shares held by Mr. Berg; 55,558 shares issuable upon
exercise of options held by Mr. Berg that are exercisable within 60 days of
June 5, 1998; 1,222,825 shares held by Baccarat Electronics, Inc., of which
Mr. Berg is President and principal stockholder; 2,499,997 shares held by
Baccarat Development Partnership for which Mr. Berg serves as the President
of the corporate general partner; 105,000 shares held by Berg & Berg
Enterprises, Inc. and 70,000 shares held by Berg & Berg Profit Sharing Plan
U/A 1/1/80 FBO Carl E. Berg Basic Transfer Carl E. Berg, Trustee. Does not
include 80,000 shares held in trust for Mr. Berg's children. Mr. Berg is
not a trustee of the trust and he disclaims beneficial ownership of such
shares.

(3) Includes 1,803,144 shares held by Mr. Dawson and 9,876 shares issuable upon
exercise of options within 60 days of June 5, 1998.

(4) All shares are issuable upon exercise of options that are exercisable
within 60 days of June 5, 1998.

(5) Includes 15,000 shares held by Mr. Archibald and 85,316 shares issuable
upon exercise of options within 60 days of June 5, 1998.

(6) Includes 1,270,321 issuable upon exercise of options within 60 days of June
5, 1998.

-29-
<PAGE>

ITEM 13
CERTAIN TRANSACTIONS

See "Compensation Committee Interlocks and Insider Participation" for a
description of certain transactions between the Company and Mr. Berg.

See "Market for Registrant's Common Equity and related Stockholder Matters" for
a description of certain transactions between the Company and Mr. Dawson.

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Bylaws provide that the Company will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person whom it
is required or permitted to indemnify. Pursuant to this provision, the Company
has entered into indemnity agreements with each of its directors and officers.

In addition, the Company's Second Restated Certificate of Incorporation provides
that to the fullest extent permitted by Delaware law, the Company's directors
will not be personally liable for monetary damages for breach of the directors'
fiduciary duty of care to the Company and its stockholders. This provision in
the Certificate of Incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under Delaware law. Each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Company, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, for acts or
omissions that the director believes to be contrary to the best interests of the
Company or its stockholders, for any transaction from which the director derived
an improper personal benefit, for acts or omissions involving a reckless
disregard for the director's duty to the Company or its stockholders when the
director was aware or should have been aware of a risk of serious injury to the
Company or its stockholders, for acts or omissions that constitute an unexecuted
pattern of inattention that amounts to an abdication of the director's duty to
the Company or its stockholders, for improper transactions between the director
and the Company and for improper distributions to stockholders and loans to
directors and officers. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.

The Company has obtained directors and officers liability insurance with
coverage of $2,000,000.

Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company and its officers and directors have
been

-30-
<PAGE>

informed that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.

ITEM 14
EXHIBITS, FINANCIAL STATEMENTS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) FINANCIAL STATEMENTS -- See Index to Consolidated Financial
Statements on page F-1 of this Form 10-K Annual Report.

(2) REPORT OF INDEPENDENT ACCOUNTANTS -- See Index to Consolidated
Financial Statements on F-1 of this Form 10-K Annual Report.

(3) EXHIBITS -- See Exhibit Index on pages 29 and 30 of this
Form 10-K Annual Report.

(b) The Registrant filed a report on Form 8-K on December 10, 1997.

-31-
<PAGE>
______________________________________________________________________________

EXHIBIT INDEX

EXHIBIT NO.

3.1(1) Second Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(1) Amended and Restated Bylaws of the Registrant.
10.1(1) Form of Indemnification Agreement entered into between the
Registrant and its Directors and Officers.
10.2(1)(+) 1990 Employee Stock Option Plan and related form of Incentive
Stock Option Grant and Supplemental Stock Option Grant.
10.3(1) Lease Agreement between the Company and Berg & Berg Developers
for the Premises at 6781 Via Del Oro, San Jose, California 95119.
10.4(1) Stock Purchase Agreement between Mead and the Company, effective
July 27, 1990.
10.5(1) Stock Assignment and License Agreement between Mead and the
Company, dated July 26, 1990.
10.6(1) Amendment No. 1 to Assignment and License Agreement, dated
December 6, 1991.
10.7(1) Contribution Agreement between Mead and Devres MS Co., dated July
26, 1990.
10.8(1) Agreement between the Company, Innocell and Delco Remy Division--
General Motors, dated March 1, 1991.
10.9(1)(+) Employment Agreement with Dr. Dale R. Shackle, dated April 30,
1991.
10.10(1)(+) Relocation Loan Agreement with Dr. Dale R. Shackle, dated
August 2, 1991.
10.11(1)(+) Employment Agreement with Mr. Calvin L. Reed, dated May 28, 1991.
10.12(1) Loan Agreement between the Company and Baccarat Electronics Inc.,
dated July 17, 1990.
10.13(1) Amendment No. 1 to Loan between the Company and Baccarat
Electronics, dated March 15, 1991.
10.14(1) Amendment No. 2 to Loan between the Company and Baccarat
Electronics, dated March 24, 1992.
10.15(1) Settlement Agreement and General Release by and among Jorgen S.
Lundsgaard, H. Hope, S. Hope, H&L, HII, Lithion, HTI, Devres and
the Company, dated September 9, 1991.
10.16(1) Settlement Agreement by and among the Company, Ultracell (Cayman
Islands), Innovision A/S, ERL, Innocell and JL ApS, dated
March 21, 1992.
10.17(1) Options to purchase an aggregate of 375,000 shares of the Common
Stock of the Company issued to Carl E. Berg by four individuals,
dated March 21, 1992.
10.18(1) Option to purchase shares of Innocell ApS issued to Ultracell
(Cayman Islands) by Jorgen S. Lundsgaard, dated March 21, 1992.
10.19(1) Letter Agreement by and between the Company and Jorgen S.
Lundsgaard, dated March 21, 1992.
10.20(1) Indemnification Agreement by and between the Company and Carl E.
Berg, dated March 21, 1992.
10.21(1) Promissory Note for $1,100,000 in favor of Carl E. Berg, dated
March 24, 1992.
10.22(1) Addendum to Promissory Note for $1,100,000, dated March 24, 1992.
10.23(2)(+) Employee Loan Agreement between the Company and William Masuda,
dated July 1, 1992.
10.24(2) Amendment No. 3 to Loan Agreement and Promissory Note between the
Company and Baccarat Electronics, Inc., dated August 17, 1992.
10.25(4)(*) Agreement between Motorola, Inc., and the Company, effective
November 30, 1992.
10.26(5)(*) Agreement between Hewlett-Packard Company, Valence Technology
Cayman Islands Inc. and the Company, dated as of January 18,
1994.
10.27(5)(*) Joint Venture Agreement between Goldtron Cayman Islands Inc. and
Valence Technology Cayman Islands Inc., dated as of March 15,
1994.
10.28(5)(*) License and Support Agreement between Goldtron Cayman Islands
Inc. and Valence Technology Cayman Islands Inc., dated as of
March 15, 1994.
10.29(5)(*) Battery Laminate Supply Agreement between Goldtron Cayman Islands
Inc. and Valence Technology Cayman Islands Inc., dated as of
March 16, 1994.
10.30(5)(*) Joint Development and License Agreement between Eveready Battery
Company, Inc., the Company and Valence Technology Cayman Islands
Inc., dated as of May 20, 1994.
10.31(5) Lease Agreement between the Company and Berg & Berg Developers
for the Premises at 6781 Via Del Oro and 160 Great Oaks, San
Jose, California 95119, dated as of May 1, 1993.

-32-
<PAGE>

10.32(6) Purchase Agreement between the Company and Whittaker Technical
Products, Inc. for the Premises at 301 Conestoga Way, Henderson,
Nevada 89015, dated as of September 21, 1994.
10.33(6) (*) Joint Research and Development Agreement between the Company and
AC Delco Systems Division of General Motors Corporation, dated as
of September 15, 1994.
10.34(7) (*) Technology Transfer Agreement between the Company and Bell
Communications Research, Inc., dated as of June 29, 1995.
10.35(8) (*) Joint Venture Agreement between the Company, through its Dutch
subsidiary, and Hanil Telecom Co., Ltd., dated as of July 10,
1996.
10.36(8) (*) License and Support Agreement between the Company, through its
Dutch subsidiary, and Hanil Valence Co., Ltd.
10.37(8) (*) Battery Laminate Supply Agreement between the Company, through
its Dutch subsidiary, and Hanil Valence Co., Ltd.
10.38(8) (*) Letter Agreement from the Company, through its Dutch subsidiary,
to Hanil Telecom Co., Ltd.
10.39(9) (*) Joint Venture Agreement between the Company and Alliant
Techsystems.
10.40(9) (*) License and Support Agreement between the Company and Alliant /
Valence, L.L.C.
10.41(9) (*) Battery Laminate Supply Agreement between the Company and Alliant
/ Valence, L.L.C.
10.42(10) 1990 Stock Option Plan as amended on October 3, 1997.
10.43(10) 1996 Non-Employee Directors' Stock Option Plan as amended on
October 3, 1997.
10.44(11)(+) Early Exercise Stock Purchase Agreement dated March 5, 1998
between Valence Technology, Inc. and Lev M. Dawson regarding
option to purchase 660,494 shares, including exhibits..
10.45(11)(+) Promissory Note issued by Lev M. Dawson to Valence Technology,
Inc. in the amount of $3,343,750.88 (included as Exhibit D to
Exhibit 10.45).
10.46(11)(+) Early Exercise Stock Purchase Agreement dated March 5, 1998
between Valence Technology, Inc.and Lev M. Dawson regarding
option to purchase 300,000 shares, including exhibits.
10.47(11)(+) Promissory Note issued by Lev M. Dawson to Valence Technology,
Inc. in the amount of $1,518,750 (included as Exhibit D to
Exhibit 10.47).
10.48(11)(+) Stock Pledge Agreement dated March 5, 1998 by Lev M. Dawson
(included as Exhibit E to Exhibit 10.45 and Exhibit 10.47).
10.49 Hanil Valence Co., Ltd. Report on Audit of Financial Statements
for the Year Ended March 31, 1998.
21.1 List of subsidiaries of the Company.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule
______________________________________________________________________________
(1) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 33-46765), AS AMENDED.

(2) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 33-52888), AS AMENDED.

(3) INCORPORATED BY REFERENCE TO EXHIBIT 22.1 IN THE COMPANY'S REGISTRATION
STATEMENT ON FORM S-1 (FILE NO. 33-52888), AS AMENDED.

(4) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10-K FILED FOR FISCAL YEAR ENDED MARCH 28, 1993.

(5) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10-K FILED FOR FISCAL YEAR ENDED MARCH 27, 1994.

(6) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10-K FILED FOR FISCAL YEAR ENDED MARCH 26, 1995.

(7) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10-Q FILED FOR FISCAL QUARTER ENDED JUNE 25, 1995.

(8) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10-Q FILED FOR FISCAL QUARTER ENDED JUNE 30, 1996.

