UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
--------------------------------------------------------------------------------
                                    FORM 10-Q

 (Mark One)

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

                For the quarterly period ended September 30, 2003

[ ]  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 registrant as specified in its charter)


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


           Five Hamilton Landing, Suite 100, Novato, California 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 [  ]


         Indicate by check mark whether the registrant is an  accelerated  filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]     No [X]


                      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:  31,977,000  shares of
common stock as of November 11, 2003.



                                       1
<PAGE>






                                SPATIALIGHT, INC.

                          Quarterly Report on Form 10-Q
                    For the Quarter Ended September 30, 2003

<TABLE>
<CAPTION>
                                Table of Contents

PART I            FINANCIAL INFORMATION

<S>                                                                                                <C>
         Item 1.           Condensed Financial Statements (unaudited)

                           Condensed Balance Sheets dated
                           September 30, 2003 and December 31, 2002..................................3

                           Condensed Statements of Operations
                           for the Three and Nine Months
                           Ended September 30, 2003 and 2002.........................................4

                           Condensed Statements of Stockholders' Deficit
                           for the Nine Months Ended September 30, 2003..............................5

                           Condensed Statements of Cash Flows
                           for the Nine Months Ended September 30, 2003 and 2002.....................6

                           Notes to Condensed Financial Statements...................................7

         Item 2.           Management's Discussion and Analysis
                           of Financial Condition and Results of Operations..........................16

         Item 3.           Quantitative and Qualitative Disclosures About Market Risks...............28

         Item 4.           Controls and Procedures...................................................29

PART II  OTHER INFORMATION

         Item 2.           Changes in Securities and Use of Proceeds.................................30


         Item 6.           Exhibits and Reports on Form 8-K..........................................34
</TABLE>



                                       2
<PAGE>



PART I.  FINANCIAL INFORMATION
Item 1.  Condensed Financial Statements (unaudited)



SPATIALIGHT, INC.
BALANCE SHEET

<TABLE>
<CAPTION>
                                                                 September 30        December 31,
                                                                     2003                2002
                                                                 (unaudited)
ASSETS

<S>                                                                 <C>                    <C>
Current assets
  Cash and cash equivalents                                         $ 2,419,661            $ 575,663
  Accounts Receivable                                                    84,452                    -
  Inventory                                                             987,203              275,959
  Prepaids and other current assets                                     406,971              565,515
                                                               -----------------  -------------------
          Total current assets                                        3,898,287            1,417,137

Property and equipment, net                                             644,900              506,968
Other assets                                                            167,387              134,349
                                                               -----------------  -------------------

               Total assets                                         $ 4,710,574          $ 2,058,454
                                                               =================  ===================

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
  Accounts payable                                                    $ 640,507          $ 2,018,230
  Other short-term notes                                                512,500                    -
  Current portion of convertible notes                                4,388,956                    -
  Accrued expenses and other current liabilities                        385,457              206,796
                                                               -----------------  -------------------
        Total current liabilities                                     5,927,420            2,225,026

Noncurrent liabilities
  Convertible notes, net of current portion                                   -            4,207,232
                                                               -----------------  -------------------

               Total liabilities                                      5,927,420            6,432,258
                                                               -----------------  -------------------

Commitments

Stockholders' deficit:
  Common stock, $.01 par value:
     50,000,000 shares authorized;
    31,157,357 and 26,018,658 shares issued and outstanding             311,573              260,187
Additional paid-in capital                                           55,259,604           45,550,830
Notes and stock subscriptions receivable                             (1,330,825)          (1,426,999)
Accumulated deficit                                                 (55,457,198)         (48,757,822)
                                                               -----------------  -------------------
        Total stockholders' deficit                                  (1,216,846)          (4,373,804)
                                                               -----------------  -------------------

Total liabilities and stockholders' deficit                         $ 4,710,574          $ 2,058,454
                                                               =================  ===================
</TABLE>


See accompanying notes to financial statements.


                                       3

<PAGE>


SPATIALIGHT, INC.
STATEMENTS OF OPERATIONS (unaudited)

<TABLE>
<CAPTION>
                                                        Three months ended September 30,  Nine months ended September 30,
                                                            2003              2002             2003              2002
                                                         ------------      ------------     ------------      ------------

<S>                                                      <C>               <C>              <C>               <C>
Revenues                                                 $     82,152      $          -     $     82,152      $          -

Cost of revenues                                              (73,875)                -          (73,875)                -
Inventory writedown                                                 -                 -         (100,690)                -
                                                         ------------      ------------     ------------      ------------
          Gross profit (loss)                                   8,277                 -          (92,413)                -
                                                         ------------      ------------     ------------      ------------

Selling, general and administrative expenses:
   Selling, general and administrative expenses          $    972,882      $    629,145     $  2,346,211      $  1,795,495
   Stock-based general and administrative expenses             71,705           141,737        1,730,637           410,706
                                                         ------------      ------------     ------------      ------------
          Total selling, general and administrative
            expenses                                        1,044,587           770,882        4,076,848         2,206,201


   Research and development expenses                          597,148           858,635        1,988,449         2,234,601
                                                         ------------      ------------     ------------      ------------

          Total operating expenses                          1,641,735         1,629,517        6,065,297         4,440,802
                                                         ------------      ------------     ------------      ------------

          Operating loss                                   (1,633,458)       (1,629,517)      (6,157,710)       (4,440,802)
                                                         ------------      ------------     ------------      ------------

Other income (expenses):

  Interest expense:
          Interest expense                                    (71,418)          (66,294)        (180,607)         (194,161)
          Stock-based interest expense                       (138,416)         (536,478)        (417,393)       (1,510,785)
                                                         ------------      ------------     ------------      ------------
            Total interest expense                           (209,834)         (602,772)        (598,000)       (1,704,946)

   Interest and other income                                   18,350                91           56,326             8,689
                                                         ------------      ------------     ------------      ------------

          Total other expenses                               (191,484)         (602,681)        (541,674)       (1,696,257)
                                                         ------------      ------------     ------------      ------------

   Loss before income tax expense                          (1,824,942)       (2,232,198)      (6,699,384)       (6,137,059)

Income tax expense (benefit)                                        -                 -               (8)            1,425
                                                         ------------      ------------     ------------      ------------

Net loss                                                 $ (1,824,942)     $ (2,232,198)    $ (6,699,376)     $ (6,138,484)
                                                         ============      ============     ============      ============

Net loss per share - basic and diluted                   $      (0.06)     $      (0.09)    $      (0.25)     $      (0.25)
                                                         ============      ============     ============      ============

Weighted average shares used in computing
 net loss per share- basic and diluted                     29,194,477        24,263,706       27,260,754        24,175,222
                                                         ============      ============     ============      ============
</TABLE>

See accompanying notes to  financial statements



                                       4
<PAGE>

SPATIALIGHT, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2003

<TABLE>
<CAPTION>
                                                                                       ADDITIONAL
                                                                  COMMON STOCK          PAID-IN            NOTES
                                                            SHARES        AMOUNT        CAPITAL          RECEIVABLE
                                                         ------------- ------------- ---------------- -----------------

<S>                                                        <C>            <C>           <C>              <C>
Balance, January 1, 2003                                   26,018,658     $ 260,187     $ 45,550,830     $ (1,426,999)

August private placement net of issuance cost of $224,648   1,212,061        12,120        2,526,731                -

May private placement net of issuance cost of $175,065      2,796,325        27,963        4,946,972                -

Beneficial pricing on stock and warrants sold in
private placements                                                  -             -          958,913                -

Issuance of shares to third party for finder's fee in
  conjunction with May private placement                      130,435         1,304          375,653                -

Conversion of accrued interest                                142,360         1,423          353,054                -

Warrants issued in lieu of interest on short term borrowings        -             -            6,647                -

Exercise of stock options and warrants                         32,250           323           38,040                -

Issuance of stock, stock options, and warrants for services    79,000           790          467,388                -

Issuance of stock and options to employees and directors            -             -           42,839                -

Shares issued on exercise of warrant under 2002 installment
  note                                                        746,268         7,463           (7,463)               -

Payments on notes receivable from stockholders                      -             -                -          152,500

Accrued interest on notes receivable from stockholders              -             -                -          (56,326)

Net loss                                                                                           -                -
                                                         ------------- ------------- ---------------- ----------------
Balance, September 30, 2003                                31,157,357     $ 311,573     $ 55,259,604     $ (1,330,825)
                                                         ============= ============= ================ ================

<CAPTION>
                                                                                           TOTAL
                                                              ACCUMULATED              STOCKHOLDERS'
                                                                (DEFICIT)                 DEFICIT
                                                             ----------------  ------------------------

<S>                                                           <C>                    <C>
Balance, January 1, 2003                                      $ (48,757,822)         $ (4,373,804)

August private placement net of issuance cost of $224,648                 -             2,538,851

May private placement net of issuance cost of $175,065                    -             4,974,935

Beneficial pricing on stock and warrants sold in
private placements                                                        -               958,913

Issuance of shares to third party for finder's fee in
  conjunction with May private placement                                  -               376,957

Conversion of accrued interest                                            -               354,477

Warrants issued in lieu of interest on short term borrowings              -                 6,647

Exercise of stock options and warrants                                    -                38,363

Issuance of stock, stock options, and warrants for services               -               468,178

Issuance of stock and options to employees and directors                  -                42,839

Shares issued on exercise of warrant under 2002 installment
  note                                                                    -                     -

Payments on notes receivable from stockholders                            -               152,500

Accrued interest on notes receivable from stockholders                    -               (56,326)

