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

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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)

2102 Business Center Drive, Suite 130, Irvine, CA 92612
(Address of principal executive offices)

(626) 768-3360
(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 878,934,693 shares of $0.001 par value common stock issued and outstanding as of August 10, 2009.

 

 

VIASPACE INC.

INDEX
QUARTER ENDED JUNE 30, 2009

		Page
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008			3
Consolidated Statements of Operations For the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited) and Consolidated Statements of Comprehensive Loss For the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)			4-5
Consolidated Statements of Stockholders’ Equity as of June 30, 2009 (Unaudited) and December 31, 2008			6
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2009 and 2008 (Unaudited)			7
Notes to Consolidated Financial Statements (Unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			35
Part II. Other Information
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			37
Item 4. Submission of Matters to Vote of Security Holders			37
Item 5. Other Information			38
Item 6. Exhibits			38
Signatures			39
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIASPACE INC.

		June 30,				December 31,
		2009				2008
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	1,558,000			$	2,666,000
Accounts receivable, net of allowance for doubtful accounts			591,000				279,000
Inventory			456,000				377,000
Prepaid expenses			705,000				797,000
Related party receivables			1,459,000				921,000
Other current assets			35,000				6,000
TOTAL CURRENT ASSETS			4,804,000				5,046,000
FIXED ASSETS:
Fixed assets, net of accumulated depreciation			734,000				793,000
OTHER ASSETS:
Land use right, net of accumulated amortization			526,000				514,000
Intellectual property, net of accumulated amortization			171,000				179,000
Grass license, net of accumulated amortization			491,000				503,000
Goodwill			12,322,000				12,322,000
Other assets			15,000				13,000
TOTAL OTHER ASSETS			13,525,000				13,531,000
TOTAL ASSETS		$	19,063,000			$	19,370,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	603,000			$	778,000
Accrued expenses			442,000				161,000
Current portion of long-term debt			44,000				44,000
Loan from related party			4,800,000				4,800,000
Related party payable			343,000				422,000
TOTAL CURRENT LIABILITIES			6,232,000				6,205,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
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, 874,644,627 and 814,336,863 issued and outstanding in 2009 and 2008, respectively			875,000				814,000
Additional paid in capital			36,203,000				35,168,000
Accumulated deficit			(31,210,000	)			(29,804,000	)
Total stockholders’ equity			5,868,000				6,178,000
Noncontrolling interest			6,963,000				6,987,000
Total equity			12,831,000				13,165,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	19,063,000			$	19,370,000

The accompanying notes are an integral part of the consolidated financial statements.

VIASPACE INC.

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
REVENUES
Government contracts		$	188,000			$	9,000			$	362,000			$	18,000
Commercial contracts			2,000				3,000				57,000				3,000
Framed artwork sales			1,280,000				—				1,871,000				—
Total revenues			1,470,000				12,000				2,290,000				21,000
COST OF REVENUES			857,000				2,000				1,383,000				9,000
GROSS PROFIT			613,000				10,000				907,000				12,000
OPERATING EXPENSES
Research and development			9,000				76,000				18,000				194,000
Selling, general and administrative expenses			1,218,000				1,805,000				2,284,000				3,412,000
Total operating expenses			1,227,000				1,881,000				2,302,000				3,606,000
LOSS FROM OPERATIONS			(614,000	)			(1,871,000	)			(1,395,000	)			(3,594,000	)
OTHER INCOME (EXPENSE)
Interest income			—				1,000				—				6,000
Interest expense			(155,000	)			(9,000	)			(285,000	)			(22,000	)
Other income			60,000				122,000				68,000				142,000
Other expense			—				—				(3,000	)			—
Gain on sale of marketable securities			—				29,000				—				29,000
Gain on sale of humidity sensor business			176,000				—				176,000				—
Total other income (expense)			81,000				143,000				(44,000	)			155,000
LOSS BEFORE DISCONTINUED OPERATIONS, NONCONTROLLING INTEREST AND INCOME TAXES			(533,000	)			(1,728,000	)			(1,439,000	)			(3,439,000	)
Discontinued operations			5,000				(172,000	)			12,000				(789,000	)
Income taxes			(2,000	)			—				(2,000	)			—
Net loss contributed to noncontrolling interest			(25,000	)			(1,000	)			23,000				1,000
NET LOSS		$	(555,000	)		$	(1,901,000	)		$	(1,406,000	)		$	(4,227,000	)
LOSS PER SHARE OF COMMON STOCK BEFORE DISCONTINUED OPERATIONS AND MINORITY INTEREST—Basic and diluted		$	*			$	*			$	*			$	(0.01	)
Discontinued operations			*				*				*				*
Minority interest in consolidated subsidiaries			*				*				*				*
NET LOSS PER SHARE OF COMMON STOCK—Basic and diluted		$	*			$	*			$	*			$	(0.01	)
WEIGHTED AVERAGE SHARES OUTSTANDING—Basic and diluted			849,565,083				443,772,554				848,349,006				393,974,135

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

NET LOSS		$	(555,000	)		$	(1,901,000	)		$	(1,406,000	)		$	(4,227,000	)
Other Comprehensive Income:
Unrealized holding gain (loss) on securities			—				(57,000	)			—				(49,000	)
Less reclassification adjustment for realized gain on securities included in net loss			—				(29,000	)			—				(29,000	)
Net unrealized holding gain (loss) on securities			—				(86,000	)			—				(78,000	)
COMPREHENSIVE LOSS		$	(555,000	)		$	(1,987,000	)		$	(1,406,000	)		$	(4,305,000	)

The accompanying notes are an integral part of the consolidated financial statements.

VIASPACE INC.

		Common Stock																Accumulated
										Additional								Other
										Paid in				Treasury				Comprehensive				Accumulated
		Shares				Amount				Capital				Stock				Income				Deficit				Total
BALANCE, DECEMBER 31, 2008			814,336,863			$	814,000			$	35,168,000			$	—			$	—			$	(29,804,000	)		$	6,178,000
Net loss																							(1,406,000	)			(1,406,000	)
Stock compensation expense related to stock options											92,000																92,000
Shares issued to consultants, vendors, employees and directors for services			60,307,764				61,000				943,000																1,004,000
BALANCE, JUNE 30, 2009			874,644,627			$	875,000			$	36,203,000			$	—			$	—			$	(31,210,000	)		$	5,868,000

The accompanying notes are an integral part of the consolidated financial statements.

VIASPACE INC.

		Six Months Ended June 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,406,000	)		$	(4,227,000	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation			85,000				35,000
Amortization of intangible assets			33,000				11,000
Stock option compensation expense			92,000				1,020,000
Stock compensation expense related to stock issued			888,000				303,000
Operating expenses paid in stock issued			165,000				2,152,000
Noncontrolling interest			(24,000	)			(55,000	)
Gain on sale of marketable securities			—				(29,000	)
Gain on sale of assets to Landtec			(176,000	)			—
(Increase) decrease in:
Accounts receivable			(325,000	)			(18,000	)
Inventory			(79,000	)			2,000
Prepaid expenses and other current assets			90,000				7,000
Increase (decrease) in:
Accounts payable			(175,000	)			(80,000	)
Unearned revenue			(13,000	)			136,000
Accrued expenses and other			257,000				(174,000	)
Related party			(131,000	)			46,000
Net cash used in operating activities			(719,000	)			(871,000	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets			(26,000	)			(2,000	)
Proceeds from sale of marketable securities			—				29,000
Investment in land lease			(25,000	)			—
Proceeds from sale of assets to Landtec			210,000				—
Net cash provided by investing activities			159,000				27,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Related party loans			(550,000	)			—
Proceeds from loan			—				300,000
Payments on long-term debt			—				(15,000	)
Proceeds from sale of common stock			—				66,000
Payments of loans			—				(300,000	)
Proceeds from exercise of warrants			—				259,000
Net cash provided by financing activities			(550,000	)			310,000
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS			2,000				—
NET DECREASE IN CASH AND CASH EQUIVALENTS			(1,108,000	)			(534,000	)
CASH AND CASH EQUIVALENTS, Beginning of period			2,666,000				608,000
CASH AND CASH EQUIVALENTS, End of period		$	1,558,000			$	74,000
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	—			$	23,000
Income taxes		$	—			$	—

Supplemental Disclosure of Non-Cash Activities for 2008:

Supplemental Disclosure of Non-Cash Activities for 2009:

The accompanying notes are an integral part of the consolidated financial statements.

VIASPACE INC.

(Unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business - VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) is a renewable and alternative energy company and a framed artwork manufacturing company. We grow a fast-growing hybrid grass (initially in China) for potential use as a low carbon liquid biofuel for transportation; as a renewable substitute for all or a portion of the coal in electricity generating power plants, and as animal feed. VIASPACE also produces disposable fuel cartridges that provide the energy source for notebook computers and cell phones powered by fuel cells. We also have a subsidiary that manufactures quality framed artwork sold to retailers in the U.S. VIASPACE is based in California with business activities in China, Korea and Japan.

VIASPACE was founded in 1998 as a private company to commercialize proven space and defense technologies from NASA and the Department of Defense. VIASPACE licensed patents from California Institute of Technology (“Caltech”), which manages the Jet Propulsion Laboratory (“JPL”) for NASA. The direct methanol fuel cell was invented at JPL and the University of Southern California. VIASPACE subsidiary Direct Methanol Fuel Cell Corporation (“DMFCC”) licensed these patents from Caltech. On October 21, 2008, the Company and its subsidiary VIASPACE Green Energy Inc. (“VGE”), signed an agreement to acquire 100% of Inter-Pacific Arts Corp. (“IPA BVI”), a British Virgin Islands international business company. As a condition of the initial closing, IPA BVI acquired 100% of the equity interest of Guangzhou Inter-Pacific Arts Corp. (“IPA China”), a Chinese wholly owned foreign enterprise registered in Guangdong province in the Peoples Republic of China (“PRC”) that manufactures high quality, copyrighted, framed artwork at its factory in the PRC and sells the framed art to large retailers in the United States. IPA China also has a worldwide license to cultivate and sell Giant King Grass — a natural hybrid, non-genetically modified, extremely fast-growing, perennial grass that is suitable for livestock feed as well as a feedstock for biofuel production. Giant King Grass has the potential to be used in the production of nonfood crop based biofuels such as cellulosic ethanol, methanol and gasoline substitutes we call “grassoline”; burned directly in power plants as a clean substitute for coal, and in the more immediate term, as animal feed for dairy cows, pigs, sheep, goats, fish and other animals.

Company Background - On June 22, 2005, ViaSpace Technologies LLC (“ViaSpace LLC”), which was founded in July 1998, acquired the non-operating shell company Global-Wide Publication Ltd. (“GW”). GW was incorporated in the State of Nevada on July 14, 2003. Upon the date of the merger, GW was renamed VIASPACE Inc. The transaction was accounted for as a reverse merger and a recapitalization of the Company.

