**United
      States**


**Securities
      and Exchange Commission**


**Washington,
      D.C. 20549**


**FORM
      10-Q/A**


This
        amendment to our Quarterly Report on Form 10-Q/A is being filed to amend
        our
        Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 as filed
        with
        the Securities and Exchange Commission on August 9, 2007 (“Original Filing”) for
        the purposes of providing clarification and additional explanation to the
        section in Note 13 covering U.S. Securities and Exchange Commission
        Investigations.




(Mark
      One)




þQuarterly
      Report
      under Section 13 or 15(d) of the Securities Exchange Act of 1934





For
      the
      quarterly period ended June 30, 2007





oTransition
      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
                Incorporation
                  or organization)
              (I.R.S.
                  Employer Identification No.)





Five
      Hamilton Landing, Suite 100, Novato, California 94949


(Address
      of principal executive offices, zip code)





(415)
      883-1693


(Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      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 þ
      No o





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


Large
      accelerated filer o  Accelerated
      filer þ  Non-accelerated filer o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o
      No þ




1




Indicate the
      number of shares outstanding of each of the issuer’s classes of common stock, as
      of the latest practicable date. As of August 7, 2007, there were 97,388,513
      common shares of the registrant’s common stock, per value $0.01 per share,
      issued and outstanding.









2





SPATIALIGHT,
      INC.


Quarterly
        Report on Form 10-Q/A
 For
      the
      Quarter Ended June 30, 2007





Table
      of Contents




**PART
                I**
              **FINANCIAL
                INFORMATION****Page****Item
                  1.**
              **Financial
                  Statements**
              3Condensed
                  Consolidated Balance Sheets as of June 30, 2007 and December 31,
                  2006
              3Condensed
                  Consolidated Statements of Operations for the Three and Six Months
                  Ended June 30, 2007 and 2006
              4Condensed
                  Consolidated Statement of Stockholders’ Deficit for the Six Months Ended
                  June 30, 2007
              5Condensed
                  Consolidated Statements of Cash Flows for the Six Months Ended
                  June 30,
                  2007 and 2006
              6Notes
                  to Condensed Consolidated Financial Statements
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              27Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risks
              41Item
                  4.
              Controls
                  and Procedures
              41**PART
                II**
              **OTHER
                INFORMATION**Item
                  1.
              Legal
                  Proceedings.
              42Item 1A.
              Risk
                  Factors.
              43Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              46Item
                  3.
              Defaults
                  Upon Senior Securities.
              46Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              46Item
                  5.
              Other
                  Information
              47Item
                  6.
              Exhibits
              47SIGNATURES
              49


3


**PART
      I.**  **FINANCIAL
      INFORMATION**




**ITEM
      1.**   **Financial
      Statements.**




SPATIALIGHT,
        INC.
 CONDENSED
          CONSOLIDATED BALANCE SHEETS


June
                30,
            
            December
                31,2007
            
            2006(unaudited)
            
            (Note
                2)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            202,408
            
            $
            220,256Accounts
                receivable, net of $0 allowance for doubtful accounts as of June
                30, 2007
                and December 31, 2006, respectively
            
            
            -
            
            
            52,238Inventory,
                net
            
            
            279,652
            
            
            423,075Prepaids
                and other current assets
            
            
            443,714
            
            
            307,428Total
                current assets
            
            
            925,774
            
            
            1,002,997Property,
                plant and equipment, net
            
            
            4,889,070
            
            
            6,635,851Other
                assets
            
            
            77,440
            
            
            37,121Total
                assets
            
            $
            5,892,284
            
            $
            7,675,969LIABILITIES
                AND STOCKHOLDERS' DEFICITCurrent
                liabilities:Senior
                secured convertible notes
            
            $
            9,818,073
            
            $
            9,596,086Unsecured
                short term loans
            
            
            632,940
            
            
            591,070Settlement
                liability
            
            
            837,710
            
            
            -Accounts
                payable
            
            
            2,481,599
            
            
            1,916,249Accrued
                expenses and other current liabilities
            
            
            2,868,659
            
            
            1,793,232Total
                current liabilities
            
            
            16,638,981
            
            
            13,896,637Related
                party convertible notes
            
            
            1,188,000
            
            
            1,188,000Total
                liabilities
            
            
            17,826,981
            
            
            15,084,637Commitments
                and contingenciesStockholders'
                deficit:Common
                stock, $.01 par value:100,000,000
                shares authorized; 87,065,095 and 44,482,616 shares issued;
                83,062,788 and 44,482,616 shares outstanding at June
                30, 2007 and December 31, 2006, respectively
            
            
            870,651
            
            
            444,826Additional
                paid-in capital
            
            
            103,209,024
            
            
            94,756,700Treasury
                stock, at cost, 4,002,307 shares, at June 30, 2007
            
            
            (1,640,946
            )
            
            -Prepaid
                non-cash interest to related party
            
            
            (1,735,699
            )
            
            (2,314,266
            )Other
                comprehensive income
            
            
            323,906
            
            
            336,975Accumulated
                deficit
            
            
            (112,961,633
            )
            
            (100,632,903
            )Total
                stockholders' deficit
            
            
            (11,934,697
            )
            
            (7,408,668
            )Total
                liabilities and stockholders' deficit
            
            $
            5,892,284
            
            $
            7,675,969





See
        accompanying notes to condensed consolidated financial
        statements.
 4
 SPATIALIGHT,
            INC.
 CONDENSED
            CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
  Three
                        months ended June 30,
                    
                    Six
                        months ended June 30,2007
                    
                    2006
                    
                    2007
                    
                    2006Revenue
                    
                    $
                    3,395
                    
                    $
                    59,148
                    
                    $
                    49,843
                    
                    $
                    144,842Cost
                        of revenue and manufacturing expenses
                    
                    
                    564,477
                    
                    
                    1,602,014
                    
                    
                    1,312,682
                    
                    
                    3,150,344Gross
                        margin
                    
                    
                    (561,082
                    )
                    
                    (1,542,866
                    )
                    
                    (1,262,839
                    )
                    
                    (3,005,502
                    )Operating
                        expenses:Selling,
                        general and administrative expenses (including stock-based
                        compensation of
                        $185,766 and $976,156 for the three monthperiods ended June 30, 2007 and 2006, respectively, and $462,753
                        and
                        $1,644,933 for the six month periods ended June 30, 2007
                        and 2006,
                        respectively)
                    
                    
                    1,616,655
                    
                    
                    2,894,372
                    
                    
                    2,878,484
                    
                    
                    5,534,466Research
                        and development expenses
                    
                    
                    405,389
                    
                    
                    411,175
                    
                    
                    699,491
                    
                    
                    653,246Impairment
                        loss
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,429,925
                    
                    
                    -Total
                        operating expenses
                    
                    
                    2,022,044
                    
                    
                    3,305,547
                    
                    
                    5,007,900
                    
                    
                    6,187,712Operating
                        loss
                    
                    
                    (2,583,126
                    )
                    
                    (4,848,413
                    )
                    
                    (6,270,739
                    )
                    
                    (9,193,214
                    )Other
                        income (expense):Interest
                        expense:Interest
                        expense
                    
                    
                    (304,591
                    )
                    
                    (31,984
                    )
                    
                    (592,000
                    )
                    
                    (314,972
                    )Non-cash
                        interest expense
                    
                    
                    (3,637,460
                    )
                    
                    (473,729
                    )
                    
