UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

S [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30~~March 31, ~~2012~~2013

£ [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________

For the transition period from ____________ to _____________

Commission file number: 000-52337

BALQON CORPORATION

(Exact name of registrant as specified in its charter)

Nevada (State or other jurisdiction of incorporation or organization)	33-0989901 (I.R.S. Employer Identification No.)

1420 240th Street, Harbor City, California 90710 (Address of principal executive offices)	90710 (Zip Code)

Registrant’s telephone number, including area code: (310) 326-3056

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

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

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

~~filer,”~~Large ~~“accelerated~~Accelerated ~~filer”~~Filer ~~and~~[_] ~~“smaller~~Accelerated ~~reporting~~Filer ~~company” in~~[_] ~~Rule 12b~~Non-2Accelerated ofFiler ~~the~~(do ~~Exchange~~not ~~Act.~~check ~~(Check~~if ~~one~~Smaller Reporting Company): [_] Smaller Reporting Company [X]

~~Large~~Indicate ~~Accelerated~~by ~~Filer~~check £mark ~~Accelerated~~whether ~~Filer~~the £registrant ~~Non-Accelerated~~is ~~Filer~~a shell company (doas ~~not~~defined ~~check~~in ifRule 12b-2 ~~Smaller~~of ~~Reporting~~the ~~Company~~Exchange Act). £Yes ~~Smaller~~[_] ~~Reporting~~No ~~Company S~~[X]

~~Indicate~~The bynumber ~~check~~of ~~mark whether~~shares outstanding of the ~~registrant~~Registrant’s common isstock, a$0.001 ~~shell~~par ~~company~~value, (as ~~defined in Rule 12b-2~~ of ~~the~~June ~~Exchange~~12, ~~Act).~~2013, ~~Yes £ No~~was S36,891,530.

The number of shares outstanding of the Registrant’s common stock, $0.001 par value, as of November 15, 2012, was 36,891,530.

DOCUMENTS INCORPORATED BY REFERENCE

None

CAUTIONARY STATEMENT

All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements or characterizations of historical fact, are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements concerning projected net sales, costs and expenses and gross profit margins; our accounting estimates, assumptions and judgments; the demand for our products; the competitive nature of and anticipated growth in our industries; and our prospective needs for additional capital. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industries and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2011~~ ~~and in Item 1A of Part II of this report~~2012. These forward-looking statements speak only as of the date of this report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.

BALQON CORPORATION

QUARTERLY REPORT
ON

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I
PART I FINANCIAL INFORMATION
FINANCIAL INFORMATION
ITEM 1.	Condensed Financial Statements	1
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2217
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	3929
ITEM 4.	Controls and Procedures	3929
PART II
OTHER INFORMATION
ITEM 1.	Legal Proceedings	40
ITEM 1A.	Risk Factors	40
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
ITEM 3.	Defaults Upon Senior Securities	41
ITEM 4.	Mine Safety Disclosures	41
ITEM 5.	Other Information	41
ITEM 6.	Exhibits	41

PART II

OTHER INFORMATION

ITEM 1.	Legal Proceedings	32
ITEM 1A.	Risk Factors	32
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
ITEM 3.	Defaults Upon Senior Securities	32
ITEM 4.	Mine Safety Disclosure	32
ITEM 5.	Other Information	32
ITEM 6.	Exhibits	32

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed ~~CONDENSED FINANCIAL STATEMENTS.~~Financial Statements

BALQON CORPORATION
CONDENSED BALANCE SHEETS

	September 30, 2012 (Unaudited)			December 31, 2011
	March 31, 2013 (Unaudited)			December 31, 2012
ASSETS
Current assets:
Current assets
Cash and cash equivalents	$	527,~~581~~105		$	3233,~~663~~869
Accounts receivable, trade, net of allowance for doubtful accounts of $1,233 and $1,233, respectively		133,427			507,246
Accounts receivable, trade, net of allowance for doubtful accounts of $1,233 and $1,233 respectively		79,600			21,239
Accounts receivable, related entities, net of allowance for doubtful accounts of $198,067 and $178,484, respectively		–			302,082
Inventories		233,527			266,009
Inventories		346,402			1,065,595
Prepaid expenses		29,917			52,615
Prepaid expenses		55,447			55,010
Total current assets		370,149			373,732
Total current assets		540,957			1,962,596
Property and equipment, net		25,530			29,223
Inventory held by customer pending lease		–			739,000
Property, plant & equipment, net		34,458			58,929
Other assets:
Deposits		14,400			14,400
Goodwill and Trade secrets, net of accumulated amortization of $186,965 and $186,965, respectively		166,500			166,500
Total assets	$	410,079		$	417,355
Total assets	$	756,315		$	2,941,425
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
Current liabilities:
Current liabilities
Bank overdraft	$	–		$	11,785
Payroll taxes payable		325,410			307,619
Payroll taxes payable		253,738			–
Accounts payable and accrued expenses		2,559,668			2,462,240
Accounts payable and accrued expenses		2,265,156			1,546,059
Accounts payable to related parties		2,133,850			1,639,702
Accounts payable to related parties		1,417,150			330,840
Customer deposits		810,658			843,860
Customer deposits		755,098			1,417,388
Advances from shareholder		5,018			5,018
Loan payable, Bridge Bank		–			233,231
Derivative liability		1,018,425			847,472
Advances from shareholders		5,018			505,018
Convertible notes, net of discount – in default		3,361,500			3,080,846
Derivative liability		2,716,835			676,284
Total current liabilities		10,214,529			9,186,757
Convertible promissory notes, net of discount		2,795,381			1,483,168
SHAREHOLDERS’ DEFICIENCY
Total current liabilities		10,208,376			6,203,773
Common stock, $0.001 par value, 100,000,000 shares authorized, 36,891,530 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively		36,891			36,891
Convertible notes payable, net of discount		–			813,492
Additional paid in capital		19,958,599			19,635,423
Shareholders’ Deficiency
Accumulated deficit		(29,799,940	)		(28,441,716	)
Common stock, $0.001 par value, 100,000,000 shares authorized, 36,891,530 and 35,641,530 shares issued and outstanding on September 30, 2012 and December 31, 2011, respectively		36,691			35,641
Total shareholders’ deficiency		(9,804,450	)		(8,769,402	)
Additional paid in capital		19,596,423			18,283,624
Total liabilities and shareholders’ deficiency	$	410,079		$	417,355
Accumulated deficit		(29,085,375	)		(22,395,105	)
Total shareholders’ deficiency		(9,452,061	)		(4,075,840	)
Total liabilities and shareholders’ deficiency	$	756,315		$	2,941,425

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

BALQON CORPORATION CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER~~MARCH 3031, ~~2012~~2013 AND ~~2011~~2012 (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2012			2011			2012			2011
	2013			2012
REVENUES	$	447,387		$	194,999
Related Parties	$	–		$	348,118		$	–		$	651,072
COSTS OF REVENUES		427,197			87,832
Commercial customers		712,324			486,825			1,860,552			799,477
GROSS PROFIT		20,190			107,167
Total Revenue		712,324			834,943			1,860,552			1,450,549
OPERATING EXPENSES
COSTS OF REVENUES		939,026			729,430			1,795,769			1,138,370
General and administrative		780,931			614,971
GROSS PROFIT		(226,702	)		105,513			64,753			312,179
Research and development		26,678			69,204
OPERATING EXPENSES
Depreciation and amortization		3,693			8,157
General and administrative		615,460			709,827			1,966,206			2,886,272
Total operating expenses		811,302			692,332
Research and development		46,890			130,820			191,159			424,544
LOSS FROM OPERATIONS		(791,112	)		(585,165	)
Depreciation and amortization		8,157			146,490			24,471			460,534
Change in fair value of derivative liabilities		(170,953	)		(12,412	)
Total operating expenses		670,507			987,137			2,181,836			3,771,350
Fair Value of warrants issued upon conversion of shareholder loan		–			(671,809	)
LOSS FROM OPERATIONS		(897,209	)		(881,624	)		(2,117,083	)		(3,459,171	)
Interest expense		(396,159	)		(397,877	)
Change in fair value of derivative liabilities		(1,458,609	)		263,199			(1,074,272	)		164,941
NET LOSS		(1,358,224	)	$	(1,667,263	)
Impairment loss		(1,345,111	)		–			(1,345,111	)		–
Net loss per share – basic and diluted	$	(0.04	)	$	(0.05	)
Costs to induce exercise of warrants		–			–			(671,809	)		–
Weighted average shares outstanding, basic and diluted		36,891,530			35,641,530
Interest expense		(490,229	)		(393,958	)		(1,481,996	)		(1,390,265	)
NET LOSS	$	(4,191,157	)	$	(1,012,383	)	$	(6,690,270	)	$	(4,684,495	)
Net loss per share – basic and diluted	$	(0.11	)	$	(0.03	)	$	(0.18	)	$	(0.13	)
Weighted average shares outstanding, basic and diluted		36,891,531			35,628,762			36,266,530			35,486,984

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

BALQON CORPORATION CONDENSED STATEMENT OF SHAREHOLDERS’ ~~EQUITY (~~DEFICIENCY~~) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 (Unaudited)~~

	Common Stock, $0.001 Par Value				Additional Paid in		Accumulated
	Number		Amount		Capital		Deficit			Total
Balances, December 31, 2011		35,641,530	$	35,641	$	18,283,624	$	(22,395,105	)	$	(4,075,840	)
Costs to induce exercise of warrants		–		–		671,809		–			671,809
Common stock issued upon conversion of shareholder loan		1,250,000		1,250		498,750		–			500,000
Fair value of warrants issued with convertible notes		–		–		109,140		–			109,140
Fair value of common stock transferred by shareholder to settle company debts		–				33,100		–			33,100
Net loss		–		–		–		(6,670,270	)		(6,670,270	)
Balances, September 30, 2012		36,891,530	$	36,891	$	19,596,423	$	(29,085,375	)	$	(9,452,061	)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 (Unaudited)

	Common Stock, $0.001 Par Value				Additional Paid in		Accumulated
	Number		Amount		Capital		Deficit			Total
Balances, December 31, 2012		36,891,530	$	36,891	$	19,635,423	$	(28,441,716	)	$	(8,769,402	)
Fair value of common stock transferred by shareholder to settle Company debts		–		–		323,176		–			323,176
Net loss		–		–		–		(1,358,224	)		(1,358,224	)
Balances, March 31, 2013		36,891,530	$	36,891	$	19,958,599	$	(29,799,940	)	$	(9,804,450	)

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

BALQON CORPORATION CONDENSED STATEMENTS OF CASH FLOWS FOR THE ~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER~~MARCH 3031, ~~2012~~2013 AND ~~2011~~2012 (Unaudited)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2012			2011
	2013			2012
Cash flows from operating activities:
Net loss	$	(61,~~690~~358,~~270~~224	)	$	(41,~~684~~667,~~495~~263	)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		243,~~471~~693			~~460~~8,~~534~~157
Fair value of common stock issued for services		–			23,250
Fair value of common stock transferred by shareholder to settle Company debts		323,176
Cost to induce conversion of warrants		~~671,809~~			–671,809
Fair value of common stock transferred by shareholder		33,100			–
Change in fair value of derivative liability		170,953			12,412
Change in fair value of derivative liability		1,345,111			(164,941	)
Amortization of note discount		280,654			306,960
Amortization of debt discount		1,234,140			1,133,738
Fair value of common stock contributed by shareholder to settle company debts		–			–
Changes in operating assets and liabilities:
Accounts receivable		~~675~~(58,~~901~~361	)		~~(765~~664,~~475~~871	)
Inventories		~~112~~32,~~982~~483			(~~972~~11,~~250~~002	)
Prepaid expenses		~~(437~~22,697	)		~~(125~~18,~~075~~238	)
Payroll Taxes payable		253,738			–
Bank Overdraft		–			56,292
Accounts payable and accrued expenses		1,805,407			416,678
Payroll taxes payable		17,791			63,548
Customer advances		(662,980	)		66,652
Accounts payable and accrued expenses		591,575			(45,198	)
Net cash used in operating activities		(122,066	)		(4,611,384	)
Customer advances		(33,201	)		85,794
Cash flows from investing activities:
Net cash (used in) provided by operating activities		(6,764	)		164,618
Acquisition of property and equipment		–			(30,410	)
Net cash used in investing activities		–			(30,410	)
Cash flows from financing activities:
Bank overdraft		(11,785	)		–
Payment of loan payable, Bridge Bank		–			(196,981	)
Proceeds from issuance of common stock upon exercise of warrants		–			148,665
Net cash used in financing activities		–			(191,981	)
Net proceeds from bank loan		–			299,941
Decrease in cash and cash equivalents		(6,764	)		(32,363	)
Payment of loan payable to bank		(233,231	)		–
Cash and cash equivalents, beginning of period		33,869			32,663
Proceeds from issuance of common stock upon conversion of notes		500,000			–
Cash and cash equivalents, end of period		27,105		$	300
Payments of notes payable, related parties		(500,000	)		–
Proceeds from issuance of convertible notes		340,000			–
Net cash provided by financing activities		94,984			448,606
Decrease in cash and cash equivalents		(27,082	)		(4,193,188	)
Cash and Cash equivalents, beginning of period		32,663			4,407,273
Cash and Cash equivalents, end of period	$	5,581		$	214,085
Supplemental Cash Flow Information:
Income taxes paid	$	–		$	–
Interest paid	$	~~47,913~~–		$	~~253~~35,~~938~~505
Supplemental non cash financing and investing activities:
Conversion of notes payable to common stock	$	–		$	~~297~~500,~~250~~000
Fair value of warrants issued in connection with exchange of notes payable	$	109,140		$	–
Fair value of warrants issued in connection with extension of notes	$	–		$	802,353

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

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

The Company

Balqon Corporation, a California corporation (“Balqon California”), was incorporated on April 21, 2005 and commenced business operations in 2006. On October 24, 2008, Balqon California completed a merger with BMR Solutions, Inc., a Nevada corporation (“BMR”), with BMR being the survivor of the merger. Upon the closing, BMR changed its name to Balqon Corporation (the “Company”). The Company develops and manufactures complete ~~electric~~ drive systems, ~~charging systems~~ and ~~lithium~~ battery systems for electric vehicles, industrial equipment and renewable energy storage devices. The Company also designs and assembles electric powered yard tractors, short haul drayage tractors and inner city Class 7 and 8 delivery trucks utilizing its proprietary drive system technologies.

Basis of Presentation of Unaudited Financial Information

The unaudited financial statements of the Company for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2012~~2013 and ~~2011~~2012 have been prepared in accordance with accounting principles ~~generally~~ generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-K for scaled disclosures for smaller reporting companies. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the Company’s financial position and results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The balance sheet information as of December 31, ~~2011~~ 2012 was derived from the audited financial statements included in the Company’s financial statements as of and for the ~~years~~ years ended December 31, ~~2011~~2012 and ~~2010~~2011 contained in the Company’s Annual Report on Form 10-K filed with the Securities and ~~Exchange~~ Exchange Commission (“SEC”) on ~~April~~June 1614, ~~2012~~2013. These financial statements should be read in conjunction with that report.

Going Concern

The accompanying ~~condensed~~ financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption ~~contemplates~~ contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the ~~nine~~three months ended ~~September 30~~March 31, ~~2012~~2013, the Company recorded a net loss of $61,~~690~~358,~~270~~224 and utilized cash flow from operations of $6,764. As of March ~~September 30~~31, ~~2012~~2013, the Company had a working capital deficit of $9,~~667~~844,~~419~~380 and a shareholders’ deficiency of $9,~~452~~804,~~061~~450. In addition, the Company has not paid $~~253~~325,~~738~~410 in payroll taxes and is delinquent in payment of $~~242~~3,~~987~~361,500 in principal of its convertible notes and $473,140 of interest due on convertible notes payable. Pursuant to the terms of the notes, the non-payment of principal and interest by the Company constitutes an event of default and, as a result, the holders of the notes may accelerate payment of all amounts outstanding under the notes by giving written notice to the Company and thereby requiring that the Company immediately pay upall ~~to an aggregate of $3,361,500 in~~ principal ~~plus~~and ~~all~~ accrued and unpaid interest. If the holders of the notes were to declare the notes due and payable, the Company presently does not have the ability to pay these notes. In addition, as of March ~~September~~31, ~~2012~~2013, $2,006,500 of the notes are secured under the terms of a security agreement granting the holders of the notes a security interest in all of the Company’s ~~personal~~assets (including all intellectual property ~~subject~~assets of the Company) subject to the interests of the holders of senior indebtedness (as that term is defined in the notes).

These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. AsThe ~~a result, the~~ Company’s ~~independent~~ability ~~registered public~~to ~~accounting~~continue ~~firm,~~as ina ~~its~~going ~~report~~concern is ondependent ~~the~~upon ~~Company’s~~its ~~2011~~ability ~~financial~~to ~~statements,~~develop ~~has~~additional ~~raised~~sources ~~substantial~~of ~~doubt~~capital ~~about~~and ~~the Company’s ability~~ to ~~continue~~ultimately asachieve asustainable ~~going~~revenues ~~concern~~and profitable operations. The ~~condensed~~Company’s financial statements do not include any adjustments that might beresult ~~necessary~~from ~~should~~ the ~~Company~~outcome ~~be unable to continue as a going concern. The Company has been, and currently is, working towards identifying and obtaining new sources~~ of ~~financing. No assurances can be given that the Company will be successful in obtaining~~these ~~additional financing in the future~~uncertainties.

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

~~Going~~The ~~Concern~~Company does not currently have sufficient liquidity to meet its anticipated working capital, debt service and other liquidity needs in the very near-term. The Company believes that it has sufficient working capital to continue operations only until approximately August 31, 2013 at the latest unless it successfully restructures its debt, experiences a significant improvement in sales and obtains other sources of liquidity. In addition, although various secured creditors holding approximately $ 2,006,500 in secured convertible notes and secured debentures have not exercised their rights to foreclose on all of the Company’s assets (~~continued~~including its intellectual property assets), no assurance can be given that these holders of secured debt will not exercise their remedies under the Company’s outstanding secured notes and secured debentures.

The Company has been, and currently is, working towards identifying and obtaining new sources of financing. No assurances can be given that the Company will be successful in obtaining additional financing in the future. Any future financing that the Company may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that the Company is able to obtain will likely include financial and other covenants that will restrict the Company’s flexibility. At a minimum, the Company expects these covenants to include restrictions on its ability to pay dividends on its common stock. Any failure to comply with these covenants would have a material adverse effect on the Company’s business, prospects, financial condition, results of operations and cash flows. In addition, the Company’s senior secured convertible debentures issued between July and December 2010 contain covenants that include restrictions on the Company’s ability to pay dividends on its common stock.

InIf ~~addition~~adequate funds are not available, the Company may be required to delay, scale back or eliminate portions of its operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require the Company to relinquish rights to certain of its technologies or potential products or other assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of the Company’s ~~senior~~proprietary technology and other important assets and ~~secured~~could ~~convertible~~also ~~debentures~~adversely ~~issued~~affect ~~between~~its ~~July~~ability to fund the Company’s continued operations and ~~December~~its ~~2010~~product ~~contain~~and ~~covenants~~service ~~that~~development efforts. ~~include~~Although ~~restrictions~~the onCompany is actively pursuing a number of alternatives, including seeking to restructure its ~~ability~~debt and seeking to ~~pay~~raise ~~dividends~~additional ondebt or equity financing, or both, there can be no assurance that the Company will be successful. If the Company cannot restructure its ~~common~~debt ~~stock~~and obtain sufficient liquidity in the very near term, the Company may need to seek to protection under the U.S. Bankruptcy Code

If adequate funds are not available, the Company may be required to delay, scale back or eliminate portions of its operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require the Company to relinquish rights to certain of its technologies or potential products or other assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of the Company’s proprietary technology and other important assets and could also adversely affect its ability to fund the Company’s continued operations and its product and service development efforts.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the ~~reported~~ reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements ~~and~~ and the reported amounts of revenue and expenses during the reporting period. Material estimates relate to the recognition of contract revenues and estimated costs to complete, recoverability of reported amounts of long-lived assets, and assumptions made in valuing derivative instruments and equity instruments issued for compensation. Actual results may differ from those estimates.

Revenues

Sales of Production Units and Parts

~~The~~We ~~Company~~recognize ~~recognizes~~ revenue from the sale of completed production units and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of ~~the~~our ~~Company’s~~ product or delivery of the product to the destination specified by the customer.

The Company determines whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs when the Company places the products with the buyer’s carrier. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured. Except for warranties, the Company has no post-sales obligations.

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

~~FOR~~We determine whether delivery has occurred based on when title ~~THE~~transfers ~~THREE~~and ~~AND~~the ~~NINE~~risks ~~MONTHS~~and ~~ENDED~~rewards ~~SEPTEMBER~~of 30ownership have transferred to the buyer, ~~2012~~which ~~AND~~usually ~~2011~~occurs ~~(Unaudited)~~when we place the products with the buyer’s carrier. We regularly review our customers’ financial positions to ensure that collectability is reasonably assured. Except for warranties, we have no post-sales obligations.

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories

Inventories ~~consist~~ ~~mainly of raw materials and~~ are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis. Recorded inventories at ~~September~~March 3031, ~~2012~~ 2013 do not include approximately $~~574~~ 648,~~900~~200 of batteries and other items held on consignment from Seven One Battery Company, an affiliate of the Company’s Chairman of the Board. (See Note 8). 9Inventories at March 31, 2013 consisted of raw materials.)

The Company conducted an assessment and determined that approximately $606,111 of its inventory was impaired and $739,000 of the value of the electric vehicles held for lease was impaired (See Note 10). Accordingly, the Company recorded an impairment loss of $1,345,111 related to these impaired assets.

Goodwill and Intangible Assets

Management performs impairment tests of goodwill and indefinite-lived intangible assets whenever an event occurs or circumstances change that indicate impairment has more likely than not occurred. Also, management performs impairment testing of goodwill and indefinite-lived intangible assets at least annually.

The Company reviews intangible assets subject to amortization at least annually to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value in the period identified. If the carrying value of assets is determined not to be recoverable, the Company records an impairment loss equal to the excess of the carrying value over the fair value of the assets.

The Company’s estimate of fair value is based on the best information available, in the absence of quoted market prices. The Company generally calculates fair value as the present value of estimated future cash flows that the Company expects to generate from the asset using a discounted cash flow income approach as described above. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.

During the years ended December 31, 2011 and December 31, 2010, the Company determined that there were no indicators of impairment of its recorded goodwill. During the year ended December 31, 2011, the Company determined that the value of its intangible asset related to the Distribution Agreement was impaired (See Note 9 for a description of the Distribution Agreement). Accordingly, the Company recorded an impairment loss of $935,583 that for the unamortized value of the Distribution Agreement as of December 31, 2011. During the years ended December 31, 2011 and December 31, 2010, the Company determined that there were no indicators of impairment of its recorded goodwill.

