##### Table of Contents



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 and Exchange Act of 1934
 For the quarterly period ended June 30, 2007
 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 333-110680
 VIASPACE INC.
 (Exact name of small business issuer as specified in its charter)
 Nevada
(State or other jurisdiction of 
incorporation or organization)
    
    76-0742386
(I.R.S. Employer Identification No.)
 171 North Altadena Drive, Suite 101, Pasadena, CA 91107
 (626) 768-3360
 þ o
  o o þ
 o þ




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##### 



VIASPACE INC.
 INDEX
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial Statements:Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006
    
    
    3-4Consolidated Statements of Operations For the Three and Six Months Ended June 30, 2007 and 2006 (Unaudited) and Consolidated Statements of Comprehensive Loss For the Three and Six Months Ended June 30, 2007 and 2006 (Unaudited)
    
    
    5Consolidated Statements of Stockholders' Equity as of June 30, 2007 (Unaudited) and December 31, 2006
    
    
    6Consolidated Statements of Cash Flows For the Three and Six Months Ended June 30, 2007 and 2006 (Unaudited)
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4.
    
    Controls and Procedures
    
    
    35Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    37Item 1A.
    
    Risk Factors
    
    
    37Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 6.
    
    Exhibits
    
    
    39Signatures
    
    
    40Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 VIASPACE INC.
CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    644,000
    
    
    $
    1,861,000Accounts receivable, net of allowance for doubtful accounts of $21,000 in 2007 and 2006
    
    
    80,000
    
    
    
    231,000Marketable securities, available for sale
    
    
    310,000
    
    
    
    419,000Inventory
    
    
    45,000
    
    
    
    Other prepaid expenses and other current assets
    
    
    73,000
    
    
    
    99,000TOTAL CURRENT ASSETS
    
    
    1,152,000
    
    
    
    2,610,000FIXED ASSETS:Fixed assets, net of accumulated depreciation of $141,000 and $106,000 in 2007 and
2006, respectively
    
    
    189,000
    
    
    
    207,000OTHER ASSETS:Intellectual property, net of accumulated amortization of $57,000 and $40,000 in 2007
and 2006, respectively
    
    
    357,000
    
    
    
    375,000Deferred financing and offering costs
    
    
    
    
    
    
    777,000Other assets
    
    
    13,000
    
    
    
    30,000TOTAL OTHER ASSETS
    
    
    370,000
    
    
    
    1,182,000TOTAL ASSETS
    
    $
    1,711,000
    
    
    $
    3,999,000LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    262,000
    
    
    $
    286,000Accrued expenses
    
    
    244,000
    
    
    
    260,000Current portion of long-term debt
    
    
    30,000
    
    
    
    29,000Current portion of convertible debenture, net of discounts
    
    
    
    
    
    
    250,000Warrant and consultant stock option derivatives
    
    
    
    
    
    
    20,000Related party payable
    
    
    209,000
    
    
    
    193,000TOTAL CURRENT LIABILITIES
    
    
    745,000
    
    
    
    1,038,000LONG-TERM LIABILITIES:Convertible debenture and embedded derivatives, net of current portion
    
    
    
    
    
    
    2,407,000Warrant and consultant stock option derivatives, net of current portion
    
    
    
    
    
    
    3,106,000Deferred rent
    
    
    15,000
    
    
    
    20,000Long-term debt, net of current portion
    
    
    56,000
    
    
    
    71,000TOTAL LONG-TERM LIABILITIES
    
    
    71,000
    
    
    
    5,604,000TOTAL LIABILITIES
    
    
    816,000
    
    
    
    6,642,000COMMITMENTS AND CONTINGENCIESMINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES:Preferred Shareholder Minority Interest
    
    
    500,000
    
    
    
    500,000Common Shareholder Minority Interest
    
    
    72,000
    
    
    
    56,000572,000
    
    
    
    556,000
  3




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##### Table of Contents



June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)(Continued)STOCKHOLDERS EQUITY (DEFICIT):Preferred stock, $0.001 par value,
10,000,000 shares authorized, zero shares
issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value, 800,000,000
shares authorized, 304,385,436 and
292,512,205 issued and outstanding in 2007
and 2006, respectively
    
    
    304,000
    
    
    
    293,000Additional paid in capital
    
    
    16,762,000
    
    
    
    7,104,000Accumulated other comprehensive income
    
    
    310,000
    
    
    
