10QSB

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

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

For the quarterly period ended June 30, 2006

or

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

For the transition period from            to

Commission File Number 333-110680

VIASPACE INC.

(Exact name of small business issuer as specified in its charter)

Nevada	76-0742386
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

171 North Altadena Drive, Suite 101, Pasadena, CA 91107
(Address of principal executive offices)

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

Check whether the issuer (1) 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 issuer 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 291,649,286 Shares of $0.001 par value Common Stock issued and outstanding as of August 11, 2006.

Transitional Small Business Disclosure Format (Check one): YES o NO þ

VIASPACE INC.

INDEX

		Page
Part I.	Financial Information:
Item 1.	Financial Statements:
	Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005		3
	Consolidated Statements of Operations For the Three and Six Months Ended June 30, 2006 and 2005 (Unaudited) and Consolidated Statements of Comprehensive Loss For the Three and Six Months Ended June 30, 2006 and 2005 (Unaudited)		4
	Consolidated Statements of Stockholders’ Equity as of June 30, 2006 (Unaudited) and December 31, 2005		5
	Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2006 and 2005 (Unaudited)		6
	Notes to Consolidated Financial Statements (Unaudited)		7
Item 2.	Management’s Discussion and Analysis		19
Item 3.	Controls and Procedures		28
Part II.	Other Information:
Item 4.	Submission of Matters to a Vote of Security Holders		29
Item 6.	Exhibits		29
Signatures			30
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

2

ITEM 1. FINANCIAL STATEMENTS

VIASPACE INC.

CONSOLIDATED BALANCE SHEETS

	June 30,
	2006			December 31,
	(Unaudited)			2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,941,000		$	2,130,000
Accounts receivable, net of allowance for doubtful accounts of zero		74,000			71,000
Marketable securities		246,000			24,000
Prepaid expenses and other current assets		37,000			53,000
TOTAL CURRENT ASSETS		2,298,000			2,278,000
FIXED ASSETS:
Fixed assets, net of accumulated depreciation of $82,000 and $67,000 in 2006 and 2005, respectively		162,000			21,000
OTHER ASSETS		77,000			16,000
TOTAL ASSETS	$	2,537,000		$	2,315,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	201,000		$	186,000
Accrued expenses		332,000			297,000
Unearned revenue		85,000			100,000
Current portion of long-term debt		28,000			27,000
TOTAL CURRENT LIABILITIES		646,000			610,000
LONG-TERM DEBT, net of current portion		86,000			100,000
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES:
Preferred Shareholder Minority Interest		500,000			500,000
Common Shareholder Minority Interest		41,000			51,000
		541,000			551,000
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, zero shares issued and outstanding		—			—
Common stock, $0.001 par value, 400,000,000 shares authorized, 291,649,286 and 284,506,430 issued and outstanding in 2006 and 2005, respectively		292,000			285,000
Additional paid in capital		4,917,000			2,200,000
Accumulated other comprehensive loss		296,000			—
Accumulated deficit		(4,241,000	)		(1,431,000	)
Total stockholders’ equity		1,264,000			1,054,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,537,000		$	2,315,000

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

3

VIASPACE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
REVENUES
Government contracts	$	91,000		$	188,000		$	183,000		$	224,000
Other contracts		83,000			—			104,000			11,000
Total revenues		174,000			188,000			287,000			235,000
COST OF REVENUES		146,000			103,000			251,000			148,000
GROSS PROFIT		28,000			85,000			36,000			87,000
OPERATING EXPENSES
Research and development		271,000			268,000			453,000			313,000
Selling, general and administrative expenses		1,211,000			284,000			2,452,000			510,000
Total operating expenses		1,482,000			552,000			2,905,000			823,000
LOSS FROM OPERATIONS		(1,454,000	)		(467,000	)		(2,869,000	)		(736,000	)
Interest income and other, net		26,000			3,000			45,000			20,000
LOSS BEFORE MINORITY INTEREST		(1,428,000	)		(464,000	)		(2,824,000	)		(716,000	)
Minority interest in consolidated subsidiaries		5,000			(8,000	)		14,000			31,000
NET LOSS	$	(1,423,000	)	$	(472,000	)	$	(2,810,000	)	$	(685,000	)
NET LOSS PER SHARE OF COMMON STOCK—Basic and diluted	$	*		$	*		$	(0.01	)	$	*
WEIGHTED AVERAGE SHARES OUTSTANDING—Basic and diluted		291,619,286			212,797,422			288,354,098			192,546,842

* Less than $0.01 per common share.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

NET LOSS	$	(1,423,000	)	$	—	$	(2,810,000	)	$	—
Other Comprehensive Income:
Conversion of securities		292,000			—		292,000			—
Unrealized holding gain on securities		9,000			—		4,000			—
Total Other Comprehensive Income		301,000			—		296,000			—
COMPREHENSIVE LOSS	$	(1,122,000	)	$	—	$	(2,514,000	)	$	—

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

4

VIASPACE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock
								Accumulated
					Additional			Other
					Paid in			Comprehensive		Accumulated
	Shares		Amount		Capital			Loss		Deficit			Total
BALANCE, DECEMBER 31, 2004		152,953,000	$	153,000	$	116,000		$	—	$	880,000		$	1,149,000
Investment by SNK Capital Trust		10,800,000		11,000		989,000								1,000,000
Shares issued for acquisition of Arroyo Sciences, Inc.		60,843,000		61,000		(61,000	)							—
Membership interest to Caltech		2,204,000		2,000		(2,000	)							—
Pre-existing post-split shares of Global-Wide Publication Ltd.		54,000,000		54,000		(118,000	)							(64,000	)
BALANCE, JUNE 22, 2005 — Reverse Merger		280,800,000	$	281,000	$	924,000		$	—	$	880,000		$	2,085,000
Exercise of options by SNK Capital Trust		3,571,000		4,000		996,000								1,000,000
Common stock issued in exchange for common shares in subsidiaries		135,000												—
Stock compensation expense related to warrants						247,000								247,000
Stock compensation expense related to stock options						33,000								33,000
Net loss											(2,311,000	)		(2,311,000	)
BALANCE, DECEMBER 31, 2005		284,506,000	$	285,000	$	2,200,000		$	—	$	(1,431,000	)	$	1,054,000
Net loss											(2,810,000	)		(2,810,000	)
Other comprehensive income:
Conversion of securities									292,000					292,000
Unrealized holding gain on securities									4,000					4,000
Comprehensive loss														(2,514,000	)
Exercise of options by SNK Capital Trust		7,143,000		7,000		1,993,000								2,000,000
Stock compensation expense related to warrants						327,000								327,000
Stock compensation expense related to stock options						397,000								397,000
BALANCE, JUNE 30, 2006		291,649,000	$	292,000	$	4,917,000		$	296,000	$	(4,241,000	)	$	1,264,000

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

5

VIASPACE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,810,000	)	$	(685,000	)
Depreciation and amortization		17,000			4,000
Stock compensation and warrant expense		724,000			—
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Accounts receivable		(3,000	)		39,000
Prepaid expenses		16,000			(2,000	)
Other assets		(13,000	)		(2,000	)
Accounts payable		15,000			58,000
Unearned revenue		(15,000	)		(12,000	)
Accrued expenses and other		79,000			(3,000	)
Related party payable		(20,000	)		(12,000	)
Minority interest		(10,000	)		(34,000	)
Net cash used in operating activities		(2,020,000	)		(649,000	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets		(156,000	)		(5,000	)
Purchase of Arroyo Sciences, Inc., net of cash and cash equivalents		—			148,000
Net cash provided by (used in) investing activities		(156,000	)		143,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options by SNK Capital Trust		2,000,000			—
Investment by SNK Capital Trust		—			1,000,000
Deposit from SNK Capital Trust for exercise of stock option		—			500,000
Payments on long-term debt		(13,000	)		(7,000	)
Reverse merger adjustment		—			(21,000	)
Net cash provided by financing activities		1,987,000			1,472,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(189,000	)		966,000
CASH AND CASH EQUIVALENTS, Beginning of period		2,130,000			1,933,000
CASH AND CASH EQUIVALENTS, End of period	$	1,941,000		$	2,899,000
Supplemental Schedule of Noncash Investing and Financing Activities:
Acquisition of Arroyo Sciences, Inc.
Cash purchase price				$	—
Working capital acquired, net of cash and cash equivalents of $118,758					(98,000	)
Long-term loan assumed					(50,000	)
				$	(148,000	)
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	6,000		$	5,000
Income taxes	$	—		$	—

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

6

VIASPACE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The accompanying unaudited consolidated financial statements of VIASPACE Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) for financial information and with the instructions to Form 10-QSB of Regulation S-B. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated on consolidation. Certain reclassifications have been made to the June 30, 2005 consolidated financial statements in order to conform to the June 30, 2006 consolidated financial statement presentation. Some information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with Securities and Exchange Commission’s rules and regulations for interim financial reporting. These interim unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s 2005 Annual Report on Form 10-KSB.

Principles of Consolidation — The Company is generally a founding shareholder of its affiliated companies, which are accounted for under the consolidation method. Affiliated companies Direct Methanol Fuel Cell Corporation (“DMFCC”), Arroyo Sciences, Inc. (“Arroyo”), Ionfinity LLC (“Ionfinity”) 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 including. 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 has adopted Statement of Financial Accounting Standards (“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.

Minority Interest in Subsidiaries — Minority interest in consolidated subsidiaries represents the minority stockholders’ proportionate share of equity of DMFCC, Ionfinity and Arroyo. The Company’s controlling interest requires that these companies’ operations be included in the consolidated financial statements. The percentage of Ionfinity and DMFCC that is not owned by the Company is shown as “Minority Interest in Consolidated Subsidiaries” in the Consolidated Statement of Operations and Consolidated Balance Sheet.

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.

Use of Estimates in the Preparation of the Financial Statements — The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, 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.

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.

Property and Equipment — Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided for using the straight-line method over the estimated useful life of the assets, which range from three to seven years.

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 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 June 30, 2006, all of the Company’s marketable securities are available for sale.

Intangible Assets — The Company’s intangible assets consist of, among other things, (1) a license to a patent that is being amortized over twenty years and (2) software application code that is being amortized over three years. All intangible assets are subject to impairment tests on an annual or periodic basis. Note 4 describes the impact of accounting for the adoption of SFAS No. 142,

7

“Goodwill and Intangible Assets”. 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.”

Income Taxes — Income taxes are accounted for under SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”) using the liability method. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The significant components of the provision for income taxes for the six months ended June 30, 2006 and 2005 was $5,000 and $4,000, respectively. There was no state deferred and federal tax provision. Due to its current net loss position, the Company has provided a valuation allowance in full on its net deferred tax assets in accordance with SFAS No. 109 and in light of the uncertainty regarding ultimate realization of the net deferred tax assets.

Revenue Recognition — The Company recognizes revenue on government contracts when the particular milestone is met and delivered to the customer and when the Company has received acceptance notification by the government program officer. Product sales revenues are recognized upon shipment, as title passes, FOB shipping point. Management fees are recognized as received for services to third party entities. Revenue collected in advance of product shipment or formal acceptance by the customer is reflected as deferred revenue.

Stock Based Compensation — VIASPACE and DMFCC have stock-based compensation plans. Effective with VIASPACE and DMFCC’s current fiscal year that began January 1, 2006, the Company has 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.

For fiscal years prior to January 1, 2006, the Company accounted for stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. VIASPACE and DFMCC had adopted the disclosure provisions of SFAS. No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” an amendment of SFAS No. 123. The following table illustrates the effect on net loss and loss per share if VIASPACE and DMFCC had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three and six months ended June 30, 2005:

	Three Months			Six Months
	Ended			Ended
	June 30, 2005			June 30, 2005
Net loss applicable to common shares, as reported	$	(472,000	)	$	(685,000	)
Add: Stock-based employee compensation included in reported net loss		—			—
Less: Total stock-based employee compensation expense determined under Black-Scholes option pricing model, net of tax effects		—			—
Pro forma net loss	$	(472,000	)	$	(685,000	)
Net loss per share — as reported: basic and diluted	$	*		$	*
Net loss per share — pro forma: basic and diluted	$	*		$	*

* Less than $0.01

Net Income (Loss) Per Share — The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” and Securities and Exchange Commission Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS 128 and SAB 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.

Concentration of Credit Risk — The Company’s financial instruments that are exposed to concentration of credit of 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.

8

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

NOTE 2 — FIXED ASSETS

Fixed assets are comprised of the following at June 30, 2006 and December 31, 2005:

	June 30,
	2006		December 31,
	(Unaudited)		2005
Computer equipment and software	$	158,000	$	66,000
Lab equipment		7,000		—
Furniture and fixtures		53,000		19,000
Leasehold improvements		26,000		3,000
Total property and equipment		244,000		88,000
Less: Accumulated depreciation		82,000		67,000
Fixed assets, net	$	162,000	$	21,000

Depreciation expense was $12,000 and $2,000 for the three months ended June 30, 2006 and 2005, respectively. Depreciation expense was $15,000 and $4,000 for the six months ended June 30, 2006 and 2005, respectively.

NOTE 3 — MARKETABLE SECURITIES

As of June 30, 2006, the Company owns 2,388,408 shares in QWIP Systems, Inc. (“QWIP”). The fair market value of these shares was $246,000 at June 30, 2006. As of December 31, 2005, the Company owned 203,740 shares in QWIP. The fair market value of these shares was $20,374 at December 31, 2005. In addition to these shares, the Company holds 3610.017 shares in QWIP Technologies, Inc., a subsidiary of QWIP, that are being held in escrow by QWIP subject to certain time restrictions. When the escrow restrictions lapse, these shares are redeemable and convertible into 1,629,859 shares of QWIP. As of June 30, 3006, the Company has reflected unredeemed QWIP shares at $50,000, reflecting a marketable securities discount rate due to price volatility and other discount factors. The total shares owned in QWIP by the Company including the issued shares and the shares subject to escrow restrictions total 4,018,266 shares. Of the total shares of QWIP that the Company has rights to, California Institute of Technology is entitled to receive 220,966 QWIP shares as part of a prior agreement. This would result in net QWIP shares owned by the Company totaling 3,797,300 shares. As of June 30, 2006, the Company owns 15% of the total outstanding shares of QWIP based on redeemed QWIP shares.

In addition, the Company held 50 escrowed shares of QWIP Series A Preferred Stock that could be released from escrow on the basis of one share for every $10,000 of positive cash flow from operations generated by QWIP Technologies, Inc. The escrow features lapsed on June 1, 2006 at which time these shares were forfeited. No escrowed shares were released to the Company prior to June 1, 2006.

NOTE 4 — INTANGIBLE ASSETS

Intangible asset balances are comprised of the following at June 30, 2006 and December 31, 2005:

	June 30,
	2006		December 31,
	(Unaudited)		2005
Amortized intangible assets, gross:
License to patent	$	10,000	$	10,000
Software Code		10,000		10,000
Total intangible assets, gross		20,000		20,000
Less: Accumulated amortization		6,000		4,000
Total intangible assets, net	$	14,000	$	16,000

Total amortization expense for intangible assets was $1,000 and zero for the three months ended June 30, 2006 and 2005, respectively. Total amortization expense for intangible assets was $2,000 and zero for the six months ended June 30, 2006 and 2005, respectively.

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The anticipated annual amortization of intangible assets for each of the five fiscal years subsequent to December 31, 2005 and thereafter are as follows:

	License to		Software
Year	Patent		Code		Total
2006	$	1,000	$	3,000	$	4,000
2007		1,000		4,000		5,000
2008		1,000		—		1,000
2009		1,000		—		1,000
2010		1,000		—		1,000
Thereafter		4,000		—		4,000
Total	$	9,000	$	7,000	$	16,000

NOTE 5 — OWNERSHIP INTEREST IN AFFILIATED COMPANIES

Ionfinity. As of June 30, 2006, 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, and Dr. Carl Kukkonen, Chief Executive Officer of the Company, acts as principal investigator on Ionfinity’s two government contracts. 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.

