##### 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, 2008
 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
    
    76-0742386(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 171 North Altadena Drive, Suite 101, Pasadena, CA 91107
 (626) 768-3360
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



VIASPACE INC.
 INDEX
 PagePart I. Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Operations For the Three and Six Months Ended June 30, 2008 and 2007
(Unaudited) and Consolidated Statements of Comprehensive Loss For the Three and Six Months Ended
June 30, 2008 and 2007 (Unaudited)
    
    
    4Consolidated Statements of Stockholders Equity as of June 30, 2008 (Unaudited) and December 31, 2007
    
    
    5Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    6-7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33Part II. Other InformationItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submission of Matters to Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Signatures
    
    
    37Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32Exhibit 99.1
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 VIASPACE INC.
 
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    74,000
    
    
    $
    608,000Accounts receivable, net of allowance for doubtful accounts
of zero in 2008 and 2007, respectively
    
    
    126,000
    
    
    
    108,000Marketable securities, available for sale
    
    
    
    
    
    
    78,000Inventory
    
    
    41,000
    
    
    
    43,000Prepaid expenses
    
    
    3,516,000
    
    
    
    89,000Other current assets
    
    
    63,000
    
    
    
    72,000TOTAL CURRENT ASSETS
    
    
    3,820,000
    
    
    
    998,000FIXED ASSETS:Fixed assets, net of accumulated depreciation of $213,000 and
$177,000 in 2008 and 2007, respectively
    
    
    122,000
    
    
    
    155,000OTHER ASSETS:Intellectual property, net of accumulated amortization of
$209,000 and $198,000 in 2008 and 2007, respectively
    
    
    206,000
    
    
    
    217,000Other assets
    
    
    13,000
    
    
    
    13,000TOTAL OTHER ASSETS
    
    
    219,000
    
    
    
    230,000TOTAL ASSETS
    
    $
    4,161,000
    
    
    $
    1,383,000LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIES:Accounts payable
    
    $
    177,000
    
    
    $
    257,000Accrued expenses
    
    
    147,000
    
    
    
    313,000Unearned revenue
    
    
    136,000
    
    
    
    Current portion of long-term debt
    
    
    31,000
    
    
    
    30,000Loans
    
    
    75,000
    
    
    
    250,000Related party payable
    
    
    231,000
    
    
    
    185,000TOTAL CURRENT LIABILITIES
    
    
    797,000
    
    
    
    1,035,000LONG-TERM LIABILITIES:Deferred rent
    
    
    1,000
    
    
    
    9,000Long-term debt, net of current portion
    
    
    275,000
    
    
    
    291,000TOTAL LONG-TERM LIABILITIES
    
    
    276,000
    
    
    
    300,000TOTAL LIABILITIES
    
    
    1,073,000
    
    
    
    1,335,000COMMITMENTS AND CONTINGENCIESMINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES:Preferred Shareholder Minority Interest
    
    
    500,000
    
    
    
    500,000Common Shareholder Minority Interest
    
    
    
    
    
    
    55,000500,000
    
    
    
    555,000STOCKHOLDERS EQUITY (DEFICIT):Preferred stock, $0.001 par value, 10,000,000 shares
authorized, zero shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value, 1,500,000,000 shares
authorized, 462,882,326 and 316,452,598 issued and
outstanding in 2008 and 2007, respectively
    
    
    463,000
    
    
    
    316,000Treasury stock (20,951,645 shares in 2008 and zero in 2007)
    
    
    (962,000
    )
    
    
    Additional paid in capital
    
    
    27,255,000
    
    
    
    19,040,000Accumulated other comprehensive income
    
    
    
    
    
    
    78,000Accumulated deficit
    
    
    (24,168,000
    )
    
    
    (19,941,000
    )Total stockholders equity (deficit)
    
    
    2,588,000
    
    
    
    (507,000
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    4,161,000
    
    
    $
    1,383,000
   3




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##### Table of Contents



VIASPACE INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUESGovernment contracts
    
    $
    9,000
    
    
    $
    21,000
    
    
    $
    18,000
    
    
    $
    102,000Commercial contracts
    
    
    58,000
    
    
    
    111,000
    
    
    
    172,000
    
    
    
    269,000Total revenues
    
    
    67,000
    
    
    
    132,000
    
    
    
    190,000
    
    
    
    371,000COST OF REVENUES
    
    
    24,000
    
    
    
    84,000
    
    
    