                    (5,526,775
                    )
                    
                    (1,486,500
                    )Total
                        interest expense
                    
                    
                    (3,942,051
                    )
                    
                    (505,713
                    )
                    
                    (6,118,775
                    )
                    
                    (1,801,472
                    )Gain
                        from revaluation of warrants
                    
                    
                    -
                    
                    
                    34,111
                    
                    
                    -
                    
                    
                    21,693Foreign
                        currency translation gain
                    
                    
                    81,672
                    
                    
                    7,780
                    
                    
                    42,055
                    
                    
                    12,353Interest
                        and other income
                    
                    
                    230
                    
                    
                    7,654
                    
                    
                    20,529
                    
                    
                    24,190Total
                        other income (expenses)
                    
                    
                    (3,860,149
                    )
                    
                    (456,168
                    )
                    
                    (6,056,191
                    )
                    
                    (1,743,236
                    )Loss
                        before income tax expense
                    
                    
                    (6,443,275
                    )
                    
                    (5,304,581
                    )
                    
                    (12,326,930
                    )
                    
                    (10,936,450
                    )Income
                        tax expense
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,800
                    
                    
                    800Net
                        loss
                    
                    $
                    (6,443,275
                    )
                    $
                    (5,304,581
                    )
                    $
                    (12,328,730
                    )
                    $
                    (10,937,250
                    )Net
                        loss per share - basic and diluted
                    
                    $
                    (0.11
                    )
                    $
                    (0.13
                    )
                    $
                    (0.24
                    )
                    $
                    (0.28
                    )Weighted
                        average shares used in computing net loss per share- basic
                        and
                        diluted
                    
                    
                    57,397,371
                    
                    
                    40,122,993
                    
                    
                    51,639,282
                    
                    
                    39,356,858
  See
            accompanying notes to condensed consolidated financial statements.
  5




SPATIALIGHT,
        INC.
 CONDENSED
        CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (unaudited)
 SIX
        MONTHS ENDED JUNE 30, 2007
 **PREPAID
                    NONCASH**
                
                
                
                OTHER
                
                **TOTAL****ADDITIONAL**
                
                
                
                
                
                **INTEREST
                    TO**
                
                
                
                **COMPRE-**
                
                **STOCK****COMMON
                      STOCK**
                
                **PAID-IN**
                
                ******TREASURY** STOCK****
                
                **RELATED**
                
                **ACCUMULATED**
                
                **HENSIVE**
                
                **HOLDERS'****SHARES**
                
                **AMOUNT**
                
                **CAPITAL**
                
                **SHARES**
                
                **AMOUNT**
                
                **PARTY**
                
                **DEFICIT**
                
                **INCOME**
                
                **DEFICIT**Balance,
                    January 1, 2007
                
                
                44,482,616
                
                $
                444,826
                
                $
                94,756,700
                
                
                -
                
                $
                -
                
                $
                (2,314,266
                )
                $
                (100,632,903
                )
                $
                336,975
                
                $
                (7,408,668
                )Stock-based
                    compensation expense
                
                
                -
                
                
                -
                
                
                462,753
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                462,753Issuance
                      of common shares, net of issuance costs of $223,196
                
                
                2,190,476
                
                
                21,904
                
                
                2,054,900
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,076,804Issuance
                    of common shares under the April 2007 Equity Credit
                    Agreement
                
                
                16,711,495
                
                
                167,116
                
                
                1,933,094
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,100,210Issuance
                    of common shares for waivers of certain contractual rights by
                    September
                    and November 2006 investors
                
                
                1,100,000
                
                
                11,000
                
                
                1,320,000
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,331,000Return
                    of common shares and warrants under the Settlement
                    Agreement
                
                
                -
                
                
                -
                
                
                (602,055
                )
                
                4,002,307
                
                
                (1,640,946
                )
                
                -
                
                
                -
                
                
                -
                
                
                (2,243,001
                )Issuance
                    and sale of common shares from Escrow under the Settlement
                    Agreement
                
                
                22,580,508
                
                
                225,805
                
                
                3,283,632
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,509,437Amortization
                    of pre-paid interest
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                578,567
                
                
                -
                
                
                -
                
                
                578,567Comprehensive
                    loss:Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (12,328,730
                )
                
                -
                
                
                (12,328,730
                )Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (13,069
                )
                
                (13,069
                )Total
                    comprehensive loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (12,328,730
                )
                
                (13,069
                )
                
                (12,341,799
                )Balance,
                    June 30, 2007
                
                
                87,065,095
                
                $
                870,651
                
                $
                103,209,024
                
                
                4,002,307
                
                $
                (1,640,946
                )
                $
                (1,735,699
                )
                $
                (112,961,633
                )
                $
                323,906
                
                $
                (11,934,697
                )
  See
        accompanying notes to condensed consolidated financial statements.


6




SPATIALIGHT,
      INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


Six
                  months ended June 30,2007
              
              2006Cash
                  flows from operating activities:Net
                  loss
              
              $
              (12,328,730
              )
              $
              (10,937,250
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Inventory
                  reserve adjustment
              
              
              92,716
              
              
              386,329Impairment
                  loss
              
              
              1,429,925
              
              
              -Depreciation
                  and amortization
              
              
              364,595
              
              
              441,448Stock-based
                  compensation expense
              
              
              462,753
              
              
              1,644,993Non-cash
                  interest expense
              
              
              5,526,775
              
              
              1,486,500Gain
                  from revaluation of warrants
              
              
              -
              
              
              (21,693
              )Non-cash
                  foreign currency translation gain
              
              
              (42,055
              )
              
              (12,353
              )Loss
                  on sale of fixed assets
              
              
              -
              
              
              1,975Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              51,238
              
              
              79,031Inventory
              
              
              50,706
              
              
              (58,552
              )Prepaids
                  and other current assets
              
              
              53,638
              
              
              (139,930
              )Other
                  assets
              
              
              (40,320
              )
              
              25,203Accounts
                  payable
              
              
              565,351
              
              
              (481,970
              )Accrued
                  expenses and other current liabilities
              
              
              (404,572
              )
              
              (145,850
              )Net
                  cash used in operating activities
              
              
              (4,217,980
              )
              
              (7,732,119
              )Cash
                  flows from investing activities:Purchase
                  of property, plant and equipment
              
              
              (10,617
              )
              
              (320,947
              )Proceeds
                  from sale of property, plant and equipment
              
              
              -
              
              
              6,000Net
                  cash used in investing activities
              
              
              (10,617
              )
              
              (314,947
              )Cash
                  flows from financing actitivies:Proceeds
                  from issuance of short-term notes
              
              
              1,116,237
              
              
              5,876,330Payment
                  on short-term notes
              
              
              (1,083,463
              )
              
              (5,897,573
              )Proceeds
                  from the sale of common shares and warrants, net of issuance
                  costs
              
              
              4,177,014
              
              
              8,451,175Proceeds
                  from exercise of warrants and options
              
              
              -
              
              
              40,245Net
                  cash provided by financing activities
              
              
              4,209,788
              
              
              8,470,177Net
                  increase (decrease) in cash and cash equivalents
              
              
              (18,809
              )
              
              423,111Effect
                  of exchange rate changes on cash
              
              
              961
              
              
              736Cash
                  and cash equivalents at beginning of period
              
              
              220,256
              
              
              42,565Cash
                  and cash equivalents at end of period
              
              $
              202,408
              
              $
              466,412Non-cash
                  financing activities:Shares
                  issued for interest and liquidated damages
              
              $
              1,331,000
              
              $
              700,960Shares
                  issued for the Settlement Agreement
              
              $
              3,509,437
              
              $
              -Supplemental
                  disclosure of cash flow information:Income
                  taxes paid during the period
              
              $
              1,800
              
              $
              800Interest
                  paid during the period
              
              $
              534,820
              
              $
              283,942
  See
        accompanying notes to condensed consolidated financial statements.