DMFCC. As of June 30, 2006, the Company owned 71.4% of the outstanding shares of voting stock of DMFCC. On May 15, 2006, the Company exercised an existing option it had with California Institute of Technology (“Caltech”) whereby the Company issued to Caltech a total of 150,000 common shares in DMFCC in exchange for approximately three issued and six pending fuel cell technology patents.

Other Affiliated Companies. As of June 30, 2006, the Company owned 100% of the voting stock of Arroyo, 73.9% of the capital stock of eCARmerce and 100% of the membership interests of Concentric Water. As of June 30, 2006, the Company owns 486,135 common shares of ViaLogy Corp. (“ViaLogy”), a company originally formed by ViaSpace LLC. The Company currently owns approximately 1.1% of the total outstanding equity of ViaLogy on a fully diluted basis. In addition, the CEO, Vice President/COO, and CFO of the Company combined own approximately 2.5% of the outstanding equity of ViaLogy. The Company does not have any recorded basis on these shares included in the Consolidated Balance Sheet.

NOTE 6 — LONG-TERM DEBT

Long-term debt is comprised of the following at June 30, 2006 and December 31, 2005:

	June 30,
	2006		December 31,
	(Unaudited)		2005
Community Development Commission of the County of Los Angeles, non-secured, with interest at 5% due 7/1/2009	$	40,000	$	45,000
Community Development Commission of the County of Los Angeles, non-secured, with interest at 5% due 9/1/2009		74,000		82,000
Total Long-term Debt		114,000		127,000
Less Current Portion		28,000		27,000
Net Long-term Debt	$	86,000	$	100,000

The monthly payments on these notes including interest are $2,762 effective August 1, 2005.

NOTE 7 — RELATED PARTIES

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.

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Ionfinity has consulting agreements with two minority owners and directors of Ionfinity to perform work on government contracts with the United States Navy and Air Force. One of these minority owners has a 47.9% membership interest in Ionfinity. As of June 30, 2006, $4,000 is included in accounts payable related to amounts owed to these individuals but not paid. During 2006, $31,000 has been billed by these two minority owners to Ionfinity for consulting work on these contracts.

Certain intellectual property including patents, trademarks, website, artwork, domain names, software code, and trade secrets were purchased by Dr. Carl Kukkonen, Chief Executive Officer of the Company and Dr. Sandeep Gulati, a former director of the Company, for $20,000 from a third party that handled a general assignment for the benefit of the creditors of ViaChange.com, Inc., a former majority-owned subsidiary of the Company. Dr. Kukkonen and Dr. Gulati subsequently sold this intellectual property to Arroyo for $20,000 ($10,000 each to Dr. Kukkonen and Dr. Gulati). Dr. Kukkonen was paid $10,000 in June 2006. Dr. Gulati is expected to be paid in the third quarter of 2006. The $10,000 owed to Dr. Gulati is included in accounts payable at June 30, 2006.

Arroyo has included in accounts payable an amount of $7,500 due to ViaLogy for consulting services performed by ViaLogy for Arroyo. This amount is expected to be paid in 2006. The Company owns 1.1% of the total outstanding equity of ViaLogy on a fully diluted basis. Dr. Carl Kukkonen, CEO; Mr. Amjad Abdallat, Vice President/COO; and Mr. Stephen J. Muzi, CFO, combined own approximately 2.5% of the outstanding equity of ViaLogy.

In October 2004, DMFCC entered into an employment agreement with Dr. Carl Kukkonen, Chief Executive Officer of the Company and of DMFCC. Under the agreement, Dr. Kukkonen is entitled to receive an annual base salary of $225,000 and a performance-based bonus of up to 25% of his base salary for the first three years of employment. In the event DMFCC terminates Dr. Kukkonen’s employment without cause, the agreement provides for severance payments to Dr. Kukkonen equal to $112,500. This agreement expires on October 15, 2007 and will be automatically renewed for one year periods unless either party gives a termination notice not later than 90 days prior to the end of the term of the employment agreement.

At June 30, 2006 and December 31, 2005, the Company has included in accrued expenses a payable of $173,105 representing accrued salary and partner draw that was due to Dr. Kukkonen and Mr. Abdallat by ViaSpace LLC prior to its merger with the Company. These amounts were accrued by ViaSpace LLC prior to December 31, 2002. This amount remains on the Consolidated Balance Sheet as a liability of the Company.

NOTE 8 — STOCK OPTIONS AND WARRANTS

SNK Capital Trust Option

On February 25, 2005, the Company granted SNK Capital Trust (“SNK”) an option to purchase up to 27,000,000 shares of common stock of the Company for an aggregate purchase price of $7,500,000. SNK had previously purchased 39,690,000 shares of common stock of the Company for $1,500,000 in December 2004, and 10,800,000 shares of common stock of the Company for $1,000,000 in February 2005.

In May 2005, the Company agreed to increase the February 2005 option to allow SNK an option to purchase up to 36,000,000 shares of common stock of the Company for an aggregate purchase price of $10,000,000.

On June 15, 2005, the Company and SNK entered into a stock option agreement (“Option Agreement”) to supercede and replace the previous option between the Company and SNK. This agreement granted SNK an option (the “Option”) to purchase up to 36,000,000 shares of common stock of the Company for $0.28 per share. The option term was based on four milestones and was set to expire no later than February 15, 2007. SNK timely met the first two milestones of the Option Agreement by exercising the Option Agreement to purchase $1,000,000 of Company common stock prior to August 15, 2005. On June 28, 2005, the Company received $500,000 from SNK for the exercise of a portion of the Option and 1,785,715 shares of common stock were issued to SNK on July 14, 2005. On August 31, 2005, the Company received an additional $500,000 from SNK for the exercise of an additional portion of the Option and 1,785,715 shares of common stock were issued to SNK. The third milestone was required to occur on or before February 15, 2006, and required that an additional $1,000,000 of Company common stock be purchased prior to that date. SNK remitted $999,980 to the Company on February 21, 2006, following the expiration period of the option.

On March 21, 2006, a majority of the shareholders and the Board of Directors of the Company voted to amend the Option Agreement (“Amended Option Agreement”) with SNK. The Amended Option Agreement reduced the total number of shares of common stock that could be purchased by SNK from 36,000,000 to 10,714,286 and changed the option expiration term from February 15, 2007 to

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March 31, 2006. The exercise price of the option remained the same. The Amended Option Agreement allowed the Company to accept the $999,980 remitted to the Company on February 21, 2006; and 3,571,357 shares of common stock were issued to SNK on that date. On March 30, 2006, the Company received an additional $1,000,020 from SNK to exercise the remaining 3,571,499 shares of common stock subject to the Option. As of March 30, 2006, the Option had been fully exercised.

The Option described above was originally granted to SNK subject to certain terms and conditions. Upon the completion of the Company’s merger on June 22, 2005, out of a total of 50,490,000 shares of common stock to be issued to SNK in connection with the merger, SNK received 17,990,000 shares of common stock outright. The balance of 32,500,000 shares (the “Held Shares”) of common stock registered to SNK at such time were held in trust by the Company, as part of the consideration for the granting of the Option. The Held Shares were to be released either to SNK as exercise thresholds were met by SNK, or to certain prior members of ViaSpace LLC if the Option expired without SNK meeting the exercise thresholds. On March 21, 2006, a majority of the shareholders and the Board of Directors of the Company voted to enter into a Stock Settlement Agreement with SNK. The Stock Settlement Agreement removed the conditions related to the Held Shares and all of the Held Shares were released to SNK. As of June 30, 2006, SNK holds 61,204,296 common shares of the Company, or 21% of the issued and outstanding common shares of the Company. On April 10, 2006, SNK agreed to a lock-up of its shares until April 9, 2011.

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 provides for the reservation for issuance under the Plan of 28,000,000 shares of the Company’s common stock. 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 of Directors 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 vest generally over four years. Options issued to directors generally vest over one year. An aggregate of 24,231,000 shares were available for future grant at June 30, 2006. During the six months ended June 30, 2006, the Company granted 2,654,000 stock options to employees and consultants to purchase common shares with exercise prices ranging from $0.80 to $2.03.

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. Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Opinion No. 25 as allowed under SFAS No. 123.

The Company has 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).

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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 7-year constant maturity. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the last 60 days of market prices prior to the grant date. 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 has calculated a 9% forfeiture rate as of June 30, 2006. The fair value of each option grant, as calculated by the Black-Scholes method, is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award. For stock options issued during the six month period ended June 30, 2006, the fair value was estimated at the date of grant using the following range of assumptions:

Risk free interest rate	4.32% - 5.06%
Dividends	0%
Volatility factor	62.91% - 83.45%
Expected life	6.67 years
Annual forfeiture rate	9%

The following table summarizes activity in the Company’s Plan for the period ended June 30, 2006:

				Weighted-		Weighted-
				Average		Average
				Exercise		Remaining		Aggregate
	Number of			Price Per		Contractual		Intrinsic
	Shares			Share		Term In Years		Value
Outstanding at December 31, 2005		1,485,000		$	2.50
Granted		2,654,000			1.04
Exercised		—			—
Forfeited		(370,000	)		2.41
Outstanding at June 30, 2006		3,769,000		$	1.48		9.2	$	—
Exercisable at June 30, 2006		295,000		$	2.43		6.8	$	—

The Company recorded $396,000 of compensation expense for employee, director and consultant stock options during the six months ended June 30, 2006. At June 30, 2006, there was a total of $2,801,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan. This cost is expected to be recognized over a weighted average period of 9.2 years.

No comparable information is presented for the six month period ended June 30, 2005, as the Company adopted the disclosure requirements of SFAS No. 123(R) using a modified prospective approach effective with periods commencing January 1, 2006, the first day of the Company’s 2006 fiscal year.

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 million shares of DMFCC 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, 2006, the DMFCC

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Option Plan has outstanding 1,631,000 option shares and 369,000 unissued option shares. Of these outstanding option shares, 1,155,000 are incentive stock options issued to employees and 476,000 are non-statutory stock options issued to consultants. During the six month period ended June 30, 2006, DMFCC issued no stock options. If stock options are issued, 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 includes assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. For stock options issued prior to June 30, 2006, the fair value of each option grant, as calculated by the Black-Scholes method, 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, 2006:

			Weighted-		Weighted-
			Average		Average
			Exercise		Remaining		Aggregate
	Number of		Price Per		Contractual		Intrinsic
	Shares		Share		Term In Years		Value
Outstanding at December 31, 2005		1,631,000	$	.02
Granted		—		—
Exercised		—		—
Forfeited		—		—
Outstanding at June 30, 2006		1,631,000	$	.02		8.3	$	127,000
Exercisable at June 30, 2006		1,395,000	$	.02		8.3	$	115,000

DMFCC recorded less than $1,000 of compensation expense for employee, director and consultant stock options during the six months ended June 30, 2006. At June 30, 2006, there was a total of $2,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan. The cost is expected to be recognized over a weighted average period of 8.3 years.

No comparable information is presented for the six month period ended June 30, 2005, as the Company adopted the disclosure requirements of SFAS No. 123(R) using a modified prospective approach effective with periods commencing January 1, 2006, the first day of DMFCC’s 2006 fiscal year.

Stock Warrants

On August 16, 2005, the Company entered into a two-year Consulting, Confidentiality and Proprietary Rights Agreement (the “Consulting Agreement”) with Synthetic/A/(America) Ltd., a California corporation (“Synthetica”). Pursuant to the Consulting Agreement, Synthetica provides the Company with consulting services and advice relating to capital market goals, strategic business planning, financial controls, regulatory compliance, revenue generation and business development. In connection with this Consulting Agreement, the Company issued three warrants to Synthetica to purchase shares of the Company’s common stock.

The first warrant issued to Synthetica (“Warrant No. 1”) gives Synthetica the right to purchase 250,000 shares of Common Stock at an exercise price of $4.00 per share. Warrant No. 1 was fully vested upon issuance and expires upon the earliest to occur of the following: (i) the date of termination of the Consulting Agreement by the Company due to a material breach of the Consulting Agreement by Synthetica; (ii) the closing of a merger or consolidation of the Company pursuant to which the stockholders of the Company hold less than 50% of the voting securities of the surviving or acquiring entity, or a sale of all or substantially all the assets

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of the Company; (iii) August 16, 2007, provided that at least 25% of the outstanding capital stock of the Company has not been held by institutional investors (at any single moment) on or prior to such time; or (iv) August 16, 2009.

The second warrant issued to Synthetica (“Warrant No. 2”) gives Synthetica the right to purchase 500,000 shares of Common Stock at an exercise price of $4.00 per share. Warrant No. 2 was fully vested upon issuance and expires upon the earliest to occur of the following: (i) the date of termination of the Consulting Agreement by the Company due to a material breach of the Consulting Agreement by Synthetica; (ii) the closing of a merger or consolidation of the Company pursuant to which the stockholders of the Company hold less than 50% of the voting securities of the surviving or acquiring entity, or a sale of all or substantially all the assets of the Company; (iii) August 16, 2007, provided that the Company has not completed a secondary offering equal to or in excess of $200,000,000; or (iv) August 16, 2009.

The third warrant issued to Synthetica (“Warrant No. 3”) gives Synthetica the right to purchase 250,000 shares of Common Stock at an exercise price of $4.00 per share. Warrant No. 3 was fully vested upon issuance and expires upon the earliest to occur of the following: (i) the date of termination of the Consulting Agreement by the Company due to a material breach of the Consulting Agreement by Synthetica; (ii) the closing of a merger or consolidation of the Company pursuant to which the stockholders of the Company hold less than 50% of the voting securities of the surviving or acquiring entity, or a sale of all or substantially all the assets of the Company; (iii) August 16, 2007, provided that the Company’s Common Stock has not become publicly traded on NASDAQ on or prior to such time; or (iv) August 16, 2009.

For the six months ended June 30, 2006, the Company recorded stock compensation expense of $327,000 related to these warrants based on valuing these warrants using the Black Scholes method. The following assumptions were used to calculate the warrant stock compensation expense: discount rate 4.36%, volatility of Company’s common stock 55.89%, term of 2 years, and an annual rate of dividends of zero.

DMFCC Shares Issued in Connection with License Agreements

DMFCC entered into a technology license agreement with California Institute of Technology (“Caltech”) and University of Southern California (“USC”) on May 21, 2002 and a second technology license agreement with Caltech on January 17, 2003. The licensed technology is composed of patents owned by Caltech and USC. According to the license agreements, upon the raising of equity by DMFCC in excess of $2,000,000, the Company can exercise its rights to designated patents in exchange for shares of DMFCC common stock. As of December 31, 2005, 25,000 shares of DMFCC had been issued to Caltech and USC related to these technology licenses. On January 19, 2006, DMFCC exercised the option rights to a certain group of patents and issued 2,112,648 DMFCC common shares to Caltech and USC. On May 15, 2006, DMFCC exercised the option rights to a certain group of patents and issued 150,000 DMFCC common shares to Caltech. As of June 30, 2006, a total of 2,287,648 shares of DMFCC common stock are held by Caltech and USC, or 11.4% of the total outstanding shares of DMFCC on a fully diluted basis.

Note 9 — 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 covers employees of VIASPACE, DMFCC and Arroyo. The 401(k) Plan allows employees to contribute up to Internal Revenue Service limits. The Company does not offer an employer match of contributions at this time.

Note 10 — 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, 2006, 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 has three reportable segments that operate in distinct market areas. The Company’s reportable segments are also represented as three separate subsidiaries of the Company: DMFCC, Arroyo and Ionfinity.