-33-
<PAGE>

(9) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S FORM
10-Q FILED FOR FISCAL QUARTER ENDED SEPTEMBER 29, 1996.

(10) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-43203) FILED ON
DECEMBER 24, 1997.

(11) INCORPORATED BY REFERENCE TO THE INDICATED EXHIBIT IN THE SCHEDULE 13D
FILED BY LEV M. DAWSON ON MARCH 16, 1998.

(+) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS.

(*) PORTIONS OF THE TEXT HAVE BEEN OMITTED. A SEPARATE FILING OF SUCH OMITTED
TEXT HAS BEEN MADE WITH THE COMMISSION AS PART OF REGISTRANT'S APPLICATION
FOR CONFIDENTIAL TREATMENT.

-34-
<PAGE>
______________________________________________________________________________

SIGNATURES

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

VALENCE TECHNOLOGY, INC.

June 29, 1998 By: /s/Lev M. Dawson
---------------------
Lev M. Dawson
Chairman of the Board, Chief Executive Officer and President
(Principal Executive Officer)

June 29, 1998 By: /s/David P. Archibald
--------------------------
David P. Archibald
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

-35-
<PAGE>

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

SIGNATURE TITLE DATE

/s/Lev M. Dawson Chairman of the Board, Chief June 29, 1998
----------------- Executive Officer and President
Lev M. Dawson

/s/Carl E. Berg Director June 29, 1998
-----------------
Carl E. Berg

/s/Alan F. Shugart Director June 29, 1998
-----------------
Alan F. Shugart

-36-
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGES
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of March 29, 1998 and March 30, 1997 . F-3
Consolidated Financial Statements for the period from
March 3, 1989 (date of inception) to March 29, 1998 and
for the years ending March 29, 1998, March 30, 1997 and
March 31, 1996:
Consolidated Statements of Operations . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity (Deficit) . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . F-7

HANIL VALENCE CO., LTD. (Included in Exhibit 10.49)

FINANCIAL STATEMENTS:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 2
Balance Sheets as of March 31, 1998 and March 31, 1997 (unaudited). . 3
Financial Statements for the year ended March 31, 1998 and the
period from July 19, 1996 (date of inception) to March 31, 1997
(unaudited) and for the cumulative period from July 19, 1996
(date of inception) to March 31, 1998:
Statement of Operations and Accumulated Deficit . . . . . . . . 5
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . 7
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 11

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
Valence Technology, Inc. and Subsidiaries
Henderson, Nevada

We have audited the accompanying consolidated financial statements of Valence
Technology, Inc. and subsidiaries (companies in the development stage) listed in
Item 14A of this Form 10-K. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Valence
Technology, Inc. and subsidiaries (companies in the development stage) as of
March 29, 1998 and March 30, 1997, and the consolidated results of their
operations and their cash flows for the period from March 3, 1989 (date of
inception) to March 29, 1998 and for each of the years ending March 29, 1998,
March 30, 1997 and March 31, 1996, in conformity with generally accepted
accounting principles.

The accompanying 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 has sustained recurring losses
from operations which raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
that may result from the outcome of this uncertainty.

COOPERS & LYBRAND L.L.P.

San Jose, California
May 8, 1998

F-2
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____
<TABLE>
<CAPTION>
March 29, March 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,400 $ 27,832
Short-term investments 9,556
Accounts receivable 1,429 431
Prepaids and other current assets 880 246
--------- ---------
Total current assets 10,709 38,065

Property, plant and equipment, net 31,712 17,191
Investment in joint venture 285
Other assets 188 270
--------- ---------
Total assets $ 42,894 $ 55,526
--------- ---------
--------- ---------
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 399 $ 1,433
Accounts payable 2,353 1,949
Accrued expenses 7,213 5,404
Accrued royalties and license fees 1,000 1,913
Advances 700
Accrued compensation 817 1,261
--------- ---------
Total current liabilities 12,482 11,960

Deferred revenue 2,500
Long-term debt, less current portion 4,950 5,217
--------- ---------
Total liabilities 19,932 17,177
--------- ---------
Commitments and Contingencies (Notes 7 and 11.)

STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value:
Authorized: 10,000 shares;
Issued and outstanding: none

Common stock, $0.001 par value:
Authorized: 50,000 shares;
Issued and outstanding: 25,067 and 21,745 shares at
March 29, 1998 and March 30, 1997, respectively 153,583 140,580
Notes receivable from shareholder (4,862)
Deficit accumulated during the development stage (128,012) (103,526)
Cumulative translation adjustment 2,253 1,295
--------- ---------
Total stockholders' equity 22,962 38,349
--------- ---------
Total liabilities and stockholders' equity $ 42,894 $ 55,526
--------- ---------
--------- ---------
</TABLE>

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

F-3
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

Period from
March 3, 1989
(date of Years ended,
inception) to -----------------------------------------
March 29, March 29, March 30, March 31,
1998 1998 1997 1996
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:

Research and development contracts $ 21,605 $ - $ - $ -
---------- --------- --------- ---------
Costs and expenses:

Research and product development 84,481 15,432 10,825 8,047

Marketing 3,532 855 205 486

General and administrative 39,429 7,066 6,168 5,614

Write-off of in-process technology 8,212 6,064

Investment in Danish subsidiary 3,489

Special charges 18,872
---------- --------- --------- ---------
Total costs and expenses 158,015 23,353 17,198 20,211
---------- --------- --------- ---------
Operating loss (136,410) (23,353) (17,198) (20,211)

Interest income 14,901 1,174 2,558 3,549

Interest expense (4,290) (528) (814) (931)

Equity in losses of Joint Venture (2,213) (1,779) (434)
---------- --------- --------- ---------

Net loss $ (128,012) $ (24,486) $ (15,888) $ (17,593)
---------- --------- --------- ---------
---------- --------- --------- ---------
Net loss per share, basic and diluted - $ (1.06) $ (0.73) $ (0.83)
---------- --------- --------- ---------
---------- --------- --------- ---------
Shares used in computing
net loss per share, basic and diluted - 23,010 21,684 21,261
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>

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

F-4
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the cumulative period from March 3, 1989 (date of inception) to March 29,
1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____
<TABLE>
<CAPTION>
Notes Deficit
Receiv- Options Accumulated Cumulative
Common Stock, $0.001 able to During the Trans-
Par Value Per Share from Purchase Develop- lation
------------------ Share- Treasury ment Adjust-
Shares Amount holder Stock Stage ment Totals
------- -------- ------- ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders:
March 1989 at $0.001 per share 4,500 $ 5 $ 5
May 1989 at $0.01 per share 3,370 34 34
Net loss $ (394) (394)
------- -------- --------- -------
Balances, March 31, 1990 7,870 39 (394) (355)
Issuance of common stock for cash in
September 1990 at $0.01 per share 500 5 5
Net loss (5,137) (5,137)
------- -------- --------- -------
Balances, March 31, 1991 8,370 44 (5,531) (5,487)
Exercise of warrants 130 572 572
Options purchased $(1,125) (1,125)
Net loss (3,769) (3,769)
------- -------- ------- --------- -------
Balances, March 31, 1992 8,500 616 $(1,125) (9,300) (9,809)
Issuance of common stock in public
offerings, net of offering costs:
May and June 1992 at $8.00
per share 4,140 30,155 30,155
November 1992 at $18.00 per share 3,380 57,031 57,031
Exercise of Stock Options: July 1992
through March 1993 at $0.01
to $0,25 per share 289 21 21
Compensation related to exercised
stock options 75 75
Net loss (8,463) (8,463)
------- -------- ------- --------- -------
Balances, March 28, 1993 16,309 87,898 $(1,125) (17,763) 69,010
Issuance of common stock in public
offering in December 1993 at $14.00
per share, net of offering costs 3,680 48,492 48,492
Exercise of stock options during year
at $0.01 to $13.00 per share 410 481 481
Compensation related to exercised
stock options 243 243
Exercise of options to purchase
treasury stock and retirement
of shares (375) (1,125) 1,125 -
Net loss (18,653) (18,653)
Translation adjustment $ 56 56
------- -------- ------- --------- ------ -------
Balances, March 27, 1994 20,024 135,989 (36,416) 56 99,629
Exercise of stock options during year
at $0.01 to $4.00 per share 83 33 33
Compensation related to exercised
stock options 43 43
Net loss (33,629) (33,629)
Translation adjustment 708 708
------- -------- ------- --------- ------ -------
Balances, March 26, 1995 20,107 136,065 (70,045) 764 66,784
Exercise of stock options during year
at $0.25 to $4.00 per share 58 179 179
Common stock issued to purchase
Bellcore technology 1,500 4,063 4,063
Net loss (17,593) (17,593)
Translation adjustment (423) (423)
------- -------- ------- --------- ------ -------
Balances, March 31, 1996 21,665 140,307 (87,638) 341 53,010
Exercise of stock options during year
at $1.88 to $4.31 per share 80 273 273
Net loss (15,888) (15,888)
Translation adjustment 954 954
------- -------- ------- --------- ------ -------
Balances, March 30, 1997 21,745 140,580 (103,526) 1,295 38,349
Exercise of options and warrants
at $0.01 to $7.13 per share 3,322 11,228 $(4,862) 6,366
Stock compensation 1,775 1,775
Net loss (24,486) (24,486)
Translation adjustment 958 958
------- -------- ------- ------- --------- ------ -------
Balances, March 29, 1998 25,067 $153,583 $(4,862) $ 0 $(128,012) $2,253 $22,962
------- -------- ------- ------- --------- ------ -------
------- -------- ------- ------- --------- ------ -------
</TABLE>