Loss Per Share

Basic loss per share has been computed using the weighted average number of common shares outstanding and issuable during the period. Diluted loss per share is computed based on the weighted average number of common shares and all common equivalent shares outstanding during the period in which they are dilutive. Common equivalent shares consist of shares issuable upon the exercise of stock options, warrants or other convertible securities such as convertible notes. For the ~~nine~~three months ended ~~September 30~~March 31, ~~2012~~2013 and ~~year ended December 31~~2012, ~~2011,~~ common stock equivalent shares have been excluded from the calculation of loss per share as their effect is anti-dilutive.

7The following table summarizes the weighted average shares and common stock equivalents outstanding as of March 31, 2013 and 2012:

BALQON CORPORATION

	March 31, 2013		March 31, 2012
Weighted average shares outstanding		36,891,530		35,641,530
Common stock equivalents:
Options exercisable into common shares		–		1,416,695
Warrants exercisable into common shares		10,295,500		12,006,220
Notes payable convertible into common shares		6,814,583		6,027,083
Total, common stock equivalents		17,110,083		19,449,998

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Loss Per Share (continued)

The following table summarizes the weighted average shares and common stock equivalents outstanding as of September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
Weighted average shares outstanding		36,266,530		35,525,621
Common stock equivalents:
Options exercisable into common shares		–		1,416,695
Warrants exercisable into common shares		10,295,500		13,256,220
Notes payable convertible into common shares		6,260,988		3,900,758
Total, common stock equivalents		15,386,750		18,573,673

Financial Assets and Liabilities Measured at Fair Value

The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the condensed balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value.

Authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:

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

Level 2 Inputs, other than the quoted prices in active markets, that is observable either directly or indirectly.

Level 3 Unobservable inputs based on the Company’s assumptions.

The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2012.7

		Level 1				Level 2				Level 3				Total
Fair value of Derivative Liability		$	–			$	–			$	2,716,835			$	2,716,835

Derivative Financial Instruments

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses the Monte Carlo simulation model using the Black Scholes Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

~~FOR THE~~Financial ~~THREE~~Assets ~~AND~~and ~~NINE~~Liabilities ~~MONTHS~~Measured ~~ENDED~~at ~~SEPTEMBER~~Fair ~~30,~~Value ~~2012 AND 2011~~ (~~Unaudited~~continued)

~~NOTE~~The following table presents certain investments 1and –liabilities ~~NATURE~~of OFthe ~~BUSINESS~~Company’s ~~AND~~financial ~~SIGNIFICANT~~assets ~~ACCOUNTING~~measured ~~POLICIES~~and ~~(continued)~~recorded at fair value on the Company’s condensed balance sheets on a recurring basis and their level within the fair value hierarchy as of March 31, 2013 and December 31, 2012.

March 31, 2013	Level 1		Level 2		Level 3		Total
Fair value of Derivative Liability	$	–	$	–	$	1,018,425	$	1,018,425
December 31, 2012	Level 1		Level 2		Level 3		Total
Fair value of Derivative Liability	$	–	$	–	$	847,472	$	847,472

Derivative Financial Instruments

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company used the probability weighted average Black-Scholes-Merton models to value the derivative instruments on March 31, 2013. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Concentrations

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and unsecured accounts receivable.

The Company maintains cash balances at one bank. At times, the amount on deposit exceeds the federally insured limits. Management believes that the financial institution that holds the Company’s cash is financially sound and, accordingly, minimal credit risk exists.

For the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013, 3438% ~~of total revenues were from one customer. For the three months ended September 30~~, ~~2012,~~ 49 21% and 11% of ~~total~~ revenues were from ~~one customer. For~~ the ~~nine~~three ~~months~~largest ~~ended September 30, 2011, 24% of total revenues were from one customer~~customers. For the three months ended ~~September~~March 3031, ~~2011~~2012, 3760% of total revenues were from one customer. At ~~September 30~~March 31, ~~2012~~2013, 4035% of accounts receivable were from one ~~customer~~trade ~~while 11% of accounts receivable were from another~~ customer. At December 31, ~~2011~~2012, 3060% of accounts receivable were from one trade customer.

For the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~ 2013, 8688% of costs of revenue ~~were~~was to one vendor. For the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012, 20 34% of costs of revenue were to one vendor. ~~For~~At ~~the~~March ~~three~~31, ~~months~~2013, ~~ended~~accounts ~~September~~payable ~~30,~~to ~~2012,~~the 97largest vendor represented 58% of ~~costs~~total ofaccounts ~~revenue~~payable ~~were~~balances. Accounts payable to ~~one vendor.~~other ~~For~~two ~~the~~largest ~~three~~vendors ~~months~~represented ~~ended~~13% ~~September~~and 306%, ~~2011~~respectively, ~~29%~~ of ~~costs~~total ofaccounts ~~revenue~~payable ~~were~~at toDecember ~~one vendor~~31, 2012.

At September 30, 2012, accounts payable to the largest vendor represented 52% of total accounts payable balances. Accounts payable to other two largest vendors represented 15% and 7% respectively, of total accounts payable at September 30, 2012. At December 31, 2011, accounts payable to the largest vendor represented 30% of total accounts payable balances. Accounts payable to other two largest vendors represented 26% and 9%, respectively, of total accounts payable at December 31, 2011.

Recent Accounting Pronouncements

~~In May 2011,~~There ~~the~~are ~~FASB~~recent accounting pronouncements issued ~~Accounting~~by ~~Standards~~the ~~Update~~FASB (~~ASU) No. 2011-04,~~including ~~“Amendments~~its toEmerging ~~Achieve~~Issues ~~Common~~Task ~~Fair Value~~Force), ~~Measurement~~the ~~and~~American ~~Disclosure~~Institute ~~Requirements~~of inCertified ~~U.S.~~Public ~~GAAP~~Accountants ~~and IFRSs~~(“AICPA”~~. ASU No. 2011-4 does not require additional~~), ~~fair value measurements~~ and isthe ~~not intended to establish valuation standards or affect valuation practices outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15~~SEC, ~~2011.~~however ~~The~~these ~~Company~~pronouncements ~~adopted ASU~~are ~~No.~~not ~~2011-04~~believed ~~effective~~by ~~January~~management 1,to ~~2012.~~have ~~The~~a ~~updated~~material ~~guidance~~impact ~~affects~~on the Company’s ~~fair value disclosures, but will not~~present ~~affect~~or ~~the~~future ~~Company’s results of operations,~~ financial ~~condition or liquidity~~statements.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. The ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after December 15, 2011. The Company adopted ASU 2011-05 effective January 1, 2012 and it did not affect the Company’s results of operations, financial condition or liquidity.8

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 effective January 1, 2012. The adoption of this new accounting guidance will not have a significant effect on the Company’s goodwill impairment assessments in the future.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect adoption of this standard to have a material impact on its results of operations, financial condition, or liquidity.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

NOTE 2 – PROPERTY AND EQUIPMENT

Property and equipment ~~consist~~consisted of the following:

	September 30, 2012 (Unaudited)			December 31, 2011
	March 31, 2013			December 31, 2012
Computer equipment and software	$	121,680		$	121,680
Office furniture		35,300			35,300
Equipment		35,941			35,941
Leasehold improvements		21,711			21,711
Total property and equipment, cost		214,632			214,632
Less: accumulated depreciation and amortization		(~~180~~189,~~173~~102	)		(~~155~~185,~~703~~409	)
Property and equipment, net	$	3425,~~459~~530		$	5829,~~929~~223

Depreciation and amortization expense ~~on property and equipment~~ for the ~~nine~~three months ended March ~~September~~31, 302013, ~~2012~~ and ~~2011~~2012 was $243,~~471~~693 and $~~460~~8,~~534~~157, respectively.

NOTE 3 – ADVANCES FROM SHAREHOLDERS

As of March 31, 2013 and December 31, 2012, $5,018 was due to the Company’s President and majority shareholder, Mr. Balwinder Samra. This amount due to Mr. Samra, a related party, is unsecured, non-interest bearing, and does not have defined terms of repayment.

NOTE 4 – CONVERTIBLE PROMISSORY NOTES IN DEFAULT

Convertible notes payable in default consist of the following as of March 31, 2013 and December 31, 2012:

	March 31, 2013			December 31, 2012
Subordinated secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (1)	$	891,500		$	891,500
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2012 (2)		25,000			25,000
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due September 1, 2012 (3)		1,330,000			1,330,000
Senior secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (4)		775,000			775,000
Secured Convertible Note Payable, Interest at 10% per annum payable quarterly, due March 31, 2013 (5)		340,000			340,000
Convertible notes payable		3,361,500			3,361,500
Less: note discount		–			(280,654	)
Convertible notes payable, net of note discount		3,361,500			3,080,846
Less: current portion of subordinated unsecured notes, net		(3,361,500	)		(3,080,846	)
Convertible notes payable, net of note discount and current portion	$	–		$	–

BALQON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

(1) Between March 25, 2009 and June 19, 2009, the Company entered into agreements with 34 accredited investors for the sale by the Company of an aggregate of $1,000,000 of 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 1,000,000 shares of the Company’s common stock at a conversion price of $1.00 per share of common stock, subject to adjustment. The notes are subordinated to the right to the prior payment of all Senior Indebtedness (as defined in the notes). Additionally, the Company issued three-year warrants to purchase an aggregate of 1,000,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The conversion price of the notes and the exercise price of the warrants are only subject to adjustment based on stock splits, stock dividends, spin-offs, rights offerings, or recapitalization through a large, nonrecurring cash dividend. During the year ended December 31, 2011, $68,500 in principal amount of these notes was converted to 68,500 shares of the Company’s common stock. As of December 31, 2011, $916,500 in principal was outstanding under these notes.

The Company determined that the relative fair value of the warrants upon issuance was $639,061. The relative fair value was determined using the methodology prescribed by current accounting guidance. The Company determined the fair value of the beneficial conversion feature was approximately $360,939. These amounts were calculated under a Black-Scholes option pricing model using as assumptions an expected life of 3 years, an industry volatility of 54.39%, a risk free interest rate of 1.15%, and no expected dividend yield. The relative value of the warrants of $639,061 and the beneficial conversion feature of $360,939 was recorded by the Company as a loan discount of $1,000,000, which the Company is amortizing to interest expense over the life of the notes. As of December 31, 2011, the unamortized balance of the note discount was $80,248. As of December 31, 2012 the Company had fully amortized the remaining unamortized discount of $80,248.

During the three months ended March 31, 2012, the Company negotiated Amendment and Exchange Agreements with holders of $891,500 of its $916,500 of 10% unsecured notes payable that matured on March 31, 2012. The terms of the Amendment and Exchange Agreements provide that the maturity date of these notes (the “Amended Notes”) was extended until March 31, 2013, and are now currently in default. The Amended Notes continue to accrue quarterly interest at the rate of 10% and are subject to a security agreement. The Amendment and Exchange Agreements also provide that the Amended Notes are convertible into common stock of the Company at a price of $0.40 per share, subject to adjustment for a weighted average anti-dilution provision. In connection with the issuance of the Amended Notes, the Company issued three-year warrants to purchase up to 975,000 shares of common stock at an exercise price per share of $0.40.

The Amended Notes were due on March 31, 2013 (the “Maturity Date”) and are currently in default due to non-payment of the note by the Company. The Amended Notes are secured under the terms of a security agreement granting the holders of the Amended Notes a security interest in all of the Company’s personal property subject to the interests of the holders of Senior Indebtedness (as defined in the Amended Notes). The security interest granted is subordinate to existing bank financing and the 10% Senior Secured Convertible Debentures that currently have a principal balance due of $775,000.

Each of the agreements governing the Amended Notes and warrants includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the current conversion price of the Amended Notes or exercise price of the warrants issued with the Amended Notes. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the Amended Notes and the exercise price of the warrants are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features and the warrants are not considered indexed to the Company’s own stock and characterized the initial fair value of these warrants as derivative liabilities upon issuance. The Company determined the aggregate initial fair value of the warrants issued to investors to be $316,876 and the initial fair value of the embedded beneficial conversion feature of the Amended Notes to be $512,613 (an aggregate amount of $829,489). These amounts were determined by management with the use of an independent valuation specialist using a Monte Carlo simulation model using the Black-Scholes Merton option pricing model. As such, the Company recorded an $829,489 valuation discount upon issuance of the notes and warrants. The Company is amortizing this valuation discount to interest expense over the life of the notes. During the three month ended March 31, 2013 the Company included in interest expense $207,357 and $306,960, respectively, relating to the amortization of this discount, and as of March 31, 2013 and December 31, 2012, the unamortized balance of the note discount was $0 and $207,357, respectively.

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

~~FOR~~(2) A holder of $25,000 in principal ~~THE~~of ~~THREE~~the ~~AND~~Company’s ~~NINE~~10% ~~MONTHS~~Unsecured ~~ENDED~~Convertible ~~SEPTEMBER~~Promissory 30Notes issued between March 25, ~~2012~~2009 ~~AND~~and ~~2011~~June 19, 2009 did not accept the Company’s offer under the Amendment and Exchange Agreements (~~Unaudited~~see note 1 above) to exchange this note for an Amended Note that matures on March 31, 2013. As such, this 10% Unsecured Convertible Promissory Note matured on March 31, 2012 and is in default due to non-payment of the note by the Company.

~~NOTE~~ (3) Between –February ~~LOAN~~5, ~~PAYABLE~~2010 –and ~~BRIDGE~~April 12, ~~BANK~~2010, the Company entered into agreements with seven accredited investors for the sale by the Company of an aggregate of $1,500,000 of 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 1,999,993 shares of the Company’s common stock at a conversion price of $0.75 per share of common stock, subject to adjustment. Additionally, the Company issued three-year warrants to purchase an aggregate of 1,999,993 shares of the Company’s common stock at an exercise price of $0.50 per share. In connection with the offering, the Company issued three year warrants to purchase 15,999 shares of its common stock at an exercise price of $0.50 per share to two accredited investors in consideration of finder services rendered. The conversion price of the notes and the exercise price of the warrants are only subject to adjustment based on stock splits, stock dividends, spin-offs, rights offerings, or recapitalization through a large, nonrecurring cash dividend. During the year ended December 31, 2011, $153,750 of the principal of the notes was converted into 204,998 shares of the Company’s common stock. As of December 31, 2012, $1,330,000 in principal was outstanding under these notes. The notes matured on September 1, 2012 and are presently in default due to non-payment.

~~On February~~The ~~25,~~Company ~~2009,~~determined that the ~~Company~~relative fair ~~executed~~value aof ~~Business~~the ~~Financing~~warrants ~~Agreement,~~upon ~~dated~~issuance ~~February~~was 18$731,710. ~~2009,~~The ~~with~~relative ~~Bridge~~fair ~~Bank,~~value ~~National~~was ~~Association (the~~determined ~~“Lender”)~~using (the ~~“Initial~~methodology ~~Agreement”)~~prescribed by current accounting guidance. The ~~Initial~~Company ~~Agreement~~determined ~~has~~the ~~been~~fair ~~amended~~value byof ~~Business~~the ~~Financing Modification~~beneficial ~~Agreements~~conversion ~~dated~~feature ~~effective~~was ~~February~~approximately 26$768,290. These ~~2009~~amounts ~~and~~were ~~August~~calculated 4,under ~~2009,~~a ~~respectively~~Black-Scholes ~~(the~~option ~~“Modification~~pricing ~~Agreements,” and~~model ~~together~~using ~~with~~as ~~the~~assumptions ~~Initial~~an ~~Agreement~~expected ~~the~~life ~~“Credit~~of ~~Agreement”).~~3 ~~The~~years, ~~Credit~~an ~~Agreement~~industry volatility ~~provides~~of ~~the~~between ~~Company~~95% ~~with~~and ~~an accounts~~116%, ~~receivable~~a ~~based~~risk ~~credit~~free ~~facility~~interest inrate ~~the~~of ~~aggregate~~1.47%, ~~amount~~and no expected dividend yield. The relative value of upthe warrants toof $2731,~~000,000~~710 (and the ~~“Credit~~beneficial ~~Facility”).~~conversion ~~At September~~feature ~~30,~~of ~~2012~~$768,290 ~~there~~ was norecorded ~~balance~~by ~~due~~the ~~under~~Company ~~the~~as ~~terms~~a loan discount of $1,500,000, which the ~~Credit~~Company ~~Agreement~~is ~~and~~amortizing ~~80%~~to ofinterest ~~eligible~~expense ~~accounts~~over ~~receivable~~the ~~was available~~life of the notes. AtAs of December 31, 2011, ~~$233,231~~the ~~was~~unamortized ~~outstanding~~balance of ~~and~~the note discount was $66362,~~601~~645. ~~was~~During ~~available~~the ~~under~~year ended December 31, 2012 the ~~terms~~remaining unamortized discount of ~~the~~$362,645 ~~Credit~~was ~~Agreement~~recorded as interest expense.

~~The~~(4) Between ~~Credit~~July ~~Agreement~~2010 ~~is formula-based~~ and ~~generally~~December ~~provides~~2010, ~~that~~ the ~~outstanding~~Company ~~borrowings~~entered ~~may~~into ~~not~~agreements ~~exceed~~with an26 ~~aggregate~~accredited ofinvestors ~~80%~~for ofthe ~~eligible~~sale ~~accounts~~by ~~receivable.~~the ~~The~~ Company ~~must~~of ~~immediately pay~~an ~~any~~aggregate ~~advance~~of ~~made~~$850,000 ~~under~~of ~~the~~10% Senior ~~Credit~~Secured ~~Agreement~~Convertible ~~within~~Debentures 90(the ~~days~~“Debentures”) ofwhich ~~the~~are ~~earlier~~convertible ofinto ~~(i)~~an ~~the~~aggregate ~~invoice~~of ~~date~~1,133,333 shares of the ~~receivable~~Company’s ~~that~~common ~~substantiated the~~stock ~~advance~~at ora ~~(ii)~~conversion ~~the~~price ~~date~~of on$0.75 ~~which~~per ~~the~~share, ~~advance~~subject ~~was~~to ~~made~~adjustment. In ~~The~~connection ~~Credit~~with ~~Agreement~~this offering, isthe ~~secured~~Company byalso aissued ~~continuing~~to ~~first priority security interest in all~~ the ~~Company’s~~investors ~~personal~~warrants ~~property (subject~~ to ~~customary~~purchase ~~exceptions).~~an ~~Interest~~aggregate onof ~~the~~850,000 ~~Credit~~shares ~~Agreement~~of isthe ~~payable~~Company’s common ~~monthly,~~stock at ~~the~~an ~~per~~exercise ~~annum~~price ~~prime~~of ~~rate~~$0.75 asper ~~published~~share, bysubject ~~the~~to ~~Lender~~adjustment. The ~~plus~~Company ~~two~~also ~~percentage~~issued ~~points,~~to ~~subject~~its placement agent warrants to apurchase ~~minimum~~68,000 ~~rate~~shares of ~~6.0% per~~the ~~annum~~Company’s ~~(6%~~common stock at ~~September~~exercise ~~30,~~price ~~2012)~~of $0.75 ~~The~~per ~~Credit~~share, ~~Agreement~~subject ~~may~~to bethe ~~terminated~~same atadjustments and ~~any~~terms ~~time~~as bythose ~~either~~warrants ~~party~~issued to ~~the Credit Agreement~~investors.

~~NOTE~~During the year ended December 31, 2011, 4$75,000 –of ~~ADVANCES~~the ~~FROM~~principal ~~SHAREHOLDERS~~of the Debentures was converted into 117,186 shares of the Company’s common stock. As of March 31, 2013 and December 31, 2012, $775,000 in principal was outstanding under these Debentures. Under the adjustment provisions of the Debentures and warrants, the conversion price of the Debentures and the exercise price of the warrants were reduced to $0.56 in connection with various dilutive issuances made in 2011 and 2010.

The ~~amount~~ ofDebentures ~~$5,018~~were ofdue ~~advances~~on ~~from~~September ~~shareholders~~30, 2012, ~~was~~and ~~advanced~~subsequently extended to, March 31, 2013 (the ~~Company~~“Maturity byDate”) ~~its~~and ~~President,~~are ~~Mr.~~now ~~Balwinder~~in ~~Samra,~~default ~~and~~due isto ~~payable~~non-payment toThe ~~Mr.~~Debentures ~~Samra.~~are ~~This~~secured ~~amount~~under ~~due~~the toterms ~~Mr.~~of ~~Samra,~~ a ~~related~~security ~~party,~~agreement isgranting ~~unsecured,~~the ~~non-interest~~holders ~~bearing,~~of ~~and~~the ~~does~~Debentures ~~not~~a ~~have~~security ~~defined~~interest ~~terms~~in all of ~~repayment~~the Company’s personal property.