(i) DMFCC: DMFCC is a provider of disposable fuel cartridges and intellectual property protection for manufacturers of direct methanol and other liquid hydrocarbon fuel cells. Direct methanol fuel cells are replacements for traditional batteries and are expected to gain a substantial market share because they offer longer operating time as compared to current lithium ion batteries and may be instantaneously recharged by simply replacing the disposable fuel cartridge. Direct methanol fuel cell-based products are being

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developed for laptop computers, cell phones, music players and other applications by major manufacturers of portable electronics in Japan and Korea.

(ii) Arroyo: Arroyo is developing products and services based on inference and sensor data fusion technology. Sensor fusion combines data, observations, and inferences derived from multiple sources and sensors to generate reliable decision-support information in critical applications where solution speed and confidence is of the utmost importance.

(iii) Ionfinity: Ionfinity is a development stage company 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.

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 is as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Revenues:
DMFCC	$	22,000		$	—		$	43,000		$	—
Arroyo		61,000			—			61,000			—
Ionfinity		91,000			188,000			183,000			235,000
Total Revenue	$	174,000		$	188,000		$	287,000		$	235,000
Income (Loss) From Operations:
DMFCC	$	(348,000	)	$	(235,000	)	$	(652,000	)	$	(368,000	)
Arroyo		(217,000	)		(213,000	)		(426,000	)		(321,000	)
Ionfinity		(2,000	)		75,000			(21,000	)		65,000
Loss From Operations by Reportable Segments		(567,000	)		(373,000	)		(1,099,000	)		(624,000	)
Corporate Administrative Costs (including Stock Compensation and Warrant Expense of $724,000 and zero in 2006 and 2005, respectively		(887,000	)		(94,000	)		(1,770,000	)		(112,000	)
Loss From Operations	$	(1,454,000	)	$	(467,000	)	$	(2,869,000	)	$	(736,000	)

	June 30, 2006		December 31,
	(Unaudited)		2005
Assets:
DMFCC	$	428,000	$	1,096,000
Arroyo		177,000		132,000
Ionfinity		123,000		153,000
Corporate		1,810,000		934,000
Total Assets	$	2,538,000	$	2,315,000

Note 11 – COMMITMENTS AND CONTINGENCIES

Employment Agreements

In October 2004, DMFCC entered into an employment agreement with Dr. Carl Kukkonen, Chief Executive Officer of the Company and DMFCC. Under the agreement, Dr. Kukkonen is entitled to receive an annual base salary of $225,000 and a performance-based bonus of up to 25% of his base salary for the first three years of employment. In the event DMFCC terminates Dr. Kukkonen’s employment without cause, the agreement provides for severance payments to Dr. Kukkonen equal to $112,500. This agreement expires on October 15, 2007 and will be automatically renewed for one year periods unless either party gives a termination notice not later than 90 days prior to the end of the term of the employment agreement.

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Royalty Commitments

Arroyo has a nonexclusive software license agreement with Caltech for executable code and source code pertaining to Spacecraft Health Inference Engine (“SHINE”) whereby Arroyo has agreed to pay Caltech royalties from the sale or licensing of software or license products related to SHINE. This SHINE agreement provides for the following minimum royalties to Caltech: $10,000 due September 28, 2006; $10,000 due September 28, 2007; $12,500 due September 28, 2008; $15,000 due September 28, 2009; $17,500 due September 28, 2010; and $20,000 due each year from September 28, 2011 to 2015.

Arroyo also has a nonexclusive software license agreement with Caltech for executable code and source code pertaining to U-Hunter (unexploded ordnance detection using electromagnetic and magnetic geophysical sensors) and to MUDSS (mobile underwater debris survey system) whereby Arroyo has agreed to pay Caltech royalties from the sale or licensing of software or license products related to U-Hunter and MUDSS. These agreements provide for a minimum royalty payment of $10,000 to be made annually beginning on June 19, 2007.

On March 15, 2006, VIASPACE entered an exclusive software license agreement for certain fields of use with Caltech for executable code and source code pertaining to Spacecraft Health Inference Engine (“VIASPACE SHINE Agreement”). VIASPACE has agreed to pay Caltech royalties from the sale or licensing of software or license products related to the VIASPACE SHINE Agreement. It provides for the following minimum royalties to Caltech: $25,000 due February 1, 2008 and every year thereafter.

Leases

Until April 30, 2006, the Company leased office and laboratory space on a month-to-month basis. 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 are as follows:

	Years Ended
Fiscal Year	December 31,
2006	$	64,000
2007		130,000
2008		134,000
2009		138,000
2010		142,000
Thereafter		73,000
Total minimum lease payments	$	681,000

Rent expense charged to operations for the three months ended June 30, 2006 and 2005 was $20,000 and $10,000, respectively. Rent expense charged to operations for the six months ended June 30, 2006 and 2005 was $28,000 and $16,000, respectively.

Notes Payable

The annual installment of principal and interest on the notes payable included in Note 6 for each of the five fiscal years subsequent to December 31, 2005 and thereafter are as follows:

Fiscal Year	Principal		Interest		Total
2006	$	27,000	$	6,000	$	33,000
2007		29,000		4,000		33,000
2008		30,000		3,000		33,000
2009		41,000		1,000		42,000
2010		—		—		—
Thereafter		—		—		—
Total	$	127,000	$	14,000	$	141,000

Litigation

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

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NOTE 12 — 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 periods ended June 30, 2006 and 2005 that are not included in the loss per share calculation since their effect would be anti-dilutive for the periods indicated:

	As of June 30,
	2006		2005
Stock Options		3,769,000		—
Warrants		1,000,000		—

The following table sets forth the computation of basic and diluted net loss per share:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Basic and diluted net loss per share:
Numerator:
Net loss attributable to common stock	$	(1,423,000	)	$	(472,000	)	$	(2,810,000	)	$	(685,000	)
Denominator:
Weighted average shares of common stock outstanding		291,619,286			212,797,422			288,354,098			192,546,842
Net loss per share of common stock, basic and diluted	$	*		$	*		$	(0.01	)	$	*

* Less than $0.01 per common share.

Note 13 — FINANCIAL ACCOUNTING DEVELOPMENTS

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations”. FIN No. 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and /or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and /or method of settlement. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year companies). Retrospective application of interim financial information is permitted but is not required. Management of the Company does not expect adoption of FIN No. 47 to have a material impact on the Company’s financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” an amendment to Accounting Principles Bulletin (APB) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” though SFAS No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of errors. SFAS No. 154 establishes new standards on accounting for changes in accounting principles, whereby all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections

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made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”), which amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities” (“SFAS No. 133”) and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS No. 140). SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. Management of the Company does not expect adoption of SFAS No. 155 to have a material impact on the Company’s financial statements.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS No. 156”), which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Statement (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3) permits an entity to choose either the amortization method or the fair value method for subsequent measurement for each class of separately recognized servicing assets or servicing liabilities; (4) permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, provided the securities reclassified offset the entity’s exposure to changes in the fair value of the servicing assets or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. The Statement also describes the manner in which it should be initially applied. Management of the Company does not believe that SFAS No. 156 will have a material impact on the Company’s financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion contains certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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.

VIASPACE Overview

VIASPACE works to transform proven space and defense technologies from NASA and the Department of Defense into hardware and software solutions. VIASPACE is developing these technologies into hardware and software products that we believe will fulfill high-growth market needs and solve today’s complex problems. The Company has expertise in energy/fuel cells, microelectronics, sensors, homeland security and public safety, information and computational technology. VIASPACE has licensed patents, trade secrets, and software technology from Caltech, which manages the Jet Propulsion Laboratory (“JPL”) for NASA. This technology was developed by scientists and engineers at JPL over the last decade and was funded by NASA and the Department of Defense. VIASPACE plans to leverage this large government research and development investment – made originally for space and defense applications into commercial products. The Company may also pursue future opportunities based on technologies licensed from Caltech and other organizations. The Company’s web site is www.VIASPACE.com.

The Company operates through its ownership in subsidiaries Direct Methanol Fuel Cell Corporation (“DMFCC”), Arroyo Sciences, Inc. (“Arroyo”), and Ionfinity LLC (“Ionfinity”). As of June 30, 2006, the Company holds a 71.4% ownership interest in DMFCC, a 100% ownership interest in Arroyo, and a 46.3% ownership interest in Ionfinity. The Company also owns 73.9% of eCARmerce Inc. (“eCARmerce”), an inactive company that holds patents in the areas of interactive radio technology and owns 100% of Concentric

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Water Technology LLC, an inactive company that plans to explore water technologies that could solve the technical and cost limitations of traditional water purification methods. On January 19, 2006, DMFCC exercised an existing option it had with Caltech and University of Southern California (“USC”) whereby the Company issued to Caltech and USC common shares in DMFCC in exchange for licenses to fuel cell technology patents. On May 15, 2006, DMFCC exercised an existing option it had with Caltech whereby the Company issued to Caltech common shares in DMFCC in exchange for licenses to approximately three issued and six pending fuel cell technology patents. As of June 30, 2006, DMFCC has licenses to approximately 56 issued patents and 62 pending fuel cell technology patents.

Critical accounting policies and estimates

Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR60”), 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 in the section entitled “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:

The Company recognizes revenue on government contracts when the particular milestone is met and delivered to the customer and when the Company has received acceptance notification by the government program officer. Product sales revenue are recognized upon shipment, as title passes, FOB shipping point. Management fees are recognized as received for services to third party entities.

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.

Three Months Ended June 30, 2006 Compared to June 30, 2005

Results From Operations

Revenues

Revenues were $174,000 and $188,000 for the three months ended June 30, 2006 and 2005, respectively, a decrease of $14,000. The decrease in revenues is primarily due to lower billings of $97,000 by Ionfinity to the Navy and Air Force on two Phase II SBIR contracts in 2006 as compared with 2005. This decrease was offset by increases in revenues of $22,000 at DMFCC related to a contract with a customer to supply fuel cell cartridges as well as an increase in revenues of $61,000 at Arroyo primarily due to a contract with L3 Communications (“L3”) for the Advanced Container Security Device (“ACSD”) project, under a contract award to L-3 by the US Department of Homeland Security.

Cost of Revenues

Cost of revenues was $146,000 and $103,000 for the three months ended June 30, 2006 and 2005, respectively, an increase of $43,000. The increase in cost of revenues is primarily due to additional payroll costs and subcontractor and consultant costs being incurred on DMFCC’s contract with a customer to supply fuel cell cartridges and also costs related to Arroyo’s contract with L3 Communications for the ACSD project.

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Research and Development

Research and development expenses were $271,000 and $268,000 for the three months ended June 30, 2006 and 2005, respectively, an increase of $3,000. We expect research and development expenses, including consulting and subcontract expenses, will continue to increase in the future at VIASPACE, DMFCC and Arroyo as these companies work to develop and commercialize products and explore new opportunities. Furthermore, as additional technologies are acquired and developed by the Company, we anticipate that research and development expenses will increase.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $1,211,000 and $284,000 for the three months ended June 30, 2006 and 2005, respectively, an increase of $927,000. Stock compensation and warrant expense of $331,000 was recorded during 2006 and zero was recorded in 2005 which accounts for a portion of the increase. The remaining increase is primarily due to increased payroll related expenses, consulting fees, higher legal and professional expenses and travel expenses in 2006 as compared with 2005. We expect selling, general and administrative expenses will increase in the future as we expand our business.

Other Income (Expense), Net

Other income (expense), net was $26,000 and $3,000 for the three months ended June 30, 2006 and 2005, an increase of $23,000. The increase is primarily due to the higher interest income recorded due to the Company maintaining higher cash balances in 2006 as compared with the same period in 2005.

Six Months Ended June 30, 2006 Compared to June 30, 2005

Results From Operations

Revenues

Revenues were $287,000 and $235,000 for the six months ended June 30, 2006 and 2005, respectively, an increase of $52,000. A decrease in revenues at Ionfinity of $52,000 due to lower revenues on their Navy and Air Force Phase II SBIR contracts in 2006 as compared with 2005, was offset by increased revenues of $104,000 at DMFCC and Arroyo. DMFCC recorded revenues of $43,000 related to a contract with a customer to supply fuel cell cartridges. In addition, Arroyo recorded revenues of $61,000 primarily due to the contract with L3 for the ACSD project, under a contract award to L-3 by the US Department of Homeland Security.

Cost of Revenues

Cost of revenues was $251,000 and $148,000 for the six months ended June 30, 2006 and 2005, respectively, an increase of $103,000. The increase in cost of revenues is primarily due to additional payroll costs and subcontractor and consultant costs being incurred on DMFCC’s contract with a customer to supply fuel cell cartridges and also costs related to Arroyo’s contract with L3 for the ACSD project.

Research and Development

Research and development expenses were $453,000 and $313,000 for the six months ended June 30, 2006 and 2005, respectively, an increase of $140,000. We expect research and development expenses, including consulting and subcontract expenses, will continue to increase in the future at VIASPACE, DMFCC and Arroyo as these companies work to develop commercialized products and explore new opportunities. Furthermore, as additional technologies are acquired and developed by the Company, we anticipate that research and development expenses will increase.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,452,000 and $510,000 for the six months ended June 30, 2006 and 2005, respectively, an increase of $1,942,000. Stock compensation and warrant expense of $693,000 was recorded during 2006 and zero was recorded in 2005 which accounts for a portion of the increase. The remaining increase is primarily due to increased payroll related expenses, consulting fees, higher legal and professional expenses and travel expenses in 2006 as compared with 2005. We expect selling, general and administrative expenses will increase in the future as we expand our business.

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Other Income (Expense), Net

Other income (expense), net was $45,000 and $20,000 for the six months ended June 30, 2006 and 2005, an increase of $25,000. The increase is primarily due to the higher interest income recorded due to the Company maintaining higher cash balances in 2006 as compared with the same period in 2005.

Liquidity and Capital Resources

Net cash used in operating activities was $2,020,000 for the six months ended June 30, 2006. During the six months ended June 30, 2006, the Company incurred a net loss of $2,810,000 related to higher research and development costs in payroll related costs, consultant expenses and subcontractor costs in order to create, expand and develop the Company’s products. In addition, we have incurred higher selling, general and administrative expenses in stock compensation expenses, payroll related expenses, consulting fees, legal and professional expenses and travel expenses.

Net cash provided by financing activities during 2006 was positive $1,987,000. On February 21, 2006, SNK Capital Trust (“SNK”) made an investment of $999,980 in the Company for the purpose of exercising a stock option to buy shares of common stock in the Company. However, the investment was received after the scheduled payment date of February 15, 2006. The Board of Directors of the Company approved acceptance of this investment on March 21, 2006, and 3,571,357 additional shares of common stock of the Company were issued to SNK effective March 21, 2006. On March 30, 2006, SNK made an investment of $1,000,020 in the Company for the purpose of exercising an additional stock option to buy 3,571,499 shares of common stock in the Company. As of March 31, 2006, the SNK stock option has been fully exercised and no additional shares are subject to the option.

We have incurred substantial losses during the six months ended June 30, 2006, but we have adequate financial resources for the next six months of operations through December 31, 2006. However, we will have to begin to obtain additional funds after the date of this report. We currently expect to attempt to obtain financing through the sale of additional equity securities, but there is no assurance that we will be able to raise such additional capital through private or public equity securities offerings.

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, 2006.

Other Matters

We were contacted informally by the Pacific Regional Office of the Securities Exchange Commission (the “SEC”) in March 2006 requesting the voluntary provision of documents concerning the reverse merger of Global-Wide Publication, Ltd. and Viaspace Technologies LLC in June 2005 and related matters. The inquiry should not be construed as an indication by the SEC or its staff that any violations of the law have occurred, nor should it be considered a reflection upon any entity, security or person. We are cooperating fully with this inquiry.

