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3DIcon CORPORATION

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

Nine Months Ended September 30, 2009 and 2008 and period

From Inception (January 1, 2001) to September 30, 2009

(Unaudited)

Note 1 – Uncertainties and Use of Estimates

Basis of Presentation

The accompanying financial statements of 3DIcon Corporation (the “Company”) have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's year end audited financial statements and related footnotes included in the previously filed 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2009, and the statements of its operations for the three and nine months ended September 30, 2009 and 2008 and the period from inception (January 1, 2001) to September 30, 2009, and cash flows for the nine-months ended September 30, 2009 and 2008, and the period from inception (January 1, 2001) to September 30, 2009, have been included. The results of operations for interim periods may not be indicative of the results which may be realized for the full year.

Use of Estimates

The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from the estimates and assumptions used.

 

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Debt issue costs

The Company defers and amortizes the legal and filing fees associated with long-term debt that is issued.  These costs are primarily related to the convertible debentures, the majority of which have a three year term.  The amortization is charged to operations over the three year term and then adjusted quarterly for debenture conversions to common stock.

Fair value of financial instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company:

Current assets and current liabilities – The carrying value approximates fair value due to the short maturity of these items.

Debentures payable

The fair value of the Company's debentures payable has been estimated by the Company based upon the liability’s characteristics, including interest rate.  The carrying value approximates fair value.

Revenue Recognition

Revenues from software license fees are accounted for in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition”.  The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured.

Uncertainties

The accompanying financial statements have been prepared on a going concern basis.  The Company is in the development stage and has insufficient revenue and capital commitments to fund the development of its planned product and to pay operating expenses. Additionally, the Company has been unable to meet certain of its monthly payment obligations and has been in arrears on the payments under the Sponsored Research Agreement (“SRA”) (see Note 3 and note 10).  A revised payment schedule was agreed to in October 2008, May 2009 and August 2009.  Failure of the Company to meet its revised payment obligations could result in the termination of the SRA and any outstanding license agreements under the SRA.  The Company has realized a cumulative net loss of $12,194,230 for the period from inception (January 1, 2001) to September 30, 2009, and a net loss of $1,184,151 and $2,845,425 for the nine months ended September 30, 2009 and 2008, respectively.

The ability of the Company to continue as a going concern during the next year depends on the successful completion of the Company's capital raising efforts to fund the development of its planned products.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management plans to fund the future operations of the Company with existing cash of $63,091, grants and investor funding. Under the terms of the Golden State Equity Investors, Inc. (“Golden State”) debentures, Golden State may advance an additional $378,787.  The additional advance would be available if the Company filed a registration statement; however, the Company does not plan to file such registration statement. In addition, pursuant to the 4.75% Convertible Debenture due in 2011, beginning in November 2007, Golden State is obligated to submit conversion notices in an amount such that Golden State receives 1% of the outstanding shares of the Company every calendar quarter for a period of one year.  In connection with each conversion, Golden State is expected to exercise warrants equal to ten times the amount of principal converted.  The warrants are exercisable at $10.90 per share.  The number of warrants exercisable is subject to certain beneficial ownership limitations contained in the 4.75% Debenture and the warrants (“the Beneficial Ownership Limitations”).  The Beneficial Ownership Limitations prevent Golden State from converting on the 4.75% Debenture or exercising warrants if such conversion or exercise would cause Golden State’s holdings to exceed 9.99% of the Company’s issued and outstanding common stock.  Subject to the Beneficial Ownership Limitations, Golden State is required to convert $3,000 of the 4.75% Convertible Debenture and exercise 30,000 warrants per month.  Based upon our current stock price, our issued and outstanding shares as of September 30, 2009 and ignoring the impact of the Beneficial Ownership Limitations, we may receive up to $981,000, in funding from Golden State as a result of warrant exercises subsequent to September 30, 2009.

The Company was approved for a matching grant from Oklahoma Center for the Advancement of Science and Technology (“OCAST”) on November 19, 2008 in the amount of $299,932. The award is for a maximum of $149,940 for calendar year 2009 with the remainder for calendar year 2010. Funding of the grant is contingent upon the Company providing matching funds for the first year's research and submission of all required documentation to OCAST.

 

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Additionally, the Company is continuing to pursue financing through private offering of debt or common stock.

Note 2 – Recent Accounting Pronouncements

The following are summaries of recent accounting pronouncements that are relevant to the Company:

Subsequent Events – In May 2009, the FASB issued new standards which establish the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In particular, the new standards set forth:

 

·	the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements (through the date that the financial statements are issued or are available to be issued);

·	the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

·	the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

We adopted the new standard as of June 30, 2009. See Note – 10.

Fair Value Measurements – The FASB’s fair value measurement standards establish a single authoritative definition of fair value based upon the assumptions market participants would use when pricing an asset or liability and create a fair value hierarchy that prioritizes the information used to develop those assumptions. The standards require additional disclosures, including disclosures of fair value measurements by level within the fair value hierarchy. As of January 1, 2008, we adopted the new standards as they related to our financial assets and liabilities.   Adoption did not have a significant impact on our financial statements.  As of January 1, 2009, we adopted the new standards as they related to our nonfinancial assets and liabilities.  In April 2009, the FASB issued additional guidance clarifying the application of US GAAP for fair value measurements in the current economic environment, modifying the recognition of other-than-temporary impairments of debt securities, and requiring companies to disclose the fair value of financial instruments in interim periods. The revised guidance is effective for interim and annual periods ending after June 15, 2009. The guidance:

 

·	describes how to determine the fair value of assets and liabilities in the current economic environment and reemphasizes that the objective of a fair value measurement remains the price that would be received to sell an asset or paid to transfer a liability at the measurement date.