AsEach of ~~December 31, 2011, Mr. Winston Chung,~~ the ~~Company’s~~agreements ~~Chairman~~governing of the ~~Board,~~Debentures and ~~had~~warrants ~~advanced~~includes ~~$500,000~~an ~~to the Company. The advance received were non~~anti-~~interest~~dilution ~~bearing,~~provision ~~and~~that ~~with~~allows nofor ~~other~~the ~~defined~~automatic ~~terms. As~~reset of ~~December~~the ~~31,~~conversion ~~2011,~~or ~~Mr.~~exercise ~~Chung~~price ~~also~~upon ~~held warrants~~any tofuture ~~acquire~~sale ~~7,812,500 shares~~ of ~~the Company’s~~ common stock instruments at anor ~~exercise~~below ~~price~~the ofcurrent ~~$0.64~~exercise ~~per share~~price. The ~~Warrants~~Company ~~were vested~~considered ~~and~~the ~~have~~current aFASB ~~5-year~~guidance of ~~term~~“Determining orWhether an ~~expiration~~Instrument ~~date~~Indexed onto ~~December~~an ~~30,~~Entity’s ~~2015. Effective~~Own ~~March~~Stock” ~~31,~~which ~~2012,~~indicates ~~the~~that ~~Company,~~any ~~Mr.~~adjustment ~~Chung~~to ~~and~~the byfixed ~~Seven~~amount ~~One Limited~~ (~~“SOL”),~~either aconversion ~~company~~price ~~related~~or tonumber ~~the~~of ~~Chairman~~shares) byof ~~common ownership, entered into an agreement whereby~~ the ~~exercise~~instrument ~~price~~regardless of ~~certain~~the ~~warrants~~probability ~~held~~or bywhether ~~SOL~~or ~~were~~not within ~~reduced~~the toissuers’ ~~$0.40~~control, ~~per~~means ~~share. SOL then~~the ~~elected~~instrument tois ~~exercise~~not ~~warrants~~indexed to ~~acquire~~the ~~1,250,000~~issuers ~~shares~~own ~~of common~~ stock ~~at a price of $0~~.40 ~~and~~Accordingly, the Company ~~issued 1,250,000~~determined ~~shares~~that ofthe ~~its~~conversion ~~common~~price ~~stock~~of tothe ~~SOL,~~Debentures inand ~~consideration of~~ the exercise price of the warrants atare annot ~~exercise~~a ~~price~~fixed ofamount ~~$0.40~~because ~~upon~~they ~~the~~are ~~conversion~~subject ofto ~~$500,000~~fluctuation ofbased on the ~~cancelation~~occurrence of ~~the~~future ~~amount~~offerings ~~owed~~or ~~to Mr~~events. ~~Chung~~As asa anresult, ~~advance~~the inCompany ~~2011. Due~~determined tothat the ~~modification~~conversion ~~of the exercise~~features ~~price,~~and the ~~Company~~warrants ~~recognized~~are anot ~~cost~~considered indexed to ~~induce~~the ~~conversion~~Company’s ofown ~~$225,000~~stock ~~relating~~and to characterized the ~~additional~~fair ~~468,750~~value ~~shares~~of ~~that~~these ~~would have~~warrants ~~been~~as ~~issued~~derivative ~~under~~liabilities ~~the~~upon ~~original $0~~issuance.~~64 per share conversion feature.~~

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

~~FOR~~The Company determined that upon issuance ~~THE~~in ~~THREE~~2010, ~~AND~~the ~~NINE~~aggregate ~~MONTHS~~fair ~~ENDED~~value ~~SEPTEMBER~~of 30the warrants issued to investors and its placement agent to be $511,399 ~~2012~~and ~~AND~~the ~~2011~~initial fair value of the embedded beneficial conversion feature of the Debentures to be $504,440 (~~Unaudited~~an aggregate amount of $1,015,839). These amounts were determined by management with the use of an independent valuation specialist using a Monte Carlo simulation model using the Black-Scholes Merton option pricing model. In accordance with current accounting guidelines, the excess of $165,839 of derivative liability created over the face amount of the Debentures was considered to be a cost of the private placement. In addition, the Company also incurred another $193,500 of closing costs (consisting of $93,500 of placement agent fees and $100,000 of legal fees directly related to the offering). As such, the Company recorded an $850,000 valuation discount upon issuance, and in 2010, recognized private placement costs of $358,339 for financial reporting purposes. As of December 31, 2012, the Company amortized $269,560 of the valuation discount, and the remaining unamortized valuation discount of $12,386 as of December 31, 2012 has been offset against the face amount of the Debentures for financial statement purposes. The remainder of the valuation discount was amortized as interest expense during the three month ended March 31, 2013.

~~NOTE~~ (5) –On May ~~CONVERTIBLE~~18, ~~PROMISSORY~~2012, ~~NOTES~~the Company entered into Agreements with 3 accredited investors for a sale by the Company of an aggregate of $340,000 10% Secured Subordinated Convertible Promissory Notes (the “May 2012 Notes”) which are convertible into an aggregate of 850,000 shares of the Company’s common stock at a conversion price of $0.40 per share of common stock, subject to adjustment. The notes were due on March 31, 2013 and are now in default due to non-payment. The May Notes are subordinated to the right to the prior payment of all Senior Indebtedness (as defined in the notes). The notes pay quarterly interest at the rate of 10% and are subject to a security agreement that secures the Notes by the Company’s assets. The security agreement is subordinate to existing bank financing and the Debentures (as defined below) that currently have a principle balance due of $775,000 and the Amended Notes that currently have a balance due of $891,500. Additionally, the Company issued three-year warrants to purchase an aggregate of 340,000 shares of the Company’s common stock at an exercise price of $0.40 per share, subject to standard anti-dilution adjustments.

~~Convertible~~The conversion ~~notes~~price ~~payable~~of ~~consist~~the May 2012 Notes are subject to full ratchet anti-dilution provisions and also subject to adjustment based on stock splits, stock dividends, spin-offs, rights offerings, or recapitalization through a large, nonrecurring cash dividend. Each of the ~~following~~agreements asgoverning the May 2012 Notes include an anti-dilution provision that allows for the automatic reset of ~~September~~the 30conversion price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the current conversion price of the May 2012 Notes. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the May 2012 Notes are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features are not considered indexed to the Company’s own stock and ~~December~~characterized ~~31,~~the ~~2011:~~fair value of the conversion feature of the notes as derivative liabilities upon issuance.

	September 30, 2012 (Unaudited)			December 31, 2011
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2012, and currently in default (1)	$	25,000		$	916,500
Subordinated secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (2)	$	891,500		$	–
Subordinated secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (3)	$	340,000		$	–
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due September 1, 2012, and currently in default (4)	$	1,330,000		$	1,330,000
Senior secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (5)	$	775,000		$	775,000
Convertible notes payable		3,361,500			3,021,500
Less: note discount		(566,119	)		(724,840	)
Convertible notes payable, net of note discount	$	2,795,381		$	2,296,660
Less: current portion of subordinated unsecured notes		(2,795,381	)		(1,483,168	)
Convertible notes payable, net of note discount and current portion	$	–		$	813,492

The Company determined the aggregate fair value of the warrants issued to investors to be $109,140 and the initial fair value of the embedded beneficial conversion feature of the May 2012 Notes to be $136,850 (an aggregate amount of $245,990). These amounts were determined by management with the use of an independent valuation specialist using a Monte Carlo simulation model using the Black-Scholes Merton option pricing model. As such, the Company recorded a $245,990 valuation discount upon issuance of the notes and warrants. The Company is amortizing this valuation discount to interest expense over the life of the notes. As of December 31, 2012, the Company amortized $185,079 of the discount, and the remaining unamortized valuation discount of $60,911 as of December 31, 2012 has been offset against the face amount of the Debentures for financial statement purposes. The remainder of the valuation discount was amortized as interest expense during the three month ended March 31, 2013.

~~(1)~~NOTE A5 ~~holder~~– ofDERIVATIVE $25,000 in principal of the Company’s 10% Unsecured Convertible Promissory Notes issued between March 25, 2009 and June 19, 2009 did not accept the Company’s offer under the Amendment and Exchange Agreements (see footnote 2 below) to exchange this note for an Amended Note that matures on March 31, 2013. As such, this 10% Unsecured Convertible Promissory Note matured on March 31, 2012 and is in default due to non-payment of the note by the Company.LIABILITY

~~(2)~~In ~~Between~~June ~~March 25~~2008, ~~2009~~the ~~and~~FASB ~~June~~issued ~~19,~~authoritative guidance ~~2009,~~on ~~the~~determining ~~Company~~whether ~~entered~~an ~~into~~instrument ~~agreements~~(or ~~with~~embedded 34feature) ~~accredited~~is ~~investors~~indexed ~~for~~to ~~the~~an ~~sale~~entity’s byown stock. Under the authoritative ~~Company~~guidance, ofeffective anJanuary ~~aggregate of $~~1,~~000~~ 2009,~~000~~ ofinstruments ~~10%~~which ~~Unsecured~~do ~~Subordinated~~not ~~Convertible~~have ~~Promissory~~fixed ~~Notes~~settlement ~~which~~provisions are ~~convertible~~deemed ~~into~~to anbe ~~aggregate~~derivative instruments. The ofconversion ~~1,000,000~~feature ~~shares~~ of the Company’s ~~common~~Debentures ~~stock~~(described atin aNote ~~conversion~~7), ~~price~~and ofthe ~~$1.00~~related ~~per~~warrants, ~~share~~do not ofhave ~~common~~fixed ~~stock,~~settlement ~~subject~~provisions tobecause ~~adjustment.~~their ~~The~~conversion ~~notes~~and ~~were~~exercise ~~due~~prices, ~~on March 31~~respectively, ~~2012~~may ~~and~~be ~~are~~lowered ~~subordinated~~if to the ~~right~~Company issues tosecurities ~~the~~at ~~prior~~lower ~~payment~~prices ~~of all Senior Indebtedness (as defined~~ in the ~~notes)~~future. The ~~Additionally,~~Company ~~the~~was ~~Company~~required ~~issued~~to ~~three-year~~include ~~warrants~~the toreset ~~purchase~~provisions anin ~~aggregate~~order ofto ~~1,000,000~~protect the ~~shares~~holders of the ~~Company’s~~Debentures ~~common~~from ~~stock~~the atpotential andilution ~~exercise~~associated ~~price~~with offuture $1financings.50 ~~per~~In ~~share.~~accordance ~~The~~with ~~conversion price of~~ the ~~notes~~FASB ~~and~~authoritative guidance, the ~~exercise~~conversion ~~price~~feature of the ~~warrants~~Debentures ~~are~~was ~~only~~separated ~~subject~~from tothe ~~adjustment~~host ~~based~~contract ~~on stock splits~~(i.e., ~~stock~~the ~~dividends,~~Debentures) ~~spin-offs,~~and ~~rights~~recognized ~~offerings, or recapitalization through~~ as a ~~large,~~derivative ~~nonrecurring cash dividend~~instrument. Both ~~During~~ the ~~year~~conversion ~~ended~~feature ~~December~~of ~~31,~~the ~~2011,~~Debentures and ~~$68,500~~the inrelated ~~principal~~warrants ~~amount~~have ofbeen ~~these~~characterized as ~~notes~~derivative ~~was~~liabilities ~~converted~~ to ~~68,500~~be ~~shares~~re-measured ofat the ~~Company’s~~end ~~common~~of ~~stock.~~every Asreporting ofperiod ~~December~~with ~~31,~~the ~~2011,~~change ~~$916,500~~ in ~~principal~~value ~~was~~reported ~~outstanding~~in ~~under~~the ~~these notes~~statement of operations.

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

~~FOR THE~~As ~~THREE~~of ~~AND~~December ~~NINE~~31, ~~MONTHS~~2012 ~~ENDED~~and ~~SEPTEMBER~~March 31, 302013, ~~2012~~the ~~AND~~derivative ~~2011~~liabilities ~~(Unaudited)~~were valued using a probability weighted average Black-Scholes pricing model with the following assumptions:

NOTE 5 – CONVERTIBLE PROMISSORY NOTES (continued)

	March 31, 2013		December 31, 2012
Conversion feature:
Risk-free interest rate		0.13%		0.18%
Expected volatility		198.77%		186.99%
Expected life (in years)		.25 years		.25 years
Expected dividend yield		0		0
Warrants:
Risk-free interest rate		0.13%		0.25%
Expected volatility		198.77%		186.99%
Expected life (in years)		2.25 years		2.5 years
Expected dividend yield		0		0

Fair Value:
Conversion feature		745,222		579,821
Warrants		273,203		267,651
	$	1,018,425	$	847,472

~~During~~The ~~the~~risk-free ~~three months~~interest ~~ended~~rate ~~March~~was ~~31,~~based ~~2012,~~on rates ~~the~~established ~~Company~~by ~~negotiated~~the ~~Amendment~~Federal ~~and~~Reserve ~~Exchange~~Bank. The ~~Agreements~~Company ~~with~~uses ~~holders~~the ofvolatility ~~$891,500~~ of ~~its~~five ~~$916,500 of~~comparable ~~10%~~guideline ~~unsecured~~companies ~~notes~~to ~~payable~~estimate volatility ~~that~~for ~~matured~~its oncommon ~~March 31, 2012~~stock. The ~~terms~~expected life of the ~~Amendment~~conversion ~~and~~feature ~~Exchange~~of ~~Agreements provide that~~ the ~~maturity~~Debentures ~~date~~was ofbased ~~these~~on ~~notes (~~the ~~“Amended~~term ~~Notes”)~~of the isDebentures ~~extended~~and ~~until~~the ~~March~~expected ~~31,~~life ~~2013,~~of the ~~Amended~~warrants ~~Notes~~was ~~continue to~~determined ~~pay~~by ~~quarterly interest at~~ the ~~rate~~expiration date of ~~10%~~the ~~and are subject to a security agreement~~warrants. The ~~Amendment~~expected ~~and~~dividend yield ~~Exchange~~was ~~Agreements~~based ~~also provide~~on ~~that~~ the ~~Amended~~fact ~~Notes~~that ~~are convertible into common stock of~~ the Company athas anot ~~price~~paid ofdividends ~~$0.40 per share, subject~~ to ~~adjustment for~~its acommon ~~weighted~~stockholders ~~average~~in ~~anti-dilution provision. In connection with~~ the ~~issuance~~past ofand ~~the~~does ~~Amended~~not ~~Notes, the Company issued three-year~~expect ~~warrants~~ to ~~purchase~~pay updividends to ~~975,000~~its ~~shares of~~ common ~~stock~~stockholders atin anthe ~~exercise price per share of $0~~future.~~40.~~

~~The~~As ~~Amended~~of ~~Notes are due on~~ March 31, 2013 ~~(the~~and ~~“Maturity~~December 31, ~~Date”).~~2012, ~~The~~the ~~Amended~~aggregate ~~Notes~~derivative ~~are~~liability ~~secured~~of ~~under~~ the ~~terms~~conversion offeature aand ~~security~~the ~~agreement~~warrants ~~granting~~was ~~the~~$1,018,425 ~~holders~~and of$847,472 respectively. For the three ~~Amended~~months ~~Notes~~ended ~~a security~~March ~~interest~~31, in2013, ~~all of~~ the Company’s ~~personal~~recorded ~~property~~a ~~subject~~change toin ~~the~~fair ~~interests~~value of the ~~holders of Senior Indebtedness~~ ~~(as~~derivative ~~defined~~liabilities ~~in the Amended Notes). The security interest granted is subordinate to existing bank financing and the 10% Senior Secured Convertible Debentures that currently have a principal balance due~~ of $~~775~~170,~~000~~953.

~~The~~NOTE ~~conversion~~6 ~~price of~~– ~~the~~INCOME Amended Notes are subject to full ratchet anti-dilution provisions and also subject to adjustment based on stock splits, stock dividends, spin-offs, rights offerings, or recapitalization through a large, nonrecurring cash dividend. Each of the agreements governing the Amended Notes and warrants includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the current conversion price of the Amended Notes or exercise price of the warrants issued with the Amended Notes. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the Amended Notes and the exercise price of the warrants are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features and the warrants are not considered indexed to the Company’s own stock and characterized the initial fair value of these warrants as derivative liabilities upon issuance. The Company determined the aggregate initial fair value of the warrants issued to investors to be $316,876 and the initial fair value of the embedded beneficial conversion feature of the Amended Notes to be $512,613 (an aggregate amount of $829,489). These amounts were determined by management with the use of an independent valuation specialist using a Monte Carlo simulation model using the Black-Scholes Merton option pricing model. As such, the Company recorded an $829,489 valuation discount upon issuance of the notes and warrants. The Company is amortizing this valuation discount to interest expense over the life of the notes. As of September 30, 2012, the unamortized balance of the note discount was $414,715.TAXES

~~(3)~~At OnDecember ~~May 18~~31, 2012 and 2011, the Company had ~~entered~~available ~~into~~Federal ~~Agreements~~and ~~with~~State 3net ~~accredited~~operating ~~investors~~loss ~~for~~carryforwards ato ~~sale~~reduce byfuture ~~the~~taxable ~~Company~~income. ofThe anamounts ~~aggregate~~available ofwere approximately $~~340~~25,400,000 ~~10%~~and ~~Secured~~$20,400,000, ~~Subordinated~~respectively, ~~Convertible~~for ~~Promissory~~federal ~~Notes~~and ~~(the~~for ~~“May~~state ~~2012~~purposes. ~~Notes”)~~The ~~which~~Federal ~~are~~carryforward ~~convertible~~expires ~~into~~in an2028 ~~aggregate~~and ofthe state ~~850,000~~carryforward ~~shares~~expired ofin 2018. Given the Company’s ~~common~~history ~~stock~~of atnet aoperating ~~conversion~~losses, ~~price~~management ofhas ~~$0.40~~determined ~~per~~that ~~share~~it is ofmore ~~common~~likely ~~stock,~~than ~~subject~~not the Company will not be able to ~~adjustment~~realize the tax benefit of the carryforwards.

Current standards require that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)

NOTE 5 –CONVERTIBLE PROMISSORY NOTES (continued)

The notes are due on March 31, 2013 and are subordinated to the right to the prior payment of all Senior Indebtedness (as defined in the notes). The notes pay quarterly interest at the rate of 10% and are subject to a security agreement that secures the Notes by the Company’s assets. The security agreement is subordinate to existing bank financing and the Debentures (as defined below) that currently have a principle balance due of $775,000 and the Amended Notes that currently have a balance due of $891,500. Additionally, the Company issued three-year warrants to purchase an aggregate of 340,000 shares of the Company’s common stock at an exercise price of $0.40 per share, subject to adjustment.

The conversion price of the May 2012 Notes are subject to full ratchet anti-dilution provisions and also subject to adjustment based on stock splits, stock dividends, spin-offs, rights offerings, or recapitalization through a large, nonrecurring cash dividend. Each of the agreements governing the May 2012 Notes include an anti-dilution provision that allows for the automatic reset of the conversion price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the current conversion price of the May 2012 Notes. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the May 2012 Notes are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features are not considered indexed to the Company’s own stock and characterized the fair value of the conversion feature of the notes as derivative liabilities upon issuance.

The Company determined the aggregate fair value of the warrants issued to investors to be $109,140 and the initial fair value of the embedded beneficial conversion feature of the May 2012 Notes to be $136,850 (an aggregate amount of $245,990). These amounts were determined by management with the use of an independent valuation specialist using a Monte Carlo simulation model using the Black-Scholes Merton option pricing model. As such, the Company recorded a $245,990 valuation discount upon issuance of the notes and warrants. The Company is amortizing this valuation discount to interest expense over the life of the notes. As of September 30, 2012, the unamortized balance of the note discount was $113,398.

(4) Between February 5, 2010 and April 12, 2010, the Company entered into agreements with seven accredited investors for the sale by the Company of an aggregate of $1,500,000 of 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 1,999,993 shares of the Company’s common stock at a conversion price of $0.75 per share of common stock, subject to adjustment. Additionally, the Company issued three-year warrants to purchase an aggregate of 1,999,993 shares of the Company’s common stock at an exercise price of $0.50 per share. In connection with the offering, the Company issued three year warrants to purchase 15,999 shares of its common stock at an exercise price of $0.50 per share to two accredited investors in consideration of finder services rendered.

BALQON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)

NOTE 5 – CONVERTIBLE PROMISSORY NOTES (continued)

The conversion price of the notes and the exercise price of the warrants are only subject to adjustment based on stock splits, stock dividends, spin-offs, rights offerings, or recapitalization through a large, nonrecurring cash dividend. During the year ended December 31, 2011, $153,750 of the principal of the notes was converted into 204,998 shares of the Company’s common stock. As of September 30, 2012 and December 31, 2011, $1,330,000 in principal was outstanding under these notes. The notes matured on September 1, 2012 and are presently in default. The Company is negotiating with the note holders to convert these notes into secured status and extend the maturity date to March 31, 2013.

The Company determined that the relative fair value of the warrants upon issuance was $731,710. The relative fair value was determined using the methodology prescribed by current accounting guidance. The Company determined the fair value of the beneficial conversion feature was approximately $768,290. These amounts were calculated under a Black-Scholes option pricing model using as assumptions an expected life of 3 years, an industry volatility of between 95% and 116%, a risk free interest rate of 1.47%, and no expected dividend yield. The relative value of the warrants of $731,710 and the beneficial conversion feature of $768,290 was recorded by the Company as a loan discount of $1,500,000, which the Company is amortizing to interest expense over the life of the notes. As of September 30, 2012 and December 31, 2011, the unamortized balance of the note discount was $38,006 and $362,645, respectively.

(5) Between July 2010 and December 2010, the Company entered into agreements with 26 accredited investors for the sale by the Company of an aggregate of $850,000 of 10% Senior Secured Convertible Debentures (the “Debentures”) which are convertible into an aggregate of 1,133,333 shares of the Company’s common stock at a conversion price of $0.75 per share, subject to adjustment. In connection with this offering, the Company also issued to the investors warrants to purchase an aggregate of 850,000 shares of the Company’s common stock at an exercise price of $0.75 per share, subject to adjustment. The Company also issued to its placement agent warrants to purchase 68,000 shares of the Company’s common stock at exercise price of $0.75 per share, subject to the same adjustments and terms as those warrants issued to investors.

During the year ended December 31, 2011, $75,000 of the principal of the Debentures was converted into 117,186 shares of the Company’s common stock. As of September 30, 2012 and December 31, 2011, $775,000 in principal was outstanding under these Debentures. Under the adjustment provisions of the Debentures and warrants, the conversion price of the Debentures and the exercise price of the warrants has been reduced to $0.56 in connection with various dilutive issuances made during 2010 and 2011.

The Debentures were due on September 30, 2012, or at the Company’s sole discretion, on March 31, 2013 (the “Maturity Date”) or such date as this Debenture is required or permitted to be repaid as provided in the agreement. The Company extended the maturity date of the Debentures to March 31, 2013. The Debentures are secured under the terms of a security agreement granting the holders of the Debentures a security interest in all of the Company’s personal property. Each of the agreements governing the Debentures and warrants includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current conversion price or exercise price. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the Debentures and the exercise price of the warrants are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events.

BALQON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)

NOTE 5 –CONVERTIBLE PROMISSORY NOTES (continued)

As a result, the Company determined that the conversion features and the warrants are not considered indexed to the Company’s own stock and characterized the fair value of these warrants as derivative liabilities upon issuance.

The Company determined the aggregate fair value of the warrants issued to investors and its placement agent to be $511,399 and the initial fair value of the embedded beneficial conversion feature of the Debentures to be $504,440 (an aggregate amount of $1,015,839). These amounts were determined by management with the use of an independent valuation specialist using a Monte Carlo simulation model using the Black-Scholes Merton option pricing model. In accordance with current accounting guidelines, the excess of $165,839 of derivative liability created over the face amount of the Debentures was considered to be a cost of the private placement. In addition, the Company also incurred another $193,500 of closing costs (consisting of $93,500 of placement agent fees and $100,000 of legal fees directly related to the offering). As such, the Company recorded an $850,000 valuation discount upon issuance, and in 2010, recognized private placement costs of $358,339 for financial reporting purposes. The aggregate fair value of the derivative liabilities as of September 30, 2012 and December 31, 2011 was $2,716,835 and $676,284, respectively. (See Note 6). As of September 30, 2012, the Company has fully amortized $850,000 of the valuation discount.

