T3M (TTTM) 10-Q 2010 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2010

OR

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

For the Transition Period From                    To                    

Commission File Number 333-150888

T3 MOTION, INC.

(Exact name of registrant as specified in its charter)

Delaware	20-4987549
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
2990 Airway Avenue, Suite A	92626
Costa Mesa, California	(Zip Code)
(Address of principal executive offices)

(714) 619-3600
(Registrant’s telephone number, including area code)

     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 the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESþ NOo

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESo NOo

     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):

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOþ

     As of November 15, 2010, the number of shares outstanding of the Registrant’s Common Stock, par value $0.001 per share was 48,558,462.

T3 MOTION, INC.
INDEX TO FORM 10-Q
September 30, 2010

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009		3
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)		4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (unaudited)		5
Notes to the Condensed Consolidated Financial Statements (unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		29
Item 4T. Controls and Procedures		29
PART II. OTHER INFORMATION		32
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 5. Other Information		32
Item 6. Exhibits		33
Signatures		33
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

T3 MOTION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2010			2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	40,966		$	2,580,798
Restricted cash		10,000			—
Accounts receivable, net of allowance of $37,000 and $37,000, respectively		486,806			747,661
Related party receivables		46,392			35,658
Inventories		1,342,170			1,169,216
Prepaid expenses and other current assets		310,323			161,997
Total current assets		2,236,657			4,695,330
Property and equipment, net		638,464			868,343
Deposits		934,374			495,648
Total assets	$	3,809,495		$	6,059,321
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,187,909		$	872,783
Accrued expenses		1,172,135			1,064,707
Related party payables		610,000			104,931
Note payable		393,468			—
Derivative liabilities		9,846,897			11,824,476
Related party notes payable, net of debt discount		3,350,715			1,836,837
Total liabilities		16,561,124			15,703,734
Stockholders’ deficit:
Preferred stock, $0.001 par value; 100,000,000 shares authorized; 11,502,563 and 12,347,563 shares issued and outstanding, respectively		11,503			12,348
Common stock, $0.001 par value; 150,000,000 shares authorized; 48,558,462 and 44,663,462 shares issued and outstanding, respectively		48,559			44,664
Additional paid-in capital		27,598,677			23,356,724
Accumulated deficit		(40,414,711	)		(33,062,174	)
Accumulated other comprehensive income		4,343			4,025
Total stockholders’ deficit		(12,751,629	)		(9,644,413	)
Total liabilities and stock holders’ deficit	$	3,809,495		$	6,059,321

See accompanying notes to condensed consolidated financial statements

3

T3 MOTION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net revenues	$	1,047,573		$	1,165,859		$	3,625,531		$	3,408,826
Cost of net revenues		915,922			1,224,988			3,265,195			3,947,002
Gross profit (loss)		131,651			(59,129	)		360,336			(538,176	)
Operating expenses:
Sales and marketing		435,562			486,127			1,305,819			1,483,281
Research and development		316,759			364,258			1,069,226			963,119
General and administrative		813,786			1,119,985			2,730,770			3,460,171
Total operating expenses		1,566,107			1,970,370			5,105,815			5,906,571
Loss from operations		(1,434,456	)		(2,029,499	)		(4,745,479	)		(6,444,747	)
Other income (expense):
Interest income		54			5			1,281			2,490
Other income, net		1,238,138			633,985			3,113,919			4,862,922
Interest expense		(1,066,047	)		(874,316	)		(2,759,158	)		(2,060,986	)
Total other income (expense), net		172,145			(240,326	)		356,042			2,804,426
Loss before provision for income tax		(1,262,311	)		(2,269,825	)		(4,389,437	)		(3,640,321	)
Provision for income tax		—			—			800			800
Net loss		(1,262,311	)		(2,269,825	)		(4,390,237	)		(3,641,121	)
Deemed dividend to preferred stockholders		(689,109	)		—			(2,962,300	)		—
Net loss attributable to common stockholders	$	(1,951,420	)	$	(2,269,825	)	$	(7,352,537	)	$	(3,641,121	)
Other comprehensive income (loss):
Foreign currency translation income (loss)		(206	)		(2,857	)		318			(3,175	)
Comprehensive loss	$	(1,951,626	)	$	(2,272,682	)	$	(7,352,219	)	$	(3,644,296	)
Net loss attributable to common stockholders per share:
Basic	$	(0.04	)	$	(0.05	)	$	(0.16	)	$	(0.08	)
Diluted	$	(0.04	)	$	(0.05	)	$	(0.16	)	$	(0.08	)
Weighted average number of common shares outstanding:
Basic		48,553,897			44,563,460			47,393,938			44,384,988
Diluted		48,553,897			44,563,460			47,393,938			44,384,988

See accompanying notes to condensed consolidated financial statements

4

T3 MOTION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,390,237	)	$	(3,641,121	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense		—			10,000
Depreciation and amortization		273,524			273,603
Gain on sale of fixed asset		(7,500	)		—
Warranty expense		77,144			123,902
Stock compensation expense		647,098			1,260,866
Change in fair value of derivative liabilities		(3,095,754	)		(4,862,598	)
Investor relations expense		10,000			80,000
Amortization of debt discounts		2,352,658			1,662,091
Change in operating assets and liabilities:
Accounts and other receivables, net		268,355			498,623
Inventories		(172,954	)		813,243
Prepaid expenses and other current assets		(148,326	)		31,789
Deposits		31,873			(3,886	)
Restricted cash		(10,000	)		—
Accounts payable and accrued expenses		368,278			154,415
Related party payables		(104,931	)		—
Net cash used in operating activities		(3,900,772	)		(3,599,073	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans/advances to related parties		(28,795	)		—
Purchases of property and equipment		(43,645	)		(10,084	)
Repayment of loans/advances to related parties		18,062			4,346
Net cash used in investing activities		(54,378	)		(5,738	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans / advances from related parties		610,000			—
Payments on note payable		(100,000	)		—
Recission of common stock		(250,000	)		—
Proceeds from the sale of preferred stock, net of issuance costs		1,155,000			1,250,000
Proceeds from related party note receivable		—			939,962
Net cash provided by financing activities		1,415,000			2,189,962
Effect of exchange rate on cash		318			(3,175	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(2,539,832	)		(1,418,024	)
CASH AND CASH EQUIVALENTS — beginning of period		2,580,798			1,682,741
CASH AND CASH EQUIVALENTS — end of period	$	40,966		$	264,717

See accompanying notes to condensed consolidated financial statements

5

T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) —Continued

	Nine Months Ended September 30,
	2010		2009
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	41,335	$	14,096
Income taxes	$	800	$	800
Supplemental disclosure of non cash activities:
Issuance of common stock for related party payables	$	—	$	1,536,206
Conversion of related party payable to related party note payable	$	—	$	498,528
Conversion of accounts payable to note payable	$	—	$	199,829
Cumulative effect to retained earnings due to adoption of accounting standard	$	—	$	1,981,338
Cumulative effect to additional paid-in capital due to adoption of accounting standard	$	—	$	4,013,085
Cumulative effect to debt discount due to adoption of accounting standard	$	—	$	859,955
Conversion option of preferred stock and warrants issued with preferred stock recorded as derivative liabilities	$	1,401,360	$	—
Reclassification of derivative liability to equity due to conversion of preferred stock to common stock	$	1,121,965	$	—
Debt discount and warrant liability recorded upon issuance of warrants	$	838,779	$	851,277
Amortization of preferred stock discount related to conversion feature and warrants	$	2,962,300	$	—
Conversion of preferred stock to common stock	$	4,000	$	—
Deposits for equipment	$	470,599	$	—
Receivable for sale of equipment	$	7,500	$	—

See accompanying notes to condensed consolidated financial statements

6

T3 MOTION, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 — DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     T3 Motion, Inc. (the “Company”) was organized on March 16, 2006, under the laws of the state of Delaware. The Company develops and manufactures T3 Series vehicles, which are electric three-wheel stand-up vehicles that are directly targeted to the public safety and private security markets. T3 Series have been designed to tackle a host of daily professional functions, from community policing to patrolling of airports, military bases, campuses, malls, public event venues and other high-density areas. The Company continues to design and introduce products based on modularity of the sub systems the Company has created. In September 2009, the Company introduced the CT Micro Car, the (L.S.V./N.E.V.) four-wheeled electric car, and in June 2010, the Company introduced the GT3, a plug-in hybrid consumer vehicle.

Interim Unaudited Condensed Consolidated Financial Statements

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Securities and Exchange Commission (“SEC”) regulations for interim financial information. The principles for condensed interim financial information do not require the inclusion of all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair presentation of the consolidated results for the interim periods. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the entire fiscal year.

     The Company has evaluated subsequent events through the filing date of this quarterly report on Form 10-Q, and determined that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes thereto other than as disclosed in the accompanying notes.

