##### Table of Contents



United States
Securities and Exchange Commission

Washington, D.C. 20549


FORM 10-QSB

(Mark One)



|[X] | Quarterly Report under Section 13 or 15(d) of the Securities and Exchange Act of 1934
|--- | -------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2002



|[   ] | Transition report under Section 13 or 15(d) of the Exchange Act
|----- | ---------------------------------------------------------------

For the transition period from ________________ to ________________

Commission File Number 000-19828

SpatiaLight, Inc.

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


|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|New York                                                       |  | 16-1363082                       
|                                                               |  |                                  
|(State or other jurisdiction of
Incorporation or organization) |  | (IRS Employer Identification No.)

9 Commercial Blvd., Suite 200, Novato, CA 94949

---

(Address of principal executive offices)


(415) 883-1693

---

(Issuers telephone number)


Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [   ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 26,057,777 shares of
common stock as of May 3, 2002.

Transitional Small Business Disclosure Format (check one): Yes [   ] No [X]





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TABLE OF CONTENTS



|                              |                                                                                                |                                                                 |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Condensed Financial Statements (unaudited)                                            
|                              |                                                                                                | BALANCE SHEETS                                                 
|                              |                                                                                                | STATEMENTS OF OPERATIONS (unaudited)                           
|                              |                                                                                                | STATEMENT OF STOCKHOLDERS DEFICIT QUARTER ENDED MARCH 31, 2002
|                              |                                                                                                | STATEMENTS OF CASH FLOW (unaudited)                            
|                              |                                                                                                | Notes to Condensed Financial Statements (Unaudited)            
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|PART II. OTHER INFORMATION   
|                              | ITEM 2 Changes in Securities and Use of Proceeds                                              
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                      
|SIGNATURES                   



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##### Table of Contents



SPATIALIGHT, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended March 31, 2002

Table of Contents

|        |  |                                                                                         |  |   
|------- |  | --------------------------------------------------------------------------------------- |  | --
|PART I  |  | FINANCIAL INFORMATION                                                                   |  |   
|       
|Item 1. |  | Condensed Financial Statements (unaudited)                                              |  |   
|       
|        |  | Condensed Balance Sheets dated
March 31, 2002 and December 31, 2001                     |  | 3 
|       
|        |  | Condensed Statements of Operations
for the Three months Ended March 31, 2002 and 2001   |  | 4 
|       
|        |  | Condensed
Statements of Stockholders Deficit for the Three months Ended
March 31, 2002 |  | 5 
|       
|        |  | Condensed Statements of Cash Flows
for the Three months Ended March 31, 2002 and 2001   |  | 6 
|       
|        |  | Notes to Condensed Financial Statements                                                 |  | 7 
|       
|Item 2. |  | Managements Discussion and Analysis
of Financial Condition and Results of Operations   |  | 12
|       
|PART II |  | OTHER INFORMATION                                                                       |  |   
|       
|Item 2. |  | Changes in Securities and Use of Proceeds                                               |  | 21
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                        |  | 22

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PART I. FINANCIAL INFORMATION




Item 1. Condensed Financial Statements (unaudited)




SPATIALIGHT, INC.
BALANCE SHEETS

|                                            |                                                |                                                                                                                               |                             |                      |         |             |             |              |         |           |           | 
|------------------------------------------- | ---------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | --------------------------- | -------------------- | ------- | ----------- | ----------- | ------------ | ------- | --------- | --------- | 
|                                            |                                                |                                                                                                                               |                             |                      |         | March 31,   |             | December 31,
|                                            |                                                |                                                                                                                               |                             |                      |         | 2002        |             | 2001        
|                                            |                                                |                                                                                                                               |                             |                      |         |             |             |             
|                                            |                                                |                                                                                                                               |                             |                      |         | (unaudited) |             |              |         |          
|ASSETS                                      |                                                |                                                                                                                               |                             |                      |         |             |             |             
|Current assets                              |                                                |                                                                                                                               |                             |                      |         |             |             |             
|                                            | Cash and cash equivalents                      |                                                                                                                               | $                           | 1,880,943            |         |             | $           | 2,728,134    |        
|                                            | Prepaids and other current assets              |                                                                                                                               |                             | 408,024              |         |             |             | 105,158      |        
|                                            |                                                |                                                                                                                               |                             |                      |         |             |             |             
|                                            |                                                |                                                                                                                               |                             | Total current assets |         |             | 2,288,967   |              |         |           | 2,833,292 | 
|Property and equipment, net                 |                                                |                                                                                                                               | 613,926                     |                      |         |             | 607,066     |             
|Other assets                                |                                                |                                                                                                                               | 48,531                      |                      |         |             | 47,644      |             
|                                            |                                                |                                                                                                                               |                             |                      |         |             |             |             
|                                            |                                                |                                                                                                                               |                             | Total assets         |         | $           | 2,951,424   |              |         | $         | 3,488,002 | 
|                                            |                                                |                                                                                                                               |                             |                      |         |             |             |             
|LIABILITIES AND STOCKHOLDERS DEFICIT       |                                                |                                                                                                                               |                             |                      |         |             |             |             
|Current liabilities                         |                                                |                                                                                                                               |                             |                      |         |             |             |             
|                                            | Accounts payable                               |                                                                                                                               | $                           | 181,286              |         |             | $           | 394,028      |        
|                                            | Short-term convertible notes                   |                                                                                                                               |                             | 3,388,367            |         |             |             | 3,137,284    |        
|                                            | Accrued expenses and other current liabilities |                                                                                                                               |                             | 90,430               |         |             |             | 170,036      |        
|                                            |                                                |                                                                                                                               |                             |                      |         |             |             |             
|                                            |                                                |                                                                                                                               | Total current liabilities   |                      |         | 3,660,083   |             |              |         | 3,701,348 |          
|                                            |                                                |                                                                                                                               |                             |                      |         |             |             |             
|Commitments                                 |                                                |                                                                                                                               |                             |                      |         |             |             |             
|Stockholders deficit:                      |                                                |                                                                                                                               |                             |                      |         |             |             |             
|                                            | Common stock, $.01 par value:                  |                                                                                                                               |                             |                      |         |             |             |              |        
|                                            |                                                | 40,000,000 shares authorized;
26,057,777 and 25,811,786 shares issued and
outstanding
at March 31, 2002 and December 31, 2001 |                             |                      | 260,578 |             |             |              | 258,118 |          
|Additional paid-in capital                  |                                                |                                                                                                                               | 42,869,386                  |                      |         |             | 41,911,879  |             
|Notes and stock subscription receivable     |                                                |                                                                                                                               | (2,005,544                  | )                    |         |             | (2,653,434  | )           
|Accumulated deficit                         |                                                |                                                                                                                               | (41,833,079                 | )                    |         |             | (39,729,909 | )           
|                                            |                                                |                                                                                                                               |                             |                      |         |             |             |             
|                                            |                                                |                                                                                                                               | Total stockholders deficit |                      |         | (708,659    | )           |              |         | (213,346  | )        
|                                            |                                                |                                                                                                                               |                             |                      |         |             |             |             
|Total liabilities and stockholders deficit |                                                | $                                                                                                                             | 2,951,424                   |                      |         | $           | 3,488,002   |             
|                                            |                                                |                                                                                                                               |                             |                      |         |             |             |             

See accompanying notes to financial statements.

