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 March 31, 2005

|_|   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 |X|     No |_|

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

         State the number of shares  outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 35,925,406 common shares as
of May 9, 2005.


                                       1
<PAGE>

                                SPATIALIGHT, INC.

                          Quarterly Report on Form 10-Q
                      For the Quarter Ended March 31, 2005


                                Table of Contents


PART I            FINANCIAL INFORMATION

         Item 1.  Condensed Consolidated Financial Statements (unaudited)

                  Condensed Consolidated Balance Sheets as of
                  March 31, 2005 and December 31, 2004.........................3

                  Condensed Consolidated Statements of Operations
                  for the Three Months Ended March 31, 2005 and 2004...........4

                  Condensed Consolidated Statements of Stockholders'
                  Equity for the Three Months Ended March 31, 2005.............5

                  Condensed Consolidated Statements of Cash Flows
                  for the Three Months Ended March 31, 2005 and 2004...........6

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

         Item 2.  Management's Discussion and Analysis
                  of Financial Condition and Results of Operations............15

         Item 3.  Quantitative and Qualitative Disclosures about Market
                  Risks.......................................................32

         Item 4.  Controls and Procedures.....................................33

PART II  OTHER INFORMATION

         Item 2.  Changes in Securities and Use of Proceeds...................36

         Item 6.  Exhibits and Reports on Form 8-K............................37


                                       2
<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.           Condensed Consolidated Financial Statements

SPATIALIGHT, INC.
CONSDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     March 31,      December 31,
                                                                       2005            2004
                                                                   ------------    ------------
                                                                    (unaudited)
<S>                                                                <C>             <C>
ASSETS

Current assets
  Cash and cash equivalents                                        $  4,115,598    $  9,087,551
  Accounts receivable, net of allowance of $345,030 at March 31,
     2005 and December 31, 2004                                          45,707         264,053
  Inventory                                                           1,324,102       1,173,314
  Prepaids and other current assets                                     594,575         949,711
  Prepaid non-cash interest to related party                          1,037,005         913,889
                                                                   ------------    ------------
          Total current assets                                        7,116,987      12,388,518

Property and equipment, net                                           6,239,877         858,212
Construction in progress                                                     --       2,801,521
Prepaid non-cash interest to related party                            3,182,115       3,474,386
Other assets                                                            125,868         123,774
                                                                   ------------    ------------

               Total assets                                        $ 16,664,847    $ 19,646,411
                                                                   ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
  Accounts payable                                                 $    952,074    $    601,394
  Note purchase option liability                                          8,639         659,874
  Accrued expenses and other current liabilities                      1,720,272       2,533,546
                                                                   ------------    ------------
        Total current liabilities                                     2,680,985       3,794,814

Senior secured and other convertible notes                           10,001,633       9,885,140
                                                                   ------------    ------------

               Total liabilities                                     12,682,618      13,679,954
                                                                   ------------    ------------
Commitments

Stockholders' equity:
  Common stock, $.01 par value:
     50,000,000 shares authorized;
      35,925,441 and 35,326,436 shares issued and outstanding,
     at March 31, 2005 and December 31, 2004, respectively              359,254         353,264
Additional paid-in capital                                           73,565,555      69,384,146
Notes receivable                                                       (243,793)       (241,462)
Common shares issuable                                                       --       4,038,149
Other comprehensive income                                               90,950          73,562
Accumulated deficit                                                 (69,789,737)    (67,641,202)
                                                                   ------------    ------------
        Total stockholders' equity                                    3,982,229       5,966,457
                                                                   ------------    ------------

Total liabilities and stockholders' equity                         $ 16,664,847    $ 19,646,411
                                                                   ============    ============
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>

SPATIALIGHT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

<TABLE>
<CAPTION>
                                                                         Three months ended March 31,
                                                                            2005            2004
                                                                        ------------    ------------
<S>                                                                     <C>             <C>
Revenue                                                                 $     97,759    $    319,100
Cost of revenue                                                              (69,844)       (346,682)
                                                                        ------------    ------------
          Gross margin                                                        27,915         (27,582)
                                                                        ------------    ------------
Selling, general and administrative expenses:
   Selling, general and administrative expenses                            1,707,265       1,005,144
   Stock-based general and administrative expenses                            99,050          42,924
                                                                        ------------    ------------
          Total selling, general and administrative expenses               1,806,315       1,048,068

   Research and development expenses                                         493,496         681,760
                                                                        ------------    ------------

          Total operating expenses                                         2,299,811       1,729,828
                                                                        ------------    ------------

          Operating loss                                                  (2,271,896)     (1,757,410)
                                                                        ------------    ------------
Other income (expenses):
  Interest expense:
          Interest expense                                                  (267,135)        (17,820)
          Non-cash interest expense                                         (277,592)       (187,696)
                                                                        ------------    ------------
            Total interest expense                                          (544,727)       (205,516)
                                                                        ------------    ------------

  Other income:
          Gain from the revaluation of note purchase option liability        651,235              --
          Interest and other income                                           19,153          17,833
                                                                        ------------    ------------
             Total other income                                              670,388          17,833
                                                                        ------------    ------------

          Total other income (expenses)                                      125,661        (187,683)
                                                                        ------------    ------------

   Loss before income tax expense                                         (2,146,235)     (1,945,093)

Income tax expense                                                             2,300             800
                                                                        ------------    ------------

Net loss                                                                $ (2,148,535)   $ (1,945,893)
                                                                        ============    ============

Net loss per share - basic and diluted                                  $      (0.06)   $      (0.06)
                                                                        ============    ============
Weighted average shares used in computing
 net loss per share- basic and diluted                                    35,817,964      32,760,703
                                                                        ============    ============
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       4
<PAGE>

SPATIALIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)
THREE MONTHS ENDED MARCH 31, 2005

<TABLE>
<CAPTION>
                                                                                     ADDITIONAL
                                                               COMMON STOCK           PAID-IN          NOTES       ACCUMULATED
                                                           SHARES        AMOUNT       CAPITAL       RECEIVABLE        DEFICIT
                                                        ------------   ----------   ------------   ------------    ------------
<S>                                                       <C>          <C>          <C>            <C>             <C>
Balance, January 1, 2005                                  35,326,436   $  353,264   $ 69,384,146   $   (241,462)   $(67,641,202)

Exercise of stock options and warrants                        17,500          175         50,025             --              --
Issuance of common shares issuable                           581,505        5,815      4,032,334             --              --
Issuance of options to employees and directors                    --           --          8,250             --              --
Issuance of warrant for services                                  --           --         90,800             --              --
Accrued interest on notes receivable from stockholder             --           --             --         (2,331)             --
Comprehensive loss:
    Net loss                                                      --           --             --             --      (2,148,535)
    Foreign currency translation adjustment                       --           --             --             --              --
                                                        ------------   ----------   ------------   ------------    ------------
         Total comprehensive loss                                 --           --             --             --              --
                                                        ------------   ----------   ------------   ------------    ------------
Balance March 31, 2005                                    35,925,441   $  359,254   $ 73,565,555   $   (243,793)   $(69,789,737)
                                                        ============   ==========   ============   ============    ============

<CAPTION>
                                                           OTHER          COMMON          TOTAL
                                                         COMPREHEN-        STOCK       STOCKHOLDERS'
                                                        SIVE INCOME      ISSUABLE         EQUITY
                                                        ------------   ------------    ------------
<S>                                                     <C>            <C>             <C>
Balance, January 1, 2005                                $     73,562   $  4,038,149    $  5,966,457

Exercise of stock options and warrants                            --             --          50,200
Issuance of common shares issuable                                --     (4,038,149)             --
Issuance of options to employees and directors                    --             --           8,250
Issuance of warrant for services                                  --             --          90,800
Accrued interest on notes receivable from stockholder             --             --          (2,331)
Comprehensive loss:
    Net loss                                                      --             --      (2,148,535)
    Foreign currency translation adjustment                   17,388             --          17,388
                                                        ------------   ------------    ------------
         Total comprehensive loss                                 --             --      (2,131,147)
                                                        ------------   ------------    ------------
Balance March 31, 2005                                  $     90,950   $         --    $  3,982,229
                                                        ============   ============    ============
</TABLE>


                                       5
<PAGE>

SPATIALIGHT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

<TABLE>
<CAPTION>
                                                                              Three months ended March 31,
                                                                              ----------------------------
                                                                                  2005           2004
                                                                              -----------    -------------
<S>                                                                           <C>            <C>
Cash flows from operating activities:
Net loss                                                                      $(2,148,535)   $(1,945,893)

Adjustments to reconcile net loss to net cash used by operating activities:

  Depreciation and amortization                                                   119,284        130,596
  Stock-based general and administrative expense                                   99,050         42,924
  Non-cash interest expense                                                       277,592        187,696
  Gain from revaluation of note purchase option liability                        (651,235)            --
  Accrued interest on notes receivable from stockholder                            (2,331)       (13,202)
  Changes in operating assets and liabilities:
     Accounts receivable                                                          218,346       (253,000)
     Inventory                                                                   (150,788)       (18,108)
     Prepaid and other current assets                                             363,192         12,931
     Other assets                                                                  15,294        (11,000)
     Accounts payable                                                             350,680       (232,844)
     Accrued expenses and other current liabilities                              (199,339)       (65,098)
                                                                              -----------    -----------

                                 Net cash used in operating activities         (1,708,790)    (2,164,998)
                                                                              -----------    -----------

Cash flows from investing activities:
  Construction of building and improvements,
  and acquisition of equipment                                                 (3,310,285)       (97,727)
                                                                              -----------    -----------

                                 Net cash used in investing activities         (3,310,285)       (97,727)
                                                                              -----------    -----------

Cash flows from financing actitivies:
  Proceeds from exercise of warrants and options                                   50,200        338,210
                                                                              -----------    -----------

                             Net cash provided by financing activities             50,200        338,210
                                                                              -----------    -----------

Net decrease in cash and cash equivalents                                      (4,968,875)    (1,924,515)

Effect of exhange rate differences on cash                                         (3,078)            --

Cash and cash equivalents at beginning of period                                9,087,551      6,359,969
                                                                              -----------    -----------
Cash and cash equivalents at end of period                                    $ 4,115,598    $ 4,435,454
                                                                              ===========    ===========

Non cash financing activities:

  Common shares issued upon conversion of interest and notes                  $        --    $ 1,138,374
                                                                              ===========    ===========
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       6
<PAGE>

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

NOTE 1.           BUSINESS DESCRIPTION

We are in the  business  of  manufacturing  high-resolution  liquid  crystal  on
silicon (LCoS)  microdisplays.  Our current customers and prospective  customers
are  original  equipment  manufacturers  (OEMs)  engaged  in the  businesses  of
manufacturing  high definition  televisions or  manufacturing  light engines for
incorporation into high definition  televisions.  Our products are also suitable
for  incorporation  into other  potential  display  applications  including rear
projection computer monitors, wireless communication devices, portable games and
digital  assistants,  although we are not currently  working with OEMs of any of
these products.