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

F-5
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
_____
<TABLE>
<CAPTION>
Period from
March 3, 1989
(date of Twelve Months Ended,
inception) to ---------------------------------------
March 29, 1998 March 29, March 30, March 31,
1998 1997 1996
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(128,012) $ (24,486) $ (15,888) $ (17,593)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 21,619 1,774 3,536 5,198
Write-off of equipment 14,792 25
Write-off of in-process technology 6,211 4,064
Compensation related to stock options 3,196 1,775 273
Noncash charge related to acquisition of
Danish subsidiary 2,245
Equity in (Earnings) Losses of Joint Venture 2,215 1,781 434
Changes in assets and liabilities:
Accounts receivable (340) (998) 114 544
Prepaid expenses and other current assets (1,886) (552) 505 (151)
Accounts payable 2,252 404 698 (1,166)
Accrued liabilities 1,445 1,152 1,039 (3,304)
Deferred revenue 2,500 2,500
--------- --------- -------- ---------
Net cash used in operating activities (73,763) (16,650) (9,537) (12,135)
--------- --------- -------- ---------
Cash flows from investing activities:
Purchase of long-term investments (665,789) (187,561) (81,139) (146,371)
Maturities of long-term investments 661,545 197,117 99,621 171,958
Capital expenditures (55,547) (16,295) (3,379) (2,306)
Other (222)
--------- --------- -------- ---------
Net cash provided by (used in) investing (60,013) (6,739) 15,103 23,281
activities --------- --------- -------- ---------
Cash flows from financing activities:
Property and equipment grants 4,419 125 356
Borrowings of long-term debt 15,502
Payments of long-term debt:
Product development loan (482)
Shareholder and director (6,173)
Other long-term debt (11,837) (1,301) (1,797) (3,214)
Proceeds from issuance of common stock,
net of issuance costs 143,150 6,366 273 179
--------- --------- -------- ---------
Net cash provided by (used in) financing 144,579 5,065 (1,399) (2,679)
activities --------- --------- -------- ---------
Effect of foreign exchange rates on cash and cash
equivalents (2,403) (1,108) (904) (500)
--------- --------- -------- ---------
Increase (decrease) in cash and cash equivalents 8,400 (19,432) 3,263 7,967
Cash and cash equivalents, beginning of period 0 27,832 24,569 16,602
--------- --------- -------- ---------
Cash and cash equivalents, end of period $ 8,400 $ 8,400 $ 27,832 $ 24,569
--------- --------- -------- ---------
--------- --------- -------- ---------
SUPPLEMENTAL DISCLOSURES:
Acquisition of property, plant and equipment
through grants and long-term debt $ 7,957
Acquisition of property and equipment through capitalized leases 1,459
Exercise of warrants in cancellation of indebtedness 572
Exercise of options to purchase treasury stock and retirement of
treasury stock 1,125
Interest paid 3,668 $ 814 $ 924
Return of equipment for extinguishment of debt 301 301
Exchange of common stock for in-process technology 4,063 4,063
Disposal of equipment fully reserved for in prior year 3,318 1,679 1,639
Exercise of options with note receivable 4,862 $ 4,862
Investment in joint venture 2,500 2,500

</TABLE>

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

F-6

<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

1. ORGANIZATION AND BUSINESS OF THE COMPANY:

Valence Technology, Inc. (the "Company") is engaged in research and development
to produce advanced rechargeable batteries based on lithium and polymer
technologies. The Company's primary activities to date have been acquiring and
developing its initial technology, implementing a production line, manufacturing
limited quantities of prototype batteries, recruiting personnel and obtaining
capital; such activities have resulted in losses since inception.

The Company's current research prototype batteries do not meet all of the
specifications demanded by the marketplace, and the Company presently has no
products available for sale. To achieve profitable operations, the Company must
successfully develop, manufacture and market its products. There can be no
assurance that any products can be developed or manufactured at an acceptable
cost and with appropriate performance characteristics, or that such products
will be successfully marketed.

The Company uses a 52/53-week fiscal year, ending on the Sunday closest to March
31. All years presented are 52-week years except fiscal 1996 which is 53 weeks.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

BASIS OF PRESENTATION:

USE OF ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.

CASH AND CASH EQUIVALENTS:

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Primarily all cash and cash equivalents are held by three banks and three
major investment brokerage companies, and primarily comprise money market
funds and investment grade bank and commercial paper.

INVESTMENTS:

Because of the Company's intent and ability to hold certain investments
to maturity or until called by the issuer, such securities have been
classified as "held to maturity" securities and reported at amortized
cost. Realized gains and losses on sales of all such investments are
reported in earnings and computed using the specific identification cost
method. Held to maturity securities with maturities less than one year
from the balance sheet date are classified as short-term and those with
maturities greater than one year from the balance sheet date are
classified as long-term.

Continued
F-7
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

PROPERTY, PLANT AND EQUIPMENT GRANTS:

Grants relating to the acquisition of property, plant and equipment are
recorded upon satisfaction of the capital investment requirements
underlying the grant and the receipt of grant funds. Such grants are
deferred and amortized over the estimated useful lives of the related
assets as a reduction of depreciation expense.

DEPRECIATION AND AMORTIZATION:

Property and equipment are stated at cost and depreciated on the
straight-line method over their estimated useful lives, generally three to
five years. Building improvements are amortized over the lesser of their
estimated useful life, generally five years, or the remaining mortgage
term. The Company assesses its ability to recover the net book value of
its long-term assets. The carrying value of assets determined to be
impaired is written down to net realizable value.

LONG-LIVED ASSETS:

The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
might not be recoverable. In certain situations, an impairment loss
would be recognized. The Company recorded impairment losses of nil,
nil, and $16,489 for the years ended March 29, 1998, March 30, 1997, and
March 31, 1996.

CONTRACT REVENUES:

Research and development contract revenues are recognized over the
performance period in accordance with the contract terms. Payments related
to future performance are deferred and recorded as revenues as they are
earned over specified future performance periods.

RESEARCH AND DEVELOPMENT:

Research and development costs are expensed as incurred.

FOREIGN CURRENCY TRANSLATION:

Exchange adjustments resulting from foreign currency transactions are
generally recognized in operations, whereas adjustments resulting from the
translation of financial statements are reflected as a separate component
of stockholders' equity. Net foreign currency transaction gains or losses
are not material in any of the years presented.

INCOME TAXES:

The Company utilizes the liability method to account for income taxes where
deferred tax assets or liabilities are determined based on the differences
between the financial statements and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
and other accrued liabilities, approximate fair value due to their short
maturities. Based on borrowing rates currently available to the Company
for loans with similar terms, the carrying value of its debt obligations
approximates fair value.

Continued
F-8
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

NET LOSS PER SHARE:

Effective December 31, 1997, the Company adopted Financial Accounting
Standards Board Statement No. 128 "Earnings Per Share" (SFAS 128) and
accordingly all prior periods have been restated. SFAS 128 specifies the
computation, presentation, and disclosure requirements for net income
(loss) per share.

Basic EPS is computed as net income (loss) divided by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares
issuable through stock options and warrants. Common equivalent shares
are excluded from the computation of net loss per share if their effect
is anti-dilutive.

The following is a reconciliation of the numerator (net loss) and
denominator (number of shares) used in the basic and diluted EPS
calculation:

Years Ended,
--------------------------------------------------------
March 29, 1998 March 30, 1997 March 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Loss per share:
Net loss $(24,486) $(15,888) $(17,593)
Weighted average
shares outstanding 23,010 21,684 21,261
-------- -------- --------
Earnings per share,
\basic and diluted $ (1.06) $ (0.73) $ (0.83)
</TABLE>

Shares excluded from the calculation of diluted EPS as their effect was
anti-dilutive was 4,983, 4,038, and 4,225 in fiscal years ended March
29, 1998, March 30, 1997, and March 31, 1996, respectively.

RECLASSIFICATIONS:

Certain amounts in the prior years' financial statements have been
reclassified to conform with fiscal 1998 presentation. These
reclassifications did not change previously reported total assets,
liabilities, stockholders' equity, loss from operations, or net loss.

Continued
F-9
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

RECENT PRONOUNCEMENTS:

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.130, "REPORTING
COMPREHENSIVE INCOME"

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as "the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners
and distributions to owners." SFAS 130 is effective for fiscal years
beginning after December 15, 1997, and reclassification of financial
statements for earlier periods provided for comparative purposes is
required. The impact of its implementation on the consolidated
financial statements of the Company has not yet been determined.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.131, "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS 131 generally
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise." Under SFAS 131,
operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that is used internally. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997, and
restatement of comparative information for earlier years is required.
However, SFAS 131 is not required to be applied to interim financial
statements in the initial year of application. The Company has not
determined the impact, if any, on the reporting of segment information.

Continued
F-10
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

3. INVESTMENTS:

The Company had no investments at March 29, 1998.

The carrying and market values of investments at March 30, 1997 were as
follows:

March 30, 1997
---------------------------
Carrying Unrealized Unrealized Fair
Held-to-Maturity Value Gains Losses Value
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government and Agency Obligations $ 2,510 $ (10) $ 2,500
Bank Paper 2,000 2,000
Collateralized Mortgage Obligations 3,046 $ 1 (23) 3,024
Other 2,000 2,000
--------- --------- ------ --------
Total Held-to Maturity Investments $ 9,556 $ 1 $ (33) $ 9,524
--------- --------- ------ --------
--------- --------- ------ --------
</TABLE>

Continued
F-11
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

4. PROPERTY, PLANT AND EQUIPMENT:

March 29, March 30,
1998 1997
----------- -----------
<S> <C> <C>
Building and land $ 9,190 $ 8,447
Leasehold improvements 1,377 1,297
Machinery and equipment 8,711 7,755
Office and computer equipment 994 820
Construction in progress 30,395 16,050
--------- --------
Total cost 50,667 34,369
Less capital grants (3,965) (3,962)
--------- --------
Total cost, net of capital grants 46,702 30,407
Less accumulated depreciation and amortization (14,990) (13,216)
--------- --------
Total cost, net of capital grants, depreciation
and amortization $ 31,712 $ 17,191
--------- ---------
--------- ---------
</TABLE>

During fiscal 1995, the Company wrote down the carrying value of property, plant
and equipment to its net realizable value. This amount of $16,489 is included
as a special charge in the consolidated statements of operations.

5. LONG-TERM DEBT:

<TABLE>
<CAPTION>
March 29, March 30,
1998 1997
---------- -----------
<S> <C> <C>
Equipment term loans $ 50 $ 1,091
Facility loans 5,299 5,559
-------- --------
5,349 6,650
Less amounts due within one year (399) (1,433)
-------- --------
Long-term debt due after one year $ 4,950 $ 5,217
-------- --------
-------- --------

</TABLE>

EQUIPMENT TERM LOANS:

The Company has one equipment term loan outstanding with an institutional
lender in the amount of $50. The term loan bears interest at a fixed rate
of 9.50% and is collateralized by certain of the Company's equipment.
Principal and accrued interest are payable in monthly installments which
expire in February 2001. Under the loan, the Company is required to
maintain certain financial ratios and meet other covenants, including
restrictions on additional indebtedness and payments of dividends.

FACILITY LOANS:

During fiscal 1995, a bank provided the Company a $2,500 facility term loan
under which drawdowns were available for the purchase and improvement of a
facility in Henderson, Nevada. The facility term loan of $1,772 at
March 29, 1998, bears interest at 10.4% and is collateralized by the
related building. The Company makes monthly principal and interest
payments of $14 monthly through November 2001, and a final principal
payment of $1,346 is due December 2001.

The Company also has a 15 year facility loan for the Northern Ireland
building payable in equal monthly principal payments of $25 plus accrued
interest. The facility term loan bears interest at an annually adjustable
published interest rate index (7.875% at March 29, 1998) on the outstanding
principal of $3,527 at March 29, 1998. The loan is collateralized by the
related building.

In July 1997, the Company entered into an amended loan agreement with a
shareholder which allows the Company to borrow, prepay and re-borrow up
to the full $10,000 principal under the promissory note on a revolving
basis and provided that the lender will subordinate its security
interest to other lenders when the loan balance is at zero. As of March
29 1998, the Company had no outstanding balance under the Loan
Agreement. The loan bears interest at one percent over lender's
principal line of credit (8.50% at March 29, 1998) and is available
through August 30, 2002.