    84,000
    
    
    
    287,000GROSS PROFIT
    
    
    43,000
    
    
    
    48,000
    
    
    
    106,000
    
    
    
    84,000OPERATING EXPENSESResearch and development
    
    
    170,000
    
    
    
    415,000
    
    
    
    745,000
    
    
    
    806,000Selling, general and administrative expenses
    
    
    1,915,000
    
    
    
    1,740,000
    
    
    
    3,743,000
    
    
    
    3,406,000Total operating expenses
    
    
    2,085,000
    
    
    
    2,155,000
    
    
    
    4,488,000
    
    
    
    4,212,000LOSS FROM OPERATIONS
    
    
    (2,042,000
    )
    
    
    (2,107,000
    )
    
    
    (4,382,000
    )
    
    
    (4,128,000
    )OTHER INCOME (EXPENSE)Interest income
    
    
    1,000
    
    
    
    16,000
    
    
    
    6,000
    
    
    
    35,000Interest expense
    
    
    (10,000
    )
    
    
    (2,000
    )
    
    
    (23,000
    )
    
    
    (3,514,000
    )Other income
    
    
    122,000
    
    
    
    
    
    
    
    142,000
    
    
    
    Gain on sale of marketable securities
    
    
    29,000
    
    
    
    
    
    
    
    29,000
    
    
    
    219,000Adjustments to fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,383,000Total other income (expense)
    
    
    142,000
    
    
    
    14,000
    
    
    
    154,000
    
    
    
    (1,877,000
    )LOSS BEFORE MINORITY INTEREST
    
    
    (1,900,000
    )
    
    
    (2,093,000
    )
    
    
    (4,228,000
    )
    
    
    (6,005,000
    )Minority interest loss (income) in
consolidated subsidiaries
    
    
    (1,000
    )
    
    
    (9,000
    )
    
    
    1,000
    
    
    
    (16,000
    )NET LOSS
    
    $
    (1,901,000
    )
    
    $
    (2,102,000
    )
    
    $
    (4,227,000
    )
    
    $
    (6,021,000
    )LOSS PER SHARE OF COMMON STOCK BEFORE MINORITY
INTERESTBasic and diluted
    
    $
    *
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )Minority interest in consolidated subsidiaries
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *NET LOSS PER SHARE OF COMMON STOCKBasic and
diluted
    
    $
    *
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )WEIGHTED AVERAGE SHARES OUTSTANDINGBasic and
diluted
    
    
    443,772,554
    
    
    
    304,046,460
    
    
    
    393,974,135
    
    
    
    299,766,092
 
 *
    
    Less than $0.005 per common share. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 NET LOSS
    
    $
    (1,901,000
    )
    
    $
    (2,102,000
    )
    
    $
    (4,227,000
    )
    
    $
    (6,021,000
    )Other Comprehensive Income:Unrealized holding gain (loss) on securities
    
    
    (57,000
    )
    
    
    21,000
    
    
    
    (49,000
    )
    
    
    93,000Less reclassification adjustment for realized
gain on securities included in net loss
    
    
    (29,000
    )
    
    
    
    
    
    
    (29,000
    )
    
    
    (219,000
    )Net unrealized holding gain (loss) on securities
    
    
    (86,000
    )
    
    
    21,000
    
    
    
    (78,000
    )
    
    
    (126,000
    )COMPREHENSIVE LOSS
    
    $
    (1,987,000
    )
    
    $
    (2,081,000
    )
    
    $
    (4,305,000
    )
    
    $
    (6,147,000
    )
   4




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VIASPACE INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(Unaudited)
 Common Stock
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    OtherPaid in
    
    
    Treasury
    
    
    Comprehensive
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Income
    
    
    Deficit
    
    
    TotalBALANCE, DECEMBER 31, 2007
    
    
    316,452,598
    
    
    $
    316,000
    
    
    $
    19,040,000
    
    
    $
    
    
    
    $
    78,000
    
    
    $
    (19,941,000
    )
    
    $
    (507,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,227,000
    )
    
    
    (4,227,000
    )Other comprehensive income:Unrealized holding loss on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,000
    )
    
    
    
    
    
    
    (49,000
    )Reclassification of realized gain on
securities to net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,000
    )
    
    
    
    
    
    
    (29,000
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,305,000
    )Sales of common stock to investors
    
    
    4,928,750
    
    
    
    5,000
    
    
    