NOTE 2.           BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  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  accounting  principles  generally
accepted  in the United  States of America.  In our  management's  opinion,  the
interim condensed  consolidated  financial  statements included herewith contain
all  adjustments  (consisting  of normal  recurring  accruals  and  adjustments)
necessary  for  their  fair   presentation.   The  unaudited  interim  condensed
consolidated  financial statements should be read in conjunction with our Annual
Report on Form 10-K, which contains the audited  financial  statements and notes
thereto,  together with the Management's  Discussion and Analysis,  for the year
ended December 31, 2004. The interim results for the period ended March 31, 2005
are not necessarily indicative of results for the full fiscal year.

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

NOTE 3.           LIQUIDITY

Through March 31, 2005 we have  sustained  recurring net losses from  operations
and at March 31,  2005 had  total  equity of  approximately  $3,982,000  and net
working capital of approximately $4,436,000. During the three months ended March
31, 2005,  we  experienced  negative  cash flows from  operating  activities  of
approximately  $1,709,000  and had a net loss of  approximately  $2,149,000.  We
expect to meet our cash needs and fund our working capital requirements with our
existing cash balances and from additional sources as follows: the purchasers in
the November 2004 Financing  have the option,  which expires on August 31, 2005,
to lend us an  additional  $5,000,000  on the same  terms as the  November  2004
Financing.  Robert A.  Olins,  our Chief  Executive  Officer  and a director  of
SpatiaLight,  and Greenpark Limited,  an unaffiliated  shareholder,  jointly and
severally  committed  to  provide  us with  additional  financing  as more fully
described in Note 6. We also expect to receive cash  payments from our customers
and from the exercises of options and warrants.  There can be no assurances that
existing  investors  will exercise  their warrants or that the purchasers in the
November 2004 Financing will exercise their right to make the additional lending
investment.  We also filed a "shelf" registration statement on Form S-3 with the
SEC on January 31, 2005, for the sale of up to two million of our common shares,
in one or more  offerings.  As of the date  hereof,  this  "shelf"  registration
statement  has not been  declared  effective by the SEC, and we cannot offer any
assurances  as to when such  registration  statement  may become  effective.  We
believe that our current cash and cash  equivalents  combined with the financing


                                       7
<PAGE>

commitment from Robert A. Olins and Greenpark Limited will be sufficient to meet
our capital and liquidity  requirements for our operations for the twelve months
following the date of this filing.

NOTE 4.  STOCK-BASED COMPENSATION

We account for our  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,"  we disclose the pro forma effects of using the fair value method
of accounting for stock-based  employee and director  compensation  arrangements
and  record  compensation  expense  for the fair  value of  options  granted  to
non-employees.

If we had elected the fair value method of accounting  for employee and director
stock options,  compensation  cost would have been 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 loss per share for the three  months  ended March 31,
2005 and 2004 as if we had elected the fair value method of accounting for stock
options.

                                                    Three months ended March 31,
                                                         2005           2004
                                                     -----------    -----------
Net loss as reported                                 $(2,148,535)   $(1,945,893)

Add: Stock-based employee/director compensation
  included in reported net loss, net of any
  applicable related tax effects                           8,250         42,924
Deduct: total stock-based employee compensation
  determined under fair value method for all awards,
  net of any applicable related tax effects           (1,043,100)      (786,081)
                                                     -----------    -----------

Proforma net loss, as adjusted                       $(3,183,385)   $(2,689,050)
                                                     ===========    ===========

Loss per share:
Basic and diluted, as reported                       $     (0.06)   $     (0.06)
Basic and diluted, as adjusted                       $     (0.09)   $     (0.08)


NOTE 5.           PER SHARE INFORMATION

Basic loss per common  share  excludes  dilution and is computed by dividing net
loss by the weighted average number of common shares outstanding for the period.
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 into common shares.  Excluded from the computation of diluted loss per
share  for  the  three   months  ended  March  31,  2005  and  March  31,  2004,
respectively, are options and warrants to acquire 6,917,761 and 6,352,183 common
shares,  and  3,404,807  and  2,376,000  common  share  equivalents  relating to
convertible secured notes, because the effect of their assumed exercise would be
antidilutive.  The weighted  average exercise price as of March 31, 2005 for the


                                       8
<PAGE>

options and  warrants is $4.01 and $3.25,  respectively;  the  weighted  average
conversion price for the common share  equivalents  related to convertible notes
is $3.29.

NOTE 6.           NOTES PAYABLE

Convertible notes at March 31, 2005 consist of the following:

Argyle Notes:

In 1998,  we received  $1,188,000  in cash in exchange for notes payable in that
amount to Argyle Capital Management  Corporation  (Argyle),  a company owned and
controlled by Robert A. Olins,  Chief Executive Officer,  Secretary,  Treasurer,
and a Director of SpatiaLight.  The notes accrue interest at a contractual  rate
of 6% per  annum,  and are  secured by  substantially  all of our  assets.  Both
principal  and  interest  are  convertible  into our common  shares at $0.50 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 originally 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  was  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 December 31, 2003, the due date was extended until June
30, 2005.  Accordingly,  the  remaining  unamortized  discount of $33,000 at the
extension  date was being  amortized  through June 30, 2005,  resulting in a new
effective  interest  rate  of 8% per  annum  when  compared  to the  outstanding
principal  balances.  On November  30,  2004,  the due date was  extended  until
December  31,  2008.  The  remaining  unamortized  discount  of  $11,000  at the
extension date will be amortized through June 30, 2005.

On March 4, 2004, we issued 71,676 common shares with a market value of $338,311
as a  prepayment  of  interest  payable on the Argyle  notes of $35,640  for the
period January 1, 2005 to June 30, 2005. Prepaid interest was computed using the
closing  price of the shares of $4.72 on March 3, 2004. On December 22, 2004, we
issued 50,000 common shares, and 448,764 common shares became issuable (and were
issued in January 2005), as a prepayment of interest payable on the Argyle notes
of $249,480 for the period July 1, 2005 through  December 31, 2008. These shares
had a market value of  $4,049,964,  based on the closing  price of the shares of
$8.12 on December 21, 2004. As of March 31, 2005,  total prepaid interest on the
Argyle  notes for the period  April 1, 2005 to December  31, 2008 is  $4,219,120
with $1,037,005  classified as a current asset,  and $3,182,115  classified as a
noncurrent asset.

At March 31,  2005,  the carrying  value of the Argyle notes totals  $1,182,500,
which includes the $1,188,000 principal balance, net of the unamortized discount
of $5,500.


                                       9
<PAGE>

The November 2004 Financing:

On November  30,  2004,  we completed a  non-brokered  private  placement of $10
million of senior secured notes (the 2004 Senior Secured Convertible Notes). The
2004 Senior Secured Notes accrue  interest at 10%,  payable  quarterly,  and the
interest  is  payable  in cash or  common  shares,  at our  option  (if  certain
conditions  are met).  The value of the shares for the  purposes of  calculating
interest  payments shall be equal to the 20-day  trailing  average of the volume
weighted  average  prices  of our  common  shares  at the end of each  quarterly
interest period. The 2004 Senior Secured Notes are due November 30, 2007.

The 2004 Senior Secured Convertible Notes are convertible,  at the option of the
holders,  into our common shares at the conversion price of $9.72 per share. The
conversion price of the principal amount of the 2004 Senior Secured  Convertible
Notes is equal to a 25% premium above the ten-day trailing average of the volume
weighted  average price of our common  shares for the period ended  November 29,
2004,  which was $7.78. As part of the November 2004  Financing,  the purchasers
required Argyle to enter into an intercreditor and subordination  agreement (the
Intercreditor  Agreement)  pursuant to which Argyle  agreed to  subordinate  our
obligations to Argyle and the senior security  interest in substantially  all of
our assets that were granted under the Argyle Notes to the interest  represented
by the purchasers of the 2004 Senior  Secured  Convertible  Notes.  In addition,
under the terms of the November 2004 Financing, we are prohibited from using the
funds to repay debt or to pay dividends.

We are  required  to file a  registration  statement  for  resale of the  shares
issuable  upon  conversion  of the  notes  and have the  registration  statement
declared  effective no later than 120 days after November 30, 2004.  Pursuant to
our  amended  registration  rights  agreement  with  the  noteholders,   if  the
registration  does not become  effective by April 20,  2005,  or does not remain
effective,  we may be  required to pay each  noteholder  cash equal to 1% of the
purchase  price of the  notes,  and 1% for  every 30 days  thereafter  until the
registration becomes effective. As of the date of this filing, that registration
statement that we filed with the SEC has not been declared effective by the SEC.

In consideration for Argyle entering into the Intercreditor Agreement, our Board
of Directors authorized us to enter into an extension and modification agreement
between  SpatiaLight  and Argyle with respect to the Argyle Notes (the Extension
Agreement) under which the due date of the Argyle Notes was extended to December
31, 2008.

Under the terms of the November  2004  Financing,  Robert A. Olins and Greenpark
Limited,  an  unaffiliated  shareholder  of  SpatiaLight,  jointly and severally
committed,  in the  event  that the Board  determines  that  such  financing  is
necessary, to provide us with up to an additional $6 million in future financing
on terms and  conditions to be  determined at the time of any such  transaction.
That  financing  commitment  shall be reduced by any funds that we receive  from


                                       10
<PAGE>

future  sales  or  exercises  of our  equity,  debt  or  derivative  securities,
including the sale of our common shares under the Prospectus  that we filed with
the SEC on January 28, 2005,  as a part of a "shelf"  registration  process.  At
March 31, 2005,  we had  received an aggregate  total of $726,200 of such funds,
thereby  reducing the commitment by Mr. Olins and Greenpark  Limited by an equal
aggregate amount.