7




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




**Note
      1.**   **Business
      Description**





SpatiaLight,
      Inc. is a New York corporation formed in 1989. We conduct operations through
      our
      two wholly-owned subsidiaries, SpatiaLight Technologies, Inc. and SpatiaLight
      Korea, Inc. As used in this Form 10-Q/A, terms such as the “Company,” “we,”
“ours,” and similar terms refer to SpatiaLight, Inc. and its wholly-owned
      subsidiaries, unless otherwise noted.





We
      are in
      the business of manufacturing high-resolution liquid crystal on silicon (LCoS)
      microdisplays. We are currently focused on manufacturing our core
      product, the T-3 LCoS Set, which has a 1920 pixels by 1080 pixels
      configuration for sale to our current and prospective customers, located
      primarily in Asia. Our previously manufactured T-1 LCoS Set has a
      lower resolution of 1280 pixels by 960 pixels configuration. We are focusing
      on
      manufacturing the T-3 LCoS Sets rather than the T-1 LCoS Sets because we believe
      that the demand for the higher resolution product will be significantly greater.
      Our current and prospective customers include manufacturers of near-to-eye
      display systems such as head mounted displays (“HMDs”), and small projection
      displays (microprojectors or nanoprojectors), targeted for use with mobile
      electronics projects, in addition to front and rear projection based televisions
      and monitors.





**Note
      2.**   **Basis
      of Presentation**





The
      accompanying condensed consolidated financial statements include the accounts
      of
      SpatiaLight, Inc. and its wholly-owned subsidiaries, SpatiaLight Technologies,
      Inc. and SpatiaLight Korea, Inc. All significant intercompany accounts and
      transactions have been eliminated in consolidation.





The
      accompanying condensed consolidated financial statements have been prepared
      in
      accordance with U. S. generally accepted accounting principles for interim
      financial information and with the instructions to Form 10-Q and Rule 10-01
      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 U.S. generally accepted accounting
      principles. 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 2006 Annual Report on Form 10-K filed
      with the SEC on March 16, 2007, which contains our audited consolidated
      financial statements, related financial notes and Management’s Discussion and
      Analysis, for the year ended December 31, 2006. The interim results for the
      six
      month period ended June 30, 2007 are not necessarily indicative of results
      for
      the full fiscal year or any future interim period. The accompanying consolidated
      balance sheet as of December 31, 2006 has been derived from the audited
      financial statements as of that date but does not include all disclosures
      required by U.S. generally accepted accounting principles.





The
      accompanying condensed consolidated financial statements have been prepared
      assuming we will continue as a going concern. As reported in our 2006 Annual
      Report on Form 10-K, we have suffered recurring operating losses and negative
      cash flows from operations. We have continued to suffer operating losses for
      the
      six month period ended June 30, 2007. While we plan on raising additional
      capital, no assurance can be given that we will be able to raise sufficient
      funds to continue our operations and meet our capital and liquidity
      requirements. If we do not receive additional funds, we will be required to
      scale back or terminate operations and/or seek protection under applicable
      bankruptcy laws. Additionally, as more fully described in Note 7, our Senior
      Secured Convertible Notes, maturing in November 2007, are held by four
      noteholders. On June 15, 2007, the Senior Secured Convertible Notes became
      redeemable on demand by the holders at 115% of the principal amount plus accrued
      interest and late charges. We have received redemption notices from holders
      of
      $9,000,000 in original principal amount of Senior Secured Convertible Notes
      and
      have accrued $1,500,000 in redemption premiums as of June 30, 2007. We do not
      presently have a source of funds with which to redeem the Senior Secured
      Convertible Notes and may be required to seek protection under applicable
      bankruptcy laws if such redemption is required by the noteholders. We also
      have
      increased the rate at which we accrue and pay interest from 10% per annum to
      12%
      per annum in accordance with the terms of the Senior Secured Convertible Notes,
      commencing on June 15, 2007. As
      a
      result of our failure to redeem the Senior Secured Convertible Notes within
      five
      days after receipt of the redemption notice, the noteholders may withdraw any
      part of the redemption notice and elect to convert the withdrawn amount at
      a new
      conversion rate equal to the lowest weighted price of the common shares between
      June 15, 2007 and the date of withdrawal. In early July 2007, Portside withdrew
      its redemption notice with respect to $100,000 and Smithfield withdrew its
      redemption notice with respect to $50,000. We have received a notice of
      conversion from each noteholder to convert the withdrawn amount at a conversion
      rate of $0.0505 per common share but do not presently have sufficient authorized
      common shares to convert the withdrawn amount. We
      have
      filed an amendment to our Certificate of Incorporation to effect a 50:1 reverse
      split of our existing common shares and provide additional authorized shares.
      The additional shares will be available for issuance when the reverse split
      is
      effective and we intend to convert the withdrawn amount at that time.


8




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




During
      2006, a substantial percentage of our T-3 LCoS Set sales were made to LG
      Electronics (“LGE”). In March 2007, LGE informed us that it intended to
      discontinue production of rear projection televisions (“RPTVs”) and failed
      to fulfill the remaining portion of our supply agreement for the T-3 LCoS
      Sets. We do not expect significant future sales to LGE and are engaged in
      settlement negotiations relating to the failure to fulfill our supply
      agreement. We intend to replace the anticipated revenues from LGE with revenues
      from sales of our T-3 LCoS Sets to other customers, as well as sales of products
      to manufacturers of HMDs and microprojectors. Due to the development and
      start-up time periods required, however, we do not anticipate significant
      revenue until at least the last quarter of 2007.




We
      are
      subject to investigations by the United States Securities and Exchange
      Commission (“SEC”) relating to the unauthorized filing of consents of our former
      auditor, BDO Seidman, LLP, as an exhibit to certain registration statements
      and
      our issuance of securities without legend or restrictions to Argyle Capital
      Management Corporation, a firm controlled by our former Chief Executive Officer
      for payment of interest on the Argyle Notes, specifically focusing on our
      prepayment of interest in late 2004 and early 2005. We received a Wells Notice
      dated May 25, 2007 from the SEC and have been advised that they intend to pursue
      civil enforcement actions against us in connection with these investigations
      and
      we may be subject to penalties and claims by our stockholders. These matters
      are
      discussed in further detail in Note  13.





These
      matters raise substantial doubt about our ability to continue as a going
      concern. The recoverability of a major portion of the amounts recorded as assets
      shown in the accompanying consolidated balance sheet is dependent upon our
      continued operations. Our condensed consolidated financial statements do not
      include any adjustments relating to the recoverability and classification of
      the
      amounts recorded as assets or amounts and classifications of liabilities that
      might be necessary should we be unable to continue as a going
      concern.