·

modifies the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities. It also modifies the presentation of other-than-temporary impairment losses and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities.

·

requires disclosures of the fair value of financial instruments in interim financial statements, the method or methods and significant assumptions used to estimate the fair value of financial instruments, and a discussion of changes, if any, in the method or methods and significant assumptions during the period.

We adopted this new guidance for the quarter ended June 30, 2009. Adoption had no impact on our financial position or results of operations.

Derivative Instruments and Hedging Activities – In March 2008, the FASB issued new standards which amended and expanded previous disclosure requirements related to derivative instruments and hedging activities. The new standards require qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about fair value amounts of derivative instruments and related gains and losses, and disclosures about credit risk-related contingent features in derivative agreements. We adopted the new standards as of January 1, 2009. They provide only for enhanced disclosures, and adoption had no impact on our financial position or results of operations.

 

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Accounting Standards Update – In August 2009, the FASB issued Accounting Standards Update (Update) 2009-5, “Measuring Liabilities at Fair Value” in order to provide further guidance on how to measure the fair value of a liability. The Update clarifies that, in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more prescribed techniques. We adopted the new guidance as of October 1, 2009. Adoption had no impact on our financial position or results of operations.

Accounting Standards Codification – In June 2009, the FASB established the FASB Accounting Standards Codification (Codification), which officially commenced July 1, 2009, to become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants.  Generally, the Codification is not expected to change US GAAP.  All other accounting literature excluded from the Codification will be considered nonauthoritative.  The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We adopted the new standards for our quarter ending September 30, 2009.  All references to authoritative accounting literature are now referenced in accordance with the Codification.

Note 3 – Sponsored Research Agreement (SRA)

On April 20, 2004, the Company entered into a SRA entitled "Investigation of Emerging Digital Holography Technologies" (Phase I) with the University of Oklahoma - Tulsa (“University”), which expired October 19, 2004. On July 15, 2005, the Company entered into a SRA with the University (Phase II), which expired January 14, 2007. Under this agreement the University conducted a research project entitled "Investigation of Emerging 3-Dimensional Display Technologies".  The agreement was modified in November 2006 to provide additional funding, and extended the term of the agreement through June 30, 2007.

On February 23, 2007, the Company entered into a SRA with the University (Phase III) which expires March 31, 2010.  Under this agreement the University will conduct a research project entitled “3-Dimensional Display Development” that seeks to make significant progress in the development of 3-dimensional display technologies.  The Company agreed to pay the University $3,468,595 payable in monthly installments ranging from $92,263 to $112,777 beginning April 30, 2007 and ending March 31, 2010, an aggregate commitment of $4,047,439.

On October 31, 2008 the University agreed to revise the payment terms under the SRA from a fixed monthly payment to a reimbursable cost payment basis effective September 1, 2008. As of September 30, 2008, the Company had a remaining obligation under the previous SRA payment schedule of $2,665,818, which includes monthly payments due for December 2007 through August 2008 of $861,131.  The $1,804,687 balance of the remaining SRA scheduled payment obligation was cancelled.  Under the terms of the revised base payments schedule, the arrearages will be paid in nine monthly base installments from July 31, 2009 to February 28, 2010 of amounts ranging from $35,000 to $101,132, leaving a remaining balance after the base payments of $290,000.  In addition to the monthly base payments, the Company agreed to make additional payments on the $861,131 arrearages of $10,000 per month. As of September 30, 2009 the August and September payments had not been made.  For the remaining balance of $290,000, the University agreed to accept 4,264,707 shares of the Company’s common stock based on the October 14, 2008 market price as reported on the OTC Bulletin Board of $0.068 per share as payment on June 30, 2009.  The Company had the option to repurchase the shares at $0.068 per share by September 30, 2009 or at market value, but not less than $0.068 per share, if the repurchase occurs after September 30, 2009.

During the periods ended September 30, 2009 and 2008, the Company charged operations $86,358 and $761,132, respectively, pursuant to the SRA.  At September 30, 2009, the Company owed the University $12,000 for the September 2009 monthly payments and $560,481on the arrearages under the revised payment terms.

 

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Note 4 – Debentures Payable

Debentures payable consist of the following:

		September 30,				December 31,
		2009				2008
Senior Convertible Debentures:
9.75% Debenture due July 2009		$	-			$	364,000
6.25% Debenture due November 2010			483,558				578,601
4.75% Debentures due November 2011			93,568				96,678
10.0% Debenture due September 2009			100,703				-
Less unamortized discount			(12,829)				-
Total Debentures			665,000				1,039,279
Less Current Maturities			(87,874)				(364,000	)
Long-term Debentures		$	577,126			$	675,279

Golden State Investors, Inc. - Securities Purchase Agreement

6.25% Convertible Debenture due 2009

The Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with Golden State on November 3, 2006, as amended on December 15, 2006 and February 6, 2007, for the sale of a 6.25% convertible debenture in the principal amount of $1,250,000 (the “First Debenture”). The Company agreed to file a registration statement with the SEC for the resale of the common stock underlying the debenture.  The registration statement became effective on July 3, 2007.  Under the terms of the Purchase Agreement, Golden State advanced $125,000 during 2006 and converted the $125,000 debenture into 357,142 shares of common stock on July 16, 2007 at $0.35 per share. Pursuant to the Securities Purchase Agreement, Golden State provided the Company with an additional $312,500 of debenture funding upon effectiveness of the registration statement and converted the $312,500 debenture into 892,857 shares of common stock on July 17, 2007 at $0.35 per share.  The remaining $812,500 of the $1.25 million debenture was placed with an escrow agent during 2007.  During the remainder of 2007, $400,000 was released to the Company and the balance of $412,500 was released in 2008.  At various dates after the July 3, 2007 effective date of the registration statement, $478,529 of the debenture was converted into 2,097,406 shares of common stock at prices ranging from $0.20 to $0.26 during 2007 and, during the first quarter of 2008, the remaining $333,971 of the debenture was converted into 2,061,573 shares of common stock at prices ranging from $0.12 to $0.20 based on the formula in the convertible debenture.