Under the terms of the November  2004  Financing,  the  purchasers  received the
right to purchase up to an additional $5 million of senior  secured  convertible
notes  (additional  investment  rights  or AIR)  subject  to the same  terms and
conditions,  including  the same  conversion  price as the  notes  issued in the
November 2004  Financing.  The AIR originally  expired on November 30, 2005, but
was amended on December 21, 2004 to expire on August 31, 2005. The fair value of
the AIR was  calculated  on the November 30, 2004  issuance  date at  $1,072,248
using the  Black-Scholes  option  pricing model and the  following  assumptions:
stock price $8.83, exercise price $9.72, volatility 67%, risk free interest rate
2.50%,  a  contractual  term of one year and a dividend  yield of 0. This AIR is
being treated as a derivative  and has been  recorded as a note purchase  option
liability and as a discount on the 2004 Senior Secured  Convertible  Notes.  The
AIR is not a  hedging  derivative.  The  fair  value of the  derivative  will be
recalculated  on a quarterly  basis until  exercise or expiration to reflect the
changing  market price of the stock,  the remaining  contractual  term,  and the
changing  volatility.  The  objective in entering into the agreement for the AIR
was that it was  required  by the  lenders in order to  complete  the  financing
agreement.

The fair value was  recalculated  as of December 31, 2004 at $659,874  using the
Black-Scholes option pricing model and the following assumptions: stock price on
December 31, 2004 of $8.95,  exercise  price $9.72,  volatility  52%,  risk free
interest  rate  2.50%,  the  remaining  contractual  term of eight  months and a
dividend  yield of 0. The reduction in the liability of $412,374 was recorded as
a gain  from  the  revaluation  of the note  purchase  option  liability  and is
included in other income.  The assumptions  changed from the November  valuation
date in that the market price of our common shares had changed,  the contractual
life had changed due to the  December  21, 2004  amendment,  and the  volatility
changed as a result of the changes in market price and contractual life.

On March 31, 2005 the AIR was revalued at $8,639 using the Black-Scholes  option
pricing model and the following  assumptions:  stock price $5.05, exercise price
$9.72,  volatility  49%, risk free interest rate 2.50%, a remaining  contractual
life of five months and a dividend yield of 0. The reduction in the liability of
$651,235 was recorded as a gain from the revaluation of the note purchase option
liability  and is included in other  income.  The  assumptions  changed from the
December valuation date for the same reasons stated above.

The $1,072,248  discount  applied to the 2004 Senior Secured  Convertible  Notes
gave rise to a  beneficial  conversion  feature of $156,610  resulting  from the
excess aggregate value of the common shares issuable upon conversion of the 2004
Senior Secured Convertible Notes into common shares over the discounted carrying
value of the 2004 Senior  Secured  Convertible  Notes at the issuance  date. The
resulting beneficial  conversion feature is treated as an additional discount to
the 2004 Senior Secured  Convertible Notes and an increase in additional paid-in
capital, and will be amortized,  along with the original discount related to the
value of the AIR,  over the life of the Notes.  In  addition,  $100,000 of legal
fees  reimbursed  to one of the lenders was  recorded as a note  discount and is
being  amortized  over  the life of the  notes.  Additional  financing  costs of
$117,162 were recorded in prepaid expenses and are being amortized over the life
of the notes.


                                       11
<PAGE>

Activity  in notes  payable  for the three  months  ended  March 31,  2005 is as
follows:

<TABLE>
<CAPTION>
                                            Balance at      Additional    (Payment) or    Reduction in
                                           December 31,       or New        Discount        Prepaid         Balance at
Debt Principal:                                2004          Discount     Amortization      Interest      March 31, 2005
                                           ------------    ------------   ------------    ------------    -------------
<S>                                        <C>             <C>            <C>             <C>             <C>
Argyle                                     $  1,188,000    $         --   $         --    $         --    $  1,188,000
Argyle discount                                 (11,000)             --          5,500              --          (5,500)
November financing                           10,000,000              --             --              --      10,000,000
November financing beneficial conversion       (152,260)             --         13,050              --        (139,210)
Reimbursement of investor's legal fees          (97,222)             --          8,333              --         (88,889)
November financing AIR discount              (1,042,378)             --         89,610              --        (952,768)
                                           ------------    ------------   ------------    ------------    ------------
               Total principal             $  9,885,140    $         --   $    116,493    $         --    $ 10,001,633
                                           ============    ============   ============    ============    ============

Interest:
Accrued Argyle 6%                          $         --    $     17,820   $         --    $    (17,820)   $         --
Beneficial interest                                  --         151,335             --        (151,335)             --
November financing                               84,932         250,000       (250,000)             --          84,932
                                           ------------    ------------   ------------    ------------    ------------
                Total interest             $     84,932    $    419,155   $   (250,000)   $   (169,155)   $     84,932
                                           ============    ============   ============    ============    ============
</TABLE>


Non-cash interest expense is as follows:

                                                                 Three months
                                                                ended March 31,
                                                             -------------------
                                                               2005       2004
                                                             --------   --------
Amortization of note discounts and prepaid financing costs   $126,257   $  5,500
Effect of beneficial conversion privileges
  on accrued interest                                         151,335    182,196
                                                             --------   --------
                                                             $277,592   $187,696
                                                             ========   ========


NOTE 7.           ISSUANCE OF SECURITIES

Exercise of Stock Options in the three months ended March 31, 2005
------------------------------------------------------------------

During the first three months of 2005, 17,500 common shares were issued upon the
exercise of employee stock options. Total cash received was $50,200.

Issuance of Shares, Stock Options and Warrants in the three months ended March
31, 2005
------------------------------------------------------------------------------

In February  2005,  we issued a fully vested  warrant to purchase  75,000 common
shares as  payment to a sales  agent.  A value of $90,800  was  assigned  to the
warrant using the  Black-Scholes  pricing  model and the following  assumptions:
stock price $4.66,  exercise price $4.50,  historical  volatility 64%, risk free
rate 2.50%, dividend yield of 0 and a contractual life of 10 months. This amount
is included in stock-based general and administrative expenses.

In January 2005,  581,505  common  shares with a value of $4,038,149  previously
recorded as common shares issuable were issued.


                                       12
<PAGE>

Other expenses  totaling  $8,250 in the three months ended March 31, 2005 relate
to the valuation of employee option issued with an exercise price lower than the
market price on the grant date and are also included in stock-based  general and
administrative expenses.

Issuance of Shares Under Installment Note

In November  2002, a warrant to purchase  746,268 common shares was exercised by
the  purchaser  of the  warrant at $2.00 per share  under a warrant  installment
agreement  totaling  $1,492,536.  Payments  of  $200,000  were made in 2002.  An
additional  $402,500  was  received in 2003.  In 2004, a payment of $142,350 was
made which  represented  interest accrued through March 2004 of $92,350,  and an
installment  payment of $50,000 for April 2004. Interest accrues at 6% per annum
and is due with the  final  payment.  The  746,268  shares  were  issued  to the
purchaser in the third quarter of 2003. On July 7, 2004,  the Board of Directors
approved  an  agreement  with  the  purchaser  that,  in  consideration  for the
purchaser's involvement in our efforts to obtain financing, we would suspend the
warrant  installment  payments  through the end of the third quarter of 2004, at
which time the Board would  evaluate the financing  efforts and the  involvement
attributed to the  purchaser.  On November 30, 2004,  the Board resolved that in
connection with the November 2004 Financing,  the purchaser and Robert A. Olins,
the Chief Executive  Officer and a director  SpatiaLight,  were each entitled to
receive due consideration  from us for their respective  financing  commitments.
Mr. Olins  communicated with the Board his desire to forego any consideration in
favor of the  purchaser.  We agreed with the purchaser to reduce the amount owed
by the purchaser under the warrant installment  agreement by $600,000.  At March
31, 2005, the remaining  balance of the note receivable,  plus accrued interest,
under the warrant  installment  agreement is  $243,793.  This note is payable in
monthly  installments  of $48,055,  with the final  payment due May 17, 2005. At
March 31, 2005 the monthly  installments  due in the first quarter 2005 have not
been made.

Stock-based compensation is as follows:

                                                  Three months ended March 31,

                                                     2005              2004
                                                ---------------  ---------------
Options granted to employees and directors            $  8,250         $ 42,924
Warrants issued for services                            90,800               --
                                                ---------------  ---------------
                                                      $ 99,050         $ 42,924
                                                ===============  ===============

NOTE 8.           SEGMENT INFORMATION AND SIGNIFICANT CUSTOMER INFORMATION

Our chief operating  decision-maker  is our Chief Executive  Officer.  The chief
operating  decision-maker reviews only financial information prepared on a basis
substantially   consistent  with  the  accompanying   financial   statements  of
operations.  Therefore,  we have determined that we operate in a single business
segment. All of our assets are located at our facilities in the United States at
March 31, 2005, except for the following:



                                       13
<PAGE>

<TABLE>
<CAPTION>
                                   Korea        Hong Kong        Japan         Total
                                -------------------------------------------------------
<S>                             <C>            <C>            <C>            <C>
Cash                            $1,261,944     $       --     $       --     $1,261,944
Property and equipment, net      1,325,913             --             --      1,325,913
Building and improvements        3,927,500             --             --      3,927,500
Inventory                          134,349        428,321        467,201      1,029,871
                                -------------------------------------------------------
                                $6,649,706     $  428,321     $  467,201     $7,545,228
                                =======================================================
</TABLE>

Of our total revenue in 2005, 69% was derived from the sales of our LCoS Sets to
a customer located in the Republic of Korea. The remaining 30% was derived sales
of our LCoS Sets to customers in Hong Kong, Taiwan, China and the United States.
For the three months  ended March 31, 2005,  69% of revenue was derived from one
customer.  This customer made up 84% of the accounts receivable balance at March
31, 2005.

NOTE 9.           INVENTORY

Inventory consisted of the following as of March 31, 2005 and December 31, 2004:

                                       March 31,              December 31,
                                         2005                     2004
                                 ------------------       -----------------
Raw materials                            $ 661,105               $ 691,168
Work-in-progress                            41,545                  31,684
Finished goods                             621,452                 450,462
                                 ------------------       -----------------
                                       $ 1,324,102             $ 1,173,314
                                 ==================       =================



                                       14
<PAGE>

NOTE 10.          RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" to revise
SFAS No. 123.  "Accounting  for  Stock-Based  Compensation,"  and  supersede APB
Opinion  No. 25,  "Accounting  for Stock  Issued to  Employees"  and its related
implementation   guidance.  It  requires  companies  to  measure  and  recognize
compensation  expense for all share-based  payments at fair value. SFAS No. 123R
is to be applied in the first  quarter of 2006.  We have not yet  evaluated  the
impact  that  the  adoption  of SFAS  No.  123R  will  have on our  consolidated
financial statements;  however, the adoption could materially impact our results
of operations.