Risk Factors Which May Affect Future Results

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, 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.

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Risks Related To Our Business

We have incurred losses and anticipate continued losses.

Our net loss for the six months ended June 30, 2006 was $2,810,000. We have not yet achieved profitability and expect to continue to incur net losses until we recognize sufficient revenues from licensing activities, customer contracts or other sources. Because we do not have an extensive operating 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.

We operate in a changing and unpredictable regulatory environment, which is uncertain.

As our technologies develop, we will be subject to current and future state, federal and international regulation, including safety codes and transportation regulations related to the methanol fuel cells and cartridges being developed by our subsidiary, DMFCC. All fuel cells and cartridges are currently prohibited on-board commercial air flights. In 2005, the International Civil Aviation Organization’s Dangerous Goods Panel (“ICAO DGP”) voted to allow passengers to carry and use micro fuel cells and methanol fuel cartridges on-board airplanes to power their laptop computers and other consumer electronic devices. The ICAO DGP action was submitted for comment to all ICAO members and was formally adopted by the 36-member ICAO Council in 2006. The regulation will go into effect on January 1, 2007, with publication of ICAO’S Technical Instructions for the Safe Transport of Dangerous Goods by Air. ICAO, a United Nations organization, establishes International Standards, Recommended Practices and Procedures for aviation. In addition to their participation in ICAO, some countries such as the U.S. have additional national aviation authorities. In the U.S., this is the Federal Aviation Administration or FAA. These national authorities must approve the ICAO Technical Instructions as well. If the regulation is eventually not adopted, this could negatively impact our business, results of operation and financial condition.

Our success depends upon market acceptance of our technologies and product development, which is uncertain.

The markets for our technologies, including direct methanol fuel cell cartridges are either new or non-existent at the present time. Our success will depend upon the market acceptance of our various products and services. This acceptance may require in certain instances a modification to the culture and behavior of customers to be more accepting of new kinds of technology and automation. Potential customers may be reluctant or slow to adopt changes or new ways of performing processes. There is no assurance that our current or future products or services will gain widespread acceptance or that we will generate sufficient revenues to allow us to ever achieve profitability.

In addition, our products require continuing improvement and development. Some of our products, whether in the market or in development, may not succeed or may not succeed as intended. As a result, we may need to change our product offerings, discontinue certain products and services or pursue alternative product strategies. There is no assurance that we will be able to successfully improve our current products or that we will continue to develop or market some of our products and services.

We operate in a competitive market, against companies with substantially greater resources than we have.

Our subsidiary, DMFCC faces two types of competition. First, from competitors in the cartridge business and second, from competitors that could also provide intellectual property protection to the DMFCC industry. The overall direct methanol fuel cell industry faces competition from other types of fuel cells. BIC Corporation in France and the US and Tokai Corporation in Japan have demonstrated cartridges for direct methanol fuel cells, and are direct competitors of ours. Other companies may enter the cartridge business. Therefore, DMFCC is potentially in competition with every company making direct methanol fuel cells. These could include large computer and consumer electronics companies, such as NEC, Toshiba, Samsung, Hitachi, Sanyo, LG, Sony, Matshusita, Fujitsu, NTT DoCoMo and their subsidiaries or affiliates. Additionally, Caltech has licensed part of its direct methanol fuel cell intellectual properties to two additional parties: DTI Energy, Inc. based in Los Angeles, CA was licensed in 1993 and Ballard Power Systems, Inc. based in Vancouver British Columbia, Canada was licensed in 1999. These entities could potentially compete with DMFCC in its core strategy. Further, the overall direct methanol fuel cell industry faces competition from other technologies such as potentially improved batteries and fuel cells using other fuels such as hydrogen, borohydrides, ethanol, biofuels, formic acid and butane. At least one company, Tekion, Inc. is pursuing a formic acid fuel cell. The Caltech patents also cover formic acid. Another company, Lillipution Systems Inc., is pursuing a butane fuel cell that operates at temperatures in excess of 700° C. Medis Technologies Ltd. is believed to be pursuing fuel cells powered by borohydrides that decompose into hydrogen.

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Arroyo Sciences competes with companies such as Gensym Corporation and other traditional expert system vendors along with other potential niche solution suppliers who develop special purpose hardware for sensor fusion in defense and security applications. We believe that Arroyo differentiates itself by being a software-based solution that can be used on standard microprocessors and also embedded into microcontrollers and similar microelectronics. Large defense and security system integrators with greater resources than the Company, such as L3 Communications Systems, Northrop-Grumman, General Dynamics, and Lockheed-Martin may also compete with the Company.

The competing technologies to the Ionfinity soft ionization membrane approach are the standard ionization techniques such as electron filament ionization, electrospray, and other approaches.

Our markets are highly competitive and many of our competitors have significantly greater resources and better name recognition than we do. These resources could allow those competitors to develop and market products more effectively than the Company, which could adversely affect our future revenues and business.

Due to uncertainties in our business, our capital on hand may not be sufficient to fund our operations until we achieve positive cash flow.

We have expended and expect to continue to expend substantial amounts of money for research and development, capital expenditures, working capital needs and manufacturing and marketing of our products and services. Our future research and development efforts, in particular, are expected to include development of additional products and services, which will require additional funds. We anticipate that expenditures on research and development will increase as we continue to develop and commercialize our technologies.

The exact timing and amount of spending required cannot be accurately determined and will depend on several factors, including:

• progress of our research and development efforts;

• competing technological and market developments;

• commercialization of products currently under development by us and our competitors; and

• market acceptance and demand for our products and services.

The cost of developing our technologies may require financial resources greater than we currently have available. Therefore, in order to successfully complete development of our technologies, we may be required to obtain additional financing. We cannot assure you that additional financing will be available if needed or on terms acceptable to us. If adequate and acceptable financing is not available, we may have to delay development or commercialization of certain of our products and services or eliminate some or all of our development activities. We may also reduce our marketing or other resources devoted to our products and services. Any of these options could reduce our sales growth and result in continued net losses.

If we lose key personnel or are unable to hire additional qualified personnel, it could impact our ability to grow our business.

We believe our future success will depend in large part upon our ability to attract and retain highly skilled technical, managerial, sales and marketing, finance and operations personnel. We face intense competition for all such personnel, and we may not be able to attract and retain these individuals. Our failure to do so could delay product development, affect the quality of our products and services, and/or prevent us from sustaining or growing our business. In addition, employees may leave our company and subsequently compete against us. Our key personnel include Dr. Carl Kukkonen, Chief Executive Officer and Amjad Abdallat, Vice President/COO.

We have taken steps to retain our key employees and we have entered into employment agreements with some of our key employees. The loss of key personnel, especially if without advanced notice, could harm our ability to maintain and build our business operations. Furthermore, we have no key man life insurance on any of our key employees.

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Our products and services could infringe on the intellectual property rights of others, which may lead to costly litigation, lead to payment of substantial damages or royalties and/or prevent us from manufacturing and selling our current and future products and services.

If third parties assert that our products and services or technologies infringe their intellectual property rights, our reputation and ability to license or sell our products and services could be harmed. Whether or not a claim has merit, it could be time consuming and expensive for us and divert the attention of our technical and management personnel from other work. In addition, these types of claims could be costly to defend and result in our loss of significant intellectual property rights.

A determination that we are infringing the proprietary rights of others could have a material adverse effect on our products and services, revenues and income. In the event of any infringement by us, we cannot assure you that we will be able to successfully redesign our products and services or processes to avoid infringement. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products and services and could require us to pay substantial damages and royalties.

Risks Related To the Industry

If we fail to successfully introduce new products and services, our future growth may suffer. We expect our areas of future growth to include products and services at an early stage of development.

As part of our strategy, we intend to develop and introduce a number of new products and services. Such products and services are currently in research and development. We have generated no revenues from such potential products and services and may never generate revenues. A substantial portion of our resources have been and for the foreseeable future will continue to be dedicated to our research programs and the development of products and services. If we do not introduce these new products and services on a timely basis, or if they are not well accepted by the market, our business and the future growth of our business may suffer. There is no assurance that we will be able to develop a commercial product from these projects. Our competitors may succeed in developing technologies or products and services that are more effective than ours.

If we do not update and enhance our technologies, they will become obsolete or noncompetitive. Our competitors may succeed in developing products and services faster than us.

We operate in a highly competitive industry and competition is likely to intensify. Emerging technologies, extensive research and new product introductions characterize the market for our products and services. We believe that our future success will depend in large part upon our ability to conduct successful research in our fields of expertise, to discover new technologies as a result of that research, to develop products and services based on our technologies, and to commercialize those products and services. If we fail to stay at the forefront of technological development, we will be unable to compete effectively.

Certain of our existing and potential competitors possess substantial financial and technical resources and production and marketing capabilities greater than ours. We cannot assure you that we will be able to compete effectively with existing or potential competitors or that these competitors will not succeed in developing technologies and products and services that would render our technology and products and services obsolete and noncompetitive. Our position in the market could be eroded rapidly by our competitors’ product advances.

Our success depends, in part, on attracting customers who will embrace the new technologies offered by our products and services.

It is vital to our long-term growth that we establish customer awareness and persuade the market to embrace the new technologies offered by our products and services. This may require in certain instances a modification to the culture and behavior of customers to be more accepting of technology and automation. Organizations may be reluctant or slow to adopt changes or new ways of performing processes and instead may prefer to resort to habitual behavior within the organization. Our marketing plan must overcome this obstacle, invalidate deeply entrenched assumptions and reluctance to behavioral change and induce customers to utilize our products and services rather than the familiar options and processes they currently use. If we fail to attract additional customers at this early stage, our business and the future growth of our business may suffer.

If we fail to comply with our obligations in our intellectual property licenses with Caltech and USC, we could lose license rights that are important to our business.

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We are a party to a number of license agreements that are material to our business. We may enter into additional technology licenses in the future. Our existing licenses impose and future licenses may impose various minimum royalty commitments, other royalties and other obligations on us. If we fail to comply with these obligations, the licensors may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensors. We cannot assure you that we will be able to obtain new licenses, or renew existing licenses, on commercially reasonable terms, if at all. Termination of the licenses could have a material adverse effect on our business, operating results and financial condition.

Our success depends, in part, on our ability to protect our intellectual property rights.

Our success is heavily dependent upon the development and protection of proprietary technology. We rely on patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and protect our products and services. These legal means, however, afford only limited protection and may not adequately protect our rights. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources and management attention.

We cannot assure you that competitors or other parties have not filed or in the future will not file applications for, or have not received or in the future will not receive, patents or obtain additional proprietary rights relating to products and services or processes used or proposed to be used by us. In that case, our competitive position could be harmed and we may be required to obtain licenses to patents or proprietary rights of others.

In addition, the laws of some of the countries in which our products and services are or may be sold may not protect our products and services and intellectual property to the same extent as U.S. laws, if at all. We may be unable to protect our rights in proprietary technology in these countries.

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 400,000,000 authorized shares of common stock, of which 291,649,286 were issued and outstanding as of June 30, 2006. Of these issued and outstanding shares, 206,100,477 shares (70.7% of the total issued and outstanding shares) are currently held by our executive officers, directors and principal shareholders. Of these shares, 61,204,286 common shares are held by SNK Capital Trust, and on April 10, 2006 SNK Capital Trust agreed to a lock-up of its shares until April 9, 2011. In addition, four other shareholders holding a collective 27 million shares have voluntarily agreed to lock-up their shares for five years until April 9, 2011. Also, 175,945,000 common shares held by officers, directors, and founders of ViaSpace LLC were originally subject to restrictions under Rule 144 of the Securities Act of 1933. These restrictions expired on June 22, 2006, and could become available for sale in the future if requested by the holders of those 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.

Our stock price is likely to be highly volatile because of several factors, including a limited public float.

The market price of our stock is likely to be highly volatile because there has been a relatively thin trading market for our stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell our common stock following periods of volatility because of the market’s adverse reaction to volatility.

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Other factors that could cause such volatility may include, among other things:

• actual or anticipated fluctuations in our operating results;

• announcements concerning our business or those of our competitors or customers;

• changes in financial estimates by securities analysts or our failure to perform as anticipated by the analysts;

• announcements of technological innovations;

• conditions or trends in the industry;

• introduction or withdrawal of products and services;

• variation in quarterly results due to the fact our revenues are generated by sales to a limited number of customers which may vary from period to period;

• litigation;

• patents or proprietary rights;

• departure of key personnel;

• failure to hire key personnel; and

• general market conditions.

Our executive officers, directors and principal shareholders own 70.7% of our voting stock, which may allow them to control substantially all matters requiring shareholder approval, and their interests may not align with the interests of our other stockholders.

Our executive officers, directors and principal shareholders hold, in the aggregate, 70.7% of our outstanding shares. Accordingly, in the event that all or some of these shareholders decide to act in concert, they can control us through their ability to determine the election of our directors, to amend our certificate of incorporation and bylaws and to take other actions requiring the vote or consent of shareholders, including mergers, going private transactions and extraordinary transactions, and the terms of these transactions.

Because our common stock is considered a “penny stock”, any investment in our common stock is considered to be a high-risk investment and is subject to restrictions on marketability.

Our common stock is currently traded on the Over-The-Counter Bulletin Board (“OTC Bulletin Board”) and is considered a “penny stock.” The OTC Bulletin Board is generally regarded as a less efficient trading market than the NASDAQ Small Cap Market.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.

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Since our common stock is subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus your ability to sell our common stock in the secondary market. There is no assurance our common stock will be quoted on NASDAQ or the NYSE or listed on any exchange, even if eligible.

We have additional securities available for issuance, including preferred stock, which if issued could adversely affect the rights of the holders of our common stock.

Our articles of incorporation authorize the issuance of 400,000,000 shares of common stock and 5,000,000 shares of preferred stock. The common stock and the preferred stock can be issued by, and the terms of the preferred stock, including dividend rights, voting rights, liquidation preference and conversion rights can generally be determined by, our board of directors without stockholder approval. Any issuance of preferred stock could adversely affect the rights of the holders of common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. Accordingly, our stockholders will be dependent upon the judgment of our management in connection with the future issuance and sale of shares of our common stock and preferred stock, in the event that buyers can be found therefore. Any future issuances of common stock or preferred stock would further dilute the percentage ownership of our Company held by the public stockholders. Furthermore, the issuance of preferred stock could be used to discourage or prevent efforts to acquire control of our Company through acquisition of shares of common stock.

ITEM 3 – 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 and at the end of each fiscal quarter therein, 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 period ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

28

PART II — OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

A resolution to amend the Company’s 2005 Stock Incentive Plan (the “Amendment”) was approved on May 18, 2006 by written consent of shareholders representing 70.7% of the issued and outstanding Common Stock of the Company. The Amendment provides that as of January 1, 2007, and each January 1 thereafter during the term of the Plan, the number of shares of the Company’s Common Stock reserved for issuance thereunder will be automatically increased by an additional number of shares of Common Stock equal to 10% percent of the total number of shares of Common Stock issued and outstanding as of the close of business on the immediately preceding December 31, which is the last day of the Company’s fiscal year.

ITEM 6. EXHIBITS

(a) Exhibits

10.1	Lease with Pasadena Business Park, LLC dated January 10, 2006, effective beginning May 1, 2006
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

29

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.

	VIASPACE Inc.
	(Registrant)
Date: August 11, 2006	/s/ CARL KUKKONEN
	Carl Kukkonen
	Chief Executive Officer
Date: August 11, 2006	/s/ STEPHEN J. MUZI
	Stephen J. Muzi
	Chief Financial Officer

30

EX-10.1

Exhibit 10.1

STANDARD MULTI-TENANT OFFICE LEASE-GROSS

AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

1. Basic Provisions (“Basic Provisions”)

     1.1 Parties: This Lease (“Lease”) dated for reference purposes only January 10, 2006, is made by and Between Pasadena Business Park, LLC (“Lessor”)and VIASPACE, Inc. a Nevada Corporation(“Lessee”). (Collectively the “Parties” or individually “Party”).