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SPATIALIGHT, INC.
STATEMENTS OF OPERATIONS (unaudited)

|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |            |         |            |          |  
|------------------------------------------------------------------------------- | ------------------------- | ----------------------------------------------- | -------------------------------------------------- | ---------------------- | ------- | ------------------ | ---------- | ---------- | ------- | ---------- | -------- | -
|                                                                                |                           |                                                 |                                                    |                        |         | Three Months Ended
|                                                                                |                           |                                                 |                                                    |                        |         | March 31,         
|                                                                                |                           |                                                 |                                                    |                        |         |                   
|                                                                                |                           |                                                 |                                                    |                        |         | 2002               |            | 2001      
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|Revenues                                                                        |                           | $                                               |                                                   |                        |         | $                  |           |           
|Cost of revenues                                                                |                           |                                                 |                                                   |                        |         |                    |           |           
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|                                                                                |                           |                                                 | Gross profit                                       |                        |         |                   |            |            |         |           |         
|Selling, general and administrative expenses:                                   |                           |                                                 |                                                    |                        |         |                    |            |           
|                                                                                |                           | Selling, general and administrative expenses    |                                                    |                        | 710,806 |                    |            |            | 639,423 |           
|                                                                                |                           | Stock-based general and administrative expenses |                                                    |                        | 265,977 |                    |            |            | 49,360  |           
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|                                                                                |                           |                                                 | Total selling, general and administrative expenses |                        |         | 976,783            |            |            |         | 688,783    |         
|                                                                                |                           | Research and development expenses               |                                                    |                        | 582,111 |                    |            |            | 603,802 |           
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|                                                                                |                           |                                                 | Total operating expenses                           |                        |         | 1,558,894          |            |            |         | 1,292,585  |         
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|                                                                                |                           |                                                 | Operating loss                                     |                        |         | (1,558,894         | )          |            |         | (1,292,585 | )       
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|Other income (expenses):                                                        |                           |                                                 |                                                    |                        |         |                    |            |           
|                                                                                | Interest expense:         |                                                 |                                                    |                        |         |                    |            |            |        
|                                                                                |                           |                                                 | Interest expense                                   |                        |         | (63,133            | )          |            |         | (64,065    | )       
|                                                                                |                           |                                                 | Stock-based interest expense                       |                        |         | (487,136           | )          |            |         | (118,431   | )       
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|                                                                                |                           |                                                 |                                                    | Total interest expense |         |                    | (550,269   | )          |         |            | (182,496 | )
|                                                                                | Interest and other income |                                                 |                                                    | 7,418                  |         |                    |            | 5,558      |        
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|                                                                                |                           |                                                 | Total other income (expenses)                      |                        |         | (542,851           | )          |            |         | (176,938   | )       
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|                                                                                | Loss before income taxes  |                                                 |                                                    | (2,101,745             | )       |                    |            | (1,469,523 | )      
|Income tax expense                                                              |                           |                                                 | 1,425                                              |                        |         |                    | 3,850      |           
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|                                                                                |                           |                                                 | Net loss                                           |                        | $       | (2,103,170         | )          |            | $       | (1,473,373 | )       
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|Net loss per share  basic and diluted                                          |                           | $                                               | (0.09                                              | )                      |         | $                  | (0.07      | )         
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           
|Weighted average shares used in computing
net loss per share- basic and diluted |                           |                                                 | 23,859,321                                         |                        |         |                    | 20,541,528 |           
|                                                                                |                           |                                                 |                                                    |                        |         |                    |            |           

See accompanying notes to financial statements

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SPATIALIGHT, INC.
STATEMENT OF STOCKHOLDERS DEFICIT
QUARTER ENDED MARCH 31, 2002

|                                                            |  |              |            |            |  |         |         |             |  |               |            |         |  |       |            |   |  |   |             |   |  |   |            |  
|----------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | ------- | ------- | ----------- |  | ------------- | ---------- | ------- |  | ----- | ---------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                            |  | COMMON STOCK |            | ADDITIONAL |  |         |         |             |  |               |            |         |  | TOTAL
|                                                            |  |              |            | PAID-IN    |  | NOTES   |         | ACCUMULATED |  | STOCKHOLDERS'
|                                                            |  | SHARES       |            | AMOUNT     |  | CAPITAL |         | RECEIVABLE  |  | DEFICIT       |            | DEFICIT
|                                                            |  |              |            |            |  |         |         |             |  |               |            |        
|Balance January 1, 2002                                     |  |              | 25,811,786 |            |  | $       | 258,118 |             |  | $             | 41,911,879 |         |  | $     | (2,653,434 | ) |  | $ | (39,729,909 | ) |  | $ | (213,346   | )
|Conversion of interest on notes                             |  |              | 178,992    |            |  |         | 1,790   |             |  |               | 689,610    |         |  |       |            |   |  |   |             |   |  |   | 691,400    |  
|Exercise of stock options                                   |  |              | 7,000      |            |  |         | 70      |             |  |               | 2,520      |         |  |       |            |   |  |   |             |   |  |   | 2,590      |  
|Issuance of stock, stock options, and warrants for services |  |              | 60,000     |            |  |         | 600     |             |  |               | 265,377    |         |  |       |            |   |  |   |             |   |  |   | 265,977    |  
|Payments on notes receivable                                |  |              |            |            |  |         |         |             |  |               |            |         |  |       | 647,890    |   |  |   |             |   |  |   | 647,890    |  
|Net loss                                                    |  |              |            |            |  |         |         |             |  |               |            |         |  |       |            |   |  |   | (2,103,170  | ) |  |   | (2,103,170 | )
|                                                            |  |              |            |            |  |         |         |             |  |               |            |         |  |       |            |   |  |   |             |   |  |   |            |  
|Balance March 31, 2002                                      |  |              | 26,057,778 |            |  | $       | 260,578 |             |  | $             | 42,869,386 |         |  | $     | (2,005,544 | ) |  | $ | (41,833,079 | ) |  | $ | (708,659   | )
|                                                            |  |              |            |            |  |         |         |             |  |               |            |         |  |       |            |   |  |   |             |   |  |   |            |  

See accompanying notes to financial statements

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SPATIALIGHT, INC.
STATEMENTS OF CASH FLOW (unaudited)