**Note** **3.**   **Liquidity**





From
      inception through June 30, 2007, we have sustained recurring net losses from
      operations totaling approximately $113 million and at June 30, 2007, had total
      stockholders’ deficit of approximately $11.9 million and working capital
      deficiency of approximately $15.7 million. During the six months ended June
      30,
      2007, our net cash decreased approximately $18,000. In the first quarter of
      2007, cash was primarily provided by the gross proceeds of approximately $2.3
      million that we received from the sale of 2,190,476 of our common shares in
      February 2007. During the second quarter of 2007, cash was primarily provided
      by
      the gross proceeds of approximately $2.1 million that we received from the
      sale
      of 16,711,495 of our common shares under an Equity Credit Agreement with certain
      institutional investors (the “Equity Credit Agreement”) that we entered into
      effective April 24, 2007, as further described in Note 8. The proceeds from
      these financings were used to fund our operations for the first half of 2007.
      We
      recognized net losses for the six months ended June 30, 2007 of approximately
      $12 million. We believe that our cash resources, including draws on the Equity
      Credit Agreement, will be sufficient to fund our operations and meet our capital
      and liquidity requirements through November 30, 2007.




9




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


**Note
      4.** **Stock-Based
      Compensation**




We
      have
      stock compensation plans for employees and directors which are described in
      more
      detail in Note 6 to our consolidated financial statements in our 2006 Annual
      Report on Form 10-K. We adopted Statement of Financial Accounting Standards
      No.
      123 (revised 2004), “ *Share-Based
      Payment* ,”
(“SFAS
      123R”) effective January 1, 2006. SFAS 123R requires the recognition of the fair
      value of stock compensation, including stock options, in net income (loss).
      We
      recognize the stock compensation expense over the requisite service period
      of
      the individual grantees, which generally equals the vesting period of the grant
      or, in the case of options granted with a market condition, we use a lattice
      model to calculate a derived service period. All of our stock-based compensation
      is accounted for as an equity instrument. Equity instruments issued to
      non-employees are recorded at their fair market value as determined in
      accordance with SFAS 123R and EITF Issue No. 96-18, “ *Accounting
      for Equity Instruments that are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods and Services* ”
(“EITF
      96-18”).





Under
      the
      provisions of SFAS 123R and EITF 96-18, we recorded $185,766 and $976,156,
      or
      $0.003 and $0.02 per share, of stock-based compensation, net of estimated
      forfeitures, in selling, general and administrative expenses, in our condensed
      consolidated statement of operations for the three month periods ended June
      30,
      2007 and 2006, respectively, and $462,753 and $1,644,933, or $0.01 and $0.04
      per
      share for the six month periods ended June 30, 2007 and 2006, respectively.
      We
      utilized the Black-Scholes valuation model for estimating the fair value of
      the
      stock compensation granted after the adoption of SFAS 123R, with the following
      weighted-average assumptions:





Three and six months ended June 30,2007
            
            2006Dividend
                yield
            
            
            -
            
            
            -Expected
                volatility
            
            
            86
                - 89
            %
            
            92.80
            %Risk-free
                interest rate
            
            
            4.51
                - 5.10
            %
            
            4.60
            %Expected
                lives (in years)
            
            
            5.21
                to 5.75
            
            
            5.21
                to 5.46




The
      dividend yield of zero is based on the fact that we have never paid cash
      dividends, have no present intention to pay cash dividends, and are prohibited
      from paying dividends under the terms of the Senior Secured Convertible Notes
      issued in November 2004. Expected volatility is based upon historical volatility
      of our common stock over the period commensurate with the expected life of
      the
      options. The risk-free interest rate is derived from the average U.S. Treasury
      Constant Maturity Rate in effect during the period at the time of the grant.
      The
      expected term is calculated using the simplified method prescribed by the SEC’s
      Staff Accounting Bulletin 107. Our currently unvested options generally vest
      over two years from the date of grant. Our options generally have a 10-year
      contractual term. Based on the above assumptions, the weighted-average fair
      values of the options granted under the stock option plans for 2007 and 2006
      were $0.88 and $1.97, respectively. As required by SFAS 123R, we estimate
      forfeitures of employee stock options and recognize compensation cost only
      for
      those awards expected to vest. Forfeiture rates are determined for three groups
      of employees - directors, senior management and all other employees - based
      on
      historical experience. Estimated forfeitures are adjusted to actual forfeitures
      as necessary.




10




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


A
      summary
      of options under our stock option plans as of December 31, 2006 and changes
      during the six months ended June 30, 2007 are as follows:





Number of
              Shares
            
            Weighted Average
                Exercise Price
            
            Weighted
                Average Remaining Contractual Term (in years)
            
            Aggregate
                Intrinsic Value at June 30, 2007Outstanding
                December 31, 2006
            
            
            5,719,894
            
            $
            3.15
            
            
            5.80Options
                granted under the plans
            
            
            987,000
            
            $
            1.20Options
                exercised
            
            
            -Options
                forfeited or expired
            
            
            (377,500
            )
            $
            3.79Outstanding
                June 30, 2007
            
            
            6,329,394
            
            $
            2.81
            
            
            5.89
            
            $
            -Options
                vested and exercisableat
                June 30, 2007
            
            
            5,652,394
            
            $
            2.99
            
            
            5.44
            
            $
            -




Aggregate
      intrinsic value is the sum of the amounts by which the quoted market price
      of
      our stock at June 30, 2007, $0.084 per share, exceeded the exercise price of
      the
      options, for those options for which the quoted market price was in excess
      of
      the exercise price (such options are referred to as “in-the-money-options”). As
      shown above, all of our options are priced above the quoted market price, and
      therefore have no intrinsic value at June 30, 2007. No options were exercised
      during the six months ended June 30, 2007. The aggregated intrinsic value of
      options exercised on the dates the options were exercised was $112,865 for
      the
      six month period ended June 30, 2006.




As
      of
      June 30, 2007, the estimated compensation cost of outstanding options that
      had
      not yet vested was approximately $461,468. This cost is expected to be
      recognized through February 2009. We recorded no income tax benefits for
      stock-based compensation expense arrangements for the six months ended June
      30,
      2007, as we have cumulative operating losses, for which a full valuation
      allowance has been established.




11




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


**Note** **5.**   **Per
      Share Information**





Basic
      net
      loss per share is computed by dividing our net loss by the weighted average
      number of common shares outstanding for the period. Diluted net 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.
      The table below reflects potentially dilutive securities which were excluded
      from the computation of diluted net loss per share for the six months ended
      June
      30, 2007 and 2006 because the effect of their assumed exercise or conversion
      would be antidilutive.





As
                of June 30,2007
            
            2006Number
                of Potentially Dilutive Shares
            
            Weighted
                Average Exercise/Conversion Price
            
            Number
                of Potentially Dilutive Shares
            
            Weighted
                Average Exercise/Conversion PriceStock
                options and warrants
            
            
            7,165,920
            
            $
            2.86
            
            
            6,795,231
            
            $
            3.45Convertible
                notes
            
            
            3,404,807
            
            $
            3.29
            
            
            3,404,807
            
            $
            3.29Settlement
                liability (*)
            
            
            9,972,738
            
            $
            0.08
            
            
            -Total
            
            
            20,543,465
            
            
            
            
            
            10,200,038




*  The
      Settlement liability (see Note 8) of $837,710 at June 30, 2007 is settled in
      shares, and potentially dilutive shares reflect the number of shares that would
      be issued in the future to settle the Settlement
      liability based on the current market price per share at the end of the period.