6.25% Convertible Debenture due 2010

Pursuant to the terms of the Purchase Agreement, on October 24, 2007, at such time as the principal balance of the First Debenture was less than $400,000, the Company provided Golden State with written notice that it desired to require Golden State to purchase the second debenture.

On November 21, 2007, the Company issued and sold a convertible note in the principal amount of $1,250,000 to Golden State (the “Second Debenture”).  Pursuant to the terms of the Second Debenture, Golden State may, at its election, convert all or a part of the Second Debenture into shares of the Company’s common stock at a conversion rate equal to the lesser of (i) $2.00 or (ii) 90% of the average of the five lowest volume weighted average prices during the twenty trading days prior to Golden State’s election to convert, subject to adjustment as provided in the Second Debenture.  In addition, pursuant to the terms of the Second Debenture, the Company agreed to file a registration statement covering the shares of common stock issuable upon conversion or redemption of the Second Debenture.  The registration statement became effective on January 4, 2008.

Golden State advanced $125,000 on the second $1.25 million debenture on November 9, 2007.  Additionally, Golden State advanced $312,500 directly to the Company and $433,713 to an escrow account on the Second Debenture in January 2008 at which time the Company placed 7,961,783 shares of common stock in escrow to be released as debentures are converted. As of December 31, 2008, Golden State has funded an aggregate of $871,213 on the Second Debenture. Golden State will be obligated to fund the Company for the remaining $378,787 in principal on the Second Debenture upon the effectiveness of a registration statement underlying the remaining unfunded principal balance on the Second Debenture. At this time, the Company has not filed a registration statement.  Under the terms of the Securities Purchase Agreement, the escrowed funds were advanced to the Company during 2008. At various dates during 2008, $292,611 of the debenture was converted into 3,651,337 shares of common stock at prices ranging from $0.05 to $0.14 based on the formula in the convertible debenture. At various dates during 2009, $95,043 of the debenture was converted into 9,139,753 shares of common stock at prices ranging from $0.009 to $0.011 based on the formula in the convertible debenture. Shares remaining in escrow and reported as outstanding at September 30, 2009 total 4,310,446.

 

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The Second Debenture is secured by the pledge of 11 million shares of common stock held by Martin Keating, the Chairman of the Company.  In the event of default and the Company has not repaid all outstanding principal and accrued interest, along with liquidating damages of $250,000 within one day of default, Golden State shall have the right to immediately sell the pledged shares in satisfaction of any amounts of principal and interest owing under the Second Debenture.

In addition to standard default provisions concerning timeliness of payments, delivery and notifications, the Second Debenture will be in default if the common stock of the Company trades at a price per share of $0.21 or lower, regardless of whether the trading price subsequently is higher than $0.21 per share.  The trading price was at $0.21 or lower on several occasions during 2009 and 2008. On each of the occasions Golden State, by separate letter agreements, agreed that the occasions did not constitute a default and thereby waived the default provision for those occasions only.

4.75% Convertible Debenture due 2011

On November 3, 2006, the Company also issued to Golden State a 4.75% convertible debenture in a principal amount of $100,000, due November 3, 2011, and warrants to buy 1,000,000 shares of the common stock at an exercise price of $10.90 per share.  Under the terms of the debenture, warrants are exercised in an amount equal to ten times the dollar amount of the debenture conversion.  During 2007 Golden State converted $596 of the $100,000 debenture into 244,045 shares of common stock at $0.002 per share, exercised warrants to purchase 5,956 shares of common stock at $10.90 per share and the Company received $64,920 from the exercise of the warrants.   During 2008, Golden State converted $2,726 of the $100,000 debenture into 5,115,695 shares of common stock at $0.002 per share, exercised warrants to purchase 27,261 shares of common stock at $10.90 per share and the Company received $297,145 from the exercise of the warrants.  During 2009, Golden State converted $3,110 of the $100,000 debenture into 27,280,771 shares of common stock at $0.002 per share, exercised warrants to purchase 31,100 shares of common stock at $10.90 per share and the Company received $388,900 from the exercise.  During 2009 and 2008 Golden State advanced $240,000 and $200,000, respectively against future exercises of warrants of which $292,570 was applied during 2009.  There remains a balance of $87,930, of unapplied advances at September 30, 2009.

9.75% Convertible debenture due July 31, 2009

To obtain funding for ongoing operations, the Company entered into a Bridge Financing Agreement with Golden State which closed on June 11, 2007 (the “Financing Agreement”), for the sale of a 9.75% convertible debenture in the principal amount of $700,000. Pursuant to the Financing Agreement, the Company filed a registration statement with the SEC within three days of closing for the resale of the common stock underlying the $1.25 million convertible debenture, which was issued to Golden State on November 3, 2006.  The Company received gross proceeds of $700,000 from the sale of the aforementioned debenture. At various dates during 2008, $336,000 of the debenture was converted into 8,079,895 shares of common stock at prices ranging from $0.04 to $0.05 per common share based on the formula in the convertible debenture. At various dates during 2009, the remaining balance of $364,000 of the debenture was converted into 29,703,510 shares of common stock at prices ranging from $0.009 to $0.029 per common share based on the formula in the convertible debenture.

