**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, 2008****or****o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the Transition Period From
             
to**







**Commission
      File Number 333-131857**




**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.)**383
                Dorchester Avenue, Suite 220, Boston, MA**
            
            **02127**(Address
                of Principal Executive Offices)
            
            (Zip
                Code)




**(617)
      868-1700**


Registrant’s
      Telephone Number, Including Area Code





(Former
      Address - **529
      Main Street, Ste 330, Boston, MA** )




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 x No o




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 September 30, 2008**Common
                Stock, par value $0.0001
            
            15,257,564
                shares













**LIGHTSPACE
      CORPORATION**


**FORM
      10 - Q**


**FOR
      THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008**


**INDEX**





**PAGE****PART
                I - FINANCIAL INFORMATION**Item
                1 –
                Unaudited Consolidated Financial StatementsStatements
                of Consolidated Financial Position as of September 30, 2008 and December
                31, 2007
            3Statements
                of Consolidated Operations for the Three and Nine Months Ended September
                30, 2008 and 2007
            4Statements
                  of Consolidated Changes in Stockholders’ Equity (Deficit) for the Year
                  EndedDecember
                  31, 2007 and the for the Nine Months Ended September 30,
                  2008
            5Statements
                of Consolidated Cash Flows for the Nine Months Ended September 30,
                2008
                and 2007
            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
            24Item
                4 –
                Controls and Procedures
            24**PART
                II - OTHER INFORMATION**Item
                1 - Legal Proceedings
            25Item
                1A –
                Risk Factors
            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
            26Item
                5 - Other Information
            26Item
                6 - Exhibits
            26Signatures
            27










**PART
      I - FINANCIAL INFORMATION**


Item
      1
– Unaudited
      Consolidated Financial Statements




**LIGHTSPACE
      CORPORATION**


**STATEMENTS
      OF CONSOLIDATED FINANCIAL POSITION**





**September 30,**
            
            **December 31,****2008**
            
            **2007****ASSETS**Current
                AssetsCash
                and cash equivalents
            
            $
            27,921
            
            $
            585,737Accounts
                receivable (net of allowance for doubtful accounts of $59,006 and
                $50,130
                at September 30, 2008 and December 31, 2007)
            
            
            29,960
            
            
            144,293Inventory
            
            
            264,304
            
            
            193,854Inventory
                deposits
            
            
            -
            
            
            223,116Other
                current assets
            
            
            1,585
            
            
            3,321Total
                current assets
            
            
            323,770
            
            
            1,150,321Property
                and Equipment - Net
            
            
            79,648
            
            
            163,209Security
                Deposits
            
            
            20,002
            
            
            102,400Intangible
                Assets
            
            
            11,803
            
            
            47,211Total
                Assets
            
            $
            435,223
            
            $
            1,463,141**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                LiabilitiesNotes
                payable
            
            $
            237,381
            
            $
            237,381Accounts
                payable
            
            
            656,915
            
            
            514,380Accrued
                interest
            
            
            65,941
            
            
            63,612Accrued
                expenses
            
            
            143,968
            
            
            407,030Deferred
                revenue
            
            
            148,474
            
            
            96,280Total
                current liabilities
            
            
            1,252,679
            
            
            1,318,683Long-term
                Debt
            
            
            950,000
            
            
            950,000Stockholders'
                Equity (Deficit)Common
                stock, $0.0001 par value; authorized 75,000,000 shares; 15,282,495
                shares
                issued and 15,257,564 shares outstanding at September 30, 2008 and
                December 31, 2007
            
            
            1,528
            
            
            1,528Treasury
                stock - 24,931 shares
            
            
            (2
            )
            
            (2
            )Additional
                paid-in capital
            
            
            14,388,008
            
            
            14,305,125Retained
                earning (deficit)
            
            
            (16,156,990
            )
            
            (15,112,193
            )Total
                stockholders' equity (deficit)
            
            
            (1,767,456
            )
            
            (805,542
            )Total
                Liabilities and Stockholders' Equity (Deficit)
            
            $
            435,223
            
            $
            1,463,141





See
      notes
      to unaudited consolidated financial statements


3





**LIGHTSPACE
      CORPORATION**


**STATEMENTS
      OF CONSOLIDATED OPERATIONS**





**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**RevenuesProduct
                sales
            
            $
            419,860
            
            $
            313,432
            
            $
            1,652,072
            
            $
            1,114,566Other
            
            
            33,951
            
            
            29,367
            
            
            263,534
            
            
            68,887Total
                revenues
            
            
            453,811
            
            
            342,799
            
            
            1,915,606
            
            
            1,183,453Product
                Cost
            
            
            356,300
            
            
            324,973
            
            
            1,442,529
            
            
            949,844Gross
                Margin
            
            
            97,511
            
            
            17,826
            
            
            473,077
            
            
            233,609Operating
                ExpensesResearch
                and development
            
            
            78,735
            
            
            280,645
            
            
            542,213
            
            
            2,072,383Sales
                and marketing
            
            
            16,867
            
            
            283,256
            
            
            375,762
            
            
            942,680General
                and administrative
            
            
            144,331
            
            
            315,861
            
            
            515,058
            
            
            790,247Total
                operating expenses
            
            
            239,933
            
            
            879,762
            
            
            1,433,033
            
            
            3,805,310Operating
                Loss
            
            
            (142,422
            )
            
            (861,936
            )
            
            (959,956
            )
            
            (3,571,701
            )Other
                Income (Expense)Interest
                expense - net
            
            
            (28,464
            )
            
            (15,257
            )
            
            (84,841
            )
            
            (36,631
            )Total
                other income (expense)
            
            
            (28,464
            )
            
            (15,257
            )
            
            (84,841
            )
            
            (36,631
            )Loss
                Before Provision For Income Taxes
            
            
            (170,886
            )
            
            (877,193
            )
            
            (1,044,797
            )
            
            (3,608,332
            )Provision
                For Income Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                Loss
            
            $
            (170,886
            )
            $
            (877,193
            )
            $
            (1,044,797
            )
            $
            (3,608,332
            )Basic
                and Diluted Net Loss Per Share
            
            $
            (0.01
            )
            $
            (0.06
            )
            $
            (0.07
            )
            $
            (0.27
            )Weighted
                Average Common Shares Outstanding
            
            
            15,257,564
            
            
            15,282,495
            
            
            15,257,564
            
            
            13,198,324





See
      notes
      to unaudited consolidated financial statements


4





**LIGHTSPACE
      CORPORATION**





**STATEMENTS
      OF CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)**





**Common Stock**
            
            **Treasury Stock**
            
            **Additional**
            
            **Retained**
            
            **Stockholders’****Shares**
            
            
            