Net loss                                                         (6,699,376)           (6,699,376)
                                                             ---------------  --------------------
Balance, September 30, 2003                                   $ (55,457,198)         $ (1,216,846)
                                                             ===============  ====================
</TABLE>

See accompanying notes financial statements

                                       5

<PAGE>

SPATIALIGHT, INC.
STATEMENTS OF CASH FLOW (unaudited)

<TABLE>
<CAPTION>
                                                                       Nine months ended September 30,
                                                                       --------------------------------

Cash flows from operating activities:                                       2003             2002
                                                                       ---------------  ---------------

<S>                                                                       <C>              <C>
Net loss                                                                  $(6,699,376)     $(6,138,484)
Adjustments to reconcile net loss to net cash used by operating activities:
  Depreciation and amortization                                               271,467          295,230
  Stock-based general and administrative expense                            1,730,637          410,706
  Stock-based interest expense                                                417,393        1,510,785
  Inventory writedown                                                         100,690                -
  Accrued interest on notes receivable from shareholders                      (56,326)               -
  Changes in operating assets and liabilities:
     Accounts receivable                                                      (84,452)               -
     Inventory                                                               (811,934)         (94,809)
     Prepaid and other current assets                                         300,625         (480,519)
     Other assets                                                             (33,038)         (80,805)
     Accounts payable                                                      (1,377,723)         593,064
     Accrued expenses and other current liabilities                           378,285           93,551

                                 Net cash used in operating activities     (5,863,752)      (3,891,281)
                                                                       ---------------  ---------------

Cash flows from investing activities:
  Purchase of property and equipment                                         (409,399)        (451,730)
                                                                       ---------------  ---------------

                                 Net cash used in investing activities       (409,399)        (451,730)
                                                                       ---------------  ---------------

Cash flows from financing actitivies:
  Payments on capital lease obligations                                             -           (4,483)
  Proceeds from issuance of short term notes                                  917,500                -
  Payment on short term notes and convertible notes                          (505,000)               -
  Payments on stock subscriptions and notes receivable from shareholders      152,500          831,533
  Proceeds from issuance of common stock                                    7,513,786                -
  Proceeds from exercise of warrants and options                               38,363          892,483
                                                                       ---------------  ---------------

                             Net cash provided by financing activities      8,117,149        1,719,533
                                                                       ---------------  ---------------

Net increase(decrease) in cash and cash equivalents                         1,843,998       (2,623,478)

Cash and cash equivalents at beginning of period                              575,663        2,728,134
                                                                       ---------------  ---------------
Cash and cash equivalents at end of period                                $ 2,419,661        $ 104,656
                                                                       ===============  ===============
Supplemental disclosure of cash flow information:

  Income taxes paid during the period                                             $ 8          $ 1,425
                                                                       ---------------  ---------------
  Interest paid during the period                                            $ 26,474            $ 348
                                                                       ---------------  ---------------
Non cash financing activities:


  Exercise of warrants in exchange for notes receivable                           $ -      $ 1,747,347
                                                                       ---------------  ---------------
  Common stock issued upon conversion of interest and notes                 $ 354,477        $ 691,400
                                                                       ---------------  ---------------
</TABLE>

See accompanying notes to financial statements.


                                       6
<PAGE>




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

NOTE 1.  BUSINESS DESCRIPTION

SpatiaLight,   Inc.   (SpatiaLight  or  the  Company)  is  in  the  business  of
manufacturing  high-resolution  microdisplays  for  applications  such  as  high
definition   television,   computer   monitors,   video   projectors  and  other
applications.  To date, the Company has entered into  agreements or memoranda of
understanding (MOUs) with eight original equipment manufacturers (OEMs) in China
and two such  agreements  with OEMs in the  Republic  of South  Korea.  Each MOU
contemplates  definitive  purchase  order  agreements  in the event that certain
testing conditions are satisfied.

In late January 2003, the Company announced that it had signed an agreement with
Skyworth,  one of the Chinese  OEMs with which the Company had an  agreement  to
test prototypes of its  microdisplay  products,  for the purchase by Skyworth of
14,100  display  units during a one year  delivery  period.  The purchase  order
originally  provided for 200 units to be delivered in February and an additional
200 units in each of March and April 2003. Skyworth and SpatiaLight subsequently
agreed to delay the first delivery of units.  To date, the Company has completed
partial shipment of the 200 units originally scheduled for delivery in the first
month.  Following the initial delivery provisions of 200 units per month for the
first three  months,  the Company is scheduled to deliver  1,500 units per month
until the order is completed.  Pursuant to the terms of the purchase order,  the
current obligations of Skyworth are backed by letters of credit in SpatiaLight's
favor.  The purchase order is cancelable by Skyworth on a quarterly basis and is
subject to pricing contingencies and other customary terms and conditions.

In September  2003, the Company  announced an agreement  with China  Electronics
Corporation  (CEC),  another of the  Chinese  OEMs with which the Company had an
agreement to test prototypes of its microdisplay  products,  for the purchase by
CEC of 2,000  display  units from  SpatiaLight.  The  agreement  provides for an
initial delivery of ten display units, which was completed in September,  with a
second  delivery  of 100  units to  follow.  Additional  shipments  will be made
periodically  according to a schedule to be  determined  by CEC and the Company.
The  purchase  order is  cancelable  by CEC after  delivery  of 110 units and is
subject to other customary terms and conditions.

In October  2003,  the Company  announced  that it had signed an agreement  with
Nanjing Panda Electronics Co., Ltd.  (Panda),  for the purchase of 2,610 display
units by Panda. The agreement provides for an initial television box integration
phase followed by delivery of ten display units to Panda with a second  delivery
of 100 units to follow.  Subsequent  shipments  under the purchase order will be
made periodically  according to a schedule to be determined by the parties.  The
purchase order is cancelable by Panda after delivery of ten display units and is
subject to other customary terms and conditions.

NOTE 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-Q of Item 303 of  Regulation
S-K.  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


                                       7
<PAGE>

financial   statements  and  notes  thereto,   together  with  the  Management's
Discussion  and  Analysis,  for the year ended  December 31,  2002.  The interim
results for the period ended September 30, 2003 are not  necessarily  indicative
of results for the full fiscal year.

Revenue is recognized when there is persuasive  evidence of an arrangement,  the
product  has been  delivered,  the  sales  price is fixed or  determinable,  and
collectibility is reasonably assured. The product is considered delivered to the
customer  once  title  and risk of loss have  transferred.  The  Company  defers
revenue if there is uncertainty  about payment.  The Company reduces revenue for
customer returns and allowances,  which may occur under arrangements the Company
has with its customers.

Certain  prior  period  amounts  have been  reclassified  in order to conform to
current year presentation.

NOTE 3.  LIQUIDITY

As of September  30, 2003 the Company has sustained  recurring  losses and had a
net capital  deficiency of approximately  $1,200,000,  and a net working capital
deficiency  of  approximately  $2,000,000.  Reflected in these amounts are gross
proceeds of $5,150,000,  and $2,763,500 raised in stock financings  completed in
May 2003 and August 2003,  respectively (See Note 6).  Management  believes that
these funds along with existing cash balances,  anticipated collections of stock
subscriptions  receivable of $1,300,000 and the anticipated exercise of warrants
held by existing  investors will fund the Company's ongoing  operations  through
2004. Management anticipates that cash expenditures during 2003 will approximate
$400,000 per month, or approximately $5 million for the year,  without regard to
any revenues in 2003.  The Company's  continued  existence is dependent upon its
ability to generate revenue by successfully  marketing and selling its products;
however,  there  can  be  no  assurance  that  the  Company's  efforts  will  be
successful.

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  approximately  $6,699,000  in the nine months
ended September 30, 2003. Of this amount,  approximately $2,148,030 was non-cash
stock-based  expenses.  Additionally,  as of September  30, 2003,  the Company's
accumulated deficit totaled approximately $55,500,000. The Company has generated
limited  revenues  to  date  and  the  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 is dependent  upon future
events. These events include 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 Company's  auditors  included a paragraph in their report on
the  audited  financial  statements  for  the  year  ended  December  31,  2002,
indicating that substantial doubt exists as to the Company's ability to continue
as a going concern.

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.


                                       8
<PAGE>

NOTE 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 and nine months ended September
30, 2003 are  1,346,268  Common  Shares  issued but held in escrow in connection
with 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  Shares  were  exercised  or
converted.  Options  and  warrants to acquire  6,046,216  and  6,953,768  Common
Shares,  and  3,702,966  and  3,428,603  Common  Share  equivalents  relating to
convertible  secured  notes,  for the three and nine months ended  September 30,
2003 and 2002,  respectively,  are excluded from the computation of diluted loss
per share because the effect of their assumed  exercise  would be  antidilutive.
The weighted average exercise price as of September 30, 2003 for the options and
warrants is $2.40 and $2.96, respectively; the weighted average conversion price
for the Common Share equivalents related to convertible notes is $1.14.