|                                                                            |                                                           |                                                |                                           |          |                    |            |            |         |         |            |  
|--------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------- | ----------------------------------------- | -------- | ------------------ | ---------- | ---------- | ------- | ------- | ---------- | -
|                                                                            |                                                           |                                                |                                           |          | Three Months Ended
|                                                                            |                                                           |                                                |                                           |          | March 31,         
|                                                                            |                                                           |                                                |                                           |          |                   
|                                                                            |                                                           |                                                |                                           |          | 2002               |            | 2001      
|                                                                            |                                                           |                                                |                                           |          |                    |            |           
|Cash flows from operating activities:                                       |                                                           |                                                |                                           |          |                    |            |            |        
|Net loss                                                                    |                                                           | $                                              | (2,103,170                                | )        |                    | $          | (1,473,373 | )      
|Adjustments to reconcile net loss to net cash used by operating activities: |                                                           |                                                |                                           |          |                    |            |            |        
|                                                                            | Depreciation and amortization                             |                                                |                                           | 96,106   |                    |            |            | 58,566  |        
|                                                                            | Stock-based general and administrative expense            |                                                |                                           | 265,977  |                    |            |            | 49,360  |        
|                                                                            | Stock-based interest expense                              |                                                |                                           | 487,136  |                    |            |            | 118,431 |        
|                                                                            | Changes in operating assets and liabilities:              |                                                |                                           |          |                    |            |            |         |        
|                                                                            |                                                           | Accounts receivable                            |                                           |          |                   |            |            |         | 1,625   |           
|                                                                            |                                                           | Prepaid and other current assets               |                                           |          | 89,530             |            |            |         | (39,838 | )         
|                                                                            |                                                           | Accounts payable                               |                                           |          | (212,742           | )          |            |         | (14,179 | )         
|                                                                            |                                                           | Accrued expenses and other current liabilities |                                           |          | (15,226            | )          |            |         | 36,807  |           
|                                                                            |                                                           | Other assets                                   |                                           |          | (887               | )          |            |         | (22,502 | )         
|                                                                            |                                                           |                                                |                                           |          |                    |            |            |        
|                                                                            |                                                           |                                                | Net cash used in operating activities     |          |                    | (1,393,276 | )          |         |         | (1,285,103 | )
|                                                                            |                                                           |                                                |                                           |          |                    |            |            |        
|Cash flows from investing activities:                                       |                                                           |                                                |                                           |          |                    |            |            |        
|                                                                            | Purchase of property and equipment                        |                                                |                                           | (102,966 | )                  |            |            | (80,893 | )      
|                                                                            |                                                           |                                                |                                           |          |                    |            |            |        
|                                                                            |                                                           |                                                | Net cash used in investing activities     |          |                    | (102,966   | )          |         |         | (80,893    | )
|                                                                            |                                                           |                                                |                                           |          |                    |            |            |        
|Cash
flows from financing activities:                                       |                                                           |                                                |                                           |          |                    |            |            |        
|                                                                            | Payments on capital lease obligations                     |                                                |                                           | (1,429   | )                  |            |            | (1,195  | )      
|                                                                            | Payments on notes receivable from shareholders            |                                                |                                           | 647,890  |                    |            |            |        |        
|                                                                            | Proceeds from exercise of warrants and options            |                                                |                                           | 2,590    |                    |            |            | 377,500 |        
|                                                                            |                                                           |                                                |                                           |          |                    |            |            |        
|                                                                            |                                                           |                                                | Net cash provided by financing activities |          |                    | 649,051    |            |         |         | 376,305    |  
|                                                                            |                                                           |                                                |                                           |          |                    |            |            |        
|Net decrease in cash                                                        |                                                           |                                                | (847,191                                  | )        |                    |            | (989,691   | )      
|Cash at beginning of period                                                 |                                                           |                                                | 2,728,134                                 |          |                    |            | 1,035,957  |        
|                                                                            |                                                           |                                                |                                           |          |                    |            |            |        
|Cash at end of period                                                       |                                                           | $                                              | 1,880,943                                 |          |                    | $          | 46,266     |        
|                                                                            |                                                           |                                                |                                           |          |                    |            |            |        
|Supplemental disclosure of cash flow information:                           |                                                           |                                                |                                           |          |                    |            |            |        
|                                                                            | Income taxes paid during the period                       |                                                | $                                         | 1,425    |                    |            | $          | 3,850   |        
|                                                                            |                                                           |                                                |                                           |          |                    |            |            |        
|                                                                            | Interest paid during the period                           |                                                | $                                         | 180      |                    |            | $          | 411     |        
|                                                                            |                                                           |                                                |                                           |          |                    |            |            |        
|Non cash financing activities:                                              |                                                           |                                                |                                           |          |                    |            |            |        
|                                                                            | Common stock issued upon conversion of notes and interest |                                                | $                                         | 691,400  |                    |            | $          | 26,425  |        

See accompanying notes to financial statements.

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SPATIALIGHT, INC.
Notes to Condensed Financial Statements (Unaudited)

1. Business Description

SpatiaLight, Inc. (SpatiaLight or the Company) is in the business of designing
high-resolution microdisplays, which consist of liquid crystals and a glass
cover on top of a silicon chip. These displays are also known as and commonly
referred to as Liquid Crystal Displays (LCD), Active Matrix Liquid Crystal
Displays (AMLCD), Liquid Crystal on Silicon (LCOS), and Spatial Light
Modulators (SLM). These displays provide high-resolution images suitable for
applications such as rear projection computer monitors, high definition
television and video projectors and potential applications such as those used
in wireless communication devices, portable games and digital assistants. The
Company has recently entered into five agreements with six original equipment
manufacturers in China to provide display units for use in their products. In
the event that the display units meet certain technical criteria satisfactory
to the manufacturer upon the conclusion of the respective test periods
specified in these agreements, as to which there can be no assurance, the
Company expects to obtain substantial purchase orders from these manufacturers
for these display units. These agreements are subject to various technical
contingencies and there can be no assurance that these agreements will result
in significant revenues, if any.

The Company has identified a number of potential applications and markets for
products, which can utilize its display technology. Some of these applications
include: large-screen rear-projection television systems, in both standard
television format (NTSC) and High Definition Television (HDTV) formats;
large-screen rear-projection computer monitors in a variety of resolutions;
video projectors for presentations; head-mounted displays which are used for
virtual reality systems, defense, aerospace and gaming applications; and other
potential applications such as point of purchase displays, optical computing,
and data storage.

The Companys principal executive offices are located in Novato, California.
The Company was organized under the laws of the State of New York in 1989.

2. Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB of Item 310(b) of
Regulation S-B. Accordingly they do not include all of the information and
footnotes necessary for a fair presentation of financial condition, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management of SpatiaLight, the interim condensed
financial statements included herewith contain all adjustments (consisting of
normal recurring accruals and adjustments) necessary for their fair
presentation. The unaudited interim condensed financial statements should be
read in conjunction with the Companys Annual Report on Form 10-KSB, which
contains the audited financial statements and notes thereto, together with the
Managements Discussion and Analysis, for the year ended December 31, 2001.

3. Liquidity

The Companys operations are constrained by an insufficient amount of working
capital. As of March 31, 2002 the Company has sustained recurring losses and
had a net capital deficiency of $708,659, and a net working capital deficiency
of $1,371,116. These conditions raise substantial doubt about the ability of
the Company to continue as a going concern. During 2002 the Company plans to
meet its working

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capital and other cash requirements through the exercise of warrants held by
existing investors associated with two of the Companys directors, as well as
from collections on stock subscriptions receivable. The Companys continued
existence is dependent upon its ability to successfully market and sell its
products and obtaining additional financing. However, there can be no
assurance that the Companys efforts will be successful. The Company continues
its efforts to locate sources of additional financing. There can be no
assurance that additional financing will be available to the Company. For this
reason, there is uncertainty whether the Company can continue as a going
concern. Further, the Companys auditors included a paragraph in their report
on the audited financial statements for the year ended December 31, 2001,
indicating that substantial doubt exists as to the Companys ability to
continue as a going concern.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
The Company incurred significant operating losses in each of the last five
fiscal years and incurred a net loss of $2,103,170 in the three months ended
March 31, 2002. Of this amount, $753,113 was non-cash stock-based expenses.
Additionally, as of March 31, 2002, the Companys accumulated deficit totaled
$41,833,079. The Company has generated limited revenues to date and the
development, commercialization and marketing of the Companys products will
require substantial expenditures in the foreseeable future. The successful
completion of the Companys development program and ultimately, the attainment
of profitable operations are dependent upon future events. These events
include obtaining adequate financing to fulfill its development activities,
successful launching of the commercial production and distribution of its
products and achieving a level of sales adequate to support the Companys cost
structure. These matters, among others, may indicate that the Company will be
unable to continue as a going concern for a reasonable period of time.