Going Concern

     The Company’s condensed consolidated financial statements are prepared using the accrual method of accounting in accordance with GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has sustained operating losses since its inception (March 16, 2006) and has used substantial amounts of working capital in its operations. Management has been and is continuing to implement its cost reduction strategy for material, production and service costs. Until management achieves its cost reduction strategy, is able to generate sales to realize the benefits of the strategy over the next year and sufficiently increase cash flow from operations, the Company will require additional capital to meet its working capital requirements, debt service, research and development, capital requirements and compliance requirements. Further, at September 30, 2010, the Company has an accumulated deficit of $40,414,711, a working capital deficit of $14,324,467 and a cash balance of $40,966. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

     Management believes that its current sources of funds and current liquid assets will allow the Company to continue as a going concern through at least November 30, 2010. During 2010, the Company has obtained equity financing from third parties of approximately $1,155,000, has received advances from shareholders of $1,810,000 and refinanced the outstanding balance of $1.0 million related to the note to Immersive Media Corporation (“Immersive”). The board of directors has allowed for Ki Nam, the Company’s CEO and chairman of the board to loan the company up to $2.0 million and an additional shareholder to loan the Company up to $1.0 million. The Company plans to raise additional debt and/or equity capital to finance future activities. In light of these plans, management is confident in the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

7

Reclassifications

     Certain amounts in the 2009 financial statements have been reclassified to conform with the current year presentation.

Use of Estimates

     The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to; collectibility of receivables, recoverability of long-lived assets, realizability of inventories, warranty accruals, valuation of stock-based transactions, valuation of derivative liabilities and realizability of deferred tax assets. The Company bases its 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 for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Cash and Cash Equivalents

     Cash and cash equivalents consist of all highly liquid investments with original maturities of three months or less.

Restricted Cash

     Under a credit card processing agreement with a financial institution, the Company is required to maintain a security reserve deposit as collateral. The amount of the deposit is at the discretion of the financial institution and as of September 30, 2010 was $10,000.

Concentrations of Credit Risk

     As of September 30, 2010 and December 31, 2009, one customer accounted for approximately 12% and two customers accounted for approximately 11% of total accounts receivable, respectively. Two customers accounted for approximately 23% and one customer accounted for approximately 14% of net revenues for the three months ended September 30, 2010 and 2009, respectively, and no single customer accounted for more than 10% of net revenues for the nine months ended September 30, 2010 and 2009.

     As of September 30, 2010 and December 31, 2009, two vendors accounted for approximately 11% and 12%, respectively, of total accounts payable. One vendor accounted for approximately 23% and 18% of purchases for the three months ended September 30, 2010 and 2009, respectively, and no single vendor accounted for more than 10% of purchases for the nine months ended September 30, 2010 and 2009.

Fair Value of Financial Instruments

     The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, related party receivables, accounts payable, accrued expenses, related party payables, notes payable, related party notes payable and derivative liabilities. The carrying value for all such instruments, except related party notes payable and derivative liabilities, approximates fair value due to the short-term nature of the instruments. The Company cannot determine the fair value of its related party notes payable due to the related party nature and instruments similar to the notes payable could not be found. The Company’s derivative liabilities are recorded at fair value (see Note 5).

8

Revenue Recognition

     The Company recognizes revenues when there is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed or determinable and collectibility of the resulting receivable is reasonably assured.

     For all sales, the Company uses a binding purchase order as evidence of an arrangement. Delivery occurs when goods are shipped to customers. The Company ships with either FOB Shipping Point or Destination terms. Shipping documents are used to verify delivery and customer acceptance. For FOB Destination, the Company records revenue when proof of delivery is confirmed by the shipping company. The Company assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund. The Company offers a standard product warranty to its customers for defects in materials and workmanship for a period of one year or 2,500 miles, whichever comes first (see Note 9), and has no other post-shipment obligations. The Company assesses collectibility based on the creditworthiness of the customer as determined by evaluations and the customer’s payment history.

     All amounts billed to customers related to shipping and handling are classified as net revenues, while all costs incurred by the Company for shipping and handling are classified as cost of net revenues.

     The Company does not enter into contracts that require fixed pricing beyond the term of the purchase order. All sales via distributor agreements are accompanied by a purchase order. Further, the Company does not allow returns of unsold items.

     The Company has executed various distribution agreements whereby the distributors agreed to purchase T3 Series packages (one T3 Series, two power modules, and one charger per package). The terms of the agreements require minimum re-order amounts for the vehicles to be sold through the distributors in specified geographic regions. Under the terms of the agreements, the distributor takes ownership of the vehicles and the Company deems the items sold at delivery to the distributor.

Share- Based Compensation

     The Company maintains a stock option plan (see Note 8) and records expenses attributable to the stock option plan. The Company amortizes stock-based compensation from the date of grant on a straight-line basis over the requisite service (vesting) period for the entire award using the Black-Scholes-Merton option pricing model.

     The Company accounts for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with the accounting standards. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

     In accordance with the accounting standards, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid expense in its consolidated balance sheets.

     Upon the exercise of common stock options, the Company issues new shares from its authorized shares.

9

Beneficial Conversion Features and Debt Discounts

     The convertible features of convertible notes provides for a rate of conversion that is below market value. Such feature is normally characterized as a “beneficial conversion feature” (“BCF”). The relative fair values of the BCF have been recorded as discounts from the face amount of the respective debt instrument. The Company is amortizing the discount using the effective interest method through maturity of such instruments. The Company will record the corresponding unamortized debt discount related to the BCF as interest expense when the related instrument is converted into the Company’s equity securities.

Business Segments

     The Company currently only has one reportable business segment due to the fact that the Company derives its revenue primarily from one product. The revenue from domestic and international sales are shown below:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2010		2009		2010		2009
	(unaudited)				(unaudited)
Net revenues:
T3 Domestic	$	677,918	$	1,122,407	$	3,078,658	$	2,715,653
T3 International		369,655		43,452		546,873		693,173
Total net revenues	$	1,047,573	$	1,165,859	$	3,625,531	$	3,408,826

NOTE 2 — INVENTORIES

     Inventories consist of the following:

	September 30,		December 31,
	2010		2009
	(unaudited)
Raw materials	$	1,179,414	$	959,909
Work-in-process		103,418		91,013
Finished goods		59,338		118,294
	$	1,342,170	$	1,169,216

NOTE 3 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

     Prepaid expenses and other current assets consist of the following:

	September 30,		December 31,
	2010		2009
	(unaudited)
Prepaid inventory	$	—	$	64,744
Vendor deposits		194,883		47,946
Prepaid expenses and other current assets		115,440		49,307
	$	310,323	$	161,997

10

NOTE 4 — RELATED PARTY NOTES PAYABLE

     Related party notes payable, net of discounts consisted of the following:

	September 30,		December 31,
	2010		2009
	(unaudited)
Note payable to Immersive Media Corp., 15% interest rate, net of discount of $202,216 and $41,265, respectively	$	797,784	$	958,735
Note payable to Vision Opportunity Master Fund, Ltd., 10% interest rate, net of discount of $947,068 and $2,621,898, respectively		2,552,931		878,102
	$	3,350,715	$	1,836,837

Immersive Note

     On December 31, 2007, the Company issued a 12% secured promissory note in the principal amount of $2,000,000 to Immersive, one of the Company’s shareholders. On March 31, 2008, the Company repaid $1,000,000 of the principal amount. The note was originally due December 31, 2008 and is secured by all of the Company’s assets.

     In connection with the issuance of the promissory note, the Company issued a warrant to Immersive for the purchase of 697,639 shares of the Company’s common stock at an exercise price of $1.08 per share. The warrants are immediately exercisable. The Company recorded a debt discount of $485,897 related to the fair value of the warrants, which was calculated using the Black-Scholes Merton option pricing model. The debt discount was amortized to interest expense over the original term of the promissory note.

     On December 19, 2008, the Company amended the terms of the promissory note with Immersive to, among other things, extend the maturity date of the outstanding balance of $1,000,000 from December 31, 2008 to March 31, 2010. In the event the Company issues common stock or common stock equivalents for cash consideration in a subsequent financing at an effective price per share less than the original conversion price, the conversion price will reset.

     In December 2009, the Company issued 2,000,000 shares of its Series A Convertible Preferred Stock in connection with an equity offering (see Note 6). As a result of the December 2009 equity offering, the Company recorded the estimated fair value of the conversion feature of $1,802 as a debt discount and amortized such amount to interest expense through the maturity of the note on March 31, 2010. The Company recorded the corresponding amount as a derivative liability and any change in fair value of the conversion feature was recorded through earnings.