NOTE 5.  NOTES PAYABLE

Convertible notes at September 30, 2003 consist of the following:

Argyle Notes:

In 1998, the Company  received  $1,188,000 in cash in exchange for notes in that
amount to Argyle Capital Management  Corporation  (Argyle),  a company owned and
controlled  by Robert A.  Olins,  Acting  Chief  Executive  Officer,  Secretary,
Treasurer,  and a  director  of the  Company.  The notes  accrue  interest  at a
contractual  rate of 6% per  annum,  and are  secured by  substantially  all the
assets of the Company.  Both  principal  and interest are  convertible  into the
Company's  Common Shares at $.50 per share. On May 23, 2001, the due date of the
notes  was  extended  until  December  31,  2002.  On the  extension  date,  the
beneficial  conversion  effect  representing  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  $1,188,000  discount  to the debt
arising  from the  beneficial  conversion  feature was being  amortized  through
December 31, 2002. The effective interest rate for financial  statement purposes
due to this discount differs from the actual  contractual  interest  received or
receivable  in  cash  or  shares  by  Argyle.  This  discount,  along  with  the
contractual 6% interest rate,  resulted in a new effective  interest rate of 72%
per annum as of the May 23, 2001 extension date when compared to the outstanding
principal  balances.  The effective  rate prior to extension had been the 6% per
annum  contractual  rate. On September 20, 2002, the due date was extended until
March 31, 2004. Accordingly, the remaining unamortized discount at the extension
date of $198,000 is being amortized  through March 31, 2004,  resulting in a new
effective  interest  rate of 17% per  annum  when  compared  to the  outstanding
principal balances.

On January 3, 2003 the Company  issued 142,360 Common Shares upon the conversion
of prepaid interest of $354,477. Prepaid interest was computed using the closing
price of the Common Shares on December 31, 2002 of $2.49, and is being amortized
through  December  31,  2003.  For the nine months  ended  September  30,  2003,
additional  stock-based interest expense of approximately  $212,400 was recorded
due to the beneficial  conversion feature of the prepaid interest,  representing
the excess value of the Common Shares  received  upon  conversion of the prepaid
interest.  At September 30, 2003,  the carrying value of the Argyle notes totals
$1,122,000,  which includes the $1,188,000  principal balance net of unamortized
discounts of $66,000. See also Note 6.


                                       9
<PAGE>

Alabama Group Notes:

In December  1999, the Company  received  $1,437,500 in cash and issued notes in
that amount to a group of investors (the Alabama Group),  which includes a trust
for the benefit of Steven F. Tripp, a director of the Company.  Mr. Tripp is not
the  trustee  of this  trust and has no power to vote or  dispose  of the Common
Shares of the  Company or any other  securities  held by that  trust.  Marcia K.
Tripp, Steven F. Tripp's mother, is the trustee of this trust and directs and is
responsible for all of the investment decisions of this trust. In the opinion of
the  Company,  no other  investor in the Alabama  Group is an  affiliate  of the
Company and Mr. Tripp is not an  affiliate of any other  investor in the Alabama
Group.  The notes accrue interest at a contractual rate of 6% per annum, and are
secured by substantially all the assets of the Company. At the time of issuance,
this portion of the notes was  convertible  into shares of the Company's  Common
Shares at $3.50 per share.  Upon issuance of the notes,  the Company also issued
warrants to purchase 821,429 Common Shares.  The warrants were exercised on June
28, 2002. The warrants were valued using the Black-Scholes  option-pricing model
and the following  assumptions:  contractual  life 2.5 years;  volatility  114%;
risk-free  interest  rate 6%; and dividend  yield of $0. The total cash received
from the  issuance  of this  tranche  of notes of  $1,437,500  was less than the
calculated value associated with the warrants.  Therefore, the value assigned to
the warrants was limited to the original  proceeds of  $1,437,500,  and has been
recorded as a discount on the notes.  The effective  interest rate for financial
statement  purposes due to this  discount  differs  from the actual  contractual
interest  received or  receivable  in cash by the  holders of the Alabama  Group
Notes.  This  discount,  along with the  contractual 6% per annum interest rate,
resulted in an  effective  interest  rate of 70% per annum when  compared to the
outstanding principal balances.

The  proceeds  of the second  tranche of notes,  also  totaling  $1,437,500  and
carrying interest at 6% per annum, were originally to be received by the Company
upon the achievement of certain performance  targets. The proceeds were received
in November 2000, prior to reaching those targets,  in exchange for reducing the
conversion  price of the notes to the  then-market  price of $2.25 per share. No
warrants were issued with the second tranche of notes. The remaining unamortized
discount  for the first  tranche,  along with the  contractual  interest on both
tranches,  resulted in a combined effective interest rate of 87% per annum as of
the  issuance  date for the second  tranche  when  compared  to the  outstanding
principal balances.

On June 15, 2001,  the due date of both tranches was extended until December 31,
2002. On the extension date, the excess  $255,000  aggregate value of the Common
Shares  receivable upon conversion of the notes based on the then current market
price of $2.65 per  share,  over the  aggregate  conversion  price for the notes
convertible  at $2.25 per share,  was recorded as a debt discount and additional
paid-in  capital.  The resulting  $255,000  discount to the debt, along with the
remaining  unamortized  discount  for the first  tranche,  was  being  amortized
through December 31, 2002. The effective  interest rate for financial  statement
purposes due to these discounts  differed from the actual  contractual  interest
received  or  receivable  by the  holders  of the  Alabama  Group  Notes.  These
discounts,  along with the contractual 6% per annum interest rate, resulted in a
new effective  interest rate upon extension of 25% per annum as of the extension
date when compared to the outstanding principal balances. On September 20, 2002,
the due  date of both  tranches  was  extended  until  March  31,  2004.  On the
extension  date,  the  excess  $58,000  aggregate  value  of the  Common  Shares
receivable  upon  conversion of the notes based on the then current market price
of $2.34 per share over the aggregate conversion price for the notes convertible
at  $2.25  per  share  was   recorded  as  a  debt   discount   and   additional
paid-in-capital.   Accordingly,   the  remaining  unamortized  discount  at  the


                                       10
<PAGE>

extension  date of  $194,195  including  the new  discount  of  $58,000 is being
amortized through March 31, 2004,  resulting in a new effective interest rate of
10.5% per annum when compared with to the outstanding principal balances.

On May 21, 2003, the Alabama Group released its security  interest in the assets
of the Company in  consideration  for a reduction in the conversion price of the
first  tranche  of notes from  $3.50 to $2.25.  The  market  price on the day of
conversion,  which was deemed to be the commitment date for accounting purposes,
was lower than the new  conversion  price;  therefore,  there was no  beneficial
conversion  effect.  On July 31, 2003, the Company retired principal of $100,000
to certain investors. Additional principal was converted to Common Shares during
the fourth quarter (See Note 10: Subsequent  Events). At September 30, 2003, the
remaining carrying value of the Alabama notes totals $3,266,956,  which includes
principal  balance  plus  accrued  interest  of  $554,436,  net  of  unamortized
discounts of $62,480.

Other Short-term Notes

During the first nine months of 2003, the Company received  proceeds of $917,500
from borrowings  under  short-term  notes. Of this amount,  $260,000 was retired
during the first and second  quarters  and an  additional  $145,000  was retired
during the third  quarter.  At  September  30, 2003 the  outstanding  balance on
short-term  notes,  excluding the Alabama and Argyle notes discussed  above, was
$512,500.  Of this outstanding balance,  $250,000 was a convertible note, with a
conversion  price of $2.67,  which  approximated  the stock price on the date of
issuance.  Therefore,  there is no beneficial  conversion effect associated with
this note. A warrant to purchase  10,000 shares of the  Company's  Common Shares
were issued in lieu of  interest  for a  short-term  note.  Interest  expense of
$6,647  was  recorded   during  the  second   quarter   using  a   Black-Scholes
option-pricing  model.  (See Note 6).  The note was  repaid  during  the  second
quarter.  All outstanding  notes at September 30, 2003 accrue interest at 6% per
annum and have maturity dates ranging from immediately to 92 days.

Activity in notes payable for the nine months ended September 30, 2003 follows:

<TABLE>
<CAPTION>
                                                                                 (PAYMENT) OR                         BALANCE AT
                                             BALANCE AT      ADDITION OR NEW       DISCOUNT        CONVERSION TO      SEPTEMBER 30,
DEBT PRINCIPAL:                           DECEMBER 31, 2002    DISCOUNT          AMORTIZATION          EQUITY              2003
                                         ------------------  ---------------- ------------------- -----------------  --------------
<S>                                            <C>               <C>                  <C>               <C>            <C>
Argyle                                         $ 1,188,000               $ -                 $ -               $ -     $ 1,188,000
Argyle discount                                   (165,000)                -              99,000                 -         (66,000)
Alabama Group                                    2,875,000                 -            (100,000)                -       2,775,000
Alabama Group discount                            (161,829)                -              99,349                 -         (62,480)
Other short term notes (convertible and other)           -           917,500            (405,000)                -         512,500
                                         ------------------  ---------------- ------------------- -----------------  --------------
                 Total                           3,736,171           917,500            (306,651)                -       4,347,020
                                         ------------------  ---------------- ------------------- -----------------  --------------


INTEREST:
Accrued Argyle 6%                                        -            53,460                   -           (53,460)              -
Accrued Alabama 6%                                 471,061           105,240             (21,865)                -         554,436
Beneficial interest - Argyle                             -           212,397                   -          (212,397)              -
                                         ------------------  ---------------- ------------------- -----------------  --------------
                 Total                             471,061           371,097             (21,865)         (265,857)        554,436

                                         ------------------  ---------------- ------------------- -----------------  --------------
TOTAL                                          $ 4,207,232       $ 1,288,597          $ (328,516)       $ (265,857)    $ 4,901,456
                                         ==================  ================ =================== =================  ==============
</TABLE>


                                       11
<PAGE>



Stock-based interest expense discussed above is as follows:

<TABLE>
<CAPTION>
                                                         Nine months ended September 30,
                                                         -------------------------------
                                                             2003                2002
                                                         ---------------  --------------
<S>                                                       <C>              <C>
Amortization of Alabama group discount                     $ 99,349          $ 408,579
Amortization of Argyle Capital discount                      99,000            594,000
Effect of beneficial conversion priviledges
   on accrued interest                                      212,397            378,900
Other                                                         6,647            129,306
                                                         -------------------------------
                                                          $ 417,393        $ 1,510,785
                                                         ===============================
</TABLE>



NOTE 6.  ISSUANCE OF SECURITIES

Issuance of Stock during the nine months ended September 30, 2003
-----------------------------------------------------------------

In August 2003, the Company  completed a private sale of 1,212,061 of its Common
Shares and fully  vested  warrants,  with a strike  price of $3.29,  to purchase
303,015  Common  Shares in exchange  for net  proceeds of  $2,538,851,  with six
purchasers,  none of whom is an affiliate of the Company. In addition,  warrants
to purchase 48,482 Shares were granted to the placement agent for the financing.
There was no earnings impact for these warrants.