As of September 30, 2012, the total discount of $566,119 is offset against the balance of the notes and Debentures for financial statement presentation. During the six months ended September 30, 2012, amortization of loan discount was $1,261,535.

As of September 30, 2012, the Company has not paid $242,989 of the quarterly interest due on its convertible promissory notes in the following amounts:

Interest payments due on January 1, 2012	$	19,375
Interest payments due on April 1, 2012	$	73,538
Interest payments due on July 1, 2012	$	75,038
Interest payments due on October 1, 2012		75,038

Pursuant to the terms of the notes, the non-payment of interest by the Company constitutes an event of default and, as a result, the holders of the notes may accelerate payment of all amounts outstanding under the notes by giving written notice to the Company and thereby requiring that the Company immediately pay up to an aggregate of $3,361,500 in principal plus all accrued and unpaid interest. If the holders of the notes were to declare the notes due and payable, the Company presently does not have the ability to pay these notes.

NOTE 6 – DERIVATIVE LIABILITY

In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. As of September 30, 2012 the Company has two securities offerings that are subject to these provisions as follows:

BALQON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)

NOTE 6 – DERIVATIVE LIABILITY (continued)

The conversion feature of the Company’s Debentures, Amended Notes, related warrants, and May 2012 Notes (described in Note 5), do not have fixed settlement provisions because their conversion and exercise prices, respectively, will be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the holders of the Debentures, Amended Notes, and May 2012 Notes from the potential dilution associated with future financings.

In accordance with the FASB authoritative guidance, the conversion feature of the Debentures, the Amended Notes and the May 2012 Notes was separated from the host contract (i.e., the Debentures, Amended Notes and May 2012 Notes) and recognized as a derivative instrument. Both the conversion feature of the Debentures, the Amended Notes, related warrants, and the May 2012 Notes have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

At the date of issuance and as of December 31, 2011, the derivative liabilities were valued using Monte Carlo simulation model. As of September 30, 2012, the derivative liabilities were valued using a probability weighted average Black-Scholes pricing model with the following assumptions:

	September 30, 2012		At Date of Issuance		December 31, 2011
Conversion feature:
Risk-free interest rate		0.13%		0.19%		0.09%
Expected volatility		98.93%		98.14%		98.40%
Expected life (in years)		0. 5 years		1.0 year		.75 years
Expected dividend yield		0		0		0
Warrants:
Risk-free interest rate		0.25% - 0.60%		0.51%		0.54%
Expected volatility		79.3% – 93.41%		98.14%		105.30%
Expected life (in years)		2. 5 – 4.75 years		3.0 years		3.75 years
Expected dividend yield		0		0		0
Fair Value:
Conversion feature		1,885,926		649,463		263,984
Warrants		830,809		316,816		412,300
	$	2,716,835	$	966,279	$	676,284

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the volatility of five comparable guideline companies to estimate volatility for its common stock. The expected life of the conversion feature of the Debentures was based on the term of the Debentures and the expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

BALQON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)

NOTE 6 – DERIVATIVE LIABILITY (continued)

As of September 30, 2012 and December 31, 2011, the aggregate derivative liability of the conversion feature and the warrants was $2,716,835 and $676,284, respectively. For the nine months ended September 30, 2012, the Company recorded a change in fair value of the derivative liabilities of $1,074,272.

NOTE 7 – INCOME TAXES

At September 30, 2012, the Company had available federal and state net operating loss carryforwards to reduce future taxable income. The amounts available were approximately $23,000,000 for federal and for state purposes. The Federal carryforward expires in 2028 and the state carryforward expires in 2018. Given the Company’s history of net operating losses, management has determined that it is more likely than not the Company will be able to realize the tax benefit of the carryforwards.

Accordingly, the Company has not recognized a deferred tax asset for this benefit. Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carryforwards and will recognize a deferred tax asset at that time. Current standards require that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.

Significant components of the Company’s deferred income tax assets are as follows:

	September 30, 2012 (Unaudited)			December 31, 2011
	March 31, 2013 (Unaudited)			December 31, 2012
Deferred income tax asset:
Net operating loss carryforward	$	10,~~400~~700,000		$	810,~~000~~100,000
Valuation allowance		(10,~~400~~700,000	)		(810,~~000~~100,000	)
Net deferred income tax asset	$	–		$	–

Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:

	September 30, 2012 (Unaudited)		December 31, 2011
	March 31, 2013(Unaudited)		December 31,2012
Tax expense at the U.S. statutory income tax		(34.0)%		(34.0)%
State tax net of federal tax benefit		(5.8)%		(5.8)%
Increase in the valuation allowance		39.8%		39.8%
Effective tax rate		–%		–%

The Company adopted authoritative guidance which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the current accounting guidelines, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Current accounting guidelines also provide guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and require increased disclosures. At the date of adoption, and as of ~~September 30~~March 31, ~~2012~~2013 and December 31, ~~2011~~2012, the Company does not have a liability for unrecognized tax benefits.

18NOTE 7 – STOCK OPTIONS AND WARRANTS

BALQON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)

NOTE 8 – SHAREHOLDERS’ EQUITY

Shares Issued Upon Exercise of Warrants

On March 31, 2012, the Company issued 1,250,000 shares of its common stock to SOL, an affiliate of the Company’s Chairman, in consideration of the exercise of warrants at an exercise price of $0.40 upon the conversion of $500,000 of an unsecured loan made by the Chairman to the Company during October 2011.

Stock Options

At September 30, 2012, options shares outstanding were as follows:	Shares			Weighted Average Exercise Price
Balance at January 1, 2012		1,416,695		$	2.50
Granted		–			–
Exercised		–			–
Expired		(1,416,695	)	$	2.50
Balance at September 30, 2012		–			–

There was no options outstanding and exercisable as of March 31, 2013.

Warrants

At September 30, 2012, warrants shares outstanding were as follows:	Shares			Weighted Average Exercise Price
Balance at January 1, 2012		13,256,220		$	0.82
Granted and Exchanged		9,127,500		$	0.40
Exercised		(1,250,000	)	$	0.40
Exchanged		(7,812,500	)	$	.64
Expired		(3,025,720	)	$	0.74
Balance at September 30, 2012		10,295,500		$	0.45

At March 31, 2013, warrants shares outstanding were as follows:

During the three months ended March 31, 2012, the Company negotiated Amendment and Exchange Agreements with holders of $891,500 of the Company’s 10% Unsecured Convertible Notes that matured on March 31, 2012. In connection with these Amendment and Exchange Agreements, the Company is issuing new warrants that will enable the warrant holders to purchase up to 975,000 shares of the Company’s common stock at an exercise price per share of $0.40. These warrants will have a contractual life of three years and expire on March 31, 2015.

	Shares		Weighted Average Exercise Price
Balance at December 31, 2012		10,295,500	$	0.44
Granted		–		–
Exercised		–		–
Expired		–		–
Balance at March 31, 2013		10,295,500	$	0.44

Effective March 31, 2012, the Company’s Chairman exercised 1,250,000 underlying a warrant to purchase 7,812,500 shares held by Seven One Limited (“SOL”), a company related to the Chairman by common ownership. These warrants were previously exercisable at $0.64 per share, however, in consideration of the Chairman converting $500,000 of an outstanding unsecured loan into common stock, the Company agreed to re-price these warrants at an exercise price of $0.40. The warrant representing the remaining shares will expire on the original expiration date of December 14~~, 2015. The total value of the adjustment of the exercise price of these warrants was $446,809 and was reflected as a cost to induce conversion during the six month period ended June 30, 2012.~~

On May 18, 2012, the Company entered into agreements with 3 accredited investors for a sale by the Company of an aggregate of $340,000 of the May 2012 Notes. In connection with these Notes, the Company is issuing new warrants that will enable the warrant holders to purchase up to 340,000 shares of the Company’s common stock at an exercise price per share of $0.40. These warrants will have a contractual life of three years and expire on March 31, 2015.

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

~~FOR THE~~The ~~THREE~~following ~~AND~~table ~~NINE~~summarizes ~~MONTHS~~information ~~ENDED~~about ~~SEPTEMBER~~stock warrants ~~30,~~outstanding ~~2012~~and ~~AND~~exercisable ~~2011~~as ~~(Unaudited)~~of March 31, 2013:

NOTE 8 – SHAREHOLDERS’ EQUITY (continued)

		Warrants Outstanding							Warrants Exercisable
Range of Exercise Prices		Number of Shares Underlying Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number of Shares		Weighted Average Exercise Price
$	0.40		8,745,500	(i)	$	0.40		2.5		8,745,500	$	0.40
$	0.64		1,500,000		$	0.64		2.9		1,500,000	$	0.64
$	1.00		50,000		$	1.00		1.8		50,000	$	1.00
			10,295,500							10,295,500

~~The following~~As ~~table~~of ~~summarizes~~March ~~information~~31, ~~about~~2013, there ~~stock~~was ~~warrants~~no ~~outstanding~~intrinsic ~~and~~value ~~exercisable~~of asthe ofwarrants ~~September~~outstanding ~~30,~~and ~~2012:~~exercisable

	Warrants Outstanding			Warrants Exercisable
Range of Exercise Prices	Number of Shares Underlying Warrants	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (in years)	Number of Shares	Weighted Average Exercise Price
$0.40	7,877,500	$0.40	2.3	7,877,500	$0.40
$0.56	868,000	$0.56	3.0	868,000	$0.56
$0.64	1,500,000	$0.64	3.2	1,500,000	$0.64
$1.00	50,000	$1.00	1.3	50,000	$1.00
	10,295,500			10,295,500

(i) As of March 31, 2013, agreements governing 1,843,000 of the warrants exercisable at $0.40 per share include an anti-dilution provision that allows for the automatic reset of the exercise price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the exercise price of these warrants

~~As of June 30, 2012, the aggregate intrinsic value of the warrants outstanding and exercisable was $672,440.~~15

NOTE 9 – RELATED PARTY TRANSACTIONS

During the nine months ended September 30, 2012, the Company had no sales to related parties. As of September 30, 2012, the Company had accounts receivable of $198,067 from related parties which is fully reserved.

As of September 30, 2012 and December 31, 2011, the Company had trade accounts payable to related parties of $1,417,150 and $330,840, respectively. The related parties are suppliers of the Company related by common ownership to the Company’s Chairman.

On December 14, 2010, the Company entered into a Distribution Agreement with SOL (the “Distribution Agreement”). Under the Distribution Agreement, SOL has granted the Company the right to distribute lithium iron phosphate batteries and high voltage charging systems manufactured by Seven One Battery Company on an exclusive basis in the United States. The Company’s Chairman of the Board, Winston Chung, is the chief executive officer of SOL. In January 2011, based on the terms of the Distribution Agreement, the Company received battery units valued at $2,629,800 on a consignment basis. As of September 30, 2012 and December 31, 2011, the Company held battery units valued at $574,900 and $1,915,200 respectively held on a consignment basis, which amounts are not included in recorded inventories.

During the nine month periods ended September 30, 2012 and December 31, 2011, battery costs were $1,340,300 and $714,600, respectively.

BALQON CORPORATION

~~NOTES~~ NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

~~FOR THE~~NOTE ~~THREE~~8 ~~AND~~– ~~NINE~~RELATED PARTY ~~MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)~~TRANSACTIONS

~~NOTE 10~~Shares –issued ~~INVENTORY~~by ~~HELD~~the BYChief ~~CUSTOMER~~Executive Officer

InOn ~~November~~January ~~2010~~9, ~~T&K Logistics~~2013, ~~the~~ ~~provider~~Company ofsigned ~~logistics~~an ~~services~~Amendment Agreement to(described ~~Ford~~in ~~Motor~~note ~~Company~~9) ~~and~~extending ~~the~~foreclosure ~~manager~~date of on~~-site~~ ~~transportation~~Lego ofAgreement ~~trailers~~from ~~and~~Jan ~~containers at~~9, ~~Ford~~2013 ~~Motor~~to ~~Company’s~~July ~~assembly plant in Wayne~~9, ~~Michigan~~2013, ~~agreed~~in toreturn ~~lease~~for 101,500,000 shares of the Company’s ~~Nautilus~~common ~~yard~~stock ~~tractors for~~owned ~~use~~individually atby the ~~assembly plant for a period of 36 months. Although the~~ Company’s ~~shipped five of its Nautilus XR E20s to T&K Logistics during the first six months of 2011~~President, ~~T&K~~Balwinder ~~Logistics has failed to accepted delivery of these units and, as a result, has failed to make any payments owed to the Company under the lease~~Samra. The ~~Nautilus XR E20s that the~~ Company ~~shipped to T&K~~recorded ~~Logistics featured battery systems with double~~ the ~~battery~~fair ~~energy~~value ~~and, therefore, double the range~~ of ~~the~~these ~~Company’s~~shares ~~Nautilus XE20s. Although the Company experienced certain delays during the installation~~ of ~~charging systems into the tractors at T&K Logistics’ facility~~$300,000 ~~the~~as ~~Company~~a ~~believes~~cost ~~that five units under current conditions operate satisfactorily~~ and ~~have accumulate~~as ~~significant~~a ~~hours~~contribution ~~of use. The Company has delayed shipment of the remaining units~~ to ~~T&K Logistics until the previously delivered five units are accepted by T&K Logistics~~capital. ~~(See Note 12).~~

~~NOTE~~On January 28, 2013 the Company’s 11Chief –Executive ~~PURCHASE~~officer ~~AND~~issued ~~REPRESENTATION~~to ~~AGREEMENT~~a vendor 115,880 shares of his common stock for payment of services performed for the Company. The Company recorded the fair value of these shares of $23,176 as a cost and as a contribution to capital.

During the three months ended March 31, 2013 and 2012, the Company had no sales to related parties. As of December 31, 2012, the Company had accounts receivable of $198,067 from related parties which is fully reserved.

As of March 31, 2013 and December 2012, the Company had trade accounts payable to related parties of $2,133,850 and $1,639,702, respectively. The related parties are suppliers of the Company related by common ownership to the Company’s Chairman.

On December 14, 2010, the Company entered into a Distribution Agreement with SOL (the “Distribution Agreement”). Under the Distribution Agreement, SOL has granted the Company the right to distribute lithium iron phosphate batteries and high voltage charging systems manufactured by Seven One Battery Company on an exclusive basis in the United States. The Company’s Chairman of the Board, Winston Chung, is the chief executive officer of SOL. In January 2011, based on the terms of the Distribution Agreement, the Company received battery units valued at $2,629,800 on a consignment basis. As of March 31, 2013 and December 31, 2012, the Company held battery units valued at $648,200 and $1,076,700 respectively held on a consignment basis, which amounts are not included in recorded inventories.

As of March 31, 2013 and 2012 the Company sold $ 207,175 and $1,502,500 in batteries under the Distribution Agreement.

BALQON CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (Unaudited)

NOTE 9 – COMMITMENTS AND CONTINGENCIES

City of Los Angeles Agreement

On June 26, 2008, the Company entered into an agreement with the City of Los Angeles to manufacture and deliver 20 electric yard tractors, 5 short-haul electric tractors, and associated equipment including chargers, batteries and controllers for a total of $5,383,750. As of December 31, 2011, the Company had delivered 14 electric yard tractors and one short-haul electric tractor to the City of Los Angeles. The agreement with the City of Los Angeles terminated on June 26, 2011, and, consequently, the Company does not have an obligation to sell, and the City of Los Angeles does not have an obligation to buy, the remaining 10 vehicles. The Company expects to negotiate an agreement with the City of Los Angeles that will allow the Company to deliver the remaining 6 electric yard tractors, 4 short-haul electric tractors and/or upgrade of existing yard tractors from lead acid batteries to lithium batteries and related associated equipment to the City of Los Angeles. While the Company is confident that such an agreement with the City of Los Angeles will be reached, no assurance that we will in fact enter into such an agreement can be given.

During 2009, under the terms of the Company’s agreement with the City of Los Angeles, the Company requested and was issued an advance payment in the amount of $1,159,601. This advance payment was recorded as a customer deposit. During June 2012, we billed $630,000 to the City of Los Angeles to upgrade six of the electric trucks previously delivered from lead acid batteries to lithium ion batteries. This billed amount was applied as a reduction of the advance payment leaving an unpaid balance of $529,601 on this advance as of March 31, 2013. Our agreement with the City of Los Angeles has been terminated, to the extent that we do not receive additional purchases from the City of Los Angeles for the remaining balance due, we may be required to return the unpaid balance to the City of Los Angeles. We anticipate selling additional products and services during the next nine months to reduce the unpaid balance; however we presently do not have the funds to pay this advance if payment is requested by the City of Los Angeles.

Employment Agreement

On March 11, 2013, the Company mutually agreed with Mr. Gruenwald to terminate his employment agreement. Mr. Gruenwald was the Company's VP- Research & Development from 2009 until March 11, 2013. Upon termination, Mr. Gruenwald and the Company entered into a one-year independent contractor agreement under which Mr. Gruenwald has agreed to provide services as a consultant to the Company. As part of the termination of his employment agreement, the Company agreed to pay him severance in the amount of $400,000. In lieu of the severance payment, Mr. Gruenwald agreed to accept 200 used lithium batteries with retail value of $400,000 as settlement of the amounts due him. The cost of the batteries, which the Company purchased on a consignment basis from Seven One LImited, was $176,000 and has been recorded as an operating expense during the three months ended March 31, 2013.

Lego Agreement

On July 9, 2012, the Company entered into a Purchase and Representation Agreement (the “Lego Agreement”) with Lego Battery Sales, LLC (“Lego”). The terms of the Lego Agreement call for the sale by the Company to Lego of 1,000 batteries for an aggregate sales price of $350,000.

The Lego Agreement further requires ~~that~~ that the Company serve as Lego’s exclusive sales agent and representative to market and resell the batteries on behalf of Lego. The sales prices of the batteries must be at a minimum sales price of $490 per battery. In consideration for its services as sales agent and representative, the Company shall earn a sales commission equal to the excess of the sales price of each battery ~~above~~ above the minimum sale price. The Lego Agreement is secured by a pledge of 2,450,000 shares of common stock owned individually by ~~the~~ the Company’s president; Mr. Balwinder Samra. If the Company does not sell the minimum consideration of $490,000 for the sale of the 1,000 batteries is ~~not achieved~~ by January 9, 2013, Lego may foreclose on these pledged shares. The term of the Lego Agreement is for six months and may be extended by mutual consent of the parties. On January 9, 2013 signed an Amendment Agreement extending the foreclosure date from January 9, 2013 to July 9, 2013 in return for 1,500,000 shares of the Company’s common stock owned individually by the Company’s President, Balwinder Samra. The Company recorded the fair value of these shares of $300,000 as a cost and as contribution to capital.

~~NOTE 12 – SUBSEQUENT EVENTS~~17

On September 21, 2012, T&K Logistics, Inc. filed a complaint (the “Complaint”) in the Superior Court of California, County of Los Angeles (Case No.: BC492619) against the Company. The Complaint relates to the lease agreement between the Company and T&K Logistics regarding the Company’s yard tractors. (See Note 10). The Complaint purports to state the following three counts against the Company: (i) breach of contract, (ii) specific performance, and (iii) negligent misrepresentation and seeks compensatory damages of not less than $453,896.75. The Company intends to vigorously defend against T&K Logistics’ claims. On November 19, 2012, the Company filed an answer to the Complaint denying all allegations in the Complaint. On that same date, the Company filed a cross-complaint against T&K Logistics for breach of contract and common count—goods and services rendered and seeking damages in excess of $300,000.

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

The following discussion and analysis should be read in conjunction with our financial statements and the related notes to financial statements included elsewhere in this report. This report and our financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business strategies. Our actual results could differ materially from those expressed in these forward-looking statements as a result of any number of factors, including those set forth under the “Risk Factors” section and elsewhere in this report. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation:

the projected growth or contraction in the industries within which we operate;

our business strategy for expanding, maintaining or contracting our presence in these markets;

anticipated trends in our financial condition and results of operations; and

our ability to distinguish ourselves from our current and future competitors.

We do not undertake to update, revise or correct any forward-looking statements.

Any of the factors described above or elsewhere in this report, including in the “Risk Factors” section of this report, or referenced from time to time in our filings with the Securities Exchange Commission, or SEC, could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.

Business Overview

We are a developer and manufacturer of electric drive systems, charging systems and lithium battery systems for trucks, tractors, buses, industrial equipment and renewable energy storage devices. We also design and assemble electric powered yard tractors, short haul drayage tractors and inner city trucks utilizing our proprietary drive systems, battery systems and charging systems.

Each of our electric drive systems is comprised of an electric motor, transmission, our proprietary flux vector motor controller (which controls the speed of an electric motor by varying the input frequency and voltage from a vehicle’s batteries), power electronic components and proprietary software configured to specific application needs. Our lithium battery systems feature our proprietary battery management system, or BMS, an electronic device connected to each lithium battery cell to monitor and balance the state of charge of the battery, including its temperature, voltage and current during charge and discharge cycles. Our proprietary software allows our BMS to be used on any battery cell chemistry. Our charging systems, introduced in the third quarter of 2011, vary in capacity ranging from 8 kilo Watt, or kW, to 120 kW in power and 200 Volts to 700 Volts in charge voltage.

A key element of our marketing strategy is to provide fully integrated propulsion and energy storage systems to vehicle manufacturer’s worldwide, allowing original equipment manufacturers, or OEMs, of commercial vehicles, such as trucks, tractors, and buses, to rapidly integrate our proprietary technologies into diversified vehicle platforms to address a growing global demand for commercial electric vehicles. We also market energy storage systems comprised of lithium batteries, battery management and chargers to renewable energy storage system manufacturers that market completed systems to solar and industries. We are also engaged in the research and development of battery systems, charging systems and power inverters (which converts direct current voltage into a alternating current voltage) for use in energy storage devices to reduce peak loads in commercial applications such as in the telecommunications industry and in large commercial and industrial buildings.

We sell our electric drive systems, charging systems and battery systems to global OEMs of commercial vehicles and industrial equipment. A key element of our sales strategy is to develop strategic partnerships with global OEM’s to jointly develop commercial electric vehicles incorporating our drive systems, charging systems and battery systems into localized chassis platforms that meet regional customer needs. We believe that this strategy allows us to market our proprietary technologies to global customers while reducing product development and integration time for our OEM partners.

We also develop, design, assemble, market and sell zero-emissions heavy-duty electric yard tractors, heavy-duty short haul drayage tractors, and inner city Class 7 and Class 8 trucks and medium-duty trucks that feature our proprietary electric drive systems, charging systems and lithium battery systems. Our heavy-duty electric tractors are suitable for use in the transportation of containers and heavy loads in off-highway applications at facilities such as marine terminals, rail yards, industrial warehouses, intermodal facilities (facilities where freight is transferred from one mode of transportation to another without actual handling of the freight itself when changing modes), military bases and industrial plants. Our medium-duty electric trucks can be configured by our customers for various uses in inner city on-highway applications. For example our customers can configure our medium-duty electric trucks as box trucks or shuttle busses for use in inner city applications.