            
            
            
            
            **Paid-In**
            
            **Earnings**
            
            **Equity****Issued**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **(Deficit)**
            
            **(Deficit)**Balance
                January 1, 2007
            
            
            10,593,111
            
            $
            1,059
            
            
            -
            
            $
            -
            
            $
            10,607,585
            
            $
            (10,311,635
            )
            $
            297,009Private
                placement of equity securities
            
            
            4,689,384
            
            
            469
            
            
            
            
            
            
            
            
            3,751,038
            
            
            
            
            
            3,751,507Expenses
                of private placement
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (311,507
            )
            
            
            
            
            (311,507
            )Stock
                option compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            127,928
            
            
            
            
            
            127,928Loss
                for the nine month period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,608,332
            )
            
            (3,608,332
            )Balance
                September 30, 2007
            
            
            15,282,495
            
            
            1,528
            
            
            -
            
            
            -
            
            
            14,175,044
            
            
            (13,919,967
            )
            
            256,605Stock
                repurchase
            
            
            
            
            
            
            
            
            (24,931
            )
            
            (2
            )
            
            
            
            
            
            
            
            (2
            )Stock
                option compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            130,081
            
            
            
            
            
            130,081Loss
                for the three month period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,192,226
            )
            
            (1,192,226
            )Balance
                December 31, 2007
            
            
            15,282,495
            
            
            1,528
            
            
            (24,931
            )
            
            (2
            )
            
            14,305,125
            
            
            (15,112,193
            )
            
            (805,542
            )Stock
                option compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            82,883
            
            
            
            
            
            82,883Loss
                for the nine month period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,044,797
            )
            
            (1,044,797
            )Balance
                September 30, 2008
            
            
            15,282,495
            
            $
            1,528
            
            
            (24,931
            )
            $
            (2
            )
            $
            14,388,008
            
            $
            (16,156,990
            )
            $
            (1,767,456
            )





See
      notes
      to unaudited consolidated financial statements


5





**LIGHTSPACE
      CORPORATION**


**STATEMENTS
      OF CONSOLIDATED CASH FLOWS**





**Nine Months Ended September 30,****2008**
            
            **2007**Cash
                Flows (Uses) from Operating Activities:Net
                loss
            
            $
            (1,044,797
            )
            $
            (3,608,332
            )Adjustments
                to reconcile net loss to cash (used)in
                operating activities:Depreciation
                and amortization
            
            
            92,561
            
            
            30,600Amortization
                of fair value of stock warrants
            
            
            35,408
            
            
            35,414Provision
                for stock option compensation
            
            
            82,883
            
            
            127,928R&D
                acquisition
            
            
            -
            
            
            950,000Other
                changes in assets and liabilities:Accounts
                receivable
            
            
            114,333
            
            
            (65,664
            )Inventory
            
            
            (70,450
            )
            
            (274,792
            )Other
                current assets
            
            
            224,852
            
            
            (5,453
            )Other
                assets
            
            
            82,398
            
            
            -Accounts
                payable and accrued expenses
            
            
            (118,198
            )
            
            (114,893
            )Deferred
                revenue
            
            
            52,194
            
            
            (98,269
            )Net
                cash (used) in operating activities
            
            
            (548,816
            )
            
            (3,023,461
            )Cash
                Flows (Uses) From Investing Activities:Purchases
                of property and equipment
            
            
            (9,000
            )
            
            (107,061
            )Net
                cash (used) in investing activities
            
            
            (9,000
            )
            
            (107,061
            )Cash
                Flows (Uses) From Financing Activities:Proceeds
                from notes payable
            
            
            70,000
            
            
            -Repayment
                of notes payable
            
            
            (70,000
            )
            
            -Proceeds
                from sale of common stock
            
            
            -
            
            
            3,751,507Expense
                of private placement
            
            
            -
            
            
            (311,507
            )Net
                cash provided from financing activities
            
            
            -
            
            
            3,440,000Net
                Increase (Decrease) in Cash and Cash Equivalents
            
            
            (557,816
            )
            
            309,478Cash
                and Cash Equivalents - beginning of period
            
            
            585,737
            
            
            879,987Cash
                and Cash Equivalents - end of period
            
            $
            27,921
            
            $
            1,189,465Non-cash
                financing activities:Issuance
                of notes payable
            
            $
            -
            
            $
            950,000


See
        notes
        to unaudited consolidated financial statements
  6


**LIGHTSPACE
      CORPORATION**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**




**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 children play areas,
      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, 2008, we had an accumulated retained earnings deficit of
      $16,156,990 and a stockholders’ deficit of $1,767,456. We have funded our
      operations through September 30, 2008 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
      consolidated financial statements at September 30, 2008 include the accounts
      of
      Lightspace Emagipix Corporation, a wholly-owned subsidiary, organized as of
      March 29, 2007. All intercompany transactions have been eliminated in
      consolidation.





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 $1,044,797 for the nine months ended September 30, 2008.
      Further, we have accumulated net losses from operations of $16,156,990 as of
      September 30, 2008. Our cash balance at September 30, 2008 was $27,921. 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
      statement of consolidated financial position as of September 30, 2008, the
      statements of consolidated operations for the three months and nine months
      ended
      September 30, 2008 and 2007, the statements of consolidated cash flows for
      the
      nine months ended September 30, 2008 and 2007, and the statements of
      consolidated changes in stockholders’ equity (deficit) for the period from
      January 1, 2007 through September 30, 2008 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 annual 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 (deficit) 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, 2008**





**2.
      BASIS OF PRESENTATION (continued)**





In
      February 2007, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards No. 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities - including an Amendment of FASB Statement
      No.
      115” (“SFAS 159”). Such Statement allows an entity to choose to measure certain
      financial instruments and liabilities at fair value. Subsequent measurements
      of
      these financial instruments and liabilities are to be recognized in the
      statement of operations. SFAS 159 was effective for the Company commencing
      January 1, 2008. The Company did not elect to remeasure any financial
      instruments or liabilities under the provisions of SFAS 159; and accordingly,
      the adoption of SFAS 159 did not have an impact on the accompanying consolidated
      financial statements.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, “Defining Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
      value, establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures with respect to measurement
      of
      fair value. SFAS 157 applies only under other accounting pronouncements that
      require or permit fair value measurements and does not require any new fair
      value measurements. SFAS 157 was effective for the Company commencing January
      1,
      2008; however, the FASB has delayed the effective date until January 1, 2009
      for
      certain nonfinancial assets and liabilities. The adoption of SFAS 157 on January
      1, 2008 with respect to the Company’s financial assets and liabilities did not
      have an impact on the accompanying consolidated financial
      statements.