In May 2003, the Company issued  2,796,325  Common Shares at $1.84 per share and
699,080  fully vested  warrants with a strike price of $2.65 in exchange for net
proceeds of $4,974,935.  Of this amount  1,357,441  shares and 339,360  warrants
were  purchased  by  Robert A.  Olins,  Acting  Chief  Executive  Officer  and a
director.  Consequently,  the Company  recognized  non-cash  expense of $958,913
related to the deemed beneficial  pricing Robert A. Olins received;  the expense
consists of two components. First, an expense of $538,106, representing the fair
value of the warrant  issued to Robert A. Olins was  recognized  in  stock-based
general and administrative  expense in the second quarter, using a Black-Scholes
option  pricing  model  and  the  following  assumptions:   stock  price  $2.15,
historical  volatility 105%, risk free rate of 2.27%,  dividend rate of 0, and a
contractual  term of five years.  Second,  since the market  price on the day of
closing  of $2.15  was  higher  than  the  issuance  price of $1.84 a charge  of
$420,807 was recognized in stock-based  general and administrative  expenses for
the 1,357,441 shares purchased by Robert A. Olins.

In order to  complete  this stock  financing,  the  outside  investors  required
significant  participation  from Robert A. Olins.  To achieve  this,  Mr.  Olins
borrowed funds to purchase his share of the stock financing. The Company's board
of directors unanimously (except for Mr. Olins, who did not vote on this matter)
approved  reimbursements  for certain  expenses  incurred in connection with the
personal loan to Mr. Olins made by an unaffiliated  bank, and $300,000,  payable
through the issuance of 130,435 Common Shares, for a finder's fee that Mr. Olins
was obligated to pay to an unaffiliated third party.  Another shareholder of the
Company, to whom the Company  subsequently issued 130,435 Shares,  undertook Mr.
Olins'  obligations to the finder. The $376,957 fair value of the 130,435 shares
is included in stock-based general and administrative expense.


                                       12
<PAGE>

Additionally,  warrants  in the  aggregate  of 77,126  shares were issued to the
placement  agent handling the financing.  There was no earnings impact for these
warrants.

The Company  has become  aware that the  current  interpretations  of the NASDAQ
rules  by the  NASDAQ  staff  require  shareholder  approval  of the sale by the
Company to Mr. Olins of 1,357,441  shares at the same  discount  received by the
other investors in that transaction.  Upon review, the Company has determined to
seek  shareholder  ratification  of the sale to Mr. Olins at the Company's  next
annual meeting of  shareholders.  Mr. Olins has informed the Company that in the
interim he will not dispose of, nor vote,  these shares until such  ratification
is obtained. In the event that such ratification is not obtained,  Mr. Olins and
the Company  have agreed that the matter will be addressed  consistent  with the
rules and regulations of the NASDAQ.

Interest Conversion
-------------------

On January 3, 2003 the Company  issued 142,360 Common Shares upon the conversion
of prepaid interest of $354,477. Prepaid interest was computed using the closing
price of the Common Shares on December 31, 2002 of $2.49, and is being amortized
through December 31, 2003. (See also Note 5).

In May 2003, the Company issued a fully vested warrant to purchase 10,000 Common
Shares in lieu of interest on a short-term  note. A value of $6,647 was assigned
to this warrant  using a  Black-Scholes  option  pricing model and the following
assumptions:  stock price $2.15,  historical  volatility  79%, risk free rate of
1.01%,  dividend yield of 0, and a contractual term of 1 year. The value of this
warrant was recorded in non-cash interest expense in the second quarter 2003.

Exercise of Stock Options and Warrants during the nine months ended
-------------------------------------------------------------------
September 30, 2003
------------------

During the first nine months of 2003,  32,250 Common Shares were issued upon the
exercise of employee stock options. Total cash received was $38,363.

Issuance of Stock,  Stock  Options and  Warrants for services in the nine months
--------------------------------------------------------------------------------
ended September 30, 2003
------------------------

On October  14,  2002 the  Company  issued a fully  vested  warrant to  purchase
250,000  Common Shares at an exercise  price of $3.50 in exchange for consulting
services  rendered over a six-month  period.  A value of $91,000 was assigned to
the  warrants  for the  portion  of the  services  rendered  in 2003  using  the
Black-Scholes  option pricing model and the following  assumptions:  stock price
$1.84, historical volatility 100%, risk free rate 5%, a dividend yield of 0, and
a contractual term of two years, and is reflected in the statement of operations
as stock-based general and administrative expense.

In March 2003,  the Company  issued a fully vested  warrant to purchase  200,000
Common Shares in exchange for services  rendered in the first quarter of 2003. A
value of $85,400  was  assigned to the warrant  using the  Black-Scholes  option
pricing  model and the  following  assumptions:  stock price  $2.43,  historical
volatility  100%,  risk free rate 5%, a dividend  yield of 0, and a  contractual
term of five months. The value of the warrant is included in stock-based general
and administrative expense in the first quarter of 2003.

In May 2003, the Company issued a fully vested option to purchase  25,000 Common
Shares in exchange for services  rendered.  A value of $49,734,  was assigned to
this  option  using a  Black-Scholes  option  pricing  model  and the  following
assumptions:  stock price $2.14,  historical  volatility 112%, risk free rate of
3.33%, a dividend yield of 0, and a contractual  term of 10 years.  The value of


                                       13
<PAGE>

this option was recorded in stock-based  general and  administrative  expense in
the second quarter.

In May 2003,  the Company  issued a fully  vested  warrant to  purchase  125,000
Common  Shares in  exchange  for  consulting  services.  A value of $56,994  was
assigned to the  warrant  using a  Black-Scholes  option  pricing  model and the
following assumptions:  stock price $2.05,  historical volatility 79%, risk free
rate of 1.01%, dividend yield of 0, and a contractual term of 18 months.

In May 2003, the Company  issued 32,000 Common Shares to an outside  consultant.
The shares were issued in consideration  of services  rendered by the consultant
in 2003. These shares were valued at $68,800,  the market value of the shares on
the date of grant.

In March  2003,  the  Company  issued  47,000  Common  Shares  in  exchange  for
consulting  services provided in 2002 totaling $116,250.  The expense associated
with these services was recorded in 2002.

Other expenses in 2003 related to the valuation of options  granted to directors
for additional  services totaled $42,839 and are included in stock-based general
and administrative.

Issuance of Stock Under Installment Note
----------------------------------------

In November  2002, a warrant to purchase  746,268 Common Shares was exercised at
$2.00  per share  under a warrant  installment  agreement  totaling  $1,492,536.
Payments of $200,000 were made in 2002.  An additional  $152,500 was received in
2003.  Interest accrues at 6% per annum and is due with the final payment. As of
September 30, 2003, approximately $63,000 of accrued interest has been recorded,
including  interest of approximately  $56,000 in 2003. The shares were issued in
2003,  but are held in escrow by the Company  pending  receipt of the  remaining
balance of  $1,140,036,  which is included in the notes and stock  subscriptions
receivable balance as of September 30, 2003.

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

<TABLE>
<CAPTION>
              Stock based  general and administrative expense discussed above
              is as follows:
                                                                    Nine months ended September 30,


                                                                        2003               2002
                                                                   ----------------   ----------------


<S>                                                                    <C>                  <C>
              Stock and options granted to employees and directors        $ 42,839          $ 237,277
              Common stock  and warrants expensed for services             283,128            103,652
              Stock issued in connection with May
                 stock purchase                                            376,957                  -
              Beneficial pricing on sale of stock and warrants
                 to officer                                                958,913                  -
              Other                                                         68,800             69,777
                                                                   ----------------   ----------------
                                                                       $ 1,730,637          $ 410,706
                                                                   ================   ================
</TABLE>


                                       14
<PAGE>


NOTE 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.

NOTE 8.  STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation arrangements for employees
and directors using the intrinsic value method pursuant to Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." As such,
compensation  expense is recorded when, on the date of grant,  the fair value of
the underlying Common Shares exceeds the exercise price for stock options or the
purchase price for issuances or sales of Common Shares. Pursuant to Statement of
Financial  Accounting  Standards  (SFAS) No.  123  "Accounting  for  Stock-Based
Compensation,"  the Company  discloses  the pro forma  effects of using the fair
value method of accounting for stock-based compensation arrangements and records
compensation expense for the fair value of options granted to non-employees.

If the Company had elected the fair value method of accounting  for  stock-based
compensation,  compensation cost would be accrued at the estimated fair value of
stock option  grants over the service  period,  regardless  of later  changes in
stock prices and price volatility.

The table below shows net income per share for the three  months and nine months
ended  September  30, 2003 and 2002 as if the Company had elected the fair value
method of accounting for stock options.