Basis of Presentation - The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for financial information and with Securities and Exchange Commission (“SEC”) instructions to Form 10-Q. Accordingly, the unaudited financial statements do not include all of the information and footnotes required by GAAP. Operating results for the six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2008. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. All significant intercompany accounts and transactions have been eliminated on consolidation. Certain reclassifications have been made to the June 30, 2008 consolidated financial statements, in order to conform to the June 30, 2009 consolidated financial statement presentation.

Noncontrolling Interest - Certain amounts presented for prior periods that were previously designated as minority interest have been reclassified to conform to the current year presentation. Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” which established new standards governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability (as was previously the case); that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements. The provisions of the standard were applied to all NCIs prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented. As a result, upon adoption, the Company retroactively reclassified the “Minority interest” previously included in the “Other liabilities” section of the consolidated balance sheet to a new component of equity with respect to NCIs in consolidated subsidiaries. The adoption also impacted certain captions previously used on the consolidated statement of income and other comprehensive income, largely identifying net income including NCI and net income attributable to the Company.

Noncontrolling interest in consolidated subsidiaries represents the minority stockholders’ proportionate share of equity of DMFCC, Ionfinity and VGE. The Company’s controlling interest requires that the results of these companies’ operations be included in the consolidated financial statements. The percentage of DMFCC, Ionfinity and VGE that is not owned by the Company is shown as NCI in the Consolidated Statement of Operations and Consolidated Balance Sheet. At June 30, 2009 and December 31, 2008, the Company recorded $500,000 as NCI representing an investment in DMFCC by a minority shareholder. At June 30, 2009 and December 31, 2008, the Company recorded $6,463,000 (unaudited) and $6,487,000, respectively, representing Common Shareholder NCIs in Ionfinity and VGE.

Principles of Consolidation - The Company is generally a founding shareholder of its affiliated companies, which are accounted for under the consolidation method. Affiliated companies include VGE, Direct Methanol Fuel Cell Corporation (“DMFCC”), Ionfinity LLC (“Ionfinity”), VIASPACE Security, Inc. (“VIASPACE Security”) and Concentric Water Technology LLC (“Concentric Water”), in which the Company owns, directly or indirectly, a controlling voting interest, are accounted for under the consolidation method of accounting. Under this method, an affiliated company’s results of operations are reflected within the Company’s consolidated statement of operations. Transactions between the Company and its consolidated affiliated companies are eliminated in consolidation. The Company adopted SFAS No. 141, “Business Combinations”, which requires use of the purchase method for all business combinations initiated after June 30, 2001.

Fiscal Year End - The Company’s fiscal year ends December 31.

Use of Estimates in the Preparation of the Financial Statements - The preparation of financial statements, in conformity with United States GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents - The Company considers all highly liquid debt instruments, purchased with an original maturity of three months or less, to be cash equivalents.

Concentration of Credit Risk - The Company’s financial instruments that are exposed to credit risk consist primarily of cash equivalents. The Company maintains all of its cash accounts with high credit quality institutions. Such balances with any one institution may exceed FDIC insured limits.

Accounts Receivable Allowance for Doubtful Accounts - The allowance for doubtful accounts relates to specifically identified receivables that are evaluated individually for collectability. We determine a receivable is uncollectible when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms of the receivable agreement, without regard to any subsequent restructurings. Factors considered in assessing collectability include, but are not limited to, a customer’s extended delinquency, requests for restructuring and filings for bankruptcy.

Marketable Securities - The Company accounts for marketable securities in accordance with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). SFAS No. 115 provides accounting and disclosure guidance for investments in equity securities that have readily determinable fair values and all debt securities. SFAS No. 115 applies to marketable equity securities and all debt securities, carried at fair value with unrealized gains and losses, net of related deferred tax effect, and requires that they be reported as an item of other comprehensive income. At December 31, 2008, all of the Company’s marketable securities are available for sale.

Inventory - Inventory is stated at the lower of cost or market. Cost is determined using the average cost method. Market is determined using net realizable value. The Company writes down its inventory for estimated obsolescence, excess quantities and other factors in evaluating net realizable value. Inventory includes material, direct labor and related manufacturing overhead. The following is a summary of inventory by business line (unaudited) at June 30, 2009:

		Raw Materials				Finished Goods				Total
Framed-Artwork		$	381,000			$	29,000			$	410,000
Humidity sensor and battery tester			—				—				—
Grass			46,000				—				46,000
Total		$	427,000			$	29,000			$	456,000

The following is a summary of inventory by business line at December 31, 2008:

		Raw Materials				Finished Goods				Total
Framed-Artwork		$	286,000			$	16,000			$	302,000
Humidity sensor and battery tester			30,000				5,000				35,000
Grass			40,000				—				40,000
Total		$	356,000			$	21,000			$	377,000

Property and Equipment - Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets and estimated lives ranging from 5 to 30 years as follows:

Building		20 to 30 years
Machinery and equipment		10 years
Office equipment		5 years
Vehicles		5 years
Computers		3 years

Land Use Right - All land in the PRC is government owned and cannot be sold to any individual or company. IPA China acquired rights for the land occupied by its manufacturing facility during 2005 for RMB 5,000,000 or approximately $605,000. The land lease is for 30 years. Accordingly, the land use right is being amortized on the straight-line method over 30 years. In 2009, VGE leased a piece of land in Guangdong province of the PRC for 20 years at a cost of RMB 172,080 or approximately $25,000 every three years. This land is being used to grow Giant King Grass.

Intangible Assets - The Company’s intangible assets consist of, among other things, (1) licenses to patents that are amortized over periods through the expiration date of the patents (up to twenty years); (2) software application code that is amortized over three years; and (3) software licenses with an estimated useful life of five years. All intangible assets are subject to impairment tests on an annual or periodic basis. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss in an amount equal to that excess is recognized. Amortizing intangibles are currently evaluated for impairment using the methodology set forth in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Impairment of Long-lived Assets - The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may no longer be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. For purposes of estimating future cash flows from impaired assets, the Company groups assets at the lowest level from which there is identifiable cash flows that are largely independent of the cash flow of other groups of assets. There have been no impairment charges recorded by the Company.

Fair Value of Financial Instruments - The recorded value of accounts receivables, accounts payable and accrued expenses approximate their fair values based on their short-term nature. The recorded values of long-term debt and liabilities approximate fair value.

Income Taxes - The Company utilizes FAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. For IPA China, the statutory corporate income tax rate for foreign enterprises in the PRC is 25% for 2008 and 2009. For 2008, IPA China was eligible for a reduced income tax at 50% of the normal income tax rate. Beginning January 1, 2009, IPA China will be subjected to the normal income tax rate. IPA BVI is a British Virgin Islands international company and not subject to any United States income taxes. The Company does not have any deferred tax assets or liabilities recorded for the periods covered by the accompanying financial statements.

Revenue Recognition - Product Revenue. VIASPACE has generated revenues to date on product revenue shipments. In accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”), VIASPACE recognizes product revenue provided that (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments. Our standard shipping terms are freight on board shipping point. If the Company ships product whereby a customer has a right of return or review period, the Company does not recognize revenue until the right of return or review period has lapsed. Prior to the period lapsing, this revenue would be recorded as deferred revenue on the Company’s Balance Sheet.

Product Development Revenue on Fixed-Price Contracts With Milestone Values Defined. Ionfinity has generated revenues to date on fixed-price contracts for government contracts. These contracts have clear milestones and deliverables with distinct values assigned to each milestone. The government is not obligated to pay Ionfinity the complete value of the contract and can cancel the contract if the Company fails to meet a milestone. Although the government can cancel the contract if a milestone is not met, the Company is not required to refund any payments for prior milestones that have been approved and paid by the government. The milestones do not require the delivery of multiple elements as noted in Emerging Issues Task Force (“EITF”) Issue 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”). In accordance with SAB No. 104, the Company treats each milestone as an individual revenue agreement and only recognizes revenue for each milestone when all the conditions of SAB 104 defined earlier are met.

Framed art sales. In accordance with SAB No. 104, IPA BVI and IPA China recognize product revenue provided: (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments. Our standard shipping terms are free on board shipping point. Some of the Company’s products are sold in the PRC and are subject to Chinese value-added tax. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. Revenue is recorded net of VAT taxes.

Cost of Goods Sold - Cost of goods sold consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products. Any write-down of inventory to lower of cost or market is also recorded in cost of goods sold.

Foreign Currency Translation and Comprehensive Income (Loss) - IPA China’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB has been translated into United States dollars (“USD”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date. IPA BVI’s sales are denominated in USD.

Segment Reporting and Geographic Information - SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

Stock Based Compensation - VIASPACE and DMFCC have stock-based compensation plans. Effective with VIASPACE and DMFCC’s fiscal year that began January 1, 2006, the Company adopted the accounting and disclosure provisions of SFAS No. 123(R), “Share-Based Payments” (“SFAS No. 123(R)”) using the modified prospective application transition method. The Company accounts for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with the provisions of EITF Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services”, and EITF Issue No. 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other than Employees”. The measurement date for the fair value of the equity instruments issued is determined at the earlier of: (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance with EITF Issue No. 00-18, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid expenses in its consolidated balance sheet.

Net Income (Loss) Per Share - The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” (SFAS No. 128”) and SEC SAB No. 98 (“SAB No. 98”). Under the provisions of SFAS No. 128 and SAB No. 98, basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period.

Research and Development - The Company charges research and development expenses to operations as incurred.

NOTE 2 — ACCOUNTS RECEIVABLE

Accounts receivable are comprised of the following at June 30, 2009 and December 31, 2008, respectively:

		2009				2008
		(Unaudited)
U.S. Government customers		$	86,000			$	32,000
Framed artwork customers			523,000				247,000
Total accounts receivable			609,000				279,000
Less: Allowance for doubtful accounts			(18,000	)			—
Accounts receivable, net		$	591,000			$	279,000

NOTE 3 — PREPAID EXPENSES

During 2008 and 2009, the Company entered into agreements with certain of its consultants and vendors whereby the Company issued registered shares of the Company’s common stock under an existing registration statement on Form S-3 and an existing registration statement on Form S-8 in exchange for future services to be provided to the Company. As of June 30, 2009 and December 31, 2008, the remaining value of these agreements was $522,000 (unaudited) and $187,000, respectively, which is included in prepaid expenses in the accompanying consolidated balance sheet.

On August 25, 2008, the Board of Directors of the Company awarded nine million shares each to Dr. Carl Kukkonen, CEO; Mr. Amjad Abdallat, COO; and Mr. Stephen Muzi, CFO; as additional compensation for services rendered to the Company. In addition, one million shares were awarded to Mr. Rick Calacci, Director, for services rendered to the Company. All of these shares have a one-year restriction attached to them that expires August 24, 2009. The value of the shares on the date of grant was $775,500 which is being expensed monthly through August 24, 2009. As of June 30, 2009 and December 31, 2008, the unamortized value of these common shares was $117,000 (unaudited) and $501,000, respectively, and is included in prepaid expenses in the accompanying consolidated balance sheets.

Other prepaid expenses were $66,000 (unaudited) and $109,000 at June 30, 2009 and December 31, 2008, respectively.