Continued
F-12
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

WORKING CAPITAL FACILITIES:

The Company has a $2,000 working capital line of credit agreement with a
bank which expires June 1998. The line of credit is collateralized by the
Company's assets. Under the working capital line of credit agreement: (i)
any borrowings from the Company's stockholder and director will be
subordinated to any borrowings from the bank; (ii) the Company will be
required to maintain certain specified financial ratios and meet other
performance criteria, and (iii) the Company will be restricted from paying
cash dividends. The line of credit has a variable interest rate which was
8.5% at March 29, 1998. During fiscal 1998, the Company did not have any
borrowings outstanding under this agreement.

Principal payments on long-term debt at March 29, 1998 are due as follows:

<TABLE>
<CAPTION>
Facility and
Fiscal Year Term Loans
------------ -------------
<S> <C>
1999 $ 399
2000 415
2001 357
2002 1,615
2003 291
Thereafter 2,272
---------
$ 5,349
---------
---------
</TABLE>

6. GRANT AGREEMENT AND OFFERS:

During fiscal 1994, the Company, through its Dutch subsidiary, signed an
agreement with the Northern Ireland Industrial Development Board (the IDB) to
open an automated manufacturing plant in Northern Ireland in exchange for
capital and revenue grants from the IDB. The Company has also received offers
from the IDB to receive additional grants. The grants available under the
agreement and offers provide for an aggregate of up to L27,555 ($46,361 as of
March 29, 1998), to be available over a five-year period through October 31,
2001. As of March 29, 1998, the Company had received grants aggregating L4,035
($6,789) reducing remaining grants available to L23,520 ($39,572). The IDB
offers also provided a fully amortized 15-year mortgage to finance the purchase
of a manufacturing plant, which the Company has utilized (see Note 5).

As a condition to receiving funding from the IDB, the subsidiary must obtain a
minimum of L12,000 in debt or equity financing from the Company. Aggregate
funding under the grants is limited to L4,035 until the Company has recognized
$4,000 in aggregate revenue from the sale of its batteries produced in Northern
Ireland.

The amount of the grants available under the agreement and offers is primarily
dependent on the level of capital expenditures made by the Company.
Substantially all of the funding received under the grants is repayable to the
IDB if the subsidiary is in default under the agreement and offers, which
includes the cessation of business in Northern Ireland; yet, the agreement does
allow for a temporary cessation of operations without penalty to the Company.
During fiscal 1995, the Company entered into such a temporary break in
operations. Funding received under the grants to offset capital expenditures is
repayable if related equipment is sold, transferred or otherwise disposed of
during a four-year period after the date of grant. In addition, a portion of
funding received under the grants may also be repayable if the subsidiary fails
to maintain specified employment levels for the two-year period immediately
after the end of the five-year grant period. As a result of the temporary
cessation of Northern Ireland business activity, specified employment levels
have not been maintained, but the IDB is not seeking repayment at this time.
The Company has guaranteed the subsidiary's obligations to the IDB under the
agreement.
Continued
F-13
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

There can be no assurance that the Company will be able to meet the requirements
necessary for it to receive and retain grants under the IDB agreement and
offers.

7. COMMITMENTS AND CONTINGENCIES:

LEASES:

The Company leased certain facilities under a noncancelable operating lease
which had an expiration date of April 1998. The facilities were leased
from a partnership whose general partner is a stockholder and director of
the Company. Under the terms of the lease, the Company was responsible for
utilities, taxes, insurance and maintenance. During fiscal years 1995 and
1996, the Company vacated the facilities. At March 29, 1998, the
facilities were fully sub-leased by the lessor and the Company was released
from any further obligation.

Total rent expense for the period from March 3, 1989 (date of inception) to
March 29, 1998 and for the years ended March 29, 1998, March 30, 1997 and
March 31, 1996 was $1,456, $66, $44 and $52 respectively.

LITIGATION:

In May 1994, a series of class action lawsuits were filed in the United
States District Court for the Northern District of California against the
Company and certain of its present and former officers and directors.
These lawsuits were consolidated, and in September 1994 the plaintiffs
filed a consolidated and amended class action complaint. Following the
Court's Orders on motions to dismiss the complaint, which were granted in
part and denied in part, the plaintiffs filed an amended complaint in
October 1995 ("Complaint"). The Complaint alleges violations of the
federal securities laws against the Company, certain of its present and
former officers and directors, and the underwriters of the Company's public
stock offerings, claiming that the defendants issued a series of false and
misleading statements, including filings with the Securities and Exchange
Commission, with regard to the Company's business and future prospects.
The plaintiffs seek to represent a class of persons who purchased the
Company's common stock between May 7, 1992 and August 10, 1994. The
Complaint seeks unspecified compensatory and punitive damages, attorney's
fees and costs.

On January 23, 1996, the Court dismissed, with prejudice, all claims
against the underwriters of the Company's public stock offerings, and one
claim against the Company and its present and former officers and
directors. On April 29, 1996, the Court dismissed with prejudice all
remaining claims against a present director and limited claims against a
former officer and director to the period when that person was an officer.
In December 1996, the Company and the individual defendants filed motions
for summary judgment, which the plaintiffs opposed. In November 1997, the
Court granted the Company's motion for summary judgment and entered a
judgment in favor of all defendants. Plaintiffs have appealed and the case
is pending before the United States Court of Appeals for the Ninth Circuit.

The ultimate outcome of these actions cannot presently be determined.
Accordingly, no provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.

In addition to the litigation noted above, the Company is from time to time
subject to routine litigation incidental to its business. The Company
believes that the results of this routine litigation will not have a
material adverse effect on the Company's financial condition.

Continued
F-14
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

8. Stockholders' Equity:

STOCK OPTIONS AND WARRANTS:

The Company has a stock option plan (the "1990 Plan") under which options
granted may be incentive stock options or supplemental stock options.
Options are to be granted at a price not less than fair value (incentive
options) or 85% of fair market value (supplemental options) on the date of
grant as determined by the Board of Directors. The options are exercisable
as determined by the Board of Directors and are generally exercisable over
a five-year period, with 20% becoming exercisable after the first year, an
additional 20% becoming exercisable after the second year, and an
additional 5% becoming exercisable every three months thereafter. During
1995, the Company issued options exercisable over a five-year period with
5% of the options becoming exercisable every three months through the
option vesting period. During 1996, the Company issued options exercisable
over a two-year period with 12.5% of the options becoming exercisable every
three months through the option vesting period. During 1996, the Company
issued options exercisable over a two-year period with 12.5% of the options
becoming exercisable every three months through the option vesting period,
and options exercisable over a three-year period with 8.3% of the options
becoming exercisable every three months through the option vesting period.
The options expire no later than ten years from the date of grant.
Unvested options are canceled and returned to the Plan upon an employee's
termination. Vested options, not exercised within 90 days of termination,
are also canceled and returned to the Plan. At March 29, 1998, the Company
had no shares available for grant under the 1990 Plan.

In fiscal 1993, the Board of Directors authorized the issuance of 210 stock
warrants, which have the same terms as stock options granted under the 1990
Stock Option Plan, to employees of the Company's Danish subsidiary.

In October 1997, the Board of Directors adopted the 1997 Non-Officer Stock
Option Plan (1997 Plan). The Company may grant options to non-officer
employees and consultants under the 1997 Plan. Options are to be granted
at a price not less than fair value (incentive options) on the date of
grant as determined by the Board of Directors. The options are exercisable
as determined by the Board of Directors and are generally exercisable
quarterly over a three-year period. The options expire no later than ten
years from the date of grant. Unvested options are cancelLed and returned
to the Plan upon an employee's termination. Vested options, not exercised
within 90 days of termination, also are cancelLed and returned to the Plan.
At March 29, 1998, the Company had 2,731 shares available for grant
under the 1997 Plan.

Prior to adopting the 1990 Stock Option Plan, the Board of Directors had
granted options to three employees of the Company to purchase a total of
850 shares of common stock. Additionally, in fiscal 1992 the Company
granted options to purchase a total of 330 shares of common stock to
certain directors and employees. These options vest over five years with
20% becoming exercisable after the first year, with an additional 20%
becoming exercisable after the second year, and an additional 5% becoming
exercisable every three months thereafter. The options expire ten years
from the date of grant.

On January 1, 1998, the Company granted options to Mr. Dawson, the
company's new Chairman of the Board, Chief Executive Officer and President,
an incentive stock option to purchase 40 shares which was granted
pursuant to the Company's 1990 Stock Option Plan (the "1990 Plan"). Also,
an option to purchase 660 shares was granted pursuant to the Company's
1990 Plan and an option to purchase 300 shares was granted outside of
any equity plan of the Company, neither of which are incentive stock
options (the "Nonstatutory Options"). The exercise price of all three
options is $5.0625 per share. The Compensation Committee of the Company
approved the early exercise of the Nonstatutory Options on March 5, 1998.
The options permitted exercise by cash, shares, full recourse notes or
non-recourse notes secured by independent collateral. The Nonstatutory
Options were exercised on March 5, 1998 with non-recourse promissory notes
secured by the shares acquired upon exercise plus 843 shares previously
held by Mr. Dawson. Purchased shares for which the underlying options have
not vested

Continued
F-15
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

are subject to repurchase by the Company. As of March 29, 1998,
none of the shares in the underlying options have vested.

During fiscal year 1998, the Company accelerated the vesting and extended
the term of certain options resulting in a new measurement date. The
difference between the exercise price and fair market value of the
Company's common stock at the date of issue of the stock options,
totaling $1,775, has been recorded as compensation expense in fiscal year
1998.

The fair value of each option grant is estimated at the date of grant using
the Black-Sholes pricing model with the following weighted average
assumptions for grants in 1998 and 1997:

1998 1997
------------ -------------
<S> <C> <C>
Risk-free Interest Rate 5.65% 6.51%
Expected Life 2.17 years 4.76 years
Volatility 71.80 78.00
Dividend Yield - -
</TABLE>

Aggregate option activity is as follows:

Outstanding Options
----------------------------------
Number of Weighted Avg.
Shares Exercise Price
-------------- -----------------
<S> <C> <C>
Balances, March 28, 1993 2,699 $2.54
Granted 536 $13.63
Exercised (410) $1.17
Canceled (398) $12.03
-----------
Balances, March 27, 1994 2,427 $3.67
Granted 1,758 $3.86
Exercised (83) $0.40
Canceled (1,400) $8.02
-----------
Balances, March 26, 1995 2,702 $1.64
Granted 498 $4.71
Exercised (58) $3.09
Canceled (140) $2.85
-----------
Balances, March 31, 1996 3,002 $2.06
Granted 1,126 $5.21
Exercised (80) $3.41
Canceled (20) $6.59
-----------
Balances, March 30, 1997 4,028 $3.14
Granted 1,649 $4.50
Exercised (2,100) $2.70
Canceled (404) $5.68
-----------
Balances, March 29, 1998 3,173 $4.07
-----------
-----------

</TABLE>

At March 29, 1998 and March 30, 1997, vested options to purchase 2,273 and
1,950 shares, respectively, were unexercised. The weighted average fair
value per share of those options granted in 1998, 1997, and 1996 was
$2.23, $3.73, and $2.67, respectively.

