**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**Form
      10-Q**




**x**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the Quarterly Period Ended September 30, 2007****or****o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the Transition Period From
             
to**






**Commission
      File Number 333-131857**




**LIGHTSPACE
      CORPORATION**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            
            **04-3572975**(State
                or other jurisdiction of incorporation or organization)
            
            (IRS
                Employer Identification No.)**529
                Main Street, Ste 330, Boston, MA**
            
            **02129**(Address
                of principal executive offices)
            
            (Zip
                Code)




Registrant’s
      telephone number, including area code: **(617)
      868-1700**


(Former
      name, former address and former fiscal year, if changed since last report):
      Not
      Applicable




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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
                accelerated filer
            o
            Accelerated
                filer
            
            o
            
            Non-accelerated
                filer
            
            x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x




Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.




**Class**
            
            **Outstanding
                at October 22, 2007**Common
                Stock, par value $0.0001
            
            15,282,495
                shares







**LIGHTSPACE
      CORPORATION**


**FORM
      10 - Q**


**FOR
      THE THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2007**


**INDEX**








**PAGE****PART
              I -
              FINANCIAL INFORMATION**Item
                1 - Unaudited Consolidated Financial StatementsConsolidated
                Statements of Financial Position as of September 30, 2007 and December
                31,
                2006
            3Consolidated
                Statements of Operations for the Three and Nine MonthsEnded
                September 30, 2007 and 2006
            4Consolidated
                Statement of Changes in Stockholders’ Equity for the Year EndedDecember
                31, 2006 and the for Nine Months Ended September 30, 2007
            5Consolidated
                Statements of Cash Flows for the Nine Months Ended September 30,
                2007 and
                2006
            6Notes
                to Unaudited Consolidated Financial Statements
            7Item
                2 - Management's Discussion and Analysis of Financial Condition and
                Results of Operations
            16Item
                3 -Quantitative
                and Qualitative Disclosures about Market Risk
            23Item
                4 - Controls and Procedures
            24**PART
                II - OTHER INFORMATION**Item
                1 - Legal Proceedings
            25Item
                2 - Unregistered Sales of Equity Securities and Use of
                Proceeds
            25Item
                3 - Defaults upon Senior Securities
            25Item
                4 - Submission of Matters to a Vote of Security Holders
            25Item
                5 - Other Information
            26Item
                6 - Exhibits
            26Signatures
            27











**PART
      I - FINANCIAL INFORMATION**





Item
      1 - Consolidated Financial Statements


**LIGHTSPACE
                  CORPORATION****CONSOLIDATED
                  STATEMENTS OF FINANCIAL POSITION****September
                  30,**
              
              **December
                  31,****2007**
              
              **2006****(unaudited)**
              
              **(audited)****ASSETS**Current
                  AssetsCash
                  and cash equivalents
              
              $
              1,189,465
              
              $
              879,987Accounts
                  receivable
              
              
              118,342
              
              
              52,678Inventory
              
              
              629,019
              
              
              354,234Other
                  current assets
              
              
              9,703
              
              
              4,250Total
                  current assets
              
              
              1,946,529
              
              
              1,291,149Property
                  and Equipment - Net
              
              
              158,759
              
              
              82,298Other
                  assets
              
              
              161,414
              
              
              196,822Total
                  Assets
              
              $
              2,266,702
              
              $
              1,570,269**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  LiabilitiesNotes
                  payable
              
              $
              237,381
              
              $
              237,381Accounts
                  payable
              
              
              369,689
              
              
              695,852Accrued
                  interest
              
              
              46,951
              
              
              12,955Accrued
                  expenses
              
              
              377,983
              
              
              200,709Deferred
                  revenue
              
              
              28,094
              
              
              126,363Total
                  current liabilities
              
              
              1,060,098
              
              
              1,273,260Long-term
                  Debt
              
              
              950,000
              
              
              -Stockholders'
                  EquityCommon
                  stock, $0.0001 par value; authorized 75,000,000 shares;15,282,495
                  and 10,593,111 shares issued and outstandingat
                  September 30, 2007 and December 31, 2006, respectively
              
              
              1,528
              
              
              1,059Additional
                  paid-in capital
              
              
              14,175,044
              
              
              10,607,585Retained
                  earning (deficit)
              
              
              (13,919,967
              )
              
              (10,311,635
              )Total
                  stockholders' equity
              
              
              256,605
              
              
              297,009Total
                  Liabilities and Stockholders' Equity
              
              $
              2,266,702
              
              $
              1,570,269




See
      notes
      to unaudited consolidated financial statements


3


**LIGHTSPACE
                  CORPORATION****CONSOLIDATED
                  STATEMENTS OF OPERATIONS (unaudited)****Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**RevenuesProduct
                  sales
              
              $
              313,432
              
              $
              191,371
              
              $
              1,114,566
              
              $
              406,978Other
              
              
              29,367
              
              
              6,964
              
              
              68,887
              
              
              19,859Total
                  revenues
              
              
              342,799
              
              
              198,335
              
              
              1,183,453
              
              
              426,837Product
                  Cost
              
              
              324,973
              
              
              228,647
              
              
              949,844
              
              
              578,051Gross
                  Margin
              
              
              17,826
              
              
              (30,312
              )
              
              233,609
              
              
              (151,214
              )Operating
                  ExpensesResearch
                  and development
              
              
              280,645
              
              
              229,927
              
              
              2,072,383
              
              
              726,709Selling
                  and marketing
              
              
              283,256
              
              
              250,797
              
              
              942,680
              
              
              742,019General
                  and administrative
              
              
              315,861
              
              
              122,664
              
              
              790,247
              
              
              576,581Total
                  operating expenses
              
              
              879,762
              
              
              603,388
              
              
              3,805,310
              
              
              2,045,309Operating
                  Loss
              
              
              (861,936
              )
              
              (633,700
              )
              
              (3,571,701
              )
              
              (2,196,523
              )Other
                  Income (Expense)Net
                  gain on debt and equity conversion
              
              
              -
              
              
              -
              
              
              -
              
              
              402,298Interest
                  expense - net
              
              
              (15,257
              )
              
              (40,562
              )
              
              (36,631
              )
              
              (266,390
              )Total
                  other income (expense)
              
              
              (15,257
              )
              
              (40,562
              )
              
              (36,631
              )
              
              135,908Loss
                  Before Provision For Income Taxes
              
              
              (877,193
              )
              
              (674,262
              )
              
              (3,608,332
              )
              
              (2,060,615
              )Provision
                  For Income Taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  Loss
              
              $
              (877,193
              )
              $
              (674,262
              )
              $
              (3,608,332
              )
              $
              (2,060,615
              )Basic
                  and Diluted Net Loss Per Share
              
              $
              (0.06
              )
              $
              (0.12
              )
              $
              (0.27
              )
              $
              (0.56
              )Weighted
                  Average Common Shares Outstanding
              
              
              15,282,495
              
              
              5,793,111
              
              
              13,198,324
              
              
              3,652,698
  See
        notes
        to unaudited consolidated financial statements





4


**LIGHTSPACE
                  CORPORATION****CONSOLIDATED
                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                  (unaudited)****Series
                  A Convertible****Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **Additional**
              
              
              **Retained**
              
              
              **Stockholders'****Shares**
              
              
              
              **Shares**
              
              
              
              **Paid-In**
              
              
              **Earnings**
              
              
              **Equity****Issued**
              
              **Amount**
              
              **Issued**
              
              **Amount**
              
              **Capital**
              
              
              **(Deficit)**
              
              
              **(Deficit)**Balance
                  December 31, 2005
              
              
              133,732
              
              
              13
              
              
              977,182
              
              
              98
              
              
              2,092,612
              
              
              
              (7,603,215
              )
              
              
              (5,510,492
              )Conversion
                  of notes payable
              
              
              
              
              
              
              
              
              1,544,865
              
              
              154
              
              
              2,724,622
              
              
              
              
              
              
              
              2,724,776Conversion
                  of senior notes
              
              
              
              
              
              
              
              
              3,110,585
              
              
              311
              
              
              2,488,160
              
              
              
              
              
              
              
              2,488,471Conversion
                  of preferred stock
              
              
              (133,732
              )
              
              (13
              )
              
              160,479
              
              
              16
              
              
              85,586
              
              
              
              
              
              
              
              85,589Issuance
                  of common warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              264,345
              
              
              
              
              
              
              
              264,345Expenses
                  of private placement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (499,595
              )
              
              
              
              
              
              
              (499,595
              )Public
                  sale of equity securities
              
              
              
              
              4,800,000
              
              
              480
              
              
              3,839,520
              
              
              
              
              
              
              
              3,840,000Expenses
                  of public offering
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (468,157
              )
              
              
              
              
              
              
              (468,157
              )Stock
                  option compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              80,492
              
              
              
              
              
              
              
              80,492Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,708,420
              )
              
              
              (2,708,420
              )Balance
                  December 31, 2006
              
              
              -
              
              $
              -
              
              
              10,593,111
              
              $
              1,059
              
              $
              10,607,585
              
              
              $
              (10,311,635
              )
              
              $
              297,009Stock
                  option compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              127,927
              
              
              
              
              
              
              
              127,927Private
                  placement of equity securities
              
              
              
              
              4,689,384
              
              $
              469
              
              $
              3,751,038
              
              
              
              
              
              
              
              3,751,507Expenses
                  of private placement
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (311,507
              )
              