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-K/A  as filed  with the
Securities and Exchange  Commission on April 27, 2005. 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 our  condensed  consolidated
financial  condition as of March 31, 2005, and our results of operations for the
three  months  ended March 31, 2005 and 2004.  The  following  should be read in
conjunction with our unaudited financial  statements and related notes appearing
elsewhere herein.

OVERVIEW

We are in the business of manufacturing high-resolution LCoS microdisplays.  Our
current customers and prospective customers are original equipment manufacturers
(OEMs) engaged in the businesses of manufacturing high definition televisions or
manufacturing light engines for incorporation into high definition  televisions.
Our products are also suitable for  incorporation  into other potential  display
applications including rear projection computer monitors, wireless communication
devices,  portable games and digital  assistants,  although we are not currently
working with OEMs of any of these products.

Status of Business with LG Electronics, Inc.

In July 2004, we entered into an agreement with LG Electronics, providing for us
to sell a specially tailored version of our T-3 LCoS Sets to LG Electronics (see
a description of our products under "Business Strategy," discussed below). Under
the  agreement,  LG  Electronics  agreed to purchase from us a minimum of 21,000
LCoS Sets over an initial  six-month  delivery  period.  Based upon  progress to
date, we currently anticipate that the initial six-month delivery period for the
LCoS Sets, which was scheduled to commence in January,  will begin in the second
quarter  of  2005,  subject  to LG  Electronics'  completion  of  pre-production
requirements.  Subsequent  deliveries  scheduled  under  our  agreement  with LG
Electronics (which was filed as Exhibit 10.5 to our Annual Report on Form 10-K/A
on April 27, 2005) are now  scheduled to follow the first  delivery on a monthly
basis.  Under  the  agreement,  commencing  in  the  first  delivery  month,  LG
Electronics is required to provide us with rolling  monthly firm purchase orders


                                       15
<PAGE>

six months in advance of the scheduled delivery and rolling twelve-month advance
projections of its  anticipated  future orders.  Although the agreement does not
contain any minimum purchase  requirements  after the initial six-month delivery
period,  it projects that LG Electronics  will commence  larger  mass-production
scale  purchases of LCoS Sets from us in the seventh  delivery  month,  which we
currently  expect to occur in the  fourth  quarter  of 2005.  The  agreement  is
scheduled to have a two-year delivery term with monthly deliveries of LCoS Sets.
All of the rights and obligations of the parties under the agreement are subject
to a limited quantity of trial LCoS Sets, all of which have been delivered to LG
Electronics,   meeting  certain  final  technical   specifications  for  product
performance.  As  provided in our  agreement,  LG  Electronics  and we have been
cooperating to the extent  necessary to assure that the trial LCoS Sets meet the
final specifications called for by the agreement.  We are currently working with
LG  Electronics  on the  final  stage  integration  of our  LCoS  Sets  into  LG
Electronics'  rear  projection   televisions  and  we  expect  that  this  final
integration  process  will  be  completed  and  we  expect  to  receive  written
confirmation   from  LG  Electronics  that  we  have  met  the  final  technical
specifications during the second quarter of 2005.

Our  agreement  with LG  Electronics  provides  that we will be their  exclusive
supplier of three-chip LCoS  microdisplay  products for twelve months  beginning
from the date that we commence shipments under the agreement.  Furthermore,  our
agreement provides that LG Electronics will have the exclusive right in Korea to
purchase  T-3  microdisplay  products  from  SpatiaLight  for the twelve  months
beginning from the date that we commence  shipments under the agreement.  In the
event that LG  Electronics  purchases  more than 60,000  LCoS Sets for  delivery
between the seventh (7th) and twelfth (12th)  delivery  months of our agreement,
LG  Electronics  has the right to  extend  its  exclusivity  period  for  twelve
additional months.

The  agreement  with LG  Electronics  occurred  as the result of LG  Electronics
working with us pursuant to a joint  development  agreement  entered into in May
2003. During the course of that work, we made specially  tailored  modifications
to our new generation of T-3 microdisplays for LG Electronics'  development of a
new line of state-of-the-art high definition televisions.

In January 2005, LG Electronics  announced in a joint press release with us that
they are  currently  planning an initial  rollout of 71-inch  and  62-inch  LCoS
televisions  incorporating  our LCoS Sets  commencing  in the second  quarter of
2005, subject to the completion of pre-production  requirements.  LG Electronics
also announced that its initial  product rollout will be into the United States,
Korean and  Australian  consumer  markets,  with future plans for expansion into
other markets.

Commencing  in the  second  quarter  of  2005,  we  expect  that  a  substantial
percentage of our product deliveries will be made to LG Electronics. The loss of
LG  Electronics  as a customer  or any  delays in our  delivery  schedule  to LG
Electronics,  could harm our future  sales or  results  of  operations;  and our
substantial  dependence  on one customer is subject to risks set forth under the
heading "Risk Factors."

Status of Business in China

To date,  we have made  deliveries of our  microdisplay  products to our Chinese
customers in limited  quantities.  The  quantities  of our products that we have
delivered to our Chinese  customers are sufficient for  engineering  testing and
pilot  program  purposes.  To date,  our  Chinese  customers  have  not  ordered
quantities of our products that would enable them to launch  commercial sales of
LCoS  high  definition  televisions.   A  substantial  portion  of  our  product
deliveries  were in  2004.  We have  entered  into  business  transactions  with
approximately ten customers and prospective  customers in China. Current Chinese
customers are at different  stages in the development  and product  introduction


                                       16
<PAGE>

processes, and their efforts are progressing at a slower rate than we originally
anticipated.  There were no  shipments  to our Chinese  customers  in the fourth
quarter of 2004,  but we expect that shipments will resume in the second quarter
of 2005.  We are  maintaining  our  plans to ship our  products  to our  Chinese
customers, although at a slower rate of shipment than originally expected. While
we have purchase orders in place with our Chinese customers, such orders are for
limited  quantities of our products and they are  cancelable at any time by such
customers.  We therefore cannot provide assurances that we will sell significant
quantities to our Chinese customers in the future.

Although our Chinese  customers'  progression  from product  prototyping to mass
production has been far slower than we had anticipated, we remain positive about
our business  prospects in China and the  potential  for China to become a large
market for us. We currently believe that Chinese  television  manufacturers tend
to apply a market strategy of following the successful business models of global
television  manufacturing  leaders,  rather than acting as leaders themselves in
terms of introducing new technologies to the marketplace.  We therefore  believe
that if the LCoS  technology  gains greater  acceptance  in the high  definition
television  marketplace,  and if  industry  leaders,  such as  Sony,  JVC and LG
Electronics,  present their LCoS based  televisions  to the  worldwide  consumer
markets in a  prominent  fashion,  it will then be more  likely that the Chinese
television manufacturers will follow these business models and ramp up their own
lines of LCoS high definition televisions. We believe that our present course of
continuing to transact business with major Chinese  television  manufacturers is
positioning us to be a leading LCoS supplier in China in the future.

Other Business Development

We are currently  developing working  relationships with prospective  customers,
located  primarily  in Japan and other parts of the  Pacific  Rim region.  These
prospective customers fall into two general categories: television manufacturers
and light engine suppliers. We have provided samples of our LCoS Sets to certain
of such  prospective  customers,  but we do not have any formal  agreements with
such parties.  While we have made  significant  progress with respect to product
integration  and negotiating  purchase orders with certain of these  prospective
customers,  we cannot assure that we will receive any purchase orders binding on
any of these  companies  for their  purchase of our products in the near future.
Even  assuming  that  we  receive  purchase  orders  that  are  binding  on  the
prospective customers,  these orders and our sales to these customers and to our
existing customers are subject to certain  contingencies  described under "Risks
Factors."

Manufacturing Capacity

We have completed  construction on our new manufacturing facility located in the
Republic of Korea.  The Korean  facility  will serve as our  central  commercial
manufacturing base. We expect that the facility will commence producing products
for commercial sale in the second quarter of 2005. The facility is designed with
the capacity,  on full employment,  to produce up to 28,000 LCoS Sets per month.
The facility has been specially designed so that capacity may be increased up to
120,000  LCoS Sets per month in several  expansion  phases.  We believe that the
facility can be expanded in an expedient manner in the event that such expansion
becomes  necessary  based upon increased or perceived  increased  demand for our
products from our customers.

We are actively hiring personnel for our Korean manufacturing  facility.  We are
currently  training our new  operators  and  supervisors  in key  processes  and
equipment  familiarization prior to beneficial occupancy of the new facility. We
believe that this will make our production  transition more efficient and reduce


                                       17
<PAGE>

the chances of our incurring unexpected delays in the transition process.  While
we cannot provide any assurances  against unexpected delays, we believe that our
transition  approach  constitutes a proactive,  measured and responsible plan to
deal with  facility  completion  risks and to  prepare  ourselves  to manage our
manufacturing  facility  in Korea  on a basis  consistent  with the  anticipated
demand for our products.

Currently we manufacture our LCoS Sets in limited  commercial  quantities at our
facility in California.  Once the Korean facility reaches  full-production mode,
we intend to transition the California  facility to research and development and
special project operations. We will not lay off any U.S. employees as the result
of opening the Korean facility.

Business Strategy

We are currently offering two types of products to our customers and prospective
customers,  all of whom are located  primarily in Asia.  One product is our LCoS
Set, which is comprised of three of our proprietary  SpatiaLight  imagEngine(TM)
LCoS microdisplays.  They are constructed with a silicon chip, a layer of liquid
crystals and a glass cover plate in contrast to the more common  construction of
liquid crystals sandwiched between two glass plates. Our displays are also known
as, and  commonly  referred  to as,  liquid  crystal on silicon  (LCoS),  liquid
crystal displays (LCD),  active matrix liquid crystal displays and spatial light
modulators.  Our other  product,  the display  unit,  is  comprised of LCoS Sets
fitted onto a light engine  designed by SpatiaLight  and Fuji Photo Optical Co.,
Ltd.  (Fuji)  and  manufactured  by Fuji.  We do not  currently  have any formal
agreement in place with Fuji.

We currently manufacture two models of our LCoS Sets. The "T-1" model has a 1280
pixels by 960 pixels  configuration  and the newer  generation "T-3" model has a
higher resolution 1920 pixels by 1080 pixels configuration.

