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

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

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

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

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

The following discussion should be read in conjunction with our financial statements and related notes, which are a part of this Report or incorporated by reference to our reports filed with the SEC. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. The results for the three month period ended June 30, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year ended March 31, 2010 or any other period.

Overview

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

In March 2009, we introduced a new revision of U-Charge®, our third generation of Lithium Iron Magnesium Phosphate Energy Storage Systems, which are expected to be commercially available in the second quarter of fiscal 2010. U-Charge® features our safe, long-life lithium iron magnesium phosphate technology which utilizes a phosphate-based cathode material. We believe that the improved features and functionality of the latest U-Charge® Lithium Iron Magnesium Phosphate Energy Storage Systems are well suited for electric vehicle (EV), plug-in hybrid electric vehicle (PHEV) and similar applications. U-Charge® Lithium Iron Magnesium Phosphate Energy Storage Systems address the safety and limited life weaknesses of other lithium technologies while offering a solution that is competitive in cost and performance. This revision of U-Charge® builds upon these features and adds improvements in state of charge, balancing and field repairability.

Strategy

Our business plan and strategy focuses on the generation of revenue from product sales, while minimizing costs through partnerships with contract manufacturers and internal manufacturing efforts through our two wholly-owned subsidiaries in China. These subsidiaries initiated operations in late fiscal 2005. We expect to develop target markets through the sales of U-Charge® systems and custom energy storage systems based on programmable Epoch™ Command and Control Logic. In addition, we expect to pursue a licensing strategy to supply the lithium phosphate sector with advanced Valence material and components, including lithium phosphate cathode materials to fulfill other manufacturers' needs.

Key elements of our business strategy include:

• Develop and market differentiated battery solutions for a wide array of applications that leverage the advantages of our technology. Our product development and marketing efforts are focused on large-format battery solutions, such as our U-Charge® Lithium Iron Magnesium Phosphate Energy Storage Systems and other custom battery solutions that feature advanced performance and technological advantages. These products are targeted for a broad range of applications in the motive, power and consumer appliance, telecommunication and utility industries and as a substitute for certain applications using lead-acid batteries.

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

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

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

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

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

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

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred operating losses each year since its inception in 1989 and had an accumulated deficit of $563.9 million as of June 30, 2009. For the three-month periods ended June 30, 2009 and June 30, 2008, the Company sustained net losses available to common stockholders of $6.2 and $5.6 million, respectively. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time. The Company's ability to continue as a going concern is contingent upon its ability to meet its liquidity requirements. If the Company is unable to arrange for debt or equity financing on favorable terms or at all, the Company's ability to continue as a going concern is uncertain. These financial statements do not give effect to any adjustments to the amounts and classifications of assets and liabilities which might be necessary should the Company be unable to continue as a going concern.

At June 30, 2009, the Company's principal sources of liquidity were cash and cash equivalents of $1.7 million. The Company does not expect that its cash and cash equivalents will be sufficient to fund its operating and capital needs for the next three to six months following June 30, 2009, nor does the Company anticipate product sales during fiscal 2010 will be sufficient to cover its operating expenses. Historically, the Company has relied upon management's ability to periodically arrange for additional equity or debt financing to meet the Company's liquidity requirements. The Company's cash requirements may vary materially from those now planned because of changes in the Company's operations including the failure to achieve expected revenues, greater than expected expenses, changes in OEM relationships, market conditions, the failure to timely realize the Company's product development goals, and other adverse developments. These events could have a negative impact on the Company's available liquidity sources during the next 12 months.