As of the date of this report, our electric tractor product portfolio features three products in our Nautilus product line, the Nautilus XE20, a heavy-duty on-road electric tractor, the MX30, a heavy-duty electric short-haul tractor, and the Nautilus XR E20, a longer-range version of the Nautilus XE20. We also offer a heavy-duty Class 7 and Class 8 electric truck, the Mule M100, a medium-duty electric truck. The Mule M100 is designed as zero emissions solutions to transport loads of 4 tons, and, depending on battery selection, can be configured to have a range of up to 150 miles on a single charge under unloaded conditions.

Recent Developments

~~Overview~~Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We do not currently have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs in the very near-term. We believe that we have sufficient working capital to continue operations only until approximately August 31, 2013, at the latest unless we successfully restructure our debt, experience a significant improvement in sales and obtain other sources of liquidity.

~~During~~We are ~~the~~in ~~year~~default ~~ended~~of ~~December 31~~$3, ~~2011 and through November 15~~361,500 ~~2012,~~in aprincipal ~~significant~~amount ~~portion~~ of our ~~research~~convertible notes and ~~development efforts~~$473, ~~have~~140 ~~been focused on the development~~ of ~~electric~~accrued ~~drive~~interest ~~systems,~~on ~~charging~~these ~~systems, lithium battery storage systems and the next generation of our flux vector motor controllers to address the light and medium-duty vehicle markets~~notes. ~~During 2011,~~ Although we ~~developed our~~are ~~proprietary~~actively ~~charging~~pursuing ~~systems, high frequency fast chargers that have~~ a ~~capacity~~number of upalternatives, toincluding ~~160~~seeking kWto ~~that~~restructure ~~will provide~~ our ~~customers with~~debt ~~the~~and ~~capability~~seeking to ~~charge~~raise ~~our~~additional ~~vehicles in less than two hours. During 2011, we also completed the development of our next generation~~debt ~~flux~~or ~~vector~~equity ~~motor controllers~~financing, which incorporate the latest transistor technology that is commercially available and provide higher efficiency and more power than our existing flux vector motor controllers. Our next generation flux vector motor controllers are designed to work seamlessly with induction motor or ~~permanent magnet motor designs~~both, ~~allowing~~there uscan ~~the~~be ~~ability~~no toassurance ~~develop~~that ~~drive~~we ~~systems for~~will ~~light-duty~~be ~~vehicles such as automobiles, pickup trucks and light-duty delivery vehicles~~successful. ~~Our~~If ~~efforts~~we ~~during~~cannot ~~2011~~restructure ~~also~~our ~~led~~debt ~~to the development of power inverters, charging systems~~ and ~~battery systems capable of providing up to one Mega Watt, or MW, of power~~obtain insufficient ~~peak~~liquidity ~~load sharing applications~~ in ~~energy~~the ~~storage~~very ~~devices.~~near ~~During 2011~~term, we ~~also~~may ~~developed~~need ~~and~~to ~~sold~~seek ~~battery systems~~ to ~~address applications~~protection ~~such~~under ~~as forklifts and pallet jacks in~~ the ~~telecommunication~~U.S. ~~energy~~Bankruptcy ~~storage and material handling markets~~Code.

23During the first three months of 2013, significant portion of our engineering effort has been focused on designing an electric drive system for a six meter bus being jointly developed by us and Sichuan Automotive Group for inner city applications in China. In November 2012, we signed a Joint Development Agreement between our companies and received a purchase order to develop a zero emissions battery-powered inner city six meter bus for the China market. Sichuan Automotive is a leading provider and operator of buses in central China and also manufactures all electric SUV’s for the local market.

A significant portion of our production efforts in 2011 and through November 15, 2012, have been focused on developing the MX30, a heavy duty on-road short-haul electric tractor. MX30 is currently being tested by Port of Los Angeles for use in short-haul applications. Testing of MX30 during the past three months under fully loaded conditions indicate 80 mile range under full load conditions transporting 20 ton containers between a marine terminal and a local rail yard. In addition the Company has received approval from Department of Energy for a grant to build three more MX30 vehicles for use in Port applications. 18

~~During~~In March ~~2012~~2013, we ~~have~~signed ~~developed~~a ~~lithium~~Memorandum ~~battery~~of ~~storage~~Understanding ~~systems~~with ~~for~~a ~~the~~large ~~solar,~~port ~~wind~~operator ~~and~~in ~~telecommunications~~Turkey ~~industries.~~to Indevelop ~~2012, we~~the ~~also~~electric ~~developed~~yard ~~12-48~~tractor ~~volt~~market in ~~high~~Turkey. ~~energy~~Under ~~storage~~this ~~capacity~~Agreement, ~~battery~~we ~~packs~~have agreed to ~~address~~jointly ~~telecommunications~~develop ~~energy~~a ~~storage~~repower ~~needs.~~kit ~~Our battery~~for ~~systems~~diesel ~~replace~~yard ~~current~~tractors ~~lead~~operated ~~acid~~in ~~batteries~~the ~~with~~region to noconvert ~~maintenance~~diesel ~~required~~yard ~~and~~tractors ~~double~~to ~~the~~electric ~~cycle~~yard ~~life of current equivalent lead acid batteries~~tractors. In ~~2012~~March 2013, we ~~developed~~received ~~lithium~~a ~~battery~~purchase ~~solutions~~order for ~~ground~~our ~~support~~electric ~~equipment~~yard ~~industry~~tractor, the Nautilus XRE20, which ~~includes~~will ~~lithium batteries~~be used for ~~airport~~testing ~~baggage~~and ~~tractors~~evaluation ~~and~~at ~~aircraft~~a ~~tractors~~port terminal in Turkey.

In ~~2012,~~April 2013, we ~~received~~signed a ~~purchase~~Memorandum ~~order~~of ~~from~~Understanding ~~Terberg~~with ~~Benschop,~~the asecond ~~leading~~largest ~~manufacturer~~truck ofand ~~Yard~~bus ~~tractors~~manufacturer ~~located~~ in ~~Europe~~China to ~~jointly~~integrate our resources to develop an electric ~~yard~~buses ~~tractor configuration~~ for ~~their~~the ~~current~~China ~~line~~and ofNorth ~~yard~~American ~~tractors~~markets. AsUnder the terms of the ~~date~~memorandum of ~~this report~~understanding, weboth ~~have~~companies ~~delivered~~have ~~three~~agreed ~~drive~~to ~~systems,~~cooperate in developing zero emission battery ~~systems~~powered ~~and~~electric ~~chargers~~bus toprototypes ~~our~~for ~~customer~~the China and ~~currently~~North ~~three~~American ~~units~~markets. Under ~~are~~the ~~undergoing~~terms ~~testing and~~of ~~demonstration~~the inMemorandum ~~Europe.~~of WeUnderstanding, ~~currently~~we have ~~two~~agreed ~~manufacturers,~~to ~~Terberg~~be ~~and~~sole ~~MOL~~the ~~Industries~~distributor ~~demonstrating~~of ~~electric~~the ~~yard in~~resulting ~~Europe~~products worldwide, while weour ~~anticipate~~Chinese ~~successful~~partner ~~demonstrations~~has ~~will~~agreed ~~lead~~ to ~~additional~~be ~~orders~~responsible for ~~our~~all ~~drive~~manufacturing ~~systems~~and marketing activities in China.

~~Significant~~Business ~~Highlights~~ Overview

~~During~~We ~~2012,~~are ~~we developed~~a andeveloper ~~on-road~~and ~~Class~~manufacturer 8of ~~short-haul~~ electric ~~tractor~~ vehicles, ~~our~~drive ~~MX30,~~systems ~~for~~and ~~port~~lithium ~~applications.~~battery Inenergy ~~June~~storage ~~2012,~~systems. weOur ~~successfully~~product ~~completed dynamometer~~line ~~testing~~includes onbattery ~~the~~powered ~~MX30~~heavy-duty ~~with a maximum load of 30 tons~~ on-road trucks aand ~~10%~~off-highway ~~grade.~~yard ~~In August 2012~~tractors, wedesigned ~~began~~to ~~on-road~~transport ~~testing~~cargo ~~the~~loads ~~MX30 for~~of ~~short-haul~~up ~~applications~~to at30 ~~the~~tons ~~Port~~in ofshort ~~Los~~haul ~~Angeles~~applications. We ~~anticipate~~also ~~that~~design, assemble ~~testing~~and ondistribute ~~the~~lithium ~~MX30~~battery ~~will~~powered ~~continue~~energy ~~for~~storage ~~six~~solutions ~~months~~ to ~~demonstrate~~ ~~the viability of our MX30 as a full~~ electric ~~zero~~vehicle ~~emissions~~manufacturers, ~~heavy-duty~~renewable ~~on-road~~energy ~~tractor~~storage providers inand ~~short~~industrial ~~haul~~equipment ~~marine applications~~manufacturers.

InOur ~~June~~business strategy leverages our ability ~~2012~~to integrate our core technologies, weflux ~~launched~~vector ~~our~~inverter, ~~website~~BMS, toand ~~market~~battery charger into a seamless operating system that provides superior ease-of-use to our ~~complete~~customer. ~~line~~We believe continued investment in research and development of ~~lithium~~electric ~~batteries~~vehicle, charger and ~~energy~~battery ~~storage~~system ~~systems~~technologies is critical to the sale of innovative products and technologies. ~~Over~~As ~~10%~~part of our strategy, we plan ~~revenue~~to ~~during~~partner ~~second~~with ~~quarter~~solution ofproviders ~~2012~~in ~~was~~the asolar, ~~result~~wind ofand ~~online~~renewable ~~sales~~energy ofmarketplace ~~batteries~~to ~~through~~jointly ~~our~~develop ~~website~~product solutions for emerging energy storage markets. We ~~anticipate~~also ~~increased~~plan to continue our expansion into the global vehicle market through joint development ~~revenues~~of ~~from~~electric ~~online~~trucks and buses with OEMs in the emerging markets. Our sales ~~during~~strategy ~~rest~~includes expanding our online sales through addition of ~~the~~third ~~year~~party accessories and components related to energy storage markets.

~~During~~We ~~2011~~founded weBalqon ~~introduced~~Corporation to develop ~~our~~inverter ~~charging~~technology ~~systems,~~for ~~which~~electric ~~vary~~vehicles inwith ~~capacity,~~focus ~~ranging~~on ~~from~~heavy 8duty kWtruck toand ~~120~~bus kWapplications. inIn ~~power~~2007, we designed and ~~200~~manufactured the ~~Volts~~world’s tofirst ~~700~~battery ~~Volts~~powered inheavy ~~charge~~duty ~~voltage. Our~~electric ~~charging~~tractors ~~systems~~for ~~feature~~use 8at kWthe ~~modules~~Port ~~that~~of ~~are~~Los ~~connected~~Angeles to transport 30 ton containers in ~~series~~both tooff-highway ~~achieve~~and ashort ~~maximum~~haul ~~charge~~applications. ~~rate~~Our offirst ~~120~~product, kWthe Nautilus XE20, ~~and~~featured ~~they~~our ~~are~~proprietary drive systems which ~~equipped~~was ~~with~~comprised of an electric motor, transmission, our proprietary ~~software~~flux ~~that~~vector ~~conforms~~motor tocontroller ~~Society~~(which controls the speed of ~~Automotive~~an electric ~~Engineers~~motor ~~J1772~~by ~~communication~~varying the input frequency and ~~protocol~~voltage ~~requirements~~from a vehicle’s batteries), power electronic components and proprietary software configured to specific application needs.

In ~~October 2011~~2009, we ~~sold~~incorporated ~~five~~lithium ~~units~~batteries to ofincrease ~~our~~range ~~next~~of ~~generation~~the ~~flux~~tractor ~~vector~~to ~~motor~~150 ~~controllers~~miles toon a ~~customer~~single ~~engaged in the manufacturing of monorail systems~~charge. Our ~~new~~lithium ~~generation~~battery ofsystem ~~motor~~also ~~controllers~~featured ~~are~~our ~~equipped~~proprietary BMS with ~~current~~operating ~~transistor~~software ~~technology~~designed ~~and are able~~ to ~~work~~protect ~~seamlessly with~~lithium ~~induction~~batteries orduring ~~permanent~~over-charge ~~magnet~~and ~~motor~~discharge ~~designs~~condition. We ~~expect~~also todeveloped ~~market~~fast battery ~~these~~charging ~~flux~~system ~~vector~~for ~~motor~~our ~~controllers~~trucks toand ~~automobile~~tractors ~~manufacturers worldwide~~to ~~for~~reduce ~~use~~charge intime ~~light-duty~~from ~~passenger~~8 ~~vehicle~~hours ~~and~~to ~~cargo~~2.5 ~~vehicle applications~~hours.

In November 2011, we completed the assembly of and delivered a one MW battery storage system, featuring our battery system, charging systems and battery management systems, to a local university for use as a peak load sharing device. In May 2012, the system was placed in operation and delivers power around the clock to a building at a local university. In December 2011, we completed and delivered two additional drive and battery systems to Ashok Leyland, for use in the development of inner city electric buses. We also received additional orders for the development and shipment of four drive and battery systems for medium duty electric trucks for use in inner city applications.19

24We are the exclusive distributor of lithium batteries manufactured by Winston Battery Limited. Our distribution agreement provides us access to low cost lithium iron phosphate in the sizes varying from 40 amp hour to 1,000 amp hour batteries. Winston Battery Limited is an exclusive developer and manufacturer of high capacity lithium batteries ranging from 400 amp hour to 1,000 amp hour. We develop, manufacture and market lithium battery storage products designed to be direct replacement of lead acid battery systems.

~~During~~Our ~~2011,~~core ~~one~~ technologies of ~~our~~inverters, ~~electric~~BMSs, charger, ~~drive~~software, ~~systems~~operating ~~was~~system ~~integrated~~and ~~into~~lithium abatteries ~~heavy-duty~~provides ~~tow tractor jointly developed by~~ us ~~and~~ability ~~Mol~~to ~~Industries,~~partner anwith ~~OEM~~OEMs ~~located in Europe. As~~ of ~~the~~fossil ~~date~~fuel ofbased ~~this~~vehicles and ~~report,~~lead ~~the~~acid ~~completed~~battery ~~vehicle~~based ~~has~~energy ~~successfully~~storage ~~completed~~system ~~testing at a customer site~~manufacturers. ~~During~~Our ~~the second~~ability ~~quarter~~to ofprovide ~~2012, the heavy-duty tow tractors that feature our electric~~ drive systems, ~~have~~battery ~~been~~systems ~~demonstrated~~and toa ~~commercial~~battery ~~and~~charger ~~marine~~integrated ~~port~~by ~~terminals. We expect the demonstrations of the Mol Industries tractor featuring~~ our ~~electric~~proprietary ~~drive~~operating system toreduces ~~result in~~development ~~additional~~time ~~orders~~and costs for our ~~electric~~OEM ~~drive systems from OEMs in Europe during the remainder of 2012 and 2013~~customers.

~~During~~We ~~2011,~~have ~~we sold~~jointly ~~two~~developed ~~Nautilus~~heavy XRduty ~~E20 yard tractors~~trucks, tractors ~~one to a steel manufacturer~~ and ~~one~~buses towith aOEMs ~~military~~in ~~base.~~Europe, WeChina, ~~expect~~India ~~these Nautilus XR E20s to be used to transport trailers~~ and ~~containers~~United ~~at these facilities~~States. InWe ~~addition~~believe tofamiliarity ~~our~~with ~~Nautilus~~local XRbrands, ~~E20s~~designs, weergonomics and ~~also~~service ~~shipped~~network ~~our~~is ~~new charging~~essential ~~systems~~ to ~~these~~ customers, ~~enabling~~purchase ~~our customers to use the Nautilus XR E20s during three shift operations~~decision.

~~During~~We ~~2011,~~have ~~we developed,~~made ~~tested~~significant ~~and~~investments ~~sold~~in integrating aour ~~Mule~~drive ~~M100,~~systems ainto ~~heavy-duty~~third ~~truck,~~party ~~configured~~OEM ~~for~~vehicle ~~use as an electric 32 passenger inner city shuttle bus. During this period~~platforms, ~~we also delivered~~ and ~~sold~~believe ~~one~~market 40introduction ~~foot passenger electric drive chassis and a charging system to a customer engaged in the development~~ of ~~next~~these ~~generation~~localized ~~electric buses and passenger vehicles. The chassis incorporates our drive system~~vehicle ~~and~~platforms ~~battery system and~~ will beprovide ~~configured~~increased bysales ~~our customer~~ for ~~use~~our asdrive asystems. 40Our ~~foot~~joint ~~passenger~~product ~~bus.~~development ~~During~~efforts ~~the~~have ~~second~~focused ~~quarter~~on ofmarkets ~~2012,~~with ~~our~~high ~~customer~~urbanization ~~completed the 40 passenger bus~~ and ~~has~~air ~~demonstrated~~pollution ~~the bus~~ to ~~customers~~provide inus ~~transit~~the ~~and~~best ~~federal~~opportunity ~~government~~for ~~agencies~~sales. We ~~expect~~In ~~demonstrations~~smaller ofregional ~~the~~markets ~~electric~~we ~~bus~~utilize byqualified dealer ~~our~~network ~~customer~~to ~~will~~promote ~~result~~and inservice ~~additional~~our ~~orders during 2012 and 2013~~products.

~~During~~Our ~~2011,~~products weinclude ~~also~~battery ~~sold~~powered ~~six battery~~electric ~~storage~~trucks ~~systems~~and totractors: a(i) ~~customer in~~ the ~~telecommunications~~Nautilus ~~industry~~XRE20, toa ~~demonstrate~~heavy-duty ~~the~~electric ~~fuel~~yard ~~savings~~tractor; ~~that~~(ii) ~~result from~~ the ~~use~~Nautilus ofMX30, ~~battery power~~a onheavy-duty, ~~remote~~Class ~~wireless~~8 electric ~~towers.~~short-haul Astractor; ofand (iii) the ~~date~~Mule ~~of this report~~M150, ~~the battery storage systems are operational and have demonstrated~~ a ~~significant reduction in fuel costs resulting from use of battery power during off~~heavy-~~peak~~duty, ~~hours~~Class of8 ~~operation~~electric ofinner ~~the~~city ~~wireless~~delivery ~~towers~~truck. ~~During~~ ~~2012~~We wealso ~~have~~market and ~~provided~~sell ~~over~~lithium ~~10 additional~~ battery ~~systems~~cells toand ~~telecommunication~~storage ~~customers.~~solutions ~~Over~~under ~~80% of~~ the ~~new~~brand ~~sales~~name ~~were to~~of ~~customers~~HIQAP™. ~~that~~We ~~had~~sell ~~previously~~our ~~purchased~~trucks and ~~tested~~tractors ~~our~~through direct ~~battery~~sales ~~systems~~force inand ~~telecommunications~~dealers, ~~applications.~~while ~~Our~~our ~~telecommunications~~ battery ~~systems~~related ~~were~~products ~~delivered~~and toaccessories ~~global~~are ~~customers~~marketed inthrough ~~Australia,~~our ~~South~~online ~~Africa,~~store ~~Nigeria, India~~ and ~~Bangladesh. We anticipate~~retailers ~~successful demonstration~~ of ~~our~~energy ~~lithium battery~~ storage ~~systems will result in additional sales during the remainder of 2012 and in 2013~~products.

~~Significant~~In ~~Customers~~2012, we developed high energy capacity lithium battery energy storage systems for the solar, wind and ~~Strategic~~telecommunication ~~Partnerships~~industry. We also developed lead acid replacement packs for baggage tractors used at airports and industrial warehouses. In 2012, we received purchase order for electric drive systems from a European manufacturer of yard tractors, located in the Netherlands. In 2012, our OEM partners in Europe (Belgium and the Netherlands) introduced two new products to the market, showcasing our electric drive system. In 2012, significant resources were allocated to the development of our on-road heavy-duty electric tractor, the Nautilus MX30. Currently, this vehicle is undergoing on-road testing and complies with DOT regulations for on-road Class 8 tractors. Our development activities also resulted in the receipt of a grant from the AQMD for the development of three additional tractors for testing at Port of Los Angeles. In 2012, we signed a Joint Development Agreement with the fifth largest bus manufacturer in China to develop all electric inner city bus.

In January 2011, we entered into an agreement with WGE, an affiliate of our Chairman of the Board headquartered in Shenzhen China, under which WGE agreed to purchase 300 of our electric drive systems at an aggregate purchase price of approximately $15.9 million. In 2011, we delivered one drive system to be integrate our electric drive system into a localized 16 passenger bus chassis. As of the date of this report, our customer has been unable to successfully integrate and test our drive system, thereby delaying our ability to ship additional drive systems. In order to remedy the delay in product development, we have signed a Memorandum of Understanding with a large Bus manufacturer in China to expedite development of small to mid-size transit buses for the China market.

Under an agreement with the City of Los Angeles, or City of Los Angeles Agreement, we agreed to sell 20 Nautilus E20 heavy-duty electric yard tractors (the predecessor to our Nautilus XE20) and five Nautilus E30 short-haul tractors (the predecessor to our Nautilus XE30) to the City of Los Angeles for use at the Port of Los Angeles. As of the date of this report, we have delivered 14 Nautilus E20s (including four Nautilus XE20s two of which have been retrofitted with extended range lithium batteries and are referred to as our Nautilus XR E20s) and one Nautilus XE30 to the Port of Los Angeles under the terms of the City of Los Angeles Agreement. Initial use of the electric vehicles at the Port of Los Angeles evidenced that the vehicles had a range of between five and six hours. Upon the request of the City of Los Angeles to increase the range of the vehicles to meet two shift operations, we retrofitted two of the vehicles already delivered under the City of Los Angeles Agreement with extended range lithium battery systems, hydraulic systems and idle stop software in order to extend the range of the resultant vehicle, the Nautilus XR E20. The two retrofitted Nautilus XR E20s have completed seven months of testing at a local marine facility. Further, as of the date of this report, two additional E20s are being tested at a local recycling facility under heavy loads exceeding 40 tons. We believe that the performance of the Nautilus XR E20s are meeting expectations, and the City of Los Angeles has requested that we retrofit two additional vehicles with extended range lithium battery systems for testing at an alternate facility. The City of Los Angeles Agreement terminated on June 26, 2011, and, consequently, we do not have an obligation to sell, and the City of Los Angeles does not have an obligation to buy, the remaining 10 vehicles. We expect to negotiate a new agreement with the City of Los Angeles to upgrade six existing units with extended range batteries to increase the range of the vehicles delivered under the previous agreement. We are also in negotiations with the City of Los Angeles to deliver an on-road Class 8 truck for use in drayage applications that will allow us to deliver the remaining 6 electric yard tractors, 4 short-haul electric tractors. While we are confident that such an agreement with the City of Los Angeles will be reached, no assurance can be given that we will in fact enter into such an agreement.

