##### 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 September 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
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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##### 



VIASPACE INC.
 INDEX
 PagePart I. Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007
    
    
    3-4Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited) and Consolidated Statements of Comprehensive Loss For the Three and Nine Months Ended
September 30, 2008 and 2007 (Unaudited)
    
    
    5Consolidated Statements of Stockholders Equity (Deficit) as of September 30, 2008 (Unaudited) and
December 31, 2007
    
    
    6Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2008 and 2007 (Unaudited)
    
    
    7-8Notes to Consolidated Financial Statements (Unaudited)
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    40Part II. Other InformationItem 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    43Item 4. Submission of Matters to Vote of Security Holders
    
    
    43Item 5. Other Information
    
    
    43Item 6. Exhibits
    
    
    43Signatures
    
    
    44Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 VIASPACE INC.
 
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    36,000
    
    
    $
    608,000Accounts receivable, net of allowance for doubtful accounts
    
    
    101,000
    
    
    
    108,000Marketable securities, available for sale
    
    
    
    
    
    
    78,000Inventory
    
    
    38,000
    
    
    
    43,000Prepaid expenses
    
    
    2,513,000
    
    
    
    89,000Other current assets
    
    
    47,000
    
    
    
    72,000TOTAL CURRENT ASSETS
    
    
    2,735,000
    
    
    
    998,000FIXED ASSETS:Fixed assets, net of accumulated depreciation
    
    
    105,000
    
    
    
    155,000OTHER ASSETS:Intellectual property, net of accumulated amortization
    
    
    199,000
    
    
    
    217,000Other assets
    
    
    13,000
    
    
    
    13,000TOTAL OTHER ASSETS
    
    
    212,000
    
    
    
    230,000TOTAL ASSETS
    
    $
    3,052,000
    
    
    $
    1,383,000LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    202,000
    
    
    $
    257,000Accrued expenses
    
    
    189,000
    
    
    
    313,000Deposits
    
    
    100,000
    
    
    
    Current portion of long-term debt
    
    
    54,000
    
    
    
    30,000Loans
    
    
    250,000
    
    
    
    250,000Related party payable
    
    
    358,000
    
    
    
    185,000TOTAL CURRENT LIABILITIES
    
    
    1,153,000
    
    
    
    1,035,000LONG-TERM LIABILITIES:Deferred rent
    
    
    
    
    
    
    9,000Long-term debt, net of current portion
    
    
    
    
    
    
    291,000TOTAL LONG-TERM LIABILITIES
    
    
    
    
    
    
    300,000TOTAL LIABILITIES
    
    
    1,153,000
    
    
    
    1,335,000COMMITMENTS AND CONTINGENCIESMINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES:Preferred Shareholder Minority Interest
    
    
    500,000
    
    
    
    500,000Common Shareholder Minority Interest
    
    
    5,000
    
    
    
    55,000505,000
    
    
    
    555,000
  3




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##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007(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, 1,500,000,000
shares authorized, 508,830,743 and
316,452,598 issued and outstanding in 2008
and 2007, respectively
    
    
    509,000
    
    
    
    316,000Additional paid in capital
    
    
    28,636,000
    
    
    
    19,040,000Accumulated other comprehensive income
    
    
    
    
    
    
    78,000Accumulated deficit
    
    
    (27,751,000
    )
    
    
    (19,941,000
    )TOTAL STOCKHOLDERS EQUITY (DEFICIT)
    
    
    1,394,000
    
    
    
    (507,000
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    3,052,000
    
    
    $
    1,383,000
   4




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##### Table of Contents



VIASPACE INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended 
September 30,
    
    
    Nine Months Ended 
September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUESGovernment contracts
    
    $
    62,000
    
    
    $
    21,000
    
    
    $
    80,000
    
    
    $
    123,000Commercial contracts
    
    
    104,000
    
    
    
    67,000
    
    
    
    276,000
    
    
    
    336,000Total revenues
    
    
    166,000
    
    
    
    88,000
    
    
    
    356,000
    
    
    