**Note
      6.**   **Property,
      Plant and Equipment, net**





Property,
      plant and equipment include:







June
                30, 2007
            
            December
                31, 2006Building
            
            $
            3,330,198
            
            $
            4,735,027Other
                equipment and instruments
            
            
            1,753,987
            
            
            2,332,603Machinery
                and manufacturing equipment
            
            
            1,701,399
            
            
            1,688,943Office
                furniture and fixtures
            
            
            394,303
            
            
            463,414Tooling
            
            
            371,700
            
            
            371,700Leasehold
                improvements
            
            
            161,394
            
            
            165,937Computer
                hardware and software
            
            
            288,751
            
            
            352,825Total
                property, plant and equipment
            
            
            8,001,732
            
            
            10,110,449Accumulated
                depreciation
            
            
            (3,112,662
            )
            
            (3,474,598
            )Property,
                plant and equipment, net
            
            $
            4,889,070
            
            $
            6,635,851




We
      recorded an asset impairment loss of $1,429,925 during the quarter ended March
      31, 2007, in accordance with SFAS
      144,
“ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ” based on
      the estimated fair value of our building in South Korea. On March 9, 2007,
      we
      received oral notification from LGE of its cancellation of our supply agreement
      to provide T-3 LCoS Sets. We deemed the loss of LGE as a customer a significant
      change in circumstances which indicated the need for an impairment analysis,
      based on undiscounted cash flows relating to our anticipated production of
      T-3
      LCoS Sets. While we believe that we will find other customers for our products,
      we do not currently have existing customers to support estimated cash flows
      necessary for the recovery of the recorded asset value. In addition,
      we have
      been certified as a “high technology” company, and the facility is located on
      land designated as a “free economic zone” by the South Korean national
      government and we receive a 100% land lease payment exemption. Under our
      agreement with the Gyeongnam provincial government, we could lose our land
      lease
      payment exemption if we lose our “high technology” company certification. If we
      were to lose the lease, we might be required to donate the building to the
      South
      Korean government.




12




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




The
      fair
      value of the building and equipment were estimated based on a preliminary
      appraisal which took into account the building’s overall structure, used
      materials, and current condition. The equipment was appraised considering such
      items as structure, standard, form, capacity, and acquisition cost. Based upon
      this appraisal, the building’s fair value was less than the net book value
      whereas the equipment was valued at greater than its net book
      value.




As
      a
      result, the carrying value of the building has been reduced by $1,429,925 with
      a
      corresponding charge to impairment loss on the condensed consolidated statement
      of operations.




**Note** **7.**   **S** **hort-Term
      Loans and Notes Payable**





*Short-Term
      Loans*





Our
      wholly-owned subsidiary, SpatiaLight Korea, has revolving credit facilities
      with
      four separate South Korean banks as detailed below (amounts in thousands, Korean
      Won, unless otherwise stated):





Bank
            
            Shinhan
                Bank
            
            Kyongnam
              Bank
            
            Korea
              Exchange
              Bank
            
            Pusan
                Bank
            
            TotalInterest
                rate type
            
            Variable
                (1)
            
            Variable
                (2)
            
            Fixed
                (1)
            
            Variable
                (1)Interest
                rate at 6/30/07
            
            
            16.28
            %
            
            16.13
            %
            
            19.00
            %
            
            19.00
            %Maturity
                date
            
            
            4/15/2007
            
            
            10/30/2007
            
            
            1/10/2007
            
            
            1/10/2007Maximum
                amount of line
            
            
            139,696
            
            
            180,000
            
            
            187,773
            
            
            78,804
            
            
            586,273Amount
                outstanding at 6/30/07
            
            
            139,696
            
            
            180,000
            
            
            187,773
            
            
            78,804
            
            
            586,273Remaining
                available
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Approximate
                US dollar equivalent
            
            $
            150,816
            
            $
            194,328
            
            $
            202,720
            
            $
            85,076
            
            $
            632,940




(1) 
        Past due interest rates apply as loans are past due.
 (2) 
        Yield ratio of annual industrial financial debenture plus
        10.0%




Interest
      under each of the credit facilities is payable monthly. We are required to
      repay
      funds on the credit facilities by the maturity dates of each of the respective
      credit facilities as noted in the table above. We have not repaid the Korean
      Exchange Bank, the Pusan Bank or the Shinhan Bank the amounts outstanding as
      of
      the maturity dates noted above and are in discussions with each of these banks
      to revise the repayment terms.




13




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




Related
      Party and Senior Secured Convertible Notes outstanding at June 30, 2007 consist
      of the following:





*Argyle
      Notes:*





In
      1998,
      we received $1,188,000 in cash in exchange for notes payable in that amount
      (the
“Argyle Notes”) to Argyle Capital Management Corporation (“Argyle”), a company
      owned and controlled by Robert A. Olins, our former Chief Executive Officer,
      Secretary, Treasurer, and a former Director. The Argyle Notes accrue interest
      at
      a contractual rate of 6% per annum, and are secured by substantially all of
      our
      assets, although these notes are subordinated to the Senior Secured Convertible
      Notes due November 30, 2007 described below. Both principal and interest are
      convertible into our common shares at $0.50 per share. The maturity date of
      the
      Argyle Notes has been extended several times, most recently on November 30,
      2004, when the due date was extended until December 31, 2008. The beneficial
      conversion effect representing the excess aggregate value of the common shares
      receivable upon conversion of the notes based on the appropriate market price
      at
      the time of measurement, over the aggregate conversion price for such common
      shares (limited to the original proceeds of $1,188,000), was recorded as
      additional paid-in capital. The resulting discount was amortized through
      non-cash interest in the financial statements, and was completely amortized
      in
      June 2005.





In
      December 2004, we issued 50,000 common shares, and in January 2005, we issued
      448,768 common shares, as a prepayment of interest 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 June 30, 2007, total prepaid interest on the Argyle
      Notes for the period July 1, 2007 to December 31, 2008 is $1,735,699, which
      is
      classified as a deduction from stockholders’ deficit in the accompanying
      condensed consolidated balance sheets. If Argyle elects to convert the notes
      prior to December 31, 2008, Argyle will return shares representing unearned
      interest on the Argyle Notes at the time of the conversion.





Non-cash
      interest expense includes $542,926 for the six months ended June 30, 2007 and
      2006 resulting from the beneficial conversion price of interest, which is
      convertible into common shares at $0.50 per share. This non-cash interest was
      computed as the excess of the market price of the shares issued for the interest
      over the calculated amount of interest due for the period.




At
      June
      30, 2007, the carrying value of the Argyle Notes totaled $1,188,000 representing
      the unpaid principal balance *.*





*November
      2004 Financing:*





On
      November 30, 2004, we completed a non-brokered private placement (the “November
      2004 Financing”) of $10 million of senior secured convertible notes (the “Senior
      Secured Convertible Notes”). The Senior Secured Convertible Notes accrue
      interest at 10% per annum, payable quarterly in cash or our common shares at
      our
      option, if certain conditions are met, such as the availability of an effective
      registration statement pursuant to which resales may be made or the availability
      of Rule 144(k) for resale of the common shares underlying the Senior Secured
      Convertible Notes. The value of the shares for the purposes of calculating
      interest payments is equal to the 10-day trailing average of the volume weighted
      average prices of our common shares at the end of each quarterly interest
      period. The Senior Secured Convertible Notes, originally due November 30, 2007,
      are in default as described further below.