    436,000Accumulated deficit
    
    
    (17,053,000
    )
    
    
    (11,032,000
    )Total stockholders equity (deficit)
    
    
    323,000
    
    
    
    (3,199,000
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,711,000
    
    
    $
    3,999,000
   4




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##### Table of Contents



VIASPACE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUESGovernment contracts
    
    $
    21,000
    
    
    $
    91,000
    
    
    $
    102,000
    
    
    $
    183,000Commercial contracts
    
    
    111,000
    
    
    
    83,000
    
    
    
    269,000
    
    
    
    104,000Total revenues
    
    
    132,000
    
    
    
    174,000
    
    
    
    371,000
    
    
    
    287,000COST OF REVENUES
    
    
    84,000
    
    
    
    146,000
    
    
    
    287,000
    
    
    
    251,000GROSS PROFIT
    
    
    48,000
    
    
    
    28,000
    
    
    
    84,000
    
    
    
    36,000OPERATING EXPENSESResearch and development
    
    
    415,000
    
    
    
    271,000
    
    
    
    806,000
    
    
    
    453,000Selling, general and administrative expenses
    
    
    1,740,000
    
    
    
    1,211,000
    
    
    
    3,406,000
    
    
    
    2,452,000Total operating expenses
    
    
    2,155,000
    
    
    
    1,482,000
    
    
    
    4,212,000
    
    
    
    2,905,000LOSS FROM OPERATIONS
    
    
    (2,107,000
    )
    
    
    (1,454,000
    )
    
    
    (4,128,000
    )
    
    
    (2,869,000
    )OTHER INCOME (EXPENSE)Interest income
    
    
    16,000
    
    
    
    29,000
    
    
    
    35,000
    
    
    
    51,000Interest expense
    
    
    (2,000
    )
    
    
    (3,000
    )
    
    
    (3,514,000
    )
    
    
    (6,000
    )Gain on sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    219,000
    
    
    
    Adjustments to fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    1,383,000
    
    
    
    Total other income (expense)
    
    
    14,000
    
    
    
    26,000
    
    
    
    (1,877,000
    )
    
    
    45,000LOSS BEFORE MINORITY INTEREST
    
    
    (2,093,000
    )
    
    
    (1,428,000
    )
    
    
    (6,005,000
    )
    
    
    (2,824,000
    )Minority interest loss (income) in
consolidated subsidiaries
    
    
    (9,000
    )
    
    
    5,000
    
    
    
    (16,000
    )
    
    
    14,000NET LOSS
    
    $
    (2,102,000
    )
    
    $
    (1,423,000
    )
    
    $
    (6,021,000
    )
    
    $
    (2,810,000
    )LOSS PER SHARE OF COMMON STOCK BEFORE MINORITY
INTERESTBasic and diluted
    
    $
    (0.01
    )
    
    $
    *
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )Minority interest in consolidated subsidiaries
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *NET LOSS PER SHARE OF COMMON STOCKBasic and
diluted
    
    $
    (0.01
    )
    
    $
    *
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )WEIGHTED AVERAGE SHARES OUTSTANDINGBasic and
diluted
    
    
    304,046,460
    
    
    
    291,619,286
    
    
    
    299,766,092
    
    
    
    288,354,098
 
 *
    
    Less than $0.01 per common share. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 NET LOSS
    
    $
    (2,102,000
    )
    
    $
    (1,423,000
    )
    
    $
    (6,021,000
    )
    
    $
    (2,810,000
    )Other Comprehensive Income:Unrealized holding gain on securities
    
    
    21,000
    
    
    
    301,000
    
    
    
    93,000
    
    
    
    296,000Less reclassification adjustment for realized
gain on securities included in net loss
    
    
    
    
    
    
    
    
    
    
    (219,000
    )
    
    
    Net unrealized holding gain (loss) on securities
    
    
    21,000
    
    
    
    301,000
    
    
    
    (126,000
    )
    
    
    296,000COMPREHENSIVE LOSS
    
    $
    (2,081,000
    )
    
    $
    (1,122,000
    )
    
    $
    (6,147,000
    )
    
    $
    (2,514,000
    )
   5




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##### Table of Contents



VIASPACE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(Unaudited)
 Common StockAccumulatedAdditional
    