    459,000COST OF REVENUES
    
    
    107,000
    
    
    
    64,000
    
    
    
    191,000
    
    
    
    351,000GROSS PROFIT
    
    
    59,000
    
    
    
    24,000
    
    
    
    165,000
    
    
    
    108,000OPERATING EXPENSESResearch and development
    
    
    997,000
    
    
    
    381,000
    
    
    
    1,742,000
    
    
    
    1,187,000Selling, general and administrative expenses
    
    
    2,651,000
    
    
    
    1,378,000
    
    
    
    6,394,000
    
    
    
    4,784,000Total operating expenses
    
    
    3,648,000
    
    
    
    1,759,000
    
    
    
    8,136,000
    
    
    
    5,971,000LOSS FROM OPERATIONS
    
    
    (3,589,000
    )
    
    
    (1,735,000
    )
    
    
    (7,971,000
    )
    
    
    (5,863,000
    )OTHER INCOME (EXPENSE)Interest income
    
    
    
    
    
    
    5,000
    
    
    
    6,000
    
    
    
    40,000Interest expense
    
    
    (13,000
    )
    
    
    (2,000
    )
    
    
    (36,000
    )
    
    
    (3,516,000
    )Other income
    
    
    70,000
    
    
    
    
    
    
    
    212,000
    
    
    
    Gain on sale of marketable securities
    
    
    
    
    
    
    45,000
    
    
    
    29,000
    
    
    
    264,000Gain on sale of patents
    
    
    
    
    
    
    114,000
    
    
    
    
    
    
    
    114,000Adjustments to fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,383,000Total other income (expense)
    
    
    57,000
    
    
    
    162,000
    
    
    
    211,000
    
    
    
    (1,715,000
    )LOSS BEFORE MINORITY INTEREST
    
    
    (3,532,000
    )
    
    
    (1,573,000
    )
    
    
    (7,760,000
    )
    
    
    (7,578,000
    )Minority interest loss (income) in
consolidated subsidiaries
    
    
    (5,000
    )
    
    
    (8,000
    )
    
    
    (4,000
    )
    
    
    (24,000
    )NET LOSS
    
    $
    (3,537,000
    )
    
    $
    (1,581,000
    )
    
    $
    (7,764,000
    )
    
    $
    (7,602,000
    )LOSS PER SHARE OF COMMON STOCK BEFORE MINORITY
INTERESTBasic and diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )Minority interest in consolidated subsidiaries
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *NET LOSS PER SHARE OF COMMON STOCKBasic and diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )WEIGHTED AVERAGE SHARES OUTSTANDINGBasic and diluted
    
    
    458,693,837
    
    
    
    304,836,803
    
    
    
    415,897,314
    
    
    
    301,474,902*     Less
than $0.005 per common share.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSNET LOSS
    
    $
    (3,537,000
    )
    
    $
    (1,581,000
    )
    
    $
    (7,764,000
    )
    
    $
    (7,602,000
    )Other Comprehensive Income:Unrealized holding gain (loss) on securities
    
    
    
    
    
    
    801,000
    
    
    
    (49,000
    )
    
    
    894,000Less reclassification adjustment for realized
gain on securities included in net loss
    
    
    
    
    
    
    (45,000
    )
    
    
    (29,000
    )
    
    
    (264,000
    )Net unrealized holding gain (loss) on securities
    
    
    
    
    
    
    756,000
    
    
    
    (78,000
    )
    
    
    630,000COMPREHENSIVE LOSS
    
    $
    (3,537,000
    )
    
    $
    (825,000
    )
    
    $
    (7,842,000
    )
    
    $
    (6,972,000
    )
   5




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##### Table of Contents



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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,764,000
    )
    
    
    (7,764,000
    )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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,842,000
    )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
    )
    
    
    
    
    
    
    
    
    
    
    16,000Shares issued pursuant to Form S-3
registration statement originally
intended to be sold, but returned to
Company and cancelled
    
    
    (20,951,645
    )
    
    
    (21,000
    )
    