     As consideration for extending the terms of the promissory note in December 2008, the Company agreed to issue warrants to Immersive for the purchase of up to 250,000 shares of the Company’s common stock exercisable at $2.00, subject to adjustment. During the three months ended March 31, 2010, the Company issued 50,000 warrants under the agreement. The Company recorded a debt discount of $15,274 during the three months ended March 31, 2010 and a total debt discount of $155,938 based on the estimated fair value of the 250,000 warrants issued, and amortized approximately $0, $8,547, $56,539 and $56,274 of the discount to interest expense during the three and nine months ended September 30, 2010 and 2009, respectively. As a result of the December 2009 equity offering, the exercise price of the warrants was adjusted to $0.70 per share (see Note 5 for a discussion on derivative liabilities).

     As of March 31, 2010, the debt discount related to the fair value of the warrants issued and the derivative liability related to the conversion feature were fully amortized. On March 31, 2010, Immersive agreed to extend the note to April 30, 2010. As consideration for extending the note, the Company agreed to exchange Immersive’s Class A warrants to purchase up to 697,639 shares of the Company’s common stock at an exercise price of $1.08 per share

11

and its Class D warrants to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $2.00 per share, for Class G Warrants to purchase up to 697,639 and 250,000 shares of the Company’s common stock, respectively, each with an exercise price of $0.70 per share. The Company recorded a debt discount and derivative liability of $1,898 based on the incremental increase in the estimated fair value of the re-pricing of the 250,000 warrants. The Company recorded an additional debt discount and derivative liability in the amount of $216,811 based on the estimated fair value of the 697,639 warrants issued. The total debt discount was amortized in April 2010.

     The note and accrued interest were not repaid in full by April 30, 2010. As a result, per the agreement, the maturity date was extended to March 31, 2011 and the Company issued Class G Warrants to purchase up to 1,040,000 shares of the Company’s common stock at an exercise price of $0.70 per share. The interest rate compounded annually was amended to 15.0%. The Company recorded interest expense of $37,500 and $102,500 for the three and nine months ended September 30, 2010, respectively, and recorded accrued interest expense of $102,500 as of September 30, 2010. The terms of the Class G Warrants are substantially similar to prior Class G warrants issued by the Company. The Company recorded a debt discount of $329,120 related to the fair value of the warrants issued. Amortization of the debt discount was $80,013 and $126,904, for the three and nine months ended September 30, 2010, respectively.

Vision Opportunity Master Fund, Ltd. Bridge Financing

     On December 30, 2009, the Company sold $3,500,000 in debentures and warrants to Vision Opportunity Master Fund, Ltd. (“Vision”) through a private placement pursuant to a Securities Purchase Agreement (the “Purchase Agreement”). The Company issued to Vision, 10.0% Secured Convertible Debentures (“Debentures”), with an aggregate principal value of $3,500,000.

     The Debentures accrue interest on the unpaid principal balance at a rate equal to 10% per annum the maturity date is December 30, 2010. At any time after the 240th calendar day following the issue date, the Debentures are convertible into “units” of Company securities at a conversion price of $1.00 per unit, subject to adjustment. Each “unit” consists of one share of the Company’s Series A Convertible Preferred Stock and a warrant to purchase one share of the common stock. As a result of the 240^th day passing the Company recorded an additional debt discount and derivative liability in the amount of $275,676 for the three and nine months ended September 30, 2010 (see Note 5). The Company may redeem the Debentures in whole or part at any time after June 30, 2010 for cash in an amount equal to 120% of the principal amount plus accrued and unpaid interest and certain other amounts due in respect of the Debenture. Interest on the Debentures is payable in cash on the maturity date or, if sooner, upon conversion or redemption of the Debentures. In the event of default under the terms of the Debentures, the interest rate increases to 15.0% per annum. The Company recorded interest expense of $87,000 and $265,000 for the three and nine months ended September 30, 2010, respectively, and had accrued interest of $265,000 as of September 30, 2010.

     The Purchase Agreement provides that during the 18 months following December 30, 2009, if either the Company or its wholly owned subsidiary, T3 Motion, Ltd., a company incorporated under the laws of the United Kingdom (the “Subsidiary”), issues common stock, common stock equivalents for cash consideration, indebtedness, or a combination of such securities in a subsequent financing (the “Subsequent Financing”), Vision may participate in such Subsequent Financing in up to an amount equal to Vision’s then percentage ownership of its common stock.

     The Purchase Agreement also provides that from December 30, 2009 to the date that the Debentures are no longer outstanding, if the Company effects a Subsequent Financing, Vision may elect, in its sole discretion, to exchange some or all of the Debentures then held by Vision for any securities issued in a Subsequent Financing on a “$1.00 for $1.00” basis (the “Exchange”); provided, however, that the securities issued in a Subsequent Financing will be irrevocably convertible, exercisable, exchangeable, or resettable (or any other similar feature) based on the price equal to the lesser of (i) the conversion price, exercise price, exchange price, or reset price (or such similar price) in such Subsequent Financing and (ii) $1.00 per share of common stock. Vision is obligated to elect the Exchange on a $0.90 per $1.00 basis (not a $1.00 for $1.00 basis) if certain conditions regarding the Subsequent Financing and other matters are met.

     Also pursuant to the Purchase Agreement, Vision received Series G Common Stock Purchase Warrants (the “Warrants”). Pursuant to the terms of Warrants, Vision is entitled to purchase up to an aggregate of 3,500,000 shares

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of our common stock at an exercise price of $0.70 per share, subject to adjustment. The Warrants have a term of five years after the issue date of December 30, 2009.

     The Subsidiary entered into a Subsidiary Guarantee (“Subsidiary Guarantee”) for its benefit to guarantee to Vision the obligations due under the Debentures. The Company and the Subsidiary also entered into a Security Agreement (“Security Agreement”) with Vision, under which it and the Subsidiary granted to Vision a security interest in certain of the Company’s and the Subsidiary’s property to secure the prompt payment, performance, and discharge in full of all obligations under the Debentures and the Subsidiary Guarantee.

     The debt discount was allocated between the warrants and the conversion feature of $1,077,652 and $1,549,481, respectively, for the year ended December 31, 2009. The discount is being amortized over the term of the Debentures. The Company amortized $842,122 and $1,950,506 for the three and nine months ended September 30, 2010, respectively. The remaining unamortized warrant and beneficial conversion feature values are recorded as a discount on the Debentures in the accompanying condensed consolidated balance sheets.

     During the three and nine months ended September 30, 2009, the Company amortized $570,238 and $1,363,848, respectively, of interest expense related to a debt discount on a different note to Vision that was ultimately exchanged for shares of the Company’s Preferred Stock.

Lock-Up Agreement

     In connection with the Vision financing, Ki Nam, the Chief Executive Officer and Chairman of the Board of Directors of the Company agreed not to transfer, sell, assign, pledge, hypothecate, give, create a security interest in or lien on, place in trust (voting trust or otherwise), or in any other way encumber or dispose of, directly or indirectly and whether or not voluntarily, without express prior written consent of Vision, any of the common stock equivalents of the Company until August 27, 2010; provided, however, that commencing on August 27, 2010, he may sell up to 1/24th of the shares of common stock of the Company in each calendar month through February 28, 2011.

NOTE 5 — DERIVATIVE LIABILITIES

     During the three and nine months ended September 30, 2010, the Company recorded additional debt discounts and derivative liabilities of $275,676 and $838,779, respectively, related to related party notes payable (see Notes 4 and 6).

     During 2010, the Company issued 2,310,000 warrants related to the issuance of preferred stock (see Note 6). The Company estimated the fair value of the warrants of $716,236 at the dates of issuance and recorded a reduction in additional paid-in capital and a derivative liability. The change in fair value of the derivative is recorded through earnings at each reporting date.

     During 2010, the Company recorded a discount on the issuance of preferred stock and derivative liability of $685,124 related to the anti-dilution provision of the conversion feature of the preferred stock issued. The discount will be recorded as a deemed dividend with a reduction to retained earnings during the 24-month period that the anti-dilution provision is outstanding. The change in fair value of the derivative is recorded through earnings at each reporting date. For the three and nine months ended September 30, 2010, the amortization of the discount related to the preferred stock anti-dilution provision was $689,109 and $1,862,558, respectively, which was recorded as a deemed dividend.

     On March 22, 2010, one of the Company’s preferred shareholders exercised their option to convert their 2,000,000 preferred shares into 4,000,000 shares of common stock (see Note 6). As a result of the conversion, the Company reclassified the balance of the derivative liability of $1,121,965 to additional paid-in capital and the balance of the discount of $1,099,742, as a deemed dividend.

     As of September 30, 2010, the unamortized discount related to the conversion feature of the preferred stock was $5,030,918.

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     The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants and embedded conversion features using the Black-Scholes-Merton option pricing model using the following assumptions:

	September 30,
	2010
	(unaudited)
Annual dividend yield		—
Expected life (years)		0.25-5
Risk-free interest rate		0.27%-2.55	%
Expected volatility		79%-123	%

     During the three and nine months ended September 30, 2010 and 2009, the Company recorded other income of $1,228,577, $633,661 $3,095,754, and $4,862,598, respectively, related to the change in fair value of the warrants and embedded conversion options and is included in other income, net in the accompanying condensed consolidated statements of operations.