Continued
F-16
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

The following table summarizes information about fixed stock options
outstanding at March 29, 1998:

Options Outstanding Options Exercisable
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (years) Price Exercisable Price
------------- ------------ ----------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$0.01 - $1.88 492 3.31 $0.37 490 $0.36
$2.50 - $3.81 771 6.46 $3.39 638 $3.44
$4.00 - $4.94 942 8.68 $4.59 545 $4.48
$5.00 - $8.88 968 8.95 $6.00 600 $5.73
----- -----
3,173 2,273
</TABLE>

At March 29, 1998, the Company has reserved 4,351 shares of common
stock for the exercise of stock options and warrants.

The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
based Compensation." Accordingly, no compensation expense has been
recognized for the Company's stock plans. Had compensation expense for the
stock plans been determined based on the fair value at the grant date for
options granted in 1998 and 1997 consistent with the provisions of SFAS
123, the pro forma net income would have been reported as follows:

<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net loss - as reported $ (24,486) $ (15,888)
Net loss - pro forma (27,422) (16,787)
Net loss per share - as reported (1.06) (0.73)
Net loss per share - pro forma (1.19) (0.78)
</TABLE>

In February 1996, the Board of Directors adopted a stock plan for outside
Directors (the "1996 Non-Employee Director's Stock Option Plan"). The plan
provides that new directors will receive an initial stock option of 100
shares of common stock upon their election to the Board. The exercise price
for this initial option will be the fair market value on the day it is
granted. This initial option will vest one-fifth on the first and second
anniversaries of the grant of the option, and quarterly over the next three
years. On the anniversary of the director's election to the Board, the
director will receive an annual stock option in the amount of 100 shares
less the total amount of unvested shares remaining in the initial option
and any annual options previously granted. The exercise price for this new
option will be the fair market value on the day it is granted. This annual
option will vest quarterly over a three year period. A director who had
been granted an option prior to the adoption of the 1996 Non-Employee
Director's Stock Option Plan will start receiving annual grants on
anniversary date of that director's prior grant. A director who had not
received an option upon becoming a director will receive an initial stock
option of 100 shares on the date of the adoption of the plan, and then
receive annual options on the anniversary dates of that grant. As of March
29, 1998, a total of 269 options have been granted to two directors under
this plan.

OTHER WARRANTS:

In connection with certain borrowings from a stockholder and director, the
Company issued a total of 1,353 warrants for the purchase of common stock
with exercise prices of between $4.00 and $6.40 per share, subject to
certain adjustments. In fiscal 1992, a total of 130 warrants were
exercised at an exercise price of $4.40 per share payable through the
cancellation of $520 of indebtedness including accrued interest. The
warrants expire on the earlier of the effective date of a reorganization of
the Company, as defined, or July 31, 1997. The warrants were deemed to
have a nominal value at their date of issuance. In fiscal 1998, the
remaining 1,223 warrants were exercised at $4.00 per share.

Continued
F-17
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

9. INCOME TAXES:

There was no provision for income taxes for fiscal years 1998, 1997 or 1996.
The provision for income taxes differs from the amount computed by applying
the federal statutory rate to the loss before income taxes as follows:

Year ended:
-----------------------------------------
March 28, March 30, March 31,
1998 1997 1996
------------- ------------- -----------
<S> <C> <C> <C>
Federal tax at statutory rate 34% 34% 34%
Change in valuation allowance (34) (34) (34)
------------- ------------- ----------
Tax provision - % - % - %
------------- ------------- ----------
------------- ------------- ----------
</TABLE>

The components of the net deferred tax asset as of March 29, 1998 and March 30,
1997 were as follows:

<TABLE>
<CAPTION>
March 29, March 30,
1998 1997
------------ -----------
<S> <C> <C>
Current assets:
Accrued liabilities $ 419 $ 696
Valuation allowance (419) (696)
--------- --------
$ - $ -
--------- --------
--------- --------
Noncurrent assets:
Depreciation and amortization $ 3,112 $ 3,250
Research and development credit carryforwards 719 719
Net operating loss carryforwards 18,970 18,530
Valuation allowance (22,801) (22,449)
--------- --------
$ - $ -
--------- --------
--------- --------
</TABLE>

At March 29, 1998, the Company had federal operating loss carryforwards
available to reduce future taxable income of approximately $55,793.

The Company has additional tax net operating loss carryforwards of approximately
$17,947 arising from the exercise of employee stock options, which can be
utilized to reduce future taxable income. The tax benefit when realized will be
reflected in stockholders' equity.

The carryforwards expire between 2008 to 2013, 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.

10. DEVELOPMENT CONTRACT:

In March 1991, the Company, its Danish subsidiary, and Delphi Automotive Systems
Group of General Motors (Delphi, formerly known as Delco Remy Division) entered
into a development agreement whereby the Company and its Danish subsidiary (the
Contractors) agreed to carry out research and development on batteries with an
emphasis on vehicular and load leveling/peak sharing applications. The original
contract consisted of an aggregate value of $20,000. In early fiscal 1995, the
Company received a contract from Delphi to provide follow on research and
product development, including the delivery of specified material, for an
aggregate of $900. As of March 26, 1995, the Contractors had billed and
received the entire $20,900 from Delphi.

Payments under the contract are nonrefundable and the Contractors have granted
to Delphi a worldwide, exclusive license to sell and manufacture load
leveling/peak sharing and vehicular batteries for a certain period of time with
a non-exclusive license thereafter. Delphi shall pay a royalty on each unit
manufactured and sold under its license until the year 2008.

The contract also provides for the use and ownership of patents developed under
the contract, including termination provisions in the event of certain
circumstances.

In September 1994, the Company and Delphi signed a new five year agreement to
combine efforts in developing the Company's rechargeable solid state lithium
polymer battery technology. Under the agreement, Delphi and the Company
combined their research and development activities in a new facility in
Henderson, Nevada. The new facility is owned by the Company, with Delphi paying
a fee of $50 per month over the five year term of the new agreement for access
to the

Continued
F-18
<PAGE>

VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

Company's research and development (of which $600, $650, and $600 was
recognized during fiscal 1998, 1997, and 1996, respectively, as an offset to
research and product development expenses), as well as Delphi contributing
to a majority of the facility's operating costs over the term of the new five
year agreement.

In May 1998, the Company and Delphi announced the successful completion of
their collaboration on lithium polymer battery development. Delphi will
retain a license to use Company-developed lithium polymer technology for
vehicular and stationary load leveling / peak shaving applications. The
Company will retain a license to use Delphi-developed lithium polymer
technology in all other applications. After September, 1998, the Company
anticipates that it will receive no further payments as a result of the
Delphi agreement.

11. PURCHASE OF TECHNOLOGY AND LICENSE AGREEMENT:

In July 1990, the Company entered into a stock purchase and license agreement
whereby the Company purchased all of the assets and certain technology and
patents from a third party. The Company has agreed to pay a royalty to the
third party on all sales of product manufactured and sold in a specified
territory. The third party agreed not to compete with the Company and the
agreement expires in 2006.

In June 1995, the Company entered into a non-exclusive license agreement with
Bell Communication Research, Inc. ("Bellcore") to license Bellcore's plastic
lithium battery technology. The Company acquired the technology for a total
purchase price of $6,064, which consisted of 1,500 shares of Valence stock plus
an initial payment of $2,000. In addition to royalty payments, the Company is
required to make a $1,000 payment to Bellcore on the earlier of June 1, 1997 or
when the Company recognizes $100 of revenue from royalty-bearing products.
Further annual payments are required if revenue milestones are not met after the
fourth year of the agreement.

The entire purchase price was allocated to in-process technology as the
technological feasibility of the in-process technology had not been established
and had no alternative use. Accordingly, the entire $6,064 has been charged to
operations in the second quarter of fiscal 1996.

12. INVESTMENT IN DANISH SUBSIDIARY:

In August 1990, the Company acquired a 45% interest in a Danish company
organized to perform research and development activities within the field of
solid state batteries. Concurrent with this acquisition, the Company and this
affiliate entered into a license and technical agreement which, among other
things, provided for an exchange of technology between the affiliate, a
geographical distribution of manufacturing rights and an ongoing exchange of
technical assistance. The Company accounted for its initial 45% investment
under the equity method.

On March 30, 1992, the Company through its Cayman Islands Subsidiary and a
director and principal stockholder of the Company entered into a series of
transactions to acquire the remaining 55% interest in the affiliate and
repurchase shares of the Company's common stock (see Note 8). These
transactions were entered into in connection with the settlement of certain
disputes between the Company and the affiliate with respect to the affiliate's
failure to enforce its contracts with certain of its shareholders. As part of
the settlement, the parties also agreed to terminate certain technology
development and license agreements entered into in 1990 and 1991.

In fiscal 1996, the Company's Danish subsidiary was liquidated.

Continued
F-19
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____

13. EMPLOYEE BENEFIT PLAN:

The Company has a 401(k) plan (the Plan) as allowed under Section 401(k) of
the Internal Revenue Code, the Plan provides for the tax deferral of
compensation by all eligible employees. All United States employees meeting
certain minimum age and service requirements are eligible to participate
under the Plan.

Under the Plan, participants may voluntarily defer up to 25% of their paid
compensation, subject to specified annual limitations. The Plan does not
provide for, and the Company has not made, contributions under the Plan.

14. JOINT VENTURE AGREEMENTS:

In July 1996, the Company, through its Dutch subsidiary, and Hanil Telecom
Co., Ltd. ("Hanil Telecom") signed an agreement to establish a joint venture
company in Korea. All funds are to be provided to the joint venture by Hanil
Telecom. Hanil Telecom and the Company, through its Dutch subsidiary, each
hold a 50% stake of the company. Valence will supply the technology, initial
equipment and product designs and technical support out of its Northern
Ireland facility. Hanil Telecom will market the joint venture's initial
products for a period of several years, depending on the market. The Company
accounts for the joint venture using the equity method. At March 29, 1998,
the joint venture had net equity and a loss from operations of approximately
$3,987 and $4,430, respectively. The proportionate share of the joint
venture's losses were recorded in this fiscal year's results as non-operating
losses. The joint venture's audited financials as of March 31, 1998 are
attached as Exhibit 10.49.