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires the Company to make estimates and assumptions
      that affect at the date of the financial statements the reported amounts of
      assets and liabilities, disclosure of contingent assets and liabilities and
      the
      reported amounts of revenue and expenses. Actual results could differ from
      these
      estimates.





**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 technology emagipix, an interactive lighting technology that
      utilizes electroluminescent sheets. On April 30, 2007, LEC completed the
      acquisition of the emagipix technology. The purchase price for the emagipix
      technology consisted of $300,000 and the issuance of a $950,000 convertible
      term
      secured non-recourse note to Illumination Design Works, Inc. In connection
      with
      the acquisition, a former officer and co-founder of Lightspace Corporation
      and
      the principal owner of Illumination Design Works, Inc. re-commenced employment
      with us and was granted options to purchase 250,000 shares of common stock
      at an
      exercise price of $0.80 per share.




8


**LIGHTSPACE
      CORPORATION**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**4.
      TECHNOLOGY ACQUISITION AND PRIVATE PLACEMENT OF SECURITIES
      (continued)**





The
      $950,000 convertible term secured non-recourse note bears interest at 5% per
      annum, payable yearly, and is due and payable on April 30, 2010. The note is
      secured by a pledge of 76% of the stock of LEC. The principal of the note is
      convertible at any time up and until April 30, 2010, at the option of the
      holder, into the common stock of the Company at a conversion price of $0.80
      per
      share, the fair market value of the Company’s common stock at April 30, 2007.
      Upon the occurrence of certain defined events of default by the noteholder,
      the
      Company 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.





The
      Company accounted for the acquisition of the emagipix technology as the
      acquisition of in process research and development and recorded a charge to
      operations on April 30, 2007 of $1,306,612, which included legal fees incurred
      in connection with the acquisition. The Company’s initial estimates that the
      cost to complete the development of the emagipix technology would be between
      $1.5 million and $2.0 million and that the technology would be commercially
      available within three years have been revised. The Company’s cash situation at
      December 31, 2007 and subsequent thereto has necessitated that development
      work
      of the emagipix technology be deferred until sufficient capital has been raised
      to fund the current operations of the Company and thereafter recommence the
      development efforts with respect to the emagipix technology.





On
      April
      30, 2007 the Company closed a private placement of its equity units. The Company
      sold 586,173 units at the offering price of $6.40 per unit, resulting in
      aggregate proceeds to the Company of $3,751,507. After expenses of the sale
      of
      $311,507, the net proceeds to the Company were $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
      the
      Company’s 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.





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.





The
      Company used a portion of the net proceeds from the private placement to
      complete the acquisition of the emagipix technology by the payment of the cash
      purchase price of $300,000. The balance of the net proceeds was used for general
      working capital purposes.





**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, and convertible debt.


9





**LIGHTSPACE
      CORPORATION**


**NOTES
      TO** **UNAUDITED
      CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**5.
      LOSS PER SHARE (continued)**





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





**September
                30,****2008**
            
            **2007**Common
                stock options
            
            
            1,405,420
            
            
            5,158,610Common
                stock warrants
            
            
            23,634,205
            
            
            23,634,205Convertible
                debt
            
            
            1,187,500
            
            
            1,187,500Total
            
            
            26,227,125
            
            
            29,980,315





**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 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.





No
      stock
      options were granted in the nine month period ended September 30, 2008. In
      the
      year ended December 31, 2007, we granted to directors, officers and key
      employees 4,075,856 options to purchase 4,075,856 shares of common stock at
      an
      exercise prices ranging from $0.80 to $1.10 per share.





The
      provision for stock option-based compensation for the three month periods ended
      September 30, 2008 and 2007 was $31,556 and $80,519, respectively. The provision
      for stock option-based compensation for the nine month periods ended September
      30, 2008 and 2007 was $82,883 and $127,928, respectively. We did not tax affect
      the provision for stock-based compensation due to our net operating loss
      carryforwards; accordingly, the net loss for the periods was directly increased
      by the amount of the provision for stock option-based compensation.





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 was 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 directors, officers
      and
      key employees 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 directors, officers and key employees
      for option grants made prior to January 1, 2006.


10





**LIGHTSPACE
      CORPORATION**


**NOTES
      TO** **UNAUDITED
      CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**




**7.
      INVENTORY**




Inventory
      is stated at lower of cost or market. At September, 2008 and December 31, 2007,
      inventory consisted of finished products of $89,000 and $161,157 and raw
      materials of $175,304 and $32,697, respectively. At December 31, 2007, advance
      payments for purchase of inventory were $223,116 and were separately classified
      in the accompanying statement of consolidated financial position. At September
      30, 2008 there were no advance payments for the purchase of
      inventory.





**8.
      ACCRUED EXPENSES**





Accrued
      expenses at September 30, 2008 and December 31, 2007 consist of the
      following:





**September 30,**
            
            **December 31,****2008**
            
            **2007**Earned
                vacation compensation
            
            $
            36,740
            
            $
            64,346Professional
                fees
            
            
            49,500
            
            
            84,500Reserve
                for warranty
            
            
            35,000
            
            
            32,000Operating
                lease payment differential
            
            
            -
            
            
            141,541Other
            
            
            22,728
            
            
            84,643Total
                accrued expenses
            
            $
            143,968
            
            $
            407,030




**9.
      NOTES PAYABLE AND LONG TERM DEBT**





Notes
      payable and long term debt at September 30, 2008, March 31, 2008 and December
      31, 2007 consist of the following:





**September 30,**
            
            **March 31,**
            
            **December 31,****Rate**
            
            **2008**
            
            **2008**
            
            **2007**Interest
                bearing short term notes
            
            
            9.0
            %
            
            -
            
            
            55,000
            
            
            -Non-interest
                bearing short term notes
            
            
            0.0
            %
            
            -
            
            
            15,000
            
            
            -Contingent
                promissory note
            
            
            8.0
            %
            
            237,381
            
            
            237,381
            
            
            237,381Long
                term debt
            
            
            5.0
            %
            
            950,000
            
            
            950,000
            
            
            950,000Total
            
            
            
            
            
            1,187,381
            
            
            1,257,381
            
            
            1,187,381





*Short
      term promissory note*


On
      March
      27, 2008 we received a $70,000 loan from two former directors and a stockholder.
      The directors’ notes bore interest rate at a 9% annual rate and the stockholder
      note was non-interest bearing. All three notes were due and payable on April
      28,
      2008. The loans were made in connection with a vendor lawsuit which was settled
      in March 2008. In April 2008, the short term notes were repaid.