Basis of Presentation, Critical Accounting Policies and Estimates

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

Revenue Recognition

We generate revenues from sales of products including batteries and battery systems, and from licensing fees and royalties per technology license agreements. Product sales are recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, seller's price to the buyer is fixed and determinable, and collection is reasonably assured. Product shipments that are not recognized as revenue during the period shipped, primarily product shipments to resellers that are subject to right of return, are recorded as deferred revenue and reflected as a liability on our balance sheet. Products shipped with the rights of return are included in finished goods inventory as we retain title to the products. For reseller shipments where revenue recognition is deferred, we record revenue and relieve inventory based upon the reseller-supplied reporting of sales to their end customers or their inventory reporting. For all shipments, we estimate a return rate percentage based upon our historical experience. From time to time we provide sales incentives in the form of rebates or other price adjustments; these are generally recorded as reductions to revenue on the latter of the date the related revenue is recognized or at the time the rebate or sales incentive is offered. Licensing fees are recognized as revenue upon completion of an executed agreement and delivery of licensed information, if there are no significant remaining vendor obligations and collection of the related receivable is reasonably assured. Royalty revenues are recognized upon licensee revenue reporting and when collection is reasonably assured.

Results of Operations

The following table summarizes the results of our operations for the three
months (also referred to as the first quarter) ended June 30, 2009 and June 30,
2008 (in thousands):

                                                Three Months Ended June 30,
                                              2009                        2008
                                                    % of                        % of
                                      Total        Revenue        Total        Revenue
     Battery and systems sales       $  4,630            98 %    $ 10,886            99 %
     Licensing and royalty revenue         87             2 %         104             1 %
     Total revenues                     4,717           100 %      10,990           100 %

     Gross margin profit (loss)           807            17 %         (26 )           0 %
     Operating expenses                 5,769           122 %       4,621            42 %
     Operating loss                    (4,962 )        (105 )%     (4,647 )         (42 )%
     Net loss                          (6,154 )        (130 )%     (5,523 )         (50 )%

Revenues and Gross Margin

Battery and System Sales. Battery and systems sales totaled $4.6 million for the three months ended June 30, 2009, as compared to $10.9 million for the three months ended June 30, 2008. The decrease in revenues was primarily due to reduced sales to The Tanfield Group, PLC, and Segway, offset by increases to Tianjin Lishen Battery Joint-Stock Co., Ltd. ("Lishen"), Brammo Motorsports, and ISE Corporation. Revenue recognized from Lishen represents sales of our P1a Cathode material for use in their cell production for other customers. Tanfield sales accounted for 0% and 38% of our product sales for the first fiscal quarter in 2010 and 2009, respectively. Lishen sales accounted for 19%, Brammo Motorsports sales accounted for 15%, and ISE Corporation sales accounted for 13% of our product sales for the first fiscal quarter in 2010, compared to 0% in fiscal 2009. Segway sales accounted for 34% and 38% of our total product sales for the first fiscal quarter in 2010 and 2009, respectively. We expect sales of the large-format battery system to remain relatively flat during the upcoming quarter. We had $398,000 and $355,000 in deferred revenue on our balance sheet at June 30, 2009 and March 31, 2009, respectively, primarily related to sales shipping in the end of the quarter.

Licensing and Royalty Revenue. Licensing and royalty revenues relate to revenue from licensing agreements for our battery construction technology. Fiscal first quarter 2010 licensing and royalty revenue was $87,000 compared with $104,000 for the same quarter in fiscal 2009. Licensing and royalty revenue was substantially from our license agreement with Amperex Technology Limited, which makes on-going royalty payments as sales are made using our technology. We expect to continue to pursue a licensing strategy as our lithium phosphate technology receives greater market acceptance.

Gross Margin. Gross margin as a percentage of revenue was 17% for the three months ended June 30, 2009, as compared to 0% in the three months ending June 30, 2008. The increase in gross margin for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, both as dollar amount of $0.8 million, and as a percentage of revenue, of 17% of revenue, is related to P1a cathode material sales in the three months ended June 30, 2009, which have a higher margin than large format battery system sales, and the inventory impairments that were booked in the three months ended June 30, 2008 which did not recur in the current quarter. In addition, we experienced a decrease in the liability that is carried related to warranty reserves. This reduction in warranty reserves had a positive impact on gross margin in the three months ended June 30, 2009 of approximately $0.3 million.