Since we commenced delivering our products to our customers in the third quarter
of 2003, there has been a significant  shift in the type of product that we have
delivered to our customers based upon their demand.  The shift in deliveries has
been in the direction of more LCoS Sets and less display units.  We believe that
this shift is significant because LCoS Sets are a higher margin product line and
require less working  capital than display units,  although LCoS Sets yield less
revenue  than  display  units  per unit  sold.  It is our  short-term  strategic
objective to operate  primarily as a seller of LCoS Sets and decrease our supply
of display  units to our  customers.  It is our  longer-term  strategic  goal to
exclusively sell LCoS Sets to our customers.

A number of our Chinese customers  currently purchase display units because they
have not yet  developed  their own light  engines.  We believe  that the display
unit, which is a turnkey product offering,  has served as a short-term  solution
and helped us to capture  market share in China because many of our  competitors
did not possess a turnkey solution.

While we will continue to offer display units to those current  customers who do
not have their own light engine solution,  we expect that new customer  business
in the future will  exclusively be for LCoS Sets rather than display units.  Our
supply  agreement  with LG  Electronics  is  exclusively  for LCoS  Sets,  as LG
Electronics  has developed its own light engine designed to incorporate our LCoS
Sets.  We expect that there will be a shift in products  demanded by our Chinese
customers,  over  time,  from  display  units to LCoS  Sets.  These  trends  are
consistent with our overall product strategy.


                                       18
<PAGE>

We believe that the T-3 model will become the  standard for the next  generation
of rear  projection  display  devices and will provide the most cost  effective,
high-resolution  microdisplays  in the  industry  and will  position  us to be a
potential  market  leader.  We  believe  that the  T-3's  ability  to  deliver 2
megapixel resolution in a high performance,  reliable, and cost effective manner
was a key factor in our obtaining the supply agreement with LG Electronics.  The
T-3 model is the central component of our ongoing customer  acquisition strategy
described above.

LIQUIDITY AND CAPITAL RESOURCES

As of  March  31,  2005,  we had  approximately  $4,116,000  in  cash  and  cash
equivalents,  a decrease of approximately  $4,972,000 from the December 31, 2004
amount  of  $9,088,000.   Our  net  working   capital  at  March  31,  2005  was
approximately  $4,436,000  compared  to a net working  capital of  approximately
$8,594,000 at December 31, 2004. This working capital change is primarily due to
the use of cash to fund  the  construction  of our  manufacturing  facility  and
purchase  of the  equipment  for that  facility,  as well as fund our  operating
expenses.

Net cash used in  operating  activities  totaled  approximately  $1,709,000  and
$2,165,000  for the three  months  ended March 31, 2005 and 2004,  respectively,
representing a decrease of approximately $456,000.

Net cash  provided by financing  activities  in the three months ended March 31,
2005 was  approximately  $50,000 as compared to  approximately  $340,000 for the
three months ended March 31, 2004. In the first  quarter of 2005 and 2004,  cash
was provided primarily from the exercise of employee stock options.

We expect to meet our cash needs and fund our working capital  requirements with
our  existing  cash  balances  and  from  additional  sources  as  follows:  the
purchasers  in the November  2004  Financing  have the option,  which expires on
August 31, 2005,  to lend us an  additional  $5,000,000 on the same terms as the
November 2004  Financing.  Robert A. Olins,  our Chief  Executive  Officer and a
director of SpatiaLight,  and Greenpark  Limited,  an unaffiliated  shareholder,
jointly and severally committed to provide us with additional  financing as more
fully  described  in Note 6. We also expect to receive  cash  payments  from our
customers  and from the  exercises  of  options  and  warrants.  There can be no
assurances  that existing  investors  will exercise  their  warrants or that the
purchasers in the November 2004  Financing will exercise their right to make the
additional lending investment. We also filed a "shelf" registration statement on
Form S-3 with the SEC on January 31, 2005,  for the sale of up to two million of
our  common  shares,  in one or more  offerings.  As of the  date  hereof,  such
registration  statement has not been  declared  effective by the SEC. We believe
that  our  current  cash  and  cash  equivalents  combined  with  the  financing
commitment from Robert A. Olins and Greenpark Limited will be sufficient to meet
our capital and liquidity  requirements for our operations for the twelve months
following the date of this filing.

RESULTS OF OPERATIONS

Revenue.  We recognized  revenue of  approximately  $98,000 and $319,000 for the
three  months  ended  March 31,  2005 and 2004,  respectively.  Revenue  for the
three-month  period  in 2005  was from  the  sale of LCoS  Sets  and  supporting
electronics. Revenue in the three months ended March 31, 2004 was primarily from
the sale of display  units.  Our  revenue for the 2005 period was lower than the
comparable  period  in 2004  because  LCoS Sets have a lower  sales  price  than
display  units and  because  our  sales  strategy  has  changed,  as more  fully
described under the heading Business Strategy above.


                                       19
<PAGE>

Revenue  from one  customer,  LG  Electronics,  accounted  for 69% of our  total
revenue for the three months ended March 31, 2005. The loss of this customer and
our  inability  to  obtain  additional  purchase  orders  from  our  current  or
prospective  customers to replace the lost  expected  revenue in a timely manner
could harm our sales or results of  operations.  Accounts  receivable  from this
customer accounted for 84% of total accounts receivable as of March 31, 2005.

Cost of revenue.  Cost of revenue was approximately  $70,000 and $347,000 in the
three  months  ended  March 31,  2005 and 2004,  respectively.  Cost of  revenue
consists  primarily  of  product  costs.  Cost of revenue  in 2004  includes  an
adjustment  to restate  inventory  at the lower of cost or market as our initial
purchases were at a cost higher than we expected to incur for future purposes.

Gross  margin.  The gross  margin  for the three  months  ended  March 31,  2005
increased  approximately  $55,000  from our gross  margin for the same period in
2004. This is due to the higher gross margin on our LCoS Sets in addition to the
inventory adjustment in 2004 that had no comparable expense in 2005.

Selling,  general and administrative costs. Selling,  general and administrative
costs were  approximately  $1,710,000  and  $1,005,000 in the three months ended
March  31,  2005 and  2004  respectively,  and  include  professional  services,
salaries and related taxes and benefits, rent,  depreciation,  travel, insurance
and  office  expenses.   Salaries  and  related  taxes  and  benefits  increased
approximately  $225,000 as a result of the increase in administrative staff, due
in part to the hiring of a sales and  marketing  team.  In addition,  travel and
lodging expenses increased by approximately $80,000 due to increase in travel to
Asia in the three months ended March 31, 2005.  This was related to the building
and  completion  of our  manufacturing  facility in the  Republic  of Korea.  In
addition,  professional services increased  approximately  $200,000 in the three
months ended March 31, 2005 due to the various  filings  related to our November
2004 Financing.  Rent increased approximately $70,000, while office supplies and
other general and  administrative  expenses  related to our new Korean  facility
were incurred that had no comparable expense in the first quarter of 2004.

Stock-based compensation. Stock-based compensation was approximately $100,000 in
the three  months  ended March 31, 2005 and  approximately  $43,000 in the three
months ended March 31, 2004. The amounts incurred relate to common shares, stock
options,  and warrants  issued.  Expenses in 2005 and 2004 relate primarily to a
warrant and stock  options  issued in exchange  for services and the issuance of
options to an employee in 2003 that are being expensed over the vesting period.

Research  and   development   costs.   Research  and   development   costs  were
approximately $493,000 and $682,000 in the three months ended March 31, 2005 and
2004,  respectively.  During the first quarter of 2005,  significant  effort has
been  expended on assisting  the  manufacturing  ramp-up,  with a  corresponding
reduction  in  research  and  development  project  spending.  As the ramp-up is
completed,  it is anticipated that the effort will be redirected to research and
development projects.

Interest  expense.  Interest  expense for the three  months ended March 31, 2005
increased  approximately  $250,000  from  the  same  period  in 2004  due to the
issuance of $10,000,000 of Senior  Secured  Convertible  Notes in November 2004,
which accrue interest at 10% annually.

Non-cash interest expense.  Non-cash interest expense was approximately $278,000
and $188,000  for the three months ended March 31, 2005 and 2004,  respectively.
Non-cash  interest  expense relates to the beneficial  price of shares issued to
prepay interest on the notes payable to Argyle Capital Management Corporation, a
company wholly owned by Robert A. Olins,  Chief Executive Officer and a director


                                       20
<PAGE>

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.  Also  included  in non-cash  interest  expense is the
amortization of note discounts and prepaid financing costs.

Critical Accounting Policies

Revenue  Recognition  - We  enter  into  commercial  transactions  to  sell  our
products.  We evaluate  revenue  recognition  for these  transactions  using the
following 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.  Contracts are used for specialized
         arrangements  with  customers,  including  deliveries  over an extended
         period of time,  and  arrangements  for  letters  of  credit.  Standard
         agreements require receipt of a purchase order.

    o    Delivery: For products,  delivery is considered to occur when title and
         risk of loss have been  transferred,  which,  for us, is generally when
         product has been delivered to a common carrier.

    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   reasonably   assured:   Collection  is  deemed
         reasonably  assured 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 reasonably assured (generally upon cash collection).

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 selling price
of the product based on historical recovery rates. If we assess the market value
of our  inventory  to be less than cost given  current  prices and future  sales
commitments we write it down to its  replacement  cost or 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  preferences  and economic
conditions.

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.  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


                                       21
<PAGE>

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 to date and have  experienced  cash  shortages.  For the
three  months  ended March 31,  2005,  we incurred  net losses of  approximately
$2,149,000.  In  addition,  we  had  an  accumulated  deficit  of  approximately
$69,790,000  as of March 31, 2005.  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.

WHILE WE HAVE OBTAINED  FINANCING AND FINANCING  COMMITMENTS THAT WE EXPECT WILL
BE  SUFFICIENT  TO FUND OUR CURRENTLY  ANTICIPATED  FINANCIAL  NEEDS THROUGH THE
SECOND  QUARTER OF 2006,  IF WE ARE UNABLE TO OBTAIN  FURTHER  FINANCING  IN THE
FUTURE OR GENERATE  REQUIRED  WORKING  CAPITAL  FOR FUTURE  CAPITAL  NEEDS,  OUR
ABILITY TO OPERATE COULD SUFFER OR CEASE.