Newton, O’Connor, Turner & Ketchum 10% convertible debenture due September 30, 2009

On May 22, 2009, the Company issued to Newton, O’Connor, Turner & Ketchum, a professional corporation (“NOTK”) and the legal counsel to the Company, a 10% convertible debenture in a principal amount of $100,703, due September 30, 2009, and warrants to purchase 4,378,394 shares of the common stock at an exercise price of $0.09 per share through September 30, 2010 and an exercise price of $0.18 per share through September 30, 2014.  The Company was indebted to NOTK for legal services performed for the Company and reimbursement of expenses in rendition of those services for the period ended December 31, 2008. The debenture and the warrants were issued in settlement of the indebtedness.  The debentures and warrants were recorded at their pro rata fair values in relation to the proceeds received.  The warrants were valued at $13,504. The difference between the pro rata fair value and face value of the debenture is being amortized over the life of the debenture.

The estimated fair value of the warrants was determined using the Black-Scholes option pricing model. The expected dividend yield of $-0- is based on the average annual dividend yield as of the grant date. Expected volatility of 160.73% is based on the historical volatility of the stock since July 25, 2007, the day the Company began trading on the Over-The-Counter Bulletin Board. The risk-free interest rate of 2.23% is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the warrant of two years is based on historical exercise behavior and expected future experience.

 

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Note 5 – Common Stock and Paid-In Capital

Pursuant to a special meeting of the stockholders held on August 21, 2009, the stockholders approved the filing of an amendment to the Company’s Articles of Incorporation to increase the Company’s authorized shares of common stock from 250,000,000 shares, par value $0.0002, to 750,000,000 shares, par value $0.0002.

Pursuant to a Subscription Agreement dated October 12, 2007, the Company sold 1,188,960 shares of the Company’s common stock at a per share price equal to 75% of the average closing price during the five (5) days prior to the signing ($.31 per share) and warrants to purchase 594,482 shares of its common stock at a price of $.40 per share from October 12, 2007 through October 11, 2008, or $.50 per share from October 12, 2008 through October 11, 2009 to two accredited individuals. The Company received $280,000 in cash from the sale.  The warrants terminate on October 11, 2009.

Pursuant to a Subscription Agreement dated October 1, 2008, the Company sold 515,677 shares of the Company’s common stock at a per share price equal to 80% of the average closing price during the five (5) days prior to the signing ($.048 per share) and warrants to purchase 257,839 shares of its common stock at a price of $.20 per share from October 1, 2008 through August 31, 2009, or $.25 per share from September 1, 2009 through August 31, 2010 to one accredited individual. The Company received $25,000 in cash from the sale.  The warrants terminate on August 31, 2010.

Pursuant to a Subscription Agreement dated March 20, 2009 and April 22, 2009, the Company sold 999,999 shares of the Company’s common stock at a per share price of $.03 per share and warrants to purchase 500,000 shares of its common stock at a price of $.10 per share from closing for a period of twelve months or $.15 per share for the second subsequent twelve months to three accredited individuals. The Company received $30,000 in cash from the sale.  The warrants terminate on March 25, 2011.

On June 18, 2009 the Company entered into Subscription Agreements with two of its directors pursuant to which the two directors purchased 17,941,176 shares of the Company’s common stock at a price per share equal to 50% of the average closing price during the five days prior to June 18, 2009 (0.0068 per share) for aggregate proceeds of $122,000.

 As of September 30, 2009, there are warrants outstanding to purchase 594,482 shares of common stock at a price of $.50 per share which expire on October 11, 2009, warrants to purchase 257,839 shares of common stock at a price of $.20 per share from October 1, 2008 through August 31, 2009, or $.25 per share from September 30, 2009 through August 31, 2010, warrants outstanding to purchase 500,001 shares of common stock at a price of $.10 per share through March 25, 2010 or $.15 per share that expire on March 25, 2011 and warrants to purchase 4,378,394 shares of common stock at a price of $0.09 per share through September 30, 2010 and $0.18 per share that expire on September 30, 2014.  Additionally, Golden State has warrants outstanding to purchase 944,683 shares of common stock at a price of $10.90 per share which expire November 2, 2011.

Common stock and options issued for services

During the nine months ended September 30, 2009, shares of common stock totaling 33,039,444 were issued for invoiced legal and invoiced consulting services for which the Company recognized $334,005 of expense. During the nine months ended September 30, 2008 shares of common stock totaling 2,743,072 were issued for invoiced legal and invoiced consulting services for which the Company recognized $242,801 of expense.  Additionally under the SRA revised payment terms The University of Oklahoma was issued 4,264,706 shares in payment of indebtedness from services performed under the SRA agreement on September 30, 2009.

On June 4, 2009 Thomas Allen, a director of the Company was issued 5,000,000 restricted shares of common stock to recognize Mr. Allen’s participation providing certain advisory and consultative services to the Company as a member of the Company’s Board of Directors.  The restricted shares value of $42,500 was determined by using 50% of the June 4, 2009 trading price of $0.017 which results in a calculated value of $0.0085 per share.

On June 6, 2009 Victor Keen, a director of the Company was issued 4,000,000 restricted shares of common stock to recognize Mr. Keen’s participation providing certain advisory and consultative services to the Company which are  beyond his required duties as a member of the Company’s Board of Directors.  The restricted shares value $33,600 was determined by using 50% of the June 6, 2009 trading price of $0.016 which results in a calculated value of $0.0084 per share.