    
    OtherPaid in
    
    
    Comprehensive
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Income
    
    
    Deficit
    
    
    TotalBALANCE, DECEMBER 31, 2006
    
    
    292,512,205
    
    
    $
    293,000
    
    
    $
    7,104,000
    
    
    $
    436,000
    
    
    $
    (11,032,000
    )
    
    $
    (3,199,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,021,000
    )
    
    
    (6,021,000
    )Other comprehensive income:Unrealized holding gain on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,000
    
    
    
    
    
    
    
    93,000Reclassification of realized gain on securities to net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (219,000
    )
    
    
    
    
    
    
    (219,000
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,147,000
    )Stock compensation expense related to warrants
    
    
    
    
    
    
    
    
    
    
    329,000
    
    
    
    
    
    
    
    
    
    
    
    329,000Stock compensation expense related to stock options
    
    
    
    
    
    
    
    
    
    
    1,119,000
    
    
    
    
    
    
    
    
    
    
    
    1,119,000Shares issued to consultants and employees for services
    
    
    423,823
    
    
    
    
    
    
    
    143,000
    
    
    
    
    
    
    
    
    
    
    
    143,000Restructuring of convertible debentures financing from
Cornell Capital into equity and the issuance of common shares
to Cornell Capital
    
    
    11,449,408
    
    
    
    11,000
    
    
    
    8,067,000
    
    
    
    
    
    
    
    
    
    
    
    8,078,000BALANCE, JUNE 30, 2007
    
    
    304,385,436
    
    
    $
    304,000
    
    
    $
    16,762,000
    
    
    $
    310,000
    
    
    $
    (17,053,000
    )
    
    $
    323,000
   6




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##### Table of Contents



VIASPACE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months Ended June 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (6,021,000
    )
    
    $
    (2,810,000
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation
    
    
    35,000
    
    
    
    15,000Amortization of intangible assets
    
    
    18,000
    
    
    
    2,000Amortization of discount related to conversion feature of debentures
    
    
    354,000
    
    
    
    Stock option and warrant compensation expense
    
    
    1,449,000
    
    
    
    724,000Stock compensation expense related to restricted stock issued
    
    
    143,000
    
    
    
    Change in fair value of derivatives
    
    
    (1,383,000
    )
    
    
    Non-cash interest expense related to convertible debentures debt discount write off
    
    
    2,096,000
    
    
    
    Non-cash interest expense related to loss on conversion of debentures
    
    
    953,000
    
    
    
    Non-cash interest expense related to convertible debentures that was forgiven
    
    
    50,000
    
    
    
    Non-cash interest expense related to deferred financing costs
    
    
    58,000
    
    
    
    Gain on sale of marketable securities
    
    
    (219,000
    )
    
    
    (Increase) decrease in:Accounts receivable
    
    
    151,000
    
    
    
    (3,000
    )Inventory
    
    
    (45,000
    )
    
    
    Prepaid expenses and other current assets
    
    
    26,000
    
    
    
    16,000Increase (decrease) in:Accounts payable
    
    
    (24,000
    )
    
    
    15,000Accrued expenses and other
    
    
    11,000
    
    
    
    51,000Related party payable
    
    
    16,000
    
    
    
    (20,000
    )Minority interest
    
    
    16,000
    
    
    
    (10,000
    )Net cash used in operating activities
    
    
    (2,316,000
    )
    
    
    (2,020,000
    )CASH FLOWS FROM INVESTING ACTIVITIES:Additions to fixed assets
    
    
    (17,000
    )
    
    
    (156,000
    )Proceeds from gain on sale of marketable securities
    
    
    219,000
    
    
    
    Net cash used in investing activities
    
    
    202,000
    
    
    
    (156,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from restructuring of convertible debentures and issuance of common stock,
net of offering costs paid
    
    
    911,000
    
    
    
    Payments on long-term debt
    
    
    (14,000
    )
    
    
    (13,000
    )Exercise of stock options by SNK Capital Trust
    
    
    
    
    
    
    2,000,000Net cash provided by financing activities
    
    
    897,000
    
    
    
    1,987,000NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,217,000
    )
    
    
    (189,000
    )CASH AND CASH EQUIVALENTS, Beginning of period
    
    
    1,861,000
    
    
    
    2,130,000CASH AND CASH EQUIVALENTS, End of period
    
    $
    644,000
    
    
    $
    1,941,000Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    3,000
    
    
    $
    6,000Income taxes
    
    $
    
    
    
    $
    
  
    
    The following transactions were a result of the restructuring of the convertible debentures on March 8, 2007:
 
    
    $85,000 of accrued interest expense was waived by Cornell Capital
Partners as part of the conversion of convertible debentures into common stock
equity.
    