              
              
              
              
              
              (311,507
              )Net
                  loss for nine months
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (3,608,332
              )
              
              
              (3,608,332
              )Balance
                  September 30, 2007
              
              
              -
              
              $
              -
              
              
              15,282,495
              
              $
              1,528
              
              $
              14,175,044
              
              
              $
              (13,919,967
              )
              
              $
              256,605




See
      notes
      to unaudited consolidated financial statements


5


**LIGHTSPACE
                  CORPORATION****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS (unaudited)****Nine
                  Months Ended September 30,****2007**
              
              **2006**Cash
                  Flows (Uses) from Operating Activities:Net
                  loss
              
              $
              (3,608,332
              )
              $
              (2,060,615
              )Adjustments
                  to reconcile net loss to cash usedin
                  operating activities:Depreciation
                  and amortization
              
              
              30,600
              
              
              25,254Amortization
                  of debt discount and expense
              
              
              -
              
              
              19,671Amortization
                  of fair value of stock warrants
              
              
              35,415
              
              
              -Debt
                  and preferred stock conversion adjustments:Fair
                  value of common stock warrants issued
              
              
              -
              
              
              350,018Fair
                  value of common stock issued
              
              
              -
              
              
              264,345Non-cash
                  gain on debt conversion
              
              
              -
              
              
              (890,765
              )Provision
                  for stock option compensation
              
              
              127,927
              
              
              40,246Emagipix
                  acquisition
              
              
              950,000
              
              
              -Other
                  changes in assets and liabilities:Accounts
                  receivable
              
              
              (65,664
              )
              
              (16,399
              )Inventory
              
              
              (274,792
              )
              
              (121,577
              )Other
                  assets
              
              
              (5,453
              )
              
              (291,731
              )Accounts
                  payable and accrued expenses
              
              
              (114,893
              )
              
              816,251Deferred
                  revenue
              
              
              (98,269
              )
              
              217,586Net
                  cash used in operating activities
              
              
              (3,023,461
              )
              
              (1,647,716
              )Cash
                  Flows (Uses) From Investing Activities:Purchases
                  of property and equipment
              
              
              (107,061
              )
              
              (38,872
              )Net
                  cash used in investing activities
              
              
              (107,061
              )
              
              (38,872
              )Cash
                  Flows (Uses) From Financing Activities:Proceeds
                  from notes payable
              
              
              -
              
              
              2,067,000Common
                  stock issuance
              
              
              3,751,507
              
              
              -Stock
                  issuance costs
              
              
              (311,507
              )
              
              (499,595
              )Net
                  cash provided from financing activities
              
              
              3,440,000
              
              
              1,567,405Net
                  Increase (Decrease) in Cash and Cash Equivalents
              
              
              309,478
              
              
              (119,183
              )Cash
                  and Cash Equivalents - beginning of period
              
              
              879,987
              
              
              123,951Cash
                  and Cash Equivalents - end of period
              
              $
              1,189,465
              
              $
              4,768Non-cash
                  financing activitiesIssuance
                  of note payable
              
              $
              950,000
              
              $
              -


See
        notes
        to unaudited consolidated financial statements




6
 **LIGHTSPACE
            CORPORATION**
 **NOTES
            TO** **UNAUDITED
            CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2007**





**1.
      NATURE OF THE BUSINESS AND OPERATIONS**





Lightspace
      Corporation (the “Company”, “Lightspace”, “we”, “our”, “us”), incorporated in
      August 2001 as a Delaware corporation, provides interactive lighting
      entertainment products to numerous industries including retail stores, family
      entertainment centers, theme parks, fashion shows, nightclubs, special events,
      stage lighting & sound, health clubs and architectural lighting and
      design.





We
      are
      subject to certain risks common to technology-based companies in similar stages
      of development. Principal risks include uncertainty of growth in market
      acceptance for our products; dependence on advances in interactive digital
      environments; history of losses since inception; ability to remain competitive
      in response to new technologies; costs to defend, as well as risks of losing,
      patent and intellectual property rights; reliance on limited number of
      suppliers; reliance on outsourced manufacture of our products for quality
      control and product availability; ability to increase production capacity to
      meet demand for the our products; concentration of our operations in a limited
      number of facilities; uncertainty of demand for our products in certain markets;
      ability to manage growth effectively; dependence on key members of our
      management; limited experience in conducting operations internationally; and
      ability to obtain adequate capital to fund future operations.




We
      have
      incurred net operating
      losses and negative operating cash flows since inception. As of September 30,
      2007, we had an accumulated retained earnings deficit of $13,919,967. We have
      funded our operations through September 30, 2007 through the issuance of private
      and public placements of equity securities, borrowings from stockholders and
      others, and sales of Lightspace products. Our long-term success is dependent
      upon obtaining sufficient capital to fund operations and product development,
      bringing such products to the worldwide market, and obtaining sufficient sales
      volume to be profitable.





**2.
      BASIS OF PRESENTATION**





The
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates the realization of assets and the satisfaction
      of liabilities in the ordinary course of business. We have incurred a net loss
      from operations of $877,193 and $3,608,332 for the three and nine month period
      ended September 30, 2007. Further, we have accumulated net losses from
      operations of $13,919,967 at that date. These factors, among others, indicate
      that there is substantial uncertainty that we will continue as a going
      concern. The consolidated financial statements do not include any adjustments
      related to the recovery of assets and classification of liabilities that might
      be necessary should we be unable to continue as a going concern. The
      consolidated financial statements at September 30, 2007 include the accounts
      of
      Lightspace Emagipix Corporation, a wholly-owned subsidiary, organized as of
      March 29, 2007.




The
      consolidated statement of financial position as of September 30, 2007, the
      consolidated statements of operations and cash flows for the three months and/or
      nine months ended September 30, 2007 and 2006, and the consolidated statement
      of
      changes in stockholders’ equity for the period from January 1, 2007 through
      September 30, 2007 are unaudited. These unaudited interim consolidated financial
      statements have been prepared in accordance with accounting principles generally
      accepted in the United States of America and in accordance with the instructions
      for Form 10-Q. Such consolidated financial statements do not include all of
      the
      information and disclosures required for audited consolidated financial
      statements. In the opinion of our management, the unaudited interim consolidated
      financial statements have been prepared on the same basis as our audited
      consolidated financial statements and include all adjustments, consisting of
      normal recurring adjustments, necessary for the fair presentation of our
      financial position, results of operations, cash flows, and changes in
      stockholders’ equity for the periods presented. The results of operations for
      the interim periods are not necessarily indicative of the results that can
      be
      expected for any other interim period or any fiscal year.




7
 **LIGHTSPACE
            CORPORATION**
 **NOTES
            TO** **UNAUDITED
            CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2007**







**3.
      RECOGNITION OF SALES**





We
      recognize revenue from the sale of our entertainment systems when all of the
      following conditions have been met: (1) evidence exists of an arrangement
      with the customer, typically consisting of a purchase order or contract;
      (2) our products have been delivered and risk of loss has passed to the
      customer; (3) we have completed all of the necessary terms of the contract
      possibly including but not limited to, installation of the product and training;
      (4) the amount of revenue to which we are entitled is fixed or
      determinable; and (5) we believe it is probable that we will be able to
      collect the amount due from the customer. To the extent that one or more of
      these conditions has not been satisfied, we defer recognition of revenue.
      Revenue from maintenance contracts is recorded on a straight-line basis over
      the
      term of the contract. An allowance for uncollectible receivables is established
      by a charge to operations, when in our opinion, it is probable that the amount
      due will not be collected.





**4.
      TECHNOLOGY ACQUISITION AND PRIVATE PLACEMENT OF SECURITIES**





On
      March 29, 2007, Lightspace Emagipix Corporation (“LEC”), a newly formed
      wholly-owned subsidiary of Lightspace Corporation, entered into an agreement
      with Illumination Design Works, Inc. to acquire the assets related to the in
      process development of its emagipix technology, an interactive lighting
      technology that utilizes electroluminescent sheets. The purchase price for
      the
      emagipix technology consisted of an initial cash payment of $45,000 upon signing
      the agreement and a cash payment of $255,000 and the issuance of a $950,000
      convertible term secured non-recourse note to Illumination Design Works, Inc.
      upon the closing of the technology purchase.





On
      April 30, 2007, LEC completed the acquisition of the emagipix technology. In
      connection with the acquisition, the developer of the emagipix technology (a
      former officer and co-founder of Lightspace Corporation and the principal owner
      of Illumination Design Works, Inc.), re-commenced employment with
      Lightspace.





The
      $950,000 convertible term secured non-recourse note bears interest a 5% per
      annum, payable yearly, and is due and payable on April 30, 2011. The note is
      secured by a pledge of 67% the stock of LEC. The principal of the note is
      convertible at any time up and until April 30, 2011, at the option of the
      holder, into the common stock of Lightspace Corporation at a conversion price
      of
      $0.80 per share. Upon the occurrence of certain defined events of default by
      the
      noteholder, Lightspace has the right to convert the note to common stock at
      the
      lower of the conversion price of $0.80 or current market price of the common
      stock.





We
      accounted for the acquisition of the emagipix technology as the acquisition
      of
      in process research and development and recorded a charge to operations in
      the
      June 30, 2007 quarter of $1,250,000 for the purchase price and $56,612 in
      related legal expenses.