    220,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    225,000Shares issued pursuant to Form S-3
registration statement to be sold by
Company
    
    
    21,276,595
    
    
    
    21,000
    
    
    
    957,000
    
    
    
    (962,000
    )
    
    
    
    
    
    
    
    
    
    
    16,000Exercise of warrants
    
    
    5,763,625
    
    
    
    6,000
    
    
    
    254,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260,000Stock compensation expense related to
stock options
    
    
    
    
    
    
    
    
    
    
    1,020,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,020,000Shares issued to consultants, employees
and vendors for services
    
    
    114,460,758
    
    
    
    115,000
    
    
    
    5,764,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,879,000BALANCE, JUNE 30, 2008
    
    
    462,882,326
    
    
    $
    463,000
    
    
    $
    27,255,000
    
    
    $
    (962,000
    )
    
    $
    
    
    
    $
    (24,168,000
    )
    
    $
    2,588,000
   5




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##### Table of Contents



VIASPACE INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months Ended June 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (4,227,000
    )
    
    $
    (6,021,000
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    35,000
    
    
    
    35,000Amortization of intangible assets
    
    
    11,000
    
    
    
    18,000Amortization of discount related to conversion feature of debentures
    
    
    
    
    
    
    354,000Stock option and warrant compensation expense
    
    
    1,020,000
    
    
    
    1,449,000Stock compensation expense related to restricted stock issued
    
    
    303,000
    
    
    
    143,000Operating expenses paid in stock issued
    
    
    2,152,000
    
    
    
    Change in fair value of derivatives
    
    
    
    
    
    
    (1,383,000
    )Non-cash interest expense related to convertible debentures debt discount write off
    
    
    
    
    
    
    2,096,000Non-cash interest expense related to loss on conversion of debentures
    
    
    
    
    
    
    953,000Non-cash interest expense related to convertible debentures that was forgiven
    
    
    
    
    
    
    50,000Non-cash interest expense related to deferred financing costs
    
    
    
    
    
    
    58,000Gain on sale of marketable securities
    
    
    (29,000
    )
    
    
    (219,000
    )(Increase) decrease in:Accounts receivable
    
    
    (18,000
    )
    
    
    151,000Inventory
    
    
    2,000
    
    
    
    (45,000
    )Prepaid expenses
    
    
    (2,000
    )
    
    
    26,000Other current assets
    
    
    9,000
    
    
    
    Increase (decrease) in:Accounts payable
    
    
    (80,000
    )
    
    
    (24,000
    )Accrued expenses and other
    
    
    (174,000
    )
    
    
    11,000Related party payable
    
    
    46,000
    
    
    
    16,000Unearned revenue
    
    
    136,000
    
    
    
    Minority interest
    
    
    (55,000
    )
    
    
    16,000Net cash used in operating activities
    
    
    (871,000
    )
    
    
    (2,316,000
    )CASH FLOWS FROM INVESTING ACTIVITIES:Additions to fixed assets
    
    
    (2,000
    )
    
    
    (17,000
    )Proceeds from gain on sale of marketable securities
    
    
    29,000
    
    
    
    219,000Net cash provided by investing activities
    
    
    27,000
    
    
    
    202,000CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from restructuring of convertible debentures and issuance of common
stock, net of offering costs paid
    
    
    
    
    
    
    911,000Proceeds from loan
    
    
    300,000
    
    
    
    Proceeds from exercise of warrants
    
    
    259,000
    
    
    
    Payments on loans
    
    
    (300,000
    )
    
    
    Payments on long-term debt
    
    
    (15,000
    )
    
    
    (14,000
    )Proceeds from sale of common stock
    
    
    66,000
    
    
    
    Net cash provided by financing activities
    
    
    310,000
    
    
    
    897,000NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (534,000
    )
    
    
    (1,217,000
    )CASH AND CASH EQUIVALENTS, Beginning of period
    
    
    608,000
    
    
    
    1,861,000CASH AND CASH EQUIVALENTS, End of period
    
    $
    74,000
    
    
    $
    644,000Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    23,000
    
    
    $
    3,000Income taxes
    
    $
    
    
    
    $
    
  6




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##### Table of Contents



Supplemental Disclosure of Non-Cash Activities for 2007
 
    
    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 YA Global Investments,
L.P. 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.
 Supplemental Disclosure of Non-Cash Activities for 2008
 
    
    The Company issued 103,410,151 shares of the Companys common stock for
future services valued on the date of issuance at $5,329,000. This amount was
recorded on the date of issuance as prepaid expenses.
   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
 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 -
  8