*Contingent
      promissory note*


In
      connection with the securityholder debt and equity conversion on April 27,
      2006,
      $237,381 in principal amount of existing notes held by the former CEO were
      converted into a $237,381 contingent promissory note. This note bears interest
      at an annual rate of 8% and is payable only if the Company achieves two
      consecutive quarters of positive EBITDA (i.e., earnings before interest, taxes,
      depreciation and amortization), aggregating at least $1,000,000, or the Company
      raises in a registered public offering of equity cash proceeds of at least
      $10 million prior to December 31, 2008. If those conditions are not
      met by December 31, 2008, or the former CEO is found to be in breach of the
      terms of the severance agreement prior to such date, the note will not be
      payable. In addition, Lightspace issued to the former CEO warrants to purchase
      361,252 shares of common stock at an exercise price of $0.80 per share. The
      warrants expire in five years, unless the terms for the payment of the
      contingent promissory note are not met; in such case, the warrants expire on
      March 31, 2009.


11





**LIGHTSPACE
      CORPORATION**


**NOTES
      TO** **UNAUDITED
      CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**9.
      NOTES PAYABLE AND LONG TERM DEBT (continued)**





*Long
      term debt*


As
      part
      of the acquisition of the emagipix in-process development technology, we issued
      a $950,000 convertible term secured non-recourse note to Illumination Design
      Works, Inc. upon the closing of the purchase on April 30, 2007. The $950,000
      convertible term secured non-recourse note bears interest at 5% per annum,
      payable yearly, and is due and payable on April 30, 2010. The note is secured
      by
      a pledge of 76% of the stock of LEC. The principal of the note is convertible
      at
      any time up and until April 30, 2010, 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.





The
      first
      annual payment of interest of $47,500 was due and payable on April 15, 2008.
      At
      September 30, 2008, Lightspace had made installment payments of $3,958 against
      the amount of interest due and is currently in arrears in the monthly
      installment payments. The non-payment of the total amount of yearly interest
      when due is defined as an event of default under the terms of the note. Upon
      an
      event of default, and after written notice of such event of default by the
      holder of the note, the holder may pursue remedies with respect to the
      collection of the principal of the note and unpaid interest. Such remedies
      are
      limited solely to the collateral security for the note, 76% of the stock of
      LEC.
      Lightspace has not received written notice of an event of default. In November
      2008, Lightspace received notice from the holder of the note of its intention
      to
      exercise the option to convert the $950,000 principal balance of the note into
      the common stock of Lightspace at an exercise price of $0.80 per share
      (1,187,500 shares of Lightspace common stock). Upon conversion of the note,
      the
      collateral security for the note, 76% of the stock of LEC, will be voided.
      Lightspace and the holder of the note are negotiating payment terms for the
      remaining balance of interest due under the note.





**10.
      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.





**11.
      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. Concurrent with the adoption of the
      2006
      Stock Plan in June 2006, no additional options can be issued 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 as determined by the Board of Directors. In 2007, under the 2006 Stock
      Plan, we granted to officers and key employees 830,000 options to purchase
      830,000 shares of common stock at exercise prices of $0.80 and $1.10 per option.
      We have reserved 2,118,622 shares of common stock for issuance under the 2006
      Stock Plan.




12





**LIGHTSPACE
      CORPORATION**


**NOTES
      TO** **UNAUDITED
      CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**




**11.
      STOCK INCENTIVE PLANS (continued)**





On
      December 10, 2007, our stockholders approved adoption of the 2007 Stock
      Incentive Plan (the “2007 Stock Plan”), which had been approved by our Board of
      Directors in August, 2007, 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. The 2007 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 as determined by the Board
      of
      Directors. 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.





Combined
      information with respect to stock options issued under the 2005, 2006 and 2007
      Stock Plans for the nine month period ended September 30, 2008 is summarized
      as
      follows:





**September 30, 2008****Weighted****Number of**
            
            **Average****Shares**
            
            **Exercise Price**Options
                outstanding January 1, 2008
            
            
            5,143,610
            
            $
            1.01Options
                granted
            
            
            -
            
            
            -Options
                exercised
            
            
            -
            
            
            -Options
                cancelled
            
            
            (3,738,190
            )
            
            (1.04
            )Options
                outstanding September 30, 2008
            
            
            1,405,420
            
            $
            0.98Options
                exercisable at September 30, 2008
            
            
            653,051
            
            $
            0.93Weighted
                average contractual life (years) options outstanding
            
            
            8
                1/2Options
                available for grant at September 30, 2008
            
            
            4,713,202




**12.
      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**
            
            **2008**
            
            **2007**$.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
            
            
            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
            
            
            13,884,905$1.25
                Unit warrant
            
            
            2006
                and April 30, 2007
            
            $
            1.25
            
            
            3,471,226
            
            
            3,471,226$1.63
                Unit warrant
            
            
            2006
                and April 30, 2007
            
            $
            1.63
            
            
            3,471,226
            
            
            3,471,226Total
                common stock warrants outstanding
            
            
            
            
            
            
            
            
            23,634,205
            
            
            23,634,205





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




13





**LIGHTSPACE
      CORPORATION**


**NOTES
      TO** **UNAUDITED
      CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**12.
      STOCK WARRANTS (continued)**





$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
      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 stock issuable upon exercise of the unit warrants, included in the
      units issued in the private placement to investors and the financial advisor.
      As
      of September 30, 2008, these securities have not been registered for resale.





At
      September 30, 2008 and December 31, 2007, the weighted average exercise price
      of
      the common stock warrants outstanding was $1.24. At September 30, 2008, the
      common stock warrants had an average remaining life of approximately three
      and
      one half years.





**13.
      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
      December 31, 2007, we had operating loss carryforwards of approximately
      $7,299,000 available to offset future taxable income for United States federal
      and state income tax purposes. At December 31, 2007, approximately $4,231,000
      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 2012.





The
      deferred tax asset related to the operating loss carryforwards, tax credits
      and
      other items deductible against future taxable income was $3,314,458 at December
      31, 2007. The Company has provided a valuation allowance at that date equal
      to
      the full amount of the deferred tax asset, and will continue to fully reserve
      the deferred tax asset until it can be ascertained that all or a portion of
      the
      asset will be realized.





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. Therefore, in future years, we may be required to pay income
      taxes even though significant operating loss and tax credit carryforwards
      exist.