<TABLE>
<CAPTION>
                                                    Three months ended September 30,     Nine months ended September 30,
                                                         2003              2002              2003               2002
                                                   ----------------- ------------------  ---------------- -----------------

<S>                                                    <C>                <C>               <C>               <C>
Net loss as reported                                   $ (1,824,942)      $ (2,232,198)     $ (6,699,376)     $ (6,138,484)


Deduct: total stock-based employee compensation
determined under fair value method for all awards,
net of any applicable related tax effects                  (230,425)          (556,027)       (1,096,680)       (2,330,360)
                                                   ----------------- ------------------  ---------------- -----------------

Proforma net loss, as adjusted                         $ (2,055,367)      $ (2,788,225)     $ (7,796,056)     $ (8,468,844)

Loss per share:
Basic and diluted, as reported                         $      (0.06)      $      (0.09)     $      (0.25)     $      (0.25)
Basic and diluted, as adjusted                         $      (0.07)      $      (0.11)     $      (0.29)     $      (0.35)
</TABLE>




NOTE 9.  RECENT ACCOUNTING PRONOUNCEMENTS


In July 2002, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
146,  "Accounting for Costs Associated with Exit or Disposal  Activities," which
addresses  financial  accounting and reporting for costs associated with exit or
disposal  activities.  SFAS  No.  146  requires  that  a  liability  for a  cost


                                       15
<PAGE>

associated with an exit or disposal activity be recognized when the liability is
incurred.  This Statement also  establishes that fair value is the objective for
initial measurement of the liability.  Severance pay under SFAS No. 146, in many
cases,  would be recognized  over time rather than up front.  The  provisions of
this statement are effective for exit or disposal  activities that are initiated
after  December 31,  2002.  Adoption of this  Statement  did not have a material
impact on the Company's financial condition or results of operations.

In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation - Transition and Disclosure," which provides alternative methods of
transition  for a voluntary  change to fair value based method of accounting for
stock-based employee  compensation as prescribed in SFAS No. 123.  Additionally,
SFAS No. 148 requires more prominent and more frequent  disclosures in financial
statements about the effects of stock-based compensation. The provisions of this
Statement  are  effective  for fiscal  years  ending  after  December  15, 2002.
Adoption  of this  Statement  did not have a  material  impact on the  Company's
financial  condition or results of  operation,  as the Company is not  currently
planning to make a voluntary  change to the fair value method of accounting  for
stock-based employee compensation.

In May 2003,  the FASB  issued SFAS No. 150,  Accounting  For Certain  Financial
Instruments  with   Characteristics  of  Both  Liabilities  and  Equity,   which
establishes standards for how an issuer of financial instruments  classifies and
measures certain financial  instruments with characteristics of both liabilities
and equity.  It requires that an issuer classify a financial  instrument  within
its cope as a liability  (or an asset in some  circumstances)  if, at inception,
the monetary value of the obligation is based solely or predominantly on a fixed
monetary amount known at inception,  variations in something other than the fair
value of the issuer's equity shares or variations  inversely  related to changes
in the fair value of the issuer's  equity shares.  SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2002, and otherwise
is effective at the beginning of the first interim period  beginning  after June
15,  2003.  Implementation  did not  have a  material  impact  on the  Company's
financial condition or results of operations.

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45. "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others."  FIN No. 45  requires a  guarantor  to
recognize,  at the inception of a qualified guarantee,  a liability for the fair
value of the  obligation  undertaken  in issuing  the  guarantee.  FIN No. 45 is
effective on a  prospective  basis for qualified  guarantees  issued or modified
after December 31, 2002. Adoption of this Interpretation did not have a material
impact on the Company's financial condition or results of operations.

NOTE 10.          SUBSEQUENT EVENTS

In October 2003, certain investors included in the Alabama Group converted their
outstanding  notes and interest  thereunder to Common Shares.  As of the date of
this  filing,  investors  in the  Alabama  Group  have  converted  principal  of
$2,500,000 and accrued interest of $508,892 into 1,211,645 Common Shares.



                                       16
<PAGE>




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

This Form 10-Q 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 April 14, 2003. 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 September 30, 2003, and the results of operations
for the Company for the three  months and nine months ended  September  30, 2003
and  2002.  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
ongoing  operations  are  expected  to be funded by the gross  proceeds of $5.15
million  received  from the stock  financing  completed  in May 2003,  the $2.76
million of gross proceeds raised in the August 2003 stock  financing,  and funds
from the  exercise  of  warrants  and  options.  Our  auditors  have  included a
paragraph in their  report on the audited  financial  statements  as of the year
ended  December 31, 2002,  indicating  that  substantial  doubt exists as to our
ability to continue as a going concern.

We anticipate that our cash expenditures  during 2003 will approximate  $400,000
per month,  or  approximately  $5 million  for the year,  without  regard to any
additional  revenues in 2003. We expect to meet our cash needs with our existing
cash   balances  from   collections   of  stock   subscriptions   receivable  of
approximately  $1,300,000  and from the  exercise of  warrants  held by existing
investors.  In  addition,  we expect to fund  working  capital  requirements  by
drawing on letters of credit  issued by  customers  in  connection  with  signed
purchase orders.  However, there can be no assurance that any significant number
of these other warrants will be exercised. If no warrants are exercised, and the
Company does not derive any  significant  revenues  from its  operations  during
2003,  it is  likely  that  we will  need to  raise  additional  debt or  equity
financing during 2004 or beyond. There can be no assurances that such additional
debt or equity funding will be available from our current  investors or from any
other source.

OVERVIEW

We manufacture  microdisplays  that provide high resolution  images suitable for
applications  such as  high  definition  television,  rear  projection  computer
monitors,  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  prospective  and  actual
customers to incorporate our microdisplays  into their final products.  While in
the  past we have had  working  arrangements  with  several  independent  liquid
crystal display fabricators to manufacture certain of our prototype products, we



                                       17
<PAGE>

are now manufacturing our microdisplays ourselves in a 500 square foot Class 100
cleanroom and a 1200 square foot Class 1000 cleanroom.  We have enhanced quality
control and we have more effective  protection of our proprietary  technology in
our products. Internal manufacturing is subject to certain risks described under
"Business  Risks  and  Uncertainties."  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.

In May 2001,  we entered into an  arrangement  with Fuji Photo Optical Co., Ltd.
(Fuji),  for the  manufacture of light engines.  In September  2002, we accepted
delivery  of the first  pre-production  SpatiaLight/Fuji  display  units.  These
pre-production  display  units  incorporate  mechanical  changes  and  technical
enhancements  that we initiated  based upon the results of extensive  testing of
the prototype  display units.  In September 2003, the first  production  display
units were shipped to Skyworth Display Ltd. (Skyworth).

Since late  October  2001,  we have  entered  into  agreements  or  memoranda of
understanding  with  eight  original  equipment  manufacturers  (OEMs)  in China
contemplating the purchase by these  prospective  customers of our display units
and/or  SpatiaLight  imagEngine(TM)  microdisplays  for use in  certain of their
products.  All of these  agreements  require  that we supply  prototypes  of our
display units and/or SpatiaLight imagEngine(TM) microdisplays and that they meet
technical criteria satisfactory to each of such prospective customers.  In 2003,
we entered into  Agreements of Principal  Terms with two OEMs in the Republic of
South Korea. One of these  agreements is a development  agreement and the second
contemplates  the  purchase of our  display  units for use in certain of the OEM
products. This agreement requires that we supply a prototype of our display unit
and that it meet technical criteria satisfactory to the prospective customer.

In late  January  2003,  we  announced  that we had  signed  an  agreement  with
Skyworth,  one of the  Chinese  OEMs  with  which  we had an  agreement  to test
prototypes of our microdisplay  products, for the purchase by Skyworth of 14,100
SpatiaLight  display units during a one year delivery period. The purchase order
originally  provided for 200 units to be delivered in February and an additional
200 units in each of March and April 2003.  Skyworth and we subsequently  agreed
to delay the  first  delivery  of  units.  To date,  we have  completed  partial
shipment of the 200 units originally  scheduled for delivery in the first month.
Following the initial  delivery  provisions of 200 units per month for the first
three months,  we are scheduled to deliver 1,500 units per month until the order
is  completed.  Pursuant  to  the  terms  of the  purchase  order,  the  current
obligations  of  Skyworth  are backed by  letters  of credit in our  favor.  The
purchase order is cancelable by Skyworth on a quarterly  basis and is subject to
pricing contingencies and other customary terms and conditions.

In  September  2003  we  announced  that  we  signed  an  agreement  with  China
Electronics  Corporation (CEC), another of the Chinese OEMs with which we had an
agreement to test prototypes of our microdisplay  products,  for the purchase by
CEC of 2,000  display  units  from us.  The  agreement  provides  for an initial
delivery of ten display units,  which was completed in September,  with a second
delivery of 100 units to follow.  Additional shipments will be made periodically
according to a schedule to be  determined  by CEC and us. The purchase  order is
cancelable by CEC after delivery of 110 units and is subject to other  customary
terms and conditions.

In October 2003, we announced  that we had signed a purchase  order with Nanjing
Panda Electronics Co., Ltd. (Panda),  for the purchase of 2,610 display units by
Panda. The agreement  provides for an initial  television box integration  phase
followed by delivery of ten display units to Panda with a second delivery of 100


                                       18
<PAGE>

units to follow.  Subsequent  shipments  under the  purchase  order will be made
periodically  according  to a schedule  to be  determined  by the  parties.  The
purchase order is cancelable by Panda after delivery of ten display units and is
subject to other customary terms and conditions.