Operating Expenses

The following table summarizes operating expenses for the three months ended
June 30, 2009 and June 30, 2008 (dollars in thousands):

                                                  Three Months Ended June 30,
                                                               Increase/
                                       2009        2008       (Decrease)        % Change
   Research and product development   $ 1,220     $ 1,183              37               3 %
   Marketing                              722         810             (88 )           (11 )%
   General and administrative           3,827       2,634           1,194              45 %
   Loss on disposal of assets               -          (6 )             6            (100 )%
   Total operating expenses           $ 5,769     $ 4,621     $     1,149              25 %
   Percentage of revenues                 122 %        42 %

During the three months ended June 30, 2009, total operating expenses were 122% of revenue compared to 42% of revenue during the same quarter last year. The dollar increase is primarily due to expenses associated with the granting of director stock options, increased costs and consulting expenses for the three months ended June 30, 2009.

Research and Product Development. Research and product development expenses consist primarily of personnel, equipment and materials to support our efforts to develop battery chemistry and products, as well as to improve our manufacturing processes. Research and product development expenses remained relatively flat for the three months ended June 30, 2008, as compared to the three months ended June 30, 2008. Research and development expenses were $1.2 million for the three months ended June 30, 2009, as well as for the three months ended June 30, 2008. During the three months ended June 30, 2009, approximately $68,000 of share based compensation was allocated to research and development expenses as compared to $58,000 in the three months ended June 30, 2008. Although research and development expenses were relatively flat on a year to year comparison, we expect research and development expenses to increase as we create and develop new products.

Marketing. Marketing expenses consist primarily of costs related to sales and marketing personnel, public relations and promotional materials. Marketing expenses of $722,000 in the three months ended June 30, 2009, were $88,000, or 11%, lower than the $810,000 for the three months ended June 30, 2008. During the three months ended June 30, 2009, approximately $77,000 of share based compensation was allocated to marketing expenses, as compared to $122,000 in the three months ended June 30, 2008, a decrease of $45,000. We expect marketing expenses to increase slightly as we focus on building a stronger market presence and continue to reach new customers.

General and Administrative. General and administrative expenses consist primarily of salaries, share based compensation and other related costs for finance, human resources, facilities, accounting, information technology, legal, and corporate-related expenses. General and administrative expenses totaled $3.8 million and $2.6 million for the three months ended June 30, 2009, and 2008, respectively, a $1.2 million, or 45% increase. Share based compensation expense increased to $658,000 in the three months ended June 30, 2009, as compared to $385,000 in the three months ended June 30, 2008, due to stock option and equity grant awards issued to board members during the three months ended June 30, 2009. Litigation expenses increased by $750,000 in the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, primarily due to expenses related to the Hydro-Quebec litigation (see Note 8, Commitments and Contingencies). Consulting expenses increased by $77,000 in the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, primarily related to the Company's applications for grants and loans under new Department of Energy programs established to develop U.S. based manufacturing of lithium-ion batteries, the Advanced Technology Vehicles Manufacturing Initiative and the Electric Drive Vehicle Battery and Component Manufacturing Initiative.

Liquidity and Capital Resources

Liquidity

At June 30, 2009, our principal source of liquidity was cash and cash equivalents of $1.7 million. We do not expect our cash and cash equivalents will be sufficient to fund our operating and capital needs for the next twelve months following June 30, 2009, nor do we anticipate product sales during the remainder of fiscal 2010 will be sufficient to cover our operating expenses. Historically, we have relied upon management's ability to periodically arrange for additional equity or debt financing to meet our liquidity requirements. Unless our product sales are greater than management currently forecasts or there are other changes to our business plan, we will need to arrange for additional financing to fund operating and capital needs. This financing could take the form of debt or equity. Given our historical operating results and the amount of our existing debt, as well as the other factors, we may not be able to arrange for debt or equity financing on favorable terms or at all.

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

The following table summarizes our statement of cash flows for the three months ended June 30, 2009 and 2008 (in thousands):