14





**LIGHTSPACE
      CORPORATION**


**NOTES
      TO** **UNAUDITED
      CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**14.
      COMMITMENTS AND CONTINGENCIES**





Effective
      July 1, 2008, the Company entered into a triple net five-year lease for
      approximately 10,700 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 $102,000 per year. Concurrent with the signing of
      the
      new lease, the Company entered into a lease termination agreement with the
      former landlord for the approximate three remaining years under a five year
      lease agreement for office and manufacturing operations entered into effective
      May 1, 2006. Under this lease termination agreement, the Company settled all
      amounts due under the May 1, 2006 lease by a payment of $75,000. As a result
      of
      this lease termination agreement, a liability established to evenly spread
      monthly lease payments in the amount of $132,909 was no longer required and
      was
      reversed as an offset to rent expense effective June 30, 2008.





The
      Company leases its facilities and certain equipment under non-cancelable
      operating leases expiring through June 2013. Total rent expense for the three
      and nine months ended September 30, 2008 and 2007 was $32,580, $129,179, $74,380
      and $238,019, respectively.





On
      September 30, 2008, we had approximately $745,000 in purchase order commitments
      to our vendors. The majority of this amount is due to the manufacturer of our
      interactive tiles.





The
      table
      below sets forth our contractual obligations as of September 30,
      2008





**Contractual
                Obligation**
            
            **Payments
                Due by Period****Total**
            
            **1
                Year**
            
            **2-3
                Years**
            
            **4-5
                Years**
            
            **Thereafter**Facility
                lease
            
            $
            486,466
            
            $
            98,930
            
            $
            204,540
            
            $
            182,996
            
            
            -Purchase
                orders
            
            
            745,000
            
            
            745,000
            
            
            -
            
            
            -
            
            
            -Other
                leases
            
            
            5,023
            
            
            3,767
            
            
            1,256
            
            
            -
            
            
            -Total
            
            $
            1,236,489
            
            $
            847,697
            
            $
            205,796
            
            $
            182,996
            
            
            -





**15.
      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.
      Within this segment, the Company’s chief executive officer views the operations
      of the manufacturing and sales and marketing organizations as an integrated
      business unit and utilizes Companywide operating results as one factor in making
      operating decisions.





Revenues,
      denominated in U.S. dollars, by geographical region are as follows:





**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**United
                States
            
            $
            182,097
            
            $
            209,546
            
            $
            860,394
            
            $
            739,325Europe
            
            
            124,262
            
            
            -
            
            
            631,906
            
            
            203,675Asia/Australia
            
            
            122,647
            
            
            101,253
            
            
            158,637
            
            
            145,953South
                America
            
            
            -
            
            
            32,000
            
            
            170,624
            
            
            74,000Canada
            
            
            24,805
            
            
            -
            
            
            94,045
            
            
            20,500Total
            
            $
            453,811
            
            $
            342,799
            
            $
            1,915,606
            
            $
            1,183,453




15





**Item 2.
      Management’s Discussion and Analysis 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
      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, 2007. 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.




Our
      Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
      Reports on Form 8-K and amendments to reports filed or furnished pursuant
      to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as
      amended (the “Exchange Act”), are available free of charge at an Internet
      website maintained by the Securities and Exchange Commission (the “SEC”) that
      contains reports, proxy and information statements, and other information
      regarding issuers that file electronically with the SEC at http://www.sec.gov ,
      and on
      our website at http://www.Lightspacecorp.com as soon as reasonably practicable
      after such reports are filed with the Securities and Exchange Commission. The
      information posted on our web site is not incorporated into this Quarterly
      Report.





You
      may
      read and copy any materials that we file with the SEC at the SEC’s Public
      Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain
      information on the operation of the Public Reference Room by calling the SEC
      at
      1-800-SEC-0330. The Annual Report and our other public reports may also be
      obtained without charge upon written request to Lightspace Corporation, 383
      Dorchester Avenue, Suite 220, Boston, Massachusetts 02127, Attention, Investor
      Relations.





**Overview**





Lightspace
      provides interactive lighting entertainment products to children play areas,
      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.




**Results
      of Operations for the Quarters and Nine Months Ended September 30, 2008 and
      200** **7** **Revenue
      and Operating Results**




For
      the
      quarter ended September 30, 2008, revenue was $453,811, an increase of $111,012
      from revenue of $342,799 recorded in the quarter ended September 30, 2007.
      The
      net loss for the quarter ended September 30, 2008 was $170,886, ($0.01) per
      diluted share, as compared to the net loss for the quarter ended September
      30,
      2007 of $877,193, ($0.06) per diluted share. The net loss for the quarter ended
      September 30, 2008 included a provision for compensation related to stock
      options in the amount of $31,556. The net loss for the quarter ended September
      30, 2007 included a provision for compensation related to stock options in
      the
      amount of $80,519. Additionally, the net loss for the quarter ended September
      30, 2008 reflects the first full quarter’s impact of staff reductions and other
      expense reductions affected during the first six months of 2008, discussed
      hereafter.


16





Revenue
      for the quarter ended September 30, 2008 was comprised of revenue from the
      sale
      of products, $419,860 and other revenue of $33,951, as represented by deferred
      maintenance revenue, sales of miscellaneous parts and other services. In this
      period, there were nineteen Lightspace Play new installation sites, six
      Lightspace Design new installation sites, and one Lightspace Dance new
      installation site, representing 919 interactive tiles. Revenue for the quarter
      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 quarter ended
      September 30, 2007, there were ten Lightspace Play new installation sites and
      two Lightspace Dance new installation sites, representing 472 interactive
      tiles.





For
      the
      quarter ended September 30, 2008, sales of Lightspace products were made to
      customers in the United States - $182,097; Europe - $124,262; Asia - $122,647;
      and Canada - $24,805. During this period, three customers accounted for 24%,
      20%
      and 15% of revenues, respectively. Total sales to these three new customers
      for
      the September 2008 quarter aggregated $267,674, or approximately 59% of total
      revenue. For the quarter ended September 30, 2007, sales of Lightspace products
      were made to customers in the United States - $209,546; Asia/Australia -
      $101,253; and South America - $32,000. During this period, four customers,
      each
      individually, accounted for over 10% of revenues. Sales to these four customers
      aggregated $204,532, or approximately 60% of total revenues.





For
      the
      nine months ended September 30, 2008, revenue was $1,915,606, an increase of
      $732,153 or approximately 62% from revenue of $1,183,453 recorded in the nine
      months ended September 30, 2007. The net loss for the nine months ended
      September 30, 2008 was $1,044,797, ($0.07) per diluted share, as compared to
      a
      net loss for the nine months ended September 30, 2007 of $3,608,332, ($0.27)
      per
      diluted share. The net loss for the nine months ended September 30, 2007
      included a charge in the amount of $1,306,612 to research and development
      operating expenses related to the acquisition of the emagipix in-process
      development technology. The net loss for the nine months ended September 30,
      2008 included a provision for compensation related to stock options in the
      amount of $82,883. The net loss for the nine months ended September 30, 2007
      included a provision for compensation related to stock options in the amount
      of
      $127,928. Additionally, the net loss for the nine months ended September 30,
      2008 reflects the impact of staff reductions and other expense reductions
      affected during the first six months of 2008, discussed hereafter.