    Embedded derivative liabilities of $1,651,000 were converted to equity.
    
    Warrant derivative liabilities of $2,442,000 were reclassified to equity.
    
    Stock option and Synthetica warrant derivative liabilities of $56,000 were reclassified to equity.
    
    Deferred offering costs of $719,000 were charged to paid in capital and
recorded against the proceeds from the issuance of equity.
    
    Convertible debentures with a face value of $2,700,000 were converted to
equity.
   7




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##### Table of Contents



VIASPACE INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description of Business
 Company Background and Merger
   
    
    GW effected a 5 for 1 forward stock split (a 6 for 1 forward stock split was
previously effected May 23, 2005);
    
    The members of ViaSpace LLC were issued an aggregate of 226,800,000 post-split shares
of GW common stock in exchange for their membership interests in ViaSpace LLC at a rate of
5.4 common shares of GW in exchange for each membership unit. All pre-merger activity has
been retroactively adjusted and presented to account for this exchange;
    
    A total of 54,000,000 post-split shares (1,800,000 shares on a pre-split basis) of
the Companys common stock were held by the pre-existing GW shareholders as of the date of
the Merger.
  
    
    On September 30, 2003, GW acquired all of the issued and outstanding shares of Marco
Polo World News Inc. (MPW), a British Columbia, Canada corporation that was engaged in
the production and distribution of an ethnic bilingual (English/Italian) weekly newspaper
called Marco Polo, in consideration of 63,000,000 restricted shares on a post-split basis
(2,100,000 shares on a pre-split basis) of GWs common stock issued to MPWs sole
shareholder, Mr. Rino Vultaggio, who became a director and officer of GW. As a result of
the transaction, MPW became a wholly owned subsidiary of GW.
    
    On May 19, 2005, GW entered into a Share Purchase Agreement with Mr. Robert Hoegler, a
former director and officer of GW, pursuant to which, upon the closing of the Merger, GW
purchased 72,000,000 shares on a post-split basis (2,400,000 shares on a pre-split basis)
of the Companys common stock for $24,000.
    
    In addition, on May 19, 2005, GW entered into an Acquisition Agreement with Mr. Rino
Vultaggio, pursuant to which, upon the closing of the Merger, GW sold 100% of its interest
in MPW to Mr. Vultaggio in exchange for 63,000,000 shares on a post-split basis (2,100,000
shares on a pre-split basis) of Company Common Stock. Thus, as of June 22, 2005, GW no
longer had any ongoing operations related to MPW, or any newspaper publication business.
  8




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##### Table of Contents



Basis of Presentation
 Principles of Consolidation
 Fiscal Year End 
 Use of Estimates in the Preparation of the Financial Statements
 Cash and Cash Equivalents
 Concentration of Credit Risk 
 Accounts Receivable Allowance for Doubtful Accounts
 Marketable Securities 
 Inventory 
 Property and Equipment
  9




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##### Table of Contents



Intangible Assets 
 Impairment of Long-lived Assets
 Deferred Financing and Offering Costs
 Minority Interest in Subsidiaries 
 Fair Value of Financial Instruments
 Derivative Instruments
 Income Taxes
  10




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##### Table of Contents



Revenue Recognition Product Revenue
 Product Development Revenue on Fixed-Price Contracts With Milestone Values Defined
 Product Development Revenue on Fixed-Price Contracts
 Stock Based Compensation 
 Net Income (Loss) Per Share 
 Research and Development
  11




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##### Table of Contents



NOTE 2  ACCOUNTS RECEIVABLE
  June 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006Commercial customers
    
    $
    101,000
    
    
    $
    169,000U.S. Government customers
    
    
    
    
    
    
    83,000Total accounts receivable
    
    
    101,000
    
    
    
    252,000Less: Allowance for doubtful accounts
    
    
    21,000
    
    
    
    21,000Accounts receivable, net
    
    $
    80,000
    
    
    $
    231,000
 NOTE 3  FIXED ASSETS
  June 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006Computer equipment and software
    
    $
    221,000
    
    
    $
    204,000Lab equipment
    
    
    15,000
    
    
    