    
    (941,000
    )
    
    
    (962,000
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants
    
    
    5,763,625
    
    
    
    6,000
    
    
    
    254,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260,000Stock compensation expense related to
stock options
    
    
    
    
    
    
    
    
    
    
    1,442,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,442,000Cash distribution from Ionfinity, LLC
    
    
    
    
    
    
    
    
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    (46,000
    )
    
    
    Shares issued to YA Global related to
litigation settlement
    
    
    22,500,000
    
    
    
    23,000
    
    
    
    607,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    630,000Shares issued to consultants, vendors,
employees and directors for services
    
    
    158,860,820
    
    
    
    159,000
    
    
    
    7,011,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,170,000BALANCE, SEPTEMBER 30, 2008
    
    
    508,830,743
    
    
    $
    509,000
    
    
    $
    28,636,000
    
    
    $
    
    
    
    $
    
    
    
    $
    (27,751,000
    )
    
    $
    1,394,000
   6




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##### Table of Contents



VIASPACE INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine Months Ended 
September 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (7,764,000
    )
    
    $
    (7,602,000
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    53,000
    
    
    
    53,000Amortization of intangible assets
    
    
    18,000
    
    
    
    152,000Amortization of discount related to conversion feature of debentures
    
    
    
    
    
    
    354,000Stock option and warrant compensation expense
    
    
    1,443,000
    
    
    
    2,063,000Stock compensation expense related to restricted stock issued
    
    
    1,248,000
    
    
    
    416,000Operating expenses paid in stock issued
    
    
    4,128,000
    
    
    
    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
    )
    
    
    (264,000
    )(Increase) decrease in:Accounts receivable
    
    
    7,000
    
    
    
    137,000Inventory
    
    
    5,000
    
    
    
    (50,000
    )Prepaid expenses
    
    
    
    
    
    
    39,000Other current assets
    
    
    25,000
    
    
    
    (230,000
    )Increase (decrease) in:Accounts payable
    
    
    (55,000
    )
    
    
    66,000Accrued expenses and other
    
    
    (33,000
    )
    
    
    30,000Related party payable
    
    
    173,000
    
    
    
    86,000Minority interest
    
    
    (50,000
    )
    
    
    24,000Net cash used in operating activities
    
    
    (831,000
    )
    
    
    (2,952,000
    )CASH FLOWS FROM INVESTING ACTIVITIES:Additions to fixed assets
    
    
    (3,000
    )
    
    
    (17,000
    )Proceeds from gain on sale of marketable securities
    
    
    29,000
    
    
    
    219,000Net cash provided by investing activities
    
    
    26,000
    
    
    
    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
    
    
    
    250,000Proceeds from exercise of warrants
    
    
    259,000
    
    
    
    Payments on loans
    
    
    (375,000
    )
    
    
    Payments on long-term debt
    
    
    (17,000
    )
    
    
    (21,000
    )Proceeds from sale of common stock
    
    
    66,000
    
    
    
    Net cash provided by financing activities
    
    
    233,000
    
    
    
    1,140,000NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (572,000
    )
    
    
    (1,610,000
    )CASH AND CASH EQUIVALENTS, Beginning of period
    
    
    608,000
    
    
    
    1,861,000CASH AND CASH EQUIVALENTS, End of period
    
    $
    36,000
    
    
    $
    251,000Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    36,000
    
    
    $
    5,000Income taxes
    
    $
    
    
    
    $
    
  7




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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 108,757,871 shares of the Companys common stock for
future services valued on the date of issuance at $5,585,000. This amount was
recorded on the date of issuance as prepaid expenses.
   8




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##### Table of Contents



VIASPACE INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
 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 
  9




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##### Table of Contents



Accounts Receivable Allowance for Doubtful Accounts
 Marketable Securities
 Inventory $0,
 Property and Equipment
 Intangible Assets 
 Impairment of Long-lived Assets
 Minority Interest in Subsidiaries 
 Fair Value of Financial Instruments
  10




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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
  11