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##### Table of Contents



Accounts Receivable Allowance for Doubtful Accounts
 Marketable Securities
 Inventory
 Property and Equipment
 Intangible Assets -
 Impairment of Long-lived Assets
 Minority Interest in Subsidiaries -
 Fair Value of Financial Instruments
  9




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##### Table of Contents



Income Taxes
 Revenue Recognition Product Revenue
 Product Development Revenue on Fixed-Price Contracts With Milestone Values Defined
 Product Development Revenue on Fixed-Price Contracts
  10




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##### Table of Contents



Stock Based Compensation -
 Net Income (Loss) Per Share
 Research and Development
 NOTE 2  ACCOUNTS RECEIVABLE
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)U.S. Government customers
    
    $
    9,000
    
    
    $
    21,000Commercial customers
    
    
    117,000
    
    
    
    87,000Total accounts receivable
    
    
    126,000
    
    
    
    108,000Less: Allowance for doubtful accounts
    
    
    
    
    
    
    Accounts receivable, net
    
    $
    126,000
    
    
    $
    108,000
 NOTE 3  PREPAID EXPENSES
    11




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##### Table of Contents



NOTE 4  FIXED ASSETS
  June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)Computer equipment and software
    
    $
    226,000
    
    
    $
    223,000Lab equipment
    
    
    15,000
    
    
    
    15,000Furniture and fixtures
    
    
    68,000
    
    
    
    68,000Leasehold improvements
    
    
    26,000
    
    
    
    26,000Total property and equipment
    
    
    335,000
    
    
    
    332,000Less: Accumulated depreciation
    
    
    213,000
    
    
    
    177,000Fixed assets, net
    
    $
    122,000
    
    
    $
    155,000
  NOTE 5  MARKETABLE SECURITIES
 Cantronic Systems Inc.
  NOTE 6  INTANGIBLE ASSETS
  June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)Amortized intangible assets, gross:License to patent
    
    $
    380,000
    
    
    $
    380,000Software code and licenses to software
    
    
    35,000
    
    
    
    35,000Total intangible assets, gross
    
    
    415,000
    
    
    
    415,000Less: Accumulated amortization
    
    
    209,000
    
    
    
    198,000Total intangible assets, net
    
    $
    206,000
    
    
    $
    217,000
  12




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##### Table of Contents



SoftwareCode andLicense to
    
    
    Licenses toYear
    
    Patent
    
    
    Software
    
    
    Total2008
    
    $
    17,000
    
    
    $
    5,000
    
    
    $
    22,0002009
    
    
    17,000
    
    
    
    5,000
    
    
    
    22,0002010
    
    
    17,000
    
    
    
    4,000
    
    
    
    21,0002011
    
    
    17,000
    
    
    
    
    
    
    
    17,0002012
    
    
    17,000
    
    
    
    
    
    
    
    17,000Thereafter
    
    
    118,000
    
    
    
    
    
    
    
    118,000Total
    
    $
    203,000
    
    
    $
    14,000
    
    
    $
    217,000
 NOTE 7  OWNERSHIP INTEREST IN AFFILIATED COMPANIES
 DMFCC
 VIASPACE Security
 Ionfinity
 Concentric Water
 eCARmerce
 NOTE 8  STOCK OPTIONS AND WARRANTS
 VIASPACE Inc. 2005 Stock Incentive Plan
   13




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##### Table of Contents



June 30,
    
    
    June 30,2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)Risk free interest rate
    
    
    3.28%
    
    
    
    4.58% - 5.12%Dividends
    
    
    0%
    
    
    
    0%Volatility factor
    
    
    118.81%
    
    
    
    118.51% - 125.13%Expected life
    
    
    6.67 years
    
    
    
    6.67 yearsAnnual forfeiture rate
    
    
    0% - 4%
    
    
    
    0% - 6%
  14




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##### Table of Contents



Employee and Director Option Grants
  Weighted-
    
    
    Weighted-Average
    
    
    AverageExercise
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Price Per
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Share
    
    
    Term In Years
    
    
    ValueOutstanding at December 31, 2007
    
    
    10,407,000
    
    
    $
    0.08Granted
    
    
    5,050,000
    
    
    
    0.39Exercised
    
    
    
    
    
    
    Reclassified to consultant options
    
    
    (1,457,000
    )
    