NOTE 4 — FIXED ASSETS

Fixed assets are comprised of the following at June 30, 2009 and December 31, 2008, respectively:

		2009				2008
		(Unaudited)
Computer equipment and office equipment		$	216,000			$	369,000
Machinery and equipment			225,000				206,000
Building			605,000				606,000
Vehicles			144,000				144,000
Leasehold improvements			1,000				26,000
Total property and equipment			1,191,000				1,351,000
Less: Accumulated depreciation			457,000				558,000
Fixed assets, net		$	734,000			$	793,000

NOTE 5 — LAND USE RIGHT

Land use right is composed of the following at June 30, 2009 and December 31, 2008, respectively:

		2009				2008
		(Unaudited)
Land use right		$	630,000			$	605,000
Less: Accumulated amortization			104,000				91,000
Land use right, net		$	526,000			$	514,000

The amortization expense for the next five years will be: 2010 — $29,000; 2011 — $29,000; 2012 - $26,000; 2013 — $20,000; and 2014 — $20,000.

NOTE 6 — INTANGIBLE ASSETS

Intellectual Property

Intangible asset balances related to intellectual property are comprised of the following at June 30, 2009 and December 31, 2008, respectively:

		2009				2008
		(Unaudited)
License to patent		$	380,000			$	380,000
Less: Accumulated amortization			205,000				201,000
Intellectual property, net		$	171,000			$	179,000

The amortization expense for the next five years will be $17,000 in each year.

Grass License

As more fully explained in Note 8, the Company acquired IPA China and IPA BVI on October 21, 2008. IPA China has a worldwide license to cultivate and sell a fast-growing high yield hybrid grass called Giant King Grass that has the potential to be used in the production of nonfood biofuels and, in the more immediate term, animal feedstock for dairy cows, pigs, sheep, goats, fish and other animals. The Company issued 30,576,007 of its common shares to the licensor of the Giant King Grass valued at $507,000 on the date of acquisition. The grass license is amortized over an estimated useful life of 20 years. For the six months ended June 30, 2009, $13,000 was recorded as amortization expense. The ending balance of license to grass, net was $491,000 and $503,000 at June 30, 2009 and December 31, 2008, respectively. The amortization expense for the next five years will be $25,000 in each year.

Goodwill

As more fully explained in Note 8, the Company acquired IPA China and IPA BVI on October 21, 2008 and recorded goodwill of $12,322,000 related to the acquisition.

NOTE 7 — OWNERSHIP INTEREST IN AFFILIATED COMPANIES

DMFCC. As of June 30, 2009 and December 31, 2008, the Company owned 71.4% of the outstanding shares of DMFCC.

VGE. As of June 30, 2009 and December 31, 2008, the Company owned 59.7% of the outstanding shares of VGE.

Ionfinity. As of June 30, 2009 and December 31, 2008, the Company owned 46.3% of the outstanding membership interests of Ionfinity. The Company has two seats on Ionfinity’s board of managers out of four total seats. The Company provides management and accounting services for Ionfinity. The Company also acts as tax partner for Ionfinity for income tax purposes. Due to these factors, Ionfinity is considered economically and organizationally dependent on the Company and as such is included in the Consolidated Financial Statements of the Company. The minority interest held by other members is disclosed separately in the Company’s Consolidated Financial Statements.

VIASPACE Security. As of June 30, 2009 and December 31, 2008, the Company owned 100% of the outstanding shares of VIASPACE Security. This subsidiary is currently inactive as the assets of VIASPACE Security were sold to a third party on December 22, 2008.

Concentric Water. As of June 30, 2009 and December 31, 2008, the Company owned 100% of the membership interests of Concentric Water. This subsidiary is currently inactive.

NOTE 8 — ACQUISITION OF IPA

On October 21, 2008, VIASPACE and VGE entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Sung Hsien Chang (“Chang”), and China Gate Technology Co., Ltd., a Brunei Darussalam company (“Licensor”). Under the Purchase Agreement, we agreed to acquire 100% of IPA BVI, and the entire equity interest of IPA China from Chang, the sole shareholder of IPA BVI and IPA China. In exchange, VIASPACE agreed to pay $16 million in a combination of cash, and newly-issued shares of VIASPACE and our ordinary shares. In addition, VIASPACE issued shares of its common stock to Licensor and in exchange Licensor sublicensed certain fast growing grass technology to IPA China.

The transactions under the Purchase Agreement (“Acquisition”) involve two phases. At the first closing on October 21, 2008, we issued 3,500,000 newly-issued shares to Chang and his designees. VIASPACE issued 215,384,615 shares of its common stock to Chang and 30,576,007 shares of common stock to Licensor. Chang delivered 70% of the outstanding common stock of IPA BVI to us. IPA China became a wholly-owned subsidiary of IPA BVI (and indirectly, our subsidiary) after the First Closing.

VGE entered into four separate two-year employment agreements with each of Carl Kukkonen, Sung Hsien Chang, Stephen Muzi and Maclean Wang. Kukkonen would serve as Chief executive Officer, Chang as President, Muzi as Chief Financial Officer and Wang as Managing Director of Grass Development. Wang is also the sole shareholder to the Licensor. Kukkonen and Chang would receive a salary of $240,000 per annum, Muzi receives $180,000 per annum and Wang receives $84,000 per annum. Each of them is entitled to a bonus as determined by the VGE Board of Directors, customary insurance and health benefits, 15 days paid leave per year, and reimbursement for out-of-pocket expenses in the course of his employment.

Under Chang’s employment agreement, VGE will grant him an option to purchase the number shares of its common stock equal to four percent (4%) of VGE’s total outstanding shares as of the Second Closing Date. The purchase price of the option shares shall be eighty percent (80%) of the fair market value of such common stock as of the Second Closing Date. The option shall vest over a period of 24 months beginning on the date of the Employment Agreement, with 1/24 of the option shares vesting on the first day of each month that Chang is employed with VGE. Our shareholders also entered into an agreement with Chang regarding the rights as our shareholders (“Shareholders Agreement”) to elect directors.

Under Wang’s employment agreement, VGE will grant him an option to purchase the number shares of its common stock equal to four percent (4%) of VGE’s total outstanding shares as of the Second Closing Date. The purchase price of the option shares shall be eighty percent (80%) of the fair market value of such common stock as of the Second Closing Date. The option shall vest over a period of 24 months beginning on the date of the Employment Agreement, with 1/24 of the option shares vesting on the first day of each month that Wang is employed with VGE.

The second closing in which the remaining minority interest of 30% of IPA BVI equity holdings would be transferred to us will be held within 304 days after the First Closing (“Second Closing”). At the Second Closing, VIASPACE shall pay $4.8 million (“Cash Consideration”) plus Interest (as determined below) since the First Closing and shall also issue 1.8% of its then outstanding shares of common stock to Licensor.

Our obligations to consummate the Second Closing are conditioned upon, among other things, the execution of the assignment of the right to grow and harvest fast-growing grasses from China Gate to IPA China so that we have a direct license from the original licensor rather than a sublicense through China Gate. In the event that the Second Closing does not occur within 304 days after the First Closing, the Purchase Agreement, each Employment Agreement and the Shareholders Agreement shall automatically terminate and all stock certificates delivered at First Closing shall be returned unless the parties decide otherwise, except that Chang shall transfer the remaining 30% of IPA BVI even if the second closing does not occur. If the second closing does not occur and our ordinary shares are listed on a trading market, then VIASPACE shall transfer to Chang all of our shares that it holds. If our ordinary shares are not listed on a trading market, then Chang may retain VIASPACE Shares instead of returning them to VIASPACE. We intend to register the shares listed in this registration statement regardless of whether the Second Closing occurs.

On June 22, 2009, the parties entered into an Amendment to the Purchase Agreement that extended the Second Closing to August 21, 2009. At the Second Closing, the Registrant is to pay $4.8 million (“Cash Consideration”) plus Interest since the First Closing, in cash to Chang. Interest on the Cash Consideration shall accrue at 6% for the first six months after the First Closing, and then 18% until June 10, 2009, and then an annual rate of 6%. As of the Second Closing, VIASPACE shall also issue 1.8% of its then outstanding shares of common stock to Licensor and Chang shall deliver the remaining 30% of the outstanding shares of IPA BVI to the Registrant.

In the event that the Second Closing does not occur by August 21, 2009, the Purchase Agreement may terminate and all stock certificates delivered at First Closing would be returned.

Notwithstanding the foregoing, if the Second Closing does not occur although Chang and Licensor have satisfied most of VIASPACE and the Registrant’s closing conditions, then Chang may receive additional Registrant shares or retain the Registrant shares as follows: if the Registrant stock is listed on a trading market, then VIASPACE shall transfer to Chang all the Registrant shares. In addition, IPA BVI and IPA China equity will remain with the Registrant. If the Registrant stock is not listed on a trading market, then Chang shall retain the VIASPACE Shares instead of returning them to VIASPACE.

If the Second Closing has occurred but if Registrant common stock is not listed on a trading market by August 21, 2009, then VIASPACE will issue to Chang the number of shares of its common stock equivalent to $5,600,000. In exchange, Chang shall return all shares of Registrant common stock it received pursuant to the Purchase Agreement to VIASPACE.

Licensor and Chang each represents and covenants that at least 100 hectares of arable land in Guangdong province in China will be available for grass farming by IPA China within 12 months after the First Closing Date. Any agreement regarding such land use rights shall grant the land use rights to IPA China, but shall be assignable to us at our option. The term of such agreement, including possible renewals, shall be at least 10 years. Currently approximately 45 hectares are leased by IPA China in Guangdong province for a term of 20 years. We do not expect to request an assignment of this lease since we intend to own IPA China through 100% ownership of IPA BVI.

The value paid for the acquisition was $15,832,000 composed of: fair market value of stock issued for assets acquired — $4,589,000; loan to related party — $4,800,000; and minority interest in VGE - $6,443,000. The net assets acquired totaled $3,003,000. The excess of value paid for the acquisition in excess of net assets acquired was assigned to: grass license — $507,000 and goodwill — $12,322,000.

The acquisition of IPA occurred on October 21, 2008. The following table reflects the Company’s consolidated unaudited results of operations for the three and six months ended June 30, 2008, as if the acquisition occurred on January 1, 2008:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2008				2008
		(Unaudited)				(Unaudited)
Revenues — as reported		$	12,000			$	21,000
Revenues — pro forma		$	1,955,000			$	2,511,000
Net Income — as reported		$	(1,901,000	)		$	(4,227,000	)
Net Income — pro forma		$	(1,750,000	)		$	(4,082,000	)
Earnings per share — basic and diluted — as reported		$	*			$	*
Earnings per share — basic and diluted — pro forma		$	*			$	*

NOTE 9 — DISCONTINUED OPERATIONS

Sale of Assets of VIASPACE Security

On December 22, 2008, the Company (the “Seller”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Knovitech, Inc., a Delaware corporation (the “Buyer”). Pursuant to the Purchase Agreement, the Company transferred certain assets described below in exchange for $479,000 (“Purchase Price”). $200,000 of the Purchase Price was already paid Buyer as a deposit. An additional $279,000 was paid by Buyer’s assumption of certain indebtedness of Seller as evidenced by that certain promissory note executed and delivered by Seller in the original principal amount of $250,000 plus accrued interest of $29,000 executed by Seller in favor of Rhino Steel Manufacturing Ltd. and subsequently acquired by SNK Capital Trust (“Rhino Note”).