The
      revenue for the nine months ended September 30, 2008 was comprised of revenue
      from the sale of products, $1,652,072, and other revenue of $263,534, as
      represented by deferred maintenance revenue, sales of miscellaneous parts and
      other services. In the nine months ended September 30, 2008, there were
      forty-seven Lightspace Play new installation sites, six Lightspace Dance new
      installation sites and ten Lightspace Design new installation sites,
      representing 3,577 interactive tiles. 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 thirty-three Lightspace Play new
      installation sites, three Lightspace Dance new installation site and one
      Lightspace Design new installation site, representing 1,709 interactive tiles.





For
      the
      nine months ended September 30, 2008, sales of Lightspace products were made
      to
      customers in the United States - $860,394; Europe - $631,906; South America
      -
      $170,624; Asia/Australia - $158,637; and Canada - $94,045. During this period,
      one new Lightspace customer accounted for approximately 24% of revenues. Sales
      to this customer aggregate $451,059 in the 2008 nine month period. 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/Australia
      -
      $145,953; South America - $74,000; and Canada - $20,500. During this period,
      two
      customers, each individually, accounted for more than 10% of revenues. Sales
      to
      these two customers aggregated $378,372 in the 2007 nine month period, or
      approximately 32% of total revenue.




17





Our
      product backlog at September 30, 2008 was $233,816, representing 505 interactive
      tiles. We expect that this backlog will be installed at customer locations
      in
      the December 2008 quarter. 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, 2008 and 2007, Lightspace recorded gross margins
      of
      $97,511, or 21%, and $17,826, or 5%, respectively. For the nine months ended
      September 30, 2008 and 2007, Lightspace recorded gross margins of $473,077,
      or
      25%, and $233,609, or 20%, respectively. The product margin percentage
      improvement in the quarter and nine month period ended September 2008 is due
      to
      increase revenues in the 2008 periods where the fixed product cost is spread
      over more units and staff reductions and other expense reductions affected
      in
      the 2008 periods. Product margins in the nine month period ended September
      30,
      2008 were unfavorably impacted by $42,000 of provisions for obsolete tooling
      and
      disputed importation taxes. Product margins in the nine month period ended
      September 30, 2007 were unfavorably impacted by a provision of $21,192 for
      obsolete materials as a result of engineering design changes. 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 operations and customer service.
      These latter costs tend to be a fixed cost that decreases on a per unit basis
      as
      volume increases.





**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 technology emagipix, an interactive lighting technology that
      utilizes electroluminescent sheets. On April 30, 2007, LEC completed the
      acquisition of the emagipix technology. The purchase price for the emagipix
      technology consisted of $300,000 and the issuance of a $950,000 convertible
      term
      secured non-recourse note to Illumination Design Works, Inc. In connection
      with
      the acquisition, a former officer and co-founder of Lightspace Corporation
      and
      the principal owner of Illumination Design Works, Inc. re-commenced employment
      with us and was granted options to purchase 250,000 shares of common stock
      at an
      exercise price of $0.80 per share.





The
      $950,000 convertible term secured non-recourse note bears interest at 5% per
      annum, payable yearly, and is due and payable on April 30, 2010. The note is
      secured by a pledge of 76% of 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 the Company at a conversion price of $0.80
      per
      share, the fair market value of the Company’s common stock at April 30, 2007.
      Upon the occurrence of certain defined events of default by the noteholder,
      the
      Company 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.





The
      Company 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, which included legal
      fees
      incurred in connection with the acquisition. The Company initial estimates
      that
      the cost to complete the development of the emagipix technology would be between
      $1.5 million and $2.0 million and that the technology would be commercially
      available within three years have been revised. The Company’s cash situation at
      December 31, 2007 and subsequent thereto has necessitated that development
      work
      of the emagipix technology be deferred until sufficient capital has been raised
      to fund the current operations of the Company and thereafter recommence the
      development efforts with respect to the emagipix technology.




18




**Operating
      Expenses**




**** To
      conserve cash, Lightspace has undertaken significant staff reductions and other
      reductions in all departments. Staff levels, which were at twenty-five full-time
      employees at December 31, 2007, were reduced to six employees by June 30, 2008
      and have remained at that level through September 30, 2008. Present staffing
      levels are as follows: operations – 2; research
      and
      development –
      2; and administration – 2. The
      financial
      impact of the reduced staff levels was not fully implemented until May of 2008;
      accordingly, fully reduced expense levels were not realized until the September
      2008 quarter. Additionally, effective July 1, 2008, the Company entered into
      a
      triple net five-year lease for approximately 10,700 square feet to be used
      for
      office and manufacturing operations. Concurrent with the signing of the new
      lease, the Company entered into a lease termination agreement with the former
      landlord for the approximate three remaining years under a five year lease
      agreement for office and manufacturing operations entered into effective May
      1,
      2006. Under this lease termination agreement, the Company settled all amounts
      due under the May 1, 2006 lease by a payment of $75,000. As a result of this
      lease termination agreement, a liability established to evenly spread monthly
      lease payments in the amount of $132,909 was no longer required and was reversed
      as an offset to rent expense effective June 30, 2008. The first year base
      monthly rental payments under the new lease are $8,194 compared to monthly
      rent
      payments of $24,682 under the terminated lease.





For
      the
      quarter ended September 30, 2008, research and development spending was $78,735
      compared to $280,645 for the quarter ended September 30, 2007. For the nine
      months ended September 30, 2008 research and development spending was $542,213
      as compared to $2,072,383 for the nine months ended September 30, 2007. The
      decreased 2008 research and development spending levels is primarily related
      to
      the acquisition of the Emagipix technology in April 2007 that required a
      valuation charge to research and development in the amount of $1,306,612 and
      to
      staff reductions that were affected in 2008. With the reduction of the research
      and development staff from nine employees to two employees during the first
      six
      months of 2008, research and development expenditures for the period from July
      through December of 2008 will be significantly less than the comparable period
      of 2007.