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 further investments in research
and development,  equipment, facilities and production activities. Our financial
condition and liquidity have been strongly assisted through private sales of our
common shares, the $10 million, less expenses, raised by us in the November 2004
Financing, the approximately $4,955,000 raised from the sale in December 2003 of
one million of our common  shares which were  registered  for sale by means of a
"shelf"  registration  process, and $2,888,703 raised through exercises of stock
options and warrants  during 2004. The purchasers in the November 2004 Financing
also have the option, which expires on August 31, 2005, to lend an additional $5
million on the same  terms,  as more  fully  described  in Note 6. In  addition,
Robert A. Olins,  Chief  Executive  Officer and a director  of  SpatiaLight  and
Greenpark  Limited,  jointly committed to provide us with additional  financing,
subject  to the  conditions  more  fully  described  in  Note 6.  Despite  these
financing and commitments,  we may still require additional financing to satisfy
our increasing working capital  requirements in the future.  Reliance on private
equity  purchase  agreements  and public  offerings  and exercises of derivative
securities  to finance our future  operations  entails the  additional  risks of
default by purchasers under such equity purchase  agreements or our inability to
sell publicly  registered  shares and an  insufficient  number of warrants being
exercised owing to the prevailing market prices of our underlying common shares.
In the event  that we  require  additional  financing  in the  future and we are
unable to obtain further  financing on  satisfactory  terms, or we are unable to
generate  sales  sufficient to offset our costs,  or if our costs of development
and operations are greater than we anticipate,  we may be unable to increase the
size of 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.

THE  OBLIGATIONS  ARISING FROM THE NOVEMBER 2004 FINANCING  RESTRICTS OUR FUTURE
FINANCING  ALTERNATIVES  AND MAY RESULT IN FINANCIAL  DIFFICULTIES FOR US IN THE
FUTURE.


                                       22
<PAGE>

The  $10,000,000  2004 Senior Secured  Convertible  Notes issued pursuant to the
November 2004 Financing bear a 10% rate of interest and are not  prepayable,  in
whole or in part, prior to their maturity on November 30, 2007. Therefore, we do
not have the ability to refinance the 2004 Senior Secured Convertible Notes with
debt obligations bearing more favorable terms to us or out of the proceeds of an
equity financing until their above-noted maturity date. However, after the first
anniversary of the November 2004 Financing's closing, we have the right to force
conversion of the 2004 Senior Secured  Convertible  Notes into our common shares
in the event that our common  shares trade at or above $14.58 (150% of the $9.72
conversion  price of the 2004  Senior  Secured  Convertible  Notes)  for  twenty
consecutive trading days. Furthermore, the 2004 Senior Secured Convertible Notes
are  secured by  virtually  all of the assets of our  Company,  other than those
located in Korea, and it may therefore be difficult for us to obtain future debt
financing;  however,  the  terms  of the  November  2004  Financing  allow us to
subordinate the security interests of the 2004 Senior Secured  Convertible Notes
to a  security  interest  given  to a bank or  other  institution  arising  from
accounts receivable,  contractual rights,  inventory or similar financing. If we
default in meeting our  obligations  under the 2004 Senior  Secured  Convertible
Notes,  the  indebtedness  which they evidence will become  immediately  due and
payable,  and the holders of such 2004 Senior Secured  Convertible Notes will be
entitled  to  foreclose  on our assets to the  serious  detriment  of our future
operations. As noted elsewhere in this 10-Q, the 2004 Senior Secured Convertible
Notes are  convertible  into our common  shares and the  issuance of such shares
(including  any shares  issued in payment of  interest on such notes) may have a
dilutive effect on the value of our outstanding common shares.

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,  manufacture our LCoS Sets and/or display units in bulk,
and sell the  resulting  LCoS Sets and/or  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 to  incorporate  our LCoS Sets and/or  display  units in their
products.  This requires us to invest significant amounts of time and capital in
designing  our LCoS Sets 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 in the LCoS Sets and/or display
units, it could seriously harm our financial  condition.  In addition,  the time
period that our  products may be demanded by our  customers  could be limited by
the acceptance of new technologies developed by our competitors.

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

We currently have nine  full-time  engineering  and ten full-time  manufacturing
personnel  based  in  California  working  on  microdisplays.  We are  currently
actively hiring personnel for our manufacturing facility located in the Republic
of  Korea.  We  currently  have  six  full-time  engineering  and  27  full-time
manufacturing  personnel based in the Republic of Korea and we expect to hire an
additional  five  engineers and 75  manufacturing  personnel by the end of 2005.
This staffing creates significant operational and research and development costs
that may not be recouped.  Even if our current LCoS Sets become  accepted and/or
successful, we must continue to use, and may increase in number, our engineering
and manufacturing  personnel to develop future  generations of our microdisplays
because of the rapid  technological  changes in our  industry.  As a result,  we
expect  to  continue   incurring   significant   operational  and  research  and
development costs.


                                       23
<PAGE>

WE ARE CURRENTLY  MANUFACTURING AND SHIPPING OUR PRODUCTS IN LIMITED  COMMERCIAL
QUANTITIES,  BUT  UNANTICIPATED  DIFFICULTIES IN  MANUFACTURING  OUR PRODUCTS IN
LARGER  QUANTITIES  MAY MAKE IT DIFFICULT TO MEET CUSTOMER  DEMANDS FROM TIME TO
TIME  AND  OUR  OPERATING   RESULTS  COULD  BE  SIGNIFICANTLY   HARMED  BY  SUCH
DIFFICULTIES.

Problems in  production of our LCoS Sets or display units 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
current and prospective 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 LCoS Sets are assembled by combining the silicon  backplanes with electronic
components. The design and manufacture of LCoS Sets and display units are highly
complex processes that are sensitive to a wide variety of factors, including the
level  of  contaminants  in the  manufacturing  environment,  impurities  in the
materials used, and the  performance of personnel and equipment.  We lease clean
room space in  California  where we  currently  manufacture  our LCoS  Sets.  We
believe that these current  arrangements provide us with strong quality controls
and  effectively  protect our  proprietary  technology in our 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. We do not have other such  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 has a known shortage of critical material.

Because the manufacture of our LCoS Sets involves  highly complex  processes and
technical problems may arise as we manufacture our liquid crystal microdisplays,
we cannot assure the manufacturing  yields of our products.  Although we believe
that we will be able to mass produce our LCoS Sets, other  companies,  including
some with  substantially  greater resources than us, have found great difficulty
or failed to do so. Current  purchase  orders and  anticipated  future  purchase
orders, which we cannot assure, will require us to produce greater quantities of
our LCoS  Sets  than we have  produced  in the  past.  Problems  in  production,
including  problems  associated with  increasing our production  output 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  LCoS  Sets  and  display  units
increases,  and such  complexities may lend to similar  difficulties  that could
harm our business and operating results.

WHILE  WE  INTEND,  IN THE  NEAR  FUTURE,  TO  COMMENCE  OPERATIONS  IN OUR  NEW
MANUFACTURING  FACILITY  IN THE  REPUBLIC  OF  KOREA,  WHICH  WILL  SERVE AS OUR
PRINCIPAL FACILITY FOR MANUFACTURING OUR MICRODISPLAY PRODUCTS, WE MAY ENCOUNTER
DIFFICULTIES IN TRANSITIONING OUR  MANUFACTURING  OPERATIONS AND DIFFICULTIES IN
MAINTAINING  OUR  QUALITY  CONTROLS  OVER  THE   MANUFACTURING   AND  PRODUCTION
PROCESSES,  ANY OF  WHICH  WOULD BE  LIKELY  TO  CAUSE  SIGNIFICANT  HARM TO OUR
BUSINESS.


                                       24
<PAGE>

Our decision to locate our principal manufacturing operations in the Republic of
Korea may cause us to encounter one or more  potential  problems that could harm
our  business.   Such  potential   problems  could  arise  in  connection   with
transitioning our manufacturing  operations to the new facility in Korea.  Other
problems may arise in the training of  employees,  which may occur as the result
of cultural or language differences, which may create misunderstandings or cause
inefficiencies  in  our  operations.   The  geographic  separation  between  our
corporate offices in the United States and our principal manufacturing operation
in Korea could result in managerial or supervisory problems, which could lead to
decreased quality controls and a subsequent material harm to our business.

GEOPOLITICAL  CONDITIONS  OR POTENTIAL  MILITARY  CONFLICTS  BETWEEN  ALLIES THE
UNITED  STATES AND THE REPUBLIC OF KOREA AND NORTH KOREA MAY  NEGATIVELY  IMPACT
OUR BUSINESS.

We intend to operate our principal  manufacturing  operations in the Republic of
Korea  commencing  in the  second  quarter  of  2005  and our  largest  expected
customer,  LG  Electronics,  resides in the  Republic of Korea.  The Republic of
Korea and North  Korea are  technically  at war with  each  other,  despite  the
sanctioned  existence  of the  Demilitarized  Zone and the  relative  absence of
physical  conflict for several decades.  Any escalation in the existing military
conflict between these countries or any commencement,  or perceived commencement
of a military  conflict between the United States and North Korea, may limit our
ability to  effectively  operate our  manufacturing  facility in the Republic of
Korea and also may  substantially  limit our ability to sell  products  into the
Republic  of  Korea  because  of  the  negative  economic,   physical  or  other
destructive  impact  that  such a  conflict  could  have on our  most  important
customer. Any such disruptions to our manufacturing operations and/or ability to
consummate   sales  to  a  substantial   customer  could  adversely  affect  the
development of our business and our financial condition.

IF THE HIGH  DEFINITION  TELEVISION  MARKET DOES NOT  CONTINUE TO DEVELOP AND IF
OTHER POTENTIAL  MARKETS FOR OUR PRODUCTS DO NOT MATERIALIZE,  THEN OUR BUSINESS
WILL LIKELY BE SIGNIFICANTLY HARMED.

High definition  television  programming  has only recently become  available to
consumers, and widespread market acceptance,  although anticipated, is uncertain
at this time.  The market demand for high  definition  televisions is considered
contingent  upon  such  widespread  acceptance  of  high  definition  television
programming. Our current sales and marketing efforts are focused on OEMs of high
definition televisions and OEMs of light engines designed for incorporation into
high  definition  televisions.  Therefore,  if the  market  for high  definition
televisions does not continue to grow and develop, then we will have significant
difficulty  selling our products,  which will have a material  adverse effect on
our results of operations.