The Company transferred assets consisting of trade and assumed names (except for the trade name “VIASPACE” and Direct Methanol Fuel Cell Corporation “DMFCC” and “Ionfinity”); customer lists and customer orders received after Closing; Seller’s licenses or other contractual arrangements for “SHINE”, an inference engine technology, and any related licenses from JPL/Caltech for use of SHINE; Seller’s intellectual property relating to the AIMS Perimeter Surveillance Radar solution (by DMT) (“AIMS Radar”) and also the deposit on the radar equipment; Seller’s intellectual property relating to: (i) ViaChange technology, (ii) U-Hunter technology; and (iii) MUDSS technology; certain equipment owned by Seller consisting of (i) desktop and laptop computers used by Seller’s consultants or employees and (ii) test and manufacturing equipment needed to carry on the business units acquired by the Buyer; all other intangible assets related to the assets set forth in subsections (a) through (h) listed above; all uniform resource locators (“URLs”) associated with the domain names of the Seller related, directly or indirectly, to the purchased assets as described in sub-sections (a) through (i) above, including, without limitation, any websites related to the Purchased Assets together with all content of such websites but excluding URLs and websites incorporating the trade name “VIASPACE”, or relating to DMFCC (as defined below);

Assets excluded from the transfer, included among other things: trademark, logo, trade name and corporate name, URLs, websites relating to and incorporating the name “VIASPACE”, and Direct Methanol Fuel Cell Corporation , and “DMFCC”; Seller’s Equipment including without limitation, furniture, fixtures, computers and tenant improvements and computer servers, not otherwise expressly included; the energy businesses, including without limitation the humidity sensor, battery tester, and battery businesses and also Seller’s member interest in Ionfinity LLC; Seller’s Accounts Receivable for products or services arising out of transactions prior to closing; and equity securities of, or any other rights, interests or privileges pertaining to any of Seller’s subsidiaries.

Seller granted Buyer an option to purchase the humidity sensor, battery tester, and battery businesses and Seller’s share in Ionfinity LLC for $400,000. This option expired on April 18, 2009.

The Company recorded a gain on sale of assets related to this Purchase Agreement of $452,000 in the fourth quarter of 2008. Discontinued operations of $617,000 for the six months ended June 30, 2008, related to the operations that were sold are shown in the accompanying consolidated statements of operations related to this business that was sold.

Sale of Humidity Sensor Business Unit

On April 20, 2009, the Company (“Seller”) entered into an Asset Purchase and Support Services Agreement (the “Landtec Purchase Agreement”) with Landtec North America, a California corporation (“Buyer”). Pursuant to the Landtec Purchase Agreement, the Company transferred certain assets (the “Purchased Assets”) described below to the Buyer. The Purchased Assets primarily included assets related to the Seller’s tunable diode laser-based humidity sensor business. Seller also agreed to cause certain of its consultants and employees to provide support services after the closing (“Support Services”).

Buyer agreed to pay Seller $210,000 for the purchase of the Purchased Assets and for the Support Services allocated as follows:

(a)		Sixty Thousand Dollars ($60,000) for the Purchased Assets payable at the time of the closing; and
(b)		One Hundred Fifty Thousand ($150,000) for the Support Services of which One Hundred Ten Thousand Dollars ($110,000) will be payable at the Closing and Forty Thousand Dollars ($40,000) will be payable sixty (60) days after the Closing conditioned upon performance of the Support Services.

Purchased Assets include:

(a)		trade and assumed names VIASENSOR; HS-1000, HS-2000, HS-3000, and all variations;
(b)		customer lists and customer orders received after Closing;
(c)		Seller’s patent rights and intellectual property related to the humidity sensor including issued US patent number 7,499,169, and any other patent applications, brochures, manuals, sales presentations and assembly drawings, instructions, software, calibration instructions and shipping instructions;
(d)		parts inventory;
(e)		prototype and tradeshow demonstration units;
(f)		manufacturing equipment and calibration equipment owned by the company including computers and monitors, IC programmer and oscilloscope;
(g)		Drawings of all parts and/or components of the humidity sensor (a complete printed set and the original CAD);
(h)		Assembly drawings for the humidity sensor (a complete printed set and the original CAD files);
(i)		Works instructions explaining how to assemble the humidity sensor;
(j)		Works instructions explaining how to calibrate the humidity sensor including acceptable limits;
(k)		A complete bill of materials for the humidity sensor;
(l)		A complete list of suppliers of each part or assembly;
(m)		Circuit diagrams for all circuits in the humidity sensor including interconnection diagrams;
(n)		Printed Circuit Board (“PCB”) information for each PCB within the humidity sensor, a complete bill of materials for each PCB, a full set of Gerber files for each PCB;
(o)		Original CAD design file for each PCB;
(p)		Purchase specification/special considerations for each PCB;
(q)		Software files containing original source code;
(r)		Software release notes, including known bugs;
(s)		Copy of compiler used and any related license;
(t)		Copy of compiled code as binary file (so you can still make copies even if compiler problems);
(u)		All software documentation;
(v)		Software version control log;
(w)		Details of development environment;
(x)		Any test gear related to the humidity sensor;
(y)		List of customers and contact information;
(z)		List of distributors and contact information; and
(aa)		all inventions, technology, processes, concepts (documented or undocumented), patents (and the right to recover for past infringements thereof), patent applications, licenses, trade secrets, trademarks (and the right to recover for past infringements thereof), designs and drawings of Seller elated to the humidity sensor.
(bb)		rights of Seller under all agreements relating to such assets set forth in sub-sections (a) through (aa), above, including but not limited to distributor, representative, teaming agreements.
(cc)		all right, title and interest of Seller in and to all Intellectual Property rights relating to such assets set forth in sub-sections (a) through (aa) above, including without limitation all books, payment records; accounts; correspondence; production records; technical, accounting and procedural manuals; development and design data; and other useful business records utilized in the conduct of or relating to the Purchased Assets.

Assets excluded from the transfer, included among other things:

(a)		Seller’s rights under this Agreement;
(b)		Seller’s Accounts Receivable for products or services arising out of transactions prior to Closing;
(c)		Securities of VGE, VIASPACE, DMFCC and all assets of VGE, VIASPACE, DMFCC, and all securities and assets not explicitly covered under this Agreement.

Seller, through its designated representatives Carl Kukkonen, CEO and Stephen Muzi, CFO, will provide support and consulting services to Buyer relating to the manufacturing of the Assets and the modification of the Assets to Buyer applications, including testing and troubleshooting, for a period of sixty (60) days after the sale.

Seller and Buyer mutually indemnified the other party for losses arising from

(i)		the breach of any representation or warranty made by Seller contained in the Agreement;
(ii)		the breach of any covenant or agreement by Seller contained in the Agreement;
(iii)		any and all Losses suffered or incurred by Buyer by reason of or in connection with any claim or cause of action of any third party to the extent arising out of any action, inaction, event, condition, liability or obligation of Seller occurring or existing prior to the Closing; and,
(iv)		all liabilities of Seller, none of which shall be assumed by Buyer.

Seller and its principals also agreed not to own, manage, operate, join or work for any business that is directly competitive with the Purchased Assets for a three year period.

On April 20, 2009, pursuant to the terms of the Landtec Purchase Agreement, the Company closed the transaction to sell assets related to its humidity sensor business for $210,000. Seller received $170,000 on April 20, 2009 from Buyer and received $40,000 on June 22, 2009.

The Company recorded a gain on sale of assets related to this Landtec Purchase Agreement of $176,000 in the second quarter of 2009. Discontinued operations of $172,000 for the six months ended June 30, 2008, related to the operations that were sold are shown in the accompanying consolidated statements of operations related to this business that was sold.

NOTE 10— STOCK OPTIONS AND WARRANTS

VIASPACE Inc. 2005 Stock Incentive Plan

On October 20, 2005, the Board of Directors (the “Board”) of the Company adopted the 2005 Stock Incentive Plan (the “Plan”) including the 2005 Non-Employee Director Option Program (the “2005 Director Plan”). The Plan was also approved by the holders of a majority of the Company’s common stock. The Plan originally provided for the reservation for issuance under the Plan of 28,000,000 shares of the Company’s common stock. On July 12, 2006, the Company filed a Form S-8 Registration Statement with the Securities and Exchange Commission registering 28,000,000 shares of the Company’s common stock. On February 14, 2008, the Board and the holders of a majority of the Company’s common stock approved an amendment to the Plan which increases the maximum aggregate number of shares which may be issued in the Plan to 99,000,000 shares. On April 30, 2008, the Company filed a Form S-8 Registration Statement registering 71,000,000 shares of the Company’s common stock. In addition, effective January 1, 2009 and each January 1 thereafter during the term of the Plan, the maximum aggregate number of shares under the Plan are to be increased so that the maximum aggregate number of shares is equivalent to 30% of the total number of shares of common stock issued and outstanding as of the close of business on the immediately preceding December 31. On February 4, 2009, the Company filed a Form S-8 Registration Statement registering 146,500,000 shares of the Company’s common stock based on the number of shares of common stock outstanding on December 31, 2008.

The Plan is designed to provide additional incentive to employees, directors and consultants of the Company through the awarding of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and other awards. On February 13, 2006, the Board approved the 2006 Non-Employee Director Option Program (the “2006 Director Plan”) replacing the 2005 Director Plan and the 2006 Director Plan was approved by the holders of a majority of the Company’s common stock. The 2006 Director Plan awards a one-time grant of 125,000 options, or such other number of options as determined by the Board of Directors as plan administrator of the 2006 Director Plan, to newly appointed outside members of the Company’s Board and annual grants of 50,000 options, or such other number of options as determined by the Board of Directors, to outside members of the Board that have served at least six months.

The Company’s Board administers the Plan, selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise price of each option. Stock options granted pursuant to the terms of the Plans generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant. The term of the options granted under the Plan cannot be greater than 10 years. Options to employees and directors generally vest over four years but the actual length of the vesting term is determined by the Board. An aggregate of 137,835,000 shares were available for future grant at June 30, 2009. During the six months ended June 30, 2009, the Company granted 3,000,000 stock options to board members to purchase common shares with exercise prices of $0.0094 per share. During this same period, no stock options were cancelled due to employees, directors or consultants terminating employment or service with the Company.

For the six months ended June 30, 2009, the Company issued 19,507,564 shares of common stock under the Plan to employees, directors and consultants for services provided to the Company. The stock compensation expense recorded relating to these share issuances was based on fair market value on the date of grant and totaled $276,000 for the six months ended June 30, 2009.

On January 1, 2006, the Company adopted SFAS No. 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values using the modified prospective transition method. SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards to employees and directors on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite services periods on a straight-line basis in the Company’s Consolidated Statements of Operations.

The Company elected to adopt the detailed method provided in SFAS No. 123(R) for calculating the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the income tax effects of employee stock-based compensation awards that are outstanding upon the adoption of SFAS No. 123(R).

The fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for United States Treasury debt securities at a maturity near the term remaining on the option. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the historical volatility of the Company’s stock price. The expected life of an option grant is based on management’s estimate as no options have been exercised in the Plan to date. The Company calculated a forfeiture rate for employees and directors based on historical information. A forfeiture rate of 0% is used for options granted to consultants. The fair value of each option grant to employees, directors and consultants is calculated by the Black-Scholes method and is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award. For stock options issued, including those issued to employees, directors , consultants and advisory board members during the period ended June 30, 2009 and 2008, the fair value was estimated at the date of grant using the following range of assumptions:

		June 30, 2009				June 30, 2008
		(Unaudited)				(Unaudited)
Risk free interest rate			2.53	%			4.58% – 5.12	%
Dividends			0	%			0	%
Volatility factor			126.13	%			118.51% – 125.13	%
Expected life		6.67 years				6.67 years
Annual forfeiture rate			49.9	%			0% – 6	%

Employee and Director Option Grants

The following table summarizes activity for employees and directors in the Company’s Plan for 2009:

						Weighted-				Weighted-
						Average				Average
						Exercise				Remaining				Aggregate
		Number of				Price Per				Contractual				Intrinsic
		Shares				Share				Term In Years				Value
Outstanding at December 31, 2008			8,130,000			$	0.04
Granted			3,000,000				0.01
Exercised			—				—
Forfeited			—				—
Outstanding at June 30, 2009			11,130,000			$	0.03				8.3			$	43,000
Exercisable at June 30, 2009			5,030,000			$	0.03				8.3			$	13,000

The weighted-average grant date fair value of stock options granted to employees and directors during 2009 was $0.0094 per share. The Company recorded $92,000 of compensation expense for employee and director stock options during 2009. At June 30, 2009, there was a total of $206,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan that is expected to be recognized over a weighted average period of approximately two years. At June 30, 2009, the fair value of options vested for employees and directors was $111,000. There were no options exercised during 2009.

There are no stock options outstanding to consultants at June 30, 2009.

Direct Methanol Fuel Cell Corporation 2002 Stock Option / Stock Issuance Plan

DMFCC formed a stock-based compensation plan in 2002 entitled the 2002 Stock Option / Stock Issuance Plan (the “DMFCC Option Plan”) that reserved 2,000,000 shares of DMFCC common stock for issuance to employees, non-employee members of the board of directors of DMFCC, board members of its parent company, consultants, and other independent advisors. As of June 30, 2009, options to purchase 1,396,000 shares of DMFCC common stock were outstanding and 604,000 shares remained available for grant under the DMFCC Option Plan. Of these outstanding options, 1,030,000 are incentive stock options issued to employees and 366,000 are non-statutory stock options issued to consultants. During the period ended June 30, 2009, DMFCC issued no stock options.

DMFCC uses the Black-Scholes option pricing model to calculate the fair market value of each option granted. The Black-Scholes option pricing model includes assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. For stock options that are issued, the fair value of each option grant is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award.

The following table summarizes activity in the DMFCC Option Plan for the period ended June 30, 2009:

						Weighted-				Weighted-
						Average				Average
						Exercise				Remaining				Aggregate
		Number of				Price Per				Contractual				Intrinsic
		Shares				Share				Term In Years				Value
Outstanding at December 31, 2008			1,396,000			$	.02
Granted			—				—
Exercised			—				—
Forfeited			—				—
Outstanding at June 30, 2009			1,396,000			$	.02				5.7			$	45,000
Exercisable at June 30, 2009			1,396,000			$	.02				5.7			$	45,000

DMFCC recorded zero stock option compensation expense during 2009 and 2008. There were no options exercised during 2008.

Warrants

The Company has issued warrants to purchase 624,000 common shares of the Company to non-affiliate parties at exercise prices ranging from $0.30 to $0.60 per share.

NOTE 11 — LONG-TERM DEBT

Concentric Water entered into a long-term debt agreement with the Community Development Commission in 2004 for $100,000, with interest of 5%, monthly payments of $1,610, with the final payment due in September 2009. The loan was secured by the assets of Concentric Water. The Company is currently negotiating with the Community Development Commission to extend the final payment due date and reduce the monthly payments on the loan.

VIASPACE Security entered into a long-term debt agreement with the Community Development Commission in 2004 for $50,000, with interest of 5%, monthly payments of $1,151, with the final payment due in September 2009. The loan was secured by the assets of VIASPACE Security. The Company is currently negotiating with the Community Development Commission to extend the final payment due date and reduce the monthly payments on the loan.

Summary of Loans and Long-Term Debt

Loans and Long-term debt is comprised of the following at June 30, 2009 and December 31, 2008, respectively:

		2009				2008
		(Unaudited)
Community Development Commission of the County of Los Angeles, secured, with interest at 5% due September 1, 2009		$	9,000			$	9,000
Community Development Commission of the County of Los Angeles, secured, with interest at 5% due September 1, 2009			35,000				35,000
Total Long-term Debt			44,000				44,000
Less Current Portion of Long-term Debt			44,000				44,000
Net Long-term Debt		$	—			$	—

As discussed in Note 8, the Company is obligated to pay Sung Hsien Chang $4,800,000 on August 21, 2009, related to the Second Closing of the acquisition of IPA China and IPA BVI by VGE and the Company. Interest expense on the $4,800,000 accrues at 6% for the first six months after the First Closing, and then 18% until June 10, 2009, and then an annual rate of 6%. The $4,800,000 loan is shown as a related party loan in the accompanying consolidated balance sheet. At June 30, 2009, there is accrued interest of $280,000 related to this loan included in accrued expenses.

NOTE 12 — STOCKHOLDERS’ EQUITY

Preferred Stock

As of June 30, 2009 (unaudited) and December 31, 2008, the number of authorized shares of the Company’s preferred stock was 10,000,000 shares. The par value of the preferred stock is $0.001. There were no shares outstanding of preferred stock as of June 30, 2009 and December 31, 2008.

Common Stock

As of June 30, 2009 (unaudited) and December 31, 2008, the number of authorized shares of the Company’s common stock was 1,500,000,000 shares. The par value of the common stock is $0.001. Common stockholders are entitled to one vote for each share held on all matters voted on by stockholders.

As of December 31, 2008, there were 814,336,863 shares of common stock outstanding. During 2009, the Company issued 19,607,564 shares of common stock under an existing Form S-8 Registration Statement to employees and consultants for services provided or to be provided to the Company. In addition, the Company issued 40,700,200 unregistered shares of common stock to employees, directors, consultants and vendors for services provided or to be provided to the Company. All of the share issuances in 2009 were recorded at fair market value on the date of grant. As of June 30, 2009, there were 874,644,627 (unaudited) shares of common stock outstanding.

NOTE 13 — INCOME TAX

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company has accrued no interest or penalties at June 30, 2009. As of the date of these financial statements, the 2007, 2006, and 2005 income tax years are open to the possibility of examination by federal, state, or local taxing authorities.

The Company did not record a provision for income taxes for the six months ended June 30, 2009 as a result of operating losses for the current fiscal year. The Company has recorded valuation allowances to fully reserve its deferred tax assets, as management believes it is more likely than not that these assets will not be realized. It is possible that management’s estimates as to the likelihood of realization of its deferred tax assets could change as a result of changes in estimated operating results. Should management conclude that it is more likely than not that these deferred tax assets are, at least in part, realizable, the valuation allowance will be reduced and recognized as a deferred income tax benefit in the statement of operations in the period of change.

NOTE 14 — RETIREMENT PLAN

Effective March 1, 2006, the Board of Directors of the Company approved and established the VIASPACE Inc. 401(k) Plan (“401(k) Plan”). The 401(k) Plan covered employees of the Company and its subsidiaries. The 401(k) Plan was closed on March 1, 2009.

NOTE 15 — OPERATING SEGMENTS

The Company evaluates its reportable segments in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). For the period ended June 30, 2009, the Company’s Chief Executive Officer, Dr. Carl Kukkonen, was the Company’s Chief Operating Decision Maker (“CODM”) pursuant to SFAS No. 131. The CODM allocates resources to the segments based on their business prospects, product development and engineering, and marketing and strategy.

The Company operates in four reportable segments. The operations of DMFCC and VIASPACE Corporate’s energy related business are included in the Energy segment. The operations of Ionfinity are included in the Security segment. The operations of IPA China and IPA BVI are included in the Framed Artwork segment. The operations of VGE are included in the Grass segment.

Effective with the acquisition of IPA by VGE on October 21, 2008, the Company has added two additional reportable segments. One is the framed-artwork segment which specializes in manufacturing and selling high-quality, copyrighted, framed artwork to retail stores. In addition, there is a grass business segment, which plans to grow, harvest and sell Giant King Grass as a livestock feed as well as a future feedstock for biofuel production.

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 expected to be replacements for traditional batteries and are expected to gain a substantial market share in the future 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.

(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)

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.

Framed-Artwork Segment:

(i)

IPA China and IPA BVI: Specialize in manufacturing high-quality, copyrighted, framed artwork in the PRC which is sold to retail stores in the U.S.

Grass Segment:

(i)

VGE: VGE is growing Giant King Grass in the PRC to be harvested and sold initially as a livestock feed and in the future as a feedstock for biofuel production and as a clean alternative to coal in electricity generating power plants,

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (see Note 1 to these financial statements). The Company evaluates segment performance based on income (loss) from operations excluding infrequent and unusual items.

The amounts shown as “Corporate Administrative Costs” consist of unallocated corporate-level operating expenses. In addition, the Company does not allocate other income/expense, net to reportable segments.

Information on reportable segments for the three and six months ending June 30, 2009 and 2008 are shown below:

		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
		June 30, 2009				June 30, 2008				June 30, 2009				June 30, 2008
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenues:
Energy		$	2,000			$	4,000			$	57,000			$	4,000
Security			188,000				8,000				362,000				17,000
Framed-Artwork			1,280,000				—				1,871,000				—
Grass			—				—				—				—
Total Revenue		$	1,470,000			$	12,000			$	2,290,000			$	21,000
Income (Loss) From Operations:
Energy		$	(14,000	)		$	(212,000	)		$	(20,000	)		$	(525,000	)
Security			25,000				(5,000	)			52,000				(9,000	)
Framed-Artwork			362,000				—				390,000				—
Grass			(344,000	)			—				(520,000	)			—
Loss From Operations by Reportable Segments			29,000				(217,000	)			(98,000	)			(534,000	)
Corporate Administrative Costs			(235,000	)			(1,145,000	)			(317,000	)			(1,926,000	)
Corporate Stock Compensation and Warrant Expense			(408,000	)			(509,000	)			(980,000	)			(1,134,000	)
Loss From Operations		$	(614,000	)		$	(1,871,000	)		$	(1,395,000	)		$	(3,594,000	)

		June 30, 2009				December 31, 2008
		(Unaudited)
Assets:
Energy		$	182,000			$	202,000
Security			176,000				134,000
Framed-Artwork			4,927,000				5,179,000
Grass			118,000				193,000
VIASPACE Corporate			13,660,000				13,662,000
Total Assets		$	19,063,000			$	19,370,000

For the six months ended June 30, 2009, the Company had one framed-artwork customer who made up 53% of the consolidated revenues of the Company.