During the year ended December 31, 2010, we delivered electric drive systems and lithium battery systems to Ashok Leyland, a large manufacturer of trucks and buses based in India, to be installed into intercity hybrid buses to be used for demonstration purposes. The intercity hybrid buses incorporating our electric drive systems and lithium battery systems underwent field tests for one year. As a result of the successful demonstration and testing of these intercity hybrid buses, in April 2011 we entered into a Joint Development Agreement with Ashok Leyland under which we will work with Ashok Leyland to jointly develop and test six electric vehicles (comprised of buses and trucks) using Ashok Leyland’s glider chassis and our electric drive systems and lithium battery systems. As of the date of this report, we have sold two electric drive systems to Ashok Leyland for integration into prototype inner city buses. In addition we have also delivered two electric drive systems and battery systems for integration into an inner city delivery truck. Subject to the six prototypes being delivered and meeting established performance and cost targets and/or Ashok Leyland obtaining firm requirements from its customers, Ashok Leyland has agreed to purchase a minimum of 14 additional drive systems from us for sale to its customers. As of the date of this report, we have delivered four of the six prototypes.

In January 2012, we received a purchase order from Terberg Benschop, a leading manufacturer of yard tractors and heavy duty trucks with facilities in Netherlands and Malaysia. Under the terms of the purchase order, we jointly developed an electric drive system for the current line of yard tractors manufactured by Terberg. In the third quarter of 2012, we delivered three sets of drive systems and jointly completed the integration of our proprietary drive system and battery system. As of the date of this report, Terberg is demonstrating the electric yard tractor to local customers and showcasing the completed product at local trade shows.

In May 2011, we received a purchase order for an electric drive system and battery system from MOL Industries, a leading manufacturer of yard tractors and heavy duty refuse trucks with facilities in Belgium. In September 2011, MOL began demonstration of the completed electric yard tractors to local warehouse and marine terminals.

Distribution Agreement

In December 2010, we entered into a three year distribution agreement, or Distribution Agreement, with Seven One Limited, or SOL, under which we were appointed as the exclusive authorized distributor in the United States for the promotion, marketing and sale of lithium iron phosphate batteries and high voltage charging systems manufactured by Seven One Battery Company. On December 31, 2011, batteries with a value of $1,915,200 were held on consignment. As of September 30, 2012, batteries with a value of $574,900 were held on consignment.

Critical Accounting Policies

Our financial statements have been prepared in accordance with ~~accounting principles generally accepted in the United States~~GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our financial statements:

Estimates

The preparation of financial statements in conformity with ~~accounting~~GAAP ~~principles generally accepted in the United States of America~~ 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. Material estimates relate to the recognition of contract revenues and estimated costs to complete contracts in process, and recoverability of reported amounts of long-lived assets. Actual results may differ from those estimates.

Revenues

Sales of Production Units and Parts. We recognize revenue from the sale of completed production units and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of our product or delivery of the product to the destination specified by the customer.

We determine whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs when we place the products with the buyer’s carrier. We regularly review our customers’ financial positions to ensure that collectability is reasonably assured. Except for warranties, we have no post-sales obligations.

Contract Revenue and Cost Recognition on Prototype Vehicles. In accounting for contracts, we recognize revenues using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. This method is used because management considers costs to be the best available measure of progress on its contracts. Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion. We also recognize as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated.

Contract costs include all direct material and labor costs. The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues earned.

Stock-Based Compensation

We periodically issue stock instruments, including shares of our common stock, stock options, and warrants to purchase shares of our common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for stock option awards issued and vesting to employees in accordance with authorization guidance of the Financial Accounting Standards Board, or FASB, where the value of stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. Options to purchase shares of our common stock vest and expire according to the terms established at the grant date.

We account for stock options and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.

We estimate the fair value of stock options and warrants using the Black-Scholes Merton option-pricing model, which was developed for use in estimating the fair value of options that have no vesting restrictions and are fully transferable. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock and the expected life of stock options. Projected data related to the expected volatility of stock options is based on the average volatility of the trading prices of comparable companies and the expected life of stock options is based upon the average term and vesting schedules of the options. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore the existing valuation models do not provide a precise measure of the fair value of our employee stock options.

We estimate the fair value of shares of common stock issued for services based on the closing price of our common stock on the date shares are granted.

Derivative Financial Instruments

We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, through June 30, 2012 we ~~use~~used the Monte Carlo simulation model to value the derivative instruments at inception and on subsequent valuation dates as of December 31, 2012 and March 31, 2013, the derivative liabilities were valued using a probability weighted average Black Scholes Merton option-pricing model. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument ~~could~~ could be required within 12 months of the balance sheet date.

Impairment of Long-Lived Assets

The FASB, has established guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized and how impairment losses should be measured. Guidance of the FASB also provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. We periodically review, at least annually, such assets for possible impairment and expected losses. If any losses are determined to exist they are recorded in the period when such impairment is determined. Based upon management’s assessment, there were no indicators of impairment of our long lived assets at ~~September~~March 3031, ~~2012~~2013 or December 31, ~~2011~~2012.

Income Taxes

We recognize income taxes for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in our financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized.

Financial Condition and Results of Operations

Our total revenues ~~decreased~~ increased by $~~122~~252,~~619~~388, or 15129%, to $~~712~~447,~~324~~387 for the three months ended ~~September~~March 3031, ~~2012~~ 2013 as compared to $~~834~~194,~~943~~999 for the three months ended ~~September~~March 3031, ~~2011~~2012. The ~~decrease~~increase in revenues was as a result of ~~lower~~the ~~sales~~ introduction of ~~electric~~our ~~yard~~energy ~~tractors~~storage ~~when~~products and ~~compared~~increased sales of lithium batteries to ~~previous~~OEM’s ~~period~~of buses and trucks. Gross profits during the ~~nine~~three months ended ~~September 30~~March 31, ~~2012~~2013 was $6420,~~753~~190, adown ~~decrease of~~ $~~247~~86,~~426~~977, or 7981%, from the same period in ~~2011~~2012. ~~The~~This decrease ~~in gross profit~~ is primarily due to a ~~$350,000 sale~~change ofin ~~batteries~~the toproduct mix afrom ~~wholesale~~drive ~~customer~~systems ~~at a loss. Our decision~~ to ~~sell~~retail ~~particular~~sales ~~configuration~~ of lithium batteries ~~to a wholesale customer was prompted by our desire to reduce inventory~~ and ~~generate cash for operations~~accessories.

We reported a net loss of $4,191,157 for the three months ended September 30, 2012 as compared to a net loss of $1,012,383 for the three months ended September 30, 2011. Net loss as a percentage of sales during the nine months ended September 30, 2012 was 612%, as compared to net loss as a percentage of sales of 121% during the three months ended September 30, 2011. The increase in losses during the three months ended September 30, 2012, is primarily attributable to the decrease in revenues, a negative gross margin resulting from sales of $350,000 in batteries to wholesale customer, offset by decreases in general and administrative expenses, research and development costs, and depreciation. These are further offset by an increase in interest expense of $96,271 and a $1,345,111 impairment loss. During the three months ended September 30, 2012, a $1,458,609 loss in the fair value of the derivative liability was realized while a $263,199 gain in the fair value of the derivative liability was realized during the three months ended September 30, 2011.22

~~Our~~We ~~product~~reported ~~mix~~a net ~~during~~loss ~~the~~of ~~first~~$1,358,224 ~~nine~~for ~~months~~the ofthree ~~2012~~months ~~varied~~ended ~~from~~March ~~our~~31, ~~product~~2013 ~~mix~~as ~~during~~compared ~~the~~to ~~first~~a ~~nine~~net ~~months~~loss of ~~2011.~~$1,667,263 ~~During~~for the ~~first~~three ~~nine~~ months ended ofMarch ~~2012~~31, ~~vehicle~~2012. ~~sales~~Losses ~~accounted~~from ~~for~~operations ~~34%~~as ofa ~~our~~percentage ~~revenues,~~of sales ofduring ~~batteries~~the ~~and~~three ~~battery~~months ~~systems~~ended ~~were~~March ~~42%~~31, of2013 ~~revenues~~was 304%, ~~and~~as compared to losses from operations as a percentage of sales of ~~our~~855% ~~electric~~during ~~drive~~the ~~systems~~three ~~accounted~~months ~~for~~ended ~~21%~~March of31, ~~revenues~~2012. ~~During~~The decrease ~~the~~in ~~first~~losses ~~nine~~during the three months ofended ~~2011~~March 31, ~~sales~~2013, ofare ~~drive~~primarily ~~systems~~attributable ~~represented~~to decreases in general and ~~55%~~administrative ofexpenses ~~total~~and ~~sales~~research and development costs. A $170,953 ~~sales~~loss ~~battery~~on ~~systems~~the change ~~accounted~~in ~~for~~the 7%fair value of ~~our~~the ~~sales,~~derivative ~~sales~~liability ofwas ~~vehicles~~realized ~~accounted~~during ~~for~~the ~~29%~~three ofmonths ~~our~~ended ~~sales~~March ~~and~~31, ~~consulting~~2013 while a ~~revenues~~$12,412 ~~represented~~loss 3%on the change in the fair value of ~~total~~the ~~sales~~derivative ~~and~~liability ~~revenues~~was realized during the three months ended March 31, 2012.

InOur ~~December~~product ~~2010,~~mix during the first three months weof ~~raised~~2013 ~~$5,000,000~~varied infrom ~~connection~~our ~~with~~product amix ~~private~~during ~~placement~~the offirst ~~common~~three ~~stock~~months ~~and~~of ~~warrants~~2012. OnSales ~~May~~of ~~18,~~our ~~2012,~~lithium webatteries ~~raised~~accounted ~~$340,000~~for in89% of ~~connection~~our ~~with~~total asales ~~private~~during ~~placement~~the first three months of 102013 as compared to 34% ~~secured~~during ~~subordinated~~the ~~convertible~~first ~~notes~~three ~~and~~months ~~warrants~~of 2012.

~~Our~~As ~~lack~~ of ~~significant revenues~~March ~~during~~31, ~~the~~2013, ~~first~~we ~~nine~~had ~~months of 2012 is~~ a ~~direct~~working ~~result of a lack of~~ capital, deficiency ~~lack~~ of ~~new sales~~$9,844,380; ~~and~~an ~~the~~accumulated ~~length~~deficit ~~and complexity~~ of ~~our product development process. Typically~~$9,804,450 weand ~~experience~~reported a ~~significant~~net ~~time~~loss ~~lag between receiving an order~~ for ~~our electric drive systems or battery systems and recognizing revenue in connection with~~ the ~~order~~three ~~due~~months toended ~~the~~March ~~development~~31, ~~time required to integrate~~2013 ~~our~~of ~~technologies~~$1,358,224. ~~into~~Our ~~new~~plans ~~vehicle~~for ~~platforms~~correcting ~~specified~~these bydeficiencies ~~our~~include ~~customers.~~the ~~For~~future ~~example,~~sales ~~while~~of our ~~electric~~products ~~drive systems~~ and ~~battery systems~~the ~~can~~raising ~~be integrated into a multitude~~ of ~~product platforms~~capital, ~~often times a substantial amount of time is needed to make design~~which ~~modifications~~we toexpect ~~our~~will ~~product~~help toprovide ~~ensure~~us ~~its~~with ~~integration~~the ~~into~~liquidity ~~each~~necessary ~~new vehicle platform. In most cases new designs require sourcing of raw materials contributing further~~ to ~~the~~meet ~~already~~operating ~~lengthy production time~~expenses. InOver the ~~case of a new customer or a new product platform~~longer-term, it iswe ~~customary~~plan ~~in our business~~ to ~~complete~~achieve profitability ~~and~~through ~~deliver a single unit prior to producing~~ the ~~entire~~sale ~~order.~~of ~~Once~~our ~~the~~battery ~~initial product is delivered~~systems, ~~installed~~drive ~~and accepted by our customer~~systems, weelectric ~~begin~~vehicles ~~production~~and onother ~~the remaining order based on production delivery dates agreed upon with our customer~~products.

29As of June 10, 2013, we had a backlog of $1,738,650. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. As of the date of this report, 41% of our backlog consists of batteries, 38% consists of a drive system, 9% consists of vehicles system, 6% consists of controllers and the remainder consists of chargers and accessories. As of the date of this report, 75 % of our backlog consists of U.S. customers, while 25% consists of international customers. Our backlog does not reflect a $975,000 Department of Energy grant awarded to us, which we are awaiting contract documents. Due to the delay in testing and approval of our drive system, we also have not included $15.9 million in drive systems from our backlog until such time we have assurances on production timelines from our customer, WGE, an affiliate of our Chairman of the Board. We believe that the majority of our current backlog will be shipped within the next 12 months. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog.

~~While~~We ~~34%~~anticipate ofthat our ~~revenues~~ ~~during~~future ~~the~~sales ~~first nine months of 2012 were derived as a result of our production efforts that were focused on the upgrade~~will ofbe ~~six~~more ~~trucks~~diversified ~~previously~~than ~~delivered~~in toprevious ~~the~~years. ~~City~~We ofbelieve ~~Los~~future ~~Angeles~~sales ~~for~~will ~~use~~reflect ~~at the Port of Los Angeles from lead acid batteries to lithium ion batteries, 34% of~~ our ~~revenues~~focus ~~during~~on ~~the~~energy ~~period~~storage ~~were derived from the delivery of battery~~ systems and ~~electric drive systems~~battery sales to ~~our OEM customers in the United States, Asia and Europe~~OEMs. ~~The~~We ~~drive~~believe ~~systems~~our ~~were~~strategic ~~customized~~relationships ~~for~~with ~~vehicle~~OEMs ~~configurations to be used~~ in ~~both~~Europe ~~on-road~~ and ~~off-road~~Asia ~~applications. We anticipate that the delivery of these drive systems~~ will result in additional ~~orders~~ ~~from~~sales for our ~~OEM partners in the future. In the short term, the Company is focused on continuing to sell battery systems to~~electric ~~decrease~~drive ~~the consigned inventory of batteries it holds and generate immediate cash~~systems.

As of September 30, 2012, we had a working capital deficiency of $9,667,419; an accumulated deficit of $9,452,061 and reported a net loss for the nine months ended September 30, 2012 of $6,690,270. Our plans for correcting these deficiencies include the future sales of our products and the raising of capital, which we expect will help provide us with the liquidity necessary to meet operating expenses. Over the longer-term, we plan to achieve profitability through the sale of our drive systems, electric vehicles, battery systems and other products.23

As of November 15, 2012, we had a backlog of $1,005,538. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. As of the date of this report, 28% of our backlog consists of a battery system, 26% consists of a drive system and remainder consists of vehicles and accessories. Our backlog does not reflect a $975,000 Department of Energy grant awarded to us, which we are awaiting contract documents. Due to the delay in testing and approval of our drive system, we have removed $15.9 million in drive systems from our backlog until such time we have assurances on production timelines from our customer, WGE, an affiliate of our Chairman of the Board. We believe that the majority of our current backlog will be shipped within the next 12 months. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog.

We anticipate that a majority of future sales of our electric vehicles will be made directly to domestic and international OEMs. We are optimistic that the demonstration of our extended range Nautilus XR E20 and MX30 to existing and potential customers will result in additional sales of our electric vehicles.

The tables presented below, which compare our results of operations from one period to another, present the results for each period, the change in those results from one period to another in both dollars and percentage change, and the results for each period as a percentage of net revenues. The columns present the following:

The first two data columns in each table show the absolute results for each period presented.

The columns entitled “Dollar Variance” and “Percentage Variance” shows the change in results, both in dollars and percentages. These two columns show favorable changes as a positive and unfavorable changes as negative. For example, when our net revenues increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns.

The last two columns in each table show the results for each period as a percentage of net revenues.

30First Quarter of 2013 Compared to the First Quarter of 2012

Third Quarter of 2012 Compared to the Third Quarter of 2011

	Three Months Ended March 31,						Dollar Variance			Percentage Variance		Results as a Percentage of Net Revenues for the Three Months Ended March 31,
	2013 (Unaudited)			2012 (Unaudited)			Favorable (Unfavorable)			Favorable (Unfavorable)		2013		2012
Net revenues	$	447,387		$	194,999		$	252,388			129%		100%		100%
Cost of revenues		427,197			87,832			339,365			386%		95%		45%
Gross profit		20,190			107,167			(86,977	)		(81)%		5%		55%
General and administrative expenses		780,931			614,970			(165,961	)		(27)%		175%		315%
Research and development		26,678			69,204			42,526			61%		6%		35%
Depreciation and amortization		3,693			8,157			4,464			55%		1%		4%
Change in derivative liability		170,953			12,412			158,541			1277%		(38)%		6%
Value of Warrants issued upon Conversion of Shareholder Loan					671,809			671,809			100%		0%		345%
Interest expense		396,159			397,877			1,718			0%		89%		204%
Net loss		(1,358,224	)	$	(1,667,263	)	$	309,039			19%		(304)%		(855)%

	Three Months Ended September 30,						Dollar Variance			Percentage Variance		Results as a Percentage of Net Revenues for the Three Months Ended September 30,
	2012 (Unaudited)			2011 (Unaudited)			Favorable (Unfavorable)			Favorable (Unfavorable)		2012		2011
Net revenues	$	712,324		$	834,943		$	(122,619	)	$	(15)%		100%		100%
Cost of revenues		939,026			729,430			(209,596	)		(29)%		132%		87%
Gross profit		(226,702	)		105,513			(332,215	)		(315)%		(32)%		13%
General and administrative expenses		615,460			709,827			94,367			13%		86%		85%
Research and development		46,890			130,820			83,930			64%		7%		16%
Depreciation and amortization		8,157			146,490			138,333			94%		1%		18%
Change in derivative liability		(1,458,609	)		263,199			(1,721,808	)		(654)%		(205)%		32%
Impairment loss		(1,345,111	)					(1,511,611	)		(100)%		(189)%
Interest expense		(490,229	)		(393,958	)		(96,271	)		(24)%		(69)%		47%
Net loss	$	(4,191,157	)	$	(1,012,383	)	$	(3,178,774	)	$	873%		(588)%		(121)%

Net Revenues. The 129% increase in our revenues during the three months ended March 31, 2013 is largely due to a $248,188 increase in sales of lithium batteries during 2013 as compared to lithium battery sales during the first quarter of 2012. During the first quarter of 2012, 60% of our revenues were generated from the shipment of drive systems for integration into medium sized buses for an international customer.

~~Net Revenues.~~Gross ~~The decrease in our revenues during~~ Profit. During the ~~third~~first quarter of ~~2012~~2013, iswe ~~due~~generated toa ~~reduced~~gross ~~sales~~profit, ofas ~~electric~~a ~~yard tractors when compared to same period in 2011. The~~ percentage of ~~our~~net revenues, ~~generated from the shipment~~ of ~~battery systems was 74~~5% ~~during the third quarter of 2012~~ as compared to ~~a 8~~55% ~~during~~for the ~~third~~ first quarter of ~~2011~~2012. ~~Our~~The ~~current~~decrease ~~backlog~~in ~~consists of~~gross ~~drive~~profit ~~systems~~margins ~~and~~in ~~battery~~2013 ~~systems~~as ~~for~~compared ~~energy~~to ~~storage~~the ~~markets.~~2012 Weis ~~expect~~attributable ~~our battery sales~~ to ~~continue~~change toin ~~increase~~sales ~~at a~~product ~~modest~~mix ~~growth~~with ~~levels~~higher ~~during~~percentage ~~the~~of ~~next~~sales ~~six~~related ~~months. Due~~ to ~~grant~~battery ~~funding from Department of Energy for on-road electric trucks, we anticipate an increase in vehicle~~ sales into ~~the~~large ~~short term~~OEM’s.

~~Gross~~General ~~Profit.~~and Administrative ~~During~~Expenses. The ~~the~~increase ~~third~~in ~~quarter~~general ofand ~~2012,~~administrative weexpenses ~~generated~~of a$165,961 ~~negative~~is ~~gross~~largely ~~profit~~due asto a ~~percentage~~$300,000 ofexpense ~~net~~related to ~~revenues~~fair value of ~~32%~~shares astransferred ~~compared~~by our President to Lego Battery in exchange for extension agreement and a $176,000 one-time ~~positive~~charge ~~gross~~for ~~profit~~severance ~~margin~~compensation to Robert Gruenwald related to the termination of ~~13%~~his ~~for~~employment agreement. The $176,000 amount is estimated to be the ~~third~~book ~~quarter~~value of ~~2011.~~used ~~This~~batteries ~~decrease~~transferred to Mr. Gruenwald in ~~gross~~exchange ~~profit~~for ~~margin~~mutual isagreement ~~due~~by both parties to terminate the ~~sale~~employment ofagreement. During the three month period ended March 31, 2013, we experienced a decrease in office salaries of $~~350~~104,~~000~~209, a decrease in ~~batteries~~professional atservices ~~wholesale~~fees of $80,212, ata decrease in travel expenses of $56,927 and a ~~loss~~net decrease in of other general and administrative expenses of $68,691. We ~~during~~expect to maintain our general and administrative expenses at the ~~third~~current ~~quarter~~level of ~~2012~~percentage of revenues for the near term.

General and Administrative Expenses. The 13% decrease in general and administrative expenses is comprised of an increase in unapplied overhead of $79,435, a decrease in marketing expenses of $89,030, a decrease in legal, consulting and professional fees of $123,869, a decrease in salaries and wages of $16,209, and a net increase of $55,306 of other general and administrative expenses. 24

Research and Development Expenses. The ~~64%~~ decrease in research and development expenses of $42,526 is ~~comprised~~primarily ~~largely~~due ofto ~~decreases~~a decrease in salaries and wages associated ofwith ~~personnel~~a ~~employed~~reduced headcount in ~~the~~our research and development group. We expect our research and development expenses to ~~remain~~increase ~~constant~~during ~~for~~ the remainder of the year as we ~~strive~~develop tonew ~~manage~~technologies ~~expenses~~and toimproved ~~achieve~~drive ~~profitability~~systems for our OEM partners worldwide.