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##### Table of Contents



Stock Based Compensation 
 Net Income (Loss) Per Share
 Research and Development
 NOTE 2  ACCOUNTS RECEIVABLE
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)U.S. Government customers
    
    $
    31,000
    
    
    $
    21,000Commercial customers
    
    
    70,000
    
    
    
    87,000Total accounts receivable
    
    
    101,000
    
    
    
    108,000Less: Allowance for doubtful accounts
    
    
    
    
    
    
    Accounts receivable, net
    
    $
    101,000
    
    
    $
    108,000
 NOTE 3  PREPAID EXPENSES
    12




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##### Table of Contents



NOTE 4  FIXED ASSETS
  September 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
    
    
    230,000
    
    
    
    177,000Fixed assets, net
    
    $
    105,000
    
    
    $
    155,000
  NOTE 5  MARKETABLE SECURITIES
   13




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##### Table of Contents



NOTE 6  INTANGIBLE ASSETS
  September 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
    
    
    216,000
    
    
    
    198,000Total intangible assets, net
    
    $
    199,000
    
    
    $
    217,000
  SoftwareCode andLicense to
    
    
    Licenses toYear
    
    Patent
    
    
    Software
    
    
    Total2009
    
    $
    17,000
    
    
    $
    5,000
    
    
    $
    22,0002010
    
    
    17,000
    
    
    
    5,000
    
    
    
    22,0002011
    
    
    17,000
    
    
    
    
    
    
    
    17,0002012
    
    
    17,000
    
    
    
    
    
    
    
    17,0002013
    
    
    17,000
    
    
    
    
    
    
    
    17,000Thereafter
    
    
    104,000
    
    
    
    
    
    
    
    104,000Total
    
    $
    189,000
    
    
    $
    10,000
    
    
    $
    199,000
 NOTE 7  OWNERSHIP INTEREST IN AFFILIATED COMPANIES
 DMFCC
 VIASPACE Security
 Ionfinity
 Concentric Water
 eCARmerce
  14




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NOTE 8  STOCK OPTIONS AND WARRANTS
 VIASPACE Inc. 2005 Stock Incentive Plan
        15




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##### Table of Contents



September 30,
    
    
    September 30,2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)Risk free interest rate
    
    
    3.28% - 3.42%
    
    
    
    4.58% - 5.12%Dividends
    
    
    0%
    
    
    
    0%Volatility factor
    
    
    118.81% - 122.90%
    
    
    
    118.51% - 125.13%Expected life
    
    6.67 years
    
    6.67 yearsAnnual forfeiture rate
    
    
    0% - 16.3%
    
    
    
    0% - 6%
 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
    
    
    7,050,000
    
    
    
    0.03Exercised
    
    
    
    
    
    
    Reclassified to consultant options
    
    
    (1,457,000
    )
    
    
    0.08Forfeited
    
    
    (1,380,000
    )
    
    
    0.08Outstanding at September 30, 2008
    
    
    14,620,000
    
    
    $
    0.06
    
    
    
    8.5
    
    
    $
    4,600Exercisable at September 30, 2008
    
    
    4,003,000
    
    
    $
    0.07
    
    
    
    8.1
    
    
    $
    
    16




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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, 2007
    
    
    1,109,000
    
    
    $
    0.28Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Reclassified from employee options
    
    
    1,457,000
    
    
    
    0.08Forfeited
    
    
    (1,104,000
    )
    
    
    0.28Outstanding at September 30, 2008
    
    
    1,462,000
    
    
    $
    0.07
    
    
    
    8.6
    
    
    $
    Exercisable at September 30, 2008
    
    
    488,000
    
    
    $
    0.08
    
    
    
    8.6
    
    
    $
    
  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, 2007
    
    
    1,396,000
    
    
    $
    .02Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2008
    
    
    1,396,000
    
    
    $
    .02
    
    
    
    5.9
    
    
    $
    45,000Exercisable at September 30, 2008
    
    
    1,381,000
    
    
    $
    .02
    
    
    