NOTE 16 — NET LOSS PER SHARE

The Company computes net loss per share in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS No. 128”). Under the provision of SFAS No. 128, basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings would customarily include, if dilutive, potential shares of common stock issuable upon the exercise of stock options and warrants. The dilutive effect of outstanding stock options and warrants is reflected in earnings per share in accordance with SFAS No. 128 by application of the treasury stock method. For the periods presented, the computation of diluted loss per share equaled basic loss per share as the inclusion of any dilutive instruments would have had an antidilutive effect on the earnings per share calculation in the periods presented.

The following table sets forth common stock equivalents (potential common stock) for the six months ended June 30, 2009 and 2008 that are not included in the loss per share calculation since their effect would be anti-dilutive for the periods indicated:

		(Unaudited)
		Six Months Ended
		June 30,
		2009				2008
Stock Options			11,130,000				16,436,000
Warrants			624,000				624,000

The following table sets forth the computation of basic and diluted net loss per share for the six months ended June 30, 2009 and 2008, respectively:

		(Unaudited)								(Unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Basic and diluted net loss per share:
Numerator:
Net loss attributable to common stock		$	(555,000	)		$	(1,901,000	)		$	(1,406,000	)		$	(4,227,000	)
Denominator:
Weighted average shares of common stock outstanding			849,565,083				443,772,554				848,349,006				393,974,135
Net loss per share of common stock, basic and diluted		$	*			$	*			$	*			$	(0.01	)

NOTE 17 — RELATED PARTY TRANSACTIONS

Other than as listed below, we have not been a party to any significant transactions, proposed transactions, or series of transactions, and in which, to our knowledge, any of our directors, officers, five percent beneficial security holders, or any member of the immediate family of the foregoing persons has had or will have a direct or indirect material interest.

Related Party Receivables

Mr. Sung Hsien Chang, President of VGE and CEO of IPA China and IPA BVI, owes $759,000 to IPA BVI at June 30, 2009. JJ International (“JJ”) is a company owned by Sung Hsien Chang that operates separately and also does business with IPA China. JJ owes IPA BVI $689,000 at June 30, 2009. IPA China recorded revenues of $28,000 during 2009 from JJ. An employee of IPA China owes $11,000 to VGE at June 30, 2009. Total related party receivables are $1,459,000 at June 30, 2009.

Related Party Payables

At June 30, 2009, the Company has included as a related party payable $173,000 representing accrued salary and partner draw that was due to Dr. Kukkonen, CEO, and Mr. Amjad Abdallat, former VP, by ViaSpace Technologies, LLC (“ViaSpace LLC”) prior to its merger with the Company on June 22, 2005. These amounts were accrued by ViaSpace LLC prior to December 31, 2002. At June 30, 2009, the Company owes $129,000 to Dr. Kukkonen and Mr. Abdallat for earned salary in 2008 that has not been paid and is included in related party payables at June 30, 2009.

On October 31, 2006, the Company entered into a Consulting Agreement (the “Consulting Agreement”) with Denda Associates Co. Ltd. (“Denda Associates”). Pursuant to the Consulting Agreement, Denda Associates will provide the Company with consulting and business development expertise to assist the Company with expanding into the Japanese market. Denda Associates was founded by Mr. Nobuyuki Denda, who serves as its CEO and who also served on the Board of Directors of the Company. Mr. Denda resigned from the Board of Directors effective July 1, 2008 for personal health reasons. As of June 30, 2009, $11,000 is owed to Mr. Denda.

As of June 30, 2009, Ionfinity owes salary payments of $4,000 to related parties including two directors of Ionfinity.

IPA China owes $26,000 to an employee of IPA China at June 30, 2009.

Total related party payables are $343,000 at June 30, 2009.

As discussed in Note 8, the Company is obligated to pay Sung Hsien Chang $4,800,000 on August 21, 2009, related to the Second Closing of the acquisition of IPA China and IPA BVI by VGE and the Company. Interest expense on the $4,800,000 accrues at 6% for the first six months after the First Closing, and then 18% until June 10, 2009, and then an annual rate of 6%. The $4,800,000 loan is shown as a related party loan in the accompanying consolidated balance sheet. At June 30, 2009, there is accrued interest of $280,000 related to this loan included in accrued expenses.

Employment Agreements

On October 21, 2008, VGE entered into two-year employment agreements with each of Dr. Carl Kukkonen, Mr. Sung Hsien Chang, Mr. Stephen Muzi and Mr. Maclean Wang. Dr. Kukkonen would serve as Chief executive Officer, Mr. Chang as President, Mr. Muzi as Chief Financial Officer, Treasurer and Secretary and Mr. Wang as Managing Director of Grass Development. Dr. Kukkonen and Mr. Chang would receive a salary of $240,000 per annum, Mr. Muzi receives $180,000 per annum and Mr. Wang receives $84,000 per annum. Each of them is entitled to a bonus as determined by the VGE Board of Directors, customary insurance and health benefits, 15 days paid leave per year, and reimbursement for out-of-pocket expenses in the course of his employment. These employment agreements are terminated if the Company fails to achieve the Second Closing of IPA BVI and IPA China as discussed in Note 8.

NOTE 18 — OTHER COMMITMENTS AND CONTINGENCIES

Leases

On May 1, 2006, the Company relocated its office and laboratory space to a new location and entered into a five year lease. Future minimum lease payments due under this lease subsequent to June 30, 2009 are as follows:

Fiscal Year
2010		$	96,000
2011			96,000
2012			8,000
Total minimum lease payments		$	224,000

The Company vacated its office space on March 1, 2009. The Company and the landlord are actively looking for a new tenant to assume this lease. Rent expense charged to operations for 2009 and 2008 was $68,000 and $35,000, respectively.

Operations in the PRC

IPA China’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Company’s sales, purchases and expenses transactions are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance.

Litigation

The Company is not party to any legal proceedings at the present time.

NOTE 19 — FINANCIAL ACCOUNTING DEVELOPMENTS

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Values When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly declined and (2) identifying transactions that are not orderly. The FSP also amends certain disclosure provisions of SFAS No. 157 to require, among other things, disclosures in interim periods of the inputs and valuation techniques used to measure fair value. This pronouncement is effective prospectively beginning April 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP 115-2). This FSP modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The FSP also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the FSP, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The FSP further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. FSP 115-2 requires entities to initially apply the provisions of the standard to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulated other comprehensive income. This pronouncement is effective April 1, 2009. The Company does not believe this standard will have a material impact on the Company’s consolidated results of operations or financial condition.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. These additional disclosures will be required beginning with the quarter ending June 30, 2009. The Company is currently evaluating the requirements of these additional disclosures.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”) [ASC 855-10-05], which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. SFAS 165 is effective for interim and annual periods ending after June 15, 2009, and accordingly, the Company adopted this pronouncement during the second quarter of 2009. SFAS 165 requires that public entities evaluate subsequent events through the date that the financial statements are issued. The Company has evaluated subsequent events through the time of filing these financial statements with the SEC on August 14, 2009.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140 (“SFAS 166”) [ASC 860], which requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company has not completed its assessment of the impact SFAS 166 will have on its financial condition, results of operations or cash flows.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”) [ASC 810-10], which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009. The Company has not completed its assessment of the impact SFAS 167 will have on its financial condition, results of operations or cash flows.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162 (“SFAS 168”). This Standard establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with US GAAP. The Codification does not change current US GAAP, but is intended to simplify user access to all authoritative US GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature.

NOTE 20 — GOING CONCERN

During the audit of its consolidated financial statements for the year ended December 31, 2008, the Company’s auditors issued a going concern audit opinion which raised doubt about the Company’s ability to continue as a going concern and fund cash requirements for operations through March 31, 2010. Beginning in the fourth quarter of 2008, the Company has made major changes to address this issue including laying off certain of its staff to reduce operating expenses and selling non-core and as yet non-profitable business units. The Company is now focused primarily on three main business units including the fuel cell business, grass business and framed-artwork business. During 2009, management of the Company is focused on completing the Second Closing of the IPA BVI and IPA China which requires a $4.8 million payment to Sung Hsien Chang as explained in Note 8. If the Second Closing is accomplished, management believes the Company will be able to continue as a going concern with no immediate need for additional outside financing.

NOTE 21 — SUBSEQUENT EVENTS

On August 11, 2009, the Company and California Institute of Technology (“Caltech”) entered into an agreement whereby the Company returned to Caltech the license it originally received from Caltech on August 15, 2007 related to certain electrochemical thermodynamic measurement system technology. In exchange for the return of this license and a payment of $25,000, Caltech agreed to cancel $134,000 in patent costs related to the electrochemical thermodynamic measurement system technology and patent costs related to DMFCC fuel cell technology licensed from Caltech. The Company also agreed to return its fuel cell patents to Caltech if it ever fails to maintain the patents or if it fails by August 11, 2013 to commercialize or license one or more of the fuel cell patents received from Caltech. The Company is free to not maintain one or more individual patents if they do not meet business objectives in which case such individual patent shall revert back to Caltech. If the portfolio is returned to Caltech, DMFCC will be granted a royalty-free nonexclusive license without the right to sublicense to the patents covering the ability to make, use, sell, offer to sell and import the items covered by the patents.

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 2008 annual report on Form 10-K.

VIASPACE Overview

VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) is a renewable and alternative energy company with a global reach. We operate three separate businesses. We grow a proprietary, fast-growing grass (initially in China) for low carbon liquid biofuels for transportation; potentially as a green substitute for all or a portion of the coal in electricity generating power plants, and as animal feed. We also manufacture and develop framed copyrighted artwork in China and market and sell them in the U.S. We produce disposable fuel cartridges that provide the energy source for notebook computers and cell phones powered by fuel cells. We do not make the biofuel; rather we grow the grass feedstock for the biofuel factory. We do not make fuel cells, but instead we make disposable fuel cartridges for fuel cell and electronics manufacturers such as Samsung. Both the grass and the fuel cartridge businesses could represent potentially large and recurring revenue streams. A single fuel cell powered notebook computer may use as many as 100 fuel cartridges during its lifetime. The fuel cell/fuel cartridge business model is analogous to the razor/razor blade business model with the fuel cartridges being the disposable product. VIASPACE is based in California with business activities in China, Korea and Japan.