Depreciation ~~and~~ and Amortization. The decrease in depreciation and amortization isexpenses ~~due~~of ~~largely~~$4,464 tois ~~the~~largely ~~amortization~~due ofto ~~the~~assets ~~battery distribution agreement~~ that ~~occurred~~became fully-depreciated during the ~~second~~year ~~quarter~~ended ofDecember ~~2011.~~31, ~~Since~~2012, ~~the~~as ~~battery~~such ~~distribution~~depreciation ~~agreement~~expense was ~~impaired~~less recorded during the ~~year~~ three months ended ~~December~~March 31, 2013 ~~2011,~~as nocompared ~~comparable~~to ~~amortization~~the ~~expense~~three ~~was~~months ~~incurred~~ended inMarch 31, 2012.

Change in Fair Value of Derivative Liability. The financial instruments that resulted in the derivative liability were acquired during the third quarter of 2010. During the quarter ended March 31, 2013, the aggregate fair value of our derivatives increased to $1,018,425. This amount was determined by management using a probability weighted average Black-Scholes Merton option pricing model. During the quarter ended March 31, 2013, the change in the fair value of derivatives on our financial statements was reported as an increase of $170,953. During the quarter ended March 31, 2012, the change in the fair value of derivatives on our financial statements was reported as an increase of $12,412. The change in the fair value of the derivative liability from the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012, was $158,541.

~~Impairment Loss.~~Interest Expense. The ~~increase~~decrease in ~~impairment~~interest ~~loss~~expense of $1,~~345,111~~718 is largely attributable to ~~impairment~~reduced ~~charges~~amortization of ~~$606,111 attributable to inventory and $739,000 attributable to~~ the ~~equipment~~beneficial ~~held~~conversion ~~for lease under an agreement with T&K Logistics. During the quarterly period~~feature ~~ended~~of ~~September 30, 2012,~~ the ~~Company~~convertible ~~determined~~notes ~~these assets to be impaired and recorded the applicable impairment losses~~payable.

Change in Fair Value of Derivative Liability. At September 30, 2012, the fair value of our derivatives increased by $1,074,272 resulting in a loss on the change in fair value of the derivative liability. During the quarter ended September 30, 2011, the fair value of our derivatives increased to $2,716,835. These amounts were determined by management with the use of a probability weighted average Black-Scholes simulation model.

Interest Expense. The $96,271 increase in interest expense is attributable to interest on convertible notes and the amortization of the related beneficial conversion feature of the convertible notes.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

	Nine Months Ended September 30,						Dollar Variance			Percentage Variance		Results as a Percentage of Net Revenues for the Nine Months Ended September 30,
	2012 (Unaudited)			2011 (Unaudited)			Favorable (Unfavorable)			Favorable (Unfavorable)		2012		2011
Net revenues	$	1,860,522		$	1,450,549		$	409,973			28%		100%		100%
Cost of revenues		1,795,769			1,138,370			657,399			58%		97%		78%
Gross profit		64,753			312,179			(247,726	)		(79)%		3%		22%
General and administrative expenses		1,966,206			2,886,272			(920,066	)		(32)%		106%		199%
Research and development		191,159			424,544			(233,385	)		(55)%		10%		29%
Depreciation and amortization		24,471			460,534			(436,063	)		(95)%		1%		32%
Change in derivative liability		(1,074,272	)		(164,941	)		(1,239,213	)		(751)%		(58)%		11%
Impairment loss		(1,345,111	)		–			(1,345,111	)		(100)%		(72)%		0%
Cost to induce exercise of warrants		(671,809	)		–			(671,809	)		(100)%		(36)%		0%
Interest expense		(1,481,996	)		(1,390,265	)		(91,731	)		(7)%		(80)%		96%
Net loss	$	(6,690,270	)	$	(4,684,495	)	$	(2,005,775	)		(442)%		(360)%		(323)%

Net Revenues. During the first nine months of 2012, approximately 34% of our revenues were generated as a result of the upgrade of six electric trucks previously delivered to the City of Los Angeles from lead acid batteries to lithium ion batteries while sales of battery systems accounted for approximately 28% of our revenues. During the nine months ended September 30, 2011, 55% of our revenues were generated from the shipment of drive systems for integration into medium sized buses and a heavy-duty tractor, 29% of our sales were comprised of sales of our electric vehicles and related battery charging equipment, 13% of our sales were from batteries and battery systems, and 3% of our revenues were from consulting services.

Gross Profit. During the first nine months of 2012, our low gross profit margin of 3% was mainly attributable to sale of $350,000 of batteries to a wholesale customer, at a loss. During the first nine months of 2011, our gross profit margin of 22% was attributable to the higher margins on the sales of drive systems attributed to improved manufacturing utilization and the lower material costs.

General and Administrative Expenses. The decrease in general and administrative expenses is comprised of an decrease in unapplied overhead of $180,449, a decrease in marketing expenses of $434,531 an decrease in legal, consulting and professional fees of $375,589, an increase in salaries and wages of $84,132, and a net decrease of $26,221 of other general and administrative expenses.

Research and Development Expenses. The decrease of 55% in research and development expenses is comprised largely of decreases in salaries and wages of personnel employed in the research and development group.

Depreciation and Amortization. The decrease in depreciation and amortization is due largely to the amortization of the battery distribution agreement that occurred during the quarter ended September 30, 2011. Since the battery distribution agreement was impaired during the year ended December 31, 2011, there is no comparable amortization expense in 2012.

Impairment loss. The increase in impairment loss of $1,345,111 is attributable to impairment charges of $606,111 attributable to inventory and $739,000 attributable to the equipment for lease. During the quarterly period ended September 30, 2012, the Company determined these assets to be impaired and recorded the applicable impairment losses.

Cost to Induce Exercise of Warrants. Effective March 31, 2012, the Company’s Chairman applied $500,000 of an unsecured loan as the exercise price to exercise a warrant to purchase 1,250,000 shares of our common stock held by Seven One Limited. In consideration of the Chairman’s agreement to use the amount loaned to exercise the warrant held by Seven One Limited, we agreed to adjust the exercise price of certain of the warrants held by Seven One Limited from $0.64 per share to $0.40 per share. The total value of the adjustment of the exercise price of these warrants was $671,809.

Interest Expense. The $91,731 increase in interest expense is attributable to interest on convertible notes and the amortization of the related beneficial conversion feature of the convertible notes. During the first nine months of 2012, amortization of the beneficial conversion feature on the convertible notes payable was $1,234,140 while during the nine months ended September 30, 2011, amortization of the beneficial conversion feature on the convertible notes payable was $822,739.

Liquidity and Capital Resources

~~The accompanying~~Our ~~condensed~~ financial statements have been prepared on ~~under the assumption that we will continue as~~ a going concern~~. This~~ ~~assumption~~basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. ~~For~~We ~~the nine~~do ~~months~~not ~~ended~~currently ~~September~~have ~~30,~~sufficient ~~2012,~~liquidity weto ~~recorded~~meet aour ~~net~~anticipated ~~loss~~working ~~of $6~~capital,~~690,270. As~~ ofdebt ~~September~~service ~~30,~~and ~~2012,~~other ~~we had a working capital~~liquidity ~~deficit~~needs ofin ~~$9,667,419~~the ~~and~~very anear-term. ~~shareholders’~~We ~~deficiency~~believe ofthat ~~$9,452,061.~~we Inhave ~~addition,~~sufficient weworking ~~are~~capital ~~delinquent~~to incontinue ~~payroll~~operations ~~taxes~~only ofuntil ~~$253,738~~approximately ~~and~~August ~~interest~~31, ~~payments~~2013 onat ~~our~~the ~~notes~~latest ofunless ~~$242,989.~~we ~~Further,~~successfully ~~$1,330,000~~restructure of our ~~convertible~~debt, ~~notes~~experience ~~came~~a ~~due~~significant onimprovement ~~September~~in 1,sales ~~2012~~ and obtain ~~unless~~other wesources ~~can~~of ~~renegotiate~~liquidity. ~~these~~We ~~debt~~are ~~obligations,~~in wedefault ~~are~~on ~~unable~~$3,361,500 toin ~~pay~~principal ~~the~~amount ~~obligations~~of ~~and~~our ~~these~~convertible notes ~~are~~and ~~now~~ in default. ~~Pursuant to~~on ~~the terms of the notes~~$473, ~~the non-payment~~ 140 of accrued interest byon usthese ~~constitutes~~notes. anWe ~~event~~are ofalso ~~default~~delinquent ~~and,~~on ~~as a result~~$325,410 ~~the holders~~ of ~~the~~ ~~notes~~payroll ~~may~~taxes. ~~accelerate~~Although ~~payment~~we ofare ~~all~~actively ~~amounts~~pursuing ~~outstanding~~a ~~under~~number of ~~the~~alternatives, ~~notes~~including byseeking ~~giving~~to ~~written~~restructure ~~notice~~our todebt us and ~~thereby~~seeking ~~requiring that~~to weraise ~~immediately~~additional ~~pay~~debt upor toequity anfinancing, ~~aggregate~~or ~~of $3~~both,~~361,500~~ inthere can ~~principal~~be ~~plus~~no ~~all~~assurance ~~accrued~~that ~~and~~we ~~unpaid~~will ~~interest~~be successful. If ~~the~~we ~~holders~~cannot ~~of the~~restructure ~~notes~~our ~~were~~debt toand ~~declare~~obtain ~~the~~sufficient ~~notes~~liquidity ~~due~~in ~~and~~the ~~payable~~very near term, we ~~presently~~may doneed ~~not~~to ~~have~~seek ~~the~~to ~~ability~~protection tounder ~~pay~~the ~~these~~U.S. ~~notes~~Bankruptcy Code.

During the three months ended March 31, 2013, we funded our operations from cash provided from operations, and use of proceeds from sale of batteries consigned to us by SOL, a related party, and deferred payment of $494,158 to fund working capital needs. As of March 31, 2013, we had a working capital deficiency of $9,844,380 as compared to working capital deficiency of $8,813,025 at December 31, 2012. At March 31, 2013 and December 31, 2012 we had an accumulated deficiency of $29,799,940 and $28,441,716, respectively, and cash and cash equivalents of $27,105 and $33,869, respectively.

These factors, among others, raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm, in its report on our 2011 financial statements, has raised substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. We have been, and currently are, working towards identifying and obtaining new sources of financing. No assurances can be given that we will be successful in obtaining additional financing in the future. Any future financing that we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict the our flexibility. At a minimum, we expect these covenants to include restrictions on its ability to pay dividends on its common stock. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows. In addition, our senior secured convertible debentures issued between July and December 2010 contain covenants that include restrictions on our ability to pay dividends on our common stock.25

IfDuring ~~adequate~~2009, ~~funds~~under ~~are~~the ~~not~~terms ~~available,~~of the City of Los Angeles Agreement, we ~~may~~requested beand ~~required~~were toissued ~~delay,~~an ~~scale~~advance ~~back~~payment orin ~~eliminate~~the ~~portions~~amount of ~~our~~$1,159,601 ~~operations~~from ~~and~~the ~~product~~City ~~and~~of ~~service~~Los ~~development~~Angeles. During ~~efforts~~June or 2012, we billed $630,000 to ~~obtain~~the ~~funds~~City ~~through~~of ~~arrangements~~Los ~~with~~Angeles ~~strategic~~to ~~partners~~upgrade orsix ~~others~~of ~~that~~the ~~may~~electric ~~require~~trucks uspreviously delivered to ~~relinquish~~from lead ~~rights~~acid batteries to ~~certain~~lithium ion batteries. This billed amount was applied as a reduction of ~~its technologies~~the oradvance ~~potential~~payment ~~products~~leaving oran ~~other~~unpaid balance ~~assets~~of $529,601 on this advance. ~~Accordingly~~Our agreement with City of Los Angeles has been terminated, to the ~~inability~~extent tothat ~~obtain~~we ~~such~~do ~~financing~~not ~~could~~receive additional ~~result~~purchases infrom aCity ~~significant~~of Los Angeles for the remaining balance due, we may be required to return the unpaid balance to ~~loss~~City of ~~ownership~~Los ~~and/or~~Angeles. ~~control~~We ofanticipate ~~our~~selling ~~proprietary~~additional ~~technology~~products and ~~other~~services ~~important~~during ~~assets~~the ~~and~~next ~~could~~12 ~~also~~months ~~adversely~~to ~~affect~~reduce ~~its~~the ~~ability~~unpaid balance; however we presently do not have the funds to ~~fund~~pay ~~our continued~~this ~~operations~~advance ~~and~~if ~~its~~payment ~~product~~is ~~and~~requested ~~service~~by ~~development~~the ~~efforts~~City of Los Angeles.

~~During~~Our ~~the~~available ~~nine~~capital ~~months~~resources ~~ended~~at ~~September 30~~March 31, 2013 ~~2012,~~consisted weprimarily ~~funded~~of ~~our~~approximately ~~operations~~$27,105 ~~from~~in ~~the~~cash ~~proceeds~~and ~~from~~cash ~~the~~equivalents. ~~exercise~~We ofexpect athat ~~warrant by~~ our ~~Chairman,~~future ~~issuance~~available ofcapital ~~convertible debt~~resources ~~and~~will ~~proceeds~~consist ~~from~~primarily ~~sales~~ of ~~consigned~~cash ~~batteries.~~on Inhand, ~~order~~sale toof ~~fund~~consigned ~~our operations~~batteries, wecash ~~also~~generated ~~deferred~~from ~~payment of~~ our ~~accounts payable~~business, ~~payroll~~ ~~taxes~~if any, and ~~interest~~future ~~on secured~~ debt and/or ~~unsecured~~equity ~~convertible~~financings, ~~notes~~if ~~payable~~any.

AsCash ofused ~~September 30,~~by ~~2012,~~operating weactivities ~~had~~for athe three ~~working~~months ~~capital~~of ~~deficiency~~2013 ofwas $96,~~667,419~~764 as compared to ~~working~~cash ~~capital~~provided ~~deficiency~~by ofoperating ~~$4,241,177~~activities atin ~~December 31, 2011. At September 30,~~ 2012 ~~and December 31, 2011 we had an accumulated deficiency~~ of $29164,~~085,376 and $22,395,105, respectively,~~618. ~~and~~During ~~cash~~the ~~and~~first ~~cash~~three ~~equivalents~~months of $52013,~~581~~ ~~and $32,663, respectively. The decrease in our~~ cash ~~position~~flows isfrom aoperating ~~result~~activities ofincluded a net ~~decrease~~ loss of $~~122~~1,~~066 in cash flow from operations and $245~~358,~~016~~224, ofdepreciation ~~cash used to pay down the Bridge Bank loan~~ and ~~bank overdraft, offset~~amortization byof $~~340~~3,~~000~~693. Material ofchanges ~~proceeds~~in ~~from~~asset ~~the~~and ~~issuance~~liabilities ofat ~~our~~March 31, ~~secured~~2012 ~~subordinated~~as ~~convertible~~compared ~~notes~~to inDecember 31, ~~May of~~ 2012 ~~and conversion of $500,000~~that inaffected ~~warrants~~these byresults ~~our Chairman.~~include:

~~During 2009,~~· ~~under~~a ~~the~~decrease ~~terms of the agreement with the City of Los Angeles, we requested and were issued an advance payment~~ in ~~the~~accounts ~~amount of~~receivable ~~$1,159,601 from the City~~ of Los Angeles. Our agreement with the City of Los Angeles terminated prior to delivery of all of the vehicles we were required to deliver under the agreement. To the extent we cannot successfully negotiate an agreement with the City of Los Angeles that gives us additional time to deliver the remaining 10 vehicles and associated equipment to the City of Los Angeles under the same terms as the original agreement, we may have to return up to the entire $158,159,601 to the City of Los Angeles. During June 2012, we billed $630,000 to the City of Los Angeles to upgrade six of the electric trucks previously delivered to from lead acid batteries to lithium ion batteries. This billed amount was applied as a reduction of the advance payment leaving an unpaid balance of $529,601 on this advance. The Company anticipates to sell additional products and services during the next 12 months to reduce the unpaid balance, however the Company presently does not have the funds to pay this advance if payment is requested by the City of Los Angeles.361;

34· a decrease in inventory of $32,483;

~~Our~~· ~~available~~a ~~capital resources~~net atincrease ~~September~~in ~~30,~~accounts ~~2012~~payable ~~consisted~~and ~~primarily~~accrued expenses of ~~approximately~~ $5591,~~581~~575, ~~in cash and cash equivalents. We expect that our future available capital resources will consist primarily~~ of ~~cash~~which ~~on hand~~$494,148 ~~cash~~was ~~generated~~an ~~from~~increase ~~our~~in ~~business,~~related ifparty ~~any,~~accounts ~~and~~payable; ~~future debt~~ and~~/or equity financings, if any.~~

~~Cash~~· used by operating activities for the first nine months of 2012 was $122,066 as compared to $4,611,384 of cash used in operating activities for first nine months of 2011. During the first nine months of 2012, cash used by operating activities included a ~~net~~decrease ~~loss~~ of $6,690,270, depreciation and amortization of $24,471, amortization of note discount of $1,234,140, cost to induce conversion of warrants of $671,809, fair value of common shares transferred by a shareholder to settle debt of $33,~~100,~~201 ~~impairment loss of $1,345,111, change~~ in ~~fair~~customer ~~value of derivative liability of $1,074,272, and net cash flows from operating assets and liabilities of $2,185,301~~deposits. ~~Material changes in asset and liabilities at September 30, 2012 as compared to December 31, 2011 that affected these results include:~~

·Cash aused ~~decrease~~by infinancing ~~accounts~~activities ~~receivable~~totaled none for the first three months of ~~$675,901;~~2013.

·Between aFebruary ~~decrease~~2010 and inApril ~~inventory~~2010, we entered into agreements with 11 accredited investors for the sale by us of an aggregate of $~~112~~1,~~982;~~500,000 of 10% Unsecured Subordinated Convertible Promissory Notes which were initially convertible into an aggregate of 1,999,993 shares of our common stock at a conversion price of $0.75 per share of common stock, subject to adjustment. Additionally, we issued to these investors three-year warrants to purchase an aggregate of 1,999,993 shares of common stock.

·Between July 2010 and December 2010, we raised an ~~increase~~aggregate of $850,000 through the issuance of senior secured convertible debentures to 26 accredited investors. The senior secured convertible debentures are secured by a security interest in ~~prepaid~~all ~~expenses~~of our personal property (subject to customary exceptions) and were initially convertible into shares of our common stock at an initial conversion price of $~~437;~~0.75 per share (subject to adjustment). In connection with this offering, we also issued five-year warrants to purchase an aggregate of 850,000 shares of our common stock at an initial exercise price of $0.75 per share (subject to adjustment). Under the adjustment provisions of the senior secured convertible debentures and warrants, the conversion price of the senior secured convertible debentures and the exercise price of the warrants were reduced to $0.64 in connection with a private placement of our common stock and warrants in December 2010. The terms of the senior secured convertible debentures include a restriction on our ability to pay dividends on our common stock.

~~· an increase in payroll taxes payable of $253,738;~~26

· an increase in accounts payable of $1,805,407; and

· a decrease in customer advances of $662,290.

Cash used in investing activities totaled none for the first nine months of 2012 as compared to $30,410 of cash used in investing activities for the first nine months of 2011.

Cash provided by financing activities totaled $94,984 for the first nine months of 2012 as compared to $448,606 of cash provided by financing activities for the first nine months of 2011.

Between February 2010 and April 2010, we raised an aggregate of $1,500,000 through the issuance of convertible notes to 11 accredited investors. The convertible notes are convertible into an aggregate of 1,999,993 shares of our common stock. In connection with this offering, we also issued three-year warrants to purchase an aggregate of 1,999,993 shares of common stock at an exercise price of $0.50 per share.

Between July 2010 and December 2010, we raised an aggregate of $850,000 through the issuance of senior secured convertible debentures to 26 accredited investors. The senior secured convertible debentures are secured by a security interest in all of our personal property (subject to customary exceptions) and were initially convertible into shares of our common stock at an initial conversion price of $0.75 per share (subject to adjustment). In connection with this offering, we also issued five-year warrants to purchase an aggregate of 850,000 shares of our common stock at an initial exercise price of $0.75 per share (subject to adjustment). Under the adjustment provisions of the senior secured convertible debentures and warrants, the conversion price of the senior secured convertible debentures and the exercise price of the warrants were reduced to $0.56 in connection with us issuing securities to raise capital during 2010 and 2011. The terms of the senior secured convertible debentures include a restriction on our ability to pay dividends on our common stock.

In December 2010, we raised $5,000,000 through the issuance of 7,812,500 shares of our common stock and a five-year warrant to purchase up to 7,812,500 shares of our common stock at an exercise price of $0.64 per share.

~~During~~In ~~the year ended December 31,~~ 2011, we raised $148,666 in connection with the issuance of 283,332 shares of our common stock upon the exercise of warrants.

35On May 18, 2012, we entered into agreements with 3 accredited investors for a sale by us of an aggregate of $340,000 10% Secured Subordinated Convertible Promissory Notes (the “May 2012 Notes”) which are convertible into an aggregate of 850,000 shares of our common stock at a conversion price of $0.40 per share of common stock, subject to adjustment. The notes were due on March 31, 2013 and are subordinated to the right to the prior payment of all Senior Indebtedness (as defined in the notes). The security agreement is subordinate to existing bank financing and the Debentures (as defined below) that currently have a principle balance due of $775,000 and the Amended Notes that currently have a balance due of $891,500. Additionally, we issued three-year warrants to purchase an aggregate of 340,000 shares of our common stock at an exercise price of $0.40 per share, subject to adjustment.

~~Effective~~As ~~March~~ of December 31, 2011, ~~2012~~Mr. Winston Chung, weour ~~converted~~Chairman of the Board, had advanced $500,000 to Balqon. The advance received were non-interest bearing, and with no other defined terms. As of anDecember ~~unsecured~~31, ~~loan~~2011, ~~from~~Mr. Chung also held warrants to acquire 7,812,500 shares of our ~~Chairman~~common stock ~~into~~at ~~the~~an exercise price ~~for~~of ~~the~~$0.64 ~~exercise~~per ofshare. ~~1,250,000~~The warrants were vested and have a 5-year term or an expiration date on December ~~held~~30, by2015. ~~Seven~~Effective ~~One~~March ~~Limited~~31, at2012, we, Mr. Chung and SOL, a company related to the Chairman by common ownership, entered into an agreement whereby the exercise price of certain warrants held by SOL were reduced to $0.40 per share. Due to the modification of the exercise price, during the year ended December 31, 2012 we recognized a cost to induce conversion of $225,000 relating to the additional 468,750 shares that would be issued under the modified exercise price.