     1.2(a) Premises: That certain portion of the Project (as defined below) known as Suite Number(s) 101. First (1^st) floor(s) consisting of approximately 5,800(tbd) rentable square feel and approximately 5,104 useable square feet (“Premises”). The Premises are located at 171 North Altadena Drive, in the City of Pasadena, County of Los Angeles, State of California, with zip code 91107. In addition to Lessee’s rights to use and occupy the Premises as hereinafter specifies, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specifies, but shall not have any rights to the roof, the exterior walls, the area above the dropped ceilings, or the utility raceways of the building containing the Premises (“Building”) or to any other buildings in the project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the “Project”. The Project consists of approximately 110,243 rentable square feel. (see Paragraph 2)

     1.2(b) Parking: 11 unreserved and 0 reserved vehicle parking spaces at a monthly cost of $0 per unreserved space and $ SEE ADDENDUM per reserved space. (See Paragraph 2.6)

     1.3 Term: Five (5) years and Three (3) months (“Original Term”) commencing TBD (“Commencement Date”) and ending ___(“Expiration Date”). (See paragraph 3).

     1.4 Early Possession___(“Early Possession Date”). (See also Paragraphs 3.2 and 3.3)

     1.5 Base Rent: $10584.00 per month (“Base Rent”), payable on the First (1^st) day of each month commencing Upon TI completion. (See also Paragraph 4)

     1.6 Lessee’s Share of Operating Expense Increase: Five and Four-Tenth percent (5.4%)(“Lessee’s Share”). Lessee’s Share has been calculated by dividing the approximate rentable square footage of the Premises but the total approximate square footage of the rentable space contained in the Project and shall not be subject to revision except on connection with an actual change in the size of the Premises or a change in the space available for lease in the Project.

     1.7 Base Rent and Other Monies Paid Upon Execution

(a)	Base Rent: $10,584.00 for the Period February 1, 2006-February 28,2006
(b)	Security Deposit: $12,269.78 (“Security Deposit”). (See Also Paragraph 5)
(c)	Parking: $0.00 for the period 0.00
(d)	Other: $0.00 for N/A

     1.8 Agreed Use: General office and laboratory. (See also Paragraph 6)

     1.9 Base Year: Insuring Party. The base year is 2006. Lessor is the “Insuring Party”. (See also Paragraphs 4.2 and 8)

     1.10 Real estate Brokers: (See Paragraph 15)

          (a) Representation: The following real estate brokers ( the “Brokers” and brokerage relationships exist in this transaction: NAI Capital Commercial represents Lessee exclusively (“Lessee’s Broker).

          (b) Payment to Brokers: Upon execution and delivery of this Lease by both Parties; Lessor shall pay to the Brokers the brokerage fee agreed to in a separate written agreement (or if there is no such agreement, the sum of Four Percent or 4% of the total Base rent for the brokerage services rendered by the Brokers).

     1.11 Guarantor. The obligations of the Lessee under this Lease shall be guaranteed by ___(“Guarantor”). (See Paragraph 37)

     1.12 Business Hours for the Building: 8:00 a.m. to 6:00 p.m., Mondays through Fridays (except Building Holidays) and 8:00 a.m. to 12:00 p.m. on Saturdays (except Building Holidays). “Building Holidays” shall mean the dates of observance of New Year’s Day, Presidents Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day, and ___.

     1.13 Lessor Supplied Services. Notwithstanding the provisions of Paragraph 11.1, Lessor is NOT obligated to provide the following:

• Other: There will be additional charge of $5.00 an hour per unit when overtime usage requested by Lessee on HVAC.

• An Addendum consisting of Paragraphs 51 through 71.

• A plot plan depicting premises: a current set of Rules and Regulations

2 Premises.

     2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth In this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. Note: Lessee is advised to verify the actual size prior to executing this Lease.

     2..2 Condition Lessor shall deliver the Premises to Lessee in a clean condition on the Commencement Date or the Early Possession Date, whichever first occurs (“Start Date”), and warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems (“HVAC”), and all other items which the Lessor IS obligated to construct pursuant to the Work Letter attached hereto, if any, other than those constructed by Lessee, shall be In good operating condition n said date.

     2.3 Compliance. Lessor warrants that the improvements comprising the Premises and the Common Areas comply with the building codes that were in effect at the time that each such Improvement, or portion thereof, was constructed, and also with all applicable laws, covenants or restrictions of record, regulations, and ordnances (“Applicable Requirements”) in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises, modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Lessee’s use (see Paragraph 50). or to any Alterations or Utility Installations (as defined In Paragraph 7.3(a)) made or to be made by Lessee NOTE: Lessee is responsible for determining whether or not the zoning and other Applicable Requirements are appropriate for Lessee’s intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee settling forth with specificity the nature and extent of such non-compliance rectify the same. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Premises (“Capital Expenditure”), Lessor and Lessee shall allocate the cost of such work as follows:

          (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants In general. Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months’ Base Rent, Lessee may Instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee’s termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to 6 months’ Base Rent If Lessee elects termination, Lessee shall immediately ease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, In no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.

          (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the cost of such Capital Expenditure as follows Lessor shall advance the funds necessary for such Capital Expenditure but Lessee shall be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent IS due, an amount equal to the product of multiplying Lessee’s share of the cost of such Capital Expenditure (the percentage specified In Paragraph 1 6 by a fraction, the numerator of which IS one. and the denominator of which is 144 ( i e1/144th of the cost per month). Lessee shall pay interest on the unamortized balance of Lessee’s share at a rate that is commercially reasonable in the judgment of Lessor’s accountants Lessee may, however. Prepay its obligation at any time. Provided, however, that if such Capital Expenditure IS required during the last 2 years of this Lease or if Lessor reasonably determines that it IS not economically feasible to pay its share thereof. Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor3 termination notice that Lessee will pay for such Capital Expenditure If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor’s share of such costs have been fully paid. If Lessee is unable to finance Lessor’s share, or if the balance of the Rent due and payable for the remainder of this Lease IS not sufficient to fully reimburse Lessee on an offset basis. Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor.

          (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to nonvoluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are Instead triggered by Lessee as a result of an actual or proposed change In use, change In Intensity of use, or modification to the Premises then, and In that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease.

     2.4 Acknowledgements. Lessee acknowledges that:

          (a) Lessee has been advised by Lessor and/or Brokers to satisfy Itself with respect to the condition of the Premises( including but not limited to the electrical. HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements),and their suitability for Lessee’s intended use,

          (b) Lessee has made such Investigation as it deems necessary with reference to such matters and assumes all responsibility therefore as the same relate to its occupancy of the Premises, and

          (c) neither Lessor, Lessor’s agents. nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth In this Lease. In addition. Lessor acknowledges that,

               (i) Brokers have made no representations. promises or warranties concerning Lessee’s ability to honor the Lease or suitability occupy the Premises, and

               (ii) it is Lessor’s sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.

     2.5 Lessee as Prior Owner/Occupant The warranties made by Lessor In Paragraph 2 shall be of no force or effective immediately prior to the Start Date. Lessee was the owner or occupant of the Premises. In such event. Lessee shall be responsible for any necessary corrective work.

     2.6 Vehicle Parking. So long as Lessee IS not In default, arid subject to the Rules and Regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to rent and use the number of parking spaces specified in Paragraph 1.2(b) at the rental rate applicable from time to time for monthly parking as set by Lessor and/or its licensee

          (a) If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then In effect, then Lessor shall have the right, without notice, In addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

          (b) The monthly rent per parking space specified in Paragraph 1 2(b) is subject to change upon 30 days prior written notice to Lessee. The rent for the parking IS payable one month In advance prior to the first day of each calendar month.

     2.7 Common Areas — Definition The term Common Areas” IS defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and Interior utility raceways and installations within the Premises that are provided and designated by the Lessor from time to time for the general nonexclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including, but not limited to, common entrances, lobbies. corridors, stairwells, public restrooms. elevators. parking areas. loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas.

     2.8 Common Areas — Lessee’s Rights. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers. contractors, customers and Invitees, during the term of this Lease, the nonexclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time. subject to any rights. powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporally or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor’s designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice. in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee. Which cost shall be immediately payable upon demand by Lessor.

     2.9 Common Areas — Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to adopt, or modify, amend and enforce reasonable rules and regulations (“Rules and Regulations”) for the management, safety, care. and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Budding and the Project and their invitees. The Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the noncompliance with said Rules and Regulations by other tenants of the Project.

     2.10 Common Areas — Changes. Lessor shall have the right. In Lessor’s sole discretion. from time to time:

          (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of the lobbies, windows, stairways. air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways.

          (b) To close temporally any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available.

          (c) To designate other land outside the boundaries of the Project to be a part of the Common Areas;

          (d)To add additional buildings and Improvements to the Common Areas.

          (e)To use the Common Areas while engaged In making additional improvements, repairs or alterations to the Project, or any portion thereof; and

          (f) To do and perform such other acts and make such other changes In, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate.

3 Term.

     3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified In Paragraph 1 3.

     3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Lessee’s Share of the Operating Expense Increase) shall, however, be In effect during such period. Any such early possession shall not affect the Expiration Date.

     3.3 Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite sad efforts, Lessor IS unable to deliver possession by such date, Lessor shall not be Subject to any liability therefore, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession IS not delivered within 30 days after the Commencement Date, as the same may be extended under the terms of any Work Letter executed by Parties, Lessee may, at its option, by notice in writing within 10 days after the end of such 30 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee’s right to cancel shall terminate If possession of the Premises is not delivered within 120 days after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.

     3.4 Lessee Compliance Lessor shall not be required to deliver possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of Insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt of such evidence of insurance Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.

4. Rent.

     4.1. Rent Defined All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent (“Rental’).

     4.2 Operating Expense Increase. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee’s Share of the amount by which all Operating Expenses for each Comparison Year exceeds the amount of all Operating Expenses for the Base Year, such excess being hereinafter referred to as the “Operating Expense Increase”. In accordance with the following provisions:

          (a) “Base Year” is as specified in Paragraph 1.9

          (b)“Comparison Year” is defined as each calendar year during the term of this Lease subsequent to the Base Year: provided, however. Lessee shall have no obligation to pay a share of the Operating Expense increase applicable to the first 12 months of the Lease Term (other than such as are mandated by a governmental authority, as to which government mandated expenses Lessee shall pay Lessee’s Share, notwithstanding they occur during the first helve (12) months). Lessee’s Share of the Operating Expense increase for the first and last Comparison Years of the Lease Term shall be prorated according to that portion of such Comparison Year as to which Lessee is responsible for a share of such increase

          (c)“Operating Expenses” include all costs Incurred by Lessor relating to the ownership and operation of the Project, calculated as rf the Project was at least 95% occupied, including, but not limited to, the following:

               (I) The operation, repair, and maintenance In neat, clean, safe, good order and condition, but not the replacement (see subparagraph (g)), of the following:

                    (aa) The Common Areas, including their surfaces, coverings, decorative Items, carpets, drapes and window coverings, and including parking areas. loading and unloading areas. trash areas. roadways, sidewalks, walkways, stairways. parkways, driveways, landscaped areas, striping, bumpers. irrigation systems, Common Area lighting facilities, exteriors and roofs, fences and gates, building

                    (bb) All heating, air conditioning, plumbing, electrical systems, the safety equipment, communication systems and other equipment used In common by, or for the benefit of, lessees or occupants of the Project, including elevators and escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair.

               (II) Trash disposal, janitorial and security services, pest control services, and the costs of any environmental inspections;

               (III) Any other service to be provided by Lessor that is elsewhere In this Lease stated to be an “Operating Expense”,

               (IVI) The cost of the premiums for the Insurance policies maintained by Lessor pursuant to paragraph 8 and any deductible portion of an insured loss concerning the Building or the Common Areas;

               (V)The amount of the Real Property Taxes payable by Lessor pursuant to paragraph 10;

               (VI)The cost of water, sewer, gas, electricity, and other publicly mandated services not separately metered.

               (VII) Labor, salaries, and applicable fringe benefits and costs, materials, supplies and tools, used In maintaining and/or cleaning the Project and accounting and management fees attributable to the operation of the Project;

               (VIII) The cost of any Capital Expenditure to the Building or the Project not covered under the provisions of Paragraph 2 3 provided; however. that Lessor shall allocate the cost of any such Capital Expenditure over a 12 year period and Lessee shall not be required to pay more than Lessee’s Share of 11144th of the cost of such Capital Expenditure In any given month;

               (IX) Replacement of equipment or improvements that have a useful life for accounting purposes of 5 years or less.

          (d) Any Item of Operating Expense that is specifically attributable to the Premises, the Building or to any other building in the Project or to the operation, repair and maintenance thereof, shall be allocated entirely to such Premises, Building, However, any such Item or other building that is not specifically attributable to the Budding or to any other budding or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings In the Project.

          (e) The Inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(c) shall not be deemed to impose an obligation upon Lessor to either have sad Improvements or facilities or to provide those services unless the Project already has the same, Lessor already provides the services. or Lessor has agreed elsewhere In this Lease to provide the same or some of them.

          (f) Lessee’s Share of Operating Expense increase shall be payable by Lessee within a 10 days after reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor’s option, however, an amount may be estimated by Lessor from time to time In advance of Lessee’s Share of the Operating Expense increase for any Comparison Year, and the same shall be payable monthly during each Comparison Year of the Lease term, on the same day as the Base Rent IS due hereunder. In the event that Lessee pays Lessor’s estimate of Lessee’s Share of Operating Expense Increase as aforesaid, Lessor shall deliver to Lessee within 60 days after the expiration of each Comparison Year a reasonably detailed statement showing Lessee’s Share of the actual Operating Expense increase Incurred during such year If Lessee’s payments under this paragraph (f) during said Comparison Year exceed Lessee’s Share as Indicated on sad statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee’s Share of Operating Expense increase next falling due If Lessee’s payments under this paragraph during said Comparison Year were less than Lessee’s Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within 10 days after delivery by Lessor to Lessee of said statement Lessor and Lessee shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Lessee is responsible as to Operating Expense Increases, notwithstanding that the Lease term may have terminated before the end of such Comparison Year

          (g) Operating Expenses shall not include the costs of replacement for equipment or capital components such as the roof. foundations, exterior walls or a Common Area capital improvement. such as the parking lot paving, elevators, fences that have a useful life for accounting purposes of 5 years or more unless it is of the type described in paragraph 4 2(c) (VIII), In which case their cost shall be included as above provided.

          (h)Operating Expenses shall not include any expenses paid by any tenant directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by Insurance proceeds

     4.3 Payment Lessee shall cause payment of Rent to be received by Lessor In lawful money of the United States on or before the day on which it IS due, without offset or deduction (except as specifically permitted in this Lease). Rent for any period during the term hereof which IS for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which IS less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Rent, regardless of Lessor’s endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor IS dishonored for any reason. Lessee agrees to pay to Lessor the sum of $25 In addition to any Late Charge. Payments will be applied first to accrued late charges and attorney’s fees, second to accrued interest, then to Base Rent and Operating Expense Increase, and any remaining amount to any other outstanding charges or costs.