14




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




The
      Senior Secured Convertible Notes are convertible, at the option of their
      holders, into our common shares at the conversion price of $9.72 per share.
      The
      Senior Secured Convertible Notes are senior to the Argyle Notes, based upon
      an
      Intercreditor Agreement.  This Intercreditor Agreement precludes us from
      repaying the Arygle Notes in cash or other property until the holders of our
      Senior Secured Convertible Notes have been repaid.  The Intercreditor
      Agreement does not, however, preclude us from paying interest on the Argyle
      Notes in either cash or shares provided there has not been an event of default
      under the Senior Secured Convertible Notes, as defined in the agreement. 
Under the terms of the Intercreditor Agreement, Argyle maintains its rights
      to
      convert the Argyle Notes into common shares under the conversion terms of the
      Argyle Notes, as described above, at any time.  The holders of our Senior
      Secured Convertible Notes have a senior security interest in substantially
      all
      of our assets, except those located in South Korea.  However, the holders
      of our Senior Secured Convertible Notes have a pledge on SpatiaLight Korea’s
      shares.  In addition, under the terms of the November 2004 Financing, we
      are prohibited from using the proceeds from the financing to repay debt or
      to
      pay dividends, and we are prohibited from paying dividends while the Senior
      Secured Convertible Notes are outstanding.





We
      were
      required under an amended registration rights agreement, to file and maintain
      the effectiveness of a registration statement for resale of the shares issuable
      upon conversion of the Senior Secured Convertible Notes.  We reported in
      Post Effective Amendment No. 2 to our registration statement on Form S-3
      relating to the Senior Secured Convertible Notes (Reg. No. 333-122391), that
      in
      late August 2005 we advised the holders of the Senior Secured Convertible Notes
      that until the matter concerning the filing of an unauthorized consent of our
      former auditors, BDO Seidman, LLP, is resolved, sales using the prospectus
      which
      is the subject of that registration statement may result in potential liability.
      A holder of $4.5 million of the Senior Secured Convertible Notes, Portside
      Growth & Opportunity Fund (“Portside”), has claimed that the post-effective
      amendment resulted in an obligation for the Company to pay each noteholder
      liquidated damages in cash equal to 1% of the purchase price of the notes,
      and
      1% for every 30 days thereafter, until the matter concerning the consent is
      resolved. That amount would equal, in the aggregate, $683,000 as of February
      14,
      2006 (when the post-effective amendment to the registration statement was
      declared effective).  We do not believe that we are contractually obligated
      to make this payment and therefore we have not accrued the alleged liquidated
      damages.  However, should the noteholders pursue their claim for liquidated
      damages pursuant to the registration rights agreement and prevail on their
      claim
      in a court of law, the alleged liquidated damages would immediately become
      due
      and payable.





Portside
      has also claimed additional events of default under the Senior Secured
      Convertible Notes based on (i) failure to make an interest payment due in
      November 2005 on a timely basis; (ii) incurrence of prohibited indebtedness
      to
      our former officers and/or directors of the Company; (iii) incurrence of
      prohibited indebtedness by our South Korean subsidiary to certain banks in
      South
      Korea; (iv) granting of a security interest by our South Korean subsidiary
      in
      certain assets located in South Korea; (v) repayment by us of indebtedness
      to
      our officers or directors and by our South Korean subsidiary of indebtedness
      under bank credit facilities. Smithfield Fiduciary LLC (“Smithfield”), another
      noteholder that holds $4.5 million of the Senior Secured Convertible Notes,
      joined in the claim that a default occurred as a result of certain indebtedness
      incurred and as a result of the failure to make the November 2005 interest
      payment in a timely fashion. These notices call for us to redeem $9.0 million
      in
      the aggregate principal amount of the Senior Secured Convertible Notes and
      to
      pay a redemption premium of $675,000 to each of these noteholders. Furthermore,
      the noteholders claim that the interest rate on the Senior Secured Convertible
      Notes has increased from 10% per annum to 12% per annum as a result of the
      claimed defaults.




15




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




On
      March
      28, 2007, Portside filed suit against the Company and certain named directors
      and officers, claiming the Company was in breach of its obligations under the
      Senior Secured Convertible Notes and that certain directors and officers had
      breached their fiduciary duties in connection with loans made by them to the
      Company and loans made by certain South Korean banks to the Company’s South
      Korean subsidiary. On June 28, 2007, SpatiaLight and Portside agreed to a
      Stipulation of Discontinuance, without prejudice, with regard to their
      respective claims and counterclaims. This Stipulation includes a Standstill
      Period of 30 days to allow for the opportunity for productive discussions to
      take place between the parties or their agents prior to either party filing
      any
      subsequent claims. To the date of this filing, no further action has been taken
      by Portside.





On
      June
      15, 2007, as a result of our stock no longer trading on the Nasdaq Capital
      Market, the Senior Secured Convertible Notes became redeemable on demand by
      the
      holders at 115% of the principal amount plus accrued interest and late charges.
      We have received redemption notices from Portside and Smithfield and have not
      redeemed either Note within the time required by the notice. As a result of
      our
      failure to redeem the Senior Secured Convertible Notes within five days after
      receipt of the redemption notice, the noteholders may withdraw any part of
      the
      redemption notice and elect to convert the withdrawn amount at a new conversion
      rate equal to the lowest weighted price of the common shares between June 15,
      2007 and the date of withdrawal. In early July 2007, Portside withdrew its
      redemption notice with respect to $100,000 and Smithfield withdrew its
      redemption notice with respect to $50,000. We have received a notice of
      conversion from each noteholder to convert the withdrawn amount at a conversion
      rate of $0.0505 per common share but do not presently have sufficient authorized
      common shares to convert the withdrawn amount. We
      have
      filed an amendment to our Certificate of Incorporation to effect a 50:1 reverse
      split of our existing common shares and provide additional authorized shares.
      The additional shares will be available for issuance when the reverse split
      is
      effective and we intend to convert the withdrawn amount at that time. We
      have
      accrued $1,500,000 in redemption premiums as of June 30, 2007 and have increased
      the rate at which we accrue and pay interest from 10% per annum to 12% per
      annum
      in accordance with the terms of the Senior Secured Convertible Notes, commencing
      on June 15, 2007.




16




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


Activity
      in notes payable for the six months ended June 30, 2007 is as
      follows:




**Debt
                  Principal:**
              
              **Balance
                  at December 31, 2006**
              
              **Addition or New
                  Discount**
              
              **(Payment) or
                  Discount Amortization**
              
              **Conversion to
                  Equity**
              
              **Balance at June
                  30, 2007**Argyle
                  note
              
              $
              1,188,000
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              1,188,000Senior
                  Secured Convertible Notes
              
              
              10,000,000
              
              
              -
              
              
              -
              
              
              -
              
              
              10,000,000Senior
                  Secured Convertible Notes beneficial conversion feature
              
              
              (47,860
              )
              
              -
              
              
              26,100
              
              
              -
              
              
              (21,760
              )Reimbursement
                  of investor's legal fees
              
              
              (30,556
              )
              
              -
              
              
              16,667
              
              
              -
              
              
              (13,889
              )Senior
                  Secured Convertible Notes AIR discount
              
              
              (325,498
              )
              
              -
              
              
              179,220
              
              
              -
              
              
              (146,278
              )Total
              
              $
              10,784,086
              
              $
              -
              
              $
              221,987
              
              $
              -
              
              $
              11,006,073**Interest:**Accrued
                  Argyle note 6%
              
              $
              -
              
              $
              35,641
              
              $
              -
              
              $
              (35,641
              )
              $
              -Argyle
                  note beneficial interest
              
              
              -
              
              
              542,926
              
              
              -
              
              
              (542,926
              )
              
              -Senior
                  Secured Convertible Notes 10% (A)
              
              
              84,353
              
              
              504,688
              
              
              (498,630
              )
              
              -
              
              
              90,411Total
              
              $
              84,353
              
              $
              1,083,255
              
              $
              (498,630
              )
              $
              (578,567
              )
              $
              90,411





(A)
            The
                interest rate was increased to 12% per annum commencing on June 15,
                2007.