Various  potential  target  markets  for  our  products,  including  projectors,
monitors, and portable microdisplays,  are uncertain and may be slow to develop.
In addition,  companies in those markets could utilize  competing  technologies.
For us to succeed in selling our products into these  potential  markets we must
offer end-product  manufacturers better and less expensive microdisplay products
than our competitors, and the manufacturers themselves will also have to develop
commercially  successful  products  using our  products.  In the  event  that we
attempt to market and sell our products into these potential target markets,  if
we are not able to succeed in selling our products into these potential markets,
then our results of operations and overall business may be negatively affected.

IF OUR PRODUCTS DO NOT BECOME WIDELY ACCEPTED BY OUR CUSTOMERS OR THE END-USERS,
OUR BUSINESS COULD BE SIGNIFICANTLY HARMED.


                                       25
<PAGE>

         Our LCOS Sets and/or  display units 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;

     o   price considerations; and

     o   lack of anticipated or actual market demand for the products.

We currently have purchase order  agreements with a limited number of customers.
Despite  our  reasonable  efforts  to retain  these  customers  and  obtain  new
customers,  we may not be successful in either of these regards. The loss of any
one or more of these  customers  or a failure  to  obtain  new  customers  could
materially harm our business and financial condition.

WE MAY BECOME  LARGELY  DEPENDENT ON ONE CUSTOMER FOR OUR FUTURE  REVENUES,  AND
FAILURE  TO EXPAND  OUR  CUSTOMER  BASE OR RECEIVE  ADDITIONAL  ORDERS  FROM OUR
EXISTING  CUSTOMER BASE WILL MAKE US VULNERABLE TO SUBSTANTIAL LOSS OF POTENTIAL
REVENUES.

Commencing  in the  second  quarter  of 2005,  it is likely  that a  substantial
percentage  of our  anticipated  revenues  will be derived from LG  Electronics,
based  upon our  agreement  with LG  Electronics.  If we  cannot  diversify  our
customer  base or derive  increased  revenues  from our existing  customer  base
through additional purchase orders and product deliveries,  and therefore become
primarily  reliant on only one  customer  for a  substantial  percentage  of our
anticipated  revenues,  we  will  be  vulnerable  to a  substantial  decline  in
anticipated  revenues if we lose LG  Electronics as a customer for any reason or
if LG Electronics were to otherwise reduce, delay or cancel its orders. Any such
events could cause a material  adverse  effect on our business,  operations  and
financial   condition   and  the  value  of  our  common  shares  could  decline
substantially.

Our ability to retain and receive  additional  purchase  orders from our current
customers and to attract and receive purchase orders from prospective  customers
may depend upon the  acceptance  of LG  Electronics'  products  in the  consumer
marketplace.  If LG  Electronics'  television  products  incorporating  our LCoS
technology  are not  commercially  successful,  demand for our products from our
current and prospective  customers may not  materialize,  which could negatively
impact our results of operations and our 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.

Even though we have received  purchase  orders for our LCoS Sets and/or  display
units from LG  Electronics  and from  several  Chinese  OEMs and we may  receive
additional purchase orders from our prospective customers,  we may have problems
implementing   volume  production  of  our  products.   Furthermore,   sales  to
manufacturers  in the  electronics  industry  are subject to severe  competitive
pressures,  rapid technological change and product obsolescence.  Customers may,
at any time,  cancel  purchase  orders or commitments or reduce or delay orders,
thereby  increasing  our inventory  and overhead  risks.  In addition,  purchase
orders  received from our Chinese  customers  are for limited  quantities of our
products. Therefore, despite the purchase orders received from current customers
and other purchase  orders that we may receive from  prospective  customers,  we
cannot assure you that these  agreements will result in significant  revenues to
us.


                                       26
<PAGE>

IF OUR CUSTOMERS' PRODUCTS ARE NOT SUCCESSFUL,  OUR BUSINESS WOULD BE MATERIALLY
HARMED.

We do not  currently  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  absence of, or 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;

      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 HIGH DEFINITION TELEVISION INDUSTRY IS HIGHLY COMPETITIVE,  WHICH MAY RESULT
IN LOST SALES OR LOWER GROSS MARGINS.

We serve the highly  competitive  high  definition  television  industry that is
characterized by price erosion,  rapid technological change and competition from
major  domestic and  international  companies.  This intense  competition  could
result in downward  pricing  pressures,  lower sales,  reduced margins and lower
market share.

Companies  competing  in the  LCoS  microdisplay  market  include  Sony and JVC,
although we presently believe that Sony has developed LCoS microdisplays for its
own use and not for  sale to  other  OEM's.  A major  competitor  of ours in the
reflective  microdisplay  market,  although  not using  liquid  crystals  in the
display, is Texas Instruments,  which is producing a micro-mechanical  structure
of moving mirrors on a silicon  backplane,  a technology  known as digital light
processing,  or DLP. Texas  Instruments has had significant  success selling its
DLP products to its  customers in the business  front  projector  market and the
rear projection  high definition  television  market.  Some of our  competitors,
including  Texas  Instruments and JVC, 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 and
effectively than we can.

Rapid and significant technological advances have characterized the microdisplay
market.  There can be no  assurance  that we will be able to effect  any of such
technological  advances or that we will have  sufficient  funds to invest in new
technologies  or products or  processes.  Although we believe  that our displays
have specifications and capabilities, which equal or exceed that of commercially
available  LCD,  cathode  ray tube  (CRT) and DLP based  display  products,  the
manufacturers  of these  products  may  develop  further  improvements  of their
existing technology that would eliminate or diminish our anticipated  advantage.


                                       27
<PAGE>

In  addition,   numerous  competitors  have  substantially   greater  financial,
technical,  marketing,  distribution  and  other  resources  than we  have.  The
acceptance  of our LCoS Sets and/or  display  units will be  dependent  upon the
pricing,  quality,  reliability  and useful life of these  products  compared to
competing technologies, as to which there can be no assurance.

Our competitive  position could suffer if one or more of our customers decide to
design and manufacture  their own  microdisplay  products,  to contract with our
competitors, or to use alternative technologies.  In addition,  customers in the
television  manufacturing  industry  typically  develop a second source.  Second
source suppliers may win an increasing  share of our customers  product demands.
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; and

      o     the rate at which customers  incorporate our displays into their own
            products;   and   products  or   technologies   introduced   by  our
            competitors.

FLUCTUATIONS  IN THE  EXCHANGE  RATE OF THE UNITED  STATES  DOLLAR  AND  FOREIGN
CURRENCIES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL PERFORMANCE AND
PROFITABILITY.

A portion of our costs is  denominated  in  foreign  currencies,  including  the
Korean Won, the Euro and the Japanese Yen. As a result,  changes in the exchange
rates of these currencies or any other applicable  currencies to the U.S. dollar
will affect our costs of good sold and  operating  margins,  and could result in
exchange  losses.  We cannot fully  predict the impact of future  exchange  rate
fluctuations on our profitability.  From time to time, we may engage in exchange
rate hedging  activities  in an effort to mitigate  the impact of exchange  rate
fluctuations,  although we have not engaged in any such  hedging  activities  to
date.  However,  we cannot  offer  assurance  that any hedging  technique we may
implement will be effective.  If it is not effective,  we may experience reduced
operating margins.

OUR BUSINESS IS SIGNIFICANTLY  AFFECTED BY CONDITIONS OR EVENTS OCCURRING IN THE
ELECTRONICS INDUSTRY GENERALLY.

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

OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.


                                       28
<PAGE>

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 that 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 highly volatile, reflecting among
other things reported  losses,  receipts of additional  financing and investors'
perceptions about our business  prospects.  Some research has shown that similar
volatility in other companies  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

      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


                                       29
<PAGE>

performance  of these  companies.  These  broad  market  fluctuations  and other
factors may adversely affect the market price of our common shares.

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

The total number of common  shares  included in the  Amendment No. 2 to Form S-3
Registration   Statement   that  we  filed  with  the  SEC  on  April  27,  2005
(Registration  Number  333-122391),  principally  relating to the November  2004
Financing  represents  approximately  5.69% of the total  number  of our  common
shares that were issued and outstanding as of December 31, 2004.  Sales of these
shares,  as well as the 2,000,000 common shares included in the Form S-3 "Shelf"
Registration  Statement  filed by us with the SEC on January 31, 2005,  into the
public market,  or the perception that future sales of these common 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  has
historically  been adversely  affected due to their limited  marketability,  but
such volume has increased  significantly  in recent periods.  Nevertheless,  any
substantial  sales of our common  shares may result in a material  reduction  in
price, reflecting the volatility of the trading market for 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  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.

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY  TECHNOLOGY
AND OUR REGISTERED INTELLECTUAL PROPERTY.

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.  If we are unable to
protect our  intellectual  property  from use by third  parties,  our ability to
compete  in the  industry  will  be  harmed.  Policing  unauthorized  use of our
products and  technology is difficult,  however.  Despite our efforts to protect
our proprietary rights, we face the following risks:


                                       30
<PAGE>

      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 current or prospective Chinese,  Korean
            or  Taiwanese  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, Korean
            and other foreign legal systems 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 customers,  manufacturers 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.  Certain of our current purchase
order  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


                                       31
<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. Moreover, under the terms of
the November 2004 Financing,  we are prohibited from paying cash dividends while
the 2004 Senior Secured  Convertible Notes issued in the November 2004 Financing
remain  outstanding.  Instead,  we intend to apply any  future  earnings  to the
expansion and development of our business.

OUR  REPORTED  FINANCIAL  RESULTS  MAY  BE  ADVERSELY  AFFECTED  BY  CHANGES  IN
ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES.

We prepare our consolidated  financial  statements in conformity with accounting
principles  generally  accepted  in the U.S.  These  accounting  principles  are
subject to  interpretation  by the Financial  Accounting  Standards  Board,  the
American Institute of Certified Public  Accountants,  the SEC and various bodies
formed to interpret  and create  appropriate  accounting  policies.  A change in
these  policies  or  interpretations  could  have a  significant  effect  on our
reported  financial  results,  and could affect the  reporting  of  transactions
completed  before  the  announcement  of a  change.  For  example,  the FASB has
implemented  changes to U.S. GAAP that require us to record a charge to earnings
for employee  stock option  grants for all awards  unvested at and granted after
December  31,  2005.  This  regulation  will  negatively  impact  our  earnings.
Technology companies  generally,  and our Company,  specifically,  rely on stock
options as a major component of our employee compensation  packages.  Due to the
new requirement to expense options, we are less likely to achieve  profitability
and we may consider  decreasing  or  eliminating  option  grants.  Decreasing or
eliminating  option  grants may  negatively  impact our  ability to attract  and
retain qualified employees.