LIQUIDITY AND CAPITAL RESOURCES

As of  September  30, 2003,  we had  approximately  $2,420,000  in cash and cash
equivalents,  an increase of approximately $1,845,000 from the December 31, 2002
amount of $575,000.  Our net working  capital  deficit at September 30, 2003 was
approximately   $2,000,000   compared  to  a  net  working  capital  deficit  of
approximately $800,000 at December 31, 2002. This working capital deficit change
is primarily due to the  reclassification  of the Argyle and Alabama group notes
to  current  liabilities  based on their  maturity  date of March  31,  2004 and
recurring losses, offset by the proceeds of the May and August stock issuances.

Net cash used in  operating  activities  totaled  approximately  $5,864,000  and
$3,891,000 for the nine months ended September 30, 2003 and 2002,  respectively.
Cash was used primarily to fund the operating loss.

Net cash provided by financing activities in the nine months ended September 30,
2003 was  approximately  $8,117,000 as compared to approximately  $1,720,000 for
the nine months ended  September 30, 2002. This increase is due primarily to the
two stock  issuances  during 2003,  which  raised net proceeds of  approximately
$7,514,000.  This increase is offset by reduced payments on stock  subscriptions
receivable  and a decrease in proceeds from the exercise of options and warrants
for the nine months  ended  September  30,  2003.  (see Note 5 and Note 6 to the
accompanying condensed financial statements).

As of  September  30,  2003,  we had an  accumulated  deficit  of  approximately
$55,500,000.  We have realized significant losses in the past and we expect that
these losses will continue at least through 2003. It is likely that we will have
quarterly  and  annual  losses in 2003 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

Revenues.  Total  revenues  were  $82,152  for the nine and three  months  ended
September 30, 2003.  Total  revenues were $0 for the nine and three months ended
September 30, 2002.  Revenues in 2003 were the result of our delivery of display
units to Skyworth and CEC.

Cost of Revenues.  Cost of revenues represents product costs associated with the
production  of display  units.  Cost of revenues  was $73,  875 for the nine and
three months ended  September  30, 2002,  $0 for the nine and three months ended
September 30, 2002,  respectively.  Gross margins  associated with sales are not
indicative  of the gross  margins  that we expect to  realize  on sales of units
produced in quantity.

Inventory writedown. The adjustment to restate inventory at the lower of cost or
market  value was $100,690 for the nine months  ended  September  30, 2003.  Our
initial  purchases of inventory  components were at a cost higher than we expect
to incur for future purchases.


                                       19
<PAGE>

Selling,  general and administrative costs. Selling,  general and administrative
costs  were  approximately  $973,000  and  $629,145  in the three  months  ended
September 30, 2003 and 2002,  respectively  and $2,346,000 and $1,795,000 in the
nine  months  ended  September  30,  2003 and 2002,  respectively,  and  include
professional   services,   salaries  and  related  taxes  and  benefits,   rent,
depreciation,  travel, insurance and office expenses. General and administrative
expense  increased  year over year due to the  reimbursement  of banking fees of
$250,000  incurred  by Robert A. Olins,  Acting  Chief  Executive  Officer and a
director, in conjunction with his participation in the May 2003 stock financing.
Additional  increase in general and  administrative  expenses year over year are
due to an increase in headcount, rent associated with new facilities, and travel
expenses.

Stock-based   general  and  administrative   costs.   Stock-based   general  and
administrative costs were approximately $72,000 and $142,000 in the three months
ended September 30, 2003 and 2002,  respectively,  and approximately  $1,731,000
and $411,000 in the nine months ended September 30, 2003 and 2002, respectively.
The increase in the nine months ended  September  30, 2003 relates  primarily to
stock-based  costs of $1,300,000  associated with the May 2003 stock  financing.
(See Note 6 to the accompanying condensed financial statements).

Research  and   development   costs.   Research  and   development   costs  were
approximately  $1,988,000 and $2,235,000 in the nine months ended  September 30,
2003 and 2002,  respectively  and  $597,000  and  $859,000  in each of the three
months  ended  September  30, 2003 and 2002,  respectively.  In 2002 we incurred
approximately  $161,000  in costs  associated  with  testing  of  prototypes  in
conjunction with our manufacturing arrangement with Fuji. Additional decrease in
expense  year over year is due to a decrease in costs  associated  with  outside
consultants.   We  expect  to  continue  incurring   significant   research  and
development  costs in order to meet the  technical  criteria  from  current  and
prospective customers.

Interest expense.  Interest expense for the nine months ended September 30, 2003
increased  approximately  $14,000 from the same period in 2002,  due to interest
paid on short-term borrowings.

Stock-based  interest  expense.  Stock-based  interest expense was approximately
$417,000 and $1,510,785  for the nine months ended  September 30, 2003 and 2002,
respectively, and $138,000 and $536,000 for the three months ended September 30,
2003  and  2002,  respectively.  Stock-based  interest  expense  relates  to the
beneficial  conversion feature of interest converted and convertible into equity
on the notes payable to Argyle Capital Management Corporation,  a company wholly
owned by Robert A. Olins,  Acting Chief  Executive  Officer of the Company.  The
beneficial  conversion  interest  represents  the  excess  value  of the  shares
received  or  receivable  at  current  market  prices  over the  $0.50 per share
conversion price. For the nine months ended September 30, 2003, interest expense
related to the beneficial  conversion feature decreased  approximately  $165,000
due to the extension of the  amortization  period resulting from an extension of
the due date of the note until March 31, 2004. In addition, stock-based interest
expense  relates to  amortization  of the  discounts on notes  payable to Argyle
Capital  Management  Corporation and to the Alabama Group, a group of investors,
which  includes a trust for the  benefit of Steven F.  Tripp,  a director of the
Company.  In September 2002 the notes were extended 18 months,  thereby reducing
the  monthly  amortization  of the  discount.  Interest  expense  related to the
reduction  of discount  amortization  was  approximately  $804,000  for the nine
months ended  September  30, 2003.  Also included in  stock-based  interest is a
warrant  with a fair value of $6,700  issued in lieu of interest on a short-term
note  payable,  which note was issued and retired  during the second  quarter of
2003.


                                       20
<PAGE>

Interest  income.  Interest  income for the nine months ended September 30, 2003
and 2002 was approximately $56,000 and $8,600, respectively. Interest income for
the three months ended September 30, 2003 and 2002 was approximately $18,400 and
$100, respectively. The increase is due to accrued interest on a note receivable
from a shareholder in the nine months of 2003.

Critical Accounting Policies
----------------------------

Outlined  below  are  accounting  policies  that  we  believe  are key to a full
understanding  of our  operations  and  financial  results.  All our  accounting
policies are in compliance with accounting  principles generally accepted in the
United States of America.

Revenue Recognition - SpatiaLight enters into transactions to sell its products.
We evaluate revenue recognition for these transactions using the following basic
criteria (collectively called the Revenue Recognition Criteria):

     o    Evidence of an arrangement: Before revenue is recognized, we must have
          evidence of an agreement  with the customer  reflecting  the terms and
          conditions to deliver our products.
     o    Delivery: For products, delivery is considered to occur when title and
          risk of loss have been transferred.
     o    Fixed  or  determinable  fee:  We  consider  a  fee  to  be  fixed  or
          determinable  if the fee is not subject to refund or adjustment.  If a
          portion  of the  arrangement  fee is not  fixed  or  determinable,  we
          recognize  that  amount as revenue  when the amount  becomes  fixed or
          determinable. We do not consider a fee to be fixed and determinable if
          any amount is due more than 180 days from the delivery  date.  Payment
          terms of less than 180 days are  evaluated  based upon the  country in
          which the  arrangement  is entered  into to assess  whether the fee is
          fixed and determinable.
     o    Collection is deemed  probable:  Collection  is deemed  probable if we
          expect the customer to be able to pay amounts under the arrangement as
          those  amounts  become due. If we  determine  that  collection  is not
          probable,  we  recognize  revenue  when  collection  becomes  probable
          (generally upon cash collection).

Stock-based   Compensation  -  We  account  for  our  stock-based   compensation
arrangements  with  employees  and directors  using the  intrinsic  value method
pursuant to  Accounting  Principles  Board Opinion (APB) No. 25, as clarified by
Financial  Accounting  Standards  Board (FASB)  Interpretation  No. 44. As such,
compensation  expense is recorded when, on the date of grant,  the fair value of
the underlying Common Shares exceeds the exercise price for stock options or the
purchase price for issuances or sales of Common Shares. Pursuant to Statement of
Financial  Accounting  Standards  (SFAS) No. 123 as amended by SFAS No.  148, we
disclose the pro forma effects of using the fair value method of accounting  for
stock-based  compensation  arrangements and records compensation expense for the
fair value of options granted to non-employees.

Research and Development - Research and development costs are charged to expense
when incurred.

Inventory  valuation - We value  inventories  at the lower of cost (based on the
first-in,  first-out  method) or market value. We include  materials,  labor and
manufacturing  overhead in the cost of  inventories.  In  determining  inventory
market values, we give substantial consideration to the expected product-selling
price based on historical  recovery  rates. If we assess the market value of our
inventory to be less than costs we write it down to its replacement  cost or its
net  realizable  value.  Our estimates may differ from actual results due to the
quantity  and quality and mix of products in  inventory,  consumer  and retailer


                                       21
<PAGE>

preferences and economic conditions.  At June 30, 2003, inventories  (consisting
entirely of raw materials  components) were written down by $100,690,  as prices
on initial order  quantities were higher than those expected in the future,  and
would otherwise have resulted in losses on sales of finished goods in 2003.