    5.9
    
    
    $
    45,000
   17




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Warrants
 YA Global and Gilford Warrants
          18




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##### Table of Contents



Other Warrants
  Summary of Warrants
  September 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
 NOTE 9  LOANS AND LONG-TERM DEBT
 SNK Capital Trust
    19




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La Jolla Cove Investors, Inc.
       Other Long-Term Debt
    20




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##### Table of Contents



Summary of Loans and Long-Term Debt
  September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)Community Development Commission of the County of Los Angeles,
secured, with interest at 5% due July 1, 2009
    
    $
    14,000
    
    
    $
    21,000Community Development Commission of the County of Los Angeles,
secured, with interest at 5% due September 1, 2009
    
    
    40,000
    
    
    
    50,000SNK Capital Trust Note, with interest at 10% due July 10, 2009
    
    
    250,000
    
    
    
    250,000LJC Loans
    
    
    
    
    
    
    250,000Total Long-term Debt
    
    
    304,000
    
    
    
    571,000Less Current Portion of Long-term Debt and Loans
    
    
    304,000
    
    
    
    280,000Net Long-term Debt
    
    $
    
    
    
    $
    291,000
 NOTE 10  STOCKHOLDERS EQUITY
 Preferred Stock
  Common Stock
   NOTE 11  INCOME TAX
     21




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NOTE 12  RETIREMENT PLAN
  NOTE 13  OPERATING SEGMENTS
   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.
  22




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Three Months Ended
    
    
    Nine Months EndedSeptember
30,
    
    

September
30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Energy
    
    $
    69,000
    
    
    $
    
    
    
    $
    207,000
    
    
    $
    59,000Security
    
    
    97,000
    
    
    
    88,000
    
    
    
    149,000
    
    
    
    400,000Total Revenue
    
    $
    166,000
    
    
    $
    88,000
    
    
    $
    356,000
    
    
    $
    459,000Income (Loss) From Operations:Energy
    
    $
    (617,000
    )
    
    $
    (449,000
    )
    
    $
    (1,333,000
    )
    
    $
    (1,499,000
    )Security
    
    
    (538,000
    )
    
    
    (350,000
    )
    
    
    (1,146,000
    )
    
    
    (954,000
    )Loss From Operations by Reportable Segments
    
    
    (1,155,000
    )
    
    
    (799,000
    )
    
    
    (2,479,000
    )
    
    
    (2,453,000
    )Corporate Administrative Costs
    
    
    (1,164,000
    )
    
    
    (307,000
    )
    
    
    (3,088,000
    )
    
    
    (1,339,000
    )Corporate Stock Compensation and Warrant Expense
    
    
    (1,270,000
    )
    
    
    (629,000
    )
    
    
    (2,404,000
    )
    
    
    (2,071,000
    )Loss From Operations
    
    $
    (3,589,000
    )
    
    $
    (1,735,000
    )
    
    $
    (7,971,000
    )
    
    $
    (5,863,000
    )
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)Assets:Energy
    
    $
    205,000
    
    
    $
    316,000Security
    
    
    109,000
    
    
    
    266,000VIASPACE Corporate
    
    
    2,738,000
    
    
    
    801,000Total Assets
    
    $
    3,052,000
    
    
    $
    1,383,000
  NOTE 14  NET LOSS PER SHARE
   September 30,2008
    
    
    2007Stock Options
    
    
    16,082,000
    
    
    
    10,225,500Warrants
    
    
    1,024,000
    
    
    
    6,399,000
  23




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Basic and diluted net loss per share:Numerator:Net loss attributable to common stock
    
    $
    (3,537,000
    )
    
    $
    (1,581,000
    )
    
    $
    (7,764,000
    )
    
    $
    (7,602,000
    )Denominator:Weighted average shares of common stock outstanding
    
    
    458,693,837
    
    
    
    304,836,803
    
    
    
    415,897,314
    
    
    
    301,474,902Net loss per share of common stock, basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
 NOTE 15  OTHER RELATED PARTY TRANSACTIONS
        24