Following is a summary of the operating results and financial position of the
joint venture:

<TABLE>
<CAPTION>
Years ended March 31,
--------------------------------------
1998 1997
--------------- --------------
(unaudited)
<S> <C> <C>
Operations:
Net sales $ - $ -
Net loss $ 4,430 $ 858

Financial position:
Current assets $ 3,802 $3,697
Noncurrent assets 15,303 4,993
--------- -----------
$ 19,105 $8,690
--------- -----------
--------- -----------
Current liabilities $ 3,002 $ 261
Noncurrent liabilities 12,117 4,730
Shareholders' equity 3,986 3,699
--------- -----------
$19,105 $8,690
--------- -----------
--------- -----------
</TABLE>

The Company and Alliant Techsystems Inc. ("Alliant") signed an agreement in
October 1996, to establish a joint venture company. The Company is expected to
supply the electrode laminate materials that are key to manufacturing high
performance batteries. The Company will account for the joint venture using the
equity method. At March 29, 1998, the Company's investment in the joint venture
was nil, which is equal to the cost basis of the technology contributed by the
Company. The net assets and operations of the joint venture were not material.

Continued
F-20

<PAGE>

COOPERS
&LYBRAND

HANIL VALENCE CO., LTD.
(A DEVELOPMENT-STAGE ENTERPRISE)

REPORT ON AUDIT OF
FINANCIAL STATEMENTS

FOR THE YEAR ENDED MARCH 31, 1998

PREPARED UNDER ACCOUNTING
PRINCIPLES GENERALLY ACCEPTED
IN THE UNITED STATES OF AMERICA

SAMIL
ACCOUNTING
CORPORATION
<PAGE>

[COOPERS & LYBRAND LETTERHEAD]

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and
Board of Directors
Hanil Valence Co., Ltd.

We have audited the accompanying balance sheet of Hanil Valence Co., Ltd. (a
development-stage enterprise) as of March 31, 1998 and the related statements
of operations, accumulated deficit, and cash flows for the year ended March
31, 1998, expressed in Korean Won. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the 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
audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hanil Valence Co., Ltd. (a
development-stage enterprise) as of March 31, 1998 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles in the United States of America.

The financial statements of Hanil Valence Co., Ltd. (a development-stage
enterprise) for the period from July 19, 1996 (date of inception) to March
31, 1997 presented herein for comparative purpose, were not audited or
reviewed and accordingly, express no opinion or other form of assurance on
them.

<PAGE>

As fully discussed in Note 7 to the financial statements, the operations of
the Company may be significantly affected by the country's unstable economy
caused by currency volatility and unstable financial markets in Korea. As a
result, there are significant uncertainties that may affect future
operations, the recoverability of the Company's assets and the ability of the
Company to maintain or pay its debts as they mature. The ultimate outcome of
this matter cannot presently be determined. The financial statements do not
include any adjustments that might result from these uncertainties.

Seoul, Korea

May 11, 1998

/s/ SAMIL ACCOUNTING CORPORATION
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

BALANCE SHEETS
March 31, 1998 and 1997

--------------------

<TABLE>
<CAPTION>
Thousands of U.S. Dollars
Korean Won (Note 2)
--------------------------------- ----------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS

Current assets:
Cash and bank deposits (Note 3) W3,373,025 W1,063,928 $2,446,348 $1,185,964
Accounts receivable, other 200,000 2,200,000 145,054 2,452,346
Marketable securities (Note 4) 1,528,475 26,100 1,108,554 29,094
Advance payments 909 - 659 -
Prepaid expenses 5,119 698 3,713 778
Prepaid income taxes 107,186 25,761 77,739 28,716
Other current assets 27,649 177 20,053 197
------------ ------------ ------------ ------------
Total current assets 5,242,363 3,316,664 3,802,120 3,697,095

Property and equipment, net of
accumulated depreciation (Note 5) 15,764,495 1,824,225 11,433,489 2,033,469
Non-current bank deposits (Note 3) 410,786 - 297,930 -
Deferred royalty (Notes 2, 7 and 9) 4,293,000 2,060,750 3,113,577 2,297,124
Rental and other deposits (Note 7) 627,993 584,790 455,463 651,867
Organization costs (Note 2) 3,113 9,338 2,258 10,409
------------ ------------ ------------ ------------
Total assets W26,341,750 W7,795,767 $19,104,837 $8,689,964
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of these statements.

Continued ;

-3-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

BALANCE SHEETS, Continued
March 31, 1998 and 1997
---------------------

<TABLE>
<CAPTION>
Thousands of U.S. Dollars
Korean Won (Note 2)
------------------------------------ ----------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable, other (Note 9) W 3,312,710 W 197,072 $ 2,402,604 $219,677
Accrued expenses 266,961 30,929 193,618 34,476
Current portion of long-term debt (Note 6) 344,700 - 250,000 -
Unearned income 150,000 - 108,790 -
Other current liabilities 64,409 6,305 46,714 7,028
------------- ------------ ------------- ----------
Total current liabilities 4,138,780 234,306 3,001,726 261,181

Long-term debt, net of current
maturities (Note 6) 14,824,573 2,242,750 10,751,794 2,500,000
Accrued severance benefits, net of transfer
to National Pension Fund (Note 2) 81,695 - 59,250 -
Unearned income (Note 7 and 9) 1,800,000 2,000,000 1,305,483 2,229,406
------------- ------------ ------------- ----------
Total liabilities 20,845,048 4,477,056 15,118,253 4,990,587
------------- ------------ ------------- ----------

Commitments and Contingencies (Note 7)

Shareholders' equity:
Common stock, par value W5,000;
authorized 1,600,000 shares;
issued and outstanding 1,600,000
shares in 1998 and 800,000 shares
in 1997 (Note 1) 8,000,000 4,000,000 9,396,650 4,895,182
Additional paid-in capital 2,242,150 41,791 2,529,100 50,890
Accumulated deficit (4,745,448) (723,080) (4,429,516) (858,490)
Translation adjustment (Note 2) - - (3,509,650) (388,205)
------------- ------------ ------------- ----------
Total shareholders' equity 5,496,702 3,318,711 3,986,584 3,699,377
------------- ------------ ------------- ----------
Total liabilities and
shareholders' equity W26,341,750 W7,795,767 $19,104,837 $8,689,964
------------- ------------ ------------- ----------
------------- ------------ ------------- ----------
</TABLE>

The accompanying notes are an integral part of these statements.

-4-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
for the year ended March 31, 1998 and
the period from July 19, 1996 (date of inception) to March 31, 1997
----------------------------------

<TABLE>
<CAPTION>
Thousands of U.S. Dollars
Korean Won (Note 2)
----------------------------------- ---------------------------------
1998 1997 1998 1997
----------- --------- ----------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales W - W - $ - $ -

Cost of sales - - - -
----------- --------- ----------- ---------

Gross profit - - - -

Selling and
administrative expenses 736,842 588,424 654,162 698,617
----------- --------- ----------- ---------

Operating loss (736,842) (588,424) (654,162) (698,617)
----------- --------- ----------- ---------

Non-operating income (expense):
Interest income 503,965 129,055 447,416 153,223
Foreign exchange gain 933,160 15,500 828,452 18,402
Commission income 50,000 - 44,389 -
Interest expense (278,344) (78,585) (247,112) (93,301)
Foreign exchange loss (4,365,239) (197,513) (3,875,424) (234,501)
Amortization of organization costs (1,530) (3,113) (1,358) (3,696)
Research and development costs (26,905) - (23,886) -
Loss on disposition of marketable
securities (100,900) - (89,578) -
Others, net 267 - 237 -
----------- --------- ----------- ---------
(3,285,526) (134,656) (2,916,864) (159,873)
----------- --------- ----------- ---------

Net loss before income taxes (4,022,368) (723,080) (3,571,026) (858,490)

Provision for income taxes (Note 8) - - - -
----------- --------- ----------- ---------
Net loss (4,022,368) (723,080) (3,571,026) (858,490)

Accumulated deficit, beginning of
the period (723,080) (-) (858,490) (-)
----------- --------- ----------- ---------
Accumulated deficit, end of
the period W(4,745,448) W(723,080) $(4,429,516) $(858,490)
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>

The accompanying notes are an integral part of these statements.

Continued;

-5-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT, Continued
for the cumulative period
from July 19, 1996 (date of inception) to March 31, 1998
----------------------------------

<TABLE>
<CAPTION>
Thousands of U.S. Dollars
Korean Won (Note 2)
------------- ------------
<S> <C> <C>
Sales W - $ -

Cost of sales - -
----------- -----------

Gross profit - -

Selling and
administrative expenses 1,325,266 1,352,779
----------- -----------

Operating loss: (1,325,266) (1,352,779)
----------- -----------

Non-operating income (expense):
Interest income 633,020 600,639
Foreign exchange gain 948,660 846,854
Commission income 50,000 44,389
Interest expense (356,929) (340,413)
Foreign exchange loss (4,562,752) (4,109,925)
Amortization of organization costs (4,643) (5,054)
Research and development costs (26,905) (23,886)
Loss on disposition of marketable
securities (100,900) (89,578)
Others, net 267 237
----------- -----------
(3,420,182) (3,076,737)
----------- -----------

Net loss before income taxes (4,745,448) (4,429,516)

Provision for income taxes (Note 8) - -
----------- -----------
Net loss (4,745,448) (4,429,516)

Accumulated deficit, beginning of
the period - -
----------- -----------
Accumulated deficit, end of
the period W(4,745,448) $(4,429,516)
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these statements.

-6-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

STATEMENTS OF CASH FLOWS
for the year ended March 31, 1998 and
the period from July 19, 1996 (date of inception) to March 31, 1997
----------------------------------

<TABLE>
<CAPTION>
Thousands of U.S. Dollars
Korean Won (Note 2)
-------------------------------- --------------------------------
1998 1997 1998 1997
------------- ----------- ------------ -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss W(4,022,368) W (723,080) $(3,571,026) $ (858,490)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 35,122 23,991 31,181 28,484
Loss on foreign exchange translation, net 3,432,079 182,013 3,046,972 216,098
Accrued severance benefit 30,333 - 26,929 -
Loss on disposition of marketable
securities 100,900 - 89,578 -
Amortization of organization costs 1,530 3,113 1,358 3,696

Changes in operating assets and liabilities:
Accounts receivable, other 2,000,000 (2,200,000) 1,450,537 (2,452,346)
Advance payments (909) - (659) -
Prepaid expenses (4,421) (698) (3,206) (778)
Prepaid income taxes (81,425) (25,761) (59,055) (28,716)
Other current assets (27,472) (177) (19,925) (197)
Accounts payable, other 3,115,652 212,559 2,259,684 236,940
Accrued expenses 236,032 30,929 171,187 34,477
National Pension Fund (9,448) - (6,852) -
Other current liabilities 58,104 6,305 42,140 7,028
Unearned income (50,000) 2,000,000 (36,263) 2,229,406
Payment of severance benefit (10,000) - (7,253) -
------------ ---------- ----------- ----------
Net cash provided by (used in)
operating activities 4,803,709 (490,806) 3,415,327 (584,398)
------------ ---------- ----------- ----------
Cash flows from investing activities:
Disposition of marketable securities 8,122,900 - 5,891,282 -
Acquisition of marketable securities (9,726,175) (26,100) (7,054,087) (29,094)
Increase of non-current bank deposit (410,786) - (297,930) -
Acquisition of property and equipment (13,904,582) (1,848,216) (10,084,553) (2,060,212)
Increase of rental deposit (43,203) (584,790) (31,334) (651,867)
Increase of deferred royalty (2,232,250) (2,060,750) (1,618,980) (2,297,124)
Organization costs 4,695 (12,451) 3,405 (13,879)
------------- ----------- ----------- ----------
Net cash used in investing activities (18,189,401) (4,532,307) (13,192,197) (5,052,176)
------------- ----------- ----------- ----------
</TABLE>

The accompanying notes are an integral part of these statements.