~~Effective March~~SOL ~~31,~~then ~~2012,~~elected weto ~~entered~~exercise ~~into Amendment and Exchange Agreements with holders of $891,500 of our $916,500 of 10% unsecured notes payable that matured on March 31, 2012. The terms of~~ the ~~Amendment and Exchange Agreements provide that the maturity date of these~~warrants ~~notes,~~to oracquire ~~the Amended Notes~~1, ~~be extended until March 31~~250,000 ~~2013, that the Amended Notes be secured under the terms of a security agreement and that the Amended Notes be convertible into~~ shares of ~~our~~ common stock at ana ~~exercise~~ price of $0.40 ~~per~~for ~~share~~which we issued 1,250,000 ~~subject to~~shares ~~adjustment~~of ~~for~~our acommon ~~full~~stock ~~ratchet~~to ~~anti-dilution~~SOL. In ~~connection~~consideration ~~with~~of the ~~issuance~~exercise of the ~~Amended Notes~~warrants, weMr. ~~also~~Chung ~~issued~~agreed ~~three-year warrants~~ to ~~purchase~~cancel upthe ~~to 975~~$500,000 ~~shares~~owed to him. We recognized costs of ~~common~~$446,809 ~~stock~~which atrepresent anthe ~~exercise~~incremental ~~price~~fair value of ~~$0.40.~~the ~~per~~warrants ~~share,~~after ~~subject~~modification toand was ~~full-ratchet~~reflected ~~anti-dilution protection~~as financing cost.

OnEffective ~~May~~ February 18, ~~2012~~2009, we ~~raised~~entered into ana ~~aggregate~~Business ofFinancing ~~$340,000~~Agreement ~~through~~with ~~the~~Bridge ~~issuance~~Bank, ofNational ~~10%~~Association, ~~secured~~or ~~subordinated~~Bridge ~~convertible~~Bank ~~notes and warrants to 3 accredited investors~~Agreement. The ~~secured~~Bridge ~~subordinated~~Bank ~~convertible notes are secured by a security interest in all of our personal property (subject~~Agreement, toas ~~customary~~amended ~~exceptions and subordinated~~ to ~~certain~~date, ~~senior~~provides ~~indebtedness)~~us ~~and~~with ~~are~~an ~~convertible~~accounts ~~into~~receivable ~~shares~~based ofcredit ~~our~~facility ~~common~~in ~~stock~~the ~~at an~~aggregate ~~initial~~amount ~~conversion price~~ of ~~$0.40~~up ~~per share (subject~~ to ~~full ratchet anti dilution adjustment)~~$2,000,000. In ~~connection with this offering,~~ 2012, we ~~also~~cancelled ~~issued~~the ~~five-year~~Business ~~warrants~~Financing toAgreement ~~purchase~~with anBridge ~~aggregate~~Bank. ofAs ~~340,000 shares~~ of ~~our~~December ~~common~~31, ~~stock~~2012, atthere anwas ~~initial~~no ~~exercise~~outstanding ~~price of~~balance ~~$0.40~~under ~~per~~the ~~share~~credit ~~(subject to full ratchet anti dilution adjustment)~~facility.

~~Effective~~We ~~February~~believe ~~18,~~that ~~2009,~~ we ~~entered~~presently ~~into~~have ~~a Business Financing Agreement with Bridge Bank, National Association, or Bridge Bank Agreement. The Bridge Bank~~sufficient ~~Agreement,~~plant asand ~~amended~~production toequipment ~~date, provides us with an accounts receivable based credit facility in the aggregate amount of up~~ to ~~$2,000,000.The~~ ~~credit~~meet ~~facility~~our iscurrent ~~formula-based~~operational plan and ~~generally~~we ~~provides~~do ~~that the outstanding borrowings under the credit facility may~~ not ~~exceed~~intend anto ~~aggregate~~dispose of ~~80% of eligible accounts receivable. We must immediately pay~~ any ~~advance~~plant ~~made under the credit facility within 90 days of the earlier of (i) the invoice date of the receivable that substantiated the advance~~ and ~~(ii) the date~~equipment. onWe ~~which~~presently ~~the~~have ~~advance~~10 ~~was~~employees ~~made. Interest~~ on ~~the~~a ~~credit~~full-time ~~facility~~basis ~~is payable monthly. As of September 30, 2012, there was no outstanding balance under the credit agreement~~ and ~~80%~~2 ofemployees ~~eligible accounts receivable was available. The interest rate is variable and is adjusted monthly based~~ on ~~the~~a ~~per~~part-time ~~annum prime rate as published by Bridge Bank plus two percentage points~~basis, ~~subject to a minimum rate of 6.0% per annum. In the event of a default~~ and ~~continuation~~expect ~~of a default, Bridge Bank may accelerate the payment of the principal balance requiring us~~ to ~~pay~~hire ~~the~~additional ~~entire indebtedness outstanding on that date. Upon the occurrence and during the continuation~~personnel ofpursuant ~~an event of default, the interest rate applicable~~ to ~~the~~increase ~~outstanding~~in ~~balance~~market ~~borrowed under the credit facility will be increased by five percentage points above the per annum interest rate that would otherwise be applicable~~demand. ~~The~~Our ~~credit~~present ~~facility~~staff is ~~secured by~~sufficient ato ~~continuing~~meet ~~first priority security interest in all of~~ our ~~personal~~current ~~property~~operational ~~(subject~~plan tofor ~~customary exceptions)~~2013. ~~The credit facility may be terminated at any time by either party.~~

~~During 2012~~Although, we expect tosale ~~incur~~of ~~approximately~~consigned ~~$200,000~~batteries and completion and delivery of the products in ~~research~~our ~~and~~backlog ~~development~~will ~~expenses.~~provide Weus with additional liquidity and capital resources, we believe that we ~~presently~~will ~~have~~need ~~sufficient~~additional ~~plant~~ liquidity and ~~production~~capital ~~equipment~~resources through debt and/or equity financing to ~~meet~~complete our ~~current~~entire existing ~~operational~~and ~~plan~~anticipated future product backlog. As discussed in this report and in notes to our financial statements included in this report, we dohave ~~not~~suffered ~~intend~~recurring tolosses ~~dispose~~from ofoperations ~~any~~and ~~plant~~at March 31, 2013, we had an accumulated deficiency of $29,799,940 and ~~equipment~~a working capital deficiency of $9,844,380.

We presently have 18 employees and expect to hire additional personnel to meet production demands of increased product sales. Our present staff is sufficient to meet our current operational plan for the remainder of 2012.27

WeThese ~~believe~~factors, among others, raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm, in its report on our 2012 financial statements, has raised substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. We have been, and currently are, working towards identifying and obtaining new sources of financing. No assurances can be given that we will ~~need~~be successful in obtaining additional ~~liquidity~~financing ~~and~~in ~~capital~~the ~~resources~~future. Any ~~through~~future financing that we may obtain may cause significant dilution to existing stockholders. Any debt ~~and/~~financing or ~~equity~~other financing of securities senior to ~~complete~~common ~~our~~stock that ~~entire~~we ~~existing~~are able to obtain will likely include financial and ~~anticipated~~ ~~future~~other ~~product~~covenants ~~backlog~~that will restrict the our flexibility. As ~~discussed~~At ina ~~this~~minimum, we ~~report~~expect ~~and~~these incovenants ~~notes~~to include restrictions on our ability to pay dividends on our ~~financial~~common ~~statements~~stock. ~~included~~Any infailure ~~this~~to comply with ~~report,~~these wecovenants would have ~~suffered~~a ~~recurring~~material ~~losses~~adverse ~~from~~effect ~~operations~~on ~~and~~our atbusiness, ~~September~~prospects, 30financial condition, ~~2012~~results of operations and cash flows. In addition, weour ~~had~~senior ansecured ~~accumulated~~convertible ~~deficit~~debentures ofissued ~~$9,452,061,~~ between July and aDecember ~~working~~2010 ~~capital~~contains ~~deficiency~~covenants that ofinclude ~~$9,667,419~~restrictions on our ability to pay dividends on our common stock.

36If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our technologies or potential products or other assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our proprietary technology and other important assets and could also adversely affect our ability to fund our continued operations and our product and service development efforts.

During the three months ended March 31, 2012, we negotiated Amendment and Exchange Agreements with holders of $891,500 of our 10% unsecured convertible notes that matured on March 31, 2012. In connection with these Amendment and Exchange Agreements, we issued new warrants that enable the warrant holders to purchase up to 975,000 shares of our common stock at an exercise price per share of $0.40. These warrants will have a contractual life of three years and expire on March 31, 2015.

As of September 30, 2012, we are delinquent on $253,738 of payroll taxes which may cause the Internal Revenue Service and California State employment tax agencies to assess penalties or institute collection actions against us. We are also in default on secured and unsecured convertible notes which have an aggregate outstanding principal amount of $3,361,500 as a result of our inability to pay $242,988 of accrued interest on these notes. As a result, the holders of the convertible notes have the right to accelerate up to $3,529,350 of the outstanding principal and accrued and unpaid interest on these notes. We are also in default on a unsecured convertible note in the principal amount of $25,000 that matured on March 31, 2012. In addition, we have an aggregate of $1,330,000 of 10% unsecured convertible notes payable that matured on September 1, 2012 and are in default. While we are attempting to renegotiate these debt obligations we cannot assure you that we will be successful at renegotiating some or all of these obligations. We are presently unable to pay our outstanding obligations due to our limited cash resources and cannot assure you that will have sufficient cash resources to pay our past due obligations.

Backlog

As of ~~November 15~~June 7, ~~2012~~2013, we had a backlog of $1,~~005~~738,~~538~~650. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. As of the date of this report, 2841% of our backlog consists of ~~a battery system~~batteries, 26 38% consists of a drive system, ~~and~~9% ~~the remainder~~ consists of vehicles, ~~and~~6% ~~accessories. Our~~consists ~~backlog~~of ~~does~~controllers ~~not~~and ~~reflect~~the aremainder ~~$975,000~~consists ~~Department~~ of ~~Energy~~chargers ~~grant awarded to us, which we are awaiting contract documents~~and accessories. ~~Due to~~As of the ~~delay~~date ~~in testing and approval~~ of ~~our~~this ~~drive system~~report, we75 ~~have~~% ~~removed~~of ~~$15.9 million in drive systems from~~ our backlog, ~~until such~~consists ~~time~~of weU.S. ~~have assurances on production timelines from our customer~~customers, ~~WGE,~~while an25% ~~affiliate~~consists of ~~our Chairman of the Board~~international customers. We believe that the majority of our current backlog will be shipped within the next 12 months. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog.

37In 2011 and 2012 we made significant investments in developing new products with our OEM partners and diversifying our market strategy to participate in lithium battery and energy storage system markets. We believe our strategy reduces our growth risk and provides us with additional flexibility during economic downturns and positions us for a more sustainable growth in the future. We rely on our OEM partners to market completed products in the regions assigned, with three of our four OEM partners completing prototypes during 2012 provides us with a better opportunity to sell additional electric drive systems during 2013. In domestic markets, we believe that increased restrictions on diesel trucks combined with government incentives for heavy-duty tractors may contribute to higher sales for our heavy-duty trucks and tractors. In the lithium battery market segment, we believe we have a significant cost advantage over our competitors. Although our competitors are substantially larger than us, we believe our low cost and technical support capabilities provide us an advantage in this growth market.

Effects of Inflation

The impact of inflation and changing prices has not been significant on the financial condition or results of operations of our company.

Impacts of New Accounting Pronouncements

InThere ~~May 2011, the~~are ~~FASB issued~~recent ~~Accounting~~accounting ~~Standards Update, or ASU, No. 2011-04, “Amendments to Achieve Common Fair Value~~pronouncements ~~Measurement~~issued ~~and~~by ~~Disclosure~~the ~~Requirements~~FASB in(including ~~U.S.~~its ~~GAAP~~Emerging ~~and~~Issues ~~IFRSs”. ASU~~Task ~~No. 2011-4~~Force), ~~does~~the ~~not~~American ~~require~~Institute ~~additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside~~ of ~~financial reporting. The~~Certified ~~ASU~~Public isAccountants ~~effective for interim and annual periods beginning after December 15~~(“AICPA”), ~~2011. We adopted ASU~~ ~~No.~~and ~~2011-04~~the ~~effective January 1~~SEC, ~~2012.~~however ~~The~~these ~~updated~~are ~~guidance~~not ~~affects~~believed ~~our~~by ~~fair~~management ~~value~~to ~~disclosures,~~have ~~but~~a ~~will~~material ~~not~~impact ~~affect~~on our ~~results of~~present ~~operations,~~or future financial ~~condition or liquidity~~statements.

InITEM ~~June 2011, the FASB issued ASU No~~3. ~~2011-05, “Presentation of Comprehensive Income”. The ASU eliminates the option to present the components~~ Quantitative ~~of other comprehensive income as part of the statement of changes in shareholders’ equity,~~ and ~~instead~~Qualitative ~~requires~~Disclosures ~~consecutive presentation~~about ofMarket the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after December 15, 2011. We adopted ASU 2011-05 effective January 1, 2012 and it did not affect our results of operations, financial condition or liquidity.Risk

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted ASU 2011-08 effective January 1, 2012. The adoption of this new accounting guidance will not have a significant effect on our goodwill impairment assessments in the future.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is effective for annual and interim reporting periods beginning on or after January 1, 2013. We do not expect adoption of this standard to have a material impact on results of operations, financial condition, or liquidity.

We do not believe that the adoption of the above recent pronouncements will have a material effect on our results of operations, financial position or cash flow. Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on our present or future financial statements.

ITEM 3. Quantitative and QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our principal accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of ~~September~~March 3031, 2013 ~~2012~~ that our disclosure controls and procedures were not effective at the reasonable assurance level due to material weakness described below.

In light of the material weaknesses described below, additional analyses and other procedures were performed to ensure that our consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared in accordance with GAAP. These measures included expanded quarterly-end closing procedures, the dedication of significant internal resources and reconciliations and management’s own internal reviews and efforts to remediate the material weaknesses in internal control over financial reporting described below. As a result of these measures, management concluded that our consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented in conformity with GAAP.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2013 based on the framework in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of management’s assessment and evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2012 our internal control over financial reporting were not effective. and identified the following material weaknesses in our internal control over financial reporting as of March 31, 2012

(a)

We did not have qualified personnel to design and manage period-end financial reporting processes. Furthermore, we do not have a formalized and consistent finance and accounting policies and procedures and our Chief Financial Officer does not have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP; and

(b)

We did not have effective corporate governance and financial controls to ensure the completeness and accuracy of the accounting for, and the disclosure of, issuance of our securities such as shares of common stock, options and warrants

The foregoing material weaknesses contributed to a delay in the filing of our and annual financial statements to the SEC. In addition, these material weaknesses could result in misstatements of our consolidated financial statement accounts and disclosures which would result in a material misstatement of future annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

As a result of these material weaknesses, management concluded that we did not maintain effective internal control over financial reporting as of March 31, 2013, based on the criteria established in the Internal Control — Integrated Framework , issued by the COSO.

Our annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting and management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.

Management's Further Remediation Initiatives and Interim Measures

In response to the identified material weaknesses, we have dedicated significant resources to improve our control environment. Management believes that actions taken beginning in December 2012, along with other improvements not yet fully implemented, will address the material weaknesses in the Company’s internal control over financial reporting noted above. Our management plans to continue to review and make changes to the overall design of its control environment, including the roles and responsibilities within the organization and reporting structure, as well as policies and procedures to improve the overall internal control over financial reporting. In particular, we have implemented, or plan to implement, the measures described below to remediate the material weaknesses described above.

We are implementing and/or enhancing a number of key accounting and finance-related policies and procedures, including with respect to our financial closing process, disbursements, treasury and stockholders’ equity. Furthermore, we are improving our existing internal control policies and implementing procedures to ensure that all required account balances are appropriately reconciled in a timely manner and that journal entries are properly prepared and approved.

We intend to retain the services of outside consultants with relevant accounting experience, skills and knowledge, working under the supervision and direction of our management, to supplement our existing accounting personnel.

We expect that these improvements and procedures will be substantially implemented by December 31, 2013 and we intend to continue to monitor the effectiveness of these actions and will make changes that management determines are appropriate.

Inherent Limitations on the Effectiveness of Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended ~~September~~March 3031, ~~2012~~2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

3931

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings.

On September 21, 2012, T&K Logistics, Inc. filed a complaint, or Complaint, against us in the Superior Court of California, County of Los Angeles (Case No.: BC492619). The Complaint relates to the lease agreement between us and T&K Logistics regarding our yard tractors. ~~(See Note 10).~~ The Complaint purports to state the following three counts against us: (i) breach of contract, (ii) specific performance, and (iii) negligent misrepresentation, and seeks compensatory damages of not less than $453,~~896~~897.~~75. We intend to vigorously defend against T&K Logistics’ claims.~~ On October 19, 2012, we filed an answer to the Complaint denying all allegations in the Complaint. On that same date, we filed a cross-complaint against T&K Logistics for breach of contract and common count—goods and services rendered, ~~and~~which ~~seeking~~seeks damages in excess of $300,000. We are currently engaged in mediation with T&K Logistics in an effort to resolve the dispute. However, if mediation does not result in resolution in the near future, we intend to continue to vigorously defend against T&K Logistics’ claims and prosecute our own claims. No trial date has been set.

ITEM 1A. Risk Factors.

In addition to the other information set forth in ~~this~~the report, you should carefully consider the ~~risk factor below and the~~ factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2011 filed with the SEC on April 16,~~ 2012, which could materially affect our business, financial condition and results ~~of operations. The risks described below and~~ in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on April 16, 2012, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.

~~Without~~ITEM ~~substantial~~2. ~~additional~~Unregistered ~~financing,~~Sales ~~we may be unable to achieve the objectives~~ of ~~our~~Equity ~~current~~Securities ~~business strategy, which could force us to delay, curtail or eliminate our product~~ and ~~service~~Use ~~development programs thereby adversely affecting our operations and the price~~ of ~~our common stock.~~Proceeds

For the nine months ended September 30, 2012, we recorded a net loss of $6,690,270. As of that date, we had a working capital deficit of $9,667,419 and a shareholders’ deficiency of $9,452,061. In addition, we are delinquent in payroll taxes of $253,738 and interest payments of $242,989 on our secured and unsecured notes. Our capital requirements for the next 12 months will continue to be significant. We have been, and currently are, working toward identifying and obtaining new sources of financing. No assurances can be given that we will be successful in obtaining additional financing in the future. Any future financing that we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. At a minimum, we expect these covenants to include restrictions on our ability to pay dividends on our common stock. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows. In addition, our senior secured convertible debentures contain covenants that include restrictions on our ability to pay dividends on our common stock.

If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our technologies or potential products or other assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our proprietary technology and other important assets and could also adversely affect our ability to fund our continued operations and our product and service development efforts and adversely affect the price of our common stock.

Our significantly high debt levels will negatively impact our business, operating results and financial condition.

We have an aggregate of $1,330,000 of 10% unsecured convertible notes payable that matured on September 1, 2012. While we intend on renegotiating these debt obligations but cannot assure you that we will be successful at renegotiating some or all of these obligations. We are presently unable to pay our outstanding obligations due to our limited cash resources and cannot assure you that will have sufficient cash resources to pay our past due obligations, any obligations that we will be subject to if the holders of our notes accelerate the notes or our obligations that came due on September 1, 2012.

We are in default on secured and unsecured convertible notes which have an aggregate outstanding principal amount of $3,361,500 as a result of our inability to pay $242,987 of accrued interest on these notes. As a result, the holders of the convertible notes have the right to accelerate the outstanding principal and accrued and unpaid interest on these notes. We are also in default on an unsecured convertible note in the principal amount of $25,000 that matured on March 31, 2012.

Our debt obligations may affect our business, operating results and financial condition in number of ways, including limiting our ability to obtain any future debt for financing working capital needs, capital expenditures, debt services; limiting our flexibility in implementing our business strategy and in planning for, or reacting to market changes in our business; placing us at a competitive disadvantage relative to any of our competitors who have lower levels of debt; subjecting us to the risk of being forced to refinance at higher interests; and requiring us to use substantial portion of our working capital to pay principal and interest on our debt obligations.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

40ITEM 3. Defaults Upon Senior Securities

~~ITEM 3~~None. ~~Defaults Upon Senior Securities.~~

~~We are~~ITEM in default on certain of our secured and unsecured convertible notes having an aggregate outstanding principal amount of $3,361,500 as a result of our inability to pay $242,988 of accrued interest on these notes4. AsMine aSafety ~~result, the holders of the convertible notes have the right to accelerate up to $3,529,350, representing the outstanding principal and accrued and unpaid interest on these notes~~Disclosure.

ITEM 4. Mine Safety Disclosures.

Not applicable.

ITEM 5. Other Information.

None.

ITEM 6. Exhibits

Exhibit Number	~~Description~~	Description
31.1	~~Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*)~~	Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*)
31.2	~~Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*)~~	Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*)
32.1	~~Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)~~	Certification of President Chief Financial Officer Pursuant to 18 U.S.C. Section 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
101.INS	~~XBRL Instance Document. (*)~~	XBRL Instance Document. (*)
101.SCH	~~XBRL Schema Document. (*)~~	XBRL Schema Document. (*)
101.CAL	~~XBRL Calculation Linkbase Document. (*)~~	XBRL Calculation Linkbase Document. (*)
101.DEF	~~XBRL Definition Linkbase Document. (*)~~	XBRL Definition Linkbase Document. (*)
101.LAB	~~XBRL Label Linkbase Document. (*)~~	XBRL Label Linkbase Document. (*)
101.PRE	~~XBRL Presentation Linkbase Document. (*)~~	XBRL Presentation Linkbase Document. (*)

_________________________

(*) Filed herewith.

4132

~~SIGNATURES~~Signatures

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

Date: November 19, 2012	BALQON CORPORATION
	BALQON CORPORATION
	By: /S/ BALWINDER SAMRA
Date June 14, 2013	By:	/s/ Balwinder Samra
	Balwinder Samra,
		Balwinder Samra,President, Chief Executive Officer and Chief Financial Officer (principal executive officer and principal financial officer)
	President and Chief Executive Officer (principal executive officer)

4233

BALQON CORPORATION

EXHIBITS FILED WITH THIS REPORT

Exhibit Number	~~Description~~	Description
31.1	~~Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~	Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	~~Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~	Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	~~Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~	Certification of President Chief Financial Officer Pursuant to 18 U.S.C. Section 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	~~XBRL Instance Document~~	XBRL Instance Document
101.SCH	~~XBRL Schema Document~~	XBRL Schema Document
101.CAL	~~XBRL Calculation Linkbase Document~~	XBRL Calculation Linkbase Document
101.DEF	~~XBRL Definition Linkbase Document~~	XBRL Definition Linkbase Document
101.LAB	~~XBRL Label Linkbase Document~~	XBRL Label Linkbase Document
101.PRE	~~XBRL Presentation Linkbase Document~~	XBRL Presentation Linkbase Document

4334

Filing Compare · BALQON CORP.