The condensed financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

4. Per Share Information

Basic loss per common share available to common shareholders excludes dilution
and is computed by dividing loss available to common shareholders by the
weighted-average number of common shares for the period. Excluded from
weighted average shares outstanding for the three months ended March 31, 2002
are 1,996,266 shares of common stock issued but held in escrow in connection
with the private stock purchase agreements and warrant installment notes.
Diluted loss per common share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock. Excluded from the computation of diluted loss per
share for the three months ended March 31, 2002 and 2001 respectively, are
options and warrants to acquire 7,592,697 and 5,174,812 shares of common stock,
and 3,425,603 common share equivalents in each period relating to convertible
secured notes, because the effect of their assumed exercise would be
antidilutive. The weighted average exercise price as of March 31, 2002 for the
options, warrants and common share equivalents is $3.24, $3.10, and $1.19,
respectively.

5. Notes Payable

Convertible notes at March 31, 2002 consist of the following:

A convertible note totaling $594,000, net of a discount of $594,000 issued to
Argyle Capital Management Corporation, a company affiliated with Robert A.
Olins, a Director, Acting Chief Executive Officer, Secretary and Treasurer of
the Company. The outstanding principal as of March 31,

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2002 is $1,188,000, with stated interest at 6%. Both principal and interest
are convertible into the Companys common shares at $.50 per share. On May 23,
2001 the due date was extended until December 31, 2002. On the extension date,
the excess aggregate value of the common shares receivable upon conversion of
the notes based on the then current market price of $1.90 per share, over the
aggregate conversion price for such common shares (limited to the original
proceeds of $1,188,000) was recorded as additional paid-in capital. The
resulting discount to the debt arising from the beneficial conversion feature
is being amortized over the life of the extended note. For the three months
ended March 31, 2002, additional stock-based interest expense of approximately
$153,000 was recorded due to the beneficial conversion feature of the accrued
interest, representing the excess value of the common shares potentially
receivable upon conversion of the accrued interest based on the average price
of $4.79 during the period, over the aggregate conversion price for such
shares. The note is secured by substantially all the assets of the Company.

Convertible notes totaling $2,794,367, inclusive of accrued interest and net of
a discount of $408,581, issued to a group of investors associated with Steven
F. Tripp, a Director of the Company (the Alabama Group). The outstanding
principal balance as of March 31, 2002 is $2,875,000 with stated interest at
6%. Of the total amount of the notes, $1,437,500 is convertible at $3.50 per
share; the remaining $1,437,500 is convertible at $2.25 per share. On June 15,
2001 the due date was extended until December 31, 2002. On the extension date,
the $255,000 excess aggregate value based on the then current market price of
$2.65 per share of the common shares receivable upon conversion of the notes,
over the aggregate conversion price for the common shares convertible at $2.25
per share was recorded as additional paid in capital. The resulting discount
to the debt is being amortized over the life of the extended note.

Activity in notes payable for the first quarter of 2002 follows:

|                                   |       |   |               |           |              |   |              |         |               |   |                |         |  |   |          |          |   |   |           |           | 
|---------------------------------- | ----- | - | ------------- | --------- | ------------ | - | ------------ | ------- | ------------- | - | -------------- | ------- |  | - | -------- | -------- | - | - | --------- | --------- | 
|                                   |       |   |               |           |              |   |              |         |               |   | (Payment) or   |         |  |   |          |          |   |   |          
|                                   |       |   | Balance at    |           | Addition or  |   | Discount     |         | Conversion to |   | Balance at    
|                                   |       |   | Dec. 31, 2001 |           | New Discount |   | Amortization |         | Equity        |   | March 31, 2002
|                                   |       |   |               |           |              |   |              |         |               |   |               
|Debt Principal:                    |       |   |               |           |              |   |              |         |               |   |                |         |  |   |          |          |   |   |           |          
|Alabama Group                      |       | $ | 2,875,000     |           |              | $ |             |         |               | $ |               |         |  | $ |         |          |   | $ | 2,875,000 |          
|Alabama Group Discount             |       |   | (544,774      | )         |              |   |             |         |               |   | 136,193        |         |  |   |         |          |   |   | (408,581  | )        
|Argyle                             |       |   | 1,188,000     |           |              |   |             |         |               |   |                |         |  |   |         |          |   |   | 1,188,000 |          
|Argyle discount                    |       |   | (792,000      | )         |              |   |             |         |               |   | 198,000        |         |  |   |         |          |   |   | (594,000  | )        
|                                   |       |   |               |           |              |   |              |         |               |   |                |         |  |   |          |          |   |   |           |          
|                                   | Total |   |               | 2,726,226 |              |   |              |        |               |   |                | 334,193 |  |   |          |         |   |   |           | 3,060,419 | 
|                                   |       |   |               |           |              |   |              |         |               |   |                |         |  |   |          |          |   |   |           |          
|Interest:                          |       |   |               |           |              |   |              |         |               |   |                |         |  |   |          |          |   |   |           |          
|Accrued Argyle 6%                  |       |   | 18,216        |           |              |   | 17,820       |         |               |   |               |         |  |   | (36,036  | )        |   |   |          |          
|Accrued Alabama 6%                 |       |   | 282,815       |           |              |   | 45,133       |         |               |   |               |         |  |   |         |          |   |   | 327,948   |          
|Beneficial interest                |       |   | 110,027       |           |              |   | 152,943      |         |               |   |               |         |  |   | (262,970 | )        |   |   |          |          
|                                   |       |   |               |           |              |   |              |         |               |   |                |         |  |   |          |          |   |   |           |          
|                                   | Total |   |               | 411,058   |              |   |              | 215,896 |               |   |                |        |  |   |          | (299,006 | ) |   |           | 327,948   | 
|                                   |       |   |               |           |              |   |              |         |               |   |                |         |  |   |          |          |   |   |           |          
|Total
Short-term Convertible Notes |       | $ | 3,137,284     |           |              | $ | 215,896      |         |               | $ | 334,193        |         |  | $ | (299,006 | )        |   | $ | 3,388,367 |          
|                                   |       |   |               |           |              |   |              |         |               |   |                |         |  |   |          |          |   |   |           |          

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Stock-based interest expense discussed above is as follows:

|                                           |  |                         |         |      |  |   |         | 
|------------------------------------------ |  | ----------------------- | ------- | ---- |  | - | ------- | 
|                                           |  | Quarter ended March 31,
|                                           |  |                        
|                                           |  | 2002                    |         | 2001
|                                           |  |                         |         |     
|Amortization of Alabama group discount     |  | $                       | 136,193 |      |  | $ | 67,288  | 
|Amortization of Argyle Capital discount    |  |                         | 198,000 |      |  |   |        | 
|Effect of beneficial conversion privileges |  |                         | 152,943 |      |  |   | 51,143  | 
|                                           |  |                         |         |      |  |   |         | 
|                                           |  | $                       | 487,136 |      |  | $ | 118,431 | 
|                                           |  |                         |         |      |  |   |         | 

6. Issuance of Securities

Issuance and Exercise of Stock Options, Warrants, and Stock in First Quarter
2002

During the first quarter of 2002, the Company issued 7,000 shares of common
stock upon the exercise of employee stock options. Total cash received was
$2,590.

On January 23, 2002, the Company issued a warrant to purchase 30,000 shares of
common stock at an exercise price of $3.00.The warrant was issued to an
investor in consideration of the failure of the Company to file a registration
statement with the Securities and Exchange Commission with respect to the
shares underlying a prior issuance of warrants by an earlier agreed upon
outside date.The warrant was valued at $37,111 using the Black-Scholes option
pricing model and the following assumptions: stock price $3.73, historical
volatility 114%, risk-free rate 5%, a dividend yield of zero, and a contractual
term of 103 days. The value of the warrant is reflected in the statement of
operations as a component of stock-based general and administrative expense.