 

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Options granted

Board of Directors – On February 25, 2008, the Company agreed to compensate its non-employee Board members with options to purchase registered stock of the corporation equaling the value of $100,000 for each of the three non-employee Board members using standard evaluation methods.  The Board granted options to purchase an aggregate of 2,061,540 shares to its three non-employee Board members; the exercise price for each option is $0.24 per share. The options expire at the end of ten years. The $300,000 compensation is for services on the Board during all or part of the calendar year 2008 and is deemed fully vested on the date of the grant. Operations were charged with $300,000 for the year ended December 31, 2008.

The estimated fair value of the options was determined using the Black-Scholes option pricing model. The expected dividend yield of $-0- is based on the average annual dividend yield as of the grant date. Expected volatility of 71.33% is based on the historical volatility of the stock since July 25, 2007, the day the Company began trading on the Over-The-Counter Bulletin Board. The risk-free interest rate of 3.0% is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option of five years is based on historical exercise behavior and expected future experience.

Employment Agreement - On April 29, 2007, the Company entered into an Employment Agreement with Vivek Bhaman (the “Bhaman Agreement”) pursuant to which Mr. Bhaman agreed to serve as the President and Chief Operating Officer of the Company.  Mr. Bhaman’s employment under the Bhaman Agreement commenced on May 1, 2007 and continued for a term of one year from May 1, 2007, the date on which he became a full-time employee of the Company. The term of the Bhaman Agreement automatically extended for successive one-year periods unless otherwise terminated by the parties, in accordance with the terms of the Bhaman Agreement. The following represents the material terms of the Bhaman Agreement:

·

Annual salary of $250,000;

·

Cash bonus equal to twenty-five percent (25%) of the annual salary in the event the Company records revenue of $500,000 for the calendar year 2007; and Mr. Bhaman is an employee of the Company;

·

Grant of 100,000 stock options valued at $21,032 with a term of 10 years and an exercise price of $0.080 per share which vest  on the commencement date of employment, May 1, 2007;

·

Grant of 200,000 stock options valued at $44,064 with a term of 10 years and an exercise price of $1.00 per share which vest on May 1, 2008; and

·

Grant of 200,000 stock options valued at $32,211 with a term of 10 years and an exercise price of $1.50 per share which vest on May 1, 2009.

The estimated fair value of the options was determined using the Black-Scholes option pricing model. The expected dividend yield of $-0- is based on the average annual dividend yield as of the grant date. Expected volatility of 137.60% is based on the historical volatility of the stock since July 25, 2007, the day the Company began trading on the Over-The-Counter Bulletin Board. The risk-free interest rate of 4.0% is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option of five years is based on historical exercise behavior and expected future experience.

Amended Employment Agreement

On October 12, 2008, the Company entered into an Amendment to the Employment Agreement of Vivek Bhaman, (the “Amendment”). Pursuant to the Amendment, Mr. Bhaman’s base salary effective May 1, 2008 is $300,000, representing an annual increase of $50,000. The Company has the option to defer payment of any or all of the increase until April 30, 2009. It was deferred and the Company elected to pay the increase in shares of the Company’s common stock at a 25% discount to the market price of the Company’s common stock on April 30, 2009. The Bonus provision of Mr. Bhaman’s employment agreement has been deleted. In addition, pursuant to the Amendment, Mr. Bhaman was granted an aggregate of 6,000,000 options to purchase shares of the Company’s common stock at an exercise price of $0.055 per share with a term of 10 years comprised of (i) 1,000,000 options vesting immediately valued at $50,782, and (ii) 5,000,000 options valued at $253,909, vesting at a rate of 125,000 options per quarter. The vesting schedule of the 5,000,000 options may be accelerated if the market price of the Company’s common stock exceeds certain thresholds pursuant to the terms of the Amendment. In addition, pursuant to the Amendment, in the event that Mr. Bhaman’s employment with the Company is terminated, he shall be entitled to severance pay equal to his regular monthly salary for a period not to exceed six months.

 

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There are 1,425,000 options vested at September 30, 2009 under the original and amended employment agreements.

The estimated fair value of the options was determined using the Black-Scholes option pricing model. The expected dividend yield of $-0- is based on the average annual dividend yield as of the grant date. Expected volatility of 125.20% is based on the historical volatility of the stock since July 25, 2007, the day the Company began trading on the Over-The-Counter Bulletin Board. The risk-free interest rate of 2.0% is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option of five years is based on historical exercise behavior and expected future experience.  Operations were charged $50,782 for the vesting of the 1,000,000 options on October 1, 2008.

 President’s resignation and interim President appointed

On February 3, 2009, Vivek Bhaman resigned as President, Chief Operating Officer and Treasurer of 3DIcon Corporation effective March 3, 2009.  Mr. Bhaman was due an aggregate of $41,667 compensation for January and February 2009 under the terms of the April 29, 2007 Employment Agreement.  Additionally, he is due $41,667 under the terms of the October 12, 2008 Amended Employment Agreement, which increased his annual compensation to $300,000 from $250,000.  Under the terms of the contract, the Company elected to defer the $50,000 increase until April 30, 2009 and pay the increased compensation in registered common stock discounted at 25% to the market price.  Mr. Bhaman was issued 1,851,852 registered common shares at $0.0225 per share for the $41,667 deferred compensation.  The Company has been unable to pay Mr. Bhaman for the remaining $41,667 compensation under his original Employment Contract.  Additionally, under the terms of the employment agreements, Mr. Bhaman has vested 1,425,000 options to purchase shares of common stock of the Company at prices ranging from $0.055 to $1.00 per share that expire at various dates through October 12, 2018.  In connection with his resignation, the Company agreed to waive certain provisions of Mr. Bhaman's employment agreement which prevented him from continuing to serve as a Director of the Company following the termination of his employment. Accordingly, Mr. Bhaman continued to serve as a Director of the Company.