    15,000Furniture and fixtures
    
    
    68,000
    
    
    
    68,000Leasehold improvements
    
    
    26,000
    
    
    
    26,000Total property and equipment
    
    
    330,000
    
    
    
    313,000Less: Accumulated depreciation
    
    
    141,000
    
    
    
    106,000Fixed assets, net
    
    $
    189,000
    
    
    $
    207,000
   12




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##### Table of Contents



NOTE 4  MARKETABLE SECURITIES
 Cantronic Systems Inc.
    ViaLogy plc
   NOTE 5  OWNERSHIP INTEREST IN AFFILIATED COMPANIES
 DMFCC.
 VIASPACE Security
 Ionfinity.
  13




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##### Table of Contents



eCARmerce.
 Concentric Water.
 NOTE 6  STOCK OPTIONS AND WARRANTS
 VIASPACE Inc. 2005 Stock Incentive Plan
       14




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##### Table of Contents



June 30,
    
    
    June 30,2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)Risk free interest rate
    
    
    4.58% - 5.12
    %
    
    
    4.32% - 4.98
    %Dividends
    
    
    0
    %
    
    
    0
    %Volatility factor
    
    
    118.51% - 125.13
    %
    
    
    116.47% - 133.8
    %Expected life
    
    6.67 years
    
    6.67 yearsAnnual forfeiture rate
    
    
    0% - 6
    %
    
    
    0
    %
 Employee and Director Option Grants
  Weighted-
    
    
    Weighted-Average
    
    
    AverageExercise
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Price Per
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Share
    
    
    Term In Years
    
    
    ValueOutstanding at December 31, 2006
    
    
    7,613,500
    
    
    $
    1.12Granted
    
    
    1,753,000
    
    
    
    0.48Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (80,000
    )
    
    
    1.62Outstanding at June 30, 2007
    
    
    9,286,500
    
    
    $
    0.99
    
    
    
    9.2
    
    
    $
    Exercisable at June 30, 2007
    
    
    1,282,167
    
    
    $
    1.67
    
    
    
    8.6
    
    
    $
    
   15




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##### Table of Contents



Consultant Option Grants
  Weighted-
    
    
    Weighted-Average
    
    
    AverageExercise
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Price Per
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Share
    
    
    Term In Years
    
    
    ValueOutstanding at December 31, 2006
    
    
    220,000
    
    
    $
    0.86Granted
    
    
    794,000
    
    
    
    0.29Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at June 30, 2007
    
    
    1,014,000
    
    
    $
    0.41
    
    
    
    8.4
    
    
    $
    9,000Exercisable at June 30, 2007
    
    
    612,500
    
    
    $
    0.45
    
    
    
    8.4
    
    
    $
    6,000
  Direct Methanol Fuel Cell Corporation 2002 Stock Option / Stock Issuance Plan
   Weighted-
    
    
    Weighted-Average
    
    
    AverageExercise
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Price Per
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Share
    
    
    Term In Years
    
    
    ValueOutstanding at December 31, 2006
    
    
    1,581,000
    
    
    $
    .02Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (185,000
    )
    
    
    .05Outstanding at March 31, 2007
    
    
    1,396,000
    
    
    $
    .02
    
    
    
    7.2
    
    
    $
    185,000Exercisable at March 31, 2007
    
    
    1,315,250
    
    
    $
    .02
    
    
    
    7.2
    
    
    $
    177,000
   16




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##### Table of Contents



Synthetica Warrants
  June 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006Synthetica Warrants
    
    
    1,000,000
    
    
    
    1,000,000
  NOTE 7  RESTRUCTURING OF CONVERTIBLE DEBENTURES AND STANDBY EQUITY DISTRIBUTION AGREEMENTS
 10% Convertible Debentures  Original Transaction
      17




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##### Table of Contents



Standby Equity Distribution Agreement  Original Transaction
      18




---



##### Table of Contents



Restructured Transaction
        
    
    The face value of Debentures of $2,700,000 was reclassified from Convertible Debentures
to common stock and additional paid in capital.
    
    Net cash proceeds of $910,800 were recorded.
    
    A loss on conversion of the Debenture agreement of $953,000 was recorded as a result of
the fair value of common shares and warrants issued exceeding the fair value of the cash
proceeds, forgiveness of interest payable and the redemption of convertible debt and
derivatives.
  19




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##### Table of Contents




    
    The fair value of the embedded derivative related to the conversion feature and the over
allotment feature of $1,651,000 as of the conversion date was reclassified to additional
paid in capital. The adjustment to the fair value of the embedded derivative relating to
the conversion feature was recorded as other income of $756,000 as of the conversion date.
    