On March 27, 2002, the Company issued an option to purchase 2,500 shares of the
Companys common stock. The option was issued in exchange for consulting
services rendered during the previous period and was valued at $8,666.

Stock-Based Compensation

On March 28, 2002 the Company issued 60,000 shares of common stock valued at
$220,200 to an employee as compensation for services rendered.

Interest Conversion

On January 15, 2002, the Company issued 36,432 shares of common stock upon the
conversion of accrued interest of $128,243, for the fourth quarter of 2001,
under certain convertible notes, which includes additional deemed interest of
$110,027 due to beneficial conversion features of the interest on the
underlying notes.

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On March 28, 2002, the Company issued 35,640 shares of common stock upon the
conversion of accrued interest of $170,763 under certain convertible notes,
which includes additional deemed interest of $152,943. In addition, the Company
issued 106,920 shares of common stock upon the conversion of prepaid interest
of $392,394 under certain convertible notes. The prepaid interest will be
amortized to expense over the next three quarters.

Stock-based general and administrative expense discussed above is as follows:

|                          |  |                         |         |      |  |   |        | 
|------------------------- |  | ----------------------- | ------- | ---- |  | - | ------ | 
|                          |  | Quarter ended March 31,
|                          |  |                        
|                          |  | 2002                    |         | 2001
|                          |  |                         |         |     
|Stock grant to employee   |  | $                       | 220,200 |      |  | $ |       | 
|Reinstatement of options  |  |                         |        |      |  |   | 49,360 | 
|Warrant and other charges |  |                         | 45,777  |      |  |   |       | 
|                          |  |                         |         |      |  |   |        | 
|                          |  | $                       | 265,977 |      |  | $ | 49,360 | 
|                          |  |                         |         |      |  |   |        | 

7. Segment Information

The Companys chief operating decision-maker, the Chief Executive Officer
(CEO), reviews the Companys financial information as a single operating
segment to make decisions about the Companys performance and resource
allocation. Therefore the Company has determined that it operates in a single
business segment. There were no sales in the first quarter of 2002.

8. New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations(SFAS 141),and No. 142, Goodwill and
Other Intangible Assets(SFAS 142).SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method
of accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within
the first interim quarter after adoption of SFAS 142.

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The Company has not entered into any significant business combinations. As a
result, the adoption of SFAS 141 & 142 did not impact the Companys financial
position and results of operations upon adoption.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to
Be Disposed Of.The statement retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long-lived assets to be disposed of by sale to include
discontinued operations. It also expands the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. Adoption
of this statement did not have a material impact on the Companys financial
position or results of operations.




Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations.

This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 21E of the Securities and Exchange Act of 1934, as amended, which
statements are subject to the Safe Harbor provisions created by that statute.
In this report, the words anticipates, believes, expects, future,
intends, and similar expressions identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including, but not
limited to, those discussed herein, those contained in this Item, 2 and those
discussed in the Companys Annual Report on Form 10-KSB as filed with the
Securities and Exchange Commission on March 21, 2002. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be needed to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

The following is a discussion and analysis of the consolidated financial
condition of the Company as of March 31, 2002, and the results of operations
for the Company for the three months ended March 31, 2002 and 2001. The
following should be read in conjunction with the unaudited financial statements
and related notes appearing elsewhere herein.

GENERAL

Our operations are constrained by an insufficient amount of working capital,
and we continue to experience negative cash flows and net operating expenses.
Our operations in recent months have been funded by the exercise of warrants
and options, the issuance of convertible securities and the sales of common
stock under private stock purchase agreements. We are continuing our efforts
to locate sources of additional financing but there can be no assurance that
additional financing will be available. Our auditors have included a paragraph
in their report on the audited financial statements as of the year ended
December 31, 2001, indicating that substantial doubt exists as to our ability
to continue as a going concern.

We anticipate that our cash expenditures during 2002 will run approximately
$400,000 per month without regard for any revenues that may occur as a result
of the technical trials now underway. We expect to meet our cash needs with our
existing cash balances and collections from stock subscriptions receivable of
approximately $2,000,000. There are outstanding warrants expiring in 2002 that
are currently in-the-money. We expect that if they are still in-the-money at
or near expiration date they will be exercised, resulting in proceeds of
approximately $3,400,000. In addition, it is possible that other outstanding
exercisable warrants that are in-the-money may be exercised. However, there
can be no

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assurance that the warrants will be exercised. If no warrants are exercised,
and if the technical trials do not result in revenues during 2002, it is
possible that we will need to seek to raise additional debt or equity financing
during the latter part of 2002. There can be no assurances that such
additional debt or equity funding will be available from our current investors
or from any other source.

Our continued existence is dependent upon our ability to successfully develop,
market and sell our products. In May 2001 we entered into an arrangement with
Fuji Photo Optical Co., Ltd., for the manufacture of light engines
incorporating our proprietary SpatiaLight imagEngine LCOS microdisplays.
Pursuant to the arrangement, Fuji Photo Optical Co., Ltd. may scale up their
manufacturing capacity in order to produce a minimum of 10,000 light engines
per month incorporating the SpatiaLight imagEngine microdisplay.

OVERVIEW

We develop microdisplays that provide high resolution images suitable for
applications such as rear projection computer monitors, high definition
television and video projectors, and potential applications such as those used
in wireless communication devices, portable games and digital assistants. Our
microdisplays are designed for use in end products of original equipment
manufacturers, and therefore we work closely with customers to incorporate our
microdisplays into their final products. Because our microdisplays can be
manufactured using existing silicon and liquid crystal processes, we contract
with existing manufacturers for the production of our silicon and the assembly
of the final microdisplay. We have patents covering parts of our designs;
however the key designs of the circuitry in the silicon, drive electronics, and
liquid crystal assembly techniques are proprietary and not covered by patents.

Since late October 2001, we entered into five agreements or memoranda of
understanding with six original equipment manufacturers in China contemplating
the purchase by these prospective customers of our display units for use in
certain of their products. All of these agreements require that we supply
prototypes of our display units and that they meet technical criteria
satisfactory to each of such prospective customers. If these tests of our
display units satisfy these prospective customers manufacturers, three of these
agreements require such customers to place purchase orders for designated
quantities of our display units. The remaining agreements indicate that under
such circumstances the parties will negotiate such purchase orders. Three of
these agreements provide for one or more specific periods for the testing of
our display units; the fourth Agreement leaves open the number of months for
testing of prototypes; and the fifth Agreement is silent on the matter. Three
of these agreements also have clauses, which prohibit these prospective
customers from working with any of our competitors during the testing periods.

The testing of our display units by certain of these prospective customers
commenced after these agreements were signed. The Company has recently been
advised by certain of these prospective customers that they are satisfied with
the results of the testing of the prototypes under their agreements with the
Company and that they are prepared to negotiate final terms of purchase orders
for our microdisplay units in the near future. Similar to all agreements for
the sale of technology products to foreign customers, these agreements are
subject to various other contingencies and, by reason of these contingencies,
we cannot assure that they will result in significant revenues, if any, to us
as of this date.

LIQUIDITY AND CAPITAL RESOURCES

Although we have produced displays based on our technology, we have not yet had
our displays incorporated in any commercial end use application. Delays in
development may result in the introduction of our displays later than
anticipated, which may have a material adverse effect on both our financial and
competitive position. Moreover, we may never be successful in developing or

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manufacturing a commercially viable display. In addition, our displays may not
be technically or commercially successful, we may not obtain suppliers or
manufacturers for adequate quantities of our displays, or we may not reach
commercially acceptable cost levels on a timely basis.