On
      April
      30, 2007 we closed a private placement of our equity units. We sold 586,173
      units at the offering price of $6.40 per unit, resulting in aggregate proceeds
      of $3,751,507. After expenses of the offering of $311,507, the net proceeds
      were
      approximately $3,440,000. Each equity unit consists of: (1) eight shares of
      common stock; (2) eight warrants to purchase a total of eight shares of
      common stock at an exercise price of $1.00 per warrant; (3) two warrants to
      purchase a total of two shares of common stock at an exercise price of $1.25
      per
      warrant; and (4) two warrants to purchase a total of two shares of common
      stock at an exercise price of $1.63 per warrant. The sale of 586,173 units
      resulted in the issuance of: (1) 4,689,384 shares of common stock; (2) 4,689,384
      warrants to purchase a total of 4,689,384 shares of common stock at an exercise
      price of $1.00 per warrant; (3) 1,172,346 warrants to purchase a total of
      1,172,346 shares of common stock at an exercise price of $1.25 per warrant;
      and
      (4) 1,172,346 warrants to purchase a total of 1,172,346 shares of common stock
      at an exercise price of $1.63 per warrant. The warrants are exercisable at
      the
      option of the holder at any time up until April 30, 2012, at which date the
      warrants expire. In the event of a division of our common stock, the warrants
      will be adjusted proportionately. The warrants have been classified permanently
      within stockholders’ equity, as upon exercise, the warrant holder can only
      receive the specified number of common shares.




8
 **LIGHTSPACE
            CORPORATION**
 **NOTES
            TO** **UNAUDITED
            CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2007**




**4.
      TECHNOLOGY ACQUISITION AND PRIVATE PLACEMENT OF SECURITIES -
      Continued**





In
      connection with the sale of the equity units, we paid Griffin Securities, Inc.,
      the financial advisor for the private placement, a fee in the amount of $187,575
      and issued to Griffin Securities a purchase warrant exercisable for 58,617
      units, in the same form sold in the private placement, at an exercise price
      of
      $6.40 per unit.





We
      used a
      portion of the net proceeds from the private placement to complete the
      acquisition of the emagipix technology by the payment of the balance of the
      cash
      purchase price of $255,000. The balance of the net proceeds will be used for
      general working capital purposes, including payment of the expenses of
      registering the private placement units for resale.





As
      a
      result of the private placement, issued and outstanding shares of our common
      stock at September 30, 2007 increased to 15,282,495 from 10,593,111 at December
      31, 2006. Additionally, issued and outstanding common stock warrants at
      September 30, 2007 were 23,634,205, exercisable at prices that range from $0.80
      to $7.50. At December 31, 2006, the Company had issued and outstanding common
      stock warrants in the aggregate amount of 15,427,789, exercisable at prices
      that
      range from $0.80 to $7.50.





In
      addition, as a result of the private placement, we entered into a Registration
      Rights Agreement with the purchasers of the units, whereby we agreed to file
      a
      registration statement, within 45 days of the closing, to register for resale
      the shares of common stock, warrants and shares of common stock issuable upon
      exercise of the warrants, included in the units issued in the private placement.





**5.
      LOSS PER SHARE**





Basic
      and diluted net loss per common share are calculated by dividing the net loss
      by
      the weighted average number of common shares outstanding during the period.
      Diluted net loss per share is the same as basic net loss per share, since the
      effects of potentially dilutive securities are excluded from the calculation
      for
      all periods presented as their inclusion would be anti-dilutive. Dilutive
      securities consist of common stock options, common stock warrants, preferred
      stock warrants, convertible preferred stock and convertible debt.





The
      following potentially dilutive securities were excluded from the calculation
      of
      diluted loss per share because their inclusion would be
      anti-dilutive:


**Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Common
                  stock options
              
              
              5,158,610
              
              
              1,794,890
              
              
              5,158,610
              
              
              72,080Common
                  stock warrants
              
              
              23,634,205
              
              
              6,187,789
              
              
              23,634,205
              
              
              99,938Preferred
                  stock warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              16,390Convertible
                  preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              53,493Convertible
                  debt
              
              
              1,187,500
              
              
              -
              
              
              1,187,500
              
              
              134,497Total
              
              
              29,980,315
              
              
              7,982,679
              
              
              29,980,315
              
              
              376,398





**6.
      STOCK OPTION BASED COMPENSATION**





Statement
      of Financial Accounting Standards No. 123(R), *Share-Based
      Payment,* addresses
      accounting for stock-based compensation arrangements, including stock options
      and shares issued to employees and directors under various stock-based
      compensation arrangements. This statement requires that we use the fair value
      method, rather than the intrinsic-value method, to determine compensation
      expense for all stock-based arrangements. Under the fair value method,
      stock-based compensation expense is determined at the measurement date, which
      is
      generally the date of grant, as the aggregate amount by which the expected
      fair
      value of the equity security at the date of acquisition exceeds the exercise
      price to be paid. The resulting


9
 **LIGHTSPACE
            CORPORATION**
 **NOTES
            TO** **UNAUDITED
            CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2007**





**6** **.
      STOCK OPTION BASED COMPENSATION - Continued**





compensation
      expense, if any, is recognized for financial reporting over the term of vesting
      or performance. This statement was first effective for us on January 1, 2006
      for
      all prospective stock option and share grants of stock-based compensation awards
      and modifications to all prior grants, and will have the effect of increasing
      our compensation costs recognized in operations from historical levels for
      all
      stock-based compensation awards and modifications of prior awards
      granted.





In
      June 2006, the our stockholders and Board of Directors approved adoption of
      the 2006 Stock Incentive Plan (the “2006 Stock Plan”), pursuant to which up to
      2,118,622 incentive stock options and/or nonqualified stock options may be
      granted to directors, officers, key employees and consultants. In August 2007,
      the Board of Directors approved adoption of the 2007 Stock Incentive Plan (the
      “2007 Stock Plan”), pursuant to which up to 4,000,000 incentive stock options
      and/or nonqualified stock options may be granted to directors, officers, key
      employees and consultants. In 2006 and the nine months ended September 30,
      2007,
      under the 2006 and 2007 Stock Plans, we granted to directors, officers and
      key
      employees 1,836,810
      and 4,075,856 options
      respectively, to purchase 1,836,810 and 4,075,856 shares of common stock at
      a
      weighted average exercise price of $0.80 and $1.06 per option. The options
      vest
      ratably over a three year period and expire in ten years. Under the provisions
      of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment,
      we determined the total stock-based compensation expense for these option grants
      was approximately $1,936,000 ,
      utilizing the following assumptions: volatility - 53% thru 57%; estimated option
      exercise period - 2 to 3 years; risk free interest rate -4.16% thru 5.17%;
      and
      expected total forfeitures related to these option grant of 6.9%.




The
      provision for stock-based compensation for common stock options granted under
      the 2006 and 2007 Stock Plans for the nine month period ended September 30,
      2007
      was $127,927. We did not record a tax benefit related to the provision for
      stock-based compensation due to our net operating loss carryforwards;
      accordingly, the net loss for the nine month period ended September 30, 2007
      was
      increased by $127,927. As of September 30, 2007, total unrecognized stock-based
      compensation expense related to the common stock option grants under the 2006
      Stock Plan expected to be charged to operations over the next three years is
      estimated to approximate $1,666,000.





For
      all
      periods prior to January 1, 2006, we accounted for stock-based compensation
      arrangements with employees and directors utilizing the intrinsic-value method.
      Under this method, stock-based compensation expense was determined at the
      measurement date, which again is generally the date of grant, as the aggregate
      amount by which the current market value of the equity security exceeds the
      exercise price to be paid. The resulting compensation expense, if any, was
      recognized for financial reporting over the term of vesting or performance.
      We
      have historically granted stock-based compensation awards to employees and
      directors at an exercise price equal to the current market value of our equity
      security at the date of grant. Accordingly, no compensation expense has been
      recognized or will be recognized in the financial statements for stock-based
      compensation arrangements with employees and directors for grants prior to
      January 1, 2006.





**7.
      INVENTORY**




At
      September 30, 2007 and December 31, 2006, inventory consisted of raw materials
      of $380,596 and $ 274,570 ,
      and
      finished products of $248,423 and $ 79,664 ,
      respectively. Included in raw materials at September 30, 2007 and December
      31,
      2006 are $214,418 and $202,810 of advance payments to suppliers for the purchase
      of component parts, respectively.




**8.
      COMMON STOCK**





On
      April 30, 2007 the our stockholders approved resolutions to increase the
      authorized shares of our $0.0001 par value common stock to 75,000,000 authorized
      shares from 30,000,000 authorized shares to provide for the issuance of the
      equity units in the private placement that closed as of April 30, 2007 and
      for




10
 **LIGHTSPACE
            CORPORATION**
 **NOTES
            TO** **UNAUDITED
            CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2007**






**8.
      COMMON STOCK - Continued**





other
      corporate purposes. The accompanying consolidated financial statements have
      been
      updated to reflect


this
      increase in authorized shares.





As
      a
      result of the private placement, issued and outstanding shares of our common
      stock at September 30, 2007 were 15,282,495 from 10,593,111 at December 31,
      2006. Additionally, issued and outstanding common stock warrants at September
      30, 2007 were 23,634,209, exercisable at prices that range from $0.80 to $7.50.
      This was an increase from 15,427,789 issued and outstanding common stock
      warrants on December 31, 2006.