    The fair value of the original warrant derivative liability of $2,442,000 as of the
conversion date was reclassified to additional paid in capital. The adjustment to the fair
value of the embedded derivative relating to the conversion feature was recorded as other
income of $611,000 as of the conversion date.
    
    The Company recorded a write off of $58,000 of deferred financing costs relating to the
cancellation of the SEDA agreement. As a result of the restructuring, the third tranche of
Debentures will be converted to an equity transaction. As such, the remaining $719,000 of
deferred offering costs will be recorded against the proceeds from the issuance of equity.
    
    The Company recorded additional interest expense of $354,000 related to the accretion of
the debt discount up to the date of the debt conversion. As of March 8, 2007, the debt
discount is $2,096,000. This was recorded to interest expense on the conversion of the
Debentures.
    
    Cornell received an amendment to the exercise price of their original warrants. The
fair value of the amended warrants on March 8, 2007 is $2,500,000.
    
    $85,000 of interest expense was accrued related to the Debentures as of the conversion
date and was forgiven by Cornell.
  December 31,
    
    
    March 8,
    
    
    March 31,2006
    
    
    2007
    
    
    2007Convertible Debentures at face value
    
    $
    2,700,000
    
    
    $
    2,700,000
    
    
    $
    Discounts on Debentures
    
    
    (2,700,000
    )
    
    
    (2,700,000
    )
    
    
    Net Convertible Debentures
    
    
    
    
    
    
    
    
    
    
    Amortization of discount from derivatives
    
    
    250,000
    
    
    
    604,000
    
    
    
    Convertible Debentures
    
    
    250,000
    
    
    
    604,000
    
    
    
    Embedded derivatives at fair value
    
    
    2,407,000
    
    
    
    1,651,000
    
    
    
    Warrant derivative at fair value
    
    
    3,052,000
    
    
    
    2,442,000
    
    
    
    Net Convertible Debentures, embedded
derivatives and warrant derivative
    
    $
    5,709,000
    
    
    $
    4,697,000
    
    
    
    
  Adjustment toBalance at
    
    
    Fair Value of
    
    
    Balance at
    
    
    Restructuring
    
    
    BalanceDecember
    
    
    Derivatives at
    
    
    March 8,
    
    
    of Debt on
    
    
    at MarchAdjustment to Fair Value of Derivatives
    
    31, 2006
    
    
    March 8, 2007
    
    
    2007
    
    
    March 8, 2007
    
    
    31, 2007Embedded Derivatives
    
    $
    2,407,000
    
    
    $
    (756,000
    )
    
    $
    1,651,000
    
    
    $
    (1,651,000
    )
    
    $
    Warrant Derivative
    
    
    3,052,000
    
    
    
    (610,000
    )
    
    
    2,442,000
    
    
    
    (2,442,000
    )
    
    
    Adjustment to Fair
Value of Derivatives included in other
(income) expense
    
    
    
    
    
    $
    (1,366,000
    )
    
    $
    4,093,000
    
    
    
    
    
    
    
    
  20




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##### Table of Contents



Fair Value at
    
    
    Fair Value at
    
    
    Fair ValueDecember 31,
    
    
    March 8,
    
    
    March 31,Warrant Derivative Liability
    
    2006
    
    
    2007
    
    
    2007Warrant Derivative
    
    $
    3,052,000
    
    
    $
    2,442,000
    
    
    $
    
  Fair Value at
    
    
    Fair Value at
    
    
    Fair ValueDecember 31,
    
    
    March 8,
    
    
    March 31,Embedded Derivative Liability
    
    2006
    
    
    2007
    
    
    2007Conversion Feature First Tranche
    
    $
    521,000
    
    
    $
    358,000
    
    
    $
    Conversion Feature Second Tranche
    
    
    403,000
    
    
    
    276,000
    
    
    
    Over Allotment Feature
    
    
    1,483,000
    
    
    
    1,017,000
    
    
    
    Embedded Derivatives
    
    $
    2,407,000
    
    
    $
    1,651,000
    
    
    $
    
   21




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##### Table of Contents



June 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006Cornell No. 1
    
    
    1,500,000
    
    
    