Income tax assets and  liabilities  - In  establishing  our deferred  income tax
assets and  liabilities,  we make  judgments  and  interpretations  based on the
enacted  tax  laws  and  published  tax  guidance  that  are  applicable  to our
operations.  We record deferred tax assets and liabilities and evaluate the need
for  valuation  allowances  to reduce  the  deferred  tax  assets to  realizable
amounts.  The  likelihood of a material  change in our expected  realization  of
these assets is dependent on future taxable  income,  our ability to use foreign
tax credit carryforwards and carrybacks, final U.S. and foreign tax settlements,
and the  effectiveness  of our tax planning  strategies in the various  relevant
jurisdictions.  Due to our  lack  of  profitable  operating  history,  potential
limitations on usage of operating  losses and general  uncertainty,  we provided
for a 100% valuation  allowance  against our deferred tax assets for all periods
presented.  We are also  subject to  examination  of our income tax  returns for
multiple years by the Internal  Revenue  Service and other tax  authorities.  We
periodically  assess the  likelihood of adverse  outcomes  resulting  from these
examinations  to  determine  the  adequacy of our  provision  for income  taxes.
Changes to our income tax  provision or the valuation of the deferred tax assets
and liabilities may affect our annual effective income tax rate.

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 nine months ended  September  30, 2003 and 2002, we incurred
net  losses  of  approximately  $6,699,000  and  $6,138,000,   respectively.  In
addition, we had an accumulated deficit of $55,500,000 as of September 30, 2003.
We expect  additional  losses as we continue  spending for  production and other
business activities as well as further research and development of our products.
As a result, we will need to generate  substantial sales to support our costs of
doing  business  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 SUBSTANTIAL DOUBT ABOUT 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  assisted  through the  previous
exercises of warrants and private  purchases of our Common Shares  including the
approximately  $8.0  million  raised by us in the two recently  completed  stock
financings,  we may still require additional financing to satisfy our increasing
working capital  requirements.  Reliance for financing upon exercise of warrants
and  private  stock  purchase   agreements   entails  the  additional  risks  of
non-exercise  of such warrants  because of the  prevailing  market prices of our
underlying  Common Shares or default by stock purchasers under these agreements.
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 if the costs
of development and operations are greater than we anticipated,  we may be unable


                                       22
<PAGE>

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  substantial doubt about 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  SpatiaLight
imagEngine(TM)  microdisplays  and/or  display  units  in their  products.  This
requires us to invest  significant  amounts of time and capital in designing our
SpatiaLight  imagEngine(TM)  microdisplays and/or 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  the
SpatiaLight   imagEngine(TM)   microdisplays  and/or  display  units,  it  could
seriously harm our financial condition. In addition, the length of time that our
products may be  successfully  received by our customers could be limited by the
acceptance of new technologies developed by our competitors.

WE  INCUR  SUBSTANTIAL   RESEARCH  AND  DEVELOPMENT  COSTS  IN  CONNECTION  WITH
TECHNOLOGIES THAT MAY NOT BE SUCCESSFUL.

We currently have eleven full-time  engineering and six full-time  manufacturing
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  and  manufacturing  personnel  to  develop  future
generations of our  microdisplays.  As a result, we expect to continue incurring
significant research and development costs.

IN RECENT MONTHS WE HAVE COMMENCED  MANUFACTURING AND SHIPPING OUR MICRODISPLAYS
IN  COMMERCIAL   QUANTITIES,   BUT  UNANTICIPATED   DIFFICULTIES  IN  CONTINUING
MANUFACTURING  OUR  MICRODISPLAYS MAY MAKE IT DIFFICULT TO MEET CUSTOMER DEMANDS
FROM TIME TO TIME AND OUR  OPERATING  RESULTS COULD BE  SIGNIFICANTLY  HARMED BY
SUCH DIFFICULTIES.

We need to work closely with our  manufacturing  sources to assure production of
our  current  display  units.  Problems  in  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  source's  operation 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


                                       23
<PAGE>

of  factors,   including  the  level  of  contaminants   in  the   manufacturing
environment,  impurities in the materials used, and the performance of personnel
and equipment.  While in the past we have had working  arrangements with several
independent  liquid crystal  display  fabricators to manufacture  certain of our
products, we are now manufacturing our microdisplays  ourselves. We believe that
the internal  manufacture of all such liquid crystal  microdisplays will benefit
us by  allowing  us to enhance  quality  control  over such  products as well as
protect more  effectively  our proprietary  interest in those products,  but the
risks  discussed  above   associated  with  the  highly  complex   processes  of
manufacturing these liquid crystal microdisplays remain applicable.

We continue to have  working  arrangements  with the  manufacturer  of the light
engines and lamps required in the assembly of our display units. We have 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 no such  manufacturer  is bound to furnish us with any  specific
quantities of their products at previously  specified  prices.  At this date, we
are not aware that any of our component  manufacturers  have known  shortages of
critical material.

Because the manufacture of our SpatiaLight imagEngine(TM) microdisplays involves
highly complex  processes and technical  problems may arise, we, in our capacity
as  internally  manufacturing  the liquid  crystal  microdisplays,  which are an
integral part of the display units,  cannot assure the  manufacturing  yields of
our products. Problems in 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 microdisplays and 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 and may
be slow to develop.  In  addition,  companies  in those  markets  could  utilize
competing  technologies.  High-definition  television  has only recently  become
available to consumers,  and  widespread  market  acceptance  is  uncertain.  In
addition,  the  commercial  success  of  the  portable  microdisplay  market  is
uncertain. The acceptance of our display units and/or SpatiaLight imagEngine(TM)
microdisplays  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  commercially
successful products using our microdisplays. SpatiaLight's marketing efforts are
focused on developing strategic customer and governmental relationships in China
and the Republic of South Korea.  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  obtain  customer  orders,  our  customers  may  determine  not  to
introduce or may terminate  products  utilizing the  technology for a variety of
reasons, including the following:

o        superior technologies developed by our competitors;


                                       24
<PAGE>

o        price considerations; and

o        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 any one or more of these customers could materially harm our
business and financial condition.

WE CANNOT  ASSURE YOU THAT WE WILL OBTAIN  ADDITIONAL  PURCHASE  ORDERS FROM OUR
CURRENT OR PROSPECTIVE  CUSTOMERS,  OR, IF WE DO, THAT SUCH ORDERS WILL GENERATE
SIGNIFICANT REVENUES.

Since late  October  2001,  we have  entered  into  agreements  or  memoranda of
understanding  with  eight OEMs in China  contemplating  the  purchase  by these
prospective  customers of our display  units and/or  SpatiaLight  imagEngine(TM)
microdisplays  for use in certain  of their  products.  All of these  agreements
require  that we supply  prototypes  of our  display  units  and/or  SpatiaLight
imagEngine(TM)  microdisplays and that they meet technical criteria satisfactory
to each of such  prospective  customers.  In 2003 we entered into  Agreements of
Principal  Terms  with two OEMs in the  Republic  of South  Korea.  One of these
agreements is a development  agreement and the second  contemplates the purchase
of our display units for use in certain of the OEM's  products.  This  agreement
requires  that we  supply  a  prototype  of our  display  unit  and that it meet
technical  criteria  satisfactory  to the prospective  customer.  As of the date
hereof, we have received purchase orders from three of the Chinese OEMs. Certain
other  prospective  Chinese  customers  have  advised the Company  that they are
satisfied  with  the  results  of the  testing  of the  prototypes  under  their
agreements with the Company and we are currently  negotiating  terms of purchase
orders for our display  units and/or  SpatiaLight  imagEngine(TM)  microdisplays
with each of them. There remain open issues that have to be finally  negotiated,
including prices and quantities of our products. We cannot offer assurances that
we will  receive,  in the  future,  binding  purchase  orders  from any of these
companies  for their  purchase  of  commercial  quantities  of our  microdisplay
products.

In addition,  even if we receive purchase orders from our current or prospective
customers  for our  display  units,  we may have  problems  implementing  volume
production of such display units.  Furthermore,  sales to  manufacturers  in the
electronics  industry  are  subject  to  severe  competitive  pressures,   rapid
technological change, and product obsolescence.  Manufacturers may, at any time,
cancel  purchase  orders  or  commitments  or reduce  or delay  orders,  thereby
increasing  our  inventory  and  overhead  risks.  Therefore,  even if we obtain
purchase orders from several current or prospective customers,  we cannot assure
you that these agreements will result in significant revenues 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.,  OEMs) 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:

o        maintain  customer  satisfaction  with  our  design  and  manufacturing
         services;


                                       25
<PAGE>

o        match our design and  manufacturing  capacity with customer  demand and
         maintain satisfactory delivery schedules;

o        anticipate customer order patterns, changes in order mix, and the level
         and timing of orders that we can meet; and

o        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 decide 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:

o        our success in designing and manufacturing new display technologies;

o        our ability to address the needs of customers;

o        the quality, performance,  reliability, features, ease of use, pricing,
         and diversity of our display products;

o        foreign currency  fluctuations,  which may cause a foreign competitor's
         products to be priced significantly lower than our displays;

o        the quality of our customer services;

o        the efficiency of our production sources;

o        the rate at which  customers  incorporate  our displays  into their own
         products; and

o        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


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<PAGE>

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:

o        introductions  of displays and market  acceptance of new generations of
         displays;

o        timing of expenditures in anticipation of future orders;

o        changes in our cost structure;

o        availability of labor and components;

o        pricing and availability of competitive products and services;

o        the timing of orders;

o        the  volume of orders  relative  to the  capacity  we can  contract  to
         produce;

o        evolution in the life cycles of customers' products; and

o        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:

o        quarterly variations in our operating results;

o        actual or  anticipated  announcements  of technical  innovations or new
         product developments by us or our competitors;

o        public announcements regarding our business developments;

o        changes in analysts' estimates of our financial performance;

o        sales of large numbers of our Common Shares by our shareholders;

o        general conditions in the electronics industry; and


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<PAGE>

o        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.