**9.
      STOCK INCENTIVE PLANS**





In
      September 2005, our
      stockholders and Board of Directors approved the 2005 Stock Incentive Plan
      (the
“2005 Stock Plan”). The 2005 Plan provides that the Board of Directors may grant
      up to 72,080 incentive stock options and/or nonqualified stock options to
      directors, officers, key employees and consultants. The 2005 Stock Plan provides
      that the exercise price of each option must be at least equal to the fair market
      value of the common stock at the date such option is granted. Options expire
      in
      ten years or less from the date of grant and vest over a period not to exceed
      four years. At June 30, 2007, we have reserved 51,530 shares of common stock
      for
      issuance under the 2005 Stock Plan. Concurrent with the approval and adoption
      of
      the 2006 Stock Incentive Plan in June of 2006, no additional options can be
      granted under the 2005 Stock Plan.




In
      June 2006, our stockholders and Board of Directors approved adoption of the
      2006 Stock Incentive Plan (the “2006 Stock Plan”), pursuant to which up to
      2,118,622 incentive stock options and/or nonqualified stock options may be
      granted to directors, officers, key employees and consultants. The 2006 Stock
      Plan provides that the exercise price of each option must be at least equal
      to
      the fair market value of the common stock at the date such option is granted.
      Options expire in ten years or less from the date of grant and vest over a
      period not to exceed four years. As of September 30, 2007 we had reserved
      2,118,622 shares of common stock for issuance under the 2006 Stock
      Plan.





In
      August
      2007, our Board of Directors approved adoption of the 2007 Stock Incentive
      Plan
      (the “2007 Stock Plan”), pursuant to which up to 4,000,000 incentive stock
      options and/or nonqualified stock options may be granted to directors, officers,
      key employees and consultants. In 2007, under the 2007 Stock Plan, we granted
      to
      directors, officers and key employees 3,245,856 options to purchase 3,245,856
      shares of common stock at an exercise price of $1.10 per option. The options
      vest ratably over a three year period and expire in ten years. We have reserved
      4,000,000 shares of common stock for issuance under the 2007 Stock Plan.




11
 **LIGHTSPACE
            CORPORATION**
 **NOTES
            TO** **UNAUDITED
            CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2007**








**9.
      STOCK INCENTIVE PLANS - Continued**





Combined
      i nformation
      with respect to stock options issued under the 2005, 2006 and 2007 Stock Plans
      for the nine month period ended September 30, 2007 is summarized as
      follows:


**September
                  30, 2007****Weighted****Number
                  of**
              
              **Average****Shares**
              
              **Exercise
                  Price**Options
                  outstanding January 1, 2007
              
              
              1,820,490
              
              $
              0.80Options
                  granted
              
              
              4,075,856
              
              
              1.06Options
                  exercised
              
              
              -
              
              
              -Options
                  cancelled
              
              
              (737,736
              )
              
              (0.80
              )Options
                  outstanding September 30, 2007
              
              
              5,158,610
              
              $
              0.83Options
                  exercisable at September 30, 2007
              
              
              378,834
              
              $
              0.83Weighted
                  average fair value of 2007 options granted
              
              
              
              
              $
              0.38Weighted
                  average contractual life (years) options outstanding
              
              
              9
                  2/3Options
                  available for grant at September 30, 2007
              
              
              1,011,542




**10.
      STOCK WARRANTS**





Issued
      and outstanding warrants to purchase Lightspace
      common stock are as follows:


**Exercise**
              
              **September
                  30,**
              
              **December
                  31,****Type
                  of Warrant**
              
              **Date
                  Issued**
              
              **Price**
              
              **2007**
              
              **2006**$.80
                  Exchange warrant
              
              
              April
                  27, 2006
              
              $
              0.80
              
              
              361,252
              
              
              361,252$1.00
                  Exchange warrant
              
              
              April
                  27, 2006
              
              $
              1.00
              
              
              276,370
              
              
              276,370$3.00
                  Exchange warrant
              
              
              April
                  27, 2006
              
              $
              3.00
              
              
              649,892
              
              
              649,892$7.50
                  Exchange warrant
              
              
              April
                  27, 2006
              
              $
              7.50
              
              
              234,398
              
              
              234,398$0.80
                  Unit warrant
              
              
              April
                  30, 2007
              
              $
              0.80
              
              
              468,936
              
              
              -$0.96
                  Unit warrant
              
              
              November
                  2, 2006
              
              $
              0.96
              
              
              816,000
              
              
              816,000$1.00
                  Unit warrant
              
              
              2006
                  and April 30, 2007
              
              $
              1.00
              
              
              13,884,905
              
              
              8,726,585$1.25
                  Unit warrant
              
              
              2006
                  and April 30, 2007
              
              $
              1.25
              
              
              3,471,226
              
              
              2,181,646$1.63
                  Unit warrant
              
              
              2006
                  and April 30, 2007
              
              $
              1.63
              
              
              3,471,226
              
              
              2,181,646Total
                  common stock warrants outstanding
              
              
              
              
              23,634,205
              
              
              15,427,789





On
      April
      27, 2006 in connection with the conversion and exchange under the Securityholder
      Debt and Equity Conversion and Exchange Agreement, we issued 1,160,660 exchange
      warrants to purchase a total of 1,160,660 shares of common stock at exercise
      prices ranging from $1.00 to $7.50 per warrant. The exchange warrants are
      exercisable at the option of the holder at any time up until April 30, 2011,
      at
      which date the warrants expire. In the event of a division of our common stock,
      the warrants will be adjusted proportionately. The value of the warrants at
      April 27, 2006 was determined to be $138,449 under the fair value computation
      method utilizing a 4.89% risk free interest rate assumption, 59% volatility
      factor and an expected life of three years. The $138,449 has been charged to
      operations as debt conversion expense and as an increase to additional
      paid-in-capital.








Additionally,
      in connection with the securityholder conversion and exchange, $237,381 in
      principal amount of existing notes held by the former CEO were converted into
      a
      $237,381 contingent promissory note. We issued to the former CEO 361,252
      exchange warrants to purchase a total of 361,252 shares of common stock at
      an
      exercise price of $0.80 per warrant. The warrants expire on April 30, 2011,
      unless the terms for payment of the contingent promissory note are not met,
      in
      which case the warrants will expire on




12
 **LIGHTSPACE
            CORPORATION**
 **NOTES
            TO** **UNAUDITED
            CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2007**




**10.
      STOCK WARRANTS - Continued**





June
      30,
      2009. The value of the warrants at April 27, 2006 was determined to be $125,896
      under the fair value computation method utilizing a 4.89% risk free interest
      rate assumption, 59% volatility factor and an expected life of three years.
      The
      $125,896 has been classified as deferred financing costs, chargeable to
      operations as additional interest expense over three years, and as an increase
      to additional paid-in-capital. The exchange warrants have been classified
      permanently within stockholders’ equity, as upon exercise, the warrant holder
      can only receive the specified number of shares of common stock.





On
      May 3, 2006, we and noteholders holding $2,400,000 in principal amount of senior
      secured notes agreed to convert $2,488,471 of senior secured note principal
      and
      accrued interest, at a conversion price of $6.40 per unit, into 388,821 units
      plus fractional shares and warrants. The units that we issued to the senior
      secured note holders are comprised of: (1) 3,110,585 shares of common stock;
      (2)
      3,110,585 unit warrants to purchase a total of 3,110,585 shares of common stock
      at an exercise price of $1.00 per warrant; (3) 777,646 unit warrants to purchase
      a total of 777,646 shares of common stock at an exercise price of $1.25 per
      warrant; and (4) 777,646 unit warrants to purchase a total of 777,646 shares
      of
      common stock at an exercise price of $1.63 per warrant. The unit warrants are
      exercisable at the option of the holder at any time up until April 30, 2011,
      at
      which date the warrants expire. In the event of a division of our common stock,
      the warrants will be adjusted proportionately. No value has been assigned to
      the
      unit warrants issued in connection with the conversion. The unit warrants have
      been classified permanently within stockholders’ equity, as upon exercise, the
      warrant holder can only receive the specified number of shares of common
      stock.





On
      November 2, 2006 we closed the initial public offering period for the sale
      of
      our securities. We sold 600,000 units, the maximum allowed, at an offering
      price
      of $6.40 per unit, resulting in aggregate proceeds of $3,840,000. The sale
      of
      600,000 units, including warrants issued to the underwriter as compensation,
      resulted in the issuance of: (1) 4,800,000 shares of common stock; (2) 816,000
      unit warrants to purchase a total of 816,000 shares of common stock at an
      exercise price of $0.96 per warrant (pursuant to the unit warrants issued to
      the
      underwriter); (3) 5,616,000 unit warrants to purchase a total of 5,616,000
      shares of common stock at an exercise price of $1.00 per warrant; (4) 1,404,000
      unit warrants to purchase a total of 1,404,000 shares of common stock at an
      exercise price of $1.25 per warrant; and (5) 1,404,000 unit warrants to purchase
      a total of 1,404,000 shares of common stock at an exercise price of $1.63 per
      warrant. The
      unit warrants are exercisable at the option of the holder at any time up until
      April 30, 2011, at which date the warrants expire. In the event of a division
      of
      our common stock, the warrants will be adjusted proportionately. No value has
      been assigned to the unit warrants issued in connection with the sale of units.
      The unit warrants have been classified permanently within stockholders’ equity,
      as upon exercise, the warrant holder can only receive the specified number
      of
      shares of common stock.