    
    0.08Forfeited
    
    
    (130,000
    )
    
    
    0.08Outstanding at June 30, 2008
    
    
    13,870,000
    
    
    $
    0.06
    
    
    
    8.7
    
    
    $
    Exercisable at June 30, 2008
    
    
    3,769,000
    
    
    $
    0.08
    
    
    
    8.2
    
    
    $
    
   Consultant Option Grants
  Weighted-
    
    
    Weighted-Average
    
    
    AverageExercise
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Price Per
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Share
    
    
    Term In Years
    
    
    ValueOutstanding at December 31, 2007
    
    
    1,109,000
    
    
    $
    0.28Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Reclassified from employee options
    
    
    1,457,000
    
    
    
    0.08Forfeited
    
    
    (150,000
    )
    
    
    0.08Outstanding at June 30, 2008
    
    
    2,416,000
    
    
    $
    0.17
    
    
    
    8.8
    
    
    $
    Exercisable at June 30, 2008
    
    
    955,000
    
    
    $
    0.24
    
    
    
    8.8
    
    
    $
    
   15




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##### Table of Contents



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
    
    
    1,396,000
    
    
    $
    .02Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at June 30, 2008
    
    
    1,396,000
    
    
    $
    .02
    
    
    
    6.2
    
    
    $
    185,000Exercisable at June 30, 2008
    
    
    1,368,000
    
    
    $
    .02
    
    
    
    6.2
    
    
    $
    182,000
  Warrants
 YA Global and Gilford Warrants
    16




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##### Table of Contents



Other Warrants
  Summary of Warrants
  June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)YA Global No. 1
    
    
    
    
    
    
    1,488,625YA Global No. 2
    
    
    
    
    
    
    2,000,000YA Global No. 3
    
    
    
    
    
    
    885,000YA Global No. 4
    
    
    
    
    
    
    790,000YA Global No. 5
    
    
    
    
    
    
    600,000Gilford No. 1
    
    
    200,000
    
    
    
    200,000Gilford No. 2
    
    
    160,000
    
    
    
    160,000Gilford No. 3
    
    
    264,000
    
    
    
    264,000Others
    
    
    400,000
    
    
    
    1,024,000
    
    
    
    6,387,625
   17




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##### Table of Contents



NOTE 9  LOANS AND LONG-TERM DEBT
 Loans
 SNK Capital Trust
   La Jolla Cove Investors, Inc.
     18




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##### Table of Contents



Other Long-Term Debt
   Summary of Loans and Long-Term Debt
  June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)Community Development Commission of the County of Los
Angeles, secured, with interest at 5% due July 1, 2009
    
    $
    15,000
    
    
    $
    21,000Community Development Commission of the County of Los
Angeles, secured, with interest at 5% due September 1, 2009
    
    
    41,000
    
    
    
    50,000SNK Capital Trust Note, with interest at 10% due July 10, 2009
    
    
    250,000
    
    
    
    250,000LJC Loans
    
    
    75,000
    
    
    
    250,000Total Long-term Debt
    
    
    381,000
    
    
    
    571,000Less Current Portion of Long-Term Debt and Loans
    
    
    106,000
    
    
    
    280,000Net Long-term Debt
    
    $
    275,000
    
    
    $
    291,000
 NOTE 10  STOCKHOLDERS EQUITY
 Preferred Stock
   19




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##### Table of Contents



Common Stock
   NOTE 11  INCOME TAX
    Note 12  RETIREMENT PLAN
  Note 13  OPERATING SEGMENTS
    20




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##### Table of Contents



Energy Segment:
 (i)
    
    DMFCC:DMFCC is a provider of disposable fuel cartridges and intellectual property
protection for manufacturers of direct methanol and other liquid hydrocarbon fuel cells.
Direct methanol fuel cells are replacements for traditional batteries and are expected to
gain a substantial market share because they offer longer operating time as compared to
current lithium ion batteries and may be instantaneously recharged by simply replacing the
disposable fuel cartridge. Direct methanol fuel cell-based products are being developed for
laptop computers, cell phones, music players and other applications by major manufacturers
of portable electronics in Japan and Korea.
 (ii)
    
    VIASPACE Corporate:VIASPACE Corporate is identifying and pursuing additional business
opportunities in areas including fuel cell test equipment such as a relative humidity
sensor, batteries and battery test equipment, alternative fuels, and new products to
conserve energy and reduce emissions.
 Security Segment:
 (i)
    