5. Security Deposit Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee’s faithful performance of its obligations under this Lease. If Lessee falls to pay Rent, or otherwise Defaults under this Lease. Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or Incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefore, deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the Initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change In the business of Lessee or to accommodate a sub lessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor’s reasonable judgment, to account for any Increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is. in Lessor’s reasonable judgment. significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 14 days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within 30 days after the Premises have been vacated pursuant to Paragraph 7 4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear Interest or to be prepayment for any monies to be paid by Lessee under this Lease

6. Use.

     6.1 Use Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which IS reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the Improvements of the Building, will not adversely affect the mechanical, electrical. HVAC, and other systems of the Building, and/or will not affect the exterior appearance of the Building. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same. which notice shall include an explanation of Lessor’s objections to the change in the Agreed Use.

     6.2 Hazardous Substances

          (a) Reportable Uses Require Consent The term “Hazardous Substance” as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal. transportation, or release, either by itself or in combination with other materials expected to be on the Premises. IS either.(i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory Hazardous Substances shall include, but not be limited to. hydrocarbons, petroleum, gasoline, and/or crude oil or any products, byproducts or fractions thereof. Lessee shall not engage In any activity or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Applicable Requirements. ‘Reportable Use” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from. or with respect to which a report, notice. registration or business plan is required to be 61ed with, any governmental authority and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use such as ordinary office supplies (copier toner, liquid paper, glue. etc.) and common household cleaning materials, so long as such use IS in compliance with all Applicable requirements. is not a Reportable Use. and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefore In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination .Injury and/or Liability. including, but not limited to , the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

          (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located In, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice. claim or other documentation which it has concerning the presence of such Hazardous Substance.

          (c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense, comply with all Applicable requirements and take all investigator and/or remedial action reasonably recommended, whether or not formally ordered or required for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party

          (d) Lessee Indemnification Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground Lessor, if any, harmless from and against any and all loss of rents and/or damages, Liabilities, judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no

liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from areas outside of the Project not caused or contributed to by Lessee). Lessee’s obligations shall include, but not be limited to , the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement. and shall survive the expiration or termination of this Lease No termination. Cancellation or release agreement entered Into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor In writing at the time of such agreement

          (e) Lessor Indemnification Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which result from Hazardous Substances which existed on the Premises prior to Lessee’s occupancy or which are caused by the gross negligence or willful misconduct of Lessor. its agents or employees Lessor’s obligations, as and when required by the Applicable Requirements. shall include, but not be limited to, the cost of investigation removal. remediation, restoration and/or abatement. and shall survive the expiration or termination of this Lease.

          (f) Investigations and Remediation’s Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entitles having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to Lessee’s occupancy, unless such remediation measure is required as a result of Lessee’s use (including” Alterations”, as defined In paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully In any such activities at the request of Lessor, including allowing Lessor and Lessor’s agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor’s investigative and remedial responsibilities.

          (g) Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefore (in which case Lessee shall make the investigation and remediation thereof required by the Applicable requirements and this Lease shall continue In full force and effect, but subject to Lessor’s rights under Paragraph 6.2(d) and Paragraph 13). Lessor may, at Lessor’s option, either (i) Investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor’s expense, In which event this Lease shall continue in full force and effect, or (11) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor’s desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee’s commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available If Lessee does not such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified In Lessor’s notice of termination.

     6.3 Lessee’s Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee’s sole expense, fully, diligently and In a timely manner, materially comply with all Applicable Requirements. the requirements of any applicable fire Insurance underwriter rating bureau, and the recommendations of Lessor’s engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now In effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor’s written request. provide Lessor with copies of all permits and other documents, and other information evidencing Lessee’s compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved)o f any threatened or actual claim. notice. citation. warning, complaint or report pertaining to or involving the of Lessee or the Premises to comply with any Applicable Requirements.

6.4 Inspection; Compliance. Lessor and Lessor’s “Lender” (as defines in Paragraph 30) and consultants shall have the right to enter into Premises at any time, In the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance Condition(see paragraph 9 le) is found to exist or be Imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination

7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations.

     7.1 Lessee’s Obligations. Notwithstanding Lessor’s obligation to keep the Premises in good condition and repair Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that selves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any improvements with the Premises. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which IS otherwise Lessee’s responsibility hereunder

     7.2 Lessor’s Obligations Subject to the provisions of Paragraphs 2 2 (Condition), 2.3 (Compliance), 4 2 (Operating Expenses). 6 (Use), 7.1 (Lessee’s Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, fire alarm and/or smoke detection systems, fire hydrants, and the Common Areas. Lessee expressly waives the benefit of any statute now or hereafter In effect to the extent it IS inconsistent with the terms of this Lease.

     7.3 Utility Installations; Trade Fixtures; Alterations.

          (a) Definitions. The term ‘Utility Installations” refers to all floor and window coverings, air lines, vacuum lines, power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, and plumbing in or on the Premises. The term “Trade Fixtures” shall mean Lessee’s machinery and equipment that can be removed without doing material damage to the Premises The term “ Alterations” shall mean any modification of the Improvements, other than Utility installations or Trade Fixtures, whether by addition or deletion. ‘Lessee Owned Alterations and/or Utility Installations” are defined as Alterations and/or installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

          (b) Consent Lessee shall not make any Alterations or Utility installations to the Premises without Lessor’s prior written consent. Lessee may. however, make non-structural Utility installations to the Interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside. do not involve puncturing, relocating or removing the roof, ceilings, floors or any existing walls. will not affect the electrical, plumbing. HVAC, and/or life safety systems, and the cumulative cost thereof during this Lease as extended does not exceed $2000. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or Install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor In written form with detailed plans. Consent shall be deemed conditioned upon Lessee’s: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (111) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious Any Alterations or Utility installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as built plans and specifications. For work which costs an amount In excess of one month’s Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee’s posting an additional Security Deposit with Lessor.

          (c) Liens; Bonds. Lessee shall pay, when due, all clams for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic’s or material man’s lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work In, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility If Lessee shall contest the validity of any such hen, claim or demand, then Lessee shall. at its sole expense defend and protect itself. Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond In an amount equal to 150U/u of the amount of such contested hen, claim or demand, indemnifying If Lessor elects to participate In any such action, Lessee shall pay Lessor’s attorneys’ Lessor against liability for the same. Fees and costs.

     7.4 Ownership; Removal; Surrender; and Restoration

          (a) Ownership Subject to Lessor’s right to require removal or elect ownership as hereinafter provided. all Alterations and Utility installations made by Lessee shall be the property of Lessee. but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7 4(b) hereof, all Lessee Owned Alterations and Utility installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

          (b) Removal By delivery to Lessee of written notice from Lessor not earlier than 90 and riot later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility installations made without the required consent (c) Surrender; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the Improvements, parts and surfaces thereof clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted “Ordinary wear and tear” shall not include any damage or degeneration that would have been prevented by good maintenance practice. Notwithstanding the foregoing. If this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank Installed by or for Lessee. Lessee shall also completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from

areas outside of the Project) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7 4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below

8. Insurance; Indemnity.

     8.1 Insurance Premiums. The cost of the premiums for the insurance policies maintained by Lessor pursuant to paragraph 8 are included as Operating Expenses (see paragraph 4 2 (c)(iv)). Said costs shall include increases In the premiums resulting from additional coverage related to requirements of the holder of a mortgage or deed of trust covering the Premises, Building and/or Project, Increased valuation of the Premises, Building and/or Project, and/or a general premium rate Increase. Said costs shall not, however, include any premium increases resulting from the nature of the occupancy of any other tenant of the Building. If the Project was not insured for the entirety of the Base Year, then the base premium shall be the lowest annual premium reasonably obtainable for the required insurance as of the Start Date, assuming the most nominal use possible of the Building and/or Project In no event. However, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $2.000.000 procured under Paragraph 8.2(b)

     8.2 Liability Insurance

          (a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal Injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000, an “Additional Insured-Managers or Lessor’s of Premises Endorsement” and contain the “Amendment of the Pollution Exclusion Endorsement” for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between Insured persons or organizations, but shall Include coverage for liability assumed under this Lease as an “insured contract” for the performance of Lessee’s Indemnity obligations under this Lease The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder All Insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose Insurance shall be considered excess Insurance only.

          (b) Carried by Lessor. Lessor shall maintain liability Insurance as described in Paragraph 8.2(a), in addition to, and not In lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein

     8.3 Property Insurance -Building, Improvements and Rental Value

          (a) Building and Improvements. Lessor shall obtain and keep In force a poky or policies of insurance in the name of Lessor, with loss payable to Lessor, any ground-Lessor, and to any Lender insuring loss or damage to the Building and/or Project. The amount of such insurance shall be equal to the full replacement cost of the Building and/or Project, as the same shall exist from time to me, or the amount required by any Lender, but In no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee’s personal property shall be insured by Lessee under Paragraph 8.4 If the coverage is available and commercially appropriate. such policy or polices shall Insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), Including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision In lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an Increase In the annual property insurance coverage amount by a factor of not less than the adjusted U S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence.

          (b) Rental Value. Lessor shall also obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days (“Rental Value”). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period.

          (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Project if said increase IS caused by Lessee’s acts, omissions, use or occupancy of the Premises.

          (d) Lessee’s improvements Since Lessor IS the Insuring Party Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the Item In question has become the property of Lessor under the terms of this Lease.

     8.4 Lessee’s Property; Business Interruption Insurance.

          (a) Property Damage. Lessee shall obtain and maintain Insurance coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such Insurance IS In force.

          (b) Business Interruption. Lessee shall obtain and maintain loss of Income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly Insured against by prudent lessees In the business of Lessee or attributable to prevention of access to the Premises as a result of such perils

          (c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified hewn are adequate to cover Lessee’s property, business operations or obligations under this Lease.

     8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business In the state where the Premises are located, and maintaining during the policy term a “General Policyholders Rating” of at least B+, V, as set forth in the most current Issue of “Best’s insurance Guide”, or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required Insurance No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 30 days prior to the expiration of such policies. furnish Lessor with evidence of renewals or “insurance binders” evidencing renewal thereof, or else Lessor may order such Insurance and charge the cost thereof to Lessee. which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less If either Party shall fall to procure and maintain the Insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.

     8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers IS not limited by the amount of Insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers wave any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance IS not invalidated thereby.

     8.7 Indemnity Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises. Lessor and its agents, Lessor’s master or ground Lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, Liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving. or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding IS brought against Lessor by reason of any of the foregoing matters. Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim In order to be defended or indemnified.

     8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers. or any other person In or about the Premises, whether such damage or Injury is caused by or results from fire, steam, electricity, gas, water or ran, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances. plumbing, HVAC or lighting fixtures, or from any other cause, whether the sad injury or damage results from conditions arising upon the Premises or upon other portions of the Building. or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor nor from the failure of Lessor to enforce the provisions of any other lease In the Project. Notwithstanding Lessor’s negligence or breach of this Lease. Lessor shall under no circumstances be liable for injury to Lessee’s business or for any loss of income or profit there from

9. Damage or Destruction.

     9.1 Definitions.

          (a) “Premises Partial Damage” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 3 months or less from the date of the damage or destruction, and the cost thereof does not exceed a sum equal to 6 month’s Base Rent. Lessor shall notify Lessee In writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

          (b) “Premises Total Destruction” shall mean damage or destruction to the Improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired In 3 months or less from the date of the damage or destruction and/or the cost thereof exceeds a sum equal to 6 month’s Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

          (c) “insured Loss” shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility installations and Trade Fixtures, which was caused by an event required to be covered by the Insurance described In Paragraph 8 3(a), irrespective of any deductible amounts or coverage limits involved.

          (d) “Replacement Cost” shall mean the cost to repair or rebuild the Improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements. and without deduction for depreciation

          (e) “Hazardous Substance Condition’ shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in. on, or under the Premises which requires repair, remediation, or restoration

     9.2 Partial Damage -insured Loss. If a Premises Partial Damage that is an insured Loss occurs, then Lessor shall. at Lessor’s expense, repair such damage (but not Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue In full force and effect; provided, however, that Lessee shall, at Lessor’s election, make the repair of any damage or destruction the total cost to repair of which IS $5,000 or less, and, In such event, Lessor shall make any applicable Insurance proceeds available to Lessee on a reasonable basis for that purpose Notwithstanding the foregoing. if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage In proceeds as and when required to complete said repairs In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage In insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefore If Lessor receives sad funds or adequate assurance thereof within said 10 day period. the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain In full force and effect. If such funds or assurance are not received. Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (I) make such restoration and repair as IS commercially reasonable with Lessor paying any shortage In proceeds, in which case this Lease shall remain in full force and effect, or (11) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9 3, notwithstanding that there may be some Insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.

     9.3 Partial Damage -Uninsured Loss. If a Premises Partial Damage that IS not an insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee’s expense), Lessor may either. (i) repair such damage as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue In full force and effect, or (11) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee’s commitment to pay for the repair of such damage without reimbursement from Lessor Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment In such event this Lease shall continue In full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice

     9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs. This Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor’s damages from Lessee, except as provided in Paragraph 8.6

     9.5 Damage Near End of Term If at any time during the last 6 months of this Lease there IS damage for which the cost to repair exceeds one month’s Base Rent, whether or not an insured Loss. Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage In insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (I) the date which is 10 days after Lessee’s receipt of Lessor’s written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee falls to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee’s option shall be extinguished.

     9.6 Abatement of Rent; Lessee’s Remedies.

          (a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee IS not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises IS impaired, but not to exceed the proceeds received from the Rental Value Insurance All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

          (b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way. such repair or restoration within 90 days after such obligation shall accrue, Lessee may. at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s election to terminate this Lease on a date not less than 60 days following the giving of such notice If Lessee gives such notice and such repair or restoration IS not commenced within 30 days thereafter, this Lease shall terminate as of the date specified In said notice. such 30 days, this Lease shall continue in full. If the repair or restoration is commenced within force and effect. “Commence” shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs

     9.7 Termination; Advance Payments. of this Lease pursuant to Paragraph 62(g) or Paragraph 9, an equitable Upon termination adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee’s Security Deposit as has not been, or IS not then required to be, used by Lessor.

     9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent considered herewith.

10. Real Property Taxes

     10.1 Definitions. As used herein, the term Real Property Taxes” shall include any form of assessment, real estate, general, special. ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes), improvement bond; and/or license fee Imposed upon or levied against any legal or equitable interest of Lessor in the Project, Lessor’s right to other income there from, and/or Lessor’s business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Project address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Project is located. “Real Property Taxes” shall also include any tax, fee, levy, assessment or charge, or any Increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Project or any portion thereof or a change In the improvements thereon.

     10.2 Payment of Taxes Except as otherwise provided In Paragraph 10.3, Lessor shall pay the Real Property Taxes applicable to the Project, and said payments shall be included in the calculation of Operating Expenses In accordance with the provisions of Paragraph 4.2

     10.3 Additional Improvements. Operating Expenses shall not include Real Property Taxes specified In the tax assessor’s records and work sheets as being caused by additional improvements placed upon the Project by other lessees or by Lessor for the exclusive enjoyment of such other lessees Notwithstanding Paragraph 10.2 hereof, Lessee shall, however, pay to Lessor at the time Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee’s request

     10.4 Joint Assessment. shall be an equitable If the Building is not separately assessed, Real Property Taxes allocated to the Building proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor’s work sheets or such other information as may be reasonably available. Lessor’s reasonable determination thereof, In good faith, shall be conclusive.

     10.5 Personal Property Taxes Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations and Utility Installations, Trade Fixtures. furnishings, equipment and all personal property of Lessee contained In the Premises. When possible. Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor If any of Lessee’s said property shall be assessed with Lessor’s real property, Lessee shall pay Lessor the taxes attributable to Lessee’s property within 10 days after receipt of a written statement settling forth the taxes applicable to Lessee’s property.