On April
      30,
      2007 we closed the offering period for the private sale of equity units. We
      sold
      586,173 units at the offering price of $6.40 per unit, resulting in gross
      proceeds of $3,751,507. The sale of 586,173 units and the issuance to the
      financial advisor of a unit purchase warrant exercisable for 58,617 units
      identical to the units sold in the private placement resulted in the issuance
      of: (1) 4,689,384 shares of common stock; (2) 468,936 unit warrants to purchase
      a total of 468,936 shares of common stock at an exercise price of $0.80 per
      warrant (3) 5,158,320 unit warrants to purchase a total of 5,158,320 shares
      of
      common stock at an exercise price of $1.00 per warrant; (4) 1,289,580 unit
      warrants to purchase a total of 1,289,580 shares of common stock at an exercise
      price of $1.25 per warrant; and (5) 1,289,580 unit warrants to purchase a total
      of 1,289,580 shares of common stock at an exercise price of $1.63 per warrant.
      The unit warrants are exercisable at the option of the holder at any time up
      until April 30, 2012, at which date the warrants expire. In the event of a
      division of our common stock, the warrants will be adjusted proportionately.
      The





warrants
      have been classified permanently within stockholders’ equity, as upon exercise,
      the warrant holder can only receive the specified number of common shares.
      We
      had entered into a Registration Rights Agreement with the purchasers of the
      units, whereby we had agreed to file a registration statement, within 45 days
      of
      the closing, to register for resale the shares of common stock, warrants and
      shares of common





13
 **LIGHTSPACE
            CORPORATION**
 **NOTES
            TO** **UNAUDITED
            CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2007**






**10.
      STOCK WARRANTS - Continued**





stock
      issuable upon exercise of the unit warrants, included in the units issued in
      the
      private placement to investors and the financial advisor.





At
      September 30, 2007 and December 31, 2006, the weighted average exercise price
      of
      the common stock warrants outstanding was $1.24 and $1.30, respectively. At
      September 30, 2007, the common stock warrants had an average remaining life
      of
      approximately four years.


**11.
      INCOME TAXES**





We
      have
      recorded no provisions or benefits for income taxes for any period presented
      due
      to the net operating losses incurred and the uncertainty as to the recovery
      of
      such net operating losses and other deferred tax assets as a reduction of
      possible future taxable income, if any.





At
      September 30, 2007 and December 31, 2006, we had operating loss carryforwards
      of
      approximately $6,427,000 and $3,384,000, respectively, available to offset
      future taxable income for United States federal and state income tax purposes.
      At September 30, 2007 and December 31, 2006, approximately $4,231,000 and
      $1,846,000 of the operating loss carryforwards were restricted as to yearly
      usage, as discussed hereafter. The United States federal tax operating loss
      carryforwards expire commencing in 2021 through 2027. The state tax operating
      loss carryforwards expire commencing in 2007 through 2011. Additionally we
      had
      research and development credit carryforwards of approximately $84,000 available
      to be used as a reduction of federal income taxes.





Our
      ability to use the operating loss carryforwards and tax credit carryforwards
      to
      offset future taxable income is subject to restrictions enacted in the United
      States Internal Revenue Code of 1986. These restrictions severely limit the
      future use of the loss carryforwards if certain ownership changes described
      in
      the code occur. The common stock ownership changes occurring as a result of
      the
      securityholder debt and equity conversion on April 27, 2006, the conversion
      of
      senior secured notes on May 3, 2006, and the private placement on April 30,
      2007
      have resulted in reductions and in limitations in the use of the operating
      loss
      and tax credit carryforwards. The value of the operating loss carryforwards
      on
      April 30, 2007, $8,699,000, was reduced to $4,231,000. In future years, such
      reduced operating loss carryforwards of $4,231,000 can be used only to offset
      approximately $441,000 of taxable income per year, if any. We may use operating
      losses and tax credits generated subsequent to the date of the ownership change
      without limitation. Unrestricted carryforwards generated in the period
      subsequent to the April 30 th ownership change to September 30, 2007 are approximately $2,196,000. Therefore,
      in future years, we may be required to pay income taxes even though significant
      operating loss and tax credit carryforwards exist.





**12.
      COMMITMENTS AND CONTINGENCIES**




At
      September 30, 2006, we leased our office and manufacturing space and certain
      office equipment. Total rent expense for the three and nine months ended
      September 30, 2007 and 2006 was $74,380, $238,019, $82,708 and $271,238
      respectively.





Effective
      May 1, 2006, we entered into a five-year lease for approximately 16,000 square
      feet to be used for office and manufacturing operations. The terms of this
      new
      lease provide for average annual base rental payments of approximately $293,500
      per year, plus an allocated percentage of the increase in the building operating
      costs over defined base year operating costs.





14
 **LIGHTSPACE
            CORPORATION**
 **NOTES
            TO** **UNAUDITED
            CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2007**




**12.
      COMMITMENTS AND CONTINGENCIES - Continued**




The
      table
      below sets forth our known contractual obligations as of December 31,
      2006


**Contractual
                  Obligation**
              
              **Payments
                  Due by Period****Total**
              
              **1
                  Year**
              
              **2-3
                  Years**
              
              **4-5
                  Years**
              
              **Thereafter**Facility
                  lease
              
              $
              1,408,123
              
              $
              259,976
              
              $
              657,867
              
              $
              490,280
              
              
              -Other
                  leases
              
              
              15,008
              
              
              15,008
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              1,423,131
              
              $
              274,984
              
              $
              657,867
              
              $
              490,280
              
              
              -




In
      addition, as of September 2007 we have an inventory purchase obligation to
      a
      vendor for approximately $885,000 to cover most of our inventory requirements
      for the first half of 2008.





**13.
      SEGMENT INFORMATION**





We
      conduct our operations and manage our business in one segment, the manufacture
      of hardware and development of software for interactive lighting entertainment.
      Revenues, denominated in U.S. dollars, by geographical region are as
      follows:


**Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**United
                  States
              
              $
              209,072
              
              $
              59,812
              
              $
              739,325
              
              $
              288,314Europe
              
              
              475
              
              
              40,413
              
              
              203,675
              
              
              40,413Asia/Africa/Australia
              
              
              101,253
              
              
              49,010
              
              
              145,953
              
              
              49,010South
                  America
              
              
              32,000
              
              
              -
              
              
              74,000
              
              
              -Canada
              
              
              -
              
              
              49,100
              
              
              20,500
              
              
              49,100Total
              
              $
              342,799
              
              $
              198,335
              
              $
              1,183,453
              
              $
              426,837


15


**Item 2.
      Management’s Discussion of Financial Condition and Results of Operations**





The
      following discussion of the financial condition and results of operations should
      be read in conjunction with the unaudited consolidated
      financial statements and the related notes thereto included elsewhere in this
      Form 10-Q. Except for the historical information contained herein, the following
      discussion, as well as other information in this report, contains
      forward-looking statements within the meaning of Section 27A of the
      Securities Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended, and is subject to the “safe harbor” created by
      those sections. Some of the forward-looking statements can be identified by
      the
      use of forward-looking terms such as “believes,” “expects,” “may,” “will,”
“should,” “could,” “seek,” “intends,” “plans,” “estimates,” “anticipates” or
      other comparable terms. Forward-looking statements involve inherent risks and
      uncertainties. A number of important factors could cause actual results to
      differ materially from those in the forward-looking statements. Management
      urges
      you to consider the risks and uncertainties described in “Risk Factors” in this
      report and in our Annual Report on Form 10-K for the year ended December 31,
      2006. Management undertakes no obligation to update forward-looking statements
      to reflect events or circumstances after the date of this report. Management
      cautions readers not to place undue reliance upon any such forward-looking
      statements, which speak only as of the date made.




**Overview**





Lightspace
      provides interactive lighting entertainment products to family entertainment
      centers, retail
      stores, theme parks, fashion shows, nightclubs, special events, stage lighting
      and sound providers, health clubs and architectural lighting and design. Our
      current product lines include: (a) Lightspace Play, an interactive 36 tile
      gaming platform for children and adult recreation; (b) Lightspace Dance, an
      interactive floor, generally in sizes of 86 tiles and larger, that displays
      customizable lights and effects; and (c) Lightspace Design, an interactive
      tile
      system that displays customizable lights and video effects that can be mounted
      on any flat surface.





During
      the first quarter of 2007, we completed and introduced a new generation of
      our
      interactive tile with added software enhancements. The new interactive tile
      and
      enhanced software, in addition to increased product reliability and reduced
      manufacturing cost, is significantly more illuminative and is now available
      in
      clear plastic in addition to the traditional off white.





On
      April
      30, 2007, we completed the acquisition of the in process development emagipix
      technology from Illumination Design Works, Inc. emagipix technology is an
      interactive lighting technology that utilizes electroluminescent sheets. The
      purchase price for the emagipix technology consisted of a cash payment of
      $300,000 and the issuance of a $950,000 convertible term secured non-recourse
      note. In connection with the acquisition, the developer of the emagipix
      technology (a former officer and co-founder of Lightspace Corporation and the
      principal owner of Illumination Design Works, Inc.), re-commenced employment
      with Lightspace. We accounted for the acquisition of the emagipix technology
      as
      the acquisition of in process research and development and recorded a charge
      to
      operations in the June 30, 2007 quarter of the $1,250,000 purchase price and
      $56,612 in related legal expenses.