As of March 31, 2002, we had approximately $1,890,000 in cash and cash
equivalents, and our net working capital deficit at March 31, 2002 was
approximately $1,370,000.

Net cash used in operating activities totaled approximately $1,390,000 and
$1,290,000 for the three months ended March 31, 2002 and 2001, respectively.
Cash was used primarily to fund the operating loss.

Net cash provided by financing activities in the three months ended March 31,
2002 was approximately $650,000 as compared to approximately $380,000 for the
three months ended March 31, 2001. In the first quarter of 2002, cash was
provided primarily from proceeds from the collection on stock subscriptions
receivable. In the first quarter of 2001, cash was provided primarily from
proceeds from the exercise of warrants and options.

As of March 31, 2002, we had an accumulated deficit of approximately
$41,830,000. We have realized significant losses in the past and we expect
that these losses will continue at least through 2002. It is likely that we
will have quarterly and annual losses in 2002 and beyond. We have generated
limited revenues and no profits from operations. The development,
commercialization and marketing of our products will require substantial
expenditures for the foreseeable future. Consequently, we may continue to
operate at a loss for the foreseeable future and there can be no assurance that
our business will operate on a profitable basis or will be able to continue as
a going concern.

RESULTS OF OPERATIONS

Selling, general and administrative costs.Selling, general and administrative
costs were approximately $710,000 and $640,000 in the three months ended March
31, 2002 and 2001, respectively, and include professional services, salaries
and related taxes and benefits, rent, depreciation, travel, insurance and
office expenses. Salaries and related benefits decreased from approximately
$180,000 in 2001 to $80,000 in 2002 due to the elimination of certain positions
as well as the termination of a severance package in the first quarter of 2001.
In the third quarter of 2001, a public relations firm was hired, resulting in
expenses of approximately $40,000 in the first quarter of 2002 with no
comparable expense in the first quarter of 2001. Other professional expenses
increased $70,000 from approximately $120,000 in 2001 to $190,000 in 2002.

Stock-based general and administrative costs.Stock-based general and
administrative costs were approximately $266,000 and $50,000 in the three
months ended March 31, 2002 and 2001, respectively. The amounts incurred relate
to common stock, stock options, and warrants issued in exchange for services.
The increase in 2002 relates primarily to expenses associated with common stock
granted as employee compensation valued at $220,000, which had no comparable
expense in 2001.

Research and development costs. Research and development costs were
approximately $591,000 and $603,000 in the three months ended March 31, 2002
and 2001, respectively. These decreases were due primarily to a more focused
approach in designing our product, resulting in reduced fabrication costs.

Interest income.Interest income for the three months ended March 31, 2002 and
2001 was approximately $7,400 and $5,500, respectively. The increase is
consistent with higher cash balances resulting from the increase in cash flow
from financing activities.

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Interest expense.Interest expense for the
three months ended March 31, 2002 remained substantially unchanged from 2001 at approximately $60,000 in each
quarter. This is consistent with the unchanged convertible note balances from
2001 to 2002.

Stock-based interest expense.Stock-based interest expense of approximately
$490,000 and $120,000 for the three months ended March 31, 2002 and 2001,
respectively, relates to the beneficial conversion feature of interest
converted and convertible into equity based on the intrinsic value of the
conversion feature. Also included in stock-based interest expense in the first
quarter of 2002 and 2001 is amortization of the discounts on notes payable.

BUSINESS RISKS AND UNCERTAINTIES

We have a history of losses and may incur losses in the future and therefore
cannot assure you that we will achieve profitability.

We have incurred losses over the past five years and have experienced cash
shortages. For the months ended March 31, 2002 and 2001, we have incurred net
losses of approximately $2,100,000 and $1,470,000, respectively. In addition,
we had an accumulated deficit of $41,830,000 as of March 31, 2002. We may
incur additional losses as we continue spending for research and development
and other business activities. As a result, we will need to generate
substantial sales to support our cost structure before we can begin to recoup
our operating losses and accumulated deficit and achieve profitability.

If we are unable to obtain further financing or generate required working
capital our ability to operate could suffer or cease. Our auditors have issued
a report on our financial statements which contains an explanatory paragraph
regarding our ability to continue as a going concern.

Our operations to date have consumed substantial amounts of cash and will
continue to require substantial amounts of capital in the future. In order to
remain competitive, we must continue to make significant investments essential
to our ability to operate profitably, including investments in further research
and development, equipment, facilities and production activities. Although our
financial condition and liquidity have been strengthened through the exercise
of warrants and private purchases of our common shares, we may still require
additional financing to provide for our required capital expenditures. In the
event that we are unable to obtain further financing on satisfactory terms or
at all, generate sales sufficient to offset our costs, or the costs of
development and operations are greater than we anticipated, we may be unable to
grow our business at the rate desired or may be required to delay, reduce, or
cease certain of our operations, any of which could materially harm our
business and financial results. Our independent auditors have included an
explanatory paragraph in their report in our Form 10-KSB on our financial
statements for our last fiscal year regarding our ability to continue as a
going concern.

We are subject to lengthy development periods and product acceptance cycles
which may significantly harm our business.

Our business model requires us to develop microdisplays that perform better
than existing technologies, contract with one or more third-party manufacturers
to manufacture our display units in bulk, and sell the resulting display units
to original equipment manufacturers that will then incorporate them into their
products. Original equipment manufacturers make the determination during their
product development programs whether or not to incorporate our display units in
their products. This requires us to invest significant amounts of time and
capital in designing display units before we can be assured that we will
generate any significant sales to our customers or even recover our investment.
If we fail to recover our investment from such display units, it could
seriously harm our financial condition. In addition, the

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length of time our products may be successfully received by our customers could
be limited by the acceptance of new technologies developed by our customers.

We incur substantial research and development costs in connection with
technologies that may not be successful.

We currently have seventeen engineering personnel based in California working
on microdisplays. This staffing creates significant research and development
costs that may not be recouped. Even if our current microdisplays become
accepted or successful, due to the rapid technological change in our industry,
we must continue to use, and may increase in number, our engineering personnel
to develop future generations of our microdisplays. As a result, we expect to
continue incurring significant research and development costs.

To date, we have only manufactured microdisplays in limited commercial
quantities, and difficulties in mass-producing our microdisplays may cause us
to be unable to meet customer demands and our operating results could be
significantly harmed.

We need to work closely with our manufacturing sources to assure volume
production of our current display units. Problems in implementing volume
production or lower than expected manufacturing yields could significantly harm
our business because we will have already incurred the costs for the materials
used in the microdisplay manufacturing process. These problems could cause
delays that might lead our potential customers to seek other sources.

We currently obtain silicon backplanes, a vital component in our microdisplays,
from the Far East. Some Asian countries are subject to earthquakes, typhoons
and political instability. Unless we obtain an alternative source, any
disruption or termination of our silicon manufacturing operations in Taiwan or
air transportation with the Far East could significantly harm our operations.