    VIASPACE Security:VIASPACE Security is developing products and services based on
inference and sensor data fusion technology. Sensor fusion combines data, observations,
and inferences derived from multiple sources and sensors to generate reliable
decision-support information in critical applications where solution speed and confidence
is of the utmost importance. In addition, VIASPACE Security is pursuing sales of a
perimeter surveillance radar solution based on a low power Doppler radar designed for
commercial perimeter security applications. This radar solution is specifically optimized
and ideal for monitoring activity surrounding or around critical infrastructure areas such
as airports, seaports, military installations, national borders, refineries and other
critical industry.
 (ii)
    
    Ionfinity:Ionfinity is working on a next-generation mass spectrometry technology, which
could significantly improve the application of mass spectrometry for industrial process
control and environmental monitoring and could also spawn a new class of detection systems
for homeland security.
 (iii)
    
    VIASPACE Corporate:VIASPACE Corporate is identifying and pursuing additional business
opportunities in areas including protection of critical infrastructure assets including
energy facilities, port security and airports. VIASPACE Corporate is also developing
products and services based on inference and sensor data fusion technology.
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Energy
    
    $
    58,000
    
    
    $
    36,000
    
    
    $
    138,000
    
    
    $
    59,000Security
    
    
    9,000
    
    
    
    96,000
    
    
    
    52,000
    
    
    
    312,000Total Revenue
    
    $
    67,000
    
    
    $
    132,000
    
    
    $
    190,000
    
    
    $
    371,000Income (Loss) From Operations:Energy
    
    $
    (126,000
    )
    
    $
    (499,000
    )
    
    $
    (716,000
    )
    
    $
    (1,050,000
    )Security
    
    
    (265,000
    )
    
    
    (347,000
    )
    
    
    (608,000
    )
    
    
    (604,000
    )Loss From Operations by Reportable Segments
    
    
    (391,000
    )
    
    
    (846,000
    )
    
    
    (1,324,000
    )
    
    
    (1,654,000
    )Corporate Administrative Costs
    
    
    (1,142,000
    )
    
    
    (444,000
    )
    
    
    (1,924,000
    )
    
    
    (1,032,000
    )Corporate Stock Compensation and Warrant Expense
    
    
    (509,000
    )
    
    
    (817,000
    )
    
    
    (1,134,000
    )
    
    
    (1,442,000
    )Loss From Operations
    
    $
    (2,042,000
    )
    
    $
    (2,107,000
    )
    
    $
    (4,382,000
    )
    
    $
    (4,128,000
    )
  21




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##### Table of Contents



Year EndedDecember 31,2007
    
    
    2006Revenues:Energy
    
    $
    130,000
    
    
    $
    65,000Security
    
    
    423,000
    
    
    
    897,000Total Revenue
    
    $
    553,000
    
    
    $
    962,000Income (Loss) From Operations:Energy
    
    $
    (1,898,000
    )
    
    $
    (1,652,000
    )Security
    
    
    (1,372,000
    )
    
    
    (819,000
    )Loss From Operations by Reportable Segments
    
    
    (3,270,000
    )
    
    
    (2,471,000
    )Corporate Administrative Costs
    
    
    (1,692,000
    )
    
    
    (1,789,000
    )Corporate Stock Compensation and Warrant Expense
    
    
    (2,681,000
    )
    
    
    (1,959,000
    )Loss From Operations
    
    $
    (7,643,000
    )
    
    $
    (6,219,000
    )
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)Assets:Energy
    
    $
    255,000
    
    
    $
    316,000Security
    
    
    99,000
    
    
    
    266,000VIASPACE Corporate
    
    
    3,807,000
    
    
    
    801,000Total Assets
    
    $
    4,161,000
    
    
    $
    1,383,000
  NOTE 14  NET LOSS PER SHARE
   June 30,2008
    
    
    2007Stock Options
    
    
    16,286,000
    
    
    
    10,320,500Warrants
    
    
    1,024,000
    
    
    
    7,399,000
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Basic and diluted net loss per share:Numerator:Net loss attributable to common stock
    
    $
    (1,901,000
    )
    
    $
    (2,102,000
    )
    
    $
    (4,227,000
    )
    
    $
    (6,021,000
    )Denominator:Weighted average shares of common stock outstanding
    
    
    443,772,554
    
    
    
    304,046,460
    
    
    
    393,974,135
    
    
    