INCREASING  THE  NUMBER OF OUR  COMMON  SHARES  THAT MAY BE SOLD INTO THE MARKET
COULD CAUSE THE MARKET  PRICE OF OUR COMMON  SHARES TO  DECREASE  SIGNIFICANTLY,
EVEN IF OUR BUSINESS OPERATIONS ARE PERFORMING WELL.

We recently  registered  for resale  1,771,119  shares  issued or issuable  upon
exercise of the warrants in conjunction with the August 2003 stock financing and
shares issuable upon exercise of warrants that were issued in  consideration  of
consulting  services  rendered.  All of these  shares  are freely  salable.  The
1,771,119 shares  (including  428,443 shares issuable upon exercise of warrants)
represent  approximately  5.7% of the total number of our Common Shares that are
issued and  outstanding  as of September 30, 2003.  Sales of these shares in the
public market,  or the perception that future sales of these shares could occur,
might adversely  affect the prevailing  market price of our Common Shares in the
near future.

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
adversely  affected due to the limited  marketability of our Common Shares.  Any
substantial  sales 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


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<PAGE>

use of our products and technology is difficult, however. Despite our efforts to
protect our proprietary rights, we face the following risks:

o        pending patent applications may not be issued;

o        patents issued to us may be challenged, invalidated, or circumvented;

o        unauthorized  parties may obtain and use information  that we regard as
         proprietary despite our efforts to protect our proprietary rights;

o        others may  independently  develop similar  technology or design around
         any patents issued to us;

o        breach of confidentiality agreements;

o        intellectual  property laws may not protect our intellectual  property;
         and

o        effective protection of intellectual  property rights may be limited or
         unavailable in some foreign  countries,  such as China, in which we may
         operate.  Specifically,  although we consider  the  following  unlikely
         because of the complex technological  structure of our products, one or
         more  of  our  prospective  Chinese  customers,   or  their  respective
         employees or other persons including our competitors, that have or gain
         access to our products for testing purposes, may seek to misappropriate
         or improperly convert to their own use our intellectual  property and a
         lack of adequate  remedies  and  impartiality  under the Chinese  legal
         system may  adversely  impact our ability to protect  our  intellectual
         property.

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,  and
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.

RISKS RELATED TO DOING BUSINESS IN CHINA MAY NEGATIVELY AFFECT OUR BUSINESS.

Our business is subject to significant political and economic  uncertainties and
may be adversely  affected by  political,  economic and social  developments  in
China. Over the past several years, the Chinese  government has pursued economic
reform policies  including the  encouragement of private  economic  activity and


                                       29
<PAGE>

greater economic  decentralization.  The Chinese  government may not continue to
pursue these policies or may significantly alter them to our detriment from time
to time with little, if any, prior notice.

A lack of adequate remedies and impartiality  under the Chinese legal system may
adversely  impact  our  ability  to do  business  in China  and to  enforce  the
agreements or purchase orders to which we are, or may become, a party.

At various  times  during  recent  years,  the United  States and China have had
significant   disagreements   over   political,   economic  and  social  issues.
Controversies may arise in the future between these two countries. Any political
or trade  controversies  between  the United  States  and China,  whether or not
directly  related to our  business,  could  adversely  affect our  ability to do
business in China.

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.


Item 3.  Quantitative and Qualitative Disclosures About Market Risks.

We place all of our excess cash and cash  equivalents  in a checking  account or
money market account with a nationally reputable bank. As of September 30, 2003,
our cash and cash equivalents totaled $2,420,000.

Item 4.  Controls and Procedures.

Quarterly evaluation of the Company's Disclosure Controls.  As of the end of the
quarterly  fiscal  period  related to this  Quarterly  Report on Form  10-Q,  we
evaluated  the  effectiveness  of the design and  operation  of our  "disclosure
controls and procedures"  (Disclosure  Controls).  Disclosure  Controls  include
components of our internal  control over financial  reporting.  This  evaluation
(the  Controls   Evaluation)  was  done  under  the  supervision  and  with  the
participation of our Chief Executive Officer and Chief Financial Officer.

Limitations on the  Effectiveness of Controls.  Our Chief Executive  Officer and
Chief  Financial  Officer  do not expect  that our  Disclosure  Controls  or our
internal control over financial  reporting will prevent all error and all fraud.
A control  system,  no matter how well conceived and operated,  can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met.  Further,  the design of a control  system must reflect the fact that there
are  resource  constraints,  and the  benefits  of controls  must be  considered
relative to their costs.  We have only had limited revenue derived from the sale
of our microdisplay products in the current reporting period. While the Controls
Evaluation  has accounted for such limited sales and revenue,  new or additional
controls  may or may not be  required  once we begin  selling  our  microdisplay
products in volume in the ordinary  course of business.  Because of the inherent
limitations  in all control  systems,  no  evaluation  of  controls  can provide
absolute  assurance  that all control  issues and  instances  of fraud,  if any,
within the Company have been detected.  These inherent  limitations  include the

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<PAGE>

realities that judgments in  decision-making  can be faulty, and that breakdowns
can occur because of simple error or honest mistake. Additionally,  controls can
be circumvented  by the individual acts of some persons,  by collusion of two or
more  persons,  or by  management  override of the  controls.  The design of any
system of  controls  also is based in part upon  certain  assumptions  about the
likelihood of future events,  and there can be no assurance that any design will
succeed in achieving  its stated goals under all  potential  future  conditions.
Over time,  specific  controls may or may not become  inadequate  (e.g., when we
commence to sell our  products  in volume in the  ordinary  course of  business)
because of changes in  conditions or  deterioration  in the degree of compliance
with  policies  or  procedures.   Because  of  the  inherent  limitations  in  a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.

Conclusions. Based upon the Controls Evaluation, our Chief Executive Officer and
Chief  Financial  Officer  have  concluded  that,  subject  to  the  limitations
mentioned in  Limitations on  Effectiveness  of Controls  above,  our Disclosure
Controls  are  effective  to ensure that  material  information  relating to the
Company  is made  known to the  Chief  Executive  Officer  and  Chief  Financial
Officer,  particularly  during the period  when our  periodic  reports are being
prepared.  There  have been no  significant  changes in the  Company's  internal
control over  financial  reporting that occurred  during the quarter  covered by
this  report  that  have  materially  affected,  or  are  reasonably  likely  to
materially affect, the Company's internal control over financial reporting.

PART II.          OTHER INFORMATION

ITEM 2   CHANGES IN SECURITIES AND USE OF PROCEEDS

On August 19,  2003,  the Company sold in a private  sale  $2,763,500  of Common
Shares and warrants to purchase  Common Shares (August  Transaction).  Under the
terms of the August Transaction, the Company sold 1,212,061 shares at a price of
$2.28 per share,  equal to a 20% discount to the trailing 30-day average closing
price of our  Common  Shares  through  August 5,  2003.  Pursuant  to the August
Transaction,  the Company  also  granted  warrants to purchase an  aggregate  of
303,015  Common Shares at an exercise  price of $3.29 per share,  equal to a 15%
premium to the foregoing  30-day  trailing  average  closing  price.  The shares
issued in the August Transaction were previously  authorized but unissued shares
of  the  Company.   This  issuance  was  made  pursuant  to  an  exemption  from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
as such issuance did not involve a "public offering"  pursuant to the Securities
Act given the  limited  number  and scope of  persons  to whom the  shares  were
issued.  In  addition,  warrants to purchase  48,482  shares were granted to the
placement agent for the financing.  The proceeds of the August  Transaction have
been used to augment the Company's working capital.


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<PAGE>

ITEM 6   EXHIBITS AND REPORTS ON FORM 8-K [TO BE MODIFIED]

(a)      Exhibits

         4.1      Amended and Restated Certificate of Incorporation. *
         4.2      Bylaws. *
         10.3     Employment  Agreement between  SpatiaLight,  Inc. and Theodore
                  Banzhaf dated July 7, 2003. *
         10.4     Time  Accelerated   Restricted  Stock  Award  Plan  ("TARSAP")
                  between SpatiaLight,  Inc. and Theodore Banzhaf, dated July 7,
                  2003. *
         31.1     Rule 13a-14(a)/15d-14(a) Certification of Robert A. Olins.
         31.2     Rule 13a-14(a)/15d-14(a) Certification of Timothy Descamps.
         32.1     Certifications  of  Robert  A.  Olins  Pursuant  to 18  U.S.C.
                  Section  1350,  As  Adopted  Pursuant  to  Section  906 of the
                  Sarbanes-Oxley Act of 2002.
         32.2     Certification  of  Timothy  Descamps  Pursuant  to  18  U.S.C.
                  Section  1350,  As  Adopted  Pursuant  to  Section  906 of the
                  Sarbanes-Oxley Act of 2002.

(b) Report on Form 8-K:

                  None.


*Previously filed.


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<PAGE>






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:          November 12, 2003
                                     ----------------------------------------
                                     SpatiaLight, Inc.



                               By:      /s/ROBERT A. OLINS
                                   ------------------------------------------
                                     Robert A. Olins
                                     Acting Chief Executive Officer



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