Our microdisplays are assembled by combining the silicon backplanes with
electronic components. The design and manufacture of liquid crystal displays
and display units are highly complex processes that are sensitive to a wide
variety of factors, including the level of contaminants in the manufacturing
environment, impurities in the materials used, and the performance of personnel
and equipment. We have working arrangements with several liquid crystal
display fabricators to manufacture our products. We also have working
arrangements with the manufacturer of the light engines and lamps required in
the assembly of our microdisplay units. We have recently entered into an
agreement for the supply of prisms and filters which are also required for the
assembly of such units. Except for that agreement, we do not have written
agreements which are binding upon the manufacturers of the other components and
any such manufacturer is not now bound to furnish us with any specific
quantities of their products at previously specified prices. At this date, the
Company is not aware that any of those manufacturers have known shortages of
critical material.

Because the manufacture of our display units involves highly complex processes
and technical problems may arise, such liquid crystal display fabricators do
not guarantee their manufacturing yields of our products. Problems in
mass-production or lower than expected manufacturing yields could significantly
harm our business and operating results. In addition, the complexity of our
manufacturing processes will increase as the sophistication of our display
units increases.

If a market for our products does not develop, our business will likely be
significantly harmed.

Various target markets for our microdisplays, including projectors, monitors,
high-definition televisions, and portable microdisplays, are uncertain, may be
slow to develop or could utilize competing technologies. High-definition
television has only recently become available to consumers, and

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widespread market acceptance is uncertain. In addition, the commercial success
of the portable microdisplay market is uncertain. The acceptance of our
microdisplay units will be dependent upon the pricing, quality, reliability and
useful life of these units compared to competing technologies, as to which
there can be no assurance. In order for us to succeed, not only must we offer
end-product manufacturers better and less expensive microdisplays than our
competitors, but the manufacturers themselves must also develop products using
our microdisplays that are commercially successful. Our failure to sell our
microdisplays to such manufacturers or the failure of the ultimate target
markets to develop as we expect will negatively affect our anticipated growth.

If our microdisplays do not become widely accepted by our customers or the
end-users, our business could be significantly harmed.

Our microdisplays may not be accepted by a widespread market. Even if we
successfully mass-produce a display that is used in a product, our customers
may determine not to introduce or may terminate products utilizing the
technology for a variety of reasons, including the following:



| |  |  | superior technologies developed by our competitors;          
| | - |  | -------------------------------------------------------------
|
| |  |  | price considerations; and                                    
|
| |  |  | lack of anticipated or actual market demand for the products.

We currently have agreements with a limited number of customers. Despite our
reasonable efforts to retain these customers, we may not be successful in this
regard. The loss of, or significant reduction in sales attributable to, any
one or more of these customers could materially harm our business and financial
condition.

We do not have firm purchase orders from our customers and cannot assure you we
will obtain them or, if we do, that they will generate significant revenues.

During the past six months, we entered into five agreements with six original
equipment manufacturers in China to sell our display units. All of these
agreements require that we supply prototypes of our display units and that they
meet technical criteria satisfactory to each of such prospective customers. If
these tests of our display units satisfy these prospective customers, three of
these agreements require such customers to place purchase orders for designated
quantities of our display units. The remaining agreements indicate that under
such circumstances the parties will negotiate such purchase orders. Three of
these agreements provide for one or more specific periods for the testing of
our display units; the fourth agreement leaves open the number of months for
testing of prototypes; and the fifth agreement is silent on the matter. Three
of these agreements also have clauses which prohibit these prospective
customers from working with any of our competitors during the testing periods.

The testing of our display units by certain of these prospective customers
commenced after these agreements were signed. The Company has recently been
advised by certain of these prospective customers that they are satisfied with
the results of the testing of the prototypes under their agreements with the
Company and that they are prepared to negotiate final terms of purchase orders
for our microdisplay units in the near future. Similar to all agreements for
the sale of technology products to foreign customers, these agreements are
subject to various other contingencies and, by reason of these contingencies,
we cannot assure that they will result in significant revenues, if any, to us
as of this date.

In addition, even if our display units are successful and meet or exceed the
customers technical criteria, we may have problems implementing volume
production of our display units. As a result of these contingencies, we do not
have firm purchase orders for our display units. Furthermore, sales to
manufacturers in the electronics industry are subject to severe competitive
pressures, rapid technological

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change, and product obsolescence. Manufacturers may, at any time, cancel
purchase commitments or reduce or delay orders thereby increasing our inventory
and overhead risks. Therefore, we cannot assure you that these agreements may
result in significant revenues, if any, to us.

If our customers products are not successful, our business would be materially
harmed.

We do not sell any products to end-users. Instead, we design and manufacture
various product solutions that our customers (i.e., original equipment
manufacturers) may incorporate into their products. As a result, our success
depends almost entirely upon the widespread market acceptance of our customers
products. Any significant slowdown in the demand for our customers products
would materially harm our business.

Our dependence on the success of the products of our customers exposes us to a
variety of risks, including our need to do the following:



| |  |  | maintain customer satisfaction with our design and
manufacturing services;                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | match our design and manufacturing capacity with
customer demand and maintain satisfactory delivery schedules;    
|
| |  |  | anticipate customer order patterns, changes in
order mix, and the level and timing of orders that we can meet;
and
|
| |  |  | adjust to the cyclical nature of the industries and
markets we serve.                                             

Our failure to address these risks may cause us to lose sales or for sales
to decline.

The electronics industry is highly competitive, which may result in lost sales
or lower gross margins.

We serve highly competitive industries that are characterized by price erosion,
rapid technological change and competition from major domestic and
international companies. This intense competition could result in pricing
pressures, lower sales, reduced margins and lower market share. Some of our
competitors have greater market recognition, larger customer bases, and
substantially greater financial, technical, marketing, distribution and other
resources than we possess. As a result, they may be able to introduce new
products and respond to customer requirements more quickly than we can.

Our competitive position could suffer if one or more of our customers decides
to design and manufacture their own display units, to contract with our
competitors, or to use alternative technologies. In addition, our customers
typically develop a second source. Second source suppliers may win an
increasing share of a program. Our ability to compete successfully depends on
a number of factors, both within and outside our control. These factors
include the following:



| |  |  | our success in designing and manufacturing new display technologies;                                                              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to address the needs of customers;                                                                                    
|
| |  |  | the quality, performance, reliability, features,
ease of use, pricing, and diversity of our display products;                     
|
| |  |  | foreign currency fluctuations, which may cause a
foreign competitors products to be priced significantly lower
than our displays;
|
| |  |  | the quality of our customer services;                                                                                             

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| |  |  | the efficiency of our production sources;                                        
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | the rate at which customers incorporate our displays into their own products; and
|
| |  |  | products or technologies introduced by our competitors.                          

Our business is significantly affected by conditions or events occurring in the
electronics industry generally.

The electronics industry has experienced significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices, and production over-capacity. Since the electronics
industry is cyclical in nature, we may experience substantial period-to-period
fluctuations in future operating results because of general industry conditions
or events occurring in the general economy.

Our operating results are subject to significant fluctuations.

Our results of operations have varied significantly from quarter to quarter in
the past and are likely to vary significantly in the future, which makes it
difficult to predict our future operating results. Accordingly, we believe
that quarter-to-quarter comparisons of our operating results are not meaningful
and should not be relied upon as an indicator of our future performance. Some
of the factors which cause our operating results to fluctuate include the
following:



| |  |  | introductions of displays and market acceptance of new generations of displays;
| | - |  | -------------------------------------------------------------------------------
|
| |  |  | timing of expenditures in anticipation of future orders;                       
|
| |  |  | changes in our cost structure;                                                 
|
| |  |  | availability of labor and components;                                          
|
| |  |  | pricing and availability of competitive products and services;                 
|
| |  |  | the timing of orders;                                                          
|
| |  |  | the volume of orders relative to the capacity we can contract to produce;      
|
| |  |  | evolution in the life cycles of customers products; and                       
|
| |  |  | changes or anticipated changes in economic conditions.                         