     The Company determines the fair value of its financial instruments based on a three-level hierarchy for fair value measurements under which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair-value hierarchy:

     Level 1 — Valuations based on unadjusted quoted market prices in active markets for identical securities. Currently the Company does not have any items classified as Level 1.

     Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. Currently the Company does not have any items classified as Level 2.

     Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment. The Company used the Black-Scholes-Merton option pricing model to determine the fair value of the instruments.

     If the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial security’s hierarchy level is based upon the lowest level of input that is significant to the fair value measurement.

     The following table presents the Company’s warrants and embedded conversion options measured at fair value on a recurring basis.

	Level 3		Level 3
	Carrying Value		Carrying Value
	September 30,		December 31,
	2010		2009
	(unaudited)
Embedded conversion options	$	5,963,936	$	8,853,893
Warrants		3,882,961		2,970,583
	$	9,846,897	$	11,824,476
Decrease in fair value	$	3,095,754

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     The following table provides a reconciliation of the beginning and ending balances for the Company’s liabilities measured at fair value using Level 3 inputs (unaudited):

Balance at January 1, 2010	$	11,824,476
Issuance of warrants and conversion option		2,240,140
Reclassification to equity due to conversion of preferred stock		(1,121,965	)
Change in fair value		(3,095,754	)
Balance at September 30, 2010	$	9,846,897

NOTE 6 — EQUITY

Series A Convertible Preferred Stock

     The Company’s Board of Directors has authorized 20,000,000 shares of Series A preferred stock (“Preferred”). Except as otherwise provided in the Series A Certificate or by law, each holder of shares of Preferred shall have no voting rights. As long as any shares of Preferred are outstanding, however, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Preferred, (a) alter or change adversely the powers, preferences, or rights given to the Preferred or alter or amend the Series A Certificate, (b) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to or otherwise pari passu with the Preferred, (c) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Preferred, (d) increase the number of authorized shares of the Preferred, or (e) enter into any agreement with respect to any of the foregoing.

     Each share of Preferred is convertible at any time and from time to time after the issue date at the holder’s option into two shares of the Company’s common stock (subject to beneficial ownership limitations determined by dividing the Stated Value of such share of Preferred by the Conversion Price (each as defined below)).

     Holders of our Preferred are restricted from converting their shares of Preferred to Common Stock if the number of shares of Common Stock to be issued pursuant to such conversion would cause the number of shares of Common Stock beneficially owned by such holder, together with its affiliates, at such time to exceed 4.99% of the then issued and outstanding shares of Common Stock; provided, however, that such holder may waive this limitation upon 61 days’ notice to the Company. The Company has not received any such notice. There are no redemption rights.

     The Conversion Price shall be proportionately reduced for a stock dividend, stock split, subdivision, combination or similar arrangements. The Conversion Price will also be reduced for any sale of common stock (or options, warrants or convertible debt or other derivative securities) at a purchase price per share less than the Conversion Price, subject to certain excepted issuances. The Conversion Price will be reduced to such purchase price if such issuance occurs within the first 12 months of the original issuance date. The Conversion Price will be reduced to a price derived using a weighted-average formula if the issuance occurs after the first 12 months but before the 24 month anniversary of the original issuance date.

     If, at any time while the Preferred is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another person, (B) the Company effects any sale of all or substantially all of its assets in one transaction or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another person) is completed pursuant to which holders of common stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the common stock or any compulsory share exchange pursuant to which the common stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a “Fundamental Transaction”), then, upon any subsequent conversion of Preferred, the holders shall have the right to receive, for each Conversion Share (as defined in Section 1 of the Series A Certificate) that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of common stock.

     On March 22, 2010, one of the Company’s preferred shareholders exercised their option to convert their 2,000,000 preferred shares into 4,000,000 shares of common stock.

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     During 2010, under the terms of the Offering, the Company issued and sold 1,155,000 shares of preferred stock through an equity financing transaction. In connection with the financing, the Company issued warrants to purchase 2,310,000 shares of common stock, exercisable at $0.70 per share. The warrants are exercisable for five years (See Note 5 for additional discussion).

Common Stock

     In September 2008, the Company sold to Piedmont Select Equity Fund (“Piedmont”) 125,000 shares of its common stock at $2.00 per share for an aggregate price of $250,000. In December 2008, the Company entered into a rescission agreement with Piedmont in which it agreed to rescind the Piedmont’s stock purchase so long as affiliates of Piedmont were to purchase at least $250,000 of Company equity securities. In March 2010, two investors affiliated with Piedmont purchased an aggregate of 250,000 shares of the Company’s Series A Preferred Stock at $1.00 per share and were granted warrants to purchase 500,000 shares of Company’s common stock for a purchase price of $250,000. Concurrent with the closing of such offering, the Company rescinded the purchase of the 125,000 shares of common stock. Piedmont delivered the stock certificate for 125,000 shares to the Company and the Company returned the original purchase price of $250,000 to Piedmont.

     On July 21, 2010, the Company issued 20,000 shares of its Common Stock in for investor relations services and recorded expense of $10,000.

NOTE 7 — LOSS PER SHARE

     Basic loss per share is computed by dividing loss applicable to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional common shares were dilutive. Options, warrants and shares associated with the conversion of debt and preferred stock to purchase approximately 51.2 million and 15.3 million shares of common stock were outstanding at September 30, 2010 and 2009, respectively, but were excluded from the computation of diluted earnings per share due to the net losses for the periods.

Net loss per basic and diluted share is computed as follows (unaudited):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net loss	$	(1,262,311	)	$	(2,269,825	)	$	(4,390,237	)	$	(3,641,121	)
Deemed preferred stock dividend		(689,109	)		—			(2,962,300	)		—
Net loss applicable to common stockholders	$	(1,951,420	)	$	(2,269,825	)	$	(7,352,537	)	$	(3,641,121	)
Weighted average number of common shares outstanding:
Basic		48,553,897			44,563,460			47,393,938			44,384,988
Diluted		48,553,897			44,563,460			47,393,938			44,384,988
Net loss per share:
Basic	$	(0.04	)	$	(0.05	)	$	(0.16	)	$	(0.08	)
Diluted	$	(0.04	)	$	(0.05	)	$	(0.16	)	$	(0.08	)

NOTE 8 — STOCK OPTIONS AND WARRANTS

Equity Incentive Plan

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     On August 15, 2007, the Company adopted the Equity Incentive Plan (the “Plan”), under which direct stock awards or options to acquire shares of the Company’s common stock may be granted to employees and nonemployees of the Company. The Plan is administered by the Company’s Board of Directors. The Plan permitted the issuance of up to 7,450,000 shares of the Company’s common stock. Options granted under the Plan vest 25% per year over four years and expire 10 years from the date of grant. The Company is no longer issuing stock awards or options under the Plan.

Stock Option/Stock Issuance Plan

     During 2010, the Company adopted the 2010 Stock Option/Stock Issuance Plan (the “2010 Plan”), under which direct stock awards or options to acquire shares of the Company’s common stock may be granted to employees and nonemployees of the Company. The 2010 Plan is administered by the Company’s Board of Directors. The 2010 Plan permits the issuance of up to 6,500,000 shares of the Company’s common stock. Options granted under the 2010 Plan generally vest 25% per year over four years and expire 10 years from the date of grant.

     In July 2010, the exercise prices of certain outstanding employee stock options previously granted under the 2007 Equity Incentive Plan were amended by the Company’s Board of Directors to have an exercise price of $0.50 per share. The amendments did not change the vesting schedules or any of the other terms of the respective stock options. As a result of the repricing of the options effected by the amendments, the Company will recognize a non-cash charge of $68,578 in expense for the incremental change in fair value of the repriced options. Of the $68,578, the Company recognized $37,087 as stock based compensation for the three and nine months ended September 30, 2010 for the previously vested options. The remainder of the balance, $31,491, related to the unvested options will be amortized over the remaining vesting period of the related options. This repricing affected 24 employees who held 859,000 stock options in July 2010.