    299,766,092Net loss per share of common stock, basic and diluted
    
    $
    *
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
 *
    
    Less than $0.005 per common share.  22




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##### Table of Contents



NOTE 15  RELATED PARTY TRANSACTIONS
         23




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##### Table of Contents



Note
16  COMMITMENTS AND CONTINGENCIES
 Employment Agreements
  Royalty Commitments
     Leases
  Years EndedFiscal Year
    
    December 31,2008
    
    $
    67,0002009
    
    
    138,0002010
    
    
    142,0002011
    
    
    73,000Total minimum lease payments
    
    $
    420,000
   24




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##### Table of Contents



Fiscal Year
    
    Principal
    
    
    Interest
    
    
    Total2008
    
    $
    25,000
    
    
    $
    1,000
    
    
    $
    26,0002009
    
    
    41,000
    
    
    
    1,000
    
    
    
    42,000Thereafter
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    66,000
    
    
    $
    2,000
    
    
    $
    68,000
 Litigation
  Note 17  FINANCIAL ACCOUNTING DEVELOPMENTS
   Note 18  GOING CONCERN
   25




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##### 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 2007 annual report onForm 10-KSB.
 VIASPACE Overview
     Critical accounting policies and estimates
   26




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##### Table of Contents



27




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##### Table of Contents



Three Months Ended June 30, 2008 Compared to June 30, 2007
 Results of Operations
 Revenues
  Cost of Revenues
  Research and Development
  Selling, General and Administrative Expenses
  .
  28




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##### Table of Contents



Other Income (Expense), Net
 Interest Income
  Interest Expense
  Other Income
  Gain on Sale of Marketable Securities
  Six Months Ended June 30, 2008 Compared to June 30, 2007
 Results of Operations
 Revenues
  Cost of Revenues
  Research and Development
   29




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##### Table of Contents



Selling, General and Administrative Expenses
  .
 Other Income (Expense), Net
 Interest Income
  Interest Expense
  Other Income
  Adjustment to the Fair Value of Derivatives
   30




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##### Table of Contents



Gain on Sale of Marketable Securities
  Liquidity and Capital Resources
    Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsLong-term debt obligations (a)
    
    $
    64,000
    
    
    $
    31,000
    
    
    $
    33,000
    
    
    $
    
    
    
    $
    Operating lease obligations (b)
    
    $
    453,000
    
    
    $
    134,000
    
    
    $
    319,000
    
    
    $
    
    
    
    $
    
 (a)
    
    The annual installment of principal and interest on the notes payable owed to the
Community Development Commission as discussed in the accompanying footnotes to the
consolidated financial statements are noted.(b)
    
    The Company leases office and laboratory space in Pasadena, California and entered into
a five-year lease on May 1, 2006. Future minimum lease payments are noted.  Employment Agreements
   31




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##### Table of Contents



Royalty Commitments
     Inflation and Seasonality
  Off-Balance Sheet Arrangements
   32




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure controls and procedures.
  Changes in internal controls over financial reporting.
  33




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 YA Global Investments, L.P. (f/k/a Cornell Capital Partners, L.P.) v. VIASPACE Inc., et al.
 
 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.
     34




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##### Table of Contents



Our revenues to date have been to a few customers, the loss of which could result in a severe
decline in revenues.
  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
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
   35




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##### Table of Contents



ITEM 5. OTHER INFORMATION
   
 ITEM 6. EXHIBITS
 (a) Exhibits
 10.1
    
    
    STTR Phase II Contract between Ionfinity and the U.S. Army for Advanced Robotic Detection of
Chemical Agents, Toxic Industrial Gases, and IEDs for Force Health Protection effective August 4,
2008. *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
    
    
    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. *99.1
    
    
    Press release dated August 11, 2008. *
 *
    
    Filed herewith.   36




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##### Table of Contents



SIGNATURES
  VIASPACE Inc.
(Registrant)Date: August 14, 2008
    /s/ CARL KUKKONENCarl KukkonenChief Executive OfficerDate: August 14, 2008
    /s/ STEPHEN J. MUZIStephen J. MuziChief Financial Officer  37




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description10.1
    
    
    STTR Phase II Contract between Ionfinity and the U.S. Army for Advanced Robotic Detection of
Chemical Agents, Toxic Industrial Gases, and IEDs for Force Health Protection effective August 4,
2008. *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
    
    
    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. *99.1
    
    
    Press release dated August 11, 2008. *
 *
    
    Filed herewith.  38