    1,500,000Cornell No. 2
    
    
    2,000,000
    
    
    
    2,000,000Cornell No. 3
    
    
    885,000
    
    
    
    885,000Cornell No. 4
    
    
    790,000
    
    
    
    790,000Cornell No. 5
    
    
    600,000
    
    
    
    600,000Gilford No. 1
    
    
    200,000
    
    
    
    200,000Gilford No. 2
    
    
    160,000
    
    
    
    160,000Gilford No. 3
    
    
    264,000
    
    
    
     ̄6,399,000
    
    
    
    6,135,000
 NOTE 8  OTHER LONG-TERM DEBT
   22




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##### Table of Contents



June 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006Community Development
Commission of the County of Los
Angeles, secured, with interest
at 5% due July 1, 2009
    
    $
    28,000
    
    
    $
    34,000Community Development
Commission of the County of Los
Angeles, secured, with interest
at 5% due September 1, 2009
    
    
    58,000
    
    
    
    66,000Total Long-term Debt
    
    
    86,000
    
    
    
    100,000Less Current Portion
    
    
    30,000
    
    
    
    29,000Net Long-term Debt
    
    $
    56,000
    
    
    $
    71,000
 NOTE 9  DERIVATIVE LIABILITIES RELATED TO WARRANTS AND STOCK OPTIONS
 Warrant Derivative Liability
  1 2
 1 2
 1 4
 Stock Option Derivative Liability
     23




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##### Table of Contents



NOTE 10  STOCKHOLDERS EQUITY
 Preferred Stock
  Common Stock
  NOTE 11  INCOME TAX
    Note 12  RETIREMENT PLAN
   24




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##### Table of Contents



Note 13  OPERATING SEGMENTS
   (i) DMFCC:
 (ii) VIASPACE Security:
 (iii) Ionfinity:
 (iii) VIASPACE:
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:DMFCC
    
    $
    
    
    
    $
    22,000
    
    
    $
    
    
    
    $
    43,000VIASPACE Security
    
    
    75,000
    
    
    
    61,000
    
    
    
    210,000
    
    
    
    61,000Ionfinity
    
    
    21,000
    
    
    
    91,000
    
    
    
    102,000
    
    
    
    183,000VIASPACE
    
    
    36,000
    
    
    
    
    
    
    
    59,000
    
    
    
    Total Revenue
    
    $
    132,000
    
    
    $
    174,000
    
    
    $
    371,000
    
    
    $
    287,000Income (Loss) From Operations:DMFCC
    
    $
    (458,000
    )
    
    $
    (348,000
    )
    
    $
    (932,000
    )
    
    $
    (652,000
    )VIASPACE Security
    
    
    (363,000
    )
    
    
    (217,000
    )
    
    
    (631,000
    )
    
    
    (426,000
    )Ionfinity
    
    
    16,000
    
    
    
    (2,000
    )
    
    
    27,000
    
    
    
    (21,000
    )VIASPACE
    
    
    (41,000
    )
    
    
    
    
    
    
    (118,000
    )
    
    
    Loss From Operations by Reportable Segments
    
    
    (846,000
    )
    
    
    (567,000
    )
    
    
    (1,654,000
    )
    
    
    (1,099,000
    )Corporate Administrative Costs
    
    
    (444,000
    )
    
    
    (541,000
    )
    
    
    (1,032,000
    )
    
    
    (1,046,000
    )Corporate Stock Compensation and Warrant Expense
    
    
    (817,000
    )
    
    
    (346,000
    )
    
    
    (1,442,000
    )
    
    
    (724,000
    )Loss From Operations
    
    $
    (2,107,000
    )
    
    $
    (1,454,000
    )
    
    $
    (4,128,000
    )
    
    $
    (2,869,000
    )
  25




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##### Table of Contents



June 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006Assets:DMFCC
    
    $
    362,000
    
    
    $
    343,000VIASPACE Security
    
    
    96,000
    
    
    
    286,000Ionfinity
    
    
    140,000
    
    
    
    202,000VIASPACE / Corporate
    
    
    1,113,000
    
    
    
    3,168,000Total Assets
    
    $
    1,711,000
    
    
    $
    3,999,000
  NOTE 14  NET LOSS PER SHARE
   June 30,2007
    
    
    2006Stock Options
    
    
    10,320,500
    
    
    
    3,769,000Warrants
    
    
    7,399,000
    
    
    