The market price of our common shares is highly volatile.

The market price of our common shares has been extremely volatile, reflecting
reported losses, receipt of additional financing and changes of management.
Other companies have found similar volatility correlates with class action
securities lawsuits although to date we have not been a defendant in any such
lawsuit. The trading price of our common shares in the future could continue
to be subject to wide fluctuations in response to various factors, including
the following:



| |  |  | quarterly variations in our operating results;                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | actual or anticipated announcements of technical
innovations or new product developments by us or our
competitors;

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| |  |  | public announcements regarding our business developments;       
| | - |  | ----------------------------------------------------------------
|
| |  |  | changes in analysts estimates of our financial performance;    
|
| |  |  | sales of large numbers of our common shares by our shareholders;
|
| |  |  | general conditions in the electronics industry; and             
|
| |  |  | worldwide economic and financial conditions.                    

In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices for many
high-technology companies and that often have been unrelated to the operating
performance of these companies. These broad market fluctuations and other
factors may adversely affect the market price of our common shares.

Our common shares may not be liquid.

Our common shares are currently traded on The Nasdaq SmallCap Market. Our
shareholders may find that it is more difficult to sell our common shares than
shares that are listed on The Nasdaq National Market, American Stock Exchange
or New York Stock Exchange. The trading volume of our common shares may be
limited in part due to the marketability of our shares. Any swing in the price
of our common shares may result in a material reduction in price because
relatively few buyers may be available to purchase our common shares.

If we lose our key personnel or are unable to attract and retain additional
personnel, our ability to compete could be harmed.

Our development and operations depend substantially on the efforts and
abilities of our senior management and qualified technical personnel. Our
products require sophisticated production, research and development and
technical support. The competition for qualified management and technical
personnel is intense. The loss of services of one or more of our key employees
or the inability to add key personnel could have a material adverse affect on
us, particularly since currently we do not have any life insurance policies in
place to cover that contingency. Our success will depend upon our ability to
attract and retain highly qualified scientific, marketing, manufacturing,
financial and other key management personnel. We face intense competition for
the limited number of people available with the necessary technical skills and
understanding of our products and technology. We cannot assure you that we
will be able to attract or retain such personnel or not incur significant costs
in order to do so.

If we are unable to protect our intellectual property from use by third
parties, our ability to compete in the industry will be harmed.

We believe that our success depends in part on protecting our proprietary
technology. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality and assignment of inventions agreements
from our employees, consultants and advisors and other contractual provisions
to establish and protect our intellectual property rights. Policing
unauthorized use of our products and technology is difficult, however. Despite
our efforts to protect our proprietary rights, we face the following risks:



| |  |  | pending patent applications may not be issued;                       
| | - |  | ---------------------------------------------------------------------
|
| |  |  | patents issued to us may be challenged, invalidated, or circumvented;

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| |  |  | unauthorized parties may obtain and use information
that we regard as proprietary despite our efforts to protect
our proprietary rights;             
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | others may independently develop similar technology
or design around any patents issued to us;                                                       
|
| |  |  | breach of confidentiality agreements;                                                                                                                
|
| |  |  | intellectual property laws may not protect our intellectual property; and                                                                            
|
| |  |  | effective protection of intellectual property
rights may be limited or unavailable in some foreign countries,
such as China, in which we may operate.

There can be no assurance that we will have adequate remedies in the event any
of the foregoing materializes. Failure to protect our intellectual property
would limit our ability to produce and market our products in the future which
would materially adversely affect our revenues generated by the sale of such
products. In addition, third parties could assert that our products and
technology infringe their patents or other intellectual property rights. As a
result, we may become subject to future patent infringement claims or
litigation, the defense of which is costly, time-consuming and diverts the
attention of management and other personnel.

Political, economic and regulatory risks associated with international
operations may limit our ability to do business abroad.

A substantial number of our manufacturers, customers and suppliers are located
outside of the United States, principally in the Far East. Our international
operations are subject to political and economic conditions abroad,
protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export or import
compliance laws, or other trade policies, any of which could adversely affect
our ability to manufacture or sell displays in foreign markets and to purchase
materials or equipment from foreign suppliers. All of our agreements with
customers are governed by foreign law and, therefore, are subject to
uncertainty with regard to their enforceability.

We do not pay cash dividends.

We have never paid any cash dividends on our common shares and do not
anticipate that we will pay cash dividends in the near future. Instead, we
intend to apply any future earnings to the expansion and development of our
business.




PART II. OTHER INFORMATION




ITEM 2 Changes in Securities and Use of Proceeds

Issuance and Exercise of Stock Options, Warrants, and Stock in First Quarter
2002

During the first quarter of 2002, the Company issued 7,000 shares of common
stock upon the exercise of employee stock options. Total cash received was
$2,590.

On January 23, 2002, the Company issued a warrant to purchase 30,000 shares of
common stock at an exercise price of $3.00.The warrant was issued to an
investor in consideration of the failure of the Company to file a registration
statement with the Securities and Exchange Commission with respect to the
shares underlying a prior issuance of warrants by an earlier agreed upon
outside date.The warrant was valued at $37,111 using the Black-Scholes option
pricing model and the following assumptions: stock price $3.73, historical
volatility 114%, risk-free rate 5%, a dividend yield of zero, and a

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contractual term of 103 days. The value of the warrant is reflected in the
statement of operations as a component of stock-based general and
administrative expense.

On March 27, 2002, the Company issued an option to purchase 2,500 shares of the
Companys common stock. The option was issued in exchange for consulting
services rendered and was valued at $8,666.

Stock-Based Compensation

On March 28, 2002 the Company issued 60,000 shares of common stock valued at
$220,200 to an employee as compensation for services rendered.

Interest Conversion

On January 15, 2002, the Company issued 36,432 shares of common stock upon the
conversion of accrued interest of $128,243, for the fourth quarter of 2001,
under certain convertible notes, which includes additional deemed interest of
$110,027 due to beneficial conversion features of the interest on the
underlying notes.

On March 28, 2002, the Company issued 35,640 shares of common stock upon the
conversion of accrued interest of $170,763 under certain convertible notes,
which includes additional deemed interest of $152,943. In addition, the Company
issued 106,920 shares of common stock upon the conversion of prepaid interest
of $392,394 under certain convertible notes. The prepaid will be amortized to
expense over the following three quarters.

The Company used the proceeds from the sale of the securities described in this
Item to fund the costs of its operations and for general working capital
purposes.

In connection with the issuance and sale of the securities described in this
Item, the Company relied upon the exemption from registration under the
Securities Act of 1933, as amended (the Act), set forth in Section 4(2)
thereof. Those securities were sold to accredited investors within the
meaning of the Act and Commission regulations, virtually all of whom had
previously purchased securities issued by the Company.




ITEM 6.      Exhibits and Reports on Form 8-K

|    |                     | 
|--- | ------------------- | 
|(a) | Report on Form 8-K:
|   
|    | None               

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SIGNATURES

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



| | Date: May 10, 2002
| | ------------------



| |                                                                                                        |                    
| | ------------------------------------------------------------------------------------------------------ | -------------------
| | SpatiaLight, Inc.                                                                                     
|
| | By:                                                                                                    | /s/ ROBERT A. OLINS
| |                                                                                                       
| | Robert A. Olins
Acting Chief Executive Officer
(Principal Executive, Financial and Accounting Officer)

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