Common Stock Options

     The following table sets forth the share-based compensation expense (unaudited):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Stock compensation expense — cost of net revenues	$	6,796	$	29,329	$	43,968	$	95,400
Stock compensation expense — sales and marketing		47,721		84,777		127,229		263,215
Stock compensation expense — research and development		38,078		49,652		99,336		153,897
Stock compensation expense — general and administrative		138,231		260,803		376,565		748,354
Total stock compensation expense	$	230,826	$	424,561	$	647,098	$	1,260,866

     A summary of common stock option activity under the Plans for the nine months ended September 30, 2010 is presented below (unaudited):

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Life		Value
Options outstanding — January 1, 2010		6,033,188		$	0.77
Options granted		2,910,500		$	0.50
Options exercised		—			—
Options forfeited		(1,856,876	)	$	0.67
Options cancelled		—			—
Total options outstanding — September 30, 2010		7,086,812		$	0.57		8.38	$	—
Options exercisable — September 30, 2010		3,719,854		$	0.63		7.33	$	—
Options vested and expected to vest — September 30, 2010		6,993,594		$	0.57		8.36	$	—
Options available for grant under the 2010 Plan at September 30, 2010		3,639,500

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     The following table summarizes information about stock options outstanding and exercisable at September 30, 2010 (unaudited):

	Options						Options
	Outstanding						Exercisable
			Weighted Average
			Remaining		Weighted				Weighted
Exercise	Number of		Contractual		Average		Number of		Average
Prices	Shares		Life (in years)		Exercise Price		Shares		Exercise Price
$0.50		3,657,520		9.44	$	0.50		485,480	$	0.50
$0.60		2,429,292		7.26	$	0.60		2,234,374	$	0.60
$0.77		1,000,000		7.20	$	0.77		1,000,000	$	0.77
		7,086,812		8.38	$	0.57		3,719,854	$	0.63

     At September 30, 2010, the amount of unearned stock-based compensation currently estimated to be expensed from fiscal 2010 through 2014 related to unvested common stock options is approximately $1.5 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 3.2 years. If there are any modifications or cancellations of the underlying unvested common stock options, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional common stock options or other equity awards.

Warrants

     From time to time, the Company issues warrants to purchase shares of the Company’s common stock to investors, note holders and to non-employees for services rendered or to be rendered in the future (See Notes 4 and 6). Such warrants are issued outside of the Plan. A summary of the warrant activity for the nine months ended September 30, 2010 is presented below (unaudited):

				Weighted-		Weighted-Average
				Exercise		Contractual		Aggregate Intrinsic
	Number of Shares			Price		Life		Value
						(In years)
Warrants outstanding — January 1, 2010		10,746,143		$	0.87		4.89
Warrants granted (See Notes 4 and 6)		4,347,639		$	0.70
Warrants exercised		—			—
Warrants cancelled		(947,639	)	$	0.93
Warrants outstanding and exercisable- September 30, 2010		14,146,143		$	0.73		4.36	$	—

NOTE 9 — COMMITMENTS AND CONTINGENCIES

Warranties

     The Company’s warranty policy generally provides coverage for components of the vehicle, power modules, and charger system that the Company produces. Typically, the coverage period is the shorter of one calendar year or 2,500 miles, from the date of sale. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using estimated information on the nature, frequency, and average cost of claims. Revision to the reserves for estimated product warranties is made when necessary, based on changes in these factors. Management actively studies trends of claims and takes action to improve vehicle quality and minimize claims.

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     The T3 Series vehicle is a front wheel drive all electric vehicle and as such the front fork assembly is the main vehicle drive system. In late 2007, the Company made significant improvements to this drive system by implementing into production a new belt drive system. The system offers greater efficiency and minimizes the need for routine maintenance while improving the overall quality of the vehicle. The belt drive system is standard on new 2008 models and is reverse compatible with all older year models. The Company has agreed to retro-fit existing vehicles that are in service with the new system.

     On June 25, 2008, the Company elected to upgrade or replace approximately 500 external chargers (revision D or older) that were produced due to a chance that the chargers could fail over time. A failed charger could result in degrading the life of the batteries or cause the batteries to be permanently inoperable, or in extreme conditions result in thermal runaway of the batteries. The charges were placed in service between January 2007 and April 2008. The Company is notifying customers informing them of the need for an upgrade and will begin sending out new and/or upgraded chargers (revision E) to replace all existing revision D or older chargers that are in the field. After all the upgrades are complete, any remaining returned chargers will be upgraded to revision E and resold as refurbished units. The Company did not include any potential revenue from re-sales in the estimate. The total costs of upgrading or replacing these chargers are estimated to be approximately $78,000. The Company anticipates that all of the chargers will be upgraded or replaced by December 2010.

     The following table presents the changes in the product warranty accrual for the nine months ended September 30 (unaudited):

	2010			2009
Beginning balance, January 1,	$	235,898		$	362,469
Charged to cost of revenues		77,144			123,902
Usage		(161,864	)		(217,087	)
Ending balance, September 30	$	151,178		$	269,284

Legal Contingency

     Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim(Orange County Superior Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (“Plaintiff”) filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki Nam, the Company’s CEO, and Jason Kim, the Company’s former COO, (“Defendants”) for breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly executed between Plaintiff and T3 Motion, Inc. On August 24, 2009, Defendants filed a Demurrer to the Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against Defendants for breach of contract, fraud and common counts, seeking compensatory damages of $470,599, attorney’s fees, punitive damages, interest and costs. On October 27, 2009, Defendants filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court overruled the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an answer to the First Amended Complaint, and trial was set for July 30, 2010. On or about July 29, 2010, the case was settled in its entirety. T3 agreed to pay compensatory damages, attorneys’ fees and costs totaling $493,468, through monthly payments of $50,000 each, with 6% interest accruing from the date of the settlement. Periodic payments are expected to be made through May 2011. The first payment of $50,000 was made on August 3, 2010 and payments are continuing to be made. At September 30, 2010, the Company recorded the entire settlement amount as a note payable in the accompanying Condensed Consolidated Balance Sheet.

     In the ordinary course of business, the Company may face various claims brought by third parties in addition to the claim described above and may from time to time, make claims or take legal actions to assert the Company’s rights, including intellectual property rights as well as claims relating to employment and the safety or efficacy of the Company’s products. Any of these claims could subject us to costly litigation and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, the insurance carriers may deny coverage or the policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of such awards could have a material adverse effect on the consolidated operations, cash flows

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and financial position. Additionally, any such claims, whether or not successful, could damage the Company’s reputation and business. Management believes the outcome of currently pending claims and lawsuits will not likely have a material effect on the consolidated operations or financial position.

Indemnities and Guarantees

     During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the Company’s officers under which the Company may be required to indemnify such person for liabilities arising out of their employment relationship. In connection with its facility leases, the Company has indemnified its lessors for certain claims arising from the use of the facilities. The duration of these indemnities and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company would be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations and no liability has been recorded for these indemnities and guarantees in the accompanying condensed consolidated balance sheets.

NOTE 10 — RELATED PARTY TRANSACTIONS

     The following reflects the activity of the related party transactions for the respective periods.

Accounts Receivable

     The Company has receivables of $35,722 due from Graphion Technology USA LLC (“Graphion”) related to consulting services rendered and fixed assets sold to them. During the three and nine months ended September 30, 2010 the company sold fixed assets to them for $6,820 to Graphion. Graphion is wholly owned by the Company’s Chief Executive Officer and is under common ownership. The amounts due are non-interest bearing and due upon demand.

     As of September 30, 2010 and December 31, 2009, there were outstanding related party receivables of $10,670 and $6,756, respectively, which primarily relate to receivables due from Mr. Nam for rent at the Company’s operating facility.

Related Party Payables

     The Company purchases batteries and research and development parts and services from Graphion. During the three months ended September 30, 2010 and 2009, the Company had no purchases and purchased $100,000 and $520,278 for the nine months ended September 30, 2010 and 2009, respectively, of parts and services and had an outstanding accounts related party balance of $0 and $104,931 at September 30, 2010 and December 31, 2009, respectively.

     During the nine months ended September 30, 2010, Ki Nam, the Chief Executive Officer, advanced $610,000 to the Company to be used for operating requirements. The Company is currently in the process of negotiating the repayment terms of the advances.

Notes Payable — see Note 4

NOTE 11 — SUBSEQUENT EVENTS

     One of the Company’s shareholders advanced $1.2 million to the Company during October 2010 for operation requirements. The Company is currently in the process of negotiating the repayment terms of the advances.

     During October 2010, the Company repaid $390,000 of the $610,000 advanced to the Company by the Chief Executive Officer, Ki Nam.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This quarterly report on Form 10-Q contains certain statements that may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this report are forward-looking statements. When used in this report, the words “may,” “will,” “should,” “would,” “anticipate,” “estimate,” “expect,” “plan,” “project,” “continuing,” “ongoing,” “could,” “believe,” “predict,” “potential,” “intend,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, changes in sales or industry trends, competition, retention of senior management and other key personnel, availability of materials or components, ability to make continued product innovations, casualty or work stoppages at the Company’s facilities, adverse results of lawsuits against the Company and currency exchange rates. Forward-looking statements are based on assumptions and assessments made by the Company’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, as there can be no assurance that these forward-looking statements will prove to be accurate. Management undertakes no obligation to update any forward-looking statements. This cautionary statement is applicable to allforward-looking statements contained in this report. Readers should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including the recently filed Annual Report on Form 10-K for the year ended December 31, 2009.