On
      April
      11, 2007, we commenced the private placement of up to 600,000 equity units
      at an
      offering price of $6.40 per unit. Each equity unit consists of: (1) eight
      shares of common stock; (2) eight warrants to purchase a total of eight
      shares of common stock at an exercise price of $1.00 per warrant; (3) two
      warrants to purchase a total of two shares of common stock at an exercise price
      of $1.25 per warrant; and (4) two warrants to purchase a total of two
      shares of common stock at an exercise price of $1.63 per warrant. On April
      30,
      2007 we closed the offering period for our equity units. We sold 586,173 units
      at the offering price of $6.40 per unit, resulting in aggregate proceeds of
      $3,751,507. After expenses of the offering of $311,507, the net proceeds were
      approximately $3,440,000.


16


**Results
      of Operations for the Three and Nine Months Ended September 30, 2007 and
      200** **6**





**Revenue
      and Operating Results**




For
      the
      three months ended September 30, 2007, revenue was $342,799, an increase of
      $144,464 from revenue of $198,335 recorded in the three months ended September
      30, 2006. The net loss for the three months ended September 30, 2007 was
      $877,193, as compared to a net loss for the three months ended September 30,
      2006 of $674,262.





The
      revenue for the three months ended September 30, 2007 was comprised of revenue
      from the sale of products, $313,432, and other revenue of $29,367, as
      represented by deferred maintenance revenue, sales of miscellaneous parts and
      other services. In the three months ended September 30, 2007, there were ten
      Lightspace Play new installation sites and two Lightspace Dance new installation
      site, representing 472 interactive tiles. For the three months ended September
      30, 2007, sales of Lightspace products were made to customers in the United
      States - $209,072; Asia/Africa/Australia - $101,253; South America - $32,000
      and
      Europe - $475. During this period,
      four Lightspace customers comprised more than
      10% of revenues
      individually. Sales to these customers aggregated $204,532 or approximately
      60%
      of total revenue.





The
      revenue for the three months ended September 30, 2006 was comprised of revenue
      from the sale of products, $191,371, and other revenue of $6,964, as represented
      by deferred maintenance revenue, sales of miscellaneous parts and other
      services. In the three months ended September 30, 2006, there were four
      Lightspace Play or Design new installation sites and two Lightspace Dance new
      installation sites, representing 287 interactive tiles. For the three months
      ended September 30, 2006, sales of Lightspace products were made to customers
      in
      United States - $59,812; Canada - $49,100; Asia - $49,010 and Europe - $40,413.
      During this period,
      four Lightspace customers comprised more than 10% of revenues individually.
      Sales to these customers aggregated $185,780 or 94% of total revenue in the
      2006
      three-month period.





For
      the
      nine months ended September 30, 2007, revenue was $1,183,453, an increase of
      $756,616 or 177% from revenue of $426,837 recorded in the nine months ended
      September 30, 2006. The net loss for the nine months ended September 30, 2007
      was $3,608,332, as compared to a net loss for the nine months ended September
      30, 2006 of $2,060,615. The difference of $1,547,717 or 75% can be primarily
      attributed to the purchase of the emagipix technology for which we recorded
      a
      charge of $1,306,612.





The
      revenue for the nine months ended September 30, 2007 was comprised of revenue
      from the sale of products, $1,114,566, and other revenue of $68,887, as
      represented by deferred maintenance revenue, sales of miscellaneous parts and
      other services. In the nine months ended September 30, 2007, there were 33
      Lightspace Play new installation sites and one Lightspace Design and three
      Lightspace Dance new installation site, representing 1,709 interactive tiles.
      For the nine months ended September 30, 2007, sales of Lightspace products
      were
      made to customers in the United States - $739,325; Europe - $203,675;
      Asia/Africa/Australia - $145,953; South America - $74,000 and Canada - $20,500.
      During this period, two Lightspace customers comprised more than 10% of revenues
      individually, with the top customer comprising approximately 22% of total
      revenues. Sales to these customers aggregated $378,372 in the 2007 nine-month
      period.





The
      revenue for the nine months ended September 30, 2006 was comprised of revenue
      from the sale of products, $406,978, and other revenue of $19,859, as
      represented by deferred maintenance revenue, sales of miscellaneous parts and
      other services. In the nine months ended September 30, 2006, there were 11
      Lightspace Play or Design new installation sites and two Lightspace Dance new
      installation sites, representing 565 interactive tiles. For the nine months
      ended September 30, 2006, sales of Lightspace products were made to customers
      in
      United States - $288,314; Canada - $49,100; Asia - $49,010 and Europe - $40,413.
      During this period, two Lightspace customers comprised more than 10% of
      revenues. Sales to these two customers aggregated $95,313 in the 2006 nine-month
      period.


17


Our
      product backlog at September 30, 2007 was $36,607, representing 76 interactive
      tiles. We expect that this backlog will be shipped and installed in the December
      2007 quarter. Product backlog at September 31, 2006 was $281,934,
      representing 409 interactive tiles. Cancellation of a signed contract or order
      included in product backlog requires the consent of Lightspace.





**Product
      Cost and Gross Margin**





For
      the
      quarters ended September 30, 2007 and 2006, we recorded gross margins of
      $17,826, or 5%, and a negative $30,312 or negative 15%, respectively. Product
      cost includes the direct cost of materials, associated freight charges, and
      the
      allocated per unit cost of the contractor's manufacturing labor, overhead and
      profit associated with products sold. For the most part, these costs are
      variable and increase or decrease with volume. Product cost also includes our
      personnel and related expenses assigned to manufacturing and customer service.
      These latter costs tend to be a fixed cost that decreases on a per unit basis
      as
      volume increases. The September 2007 gross margin was affected by a one-time
      $21,192 vendor cancellation charge as a result of an engineering design change
      that is expected to lower production costs going forward.


For
      the
      nine months ended September 30, 2007 and 2006, we recorded gross margins of
      $233,609, or 20%, and a negative $151,214 or negative 35%, respectively.





**Operating
      Expenses**




Research
      and development spending for the three months ended September 30, 2007 and
      September 30, 2006 respectively were $280,645 and $229,927, an increase of
      $50,718 or approximately 22%. Research and development spending was $2,072,383
      for the nine months ended September 30, 2007 as compared to $726,709 for the
      nine months ended September 30, 2006. The difference of $1,345,674 can be
      attributed primarily to the acquisition of the emagipix technology, which we
      took a charge to operations in April 2007 of 1,306,612. Research and development
      spending for 2007 has focused primarily on hardware and software enhancements
      for our current generation of tile as well as expenditures on the development
      of
      the next generation of our interactive tile.




Selling
      and marketing expenditures were $283,256 for the three months ended September
      30, 2007 as compared to $250,797 for the three months ended September 30, 2006,
      an increase of $32,459, or 13%. Selling and marketing expenditures were $942,680
      for the nine months ended September 30, 2007 as compared to $742,019 for the
      nine months ended September 30, 2006, an increase of $200,661, or 27%. The
      increased expenditures was a result of added sales and customer service staff
      and increased spending for trade shows, advertising, print publications, and
      employee travel expenses.





General
      and administrative expenses were $315,861 for the three months ended September
      30, 2007 as compared to $122,664 for the three months ended September 30, 2006,
      an increase of $193,197, or 158%. Administrative expenses were $790,247 for
      the
      nine months ended September 30, 2007 as compared to $576,581 for the nine months
      ended September 30, 2006, an increase of $213,666, or 37%. Increases in
      personnel costs, audit, legal and patent filing costs constitute approximately
      $183,000 of the increase in administrative expenses in the 2007 nine month
      period compared to the same period in 2006.





**Interest
      Expense**




Net
      interest expense was $15,257 for the three months ended September 30, 2007
      as
      compared to $40,562 for the three months ended September 30, 2006, a decrease
      of
      $25,305, or 62%. Interest expense was $36,631 for the nine months ended
      September 30, 2007 as compared to $266,390 for the nine months ended September
      30, 2006, a decrease of $229,759, or 86%. The decreases in the nine month
      periods from 2006 to 2007 is due to the conversion to common stock on April
      27,
      2006 of $2,701,853 in principal amount of convertible and demand notes, and
      the
      conversion to common stock on May 3, 2006 of $2,488,471 in principal amount
      and
      accrued interest of bridge notes.


18


**Income
      Taxes**





At
      September 30, 2007 and December 31, 2006, we had operating loss carryforwards
      of
      approximately $6,427,000 and $3,384,000, respectively, available to offset
      future taxable income for United States federal and state income tax purposes.
      At September 30, 2007 and December 31, 2006, approximately $4,231,000 and
      $1,846,000 of the operating loss carryforwards were restricted as to yearly
      usage, as discussed hereafter. The United States federal tax operating loss
      carryforwards expire commencing in 2021 through 2027. The state tax operating
      loss carryforwards expire commencing in 2007 through 2011. Additionally we
      had
      research and development credit carryforwards of approximately $84,000 available
      to be used as a reduction of federal income taxes.