On April 29, 2009 the Company and Mr. Bhaman signed a Separation Agreement And Release (the “Agreement”) whereby the Company agreed to settle the $41,667 compensation due by paying Mr. Bhaman an aggregate of one hundred thousand dollars ($100,000) (the “Settlement”), 75% of which shall be payable in the form of a “Stock Payout” and 25% of which shall be payable in “Cash Consideration”.  Under the Stock Payout Mr. Bhaman shall receive the aggregate sum of $4,000 per week, payable in registered shares of the Company’s common stock calculated at a 50% discount to the average closing price for the five days prior to the weekly issuance.  Under the Cash Consideration Mr. Bhaman shall receive the greater of $500 or 25% of any amounts paid to the remaining three full time employees and amount owed for 2008 legal service to Newton, O’Connor, Turner & Ketchum, P.C.  Any unpaid amounts will bear interest at 8% or at the option of Mr. Bhaman, be payable in registered shares of the Company’s common stock calculated  at a 50% discount to the average closing price for the five days prior, provided, however, that the amount of shares issued in any one week, shall not exceed 450,000 shares.  During the nine months ended September 30, 2009, the Company issued 6,950,775 shares of common stock to Mr. Bhaman in payment of $77,667 under the terms of the Agreement.

On February 9, 2009, the Board of Directors of the Company appointed James N. Welsh to serve as the Company’s Interim Chief Operating Officer and Treasurer. His appointment was effective as of March 1, 2009. On May 5, 2009, Mr. Bhaman resigned as a Director of the Company.

Employment Agreement

On July 28, 2008 the Company entered into an Employment Agreement with Dr. Hakki Refai (the “Employment Agreement”) pursuant to which Dr. Refai has agreed to serve as the Chief Technology Officer of the Company. Dr. Refai’s employment under the Employment Agreement commenced on October 1, 2008 and will continue for a term of one year from October 1, 2008, the date on which he became a full-time employee of the Company. The term of the Employment Agreement will automatically extend for successive one year periods unless otherwise terminated by the parties in accordance with the terms of the Employment Agreement. The following represents the material terms of the Employment Agreement:

 

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·

Annual salary of $175,000 until the achievement of certain technical milestones as provided in the Employment Agreement (the “Technical Milestones”). Upon achievement of the Technical Milestones, the annual salary shall increase to $200,000;

·

Commission which shall not exceed 3% of sales of the Company’s Pixel Precision™ and CSpace™ technologies products, which commission shall not exceed $30,000 for the 12 month period commencing on October 1, 2008 and $50,000 for the 12 month period commencing on October 1, 2009; and

·

Grant of 5,000,000 incentive stock options with a term of 10 years and an exercise price of $0.085 per share which vest as follows:

1.

The first installment of 500,000 options, valued at $33,622, are vested and exercisable on October 1, 2008, the date Dr. Refai commences full-time employment;

2.

3,500,000 options, valued at $235,357, vesting in accordance with certain technical achievements, deliverables and milestones as provided in the Employment Agreement; and

3.

1,000,000 options vesting in accordance with certain non-technical, general milestones as provided in the Employment Agreement or upon severance of the Employment Agreement under certain conditions as provided in the Employment Agreement.

The estimated fair value of the options was determined using the Black-Scholes option pricing model. The expected dividend yield of $-0- is based on the average annual dividend yield as of the grant date. Expected volatility of 95.50% is based on the historical volatility of the stock since July 25, 2007, the day the Company began trading on the Over-The-Counter Bulletin Board. The risk-free interest rate of 2.0% is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option of five years is based on historical exercise behavior and expected future experience.  Operations were charged $100,867 in 2008 for the vesting of the options cost of Mr. Refai under the terms of the Employment Agreement. There were no options vested in 2009.

The following summary reflects warrant and option activity for the nine months ended September 30, 2009.

		Attached Warrants				Golden State Warrants				Options
Outstanding December 31, 2008			852,321				966,783				20,111,540
Granted			4,878,395				-				-
Exercised			-				(22,100)				-
Cancelled			-				-				(6,825,000	)
Outstanding September 30, 2009			5,730,716				944,683				13,286,540

Note 6 – Office Lease

The Company signed an Office Lease Agreement (the “Agreement”) on April 24, 2008. The Agreement commences on June 1, 2008 and expires June 1, 2011. At September 30, 2009, minimum future lease payments to be paid annually under the three year non-cancellable operating lease for office space are as follows:

  

2009		$	6,820
2010			27,570
2011			11,573
		$	45,963

 

 

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Note 7 – Related Party Transaction

3DIcon engaged the law firm of Newton, O’Connor, Turner & Ketchum as its outside corporate counsel since 2005. John O’Connor, a director of 3DIcon, is the Chairman of Newton, O’Connor, Turner & Ketchum.

Martin Keating, the Chairman and major shareholder, has advanced the company $25,642 and is owed an additional $1,772 in unreimbursed business expenses at September 30, 2009.  Currently there are no specific terms for repayment.