For
      the
      quarter ended September 30, 2008, sales and marketing expenditures were $16,867
      as compared to $283,256 for the quarter ended September 30, 2007. For the nine
      months ended September 30, 2008 sales and marketing expenditures were $375,762
      as compared to $942,680 for the nine months ended September 30, 2007. The
      significant reduction in 2008 sales and marketing expenses is directly related
      to the reduction in sales and marketing staff. The sales and marketing staff
      of
      eight employees at December 31, 2007 has been eliminated. At September 30,
      2008,
      the Company’s CEO and vice president of operations are maintaining the sales and
      marketing function, as the Company shifts to a distributor based sales
      organization from a Company based sales organization.




For
      the
      quarter ended September 30, 2008, administrative expenditures were $144,331
      as
      compared to $315,861 for the quarter ended September 30, 2007. For the nine
      months ended September 30, 2008 administrative expenditures were $515,058 as
      compared to $790,247 for the nine months ended September 30, 2007. The
      significant reduction in 2008 administrative expenses is directly related to
      the
      reduction in staff and other expense reductions. The administrative staff of
      four employees at December 31, 2007 had been reduced to two employees at June
      30, 2008, and remained at that level through the September 2008 quarter.





**Inflation**





In
      the
      opinion of management, inflation has not had a material impact on our
      operations.





**Net
      Interest Expense**




Net
      interest expense was $28,464 for the quarter ended September 30, 2008 as
      compared to $15,257 for the quarter ended September 30, 2007. For the nine
      month
      period ended September 30, 2008, net interest expense was $84,841 as compared
      to
      $36,631 in the corresponding period of 2007. The increased net interest expense
      in the 2008 periods is due to the issuance in April 2007 of a $950,000 note
      in
      connection with the purchase of the emagipix technology.


19


**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
      December 31, 2007, we had operating loss carryforwards of approximately
      $7,299,000 available to offset future taxable income for United States federal
      and state income tax purposes. At December 31, 2007, approximately $4,231,000
      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 2012.





The
      deferred tax asset related to the operating loss carryforwards, tax credits
      and
      other items deductible against future taxable income was $3,314,458 at December
      31, 2007. The Company has provided a valuation allowance at that date equal
      to
      the full amount of the deferred tax asset, and will continue to fully reserve
      the deferred tax asset until it can be ascertained that all or a portion of
      the
      asset will be realized.





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. Therefore, in future years, we may be required to pay income
      taxes even though significant operating loss and tax credit carryforwards
      exist.





**Liquidity,
      Capital Resources and Cash Flow**





We
      have
      incurred net operating losses and negative operating cash flows since inception.
      As of September 30, 2008, we had an accumulated retained earnings deficit of
      $16,156,990 and a stockholders’ deficit of $1,767,456. We have funded our
      operations through September 30, 2008 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. At September 30, 2008, the Company’s cash balance was $27,921. These
      factors, among others, indicate that there is substantial uncertainty that
      we
      will continue as a going concern.





As
      part
      of the acquisition of the emagipix in-process development technology, we issued
      a $950,000 convertible term secured non-recourse note to Illumination Design
      Works, Inc. upon the closing of the purchase on April 30, 2007. The $950,000
      convertible term secured non-recourse note bears interest at 5% per annum,
      payable yearly, and is due and payable on April 30, 2010. The note is secured
      by
      a pledge of 76% of the stock of LEC. The principal of the note is convertible
      at
      any time up and until April 30, 2010, 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.


20





The
      first
      annual payment of interest of $47,500 was due and payable on April 15, 2008.
      At
      September 30, 2008, Lightspace had made installment payments of $3,958 against
      the amount of interest due and is currently in arrears in the monthly
      installment payments. The non-payment of the total amount of yearly interest
      when due is defined as an event of default under the terms of the note. Upon
      an
      event of default, and after written notice of such event of default by the
      holder of the note, the holder may pursue remedies with respect to the
      collection of the principal of the note and unpaid interest. Such remedies
      are
      limited solely to the collateral security for the note, 76% of the stock of
      LEC.
      Lightspace has not received written notice of an event of default. In November
      2008, Lightspace received notice from the holder of the note of its intention
      to
      exercise the option to convert the $950,000 principal balance of the note into
      the common stock of Lightspace at an exercise price of $0.80 per share
      (1,187,500 shares of Lightspace common stock). Upon conversion of the note,
      the
      collateral security for the note, 76% of the stock of LEC, will be voided.
      Lightspace and the holder of the note are negotiating payment terms for the
      remaining balance of interest due under the note.





On
      April
      30, 2007 the Company closed a private placement of its equity units. The Company
      sold 586,173 units at the offering price of $6.40 per unit, resulting in
      aggregate proceeds to the Company of $3,751,507. After expenses of the offering
      of $311,507, the net proceeds to the Company were $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.
      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.





The
      Company used a portion of the net proceeds from the private placement to
      complete the acquisition of the emagipix technology by the payment of the cash
      purchase price of $300,000. The balance of the net proceeds was used for general
      working capital purposes.





**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.





**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, 2008 and
      December 31, 2007 was $233,816 and $96,280, respectively.





**Off-Balance
      Sheet Arrangements**





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





Effective
      July 1, 2008, the Company entered into a triple net five-year lease for
      approximately 10,700 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 $102,000 per year. Concurrent with the signing of
      the
      new lease, the Company entered into a lease termination agreement with the
      former landlord for the approximate three remaining years under a five year
      lease agreement for office and manufacturing operations entered into effective
      May 1, 2006. Under this lease termination agreement, the Company settled all
      amounts due under the May 1, 2006 lease by a payment of $75,000. As a result
      of
      this lease termination agreement, a liability established to evenly spread
      monthly lease payments in the amount of $132,909 was no longer required and
      was
      reversed as an offset to rent expense effective June 30, 2008.


21





The
      Company leases its facilities and certain equipment under non-cancelable
      operating leases expiring through June 2013. Total rent expense for the three
      and nine months ended September 30, 2008 and 2007 was $32,580, $129,179, $74,380
      and $238,019, respectively.





On
      September 30, 2008, we had approximately $745,000 in purchase order commitments
      to our vendors. The majority of this amount is due to the manufacturer of our
      interactive tiles.