VIASPACE was founded in 1998 as a private company to commercialize proven space and defense technologies from NASA and the Department of Defense. VIASPACE has licensed patents, and software technology from California Institute of Technology (“Caltech”), which manages the Jet Propulsion Laboratory (“JPL”) for NASA. The direct methanol fuel cell was invented at JPL and the University of Southern California. VIASPACE subsidiary Direct Methanol Fuel Cell Corporation has licensed these patents from Caltech. VIASPACE became a public company on June 22, 2005. On October 21, 2008, the Company through its wholly-owned subsidiary VIASPACE Green Energy (“VGE”), acquired an equity interest in Inter-Pacific Arts, Corp. (“IPA BVI”), a British Virgin Islands profitable company that manufactures high quality, copyrighted, framed artwork at its factory in the People’s Republic of China (“PRC’), and sells the framed art to large retailers in the US. IPA BVI, through its wholly-owned subsidiary, Guangzhou Inter-Pacific Arts Corp., a Chinese wholly owned foreign enterprise registered in Guangdong province (“IPA China”) which also has a worldwide license to cultivate and sell Giant King Grass — a natural hybrid, non-genetically modified, extremely fast-growing, perennial grass that is suitable for livestock feed as well as a feedstock for biofuel production. The Giant King Grass has the potential to be used in the production of nonfood crop based biofuels such as cellulosic ethanol, methanol and green gasoline; burned directly in power plants as a clean substitute for coal, and in the more immediate term, as animal feed for dairy cows, pigs, sheep, goats, fish and other animals.

The Company’s web site is www.VIASPACE.com.

Critical accounting policies and estimates

Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR60”) issued by the SEC, suggests that companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to the Company’s financial condition and results of operations, and requires significant judgment and estimates on the part of management in its application. For a summary of the Company’s significant accounting policies, including the critical accounting policies discussed below, see the accompanying notes to the consolidated financial statements.

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. The following accounting policies require significant management judgments and estimates:

VIASPACE and DMFCC have generated revenues on product revenue shipments. In accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”), VIASPACE and DMFCC recognize product revenue provided that (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments. Our standard shipping terms are freight on board shipping point. If the Company ships product whereby a customer has a right of return or review period, the Company does not recognize revenue until the right of return or review period has lapsed. Prior to the period lapsing, this revenue would be recorded as deferred revenue on the Company’s balance sheet.

Ionfinity has generated revenues to date on fixed-price contracts for government contracts in 2008 and 2007. These contracts have clear milestones and deliverables with distinct values assigned to each milestone. The government is not obligated to pay Ionfinity the complete value of the contract and can cancel the contract if the Company fails to meet a milestone. The milestones do not require the delivery of multiple elements as noted in Emerging Issues Task Force (“EITF”) Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”). In accordance with SAB No. 104, the Company treats each milestone as an individual revenue agreement and only recognizes revenue for each milestone when all the conditions of SAB No. 104 defined earlier are met.

In accordance with SAB No. 104, IPA BVI and IPA China recognize product revenue provided: (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments. Our standard shipping terms are free on board shipping point. Some of the Company’s products are sold in the PRC and are subject to Chinese value-added tax. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. Revenue is recorded net of VAT taxes.

The Company accounts for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with the provisions of EITF Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services”, and EITF Issue No. 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other than Employees”. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance with EITF Issue No. 00-18, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid expenses in its consolidated balance sheet.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There is no assurance that actual results will not differ from these estimates.

See footnotes in the accompanying financial statements regarding recent financial accounting developments.

Results of Operations

Three Months Ended June 30, 2009 Compared to June 30, 2008

Revenues

Revenues were $1,470,000 and $12,000 for 2009 and 2008, respectively, an increase of $1,458,000. IPA BVI and IPA China recorded revenues of $1,280,000 from the sales of framed-artwork primarily to retail U.S. customers. There were no revenues recognized in 2008 for IPA BVI and IPA China as the acquisition of IPA BVI and IPA China occurred on October 21, 2008. Ionfinity incurred higher revenues of $180,000 due to the starting of a Phase II U.S. Army contract in August 2008 and a U.S. Navy contract in October 2008. VIASPACE recorded increased revenues of $2,000 related to a battery sale in 2009. DMFCC recorded decreased sales of $4,000 from 2008 to 2009.

Cost of Revenues

Costs of revenues were $857,000 and $2,000 for 2009 and 2008, respectively, an increase of $855,000. IPA BVI and IPA China incurred costs related to its framed-artwork totaling $699,000. There were no costs of revenues for framed-artwork recognized in 2008 as the acquisition of IPA occurred on October 21, 2008. Ionfinity recorded increased cost of revenues of $159,000 during 2009 as compared with 2008 due to the beginning of its Phase II contracts with the U.S. Army and U.S. Navy in the fourth quarter of 2008. DMFCC recorded decreased cost of revenues of $3,000 due to lower sales in 2009 for this period.

Gross Profit

The resulting effect on these changes in revenues and cost of revenues from 2008 to 2009 was an increase in gross profits from $10,000 in 2008 to $613,000 in 2009, an increase of $603,000.

Research and Development

Research and development expenses were $9,000 and $76,000 for 2009 and 2008, respectively, a decrease of $67,000. Consulting expenses decreased by $66,000 due to the termination of consultants performing research and development assignments. Other research and development expenses, net, decreased $1,000. Research and development will continue at DMFCC in 2009 but at lower levels compared with 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $1,218,000 and $1,805,000 for 2009 and 2008, respectively, a decrease of $587,000. Selling payroll, payroll benefits and commissions increased $87,000 in 2009 as compared with 2008 primarily due to higher commissions in the framed-artwork business segment. There were no commissions paid in the framed-artwork segment in 2008 as the acquisition of IPA BVI and IPA China occurred on October 21, 2008. General and administrative payroll and payroll benefit costs increased $141,000 primarily due to salaries paid by VGE in 2009 and no salaries paid by VGE in 2008. Stock compensation expense related to stock options decreased by $436,000 during 2009 as compared with 2008 as many stock options were cancelled in 2008. Stock compensation related to the Company issuing stock to employees, consultants and vendors in lieu of cash payments for services increased $323,000 in 2009 as compared to the same period in 2008. The Company’s consulting expenses decreased by $266,000 in 2009 as compared to 2008 as fewer consultants were used in Company’s operations. The Company’s accounting fees increased $97,000 due to higher audit fees. The Company incurred higher legal fees by $46,000 due to additional fees related to the Form S-1 Registration statement for VGE. The Company incurred lower public relations and investor relations fees of $651,000 as compared with the same period of 2008. Other selling, general and administrative expenses, net, increased by $72,000 during 2009. We expect that selling, general and administrative expenses will continue in 2009 to be lower than 2008 levels.

Loss from Operations

The resulting effect on these changes in gross profits, research and development expenses and selling, general and administrative expenses from 2008 to 2009 was a decrease in the loss from operations from $1,871,000 in 2008 to $614,000 in 2009, a decrease of $1,257,000.

Other Income (Expense), Net

Interest Income

Interest income decreased $1,000 from 2008 to 2009.

Interest Expense

Interest expense increased by $146,000 from 2008 to 2009, primarily as a result of interest expense being accrued on the related party loan payable to Sung Hsien Chang related to the acquisition of IPA by the Company on October 21, 2008 as discussed in Note 8.

Other Income and Other Expense

Other income decreased $62,000 from 2008 to 2009.

Gain on Sale of Humidity Sensor Business

On April 20, 2009, the Company into an Asset Purchase and Support Services Agreement with Landtec North America. The Purchased Assets primarily included assets related to the Seller’s tunable diode laser-based humidity sensor business. Seller also agreed to cause certain of its consultants and employees to provide support services for a period of 60 days after the closing. Landtec agreed to pay $210,000 for the purchased assets and support services. The Company recorded a gain on sale of assets related to this Landtec Purchase and Support Services Agreement of $176,000 in the second quarter of 2009.

Discontinued Operations

As explained in Note 9, on December 22, 2008, the Company entered into an asset purchase agreement with Knovitech, Inc., whereby the Company transferred certain assets related to its security business for $479,000. In addition, in Note 9, the Company explains that it sold its laser-based humidity sensor business to Landtec for $210,000. Discontinued operations loss of $172,000 for the three months ended June 30, 2008, related to the operations of these sold business units are shown in the accompanying consolidated statements of operations. In addition, income of $5,000 is shown as discontinued operations for the three months ended June 30, 2009.

Six Months Ended June 30, 2009 Compared to June 30, 2008

Revenues

Revenues were $2,290,000 and $21,000 for 2009 and 2008, respectively, an increase of $2,269,000. IPA BVI and IPA China recorded revenues of $1,871,000 from the sales of framed-artwork primarily to retail U.S. customers. There were no revenues recognized in 2008 for IPA BVI and IPA China as the acquisition of IPA BVI and IPA China occurred on October 21, 2008. Ionfinity incurred higher revenues of $345,000 due to the starting of a Phase II U.S. Army contract in August 2008 and a U.S. Navy contract in October 2008. VIASPACE recorded increased revenues of $2,000 related to a battery sale in 2009. DMFCC recorded increased sales of $51,000 from 2008 to 2009 related to a fuel cell contract it has with Samsung.

Cost of Revenues

Costs of revenues were $1,383,000 and $9,000 for 2009 and 2008, respectively, an increase of $1,374,000. IPA BVI and IPA China incurred costs related to its framed-artwork totaling $1,034,000. There were no costs of revenues for framed-artwork recognized in 2008 as the acquisition of IPA occurred on October 21, 2008. Ionfinity recorded increased cost of revenues of $295,000 during 2009 as compared with 2008 due to the beginning of its Phase II contracts with the U.S. Army and U.S. Navy in the fourth quarter of 2008. DMFCC recorded increased cost of revenues of $45,000 due to higher sales in 2009 compared with 2008.

Gross Profit

The resulting effect on these changes in revenues and cost of revenues from 2008 to 2009 was an increase in gross profits from $12,000 in 2008 to $907,000 in 2009, an increase of $895,000.

Research and Development

Research and development expenses were $18,000 and $194,000 for 2009 and 2008, respectively, a decrease of $176,000. Consulting expenses decreased by $104,000 due to the termination of consultants performing research and development assignments. Payroll and payroll benefits decreased $47,000 in 2009 as compared with 2008 as the Company laid off certain employees. Other research and development expenses, net, decreased $25,000. Research and development will continue at DMFCC in 2009 but at lower levels compared with 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,284,000 and $3,412,000 for 2009 and 2008, respectively, a decrease of $1,128,000. Selling payroll, payroll benefits and commissions increased $168,000 in 2009 as compared with 2008 primarily due to higher commissions in the framed-artwork business segment. There were no commissions paid in the framed-artwork segment in 2008 as the acquisition of IPA BVI and IPA China occurred on October 21, 2008. General and administrative payroll and payroll benefit costs increased $115,000 primarily due to salaries paid by VGE in 2009 and no salaries paid by VGE in 2008. Stock compensation expense related to stock options decreased by $902,000 during 2009 as compared with 2008 as many stock options were cancelled in 2008. Stock compensation related to the Company issuing stock to employees, consultants and vendors in lieu of cash payments for services increased $680,000 in 2009 as compared to the same period in 2008. The Company’s consulting expenses decreased by $345,000 in 2009 as compared to 2008 as fewer consultants were used in Company’s operations. The Company’s accounting fees increased $93,000 due to higher audit fees. The Company incurred lower legal fees of $109,000 due to lower fees related to patents and investment activities. The Company incurred lower public relations and investor relations fees of $859,000 as compared with the same period of 2008. Other selling, general and administrative expenses, net, increased by $31,000 during 2009. We expect that selling, general and administrative expenses will continue in 2009 to be lower than 2008 levels.