Note 8 – Incentive Stock Plan

In August 2007, the Company established 3DIcon Corporation 2007 Incentive Stock Plan (the "Plan"). The Plan is designed to retain directors, executives and selected employees and consultants and reward them for making major contributions to the success of the Company. These objectives are accomplished by making long-term incentive awards under the Plan thereby providing Participants with a proprietary interest in the growth and performance of the Company. The total number of shares of stock which may be purchased or granted directly by options, stock awards or restricted stock purchase offers, or purchased indirectly through exercise of options granted under the Plan shall not exceed eight million (8,000,000) shares.  The shares are included in a registration statement filed August 7, 2007, which registered an aggregate of fifteen million shares.

The Company’s Incentive Stock Plan was amended in February 2009 and September 2009 to increase the number of shares available by thirty-five million (35,000,000) and fifty million seven hundred thirty-seven thousand one hundred fifteen (50,737,115), respectively.  Shares totaling 38,010,351 and 1,162,281 were issued from the Plan during the nine months ended September 30, 2009 and 2008, for services rendered to the Company. There are currently 50,917,791 shares available for issuance under the plan.

Note 9 – OCAST Grant

The Oklahoma Center for the Advancement of Science and Technology (OCAST) approved the Company’s application for funding of a matching grant titled 800 Million Voxels Volumetric Display, on November 19, 2008.  The two-year matching grant, totaling $299,932, has a start date of January 1, 2009.  The award is for a maximum of $149,940 for 2009 and the remainder for 2010.  Funding beyond 2009 is contingent upon the Company obtaining matching funds, satisfactory performance evaluation and the availability of funds.  The Company has received $23,403 in matching funds from the grant for the nine-month period ended September 30, 2009.

 Note 10 – Subsequent Events

We have evaluated subsequent events after the balance sheet date of September 30, 2009 through the time of the filing with the Securities Exchange Commission on November 16, 2009 which is the date the financial statements were issued.

 

SRA Modification #2 to Repayment Plan Agreement

 

Pursuant to  the Modification #2 To the Repayment Plan Agreement (“the Agreement”)  signed October 30, 2009, 12, 2009, between the Company  (“Sponsor”), and the University of Oklahoma, (the “University”) the parties modified the Repayment Plan Agreement dated May 12, 2009, and the Modification to Repayment Plan Agreement dated August 28, 2009.  Under the terms of the Agreement, the terms of the Modification to Repayment Plan Agreement dated August 28, 2009 are completely superseded by the terms of this Modification #2 to the Repayment Plan Agreement.

 

To date the Sponsor has met its payment obligations under the Repayment Plan Agreement through July 31, 2009. Accordingly, Sponsor shall pay the University as follows:

 

A. Sponsor shall pay University $35,000 on or before October 30, 2009.

 

In order to retire the outstanding debt of $525,481, Sponsor shall make payments to the University no less than quarterly for an amount equal to 22.5% of any funding received by Sponsor. Eligible funding shall include all revenues, investments in the Company, funding from current sources or other funding, provided, however, that grants or other similar funding with specific allocation to designated research and development projects shall be excluded from such calculation. The first quarter shall commence November 1, 2009. Quarterly payments shall be made within thirty (30) days of the end of each quarter. Accordingly, the first quarterly payment is due to the University on February 2, 2010. For transparency purposes, Sponsor shall provide its financial statements to the University immediately at the end of each quarter. These repayment terms shall remain in effect until the outstanding debt is retired. The University has the right at its sole discretion to request an independent audit of Sponsor’s financial statement the cost of which shall be borne solely by Sponsor.

 

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B. In addition to the amounts due and owing as noted above, the additional $290,000 owed to the University, is secured by 4,264,706 shares of 3DICON rule 144 stock priced at $.068, the closing price on Tuesday, October 14, 2008. The collateral shares representing the amount of $290,000 were delivered to the University on June 30, 2009. Shares may be repurchased from the University by the Company for: (i) the price per share rate at the time the collateral shares were issued if such a purchase occurs by September 30, 2009, or (ii) whichever is greater between the price per share rate at the time the collateral shares were issued or market price per share, if such purchase occurs after September 30, 2009.

 

Breach of Repayment Terms: Should Sponsor fail to report revenue or fail to timely pay any of the quarterly amounts owed above, Sponsor acknowledges and agrees that University, immediately and without notice or opportunity to cure, may terminate any or all existing agreements between the parties, including but not limited to, the Exclusive License Agreement, the Facilities/Resources Use Agreement, and the 2009 SRA. Any clauses contained within any of those agreements which conflict with the University’s right to immediately terminate any of the agreements for failure to pay as noted herein are superseded by this Repayment Plan Agreement. Sponsor recognizes that termination of a license agreement with the University shall forfeit Sponsor’s rights to any or all intellectual property licensed to it under the terminated license.

 

Debentures payable

In accordance with the terms of the Second Debenture, an event of default occurs if the common stock of the Company trades at a price per share of $0.21 or lower. The trading price was at $0.21 or lower on several occasions subsequent to September 30, 2009.  On each of the occasions Golden State, by separate letter agreements, agreed that the occasions did not constitute a default and thereby waived the default provision for the occasions.

Subsequent to September 30, 2009 Golden State converted $20,000 of the 6.25% convertible debenture into 2,985,075 shares of common stock at $0.0067 per share under the terms of the Securities Purchase Agreements.

Common stock and paid- in capital

Vivek Bhaman, the former president of the Company, was issued 7,172,688 shares of common stock valued at $40,000 as payment under the terms of the Separation Agreement.   Additionally, common shares totaling 6,284,598 were issued to vendors in payment of $36,500 for services.