T3 Motion, Inc. (the “Company”, “we” or “us”) was organized on March 16, 2006, under the laws of the state of Delaware. We develop and manufacture the T3 Series which are electric three-wheel stand-up vehicles that are directly targeted to the public safety and private security markets. T3 Series have been designed to tackle a host of daily professional functions, from community policing to patrolling of airports, military bases, campuses, malls, public event venues and other high-density areas. We continue to design and introduce products based on modularity of the sub systems we have created. In September 2009, we launched our second product, the CT Micro Car . The Micro Car is another product line to sell to our potential and existing customers. In June 2010, we introduced the GT3, a plug-in hybrid consumer vehicle.

Critical Accounting Policies and Estimates

     Our management’s discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which 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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     A summary of these policies can be found in the Management’s Discussion and Analysis section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The following is an update to the critical accounting policies and estimates.

Going Concern

     The Company’s condensed consolidated financial statements are prepared using the accrual method of accounting in accordance with GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has sustained operating losses since its inception (March 16, 2006) and has used substantial amounts of working capital in its operations. Management has been and is continuing to implement its cost reduction strategy for material, production and service costs. Until management achieves its cost reduction strategy and is able to generate sales to realize the benefits of the strategy over the next year and sufficiently increases cash flow from operations, the Company will require additional capital to meet its working capital requirements, debt service, research and development, capital

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requirements and compliance requirements. Further, at September 30, 2010, the Company has an accumulated deficit of $40,414,711, a working capital deficit of $14,324,467 and a cash balance of $40,966. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

          Management believes that its current sources of funds and current liquid assets will allow the Company to continue as a going concern through at least November 30, 2010. During 2010, the Company has obtained equity financing from third parties of approximately $1,155,000, has received advances from shareholders of $1.8 million and refinanced the outstanding balance of $1.0 million related to the note to Immersive Media Corporation (“Immersive”). The board of directors has allowed for Ki Nam, the Company’s CEO and chairman of the board, to loan the company up to $2.0 million and an additional shareholder to loan the Company up to $1.0 million. The Company plans to raise additional debt and/or equity capital to finance future activities. In light of these plans, management is confident in the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements included elsewhere in this report do not include any adjustments that might result from the outcome of this uncertainty.

Cash and Cash Equivalents

     Cash and cash equivalents consist of all highly liquid investments with original maturities of three months or less.

Restricted Cash

     Under a credit card processing agreement with a financial institution, the Company is required to maintain a security reserve deposit as collateral. The amount of the deposit is at the discretion of the financial institution and as of September 30, 2010 was $10,000.

Concentrations of Credit Risk

     As of September 30, 2010 and December 31, 2009, one customer accounted for approximately 12% and two customers accounted for approximately 11% of total accounts receivable. Two customers accounted for approximately 26% and one customer accounted for approximately 14% of net revenues for the three months ended September 30, 2010 and 2009, respectively, and no single customer accounted for more than 10% of net revenues for the nine months ended September 30, 2010 and 2009.

     As of September 30, 2010 and December 31, 2009, two vendors accounted for approximately 11% and 12%, respectively, of total accounts payable. One vendor accounted for approximately 23% and 18% of purchases for the three months ended September 30, 2010 and 2009, respectively no single vendor accounted for more than 10% of purchases for the nine months ended September 30, 2010 and 2009, respectively.

Fair Value of Financial Instruments

     The Company’s financial instruments consist of cash and cash equivalents, restricted cash accounts receivable, related party receivables, accounts payable, accrued expenses, related party payables, notes payable and derivative liabilities, related party notes payable and derivative liabilities. The carrying value for all such instruments, except related notes payable and derivative liabilities approximates fair value due to the short-term nature of the instruments. The Company cannot determine the fair value of its related party notes payable due to the related party nature and instruments similar to the notes payable could not be found. The Company’s derivative liabilities are recorded at fair value.

Revenue Recognition

     The Company recognizes revenues when there is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed or determinable and collectibility of the resulting receivable is reasonably assured.

     For all sales, the Company uses a binding purchase order as evidence of an arrangement. Delivery occurs when goods are shipped to customers. The Company ships with either FOB Shipping Point or Destination terms.

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Shipping documents are used to verify delivery and customer acceptance. For FOB Destination, the Company records revenue when proof of delivery is confirmed by the shipping company. The Company assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund. The Company offers a standard product warranty to its customers for defects in materials and workmanship for a period of one year or 2,500 miles, whichever comes first, and has no other post-shipment obligations. The Company assesses collectibility based on the creditworthiness of the customer as determined by evaluations and the customer’s payment history.

     All amounts billed to customers related to shipping and handling are classified as net revenues, while all costs incurred by the Company for shipping and handling are classified as cost of revenues.

     The Company does not enter into contracts that require fixed pricing beyond the term of the purchase order. All sales via distributor agreements are accompanied by a purchase order. Further, the Company does not allow returns of unsold items.

     The Company has executed various distribution agreements whereby the distributors agreed to purchase T3 Series packages (one T3 Series, two power modules, and one charger per package). The terms of the agreements require minimum re-order amounts for the vehicles to be sold through the distributors in specified geographic regions. Under the terms of the agreements, the distributor takes ownership of the vehicles and the Company deems the items sold at delivery to the distributor.

Business Segments

     The Company currently only has one reportable business segment due to the fact that the Company derives its revenue primarily from one product. The revenue from domestic sales and, international sales are shown below:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2010		2009		2010		2009
	(unaudited)				(unaudited)
Net revenues:
T3 Domestic	$	677,918	$	1,122,407	$	3,078,658	$	2,715,653
T3 International		369,655		43,452		546,873		693,173
Total net revenues	$	1,047,573	$	1,165,859	$	3,625,531	$	3,408,826

Derivative Liabilities

     During the three and nine months ended September 30, 2010, the Company recorded additional debt discounts and derivative liabilities of $275,676 and $838,781, respectively, related to related party notes payable.

     During 2010, the Company issued 2,310,000 warrants related to the issuance of preferred stock. The Company estimated the fair value of the warrants of $716,236 at the dates of issuance and recorded a reduction in additional paid-in capital and a derivative liability. The change in fair value of the derivative is recorded through earnings at each reporting date.

     During 2010, the Company recorded a discount on the issuance of preferred stock and derivative liability of $685,124 related to the anti-dilution provision of the preferred stock issued. The discount will be recorded as a deemed dividend with a reduction to retained earnings during the 24-month period that the anti-dilution provision is outstanding. The change in fair value of the derivative is recorded through earnings at each reporting date. For the three and nine months ended September 30, 2010, the amortization of the discount related to the preferred stock anti-dilution provision was $689,109 and $1,862,558, respectively, which was recorded as a deemed dividend.

     On March 22, 2010, one of the Company’s preferred shareholders exercised their option to convert their 2,000,000 preferred shares into 4,000,000 shares of common stock. As a result of the conversion, the Company reclassified the balance of the derivative liability of $1,121,965 to additional paid in capital and the balance of the discount of $1,099,742, as a deemed dividend.

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     The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants and embedded conversion features using the Black-Scholes-Merton option pricing model.

Loss Per Share

Basic loss per share is computed by dividing loss applicable to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional common shares were dilutive. Options, warrants and shares associated with the conversion of debt and preferred stock to purchase approximately 51.2 million and 15.3 million shares of common stock were outstanding at September 30, 2010 and 2009, respectively, but were excluded from the computation of diluted earnings per share due to the net losses for the periods.

Net loss per basic and diluted share is computed as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net loss	$	(1,262,311	)	$	(2,269,825	)	$	(4,390,237	)	$	(3,641,121	)
Deemed preferred stock dividend
		(689,109	)		—			(2,962,300	)		—
Net loss applicable to common stockholders		(1,951,420	)		(2,269,825	)		(7,352,537	)		(3,641,121	)
Weighted average number of common shares outstanding:
Basic		48,553,897			44,563,460			47,393,938			44,384,988
Diluted		48,553,897			44,563,460			47,393,938			44,384,988
Net loss per share:
Basic	$	(0.04	)	$	(0.05	)	$	(0.16	)	$	(0.08	)
Diluted	$	(0.04	)	$	(0.05	)	$	(0.16	)	$	(0.08	)

Commitments and Contingencies

     On June 25, 2008, we elected to upgrade or replace approximately 500 external chargers (revision D or older) that were produced due to a chance that the chargers could fail over time. A failed charger could result in degrading the life of the batteries or cause the batteries to be permanently inoperable, or in extreme conditions result in thermal runaway of the batteries. The chargers were placed in service between January 2007 and 2008. We notified customers informing them of the need for an upgrade and began sending out new and/or upgraded chargers (revision E) in July of 2008 to replace all existing revision D or older chargers that are in the field. After all the upgrades are complete, any remaining returned chargers will be upgraded to revision E and resold as refurbished units. We did not include any potential revenue from re-sales in the estimate. The total costs of upgrading or replacing these chargers are estimated to be approximately $78,000. We anticipate that all of the chargers will be upgraded or replaced by December 2010.

     Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim(Orange County Superior Court Case

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No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (“Plaintiff”) filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki Nam, the Company’s CEO, and Jason Kim, the Company’s former COO, (“Defendants”) for breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly executed between Plaintiff and T3 Motion, Inc. On August 24, 2009, Defendants filed a Demurrer to the Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against Defendants for breach of contract, fraud and common counts, seeking compensatory damages of $470,599, attorney’s fees, punitive damages, interest and costs. On October 27, 2009, Defendants filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court overruled the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an answer to the First Amended Complaint, and trial was set for July 30, 2010. On or about July 29, 2010, the case was settled in its entirety. T3 agreed to pay compensatory damages, attorneys’ fees and costs totaling $493,468 through monthly payments of $50,000 each, with 6% interest accruing from the date of the settlement. Periodic payments are expected to be made through May 2011. The first payment of $50,000 was made on August 3, 2010 and payments are continuing to be made. At September 30, 2010, the Company recorded the entire settlement amount as a note payable in the accompanying Condensed Consolidated Balance Sheet.

     In the ordinary course of business, the Company may face various claims brought by third parties in addition to the claim described above and may from time to time, make claims or take legal actions to assert the Company’s rights, including intellectual property rights as well as claims relating to employment and the safety or efficacy of the Company’s products. Any of these claims could subject us to costly litigation and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, the insurance carriers may deny coverage or the policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of such awards could have a material adverse effect on the consolidated operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage the Company’s reputation and business. Management believes the outcome of currently pending claims and lawsuits will not likely have a material effect on the consolidated operations or financial position.

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Result of Operations

     The following table sets forth the results of our operations for the three and nine months ended September 30, 2010 and 2009 (unaudited):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net revenues	$	1,047,573		$	1,165,859		$	3,625,531		$	3,408,826
Cost of net revenues		915,922			1,224,988			3,265,195			3,947,002
Gross profit (loss)		131,651			(59,129	)		360,336			(538,176	)
Operating expenses:
Sales and marketing		435,562			486,127			1,305,819			1,483,281
Research and development		316,759			364,258			1,069,226			963,119
General and administrative		813,786			1,119,985			2,730,770			3,460,171
Total operating expenses		1,566,107			1,970,370			5,105,815			5,906,571
Loss from operations		(1,434,456	)		(2,029,499	)		(4,745,479	)		(6,444,747	)
Other income (expense):
Interest income		54			5			1,281			2,490
Other income, net		1,238,138			633,985			3,113,919			4,862,922
Interest expense		(1,066,047	)		(874,316	)		(2,759,158	)		(2,060,986	)
Total other income (expense), net		172,145			(240,326	)		356,042			2,804,426
Loss before provision for income tax		(1,262,311	)		(2,269,825	)		(4,389,437	)		(3,640,321	)
Provision for income tax		—			—			800			800
Net income (loss)		(1,262,311	)		(2,269,825	)		(4,390,237	)		(3,641,121	)
Deemed dividend to preferred stockholders		(689,109	)		—			(2,962,300	)		—
Net loss attributable to common stockholders	$	(1,951,420	)	$	(2,269,825	)	$	(7,352,537	)	$	(3,641,121	)
Other comprehensive income (loss):
Foreign currency translation income (loss)		(206	)		(2,857	)		318			(3,175	)
Comprehensive loss	$	(1,951,626	)	$	(2,272,682	)	$	(7,352,219	)	$	(3,644,296	)
Net loss attributable to common stockholders per share:
Basic	$	(0.04	)	$	(0.05	)	$	(0.16	)	$	(0.08	)
Diluted	$	(0.04	)	$	(0.05	)	$	(0.16	)	$	(0.08	)
Weighted average number of common shares outstanding:
Basic		48,553,897			44,563,460			47,393,938			44,384,988
Diluted		48,553,897			44,563,460			47,393,938			44,384,988

     Net revenues.Net revenues are primarily from sales of the T3 Series, T3-iSeries, power modules, chargers, related accessories and service revenue. Net revenues decreased ($118,286), or (10.1%), to $1,047,573 for the three months ended September 30, 2010, and increased $216,705, or 6.4%, to $3,625,531 for the nine months ended September 30, 2010 compared to the same periods of the prior year. The decrease for the three months ended September 30, 2010 was due to vendor supply issues resulting in orders placed by customers not being shipped during the quarter. The increase for the nine months ended September 30, 2010 is due to a growth in units sold as the economy began to recover, new markets were added, achieving a higher

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average selling price per unit, and an increase in service and parts revenue. As of September 30, 2010 the sales order backlog was $1.3 million.

     Cost of net revenues.Cost of net revenues consists of materials, labor to produce vehicles and accessories, warranty and service costs and applicable overhead allocations. Cost of net revenues decreased ($309,066), or (25.2%), to $915,922 for the three months ended September 30, 2010, and decreased ($681,807), or (17.3%), to $3,265,195 for the nine months ended September 30, 2010 compared to the same periods of the prior year. This decrease in cost of net revenues is primarily attributable to management’s cost reduction strategy and lower warranty cost experience due to increase in product reliability.

     Gross profit (loss).During 2010, management has continued to source lower product costs, increase production efficiencies and achieve lower warranty experience rates resulting in gross profit of $131,651 for the three months ended September 30, 2010, compared to a gross loss of ($59,129) for the same period of the prior year and achieved a gross profit of $360,336 for the nine months ended September 30, 2010, compared to a gross loss of ($538,176) for the same period of the prior year. Management has and will continue to evaluate the processes and materials to reduce the costs of net revenues over the next year. Gross income (loss) margin was 12.6% and (5.1%) for the three months ended September 30, 2010 and 2009, respectively, and 9.9% and (15.8%) for the nine months ended September 30, 2010 and 2009, respectively.

     Sales and marketing.Sales and marketing decreased by ($50,565), or (10.4%), to $435,562 for the three months ended September 30, 2010, compared to the same period of the prior year and decreased by ($177,462), or (12.0%), to $1,305,819 for the nine months ended September 30, 2010 compared to the same period of the prior year. The decrease in sales and marketing expense is attributable to reduction in salaries and commissions and decreases in trade show and travel expenses.

     Research and development.Research and development costs include development expenses such as salaries, consultant fees, cost of supplies and materials for samples and prototypes, as well as outside services costs. Research and development expense decreased by ($47,499), or (13.0%), to $316,759 for the three months ended September 30, 2010, compared to the same period of the prior year and increased by $106,107, or 11%, to $1,069,226 for the nine months ended September 30, 2010 compared to the prior year. The increase for the nine months ended September 30, 2010 was largely in part due to development costs on the GT3, our new hybrid consumer vehicle.

     General and administrative. General and administrative expenses decreased ($306,199), or (27.3%), to $813,786, for the three months ended September 30, 2010 compared to the same period of the prior year and decreased ($729,401), or (21.1%), to $2,730,770 for the nine months ended September 30, 2010 compared to the prior year. The decrease was primarily due to decreases in salaries, legal, stock compensation expenses and accounting compliance costs.

     Other income (expense, net). Other income expense, net increased $412,471, or 171.6%, to $172,145 for the three months ended September 30, 2010 and decreased by ($2,448,384), or (87.3%), to $356,042 for the nine months ended September 30, 2010 compared to the prior year. The decrease was primarily due to the change in the fair value of the derivative liabilities and amortization of debt discounts when compared to the same period of the prior year.

     Deemed dividend.During 2010, as a result of the issuance of Series A Convertible Preferred Stock, we recorded a deemed dividend related to the amortization of discounts on the Preferred Stock for the three and nine months ended September 30, 2010 in the amount of $689,109 and $2,962,300, respectively. There were no deemed dividends during the three and nine months ended September 30, 2009.

     Net loss  attributable to common stockholders.Net loss attributable to common stockholders for the three months ended September 30, 2010, was ($1,951,420), or $(0.04) per basic and diluted share compared to a loss of ($2,269,825), or ($0.05) per basic and diluted share, for the same period of the prior year. Net loss attributable to common stockholders for the nine months ended September 30, 2010 was ($7,352,537), or ($0.16) per basic and diluted share compared to a loss of ($3,641,121) for the same period of the prior year or ($0.08) per basic and diluted share.

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Liquidity and Capital Resources

     Our principal capital requirements are to fund working capital requirements, invest in research and development activities and capital equipment, to make debt service payments and fund the continued costs of public company filing requirements. We will continue to raise equity and/or secure additional debt to meet our working capital requirements. For the year ended December 31, 2009, our independent registered public accounting firm noted in its report that we have incurred losses from operations and have an accumulated deficit and working capital deficit of approximately $33.0 million and $11.0 million, respectively, as of December 31, 2009, which raises substantial doubt about our ability to continue as a going concern. Management believes that our current and potential sources of funds and current liquid assets will allow us to continue as a going concern through at least November 30, 2010.