Item 3.  Quantitative and Qualitative Disclosures About Market Risks.

We are exposed to the impact of  interest  rate  changes  and  foreign  currency
fluctuations.

Interest  Rate Risk.  Our  exposure  to market rate risk for changes in interest
rates  relates  primarily to our cash  accounts.  We invest excess cash and cash
equivalents in a checking  account or money market account with reputable  banks
both in the  United  States and South  Korea.  Our cash  accounts  in the United
States are not FDIC or otherwise insured, to the extent that the accounts exceed
$100,000;  and our cash accounts in South Korea are not insured. As of March 31,
2005, our cash and cash equivalents totaled $4,115,598.


                                       32
<PAGE>

Foreign Currency Risk. We are exposed to foreign exchange rates  fluctuations as
we convert the financial  statements of our foreign subsidiary into U.S. dollars
in  consolidation.  If there is a change in foreign currency exchange rates, the
conversion of the foreign  subsidiary's  financial  statements into U.S. dollars
will lead to a  translation  gain or loss which is recorded  as a  component  of
other comprehensive income and expenses. In addition, we have certain assets and
liabilities that are denominated in currencies other than the relevant  entity's
functional  currency.  Changes in the functional  currency value of these assets
and  liabilities  create  fluctuations  that will lead to a transaction  gain or
loss. During the first quarter of 2005, the foreign currency  transaction gains,
realized and unrealized, were not material.

Item 4.  Controls and Procedures.

Disclosure  Controls and  Procedures.  As of March 31, 2005,  management  of our
Company,  under the supervision of our principal executive and financial officer
(CEO),  evaluated (the Controls  Evaluation) the effectiveness of the design and
operation of our "disclosure  controls and procedures",  as such term is defined
under Rule 13a-15(e)  promulgated under the Securities  Exchange Act of 1934, as
amended (Disclosure Controls), and whether any changes in the Company's internal
control over financial reporting (Internal Controls), as such term is defined in
Rule  13a-15(f)  under the Exchange Act,  during the most recent fiscal  quarter
have materially  affected,  or are reasonably likely to materially  affect,  our
Internal Controls (Internal Controls).

Limitations on the  Effectiveness of Controls.  Our CEO does 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  and  since  we  commenced  operations.   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 increased 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 our Company have been detected.  These inherent  limitations include
the  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 increased 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.

CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES

Based on all of the material  weaknesses  related to our  internal  control over
financial reporting, which are set forth below, and which were identified during
the Controls  Evaluation,  the CEO concluded  that our  disclosure  controls and
procedures  were not effective as of the end of the period  covered by this Form
10-Q.


                                       33
<PAGE>

CHANGES IN INTERNAL CONTROLS

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.


CONTROLS EVALUATION

The management of SpatiaLight,  Inc.  assessed the effectiveness of our internal
control  over  financial  reporting as of March 31,  2005,  and this  assessment
identified the following  material  weaknesses in the company's internal control
over financial reporting.

         The material weaknesses identified were:

      o     Our corporate  governance and disclosure  controls and procedures do
            not provide  reasonable  assurance  that material  transactions  are
            timely and  accurately  reported  in the  financial  statements  and
            related disclosures,  or that the unauthorized disposition of assets
            are prevented and detected. In particular:

            o     We do not have a corporate governance or disclosure committee.

            o     We do not have a fraud training  program for  employees,  or a
                  mechanism to report fraud to the audit committee.

            o     The  audit  committee  does not have a  financial  expert  (as
                  defined by SEC rules) or procedures  for archiving  minutes of
                  its meetings.

      o     We do not currently have a chief financial  officer to work with the
            chief executive  officer and chief  operating  officer in overseeing
            and  monitoring  complex and  significant  transactions  in order to
            provide  reasonable  assurance that such  transactions are reflected
            accurately and fairly in the financial statements.

      o     We have  inadequate  controls  and  procedures  (1) to  monitor  the
            tracking  and movement of  inventory,  and (2) to prevent and detect
            the unauthorized  use of inventory due to an inadequate  segregation
            of duties. The employee who performs the periodic physical inventory
            counts also has access to the inventory and inventory records.

      o     We lack  information  technology  controls and procedures that would
            likely prevent  unauthorized  access to the accounting and financial
            systems,  and ensure that the accounting  and financial  records are
            recoverable in the event of a disaster.

In making its assessment of internal control over financial reporting management
used the criteria  issued by the  Committee of Sponsoring  Organizations  of the
Treadway Commission (COSO) in Internal Control-Integrated Framework.

Each of the material  weaknesses  identified  by  management  during the control
evaluation  for the period ended  December 31, 2004,  was reported in Item 9A of
our Form 10-K/A, and filed with the SEC on April 27, 2005.


                                       34
<PAGE>

Management has and is taking the following steps to address some of the material
weaknesses set forth in this report:

         Fraud  training  program  - We are in the  process  of  implementing  a
procedure for the reporting of fraud to the Audit  Committee of the Board.  This
procedure  will include  informing  employees in writing about what  constitutes
fraud. Our Audit Committee is establishing  related  procedures for the receipt,
retention and treatment of complaints regarding accounting,  internal accounting
controls or auditing matters and the Audit Committee is establishing  procedures
that will provide a mechanism  for the  confidential,  anonymous  submission  by
employees of concerns regarding questionable  accounting or auditing matters. We
expect that these  procedures  will be implemented  during the second quarter of
2005.

         Procedures  for archiving  audit  committee  meeting  minutes - We have
implemented  procedures for archiving minutes of meetings of the Audit Committee
and such  procedures  were in place  for the most  recent  meeting  of the Audit
Committee, which occurred in March 2005.

         Issuance  of  common  shares  to a  company  wholly  owned by our Chief
Executive  Officer - The material weakness relating to issuance of common shares
arose in  connection  with a  situation  where  the  Board,  in  November  2004,
authorized  the  issuance  of common  shares to Argyle in  January  2005,  but a
portion of the  authorized  common  shares were  delivered to Argyle in December
2004.  Through action taken by the Board in March 2005, we have  implemented new
controls  over the process for issuance of common  shares to Robert  Olins,  our
CEO,  secretary,  treasurer  and  director,  and to  Argyle  Capital  Management
Corporation  (Argyle),  a company  wholly-owned by Mr. Olins,  whereby  American
Stock Transfer & Trust Company, our transfer agent, is not permitted to transfer
any shares from our treasury  account to Mr. Olins or to Argyle,  without  prior
written  authorization  executed by a majority of Board  members  excluding  Mr.
Olins.

         Safeguarding  of our  common  shares  held  in  connection  with  notes
receivable  -  Through  action  taken  by the  Board  in  March  2005,  we  have
implemented new procedures with respect to the safeguarding of our common shares
held in  connection  with notes  receivable.  We have  established  controls and
procedures  for   maintaining   escrow  accounts  for  common  shares  that  are
deliverable to other parties upon the performance of certain future  conditions,
such as fulfillments of payments under notes receivable.

         Our  management   believes  that  the  actions  described  in  the  two
immediately  preceding  paragraphs  have  fully  and  adequately  addressed  the
material  weakness "We do not have  adequate  controls  over (1) the process for
issuance  of common  shares to a company  wholly-owned  by the  Company's  chief
executive  officer;  and (2)  the  safeguarding  of its  common  shares  held in
connection with notes  receivable."  That material weakness was disclosed in our
Form 10-K/A filed with the SEC on April 27, 2005.


                                       35
<PAGE>

         Chief  Financial  Officer and  Corporate  Controller - We are currently
conducting a search for the position of full-time  corporate  controller and are
in the process of interviewing  potential  candidates.  We have discontinued our
search for a CFO. Management believes that in the event that we are able to hire
a highly qualified full-time corporate controller,  such person will obviate the
need for us to hire a CFO. We will reassess  that position  following the hiring
of a  controller.  We expect to hire a  full-time  corporate  controller  in the
second quarter of 2005.

         Information  technology  controls and  procedures  - In March 2005,  we
entered into an International  Program License Agreement with Microsoft Business
Solutions Corporation, pursuant to which we are licensing the Microsoft Business
Solutions  Navision software system  (Navision).  Navision is an advanced IT-ERP
system  that has the  capability  to support  our  management's  accounting  and
financial systems.  We also have contracted with a reputable company to lead the
company-wide  implementation  of the Navision  system.  In  connection  with the
implementation of Navision, we are implementing  systematic controls designed to
prevent  unauthorized  access to our accounting and financial systems,  which we
believe that Navision will  facilitate.  We are also  implementing  physical and
electronic back-up and storage procedures to help ensure that our accounting and
financial records will be recoverable in the event of a disaster.

         Our management presently expects that implementation of Navision in our
California  and South Korea offices will be completed and the system will become
active by the end of the second quarter of 2005.

         Controls  and  procedures  of  inventory  - We are in  the  process  of
implementing  the Navision ERP system  referred to in the  preceding  paragraph.
Management   believes  that  this  will  assist  in  addressing  the  identified
inadequate controls and procedures described in the Controls Evaluation.


We have not taken any  steps,  as of the date of this  filing,  to  address  the
material  weaknesses  relating  to the  facts  that we do not  have a  corporate
governance or disclosure committee, and that the audit committee does not have a
financial  expert,  as defined by SEC rules.  We do not presently  have specific
plans with respect to adding a director who would  constitute a financial expert
or with respect to establishing a corporate governance or disclosure committee.

PART II.          OTHER INFORMATION

ITEM 2   CHANGES IN SECURITIES AND USE OF PROCEEDS

 In February  2005, we issued a fully vested  warrant to purchase  75,000 common
shares as payment to a sales agent in consideration for services. As of the date
of this filing,  the sales agent has not  exercised the warrant and therefore we
have not received any proceeds from that transaction.


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<PAGE>

ITEM 6   EXHIBITS AND REPORTS ON FORM 8-K

      (a)   Exhibits

            4.1   Amended and Restated Certificate of Incorporation. *

            4.2   Bylaws. *

            31.1  Rule 13a-14(a)/15d-14(a) Certification of Robert A. Olins.

            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.

      (b)   Report on Form 8-K:

            The Company  filed no reports on Form 8-K during the  quarter  ended
            March 31, 2005.

*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:          May 10, 2005
                                                   -----------------------------

                                             SpatiaLight, Inc.



                                             By: /s/ ROBERT A. OLINS
                                                 -------------------------------
                                                 Robert A. Olins
                                                 Chief Executive Officer
                                                 and Principal Financial Officer



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