 

 

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

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Plan of Operation

Background:

The Company is engaged in the development of 360 o volumetric imaging and display technology, specifically in the areas identified by the initial in-depth investigation conducted by the University of Oklahoma (OU or University). The identified areas are two major complementary areas of technology that comprise the spectrum of the solution and application (1) a means of recording 3D objects as digital holographic data elements (capture); and (2) a means of reconstructing and displaying the 3D images (display).

Based on the investigation as well as review of existing patents and technologies, it was concluded that the area of 3-D image capture and recording had multiple solutions and technologies that adequately served the market. Therefore our primary area of focus is to develop products and intellectual property in the reconstruction and display of 3D images where we see the most opportunity. We aim to establish strategic partnerships with the assignees or license holders of existing 3D recording technologies as well as integrate our technologies with existing solutions.

The existing products reviewed can generally be broken down into two broad categories: stereoscopic - those that use flat-panels to implement 3D displays on 2D screens, and those that implement volumetric 3D displays. The flat-panel approaches, as previously noted, do not support 3DIcon’s planned embodiment of the technology. However, the application space of volumetric 3D displays supports the Company vision and appears to offer major opportunities for further technology development and creation of intellectual property through the University of Oklahoma, to which 3DIcon will have exclusive world-wide rights.

The research team at OU has been working to integrate open source image capture applications as well as to establish 3D image capture systems.

We continue to build intellectual property through the University of Oklahoma, to which 3DIcon has exclusive rights and engage in product research and development both directly related to the display as well as by-product technologies.

Current Activities and Operations

Currently the Company is pursuing the research and development of volumetric 3-D display technology through the Sponsored Research Agreement (“SRA”) with the University of Oklahoma (“OU”). Our efforts are focused on the technological approach for volumetric display which has been developed into a proof-of-concept system.

 

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Static Volume Display Technology: Also known as CSpace™, 3DIcon has produced the first non-mechanical, 360-degree, multi-view, high-resolution volumetric display. A prototype was demonstrated during September 2008, when a 3D image was created within a proprietary volumetric media (also called projection space or image matrix). This technology incorporates existing and rapidly evolving image projection technologies, such as DLP®/DMD technology from Texas Instruments, allowing 3DIcon to pursue full-color, full-motion 3D visualization, in harmony with 3DIcon’s vision for product development.

We have also released a software product called Pixel Precision™. The current version of the software is 2.0. We plan to continue to pursue this market and provide versions and variations of this software. The plans include enhancements to the functionality as well as variants to address additional opportunities.

We have signed a sales and distribution agreement with Digital Light Innovations (DLi) for the sales, marketing and first level support of the Pixel Precision™ software. Through DLi and its sub-distributors the software is being marketed in the United States as well as in Europe and Asia.

 

The Oklahoma Center for the Advancement of Science and Technology (“OCAST”) approved our application for funding of a matching grant titled 800 Million Voxels Volumetric Display, on November 19, 2008.  The two-year matching grant totals $299,932.  The award is for a maximum of $149,940 for the calendar year 2009 and the remainder for the calendar year 2010.  Funding beyond 2009 is contingent upon satisfactory performance evaluation and the availability of funds.

Progress on Research and Development Activities

The research team at OU filed two new patent applications in the first quarter of 2008 and converted one from a provisional to a utility filing.

Under the aegis of the SRA, the University has filed the following Patent Applications. The Utility Patents have been converted and consolidated from the previously filed Provisional Applications.

Description of Provisional Patent Application as Filed		Description of Utility Patent Application Filing (Combined)		Date of Filing
Swept Volume Display		Swept Volume Display		September 2006
Colorful Translation Light Surface 3D Display		Light Surface Display for		April 2007
Colorful Translation 3D Volumetric Display		Rendering Three-Dimensional
3D Light Surface Display		Image (Combined)
Volumetric Liquid Crystal Display		Volumetric Liquid Crystal Display		April 2007
		for Rendering Three-Dimensional
		Image (Combined)
Computer System Interaction with DMD		Computer System Interaction with DMD		January 2008
Virtual Moving Screen for Rendering Three Dimensional Image		Utility Patent Application to be filed		January 2008 (Provisional)
Optically Controlled Light Emitting…and System for Optically Written 2D and 3D Displays		Utility Patent Application to be filed		April 2008 (Provisional)

The Company has also filed its own provisional patent for a new display screen which it believes has significant advantages and market potential.

Further, we are taking steps to explore areas that may be related to assist in the protection of intellectual property assets. In addition, we have begun the process of applying for trademarks related to our 3D technologies.

Our research and development objectives for the 2009 calendar year are as follows. The work will mainly be done by researchers, faculty and selected graduate or doctoral level students at the University of Oklahoma with oversight by 3DIcon personnel:

 

 

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I. Static Volumetric Display (CSpace™)

·

Continue work on development of blue and red up-conversion materials.

·

Synthesize near-transparent projection media suitable for dispersion of display materials.

·

Investigate the use of additional technologies for development of image space that enhance the commercialization of the technology. Dr. Hakki Refai has begun collaboration with parties outside of OU to explore alternate material development strategies.

·

Demonstrate improvements in optical properties for transparent projection materials for Static Volumetric Display and Nano-materials

II. By-Product Technologies

·

Continue to generate revenue from Pixel Precision™ the DMD Control Software for DMD Application development markets

·

Develop next generation of Pixel Precision™ software for controlling multiple DMDs as well as for controlling the next generation of the DMD-Discovery™ series

Support Pixel Precision™ for the Discovery 4000 series (D4000).

III. New 3D Technologies

·

Continue to pursue new 3D opportunities across a broad technological spectrum, with the ultimate goal of the creation of a “free space” 3D display (i.e., one without a visible containment vessel).