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NOTE 16  COMMITMENTS AND CONTINGENCIES
 Employment Agreements
  Royalty Commitments
      25




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Leases
  Years EndedFiscal Year
    
    September 30,2009
    
    $
    136,0002010
    
    
    140,0002011
    
    
    120,000Total minimum lease payments
    
    $
    396,000
   Fiscal Year
    
    Principal
    
    
    Interest
    
    
    Total2009
    
    
    54,000
    
    
    
    2,000
    
    
    
    56,000Thereafter
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    54,000
    
    
    $
    2,000
    
    
    $
    56,000
 Litigation
   NOTE 17  FINANCIAL ACCOUNTING DEVELOPMENTS
    26




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NOTE 18  GOING CONCERN
  NOTE 19  SUBSEQUENT EVENTS
 Acquisition
         27




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28




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Employment Agreements
        29




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##### Table of Contents



Shareholder Agreement
    
    
    other than certain permitted issuances, any issuance or agreement to issue any equity securities
of VGE or the Subsidiaries;
    
    any transaction of merger, consolidation, amalgamation, recapitalization or other form of
business combination; any joint venture; any liquidation, winding up or dissolution of VGE or the
Subsidiaries; or any acquisition of any business or assets from, or capital stock of, any person;
    
    any sale, conveyance, lease, transfer or other disposition of any substantial assets or any other
transaction not in the ordinary course of business;
    
    any declaration or making of dividend payments or other payments or distributions made to any
shareholders;
    
    any amendment or modification of the Memorandum and Articles of Association;
    
    any indebtedness incurred or guaranty made by VGE or the Subsidiaries or any pledge of VGEs or
the Subsidiaries assets by VGE or the Subsidiaries;
    
    commercial proposals or contracts which would commit VGE or the Subsidiaries for a total amount
of more than $100,000;
    
    decisions relating to the officers and executive management of VGE or the Subsidiaries, including
compensation, employment and termination of employment;
    
    approval of the annual budget of VGE and the Subsidiaries; and
    
    selection of auditors for VGE and the Subsidiaries.
  30




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31




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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 on Form 10-KSB .
 VIASPACE Overview
      32




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Critical accounting policies and estimates
      33




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Three Months Ended September 30, 2008 Compared to September 30, 2007
 Results of Operations
 Revenues
  Cost of Revenues
  Research and Development
 March
1,
  34




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Selling, General and Administrative Expenses
 .
 Other Income (Expense), Net
 Interest Income
  Interest Expense
  Other Income
  Gain on Sale of Marketable Securities
  Gain on Sale of Patents
   35




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Nine Months Ended September 30, 2008 Compared to September 30, 2007
 Results of Operations
 Revenues
  Cost of Revenues
  Research and Development
  Selling, General and Administrative Expenses
 .
 Other Income (Expense), Net
 Interest Income
   36




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Interest Expense
  Other Income
  Adjustment to the Fair Value of Derivatives
  Gain on Sale of Marketable Securities
  Gain on Sale of Patents
  Liquidity and Capital Resources
   37




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Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsLong-term debt obligations (a)
    
    $
    54,000
    
    
    $
    54,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations (b)
    
    $
    396,000
    
    
    $
    136,000
    
    
    $
    260,000
    
    
    $
    
    
    
    $
    
 (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
  Royalty Commitments
   38




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Inflation and Seasonality
  Off-Balance Sheet Arrangements
   39




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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.
  40




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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.
   41




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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.
  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.
     42




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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
  
 ITEM 5. OTHER INFORMATION
   
 ITEM 6. EXHIBITS
 (a) Exhibits31.1
    
    
    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. *
 *
    
    Filed herewith.   43




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SIGNATURES
  VIASPACE Inc.
(Registrant)Date: November 14, 2008
    /s/ CARL KUKKONENCarl KukkonenChief Executive OfficerDate: November 14, 2008
    /s/ STEPHEN J. MUZIStephen J. MuziChief Financial Officer  44




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    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
    
    
    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. *
 *
    
    Filed herewith.  45