Our
      ability to use the operating loss carryforwards and tax credit carryforwards
      to
      offset future taxable income is subject to restrictions enacted in the United
      States Internal Revenue Code of 1986. These restrictions severely limit the
      future use of the loss carryforwards if certain ownership changes described
      in
      the code occur. The common stock ownership changes occurring as a result of
      the
      securityholder debt and equity conversion on April 27, 2006, the conversion
      of
      senior secured notes on May 3, 2006, and the private placement on April 30,
      2007
      have resulted in reductions and in limitations in the use of the operating
      loss
      and tax credit carryforwards. The value of the operating loss carryforwards
      on
      April 30, 2007, $8,699,000, was reduced to $4,231,000. In future years, such
      reduced operating loss carryforwards of $4,231,000 can be used to offset only
      about $441,000 of taxable income per year, if any. We may use operating losses
      and tax credits generated subsequent to the date of the ownership change without
      limitation. Unrestricted carryforwards generated in the period subsequent to
      the
      April 30 th ownership change to September 30, 2007 are approximately $2,196,000.
      Restrictions on the use of operating loss carryforwards would mean that we
      may
      be required to pay income taxes even though significant operating loss and
      tax
      credit carryforwards exist.





**Net
      Loss**





The
      net
      loss for the nine months ended September 30, 2007 was $3,608,332 as compared
      to
      a net loss of $2,060,615 in the nine months ended September 30, 2006. Impacting
      the nine months ended September 30, 2007, in addition to the preceding
      discussion, was a charge in the amount of 1,306,612 related to the acquisition
      of the emagipix technology.





**Liquidity,
      Capital Resources and Cash Flow**





We
      have
      incurred net operating losses and negative operating cash flows since inception.
      At September 30, 2007and December 31, 2006, we had an accumulated retained
      deficit of $13,919,967and $10,311,635. We expect to incur additional losses
      and
      negative operating cash flows through at least the September quarter of 2008.
      We
      will continue thereafter to incur losses and negative operating cash flows
      until
      our revenue growth reaches that level that is able to support our operating
      expenses.





We
      have
      funded operations through September 30, 2007 through the private and public
      issuances of common stock and warrants, Series A Preferred Stock, borrowings
      from stockholders and others pursuant to convertible and demand notes, bridge
      notes and senior notes, and sales of our products.





On
      April
      30, 2007 we sold in a private placement 586,173 units, in the same form sold
      in
      our public offering, at the offering price of $6.40 per unit, resulting in
      aggregate proceeds of $3,751,507. After expenses of the offering of $311,507,
      the net proceeds were approximately $3,440,000. The sale of 586,173 units
      resulted in the issuance of: (1) 4,689,384 shares of common stock; (2) 4,689,384
      warrants to purchase a total of 4,689,384 shares of common stock at an exercise
      price of $1.00 per warrant; (3) 1,172,346 warrants to purchase a total of
      1,172,346 shares of common stock at an exercise price of $1.25 per warrant;
      and
      (4) 1,172,346 warrants to purchase a total of 1,172,346 shares of common stock
      at an exercise price of $1.63 per warrant. The warrants are exercisable at
      the
      option of the holder at any time up until April 30, 2012, at which date the
      warrants expire. In the event of a division of our common stock, the warrants
      will be adjusted proportionately. The warrants have been classified permanently
      within stockholders’ equity, as upon exercise, the warrant holder can only
      receive the specified number of common shares. We have entered into a
      Registration Rights Agreement with the purchasers of the units, whereby we
      have
      agreed to file a registration statement, within 45 days of the closing, to
      register for resale the shares of common stock, warrants and shares of common
      stock issuable upon exercise of the warrants, included in the units issued
      in
      the private placement to investors and the financial advisor.


19


In
      connection with the sale of the equity units, we paid Griffin Securities, Inc.,
      the financial advisor for the private placement, a fee in the amount of $187,575
      and issued to Griffin Securities a purchase warrant exercisable for 58,617
      units, in the same form sold in the private placement, at an exercise price
      of
      $6.40 per unit.





We
      used a
      portion of the net proceeds from the private placement to complete the
      acquisition of the emagipix technology by the payment of the balance of the
      cash
      purchase price of $255,000. The balance of the net proceeds will be used for
      general working capital purposes, including payment of the expenses of
      registering the private placement units for resale.





We
      believe that the proceeds from the April 30, 2007 private placement, together
      with anticipated revenues from sales of our products, will be sufficient to
      meet
      our liquidity requirements for the next 8 - 10 months. Our long-term success
      is
      dependent bringing our products to the worldwide market and obtaining sufficient
      sales volume to be profitable. To achieve these objectives, we may be required
      to raise additional capital through public or private financings or other
      arrangements. It cannot be assured that such financings will be available on
      terms attractive to us, if at all. Such financings may be dilutive to
      stockholders and may contain restrictive covenants.





**Technology
      Acquisition**




On
      March
      29, 2007, Lightspace Emagipix Corporation (“LEC”), a newly formed wholly-owned
      subsidiary of Lightspace Corporation, entered into an agreement with
      Illumination Design Works, Inc. to acquire the assets related to the in process
      development of its emagipix technology, an interactive lighting technology
      that
      utilizes electroluminescent sheets. The purchase price for the emagipix
      technology consisted of an initial cash payment of $45,000 upon signing the
      agreement, a subsequent cash payment of $255,000 and the issuance of a $950,000
      convertible term secured non-recourse note to Illumination Design Works, Inc.
      upon the closing of the technology purchase.





On
      April
      30, 2007, LEC completed the acquisition of the emagipix technology. In
      connection with the acquisition, the developer of the emagipix technology (a
      former officer and co-founder of Lightspace Corporation and the principal owner
      of Illumination Design Works, Inc.), re-commenced employment with
      Lightspace.





The
      $950,000 convertible term secured non-recourse note bears interest a 5% per
      annum, payable yearly, and is due and payable on April 30, 2011. The note is
      secured by a pledge of 67% the stock of LEC. The principal of the note is
      convertible at any time up and until April 30, 2011, at the option of the
      holder, into the common stock of Lightspace Corporation at a conversion price
      of
      $0.80 per share. Upon the occurrence of certain defined events of default by
      the
      noteholder, we have the right to convert the note to common stock at the lower
      of the conversion price of $0.80 or current market price of the common
      stock.





We
      have
      accounted for the acquisition of the emagipix technology as the acquisition
      of
      in process research and development and recorded a charge to operations in
      the
      June 30, 2007 quarter of $1,306,612.





**Manufacturing
      Operations**





We
      currently contract for the production and assembly of interactive tiles from
      an
      independent manufacturing company and have had discussions with other contract
      manufacturers as secondary sources for the production and assembly of our
      interactive tiles. The current contract manufacturer is ISO certified and,
      to
      date, we have not experienced either quality or production difficulties. The
      production run is scheduled for a minimum of 200 interactive tiles per week,
      with the ability to increase the weekly production to 400 to 500 interactive
      tiles, if required.


20


**Deferred
      Revenue and Backlog**





Deferred
      revenue is represented by: (1) advance deposits received from customers for
      the
      future purchase and installation of a Lightspace system and (2) the balance
      of
      deferred maintenance revenue to be recognized as income over the remaining
      term
      of the maintenance contract. Our product backlog at September 30, 2007 and
      December 31, 2006 was $36,607 (76 interactive tiles) and $208,134 (343
      interactive tiles), respectively.





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements other than normal lease
      arrangements.





At
      September 30, 2006, we leased our office and manufacturing space and certain
      office equipment. Total rent expense for the three and nine months ended
      September 30, 2007 and 2006 was $74,380, $238,019, $82,708 and $271,238
      respectively.




Effective
      May 1, 2006, we entered into a five-year lease for approximately 16,000 square
      feet to be used for office and manufacturing operations. The terms of this
      new
      lease provide for average annual base rental payments of approximately $293,500
      per year, plus an allocated percentage of the increase in the building operating
      costs over defined base year operating costs.





The
      table
      below sets forth our known contractual obligations as of December 31,
      2006


**Contractual
                  Obligation**
              
              **Payments
                  Due by Period****Total**
              
              **1
                  Year**
              
              **2-3
                  Years**
              
              **4-5
                  Years**
              
              **Thereafter**Facility
                  lease
              
              $
              1,408,123
              
              $
              259,976
              
              $
              657,867
              
              $
              490,280
              
              
              -Other
                  leases
              
              
              15,008
              
              
              15,008
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              1,423,131
              
              $
              274,984
              
              $
              657,867
              
              $
              490,280
              
              
              -




In
      addition, as of September 2007 we have an inventory purchase obligation to
      our
      vendor for approximately $885,000 to cover our inventory requirements for the
      first half of 2008.





**Recent
      Accounting Pronouncements**





In
      July 2006, the FASB issued FIN 48, which clarifies the accounting for
      uncertainty in income taxes recognized in an entity’s financial statements in
      accordance with SFAS No. 109, :Accounting for Income Taxes” and prescribes a
      recognition threshold and measurement attribute for financial statement
      disclosure of income tax positions taken or expected to be taken on an income
      tax return. Additionally, FIN 48 provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. FIN 48 is effective for fiscal years beginning after
      December 15, 2006, with early adoption permitted. Lightspace adopted this
      interpretation on January 1, 2007. See Note 11, “Income Taxes” above for a
      discussion of its effect on the Company’s financial condition, its results of
      operations or liquidity.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
      defines fair value, establishes a framework for consistently measuring fair
      value under GAAP, end expands disclosures about fair value measurements. SFAS
      No. 157 is effective for the Company beginning January 1, 2008, and the
      provisions of SFAS No. 157 will be applied prospectively as of that date. We
      are
      currently evaluating whether the adoption of this statement will have a material
      effect on our financial condition, our results of operations or
      liquidity.