     During 2010, the Company has obtained equity financing from third parties of approximately $1,155,000, has received advances from shareholders of $1.8 million and refinanced the outstanding balance of $1.0 million related to the note to Immersive Media Corp. (“Immersive”). The board of directors has allowed for Ki Nam, the Company’s CEO and chairman of the board to loan the company up to $2.0 million and additional shareholder to loan the Company up to $1.0 million. The Company plans to raise additional debt and/or equity capital to finance future activities. In light of these plans, management is confident in the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements included elsewhere in this report do not include any adjustments that might result from the outcome of this uncertainty.

     Until management achieves our cost reduction strategy and is able to generate sales to realize the benefits of the strategy over the next year and sufficiently increases cash flow from operations, we will require additional capital to meet our working capital requirements, debt service, research and development, capital requirements and compliance requirements. We will continue to raise additional equity and/or financing to meet our working capital requirements.

     Our principal sources of liquidity are cash and receivables. As of September 30, 2010, cash and cash equivalents were $40,966 or 1.1% of total assets compared to $2,580,798, or 42.6% of total assets as of December 31, 2009. The decrease in cash and cash equivalents was primarily attributable to net cash used in operating activities.

Cash Flows

For the nine months ended September 30, 2010 and 2009

     Net cash used in operating activities for the nine months ended September 30, 2010 and 2009 was $3,900,772 and $3,599,073, respectively. For the nine months ended September 30, 2010, cash flows used in operating activities related primarily to the net loss of $4,390,237. Net cash flows used were due in part by increases in, inventories and other current assets of $172,954 and $148,326, respectively, a purchase of a certificate of deposit for $10,000, an increase in accounts payable and deposits of $368,278 and $31,873, respectively, and a decrease in related party payables of $104,931.

     For the nine months ended September 30, 2009, cash flows used in operating activities related primarily to the net loss of $3,599,073. Net cash flows used were offset in part by decreases in accounts receivables, prepaid expenses and inventories of $498,623, $31,789 and $813,243, respectively.

     Net cash used in investing activities of $54,378 for the nine months ended September 30, 2010 related primarily to purchases of property and equipment of $43,645 and loans to related parties of $28,795, offset by repayment of loans to related parties of $18,062.

     Net cash used in investing activities was $5,738 for the nine months ended September 30, 2009.

     Net cash provided by financing activities was $1,415,000 for the nine months ended September 30, 2010. For the nine months ended September 30, 2010, cash flows provided by financing activities related to proceeds from the sale

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of preferred stock of $1,155,000, advances from a related party for $610,000, offset by payments for a common stock rescission of $250,000 and payment on a note payable of $100,000.

     For the nine months ended September 30, 2009, net cash provided by financing activities was $2,189,962. There was $1,250,000 of proceeds from the sale of preferred stock, net of issuance, and there was $939,962 of proceeds from related party debt.

Off-Balance Sheet Arrangements

     We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Warrants

     From time to time, we issue warrants to purchase shares of the Company’s common stock to investors, note holders and to non-employee consultants for services rendered or to be rendered in the future. Warrants issued in conjunction with equity, are recorded to equity as settled.

     The following table summarizes the warrants issued and outstanding as of September 30, 2010:

Warrants Outstanding & Exercisable	Exercise Price		Expiration
120,000	$	1.54		3/31/2013
274,774	$	2.00		12/29/2014
1,953,730	$	0.70		12/29/2014
3,500,000	$	0.70		12/30/2014
4,000,000	$	0.70		12/30/2014
1,600,000	$	0.70		2/2/2015
947,639	$	0.70		3/31/2015
710,000	$	0.70		3/22/2015
1,040,000	$	0.70		4/30/2015

     The exercise price and the number of shares issuable upon exercise of the warrants will be adjusted upon the occurrence of certain events, including reclassifications, reorganizations or combinations of the common stock. At all times that the warrants are outstanding, we will authorize and reserve at least that number of shares of common stock equal to the number of shares of common stock issuable upon exercise of all outstanding warrants.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

     Not Applicable

Item 4T. Controls and Procedures.

     Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

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We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our 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 the Exchange Act, as of September 30, 2010, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

In light of the material weaknesses described below, we performed additional analysis and other procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

A material weakness is a control deficiency (within the meaning of the 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. Management has identified the following four material weaknesses which have caused management to conclude that, as of September 30, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level:

     1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

     2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

     3. We did not maintain sufficient accounting resources with adequate training in the application of generally accepted accounting principles (“GAAP”) commensurate with our financial reporting requirements and the complexity of our operations and transactions.

     4. We do not have sufficient policies and procedures to approve changes to shipping terms of sales agreements to ensure appropriate revenue recognition of sales transactions.

     5. We have had, and continue to have, a significant number of audit adjustments. Audit adjustments are the result of a failure of the internal controls to prevent or detect misstatements of accounting information. The failure could be due to inadequate design of the internal controls or to a misapplication or override of controls. Management evaluated the impact of our significant number of audit adjustments and has concluded that the control deficiency that resulted represented a material weakness.

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Management has reviewed the financial statements and underlying information included herein in detail and believes the procedures performed are adequate to fairly present our financial position, results of operations and cash flows for the periods presented in all material respects.

Remediation of Material Weaknesses

We are attempting to remediate the material weaknesses in our disclosure controls and procedures identified above by refining our internal procedures (see below).

Changes in Internal Control over Financial Reporting

We have also initiated the following corrective actions, which management believes are reasonably likely to materially affect our controls and procedures as they are designed to remediate the material weaknesses as described above:

• We are in the process of further enhancing, the supervisory procedures that will include additional levels of analysis and quality control reviews within the accounting and financial reporting functions.

• We are in the process of strengthening our internal policies and enhancing our processes for ensuring consistent treatment and recording of reserve estimates and that validation of our conclusions regarding significant accounting policies and their application to our business transactions are carried out by personnel with an appropriate level of accounting knowledge, experience and training.

We do not expect to have fully remediated these significant deficiencies until management has tested those internal controls and found them to have been remediated. We expect to complete this process during our annual testing for fiscal 2010.

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PART II — OTHER INFORMATION

Item 1.Legal Proceedings.

     Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim(Orange County Superior Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (“Plaintiff”) filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki Nam, the Company’s CEO, and Jason Kim, the Company’s former COO, (“Defendants”) for breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly executed between Plaintiff and T3 Motion, Inc. On August 24, 2009, Defendants filed a Demurrer to the Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against Defendants for breach of contract, fraud and common counts, seeking compensatory damages of $470,598, attorney’s fees, punitive damages, interest and costs. On October 27, 2009, Defendants filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court overruled the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an answer to the First Amended Complaint, and trial was set for July 30, 2010. On or about July 29, 2010, the case was settled in its entirety. T3 agreed to pay compensatory damages, attorneys’ fees and costs totaling $493,468.24, through monthly payments of $50,000 each, with 6% interest accruing from the date of the settlement. Periodic payments are expected to be made through May 2011. The first payment of $50,000 was made on August 3, 2010 and payments are continuing to be made at September 30, 2010, the Company recorded the entire settlement amount as a note payable in the accompanying Condensed Consolidated Balance Sheet.

     Other than the description above, there have been no material developments during the nine months ended September 30, 2010 in any material pending legal proceedings to which the Company is a party or of which any of our property is the subject.

Item 1A.Risk Factors

Risks Related to Our Company and Our Industry

     There were no material changes from the risk factors previously disclosed in our 2009 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or the SEC, on March 31, 2010.

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

     There were no unregistered sales of equity securities during the quarter ended September 30, 2010.

Item 3. Defaults Upon Senior Securities.

None

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Item 6. Exhibits.

INDEX TO EXHIBITS

Exhibit
Number	Description
3.1	Amended and Restated Certificate of Incorporation, as currently in effect(1)
3.2	Bylaws(1)
3.3	Amendment to Bylaws, dated January 16, 2009(2)
3.4	Amendment to Certificate of Incorporation(3)
3.5	Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock(3)
31.1	Section 302 Certificate of Chief Executive Officer*
31.2	Section 302 Certificate of Chief Financial Officer*
32.1	Section 906 Certificate of Chief Executive Officer*
32.2	Section 906 Certificate of Chief Financial Officer*

*	Filed herewith.
(1)	Filed with the Company’s Registration Statement on Form S-1 filed on May 13, 2008.
(2)	Filed with the Company’s Current Report on Form 8-K filed on January 20, 2009.
(3)	Filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and filed on November 16, 2009.

SIGNATURES

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

Date: November 15, 2010	T3 MOTION, INC.
	(Registrant)
	By:	/s/ Ki NamKi Nam Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Date: November 15, 2010	T3 MOTION, INC. (Registrant)
	By:	/s/ Kelly Anderson
		Kelly Anderson
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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