The
      maturity date of the Senior Secured Convertible Notes is November 30, 2007.
      Additionally, the Notes are in default effective June 15, 2007, as a result
      of
      our stock no longer trading on the Nasdaq Capital Market. Consequently, we
      have
      classified the net balance of $9,818,073 related to these notes as a current
      liability in the condensed consolidated balance sheet at June 30, 2007. The
      $1,188,000 outstanding balance of the Argyle Notes continues to be classified
      as
      long-term debt at June 30, 2007 as they are due on December 31,
      2008.





Non-cash
      interest expense is as follows:




Six
                  months ended June 30,2007
              
              2006Amortization
                  of Senior Secured Convertible Notes
              
              $
              221,987
              
              $
              221,987Senior
                  Secured Convertible Notes 10% interest paid in common
                  stock
              
              
              -
              
              
              252,055Redemption
                  premium on the Senior Secured Convertible Notes
              
              
              1,500,000
              
              
              -Liquidated
                  damages on the October 2005, January 2006, September 2006 and November
                  2006 financings
              
              
              302,806
              
              
              437,817Beneficial
                  conversion privileges of interest on Argyle note
              
              
              542,926
              
              
              542,926Expense
                  associated with waiver agreements with February 2007 and November
                  2006
                  investors settled in stock
              
              
              1,300,194
              
              
              -Loss
                  associated with the Settlement Agreement
              
              
              1,627,146
              
              
              -Amortization
                  of prepaid financing costs
              
              
              31,716
              
              
              31,715Total
                  non-cash interest expense
              
              $
              5,526,775
              
              $
              1,486,500




17




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


Activity
      in notes payable for the three months ended June 30, 2007 is as
      follows:





**Debt
                Principal:**
            
            **Balance atMarch 31, 2007**
            
            **Addition orNew
                Discount**
            
            **(Payment) orDiscountAmortization**
            
            **Conversion toEquity**
            
            **Balance at June30,
                2007**Argyle
                note
            
            $
            1,188,000
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            1,188,000Senior
                Secured Convertible Notes
            
            
            10,000,000
            
            
            -
            
            
            -
            
            
            -
            
            
            10,000,000Senior
                Secured Convertible Notesbeneficial
                conversion feature
            
            
            (34,810
            )
            
            -
            
            
            13,050
            
            
            -
            
            
            (21,760
            )Reimbursement
                of investor's legal fees
            
            
            (22,223
            )
            
            -
            
            
            8,333
            
            
            -
            
            
            (13,889
            )Senior
                Secured Convertible NotesAIR
                discount
            
            
            (235,888
            )
            
            -
            
            
            89,610
            
            
            -
            
            
            (146,278
            )Total
            
            $
            10,895,079
            
            $
            -
            
            $
            110,993
            
            $
            -
            
            $
            11,006,073**Interest:**Accrued
                Argyle note 6%
            
            $
            -
            
            $
            17,820
            
            $
            -
            
            $
            (17,820
            )
            $
            -Argyle
                note beneficial interest
            
            
            -
            
            
            271,463
            
            
            -
            
            
            (271,463
            )
            
            -Senior
                Secured Convertible Notes 10% (A)
            
            
            84,932
            
            
            257,534
            
            
            (252,055
            )
            
            
            
            
            90,411Total
            
            $
            84,932
            
            $
            546,817
            
            $
            (252,055
            )
            $
            (289,283
            )
            $
            90,411





(A)  The
      interest rate was increased to 12% per annum commencing on June 15,
      2007.





Non-cash
      interest expense is as follows:





Three
                months ended June 30,2007
            
            2006Amortization
                of discounts on Senior Secured Convertible Notes
            
            $
            110,993
            
            $
            110,994Senior
                Secured Convertible Notes 10% interest paid in common
                stock
            
            
            -
            
            
            252,055Redemption
                premium on the Senior Secured Convertible Notes
            
            
            1,500,000
            
            
            -Liquidated
                damages on the October 2005, January 2006, September2006
                and November 2006 financings
            
            
            112,000
            
            
            (176,640
            )Beneficial
                conversion privileges of interest on Argyle note
            
            
            271,463
            
            
            271,463Loss
                associated with the Settlement Agreement
            
            
            1,627,146
            
            
            -Amortization
                of prepaid financing costs
            
            
            15,858
            
            
            15,857Total
                non-cash interest expense
            
            $
            3,637,460
            
            $
            473,729




**Note** **8.**   **Issuance
      of Securities**





Exercise
      of Stock Options and Warrants in the Six Months Ended June 30,
      2007





No
      stock
      options or warrants were exercised during the three or six months ended June
      30,
      2007.





Issuance
      of Shares, Stock Options and Warrants During the Six Months Ended June 30,
      2007





During
      the fourth quarter of 2006, we entered into an agreement to grant options to
      purchase 950,000 common shares to our former Executive Vice President of
      Strategic Planning for services under a consulting agreement. The options
      contain market conditions and were initially valued at $59,529 at date of grant
      using a binomial model. The estimated value was increased to $176,747 based
      on a
      revised assumption as to when the vested options would be exercised. The
      following assumptions were used for valuing this grant: no dividend yield,
      expected volatility of 81%, risk free rate of 4.74% and expected lives (derived
      service period) varying from 47 days to 278 days. This agreement to grant
      options was cancelled in April 2007. Stock-based compensation expense during
      the
      first half of 2007 includes $142,317 associated with this option grant
      agreement.




18




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


On
      January 8, 2007, we issued a fully vested option to purchase 25,000 of our
      common shares to a consultant for compensation for services provided pursuant
      to
      a service agreement. A value of $28,490 was assigned to the option using the
      Black-Scholes pricing model and the following assumptions: stock price $1.35,
      exercise price $1.35, historical volatility 81%, risk free interest rate 4.77%,
      dividend yield of zero and a contractual life of 10 years. This amount is
      included in stock-based compensation expense for the six month period ended
      June
      30, 2007.





On
      February 23, 2007, when the price of our common stock was $1.31, we sold to
      five
      institutional investors that had also participated in the November 2006
      financing (“November 2006 Financing”), an aggregate of 2,190,476 of our common
      shares at a purchase price of $1.05 per share (“February 2007 Financing”). In
      addition, we issued 600,000 common shares, valued at $786,000, as a fee to
      obtain a one-time waiver (“February 2007 Waiver”) of contractual prohibitions
      under the November 2006 Financing against offering shares of our common stock
      for less than $1.30 per share. We received aggregate proceeds of $2.3 million,
      before issuance costs, from the sale of these shares, which was used for working
      capital and other corporate purposes. We made the sale pursuant to our “shelf”
registration statement on Form S-3 (File No. 333-137100), which was declared
      effective by the SEC on February 14, 2007.