The
      table
      below sets forth our contractual obligations as of September 30,
      2008





**Contractual
                Obligation**
            
            **Payments
                Due by Period****Total**
            
            **1
                Year**
            
            **2-3
                Years**
            
            **4-5
                Years**
            
            **Thereafter**Facility
                lease
            
            $
            486,466
            
            $
            98,930
            
            $
            204,540
            
            $
            182,996
            
            
            -Purchase
                orders
            
            
            745,000
            
            
            745,000
            
            
            -
            
            
            -
            
            
            -Other
                leases
            
            
            5,023
            
            
            3,767
            
            
            1,256
            
            
            -
            
            
            -Total
            
            $
            1,236,489
            
            $
            847,697
            
            $
            205,796
            
            $
            182,996
            
            
            -





**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*


The
      Company recognizes revenue from the sale of its 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) the Company’s products have been delivered and risk of loss
      has passed to the customer; (3) the Company has completed all of the necessary
      terms of the contract generally including but not limited to, installation
      of
      the product and training; (4) the amount of revenue to which the Company is
      entitled is fixed or determinable; and (5) the Company believes it is
      probable that it 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, the
      Company defers 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
      the opinion of the Company, it is probable that the amount due to the Company
      will not be collected.





*Inventory*


Inventories
      are stated at the lower of cost or market value.





*Warranty
      Reserve*


The
      Company’s products are warranted against manufacturing 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 the Company’s
      estimate of repair costs.




22





*Stock-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 the Company 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
      future value of the equity security at the date of acquisition exceeds the
      exercise price to be paid. The resulting compensation expense, if any, is
      recognized for financial reporting over the term of vesting or performance.
      This
      statement was first effective for the Company on January 1, 2006 for all
      prospective stock option and share grants of stock-based compensation awards
      and
      modifications to all prior grants.





For
      all
      periods prior to January 1, 2006, the Company 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, is recognized for financial reporting over the term of vesting or
      performance. The Company has historically granted stock-based compensation
      awards to directors, officers and employees and directors at an exercise price
      equal to the current market value of the Company’s 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 directors, officers and employees for grants prior to January 1,
      2006.





Stock-based
      compensation arrangements with nonemployees or associated with borrowing
      arrangements are accounted for utilizing the fair value method or, if a more
      reliable measurement, the value of the services or consideration received.
      The
      resulting compensation expense, if any, is recognized for financial reporting
      over the term of performance or borrowing arrangement.




23


**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 United States
      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 United States 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.





**Item 4.
      Controls and Procedures**




(a)
      Evaluation of disclosure controls and procedures.




The
      Company conducted an evaluation, under the supervision and with the
      participation of our Chief Executive Officer/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.





Since
      April 16, 2008, the date that our Chief Financial Officer was released as a
      Lightspace employee, our Chief Executive Officer has been serving as both the
      Company’s principal executive officer and principal financial officer (Chief
      Financial Officer).





(b)
      Changes in internal control over financial reporting.





There
      have been no changes in our internal control over financial reporting in
      connection with the evaluation required under paragraph (d) of Rule 13a-15
      of
      the Exchange Act that occurred during the quarter ended September 30, 2008
      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, we were served notice of a wrongful termination claim against
      us
      by a former employee. The former employee was seeking damages in the amount
      of
      lost compensation. We believed there was no merit to the lawsuit and intended
      to
      defend against it. However, to avoid the cost of protracted litigation, on
      April
      4, 2008, we agreed to settle the former employee’s claim to the mutual
      satisfaction of all parties. The settlement of this litigation did not have
      a
      significant effect on the results of operations for the nine months ended
      September 30, 2008.





In
      March
      2008, we received a letter from a vendor claiming breach of contract and
      non-payment of bills due. As of March 28, 2008 approximately $76,000 was owed
      to
      this vendor. This amount was not in dispute. Additionally, the vendor claimed
      to
      have purchased approximately $36,000 in materials on our behalf which as of
      March 28, 2007, had not been invoiced to the Company. On March 28, 2007, the
      case was settled and we agreed to the payment of the $76,000 to be made by
      March
      31, 2008. The additional $36,000 allegedly owed was settled for approximately
      $28,000. On March 28, 2007, the Company obtained short term loans due April
      28,
      2008 for $70,000 from a stockholder and two ex-directors, the proceeds of which
      were used in payment of the $76,000. The short term loans were repaid when
      due.
      The remaining balance due to the vendor in the approximate amount of $28,000
      was
      paid prior to June 30, 2008.





During
      the normal course of business, we may at times be involved in disputes and/or
      litigation with respect to our products, operations or employees. We are not
      currently involved in any significant litigation.





**Item
      1A. Risk Factors**





There
      have been no material changes from the risk factors set forth on the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2007 filed with
      the
      Securities and Exchange Commission on April 1, 2008. 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, 2007.





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





None





**Item
      3. Defaults upon Senior Securities**





As
      part
      of the acquisition of the emagipix in-process development technology, we issued
      a $950,000 convertible term secured non-recourse note to Illumination Design
      Works, Inc. upon the closing of the purchase on April 30, 2007. The $950,000
      convertible term secured non-recourse note bears interest at 5% per annum,
      payable yearly, and is due and payable on April 30, 2010. The note is secured
      by
      a pledge of 76% of the stock of LEC. The principal of the note is convertible
      at
      any time up and until April 30, 2010, 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.





The
      first
      annual payment of interest of $47,500 was due and payable on April 15, 2008.
      At
      September 30, 2008, Lightspace had made installment payments of $3,958 against
      the amount of interest due and is currently in arrears in the monthly
      installment payments. The non-payment of the total amount of yearly interest
      when due is defined as an event of default under the terms of the note. Upon
      an
      event of default, and after written notice of such event of default by the
      holder of the note, the holder may pursue remedies with respect to the
      collection of the principal of the note and unpaid interest. Such remedies
      are
      limited solely to the collateral security for the note, 76% of the stock of
      LEC.
      Lightspace has not received written notice of an event of default. In November
      2008, Lightspace received notice from the holder of the note of its intention
      to
      exercise the option to convert the $950,000 principal balance of the note into
      the common stock of Lightspace at an exercise price of $0.80 per share
      (1,187,500 shares of Lightspace common stock). Upon conversion of the note,
      the
      collateral security for the note, 76% of the stock of LEC, will be voided.
      Lightspace and the holder of the note are negotiating payment terms for the
      remaining balance of interest due under the note.


25





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





None





**Item
      5. Other Information**





On
      April
      16, 2008, Mr. Louis Nunes, our Chief Financial Officer, was released as a
      Lightspace employee. There were no disagreements between Mr. Nunes and the
      Company and his release was not based on his performance. Mr. Nunes provided
      financial and accounting services to the Company on an outsourced basis in
      connection with the filing of our Form 10-Q for the March 2008
      quarter.





**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
                Florindo32.1
            
            *
            
            Certification
                Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 - Gary
                Florindo





*
      Filed
      herewith


26


**SIGNATURES**





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




LIGHTSPACE
                CORPORATIONDate:
                November 12, 2008
            
            By:
            /s/
                GARY FLORINDOGary
                Florindo
              President,
                Chief Executive Officer and
              Chief
                Financial Officer




27