Continued;

-7-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

STATEMENTS OF CASH FLOWS, Continued
for the year ended March 31, 1998 and
the period from July 19, 1996 (date of inception) to March 31, 1997
----------------------------------

<TABLE>
<CAPTION>
Thousands of U.S. Dollars
Korean Won (Note 2)
------------------------- ----------------------------
1998 1997 1998 1997
------------- ----------- ------------ --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities:

Increase in long-term debt W9,494,430 W2,045,250 $6,886,010 $2,279,846
Issuance of common stock 6,200,359 4,041,791 6,979,678 4,946,072
----------- ----------- ----------- -------------
Net cash provided by financing
activities 15,694,789 6,087,041 13,865,688 7,225,918
----------- ----------- ----------- -------------

Translation adjustment - - (2,828,434) (403,380)
----------- ----------- ----------- -------------
Net increase in cash and
cash equivalents 2,309,097 1,063,928 1,260,384 1,185,964

Cash and cash equivalents at
beginning of the year 1,063,928 - 1,185,964 -
----------- ----------- ----------- -------------

Cash and cash equivalents at
end of the year W3,373,025 W1,063,928 $2,446,348 $1,185,964
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION

Cash paid during the year for:

Interest, net of capitalized interest W272,802 W67,411 $242,191 $80,035
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Income taxes W 81,425 W25,761 $ 59,055 $28,716
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
</TABLE>

The accompanying notes are an integral part of these statements.

Continued;

-8-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

STATEMENTS OF CASH FLOWS, Continued
for the cumulative
Period from July 19, 1996 (date of inception) to March 31, 1998
----------------------------------

<TABLE>
<CAPTION>
Thousands of U.S. Dollars
Korean Won (Note 2)
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss W (4,745,448) $ (4,429,516)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 59,113 59,665
Loss on foreign exchange translation, net 3,614,092 3,263,070
Accrued severance benefit 30,333 26,929
Loss on disposition of marketable
securities 100,900 89,578
Amortization of organization costs 4,643 5,054

Changes in operating assets and liabilities:
Accounts receivable, other (200,000) (145,054)
Advance payment (909) (659)
Prepaid expenses (5,119) (3,713)
Prepaid income taxes (107,186) (77,739)
Other current assets (27,649) (20,053)
Accounts payable, other 3,328,211 2,413,846
Accrued expenses 266,961 193,618
National Pension Fund (9,448) (6,849)
Other current liabilities 64,409 46,714
Unearned income 1,950,000 1,414,273
Payment of severance benefit (10,000) (7,253)
----------- -----------
Net cash provided by operating activities 4,312,903 2,821,911
----------- -----------

Cash flows from investing activities:
Disposition of marketable securities 8,122,900 5,891,282
Acquisition of marketable securities (9,752,275) (7,073,016)
Increase of non-current bank deposit (410,786) (297,930)
Acquisition of property and equipment (15,752,798) (11,425,006)
Increase of rental deposit (627,993) (455,463)
Increase of deferred royalty (4,293,000) (3,113,577)
Organization costs (7,756) (5,626)
----------- -----------
Net cash used in investing activities (22,721,708) (16,479,336)
----------- -----------
</TABLE>

The accompanying notes are an integral part of these statements.

Continued;

-9-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

STATEMENTS OF CASH FLOWS, Continued
for the cumulative
period from July 19, 1996 (date of inception) to March 31, 1998
----------------------------------

<TABLE>
<CAPTION>
Thousands of U.S. Dollars
Korean Won (Note 2)
------------ ------------
<S> <C> <C>
Cash flows from financing activities :
Increase in long-term debt W11,539,680 $ 8,369,365
Issuance of common stock 10,242,150 11,925,750
----------- -----------

Net cash provided by financing
activities 21,781,830 20,295,115
----------- -----------

Translation adjustment - (4,191,342)
----------- -----------
Net increase in cash and
cash equivalents 3,373,025 2,446,348

Cash and cash equivalents at
beginning of the year - -
----------- -----------

Cash and cash equivalents at
end of the year W 3,373,025 $ 2,446,348
----------- -----------
----------- -----------

SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION

Cash paid during the year for:

Interest, net of capitalized interest W 340,213 $ 322,226
----------- -----------
----------- -----------
Income taxes W 107,186 $ 77,739
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these statements.

-10-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997

1. THE COMPANY:

Hanil Valence Co., Ltd. (the "Company") was incorporated on July 19,
1996 under the Commercial Code of the Republic of Korea to manufacture
and sell solid polymer batteries and related products. The Company is in
its development stage and expects to begin sale of its products during
the year ended March 31, 1999.

In accordance with the Foreign Capital Inducement Law, the Company was
registered with the Ministry of Finance and Economy as a foreign
invested company on October 5, 1996.

Including the initial capitalization of 400,000 shares, there are
1,600,000 total issued and outstanding equity shares at March 31, 1998,
of which Valence Technology B.V. owns 50% and the remainder are held by
Korean investors.

In accordance with a joint venture agreement, during the year ended
March 31, 1998, the Company issued an additional 800,000 shares of
common stock, raising the total number outstanding shares to 1,600,000
shares. The new shares were subscribed equally by Valence Technology
B.V. at par value and Korean shareholders including Hanil Cement
Manufacturing Co., at the twice par value.

The Company is in the development stage and has incurred losses and
negative cash flow from operating activities since its inception. These
circumstances raise substantial doubt about the ability of the Company
to continue as a going concern. The Company's continued existence is
dependent on its ability to generate revenue and/or obtain sufficient
equity or debt financing. Management is seeking additional funding
through equity infusions or debt financing. The financial statements do
not include any adjustment that may result from the outcome of this
uncertainty.

Continued;

-11-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The significant accounting policies followed by the Company in the
preparation of its financial statements are summarized below:

BASIS OF FINANCIAL STATEMENT PRESENTATION -

The official accounting records of the Company are expressed in Korean
Won and are maintained in accordance with the laws and regulations of
the Republic of Korea. The accompanying financial statements have been
adjusted to confirm with generally accepted accounting principles in the
United States of America. The statutory fiscal year of the Company is
from January 1 to December 31.

USE OF ESTIMATES -

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results inevitably will differ from those
estimates, and such differences may be material to the financial
statements.

TRANSLATION INTO UNITED STATES DOLLARS -

The Korean Won is the functional currency of the Company. The U.S.
Dollar presentation has been set forth for the convenience of the reader
and translation adjustments have been made in accordance with Statement
of Financial Accounting Standards (SFAS) No. 52; "Foreign Currency
Translation". Accordingly, translation adjustments have been included in
shareholders' equity, expressed in U.S. Dollars.

The current exchange rates at March 31, 1998 and 1997 of W1,378.8 : US$1
and W897.1 : US$1, respectively, are used to translate assets and
liabilities; historical rates are used to translate shareholders'
equity; and average exchange rates for the year ended March 31, 1998 and
the period from July 19, 1996 (date of inception) to March 31, 1997 of
W1,126.39 : US$1 and W842.27 : US$1, respectively, are used to translate
revenues and expenses.

Continued;

-12-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:

TRANSLATION INTO UNITED STATES DOLLARS, Continued -

The change in the balance of the translation adjustment account is as
follows:

<TABLE>
<CAPTION>
U.S. Dollars
----------------------------
1998 1997
------------ ---------
<S> <C> <C>
Balance, beginning of year $ (388,205) $ -

Adjustment from:

Net asset translation (3,775,175) (440,676)
Net income 653,730 52,471
----------- ---------
$(3,509,650) $(388,205)
----------- ---------
----------- ---------
</TABLE>

MARKETABLE SECURITIES -

Marketable securities are stated at cost which approximates market value
and are comprised of investments in government issued bonds and
beneficiary certificates.

PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION -

Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method, over the estimated useful lives of the
assets as described below:

<TABLE>
<CAPTION>
Estimated
Useful Lives (years)
------------------------
<S> <C>
Vehicles 5
Tools, furniture and fixtures 5
</TABLE>

The Company capitalizes financing costs on funds used to finance the
purchase or construction of property, plant and equipment as part of the
cost of such assets. Interest costs capitalized during the year ended
March 31, 1998 were W453 million.

The costs of routine maintenance and repairs are charged to expense as
incurred. Expenditures which enhance the value or extend the useful life
of the assets involved are capitalized. Gains or losses on the disposal
of assets are recognized in current operations.

Continued;

-13-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:

ACCRUED SEVERANCE BENEFITS -

Employees and directors with more than one year of service are entitled
to receive a lump-sum payment upon termination of their employment with
the Company, based on their length of service and rate of pay at the
time of termination. Accrued severance benefits represent the amounts
which would be payable assuming all eligible employees and directors
terminated their employment as of March 31, 1998.

In accordance with the National Pension Act, a certain portion of
accrued severance benefits was contributed to the National Pension Fund
and deducted from accrued severance benefits. The contributed amount
shall be refunded to the employees on their retirement by the National
Pension Fund.

INCOME TAXES -

Income taxes are recognized based on the liability method pursuant to
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes". Accordingly, deferred income taxes are recorded to
reflect the expected future tax consequences of temporary differences
between the tax bases of assets and liabilities and their financial
reporting amount at each balance sheet date. Deferred taxes are recorded
at enacted tax rates which will be in effect when the temporary
differences are expected to reverse. The provision for income taxes
represents taxes currently payable for the year plus the change in the
net deferred tax balance. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount management
estimates to be realized.

FOREIGN CURRENCY TRANSACTIONS -

Monetary assets and liabilities denominated in foreign currencies are
translated into Korean Won at exchange rates prevailing at the balance
sheet date. Resulting foreign exchange transaction losses and gains are
recognized currently.

ORGANIZATION COSTS -

Organization costs are amortized over five years using the straight-line
method.

Continued;

-14-
<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

RESEARCH AND DEVELOPMENT COSTS -

Research and development costs are charged to expense as incurred.
Research and development expenses amount to W26,905 thousand for the
year ended March 31, 1998.

ROYALTIES -

Royalties paid in connection with the license and support agreement with
Valence Technology B.V., a shareholder (see Note 7) are recorded as
deferred royalties.

Deferred royalties will be amortized from the commencement of commercial
production of the licensed product over the period during which the
benefits are expected to arise.

CASH AND CASH EQUIVALENTS -

For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.

CONCENTRATIONS OF CREDIT RISK -

The Company has paid refundable security deposits under the terms of
office lease agreements. In addition, the Company deposits cash with
various financial institutions. The collection of these funds is subject
to the financial condition of lessor and the related financial
institutions. Management estimates that allowances in this regard are
unwarranted.