11. Utilities and Services.

     11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air conditioning, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use in connection with an office, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. Lessor shall also provide janitorial services to the Premises and Common Areas 5 times per week. excluding Building Holidays, or pursuant to the attached janitorial schedule, if any. Lessor shall not, however, be required to provide janitorial services to kitchens or storage areas included within the Premises

     11.2 Services Exclusive to Lessee. Lessee shall pay for all water. gas, heat, Light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee. Together with any taxes thereon. If a service is deleted by Paragraph 1.13 and such service IS not separately metered to the Premises, Lessee shall pay at Lessor’s option, either Lessee’s Share or a reasonable proportion to be determined by Lessor of all charges for such jointly metered service.

     11.3 Hours of Service. Said services and utilities shall be provided during times set forth in Paragraph 1.12. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof.

     11.4 Excess Usage by Lessee. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment In or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities Lessor shall require Lessee to or services, including but not limited to security and trash services, over standard office usage for the Project. reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee Lessor may, in its sole discretion, Install at Lessee’s expense supplemental equipment and/or separate metering applicable to Lessee’s excess usage or loading.

     11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the Inadequacy, stoppage. interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor’s reasonable control or In cooperation with governmental request or directions.

12. Assignment and Subletting.

     12.1 Lessor’s Consent Required

          (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, ‘assign or assignment’) or sublet all or any part of Lessee’s interest In this Lease or in the Premises without Lessor’s prior written consent

          (b) Unless Lessee is a corporation and its stock is publicly traded on a national stock exchange, a change In the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative bass of 25% or more of the voting control of Lessee shall constitute a change In control for this purpose

          (c) The involvement of Lessee or its assets In any transaction, or series of transactions (by way of merger. sale, acquisition. financing, transfer, leveraged buyout or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee’s assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction. Whichever was or is greater shall be considered an assignment of this Lease to which Lessor may withhold its consent ‘Net Worth of Lessee” shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.

          (d) An assignment or subletting without consent shall, at Lessor’s option, be a Default curable after notice per Paragraph 13.1(c). or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may ether: (I) terminate this Lease, or (11) upon 30 days written notice, Increase the monthly Base Rent to 110% of the Base Rent then In effect. Further, In the event of such Breach and rental adjustment, (I) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously In effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent.

          (e) Lessee’s remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief

     12.2 Terms and Conditions Applicable to Assignment and Subletting.

          (a) Regardless of Lessor’s consent, no assignment or subletting shall: (I) be effective without the express written assumption by such assignee or sub lessee of the obligations of Lessee under this Lease, (11) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee

          (b) Lessor may accept Rent or performance of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppels of Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

          (c) Lessor’s consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.

          (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee’s obligations under this Lease, including any assignee or sub lessee, without first exhausting Lessor’s remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor.

          (e) Each request for consent to an assignment or subletting shall be in wilting, accompanied by information relevant to Lessor’s determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sub lessee, including but not limited to the intended use and/or required modification of the Premises, if any. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36)

          (f) Any assignee of, or sub lessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to In writing.

          (g) Lessor’s consent to any assignment or subletting shall not transfer to the assignee or sub lessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor In writing. (See Paragraph 39.2)

     12.3 Additional Terms and Conditions Applicable to Subletting The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included In all subleases under this Lease whether or not expressly incorporated therein:

          (a) Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee’s obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee’s obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublease for any failure of Lessee to perform and comply with any of Lessee’s obligations to such sub lessee Lessee hereby Irrevocably authorizes and directs any such sub lessee, upon receipt of a written notice from Lessor stating that a Breach exists In the performance of Lessee’s obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sub lessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

          (b) In the event of a Breach by Lessee, Lessor may, at its option, require sub lessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of sad option to the expiration of such sublease, provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sub lessee to such sublessor or for any prior Defaults or Breaches of such sublessor

          (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor

          (d) No sub lessee shall further assign or sublet all or any part of the Premises without Lessor’s prior written consent. le) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sub lessee. who shall have the right to cure the Default of Lessee within the grace period. if any, specified In such notice The sub lessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sub lessee

13. Default; Breach; Remedies

     13.1 Default; Breach. A “Default” is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A ‘Breach” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period

          (a) The abandonment of the Premises, or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described In Paragraph 8 3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism

          (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of Insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee.

          (c) The failure by Lessee to provide (I) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (III) the rescission of an unauthorized (vi) evidence concerning assignment or subletting. (IV) an Estoppels Certificate. (v) a requested subordination, any guaranty and/or Guarantor, (vii) any document requested under Paragraph 41 (easements), or (mi) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee.

          (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof, other than those described in subparagraphs 13.1(a). (b) or (c), above, where such Default continues for a period of 30 days after written notice. provided, however, that if the nature of Lessee’s Default IS such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion.

          (e) The occurrence of any of the following events

               (I) the making of any general arrangement or assignment for the benefit of creditors:

               (II) becoming a debt of as defined in 11 U.S. C § 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same IS dismissed within 60 days);

               (III) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where possession IS not restored to Lessee within 30 days; or

(iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s Interest In this Lease, where such seizure IS not discharged within 30 days. provided, however, In the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

          (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false

          (g) If the performance of Lessee’s obligations under this Lease IS guaranteed (i) the death of a Guarantor. (ii) the termination of a Guarantor’s liability with respect to this Lease other than In accordance with the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor the guaranty, or (v) a Guarantor’s breach of its guaranty obligation on an anticipatory basis, and Lessee’s failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

     13.2 Remedies. If Lessee falls to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency. without notice). Lessor may, at its option, perform such duty or obligation on Lessee’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental Licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of Invoice therefore. If any check given to Lessor by Lessee shall not be honored by the bank upon which it IS drawn. Lessor, at its option, may require all future payments to be made by Lessee to be by cashier’s check In the event of a Breach, Lessor may, with or without further notice or demand, and without Limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach.

          (a) Terminate Lessee’s right to possession of the Premises by any lawful means, In which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor In such event Lessor shall be entitled to recover from Lessee (I) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided, (III) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided: and (IV) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee’s failure to perform its obligations under this Lease or which In the ordinary course of things would be likely to result there from, including but not limited to the cost of recovering possession of the Premises. expenses of releting, Including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and that portion of any leasing commission paid by Lessor In connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to In provision (III)of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent Efforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease shall not waive Lessor’s right to recover damages under Paragraph 12 If termination of this Lease IS obtained through the provisional remedy of unlawful detained. Lessor shall have the night to recover In such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof In a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

          (b) Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due, In which event Lessee may sublet or assign, subject only to reasonable Limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor’s interests, shall not constitute a termination of the Lessee’s right to possession.

          (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

     13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee’s entering into this Lease, all of which concessions are hereinafter referred to as “Inducement Provisions”, shall be deemed conditioned upon Lessee’s full and faithful performance of all of the terms, covenants and conditions of this Lease Upon Breach of this Lease by Lessee. any such inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance

     13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender Accordingly, if any Rent shall not be received by Lessor within 9 10 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to 10% of each such overdue amount or $100, whichever is greater. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will Incur by reason of such late payment Acceptance of such late charge by Lessor shall in no event constitute a waver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly In advance.

     13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for nonscheduled payment, shall bear interest from the date when due. as to scheduled payments, or the 31st day after it was due as to nonscheduled payments. The interest (“Interest’) charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. interest IS payable in addition to the potential late charge provided for in Paragraph 13.4.

     13.6 Breach by Lessor.

          (a) Notice of Breach. Lessor shall not be deemed In breach of this Lease unless Lessor falls within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however. that if the nature of Lessor’s obligation IS such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion.

          (b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures sad breach within 30 days after receipt of said notice, or if having commenced sad cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee’s expense and offset from Rent the actual and reasonable cost to perform such cure, provided however, that such offset shall not exceed an amount equal to the greater of one month’s Base Rent or the Security Deposit, reserving Lessee’s right to seek reimbursement from Lessor Lessee shall document the cost of said cure and supply said documentation to Lessor

14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of sad power (collectively ‘Condemnation”), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the rentable floor area of the Premises, or more than 25% of Lessee’s Reserved Parking Spaces, if any, are taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or In the absence of such notice, within terminate this Lease as of the date the 10 days after the condemning authority shall have taken possession) condemning authority takes such possession. If Lessee does not terminate this Lease In accordance with the foregoing, this Lease shall remain In full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced In proportion to the reduction in utility of the Premises caused by such Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any Compensation for Lessee’s relocation expenses. loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease IS terminated pursuant to the provisions of this Paragraph. All Alterations and Utility installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which IS payable therefore In the event that this Lease IS not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.

15. Brokerage Fees.

     15.1 Additional Commission. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee acquires from Lessor any rights to the Premises or other Premises owned by Lessor and located within the Project, (c) if Lessee remains In possession of the Premises. with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent IS Increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee In accordance with the schedule of the Brokers in effect at the time of the execution of this Lease

     15.2 Assumption of Obligations. Any buyer or transferee of Lessor’s Interest in this Lease shall be deemed to have assumed Lessor’s obligation hereunder. Brokers shall be third party benefices of the provisions of Paragraphs 1 10, 15. 22 and 31. If Lessor falls to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor falls to pay any

amounts to Lessee’s Broker when due, Lessee’s Broker may send written notice to Lessor and Lessee of such failure and if Lessor falls to pay such amounts within 10 days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee’s Broker shall be deemed to be a third party beneficiary of any commission agreement entered Into by and/or between Lessor and Lessor’s Broker for the limited purpose of collecting any brokerage fee owed.

     15.3 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) In connection with this Lease. and that no one other than sad named Brokers is entitled to any commission or finder’s fee in connection herewith Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party. including any costs, expenses, attorneys’ fees reasonably Incurred with respect thereto.

16. Estoppels Certificates.

          (a) Each Party (as “Responding Party”) shall within 10 days after written notice from the other Party (the “Requesting Party”) execute. acknowledge and deliver to the Requesting Party a statement In writing In form similar to the then most current “Estoppels Certificate” form published by the American industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

          (b) If the Responding Party shall fall to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party. (11) there are no uncured defaults In the Requesting Party’s performance, and (lib) if Lessor IS the Requesting Party, not more than one month’s rent has been paid in advance. Prospective purchasers and encumbrances may rely upon the Requesting Party’s Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.

          (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof. Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee’s financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser In confidence and shall be used only for the purposes herein set forth.

17. Definition of Lessor The term ‘Lessor” as used herein shall mean the owner or owners at the time In question of the fee title to the Premises. or. if this IS a sublease, of the Lessee’s interest In the prior lease In the event of a transfer of Lessor’s title or Interest In the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided In Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit. as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants In this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.

18. Severability. The Invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall In no way affect the validity of any other provision hereof.

19. Days. Unless otherwise specifically Indicated to the contrary. the word “days” as used In this Lease shall mean and refer to calendar days.

20. Limitation on Liability. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor or its partners, members, directors, officers or shareholders, and Lessee shall look to the Project, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor’s partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction.

21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature. quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys’ fees) of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

23. Notices.

     23.1 Notice Requirements. All notices required or permitted by this Lease or applicable law shall be In writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mall or U.S. Postal Service Express Mail, with postage prepaid. or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

     23.2 Date of Notice Any notice sent by registered or certified mall, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card. or if no delivery date is shown, the postmark thereon If sent by regular mail the notice shall be deemed given 48 hours after the same is addressed as required herein and mailed with postage prepaid Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mall. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof Lessor’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor’s consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an Estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee In connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to In writing by Lessor at or before the time of deposit of such payment

25. Disclosures Regarding The Nature of a Real Estate Agency Relationship.

          (a) When entering Into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction. as follows:

               (I) Lessor’s Agent. Lessor’s agent under a listing agreement with the Lessor acts as the agent for the Lessor only A Lessor’s agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor To the Lessee and the Lessor a Diligent exercise of reasonable skills and care in performance of the agent’s duties. b A duty of honest and far dealing and good faith, c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

               (II) Lessee’s Agent. An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor’s agent, even if by agreement the agent may receive compensation for services rendered, either In full or In part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee A fiduciary duty of utmost care. integrity, honesty, and loyalty in dealings with the Lessee. ID the I Lessee and the lea a. Diligent exercise of reasonable skills and care in performance of the agent’s duties b. A duty of honest and far dealing and good faith. c A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above

               (III) Agent Representing both Lessor and Lessee. A real estate agent, either acting directly or through one or more associate Licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation. the agent has the following affirmative obligations to both the Lessor and the Lessee. A fiduciary duty of utmost care. integrity, honesty and loyalty In the dealings with either Lesser or the Lessee. b Other duties to the Lessor and the Lessee as stated above in subparagraphs (I) or (18). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent In an amount less than that indicated In the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own Interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction a real estate agent is a person qualified to advise about real estate If legal or tax advise IS desired, consult a competent professional.

          (b) Brokers have no responsibility with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys’ fees), of any Broker with respect to any breach of duty, error or omission relating to this Lease shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

          (c) Buyer and Seller agree to Identify to Brokers as “Confidential” any communication or information given Brokers that is considered by such Party to be confidential. 26 No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease In the event that Lessee holds over, then the Base Rent shall be increased to 150“h of the Base Rent applicable immediately preceding the expiration or termination Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity Covenants and Conditions; Construction of Agreement All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa This Lease shall not be construed as if prepared by one of the Parties, but rather according to its far meaning as a whole, as if both Parties had prepared it.

29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated In the county In which the Premises are located

30. Subordination; Attornment; Non-Disturbance.

     30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively. ‘Security Device”). now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as ‘Lender”) shall have no liability of Lessor under this Lease or obligation to perform any of the obligations Any Lender may elect to have this Lease and/or any Option granted hereby superior to the hen of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof

     30.2 Atonement In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall. subject to the nondisturbance provisions of Paragraph 30 3, attorn to such new owner, and upon request, enter Into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof. or, at the election of such new owner, this Lease shall automatically become a new Lease between Lessee and such new owner, upon all of the terms and conditions hereof, for the remainder of the term hereof, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor’s obligations hereunder, except that such new owner shall not (a) be liable for any act or omission of any prior Lessor or with respect to events occurring prior to acquisition of ownership, (b) be subject to any offsets or defenses which Lessee might have against any prior Lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be liable for the return of any security deposit paid to any prior Lessor.

     30.3 Non-Disturbance. With respect to Security Devices entered Into by Lessor after the execution of this Lease, Lessee’s subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a ‘Non-Disturbance Agreement) from the Lender which Non-Disturbance Agreement provides that Lessee’s possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and atones to the record owner of the Promises Further, within 60 days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may at Lessee’s option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement

     30.4 Self-Executing. The agreements contained In this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attainment and/or Non-Disturbance Agreement provided for herein.

31. Attorneys’ Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded In the same suit or recovered in a separate suit, whether or not such action or proceeding IS pursued to decision or judgment. The term, ‘Prevailing Party” shall include. without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise. settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys’ fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees reasonably Incurred In addition, Lessor shall be entitled to attorneys’ fees, costs and expenses incurred In the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 IS a reasonable minimum per occurrence for such services and consultation).

32. Lessor’s Access; Showing Premises; Repairs Lessor and Lessor’s agents shall have the right to enter the Premises at any time, In the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or tenants. and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities. services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee’s use of the Premises. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary “For Sale” signs and Lessor may during the last 6 months of the term hereof place on the Premises any ordinary ‘For Lease” signs. In addition. Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files. vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or Interference with Lessee’s property or business In connection therewith.

33. Auctions Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor’s prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

34. Signs. Lessee shall not place any sign upon the Project without Lessor’s prior written consent.

35. Termination: Merger. Unless specifically stated otherwise In writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof. or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate In the Premises; provided, however, that Lessor may elect to continue any one or all existing sub tenancies. Lessor’s failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser Interest, shall constitute Lessor’s election to have such event constitute the termination of such Interest.