    1,000,000
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Basic and diluted net loss per share:Numerator:Net loss attributable to common stock
    
    $
    (2,102,000
    )
    
    $
    (1,423,000
    )
    
    $
    (6,021,000
    )
    
    $
    (2,810,000
    )Denominator:Weighted average shares of common stock outstanding
    
    
    304,046,460
    
    
    
    291,619,286
    
    
    
    299,766,092
    
    
    
    288,354,098Net loss per share of common stock, basic and diluted
    
    $
    (0.01
    )
    
    $
    *
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )
  NOTE 15  RELATED PARTIES
   26




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##### Table of Contents



Note 16  COMMITMENTS AND CONTINGENCIES
 Royalty Commitments
   27




---



##### Table of Contents



Note 17  FINANCIAL ACCOUNTING DEVELOPMENTS
  Note 18  GOING CONCERN
   Note 19  SUBSEQUENT EVENT
   28




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 The following discussion contains certain statements that constitute forward-looking
statements. Such statements appear in a number of places in this Report, including, without
limitation, Managements Discussion and Analysis of Financial Condition or Plan of Operation.
These statements are not guarantees of future performance and involve risks, uncertainties and
requirements that are difficult to predict or are beyond our control. Our future results may differ
materially from those currently anticipated depending on a variety of factors, including those
described below under Risks Related to Our Future Operations and our filings with the Securities
and Exchange Commission. The following should be read in conjunction with the unaudited
Consolidated Financial Statements and notes thereto that appear elsewhere in this report and in
conjunction with our 2006 annual report onForm 10-KSB.
 VIASPACE Overview
   Critical accounting policies and estimates
    29




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##### Table of Contents



Three Months Ended June 30, 2007 Compared to June 30, 2006
 Results of Operations
 Revenues
   30




---



##### Table of Contents



Cost of Revenues
  Research and Development
  Selling, General and Administrative Expenses
  .
 Other Income (Expense), Net
  Six Months Ended June 30, 2007 Compared to June 30, 2006
 Results of Operations
 Revenues
   31




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##### Table of Contents



Cost of Revenues
  Research and Development
  Selling, General and Administrative Expenses
  .
 Other Income (Expense), Net
 Interest Expense
   32




---



##### Table of Contents



Adjustment to the Fair Value of Derivatives
 Interest Income
 Gain on Sale of Marketable Securities
 Liquidity and Capital Resources
     33




---



##### Table of Contents



Contractual Obligations
  Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    
    Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsLong-term debt obligations (a)
    
    $
    91,500
    
    
    $
    16,500
    
    
    $
    75,000
    
    
    
    
    
    
    
    Operating lease obligations (b)
    
    $
    552,000
    
    
    $
    65,000
    
    
    $
    414,000
    
    
    $
    73,000
    
    
    
    
 (a)
    
    The annual installment of principal and interest on the notes payable owed to the
Community Development Commission as discussed in Note 8 to the consolidated financial
statements are noted.(b)
    
    On May 1, 2006, the Company relocated its office and laboratory space to a new location
in Pasadena, California and entered into a five year lease. Future minimum lease payments
are noted.
  Employment Agreements
  Royalty Commitments
     Inflation and Seasonality
   34




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##### Table of Contents



Off-Balance Sheet Arrangements
  Other Matters
     
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure controls and procedures.
  35




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##### Table of Contents



Changes in internal controls over financial reporting.
   36




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 Risk Factors Which May Affect Future Results
   Risks Related To Our Business
 We have incurred losses and anticipate continued losses for the foreseeable future.
  Our ability to continue as a going concern is dependent on future financing.
    Our revenues to date have been to a few customers, the loss of which could result in a severe
decline in revenues.
   37




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##### Table of Contents



Risks Related To An Investment In Our Stock
 Any future sale of a substantial number of shares of our common stock could depress the trading
price of our common stock, lower our value and make it more difficult for us to raise capital.
       
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   38




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##### Table of Contents



ITEM 6. EXHIBITS
 (a) Exhibits
 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *
   39




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##### Table of Contents



SIGNATURES
  VIASPACE Inc.
(Registrant)Date: August 10, 2007
    /s/ CARL KUKKONENCarl KukkonenChief Executive OfficerDate: August 10, 2007
    /s/ STEPHEN J. MUZIStephen J. MuziChief Financial Officer  40




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *
   41