-15-

<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997

3. CASH AND BANK DEPOSITS:

Cash and bank deposits at March 31, 1998 and 1997 comprise the following:

<TABLE>
<CAPTION>
Annual Thousands of U.S. Dollars
Interest Rate (%) Korea Won (Note 2)
----------------- --------------------- ----------------------
1998 1998 1997 1998 1997
----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash on hand and in bank - W 495 W 602 $ 359 $ 671
Passbook accounts 1.0-10.0 472,530 463,326 342,711 516,471
Installment and time
deposit 10.0-16.0 1,008,286 600,000 731,278 668,822
Deposit for checking
accounts - 2,500 - 1,813 -
Certificates of deposit 19.3-20.55 2,300,000 - 1,668,117 -
---------- ---------- ---------- ----------
3,783,811 1,063,928 2,744,278 1,185,964

Less: non-current portion (410,786) (-) (297,930) (-)
---------- ---------- ---------- ----------
W3,373,025 W1,063,928 $2,446,348 $1,185,964
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

Deposit for checking accounts of W2,500 thousand represent a collateral
deposit required to maintain checking accounts.

-16-

<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997

4. MARKETABLE SECURITIES:

Marketable securities as of March 31, 1998 and 1997 comprise the
following:

Annual Thousands of U.S Dollars
Interest Rate(%) Korean Won (Note 2)
----------------- ---------------------- ----------------------
1998 1998 1997 1998 1997
----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Public bonds 5.0-6.0 W 28,475 W 26,100 $ 20,652 $ 29,094
Beneficiary certificates 19.5 1,500,000 - 1,087,902 -
---------- ---------- ---------- ----------
W 1,528,475 W 26,100 $1,108,554 $ 29,094
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

5. PROPERTY AND EQUIPMENT:

Property and equipment at March 31, 1998 and 1997 comprise the
following:

<TABLE>
<CAPTION>
Thousands of U.S. Dollars
Korean Won (Note 2)
----------------------- ----------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Vehicles W 66,799 W 40,386 $ 48,447 $ 45,018
Tools, furniture and fixtures 243,184 102,655 176,374 114,430
----------- ---------- ----------- ----------
309,983 143,041 224,821 159,448
Less: Accumulated depreciation (59,113) (23,991) (42,873) (26,743)
----------- ---------- ----------- ----------
250,870 119,050 181,948 132,705
Land 1,643,584 1,600,000 1,192,039 1,783,525
Construction in-progress 13,870,041 105,175 10,059,502 117,239
----------- ---------- ----------- ----------
W15,764,495 W1,824,225 $11,433,489 $2,033,469
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>

The Company's land and construction in-progress are pledged as
collateral for long-term loans from Korea Development Bank up to a
maximum of US$43,000 thousand at March 31, 1998. Under the terms of
these loan agreements the Company is restricted from transferring these
assets to the third parties (see Note 6).

-17-

<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997

6. LONG-TERM DEBT:

Long-term debt at March 31, 1998 and 1997 comprises the following:

<TABLE>
<CAPTION>
Annual
Interest
Rates(%) U.S. Dollars
------------- ---------------------
1998 1998 1997
------------- ---------- ----------
<S> <C> <C> <C>
FOREIGN CURRENCY LOANS

Korea First Bank LIBOR+1.2 $2,500,000 $2,500,000

Korea Development Bank LIBOR+1.2-8.9 8,501,794 -
---------- ----------
11,001,794 2,500,000
Less: current maturities (250,000) (-)
----------- ----------
$10,751,794 $2,500,000
----------- ----------
----------- ----------
Won equivalent (in thousands) W14,824,573 W2,242,750
----------- ----------
----------- ----------
</TABLE>

Certain property and equipment is pledged as collateral for the loans
from Korea Development Bank (see Note 5). In addition, repayment of the
above loans is guaranteed by Hanil Cement Manufacturing Co., Ltd., a
shareholder.

The annual maturities of long-term debt outstanding at March 31, 1998
are as follows:

<TABLE>
<CAPTION>
Thousands of U.S.Dollars
Year Korean Won (Note 2)
---------------------- ------------ -----------
<S> <C> <C>
1999. 4 .1-2000. 3. 31 W 1,668,421 $ 1,210,054
2000. 4. 1-2001. 3. 31 2,642,718 1,916,680
2001. 4. 1-2002. 3. 31 2,642,718 1,916,680
2002. 4. 1-2003. 3. 31 2,642,718 1,916,680
after 2003. 4. 1 5,227,998 3,791,700
------------ -----------
W14,824,573 $10,751,794
------------ -----------
------------ -----------
</TABLE>

-18-

<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997

7. COMMITMENTS AND CONTINGENCIES:

The Company entered into a license and support agreement with Valence
Technology B.V. of the Netherlands, a shareholder, to obtain the
technology for production of certain battery products. Under the terms
of the agreement, the Company made an initial royalty payment of
US$2,500 thousand for the year ended March 31, 1997 and an additional
royalty payment of US$2,500 thousand for the year ended March 31, 1998.

The Company entered into an exclusive marketing, sales and distribution
license agreement with Hanil Telecom Co., Ltd., a shareholder ('Hanil').
Under the terms of the agreement, Hanil has been provided the exclusive
right to market, sell and distribute batteries produced by the Company
domestically until the end of year 2004. In return, the Company received
W2,000 million, which is recorded as unearned income and to be amortized
over the period of the agreement.

The Company rents office space under single-year, operating lease
agreements which provide renewal options. Under the terms of the
lease agreements, the Company has placed security deposits of
W626,035 thousand with the lessors in lieu of monthly rental
charges. These deposits are refundable when the Company vacates the
premises.

Korean economy is experiencing severe difficulties relating to currency
devaluations, volatile stock markets and slowdown in growth. The
operations of the Company may be significantly affected by the
country's unstable economy. As a result, there are significant
uncertainties that may affect future operations, the recoverability
of the Company's assets and the ability of the Company to maintain
or pay its debts as they mature. The ultimate outcome of this
matter cannot presently be determined. The financial statements do
not include any adjustments that might result from these
uncertainties.

-19-

<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997

8. INCOME TAXES, Continued:

The statutory income tax rate, including residence tax surcharges,
applicable to the Company is approximately 30.8%.

The Company is registered as a high-technology foreign invested company
under the Foreign Capital Inducement Law of the Republic of Korea and,
thus, is entitled to an exemption from income taxes in proportion to the
percentage of qualified foreign equity. Such exemption applies to 100%
of the relevant income derived for five years commencing from the first
year in which taxable income is realized and 50% for the following three
years.

Due to the tax exemption, the Company's adjusted income tax rate is
approximately 15.4%.

The provision for income taxes for the year ended March 31, 1998 is zero
due to the full valuation allowance recorded to off set deferred
tax assets.

Net deferred income tax assets and liabilities are presented to reflect
the estimated tax effect of temporary differences. Net deferred income tax
assets at March 31, 1998 are comprised of the anticipated future tax
benefit (cost) associated with the following items :

Thousands of Korean Won U.S. Dollars (Note 2)
----------------------- ---------------------
1998 1998
----------------------- ---------------------
<S> <C> <C>
Deferred income tax assets:
Amortization of pre-operating
cost W253,934 $184,170
Foreign currency translation
loss 176,484 127,998
Loss carry forward 456,368 330,989
Other 39,732 28,817
----------------------- ---------------------
926,518 671,974
----------------------- ---------------------
Deferred income tax liabilities:
Royalty amortization for
tax purposes (195,696) (141,932)
----------------------- ---------------------
730,822 530,042
Valuation allowance (730,822) (530,042)
----------------------- ---------------------
Net deferred income tax assets W - $ -
----------------------- ---------------------
----------------------- ---------------------
</TABLE>
-20-

<PAGE>

HANIL VALENCE CO., LTD.
(A development-stage enterprise)

NOTES TO FINANCIAL STATEMENTS, Continued
March 31, 1998 and 1997

9. RELATED PARTY TRANSACTIONS:

As discussed in Note 7, the Company made royalty payments of US$2,500
thousand to Valence Technology B.V., a shareholder in each of 1998 and
1997. In addition, the Company received W2,000 million of commission
income advances from Hanil Telecom Co., Ltd., a shareholder.

During the year ended March 31, 1998, the Company entered into a
construction contract with Hanil Construction Co., Ltd., a
shareholder, to build its plant. Under the terms of the contract,
the Company made payments of W5,700 thousand during the year and
has related accounts payable to the related party at March 31, 1998
of W3,029 million.

-21-

<PAGE>

Exhibit 21.1

LIST OF SUBSIDIARIES OF VALENCE TECHNOLOGY, INC.

DEVRES CO.
Ohio corporation wholly owned by Valence Technology, Inc.

MHB JOINT VENTURE
Ohio partnership jointly owned by Valence Technology, Inc. and
Devres, Co.

VALENCE TECHNOLOGY CAYMAN ISLANDS INC.
Cayman Islands corporation wholly owned by Valence Technology, Inc.

VALENCE TECHNOLOGY N.V.
Dutch Antilles corporation wholly owned by Valence Technology Cayman
Islands Inc.

VALENCE TECHNOLOGY B.V.
Dutch corporation wholly owned by Valence Technology N.V.

VALTRON TECHNOLOGY PTE. LTD.
Singapore corporation 40% owned by Valence Technology Cayman
Islands Inc. and 60% owned by Goldtron Ltd., through its Cayman
Islands subsidiary.

HANIL VALENCE CO., LTD.
Korea corporation 50% owned by Valence Technology B.V. and 50%
owned by Hanil Telecom Co., Ltd.

ALLIANT / VALENCE, L.L.C.
Delaware limited liability corporation 50% owned by Valence
Technology, Inc. and 50% owned by Alliant Techsystems Inc.

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statements
of Valence Technology, Inc. and subsidiaries (companies in the development
stage) (the "Company") on Form S-8 (File Nos. 33-48982 and 33-60562) of our
report dated May 8, 1998, on our audits of the consolidated financial
statements of the Company as of March 29, 1998 and March 30, 1997, and for
the period of March 3, 1989 (date of inception) to March 29, 1998 and for
each of the years ending March 29, 1998, March 30, 1997 and March 31, 1996,
which report is included in this annual report on Form 10-K.

COOPERS & LYBRAND L.L.P.

San Jose, California
June 29, 1998

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-29-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 8,400
<SECURITIES> 0
<RECEIVABLES> 1,429
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,009
<PP&E> 46,702
<DEPRECIATION> (14,990)
<TOTAL-ASSETS> 45,394
<CURRENT-LIABILITIES> 11,782
<BONDS> 4,950
0
0
<COMMON> 153,583
<OTHER-SE> (126,681)
<TOTAL-LIABILITY-AND-EQUITY> 45,394
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (22,022)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (528)
<INCOME-PRETAX> (23,155)
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</TABLE>