On
      February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an Amendment of FASB
      Statement No. 115.” This standard permits an entity to choose to measure many
      financial instruments and certain other items at fair value. Most of the
      provisions in SFAS No. 159 are elective; however, the amendment to SFAS No.
      115,
“Accounting for Certain Investments in Debt and Equity Securities,” applies to
      all entities with available-for-sale and trading securities. The fair value
      option established by SFAS No. 159 permits all entities to choose to measure
      eligible items at fair value at specified election dates. A business entity
      will
      report unrealized gains and losses on items for which the fair value option
      has
      been elected in earnings at each subsequent reporting date. The fair value
      option: (a) may be applied instrument by instrument, with a few exceptions,
      such
      as investments otherwise accounted for by the equity method; (b) is irrevocable
      (unless a new election date occurs); and (c) is applied only to entire
      instruments and not to portions of instruments. SFAS No. 159 is effective as
      of
      the beginning of an entity’s first fiscal year that begins after November 15,
      2007. Early adoption is permitted as of the beginning of the previous fiscal
      year provided that the entity makes that choice in the first 120 days of the
      fiscal year and also elects to apply the provisions of SFAS No. 157, “Fair Value
      Measurements”. Lightspace is currently evaluating whether the adoption of this
      statement will have a material effect on its financial condition, its results
      of
      operations or liquidity.


21


**Critical
      Accounting Policies and Estimates**





The
      consolidated financial statements of Lightspace are prepared in conformity
      with
      accounting principles generally accepted in the United States of America. These
      accounting principles require us to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and the disclosure of contingent
      assets and liabilities at the date of the financial statements. We are also
      required to make certain judgments that affect the reported amounts of revenues
      and expenses during the reporting period. On an on-going basis, we evaluate
      our
      estimates and the process under which those estimates are formulated. We develop
      our estimates based upon historical experience as well as assumptions that
      are
      considered to be reasonable under the circumstances. Actual results may differ
      from these estimates.





We
      believe that the following critical accounting policies impact the more
      significant judgments and estimates used in the preparation of the financial
      statements:





*Revenue
      Recognition* .
      We recognize revenue from the sale of our entertainment systems when all of
      the
      following conditions have been met: (1) evidence exists of an arrangement with
      the customer, typically consisting of a purchase order or contract; (2) our
      products have been delivered and risk of loss has passed to the customer; (3)
      we
      have completed all of the necessary terms of the contract possibly including
      but
      not limited to, installation of the product and training; (4) the amount of
      revenue to which we are entitled is fixed or determinable; and (5) we believe
      it
      is probable that we will be able to collect the amount due from the customer.
      To
      the extent that one or more of these conditions has not been satisfied, we
      defer
      recognition of revenue. Revenue from maintenance contracts is recorded on a
      straight-line basis over the term of the contract. An allowance for
      uncollectible receivables is established by a charge to operations, when in
      our
      opinion it is probable that the amount due will not be collected.





*Warranty
      Reserve* .
      Our products are warranted against defects for twelve months following the
      sale.
      Reserves for potential warranty claims are provided at the time of revenue
      recognition and are based on several factors including historical claims
      experience, current sales levels and our estimate of repair costs.





*Stock-Based
      Compensation* .
      Effective January 1, 2006, we adopted the provisions of Financial
      Accounting Standards No. 123(R), Share-Based Payment. This statement requires
      that the fair value of stock-based awards be measured at the grant date,
      recognized as compensation expense over the defined service period, and be
      adjusted for anticipated forfeitures. We estimate the fair value of each
      stock-based award on the date of grant using a stock option valuation model.
      The
      valuation model incorporates assumptions for stock price volatility, the
      expected exercise period, risk-free interest rate and dividend yield. Some
      of
      these assumptions are subjective and require the exercise of judgment.
      Additionally we must estimate the number of grants that may be forfeited. If
      actual experience differs significantly from our estimates, compensation expense
      that we record in future periods may differ materially from that recorded in
      the
      current period and that amount projected for future periods.


22


**Item 3.
      Quantitative and Qualitative Disclosures about Market Risk**





Market
      risk represents the risk of loss arising from adverse changes in interest
      rates and foreign exchange rates. We do not have any material exposure to
      interest rate risk. All of our products and services are denominated in U.S.
      dollars, as a result of which we are not exposed to foreign currency risk with
      respect to our accounts receivable. All materials and components that we buy
      for
      the manufacturing of our products are also priced in U.S. dollars. We also
      did
      not have any operations outside the United States. Accordingly, we do not have
      any material foreign currency risk at this time.





23


**Item 4.
      Controls and Procedures**




(a)
      Evaluation of disclosure controls and procedures.




We
      conducted an evaluation, under the supervision and with the participation of
      our
      Chief Executive Officer and Chief Financial Officer, of the effectiveness of
      the
      design and operation of our disclosure controls and procedures (as defined
      in
      Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
      amended (the “Exchange Act”)) as of the end of the period covered by this
      report. Based on this evaluation, we concluded that our disclosure controls
      and
      procedures are effective, as of the end of the period covered by this report,
      to
      ensure that information required to be disclosed in our Exchange Act reports
      is
      recorded, processed, summarized and reported within the time periods specified
      in the Securities and Exchange Commission rules and forms, and that the
      information is accumulated and communicated to our management, including our
      Chief Executive Officer, as appropriate to allow timely decisions regarding
      required disclosure.





(b)
      Changes in internal control over financial reporting





No
      changes in our internal control over financial reporting occurred during the
      quarter ended September 30, 2007 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.


24


**PART
      II - OTHER INFORMATION**




**Item
      1. Legal Proceedings**





In
      October 2007, Lightspace was served notice of a wrongful termination claim
      against us by a former employee. The former employee is seeking damages in
      the
      amount of lost compensation. We believe there is no merit to the lawsuit and
      intend to defend against it. Should a finding go against us, there would be
      no
      material impact on our liquidity or results of operations. A contingency accrual
      for the potential litigation was established in the June 2007
      quarter.





**Item
      1A. Risk Factors**





There
      have been no material changes from the risk factors set forth on the Company’s
      Annual Report on Form 10K for the year ended December 31, 2006 filed with the
      Securities and Exchange Commission on March 26, 2007. Management urges you
      to
      consider the risks and uncertainties described in “Risk Factors” in this Annual
      Report on Form 10-K for the year ended December 31, 2006.





**Item
      2 Unregistered Sales of Equity Securities and Use of
      Proceeds**





**Unregistered
      Sales of Equity Securities**





On
      April 30, 2007 Lightspace closed the sale of 586,173 units in a private
      placement, resulting in aggregate proceeds to us of $3,751,507.  After
      expenses of the offering of $311,507, the net proceeds to us were $3,440,000. Through
      September 30, 2007, we used approximately $548,000, $492,000, $454,000 and
      $449,000 of the net proceeds of the offering for purchase of inventory, sales
      and marketing, research and development, and general and administrative expenses
      respectively.





In
      connection with the April 2007 private placement, Lightspace paid Griffin,
      the
      financial advisor for the private placement, a fee in the amount of $187,575
      and
      issued to Griffin the Griffin Warrants, exercisable to purchase up to 58,617
      Units, in the same form sold in the private placement, at an exercise price
      of
      $6.40 per Unit. Approximately $168,818 of the fee and 52,755 of the Griffin
      Warrants were paid to Robert Giannini, who subsequently became a director of
      the
      Company.





**Use
      of Proceeds from Registered Securities**





On
      November 2, 2006 Lightspace closed the public sale of 600,000 units at an
      offering price of $6.40 per unit, resulting in aggregate proceeds to us of
      $3,840,000. After repayment of principal and interest due on senior notes in
      the
      aggregate amount of $1,409,000 and expenses of the offering of $468,000, the
      net
      proceeds to us were $1,963,000.





We
      invested the net proceeds of the public offering in short-term interest bearing
      securities pending the use thereof to fund our development efforts, sales growth
      and operating losses. Through September 30, 2007, we used approximately
      $261,300, $210,500, and $280,000 of the net proceeds of the public offering
      for
      sales and marketing, inventory purchases and research and development,
      respectively. The amount allocated to working capital, $1,263,000, was used
      to
      make payments to trade creditors in the normal course of business and to fund
      the normal recurring expenses in our operations and administrative departments.
      We fully expended the net proceeds from the sale of units in March
      2007.





**Item
      3. Defaults upon Senior Securities**





None





**Item
      4. Submission of Matters to a Vote of Security Holders**





None


25


**Item
      5. Other Information**





None





**Item
      6. Exhibits**





The
      following is a complete list of exhibits filed with the Form 10-Q.




**Exhibit
                  No.**
              
              
              
              **Description**31.1
              
              *
              
              Certification
                  Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 - Gary
                  Florindo31.2
              
              *
              
              Certification
                  Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 - Louis P.
                  Nunes32.1
              
              *
              
              Certification
                  Pursuant to Section 906 of Sarbanes-Oxley Act of 2002




*
        Filed
        herewith




26


**SIGNATURES**




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




LIGHTSPACE
                CORPORATIONDate: November
              14, 2007
            By:
            /s/ GARY
              FLORINDOGary
                Florindo
              President,
                and
              Chief
                Executive Officer




Date: November
              14, 2007
            By:
            /s/ LOUIS
              P.
              NUNESLouis
                P. Nunes
              Chief
                Financial Officer and Chief Accounting
                Officer


27