Loss from Operations

The resulting effect on these changes in gross profits, research and development expenses and selling, general and administrative expenses from 2008 to 2009 was a decrease in the loss from operations from $3,594,000 in 2008 to $1,395,000 in 2009, a decrease of $2,199,000.

Other Income (Expense), Net

Interest Income

Interest income decreased $6,000 from 2008 to 2009.

Interest Expense

Interest expense increased by $263,000 from 2008 to 2009, primarily as a result of interest expense being accrued on the related party loan payable to Sung Hsien Chang related to the acquisition of IPA by the Company on October 21, 2008 as discussed in Note 8.

Other Income and Other Expense

Other income decreased $74,000 from 2008 to 2009.

Gain on Sale of Humidity Sensor Business

On April 20, 2009, the Company into an Asset Purchase and Support Services Agreement with Landtec North America. The Purchased Assets primarily included assets related to the Seller’s tunable diode laser-based humidity sensor business. Seller also agreed to cause certain of its consultants and employees to provide support services for a period of 60 days after the closing. Landtec agreed to pay $210,000 for the purchased assets and support services. The Company recorded a gain on sale of assets related to this Landtec Purchase and Support Services Agreement of $176,000 in the second quarter of 2009.

Discontinued Operations

As explained in Note 9, on December 22, 2008, the Company entered into an asset purchase agreement with Knovitech, Inc., whereby the Company transferred certain assets related to its security business for $479,000. In addition, in Note 9, the Company explains that it sold its laser-based humidity sensor business to Landtec for $210,000. Discontinued operations loss of $789,000 for the six months ended June 30, 2008, related to the operations of these sold business units are shown in the accompanying consolidated statements of operations. In addition, income of $12,000 is shown as discontinued operations for the six months ended June 30, 2009.

Liquidity and Capital Resources

Net cash used in operating activities was $1,272,000 for the six months ended June 30, 2009. The Company’s net loss was $1,406,000 in 2009. Non-cash expenses totaled $1,255,000 for the first six months of 2009, composed primarily of stock compensation expense related to stock issued to employees, directors and consultants. General working capital used $437,000 in cash for the six months of 2009. Related party, net, used $684,000 in cash during 2009.

Net cash provided by investing activities was $164,000 for the six months ended June 30, 2009, primarily related to proceeds received on the sale of assets to Landtec of $210,000, an investment in a land lease in the PRC related to the growing of VGE’s Giant King Grass of $25,000 and the purchase of capital expenditures of $21,000.

There was no cash provided by financing activities for the six months ended June 30, 2009.

Our quarterly loss was lower in 2009 as compared to 2008 and we expect that to continue for the rest of 2009. During the audit of its consolidated financial statements for the year ended December 31, 2008, the Company’s auditors issued a going concern audit opinion which raised doubt about the Company’s ability to continue as a going concern and fund cash requirements for operations through March 31, 2010. Beginning in the fourth quarter of 2008, the Company has made major changes to address this issue including laying off certain of its staff to reduce operating expenses and selling non-core and as yet non-profitable business units. The Company is now focused primarily on three main business units including the fuel cell business, grass business and framed-artwork business. During 2009, management of the Company is focused on completing the second closing of the IPA transaction which requires a $4.8 million payment to Sung Hsien Chang as explained in Note 8. If the second closing is accomplished, management believes the Company will be able to continue as a going concern with no immediate need for additional outside financing. If the second closing is not accomplished, management expects that the auditors will continue to issue a going concern audit opinion on the Company for 2009.

Contractual Obligations

The following table summarizes our long-term contractual obligations subsequent to June 30, 2009:

						Less than 1												More than
		Total				Year				1-3 Years				3-5 Years				5 Years
Long-term debt obligations (a)		$	44,000			$	44,000			$	—			$	—			$	—
Operating lease obligations (b)		$	200,000			$	96,000			$	104,000			$	—			$	—
Employment agreements (c)		$	992,000			$	744,000			$	248,000			$	—			$	—

There are no other major outstanding contractual obligations.

Inflation and Seasonality

We have not experienced material inflation during the past five years. Seasonality has historically not had a material effect on our operations.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements as of June 30, 2009.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is confined to our cash and cash equivalents. We invest excess cash and cash equivalents in high-quality money market funds that invest in federal agency notes and United States treasury notes, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. The effective duration of our portfolio is all current with no investment of a long-term duration. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments.

Most of our transactions are conducted in United States dollars, although we do have some research and development, and sales and marketing agreements with consultants outside the United States. The majority of these transactions are conducted in United States dollars. If the exchange rate changed by ten percent, we do not believe that it would have a material impact on our results of operations or cash flows.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures. Disclosure controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

At the end of the period covered by this report, the Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective at the reasonable assurance level described above as of the end of the period covered in this report.

Changes in internal controls over financial reporting. Management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter. Based on that evaluation, management, the Chief Executive Officer and the Chief Financial Officer of the Company have concluded that no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company does not have any legal proceedings as of June 30, 2009.

ITEM 1A. RISK FACTORS

Risk Factors Which May Affect Future Results

The Company wishes to caution that the following important factors, among others, in some cases have affected and in the future could affect the Company’s actual results and could cause such results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company.

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, other than as set forth below:

Risks Related To Our Business

We have incurred losses and anticipate continued losses for the foreseeable future.

Our net loss for the six months ended June 30, 2009 was $1,406,000. The Company’s net loss has decreased in 2009 from 2008 although we are not yet profitable on a consolidated basis. Beginning in the fourth quarter of 2008, the Company made major changes to address this issue including laying off certain of its staff to reduce operating expenses and selling non-core and as yet non-profitable business units. The Company is now focused primarily on three main business units including the fuel cell business, grass business and framed-artwork business. We have not yet achieved profitability and expect to continue to incur net losses until we recognize sufficient revenues from the fuel cell business, grass business and framed-artwork business to offset expenses. Because we have a limited history upon which an evaluation of our prospects can be based, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies seeking to develop new and rapidly evolving technologies. To address these risks, we must, among other things, respond to competitive factors, continue to attract, retain and motivate qualified personnel and commercialize and continue to develop our technologies. We may not be successful in addressing these risks. We can give no assurance that we will achieve or sustain profitability.

Our ability to continue as a going concern is dependent on future financing.

Goldman Parks Kurland Mohidin LLP, our independent registered public accounting firm, included an explanatory paragraph in its report on our financial statements for the fiscal year ended December 31, 2008, which expressed substantial doubt about our ability to continue as a going concern. The inclusion of a going concern explanatory paragraph in Goldman Parks Kurland Mohidin LLP’s report on our financial statements could have a detrimental effect on our stock price and our ability to raise additional capital.

Our financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have not made any adjustments to the financial statements as a result of the outcome of the uncertainty described above. Accordingly, the value of the Company in liquidation may be different from the amounts set forth in our financial statements.

Our continued success will depend on our ability to continue to raise capital in order to fund the development and commercialization of our products. Failure to raise additional capital may result in substantial adverse circumstances, including our inability to continue the development of our products and our liquidation.

Our revenues to date have been to a few customers, the loss of which could result in a severe decline in revenues.

For the six months ended June 30, 2009, the Company had one customer who made up 53% of the consolidated revenues of the Company. We believe that this trend of revenues to a few customers will continue in the near future. A loss of any customer by the Company could significantly reduce recognized 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.

Any sale of a substantial number of shares of our common stock (or the prospect of sales) may have the effect of depressing the trading price of our common stock. In addition, these sales could lower our value and make it more difficult for us to raise capital. Further, the timing of the sale of the shares of our common stock may occur at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.

The Company has 1,500,000,000 authorized shares of common stock, of which 874,644,627 were issued and outstanding as of June 30, 2009. Of these issued and outstanding shares, 387,668,513 shares (42.8% of the total issued and outstanding shares) are currently held by our executive officers, directors and principal shareholders (including Dr. Carl Kukkonen, CEO and Director; Mr. Amjad Abdallat, Former COO and Director; Mr. Sung Hsien Chang, President of VGE and CEO of IPA BVI and IPA China; and SNK Capital Trust). On April 10, 2006, SNK Capital Trust agreed to a lock-up of its 61,204,286 shares until April 9, 2011. No other shares are currently subject to any lock-up arrangement. Of the total shares issued and outstanding at June 30, 2009, 477,406,544 are accounted by our transfer agent as restricted under Rule 144. These shares could be released in the future if requested by the holder of the shares, subject to volume and manner of sale restrictions under Rule 144. A total of 397,238,083 shares of the Company’s common stock are accounted for by our transfer agent as free trading shares.

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares currently held by management and principal shareholders), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On April 1, 2009, April 20, 2009 and May 28, 2009, the Company issued Dr. Kukkonen, CEO of the Company, a combined total of 7,162,079 unregistered shares of the Company’s common stock in exchange for salary at valued at $111,000 on the date of issuance. On May 13, 2009 and May 15, 2009, the Company issued vendors 2,332,532 unregistered shares of the Company’s common stock in exchange for investor relations services valued at $60,000 on the date of issuance. On May 6, 2009, the Company issued consultants 11,705,686 unregistered shares of the Company’s common stock in exchange for future consulting and legal services valued at $350,000 on the date of issuance. The shares were issued in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. We made a determination that these parties were sophisticated investors with enough knowledge and experience in business to evaluate the risks and merits of accepting our shares as payment for their services and the Company believes that each party was given or had access to detailed financial and other information with respect to the Company. These vendors acquired the shares for investment purposes without view to distribution, and there was no general advertising or general solicitation in connection with the issuance of the shares. Further, restrictive transfer legends were placed on all certificates issued to these parties, and no underwriting or selling commissions were paid in connection with these share issuances.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

Execution of Material Agreements

On August 11, 2009, the Company and California Institute of Technology (“Caltech”) entered into an agreement whereby the Company returned to Caltech the license it originally received from Caltech on August 15, 2007 related to certain electrochemical thermodynamic measurement system technology. In exchange for the return of this license and a payment of $25,000, Caltech agreed to cancel $134,000 in patent costs related to the electrochemical thermodynamic measurement system technology and patent costs related to DMFCC fuel cell technology licensed from Caltech. The Company also agreed to return its fuel cell patents to Caltech if it ever fails to maintain the patents or if it fails by August 11, 2013 to commercialize or license one or more of the fuel cell patents received from Caltech. The Company is free to not maintain one or more individual patents if they do not meet business objectives in which case such individual patent shall revert back to Caltech. If the portfolio is returned to Caltech, DMFCC will be granted a royalty-free nonexclusive license without the right to sublicense to the patents covering the ability to make, use, sell, offer to sell and import the items covered by the patents.

ITEM 6. EXHIBITS

(a) Exhibits

	10.1			Agreement between the Company and California Institute of Technology dated August 11, 2009. *
	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. *

[SIGNATURES PAGE FOLLOWS]

SIGNATURES

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

EXHIBIT INDEX

Exhibit No.				Description
	10.1			Agreement between the Company and California Institute of Technology dated August 11, 2009. *
	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. *