36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed Lessor’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’. engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefore Lessor’s consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated In writing by Lessor at the time of such consent The failure to specify herein any particular condition to Lessor’s consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent IS being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons In writing and In reasonable detail within 10 business days following such request.

37. Guarantor.

     37.1 Execution. The Guarantors, if any, shall each execute a guaranty In the form most recently published by the American Industrial Real Estate Association.

     37.2 Default. It shall constitute a Default of the Lessee if any Guarantor falls or refuses, upon request to provide (a) evidence of the execution of the guaranty. including the authority of the party signing on Guarantor’s behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements. (c) an Estoppels Certificate, or (d) written confirmation that the guaranty IS still in effect

38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee’s part to be observed and performed under this Lease. Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

39. Options If Lessee is granted an Option, as defined below, then the following provisions shall apply.

     39.1 Definition. “Option” shall mean (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor

     39.2 Options Personal To Original Lessee Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee IS in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no Intention of thereafter assigning or subletting

     39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.

     39.4 Effect of Default on Options.

          (a) Lessee shall have no right to exercise an Option. (I) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (11) during the period of time any Rent IS unpaid (without regard to whether notice thereof IS given Lessee), (III) during the time Lessee is in Breach of this Lease, or (IV) in the event that Lessee has been given 3 or more notices of separate Default, whether or riot the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option.

          (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise an Option because of the provisions of Paragraph 39.4(a).

          (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee’s due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (I) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (ii) if Lessee commits a Breach of this Lease.

40. Security Measures Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties In the event, however, that Lessor should elect to provide security services, then the cost thereof shall be an Operating Expense.

41. Reservations.

          (a) Lessor reserves the right: (i) to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary. (11) to cause the recordation of parcel maps and restrictions. (III) to create and/or install new utility raceways, so long as such easements, rights, dedications, maps, restrictions, and Utility raceways do not unreasonably Interfere with the use of the Premises by Lessee. Lessor may also- change the name, address or title of the Building standard or Project upon at least 90 days prior written notice; provide and Install, at Lessee’s expense. Building graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; grant to any lessee the exclusive right to conduct any business as long as such exclusive right does not conflict with any rights expressly given herein; and to place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the Building or the Project or on pole signs in the Common Areas. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such rights. The obstruction of Lessee’s view, air, or light by any structure erected in the vicinity of the Building, upon Lessor whether by Lessor or third parties. shall In no way affect this Lease or Impose any ability

          (b) Lessor also reserves the right to move Lessee to other space of comparable size in the Building or Project. Lessor must provide at least 45 prior written notice of such move, and the new space must contain improvements of comparable quality to those contained within the Premises. Lessor shall pay the reasonable out of pocket costs that Lessee incurs with regard to such relocation, including the expenses of moving and necessary stationary revision costs. In no event, however, shall Lessor be required to pay an amount in excess of two months Base Rent. Lessee may not be relocated more than once during the term of this Lease

          (c) Lessee shall not: (i) use a representation (photographic or otherwise) of the Building or Project or their name(s) In connection with Lessee’s business, or (11) suffer or permit anyone, except in emergency, to go upon the roof of the Building.

42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be pad by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money IS asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof. Said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay.

43. Authority. (a) If either Party hereto IS a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall. within 30 days after request, deliver to the other party satisfactory evidence of such authority. (b) If this Lease IS executed by more than one person or entity as “Lessee”, each such person or entity shall be jointly and severally liable hereunder. It is agreed that any one of the named Lessees shall be empowered to execute any amendment to this Lease, or other document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named Lessees had executed such document

44. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

45. Offer. Preparation of this Lease by either party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party This Lease IS not intended to be binding until executed by all Parties hereto.

46. Amendments. This Lease may be modified only in writing, signed by the Parties in Interest at the time of the modification. As long as they do not materially change Lessee’s obligator is hereunder, Lessee agrees to make such reasonable nonmonetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

47. Multiple Parties If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease

48. Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.

49. Mediation and Arbitration of Disputes An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease IS not attached to this Lease.

50. Americans with Disabilities Act In the event that as a result of Lessee’s use, or intended use, of the Premises the Americans with Disabilities Act or any similar law requires modifications or the construction or installation of improvements In or to the Premises, Building, Project and/or Common Areas, the Patties agree that such modifications, construction or improvements shall be made at: Lessor’s expense [II Lessee’s expense.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN. AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT. AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE With RESPECT TO THE PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO

1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING AND SIZE OF THE PREMISES. THE STRUCTURAL INTEGRITY. THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE With THE AMERICANS With DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE

WARNING IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY With THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED

The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures

Executed at:
Executed on 1/24/06
By Lessor: Pasadena Business Park, LLC	Executed at:
/s/Donald Lam	Executed on: 1/24/06
Name Printed: Donald Lam	By Lessee: VIASPACE, Inc. a Nevada Corporation
Title: Managing Member	/s/ CARL KUKKONEN
Address: 2500 East Foothill Blvd. #509	Printed Name: Carl Kukkonen
Pasadena, CA 91107	Title: Chief Executive Officer
Telephone/Facsimile: 626-304-0310/626-304-0315	Lessee’s Broker:
	NAI Capital Commercial
	Attn: Gray DeFevere
	16001 Ventura Boulevard, Suite #200
	Encino, CA 91436

FIRST ADDENDUM TO LEASE

This First Addendum to Lease (“Addendum”) dated January 10, 2006, shall be attached to and made a part of that certain Lease dated January 10, 2006 (“Lease”), by and between Pasadena Business Park, LLC. (“Lessor”), and VIASPACE Inc., a Nevada Corporation (“Lessee”) for 171 North Altadena Drive, Suite 101 (Premises) consisting approximately 5,880 rentable square feet.

The terms and conditions of this Addendum shall amend and modify said Lease thereto only to the extent included herein. In the event that the terms and conditions of this Addendum should conflict with the Lease, the terms of this Addendum shall prevail.

51.	Commencement Date: On the date when the Premises are substantially completed and ready for occupancy. Lessor anticipates the completion to be no more than ninety (90) days after the Lease has been fully executed by all parties and all permits related to Tenant Improvement are signed off by the City of Pasadena.
52.	Tenant Improvement:

a. Lessor, at Lessor’s sole cost and expense to build out premises per a mutually agreeable space “Floorplan” (If separate A/C require for server room, it would be at Lessee’s cost)

i.	Repaint entire suite with building standard paint
ii.	Recarpet entire suite with building standard carpet & VCT tile in the kitchen and 2 laboratories
iii.	Exterior/interior chainlink fences by the south windows are to be removed upon commencement.
iv.	Tenant Improvement to include an exterior vent to meet applicable codes.

53. Monthly Rent:

a.	Month 1 = $10,584.00
b.	Month 2-7 = $5,292.00
c.	Month 8 – 12 = $10,584.00
d.	Month 13 – 24 = $10,901.52
e.	Month 25 – 36 = $11,228.57
f.	Month 37 – 48 = $11,565.42
g.	Month 49 — 60 = $11,912.39
h.	Month 61 – 63 = $12,269.76

54.	Non-Smoking: Lessee is aware that the Premises is designated as a “Non-Smoking” building. All employees and clientele shall smoke outside the Building in Lessor’s designated smoking area.
55.	Options to Extend: Lessee shall have One (1) Five (5) year option to extend the initials lease term. Lessee shall provide no less than four (4) months prior written notice. The rent shall be at then prevailing market rate.
56.	Termination Option: Lessee shall have the right to terminate the Lease at the expiration of the 39th month of the lease term by first providing Lessor at least nine (9) months prior written notice of its intent to exercise such Termination Option. In the event Lessee exercise such option, then Lessee will pay to Lessor all unamortized tenant improvement costs, leasing commissions, 3 months rent equals to $31,752.00.
57.	Parking: Lessee shall have the right but not obligated to Ten (10) to Fifteen (15) non-reserve parking spaces in Nina Street parking structure at $50.00 per month per space charge throughout the initial term of this lease.
58.	Signage: Each sign will be $0.10 per rentable square foot additional to rent and signage and installation shall be provided by Lessee. Design on signage design must have Lessor’s consent prior apply with the City of Pasadena. Lessor must receive copy of written approval of the signage from City of Pasadena before signage installation.
59.	Janitorial Service: Lessor, at Lessor’s sole cost and expense will provide janitorial service 5 days a week. Lessor will also provide janitorial cleaning for kitchen counter, sink (no dishes) and appliance surface cleaning (no inside appliances cleaning).
60.	Tenant Cabling Costs: Lessee shall provide Lessee’s own cabling, server room fit and finish.
61.	Option to Expand: Lessee shall have the right of first refusal on space adjacent to Premises.
62.	Assignment & Subletting: Lessee shall have the right to all or any part of the Premises subject to Lessor’s approval, which approval shall not be withheld, delayed, or unreasonably conditioned. Any “Net profits”, which term shall be defined in the Lease and shall be split with Lessor on a fifty/fifty (50%/50%) basis.
63.	No Verbal Promises: No verbal promises have been made other than those expressly stated in the Lease or Lease Addendum

64.	Operating Expenses: See attached actual expenses for 2004 and projected for 2005. Year of 2006 is not available.
65.	Non-Emergency access: Lessor will provide 24 hour notice to Lessee for non-emergency access to the Premises.
66.	Paragraph 4.2(c)(vi): Lessor will not charge Lessee any other operating expenses related cost that are not charged to other Lessee in the Building.
67.	Paragraph 6.4: Lessor will provide 24 hours advance notice on non-emergency repair to the suite.
68.	Paragraph 8.8: The following sentence is to be added to the end of paragraph 8.8: “Except any Latent Defect know to Lessor.”
69.	Paragraph 13.2: Lessor will insert the following clause “within the time periods provided in Paragraph 13.1(d)” after the word “notice” and before “or” on line 1.
70.	Paragraph 20: Lessee will insert the following clause “and the proceeds of any insurance” after the work of “Project” on line 2.
71.	Access: Lessee shall be permitted access to the building and premises twenty-four (24) hours per day, three hundred sixty five (365) days per year.

Lessor: Pasadena Business Park, LLC

Donald Lam – Manager Member	Date
Lessee: VIASPACE Inc.
Carl Kukkonen – Chief Executive Officer	Date

RULES AND REGULATIONS FOR STANDARD OFFICE LEASE

Dated: January 10, 2006

By and Between: Pasadena Business Park, LLC and VIASPACE Technologies, Inc, a
                    Nevada Corporation

GENERAL RULES

1.	Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways, and stairways.
2.	Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety and reputation of the Project and its occupants.
3.	Lessee shall not make or permit any noise or odors that annoy or interfere with other Lessees or persons having business within the Project.
4.	Lessee shall not keep animals or birds within the Project, and shall not bring bicycles, motorcycles or other vehicles into area not designated as authorized for same.
5.	Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose.
6.	Lessee shall not alter any lock or install new or additional locks or bolts.
7.	Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein.
8.	Lessee shall not deface the walls, partitions or other surfaces of the Premises or Project.
9.	Lessee shall not suffer or permit anything in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Project.
10.	Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor’s knowledge and consent, and subject to such reasonable limitations, techniques, and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity.
11.	Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor.
12.	Lessor reserves the right to close and lock the Building on Saturdays, Sundays and Building Holidays, and on other days between the hours of 6:00 pm and 8:00 am.
13.	Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost.
14.	No window coverings, shades or awnings shall be installed by Lessee.
15.	No Lessee, employee or invitee shall go upon the roof of the Building.
16.	Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas.
17.	Lessee shall not use any method of heating or air conditioning other than as provided by Lessor and the portable unit in the Computer Room.
18.	Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor’s written consent
19.	The Premises shall not be used for lodging or manufacturing, cooking, or food preparation.
20.	Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency.
21.	Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee.
22.	Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required.
23.	Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Project and its occupants. Lessee agrees to abide by these and such rules and regulations.
24.	Lessee is aware that the Premises are designated as a “Non-Smoking” building. All employees and clientele shall smoke outside the building in Lessor’s designated smoking area.

PARKING RULES

1.	Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called ‘Permitted Size Vehicles”. Vehicles other than Permitted Size Vehicles are herein referred to as “Oversized Vehicles”.
2.	Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee’s employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities.
3.	Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder’s parking privileges. Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices.
4.	Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and /or agreements.

5.	Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent offsite locations(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws and ordinances and regulations.
6.	Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking.
7.	Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area.
8.	Validation, if established, will be permissible only by such method or methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking.
9.	The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited.
10.	Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements.
11.	Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking areas.
12.	Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby.
13.	Overnight parking is not permitted without Lessor’s written consent.

LESSOR	LESSEE
Agreed	Agreed
Dated	Dated

SIDE LETTER

MONUMENT SINAGE:

Tenant shall have the right to select the Monument Signage (sign) identification for VIASPACE from two (2) basic scenarios.

1] No Cost to Tenant.

i.	Landlord and Tenant have agreed upon the ‘site containing the Fire Department Stand Pipe’ (site).
ii.	Landlord will remove the ‘tree’ presently in the site and replace with a palm tree similar to those presently in Landlords adjacent building.
iii.	Within said site, Landlord and Tenant have agreed that Tenant may have their sign within the boundaries of said site and within the rules as given and approved by the City of Pasadena.
iv.	Landlord shall have the right, but not the obligation, to offer multiple tenants Monument Signage”, to no more than three other tenants (total of 4). If Landlord elects to exercise this option, tenants will be charge for their pro-rata share of the signage and installation.
v.	VIASPACE would have the 1st choice of their signage placement on the monument sign and VIASPACE will have the right but not obligated to have their sign twice as big as the other tenants.

2] Cost to Tenant.

i.	Landlord and Tenant have mutually agreed Tenant shall have the right, but not the obligation, to elect to place their monument sign at the ‘ site in front of the Building, in the planter opposite the stairwell within the lobby of the Building” (site) as the location for tenant’s sign.
ii.	Landlord and Tenant have agreed the cost shall be consistent with paragraph 58 of the Addendum.

Design on signage design must have Lessor’s consent prior apply with the City of Pasadena.

Lessor must receive copy of written approval of the signage from City of Pasadena before signage installation.

Lessor: Pasadena Business Park, LLC	Lessee: VIASPACE, Inc. a
	Nevada corporation

By:		By:
Title:	Manager Member	Title:	Chief Executive Officer
Date:		Date:

Initial                    
                    

EX-31.1

Exhibit 31.1

VIASPACE INC.
Certification of Chief Executive Officer Pursuant to Section 302 to the Sarbanes-Oxley Act of 2002

I, Carl Kukkonen, President and Chief Executive Officer of VIASPACE Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-QSB of VIASPACE Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case o an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2006	/s/ CARL KUKKONEN
	Carl Kukkonen
	Chief Executive Officer

EX-31.2

Exhibit 31.2

VIASPACE INC.
Certification of Chief Financial Officer Pursuant to Section 302 to the Sarbanes-Oxley Act of 2002

I, Stephen J. Muzi, Chief Financial Officer of VIASPACE Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-QSB of VIASPACE Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case o an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2006	/s/ STEPHEN J. MUZI
	Stephen J. Muzi
	Chief Financial Officer

EX-32.1

Exhibit 32.1

VIASPACE INC.
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United States Code), each of the undersigned officers of VIASPACE Inc., (the “Company”), does hereby certify with respect to the Quarterly Report of the Company on Form 10-QSB for the period ending June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), to the best of the undersigned’s knowledge that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 11, 2006	/s/ CARL KUKKONEN
	Carl Kukkonen
	Chief Executive Officer
Date: August 11, 2006	/s/ STEPHEN J. MUZI
	Stephen J. Muzi
	Chief Financial Officer