On
      March
      6, 2007, we entered into First Amendments amending the Registration Rights
      Agreements dated September 26, 2006 between the Company and each of Bluegrass
      Growth Fund, L.P. and Bluegrass Growth Fund, LTD. In exchange for the
      forgiveness of accrued liquidated damages under the Registration Rights
      Agreements in the amount of approximately $31,000, the rescission of a
      contingent obligation to issue 250,000 warrants to purchase common shares,
      and
      amending the Registration Rights Agreement filing date, the Company issued
      to
      Bluegrass Growth Fund, L.P. and Bluegrass Growth Fund, LTD. an aggregate of
      500,000 common shares. The common shares, valued at $545,000, were issued on
      March 6, 2007, when the price of our common stock was $1.09, and were issued
      pursuant to the Company’s Registration Statement on Form S-3 (File No.
      333-137100), which was declared effective by the SEC on February 14,
      2007.





On
      April
      26, 2007, we entered into an Equity Credit Agreement (the “Equity Credit
      Agreement”) with six institutional investors (“Investors”) that participated in
      the November 2006 and February 2007 Financings, under which we may elect to
      sell
      and the Investors are required to purchase from time to time our common shares,
      having an aggregate market value of $15,400,000 over a period of eighteen
      months. The first $3,700,000 in common shares sold by us pursuant to the Equity
      Credit Agreement will be priced at 100% of the closing bid price on the date
      of
      sale. The balance of the common shares may be sold by us under the Equity Credit
      Agreement only after the approval of our stockholders, and will be priced at
      95%
      of the closing bid price on the date of sale. On July 13, 2007, our stockholders
      approved the sale of the additional shares. As of June 30, 2007 we have elected
      to sell and the Investors have purchased 16,711,495 common shares with a value
      of $2,100,210 under this Equity Credit Agreement.




19




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


In
      connection with the Equity Credit Agreement, we also entered into a Waiver,
      Rescission and Settlement Agreement effective as of April 24, 2007 (the
“Settlement Agreement”) with the Investors under which the Investors (i)
      released disputed claims under the November 2006 Financing Securities Purchase
      Agreement and Registration Rights Agreement, the February 2007 Financing
      Securities Purchase Agreement and Registration Rights Agreement, and the
      February 2007 Waiver described above; (ii) returned for cancellation warrants
      to
      purchase 4,800,000 common shares that were issued in the November 2006
      Financing; (iii) cancelled the future financings restriction under which we
      could not sell common shares for less than $1.30 per share without the
      Investors’ consent; and (iv) entered into an Escrow Agreement pursuant to which
      we will issue in escrow, from time to time, an unspecified number of common
      shares, and the Investors will deliver to escrow 4,002,307 common shares
      previously issued pursuant to the November 2006 Financing and the February
      2007
      Financing. Under the terms of the Settlement Agreement, the Investors’ shares
      and shares we contribute to the escrow account will be periodically removed
      from
      escrow and sold, with the sales proceeds provided to the Investors, until they
      receive a total of $4,347,147. We recorded a settlement liability in the amount
      of $4,347,147 based on the Investors' gross investment in the November 2006
      and
      February 2007 financings, in aggregate $5.3 million, plus a one-time commitment
      fee to the Investors of $185,000 as consideration for the $15.4 million equity
      line of credit, less proceeds previously received by the Investors from the
      sale
      of their common shares. We recorded a $1.627 million loss on the settlement
      as
      part of non-cash interest expense in the three month period ended June 30,
      2007.
      The settlement loss was calculated by reducing the $4.3 million settlement
      liability to the Investors by: 1) the fair value of the warrants returned for
      cancellation of $602,055, recorded as a reduction of additional paid-in capital;
      2) the fair market value of the 4,002,307 common shares placed in escrow by
      the
      Investors, or $1.64 million, recorded as treasury stock; 3) the reversal of
      a
      $292,000 accrued liability for liquidated damages, waived under the Settlement
      Agreement; and 4) the $185,000 prepaid financing commitment fee for the Equity
      Credit Agreement. The fair value of the warrants to purchase 4,800,000 common
      shares was calculated at $602,055 at April 24, 2007 using the Black-Scholes
      option pricing model, using the following assumptions: stock price $0.34,
      exercise price $1.75, volatility 86%, risk free interest rate 4.58%, remaining
      contractual life 4.6 years and dividend yield of zero. At June 30, 2007,
      $837,710 remained as the settlement liability reflecting the issuance and sale
      by the Investors of 22,580,508 shares of our common stock pursuant to the
      Settlement Agreement.





Any
      new
      securities we issue under either the Equity Credit Agreement or the Settlement
      Agreement are registered pursuant to our Registration Statement on Form S-3
      (File No. 333-137100), which was declared effective by the SEC on February
      14,
      2007.





On
      June
      15, 2007, trading in our common stock no longer occurred on the Nasdaq Capital
      Market as a result of the review by the Nasdaq Listing Qualifications Panel
      and
      their determination that we did not meet the minimum aggregate common stock
      value necessary to continue trading on the Nasdaq Stock Market. Our securities
      are quoted on the Over-the-Counter Bulletin Board under “HDTV”.




20




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


Stock-based
      compensation, included in selling, general and administrative expenses, is
      as
      follows:





Three
                months ended June 30,
            
            Six
                months ended June 30,2007
            
            2006
            
            2007
            
            2006Options
                granted to employees and directors
            
            $
            182,778
            
            $
            976,156
            
            $
            291,946
            
            $
            1,644,993Options
                issued to consultants for services
            
            
            2,988
            
            
            -
            
            
            170,807
            
            
            -$
            185,766
            
            $
            976,156
            
            $
            462,753
            
            $
            1,644,993





**Note
      9.**   **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 condensed consolidated financial
      statements of operations. Therefore, we have determined that we operate in
      a
      single business segment. All of our assets are located at our facility in the
      United States at June 30, 2007, except for the following:





South
                KoreaCash
            
            $
            34,896Prepaid
                expenses
            
            
            100,836Deposits
            
            
            43,886Building
                and leasehold improvements, net
            
            
            3,032,317Machinery
                and manufacturing equipment, net
            
            
            728,422Office
                furniture and fixtures, net
            
            
            109,701Other
                equipment and instruments, net
            
            
            635,718Inventory,
                net
            
            
            257,012Total
            
            $
            4,942,788





The
      following table summarizes our product revenue percentages for the six months
      ended June 30, 2007 and 2006:





Six
                months ended June 30,2007
            
            2006LCoS
                (T-3) sets
            
            
            100
            %
            
            88
            %Other
                (primarily supporting electronics)
            
            
            -
            
            
            12
            %Total
            
            
            100
            %
            
            100
            %





Of
      our
      total revenue in 2007, 90% was derived from the sales of LCoS Sets to LGE,
      a
      customer located in South Korea. For the six months ended June 30, 2006, sales
      to LGE comprised 89% of our total sales, and 100% of our accounts receivable
      balance at June 30, 2006.




21




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


**Note** **10.** **Inventory,
      net**





Inventory
      consisted of the following as of June 30, 2007 and December 31,
      2006:





June
                30,
            
            December
                31,2007
            
            2006Raw
                materials
            
            $
            489,286
            
            $
            531,114Work-in-progress
            
            
            19,678
            
            
            26,088Finished
                goods
            
            
            160,181
            
            
            161,285669,145
            
            
            718,487Inventory
                reserve
            
            
            (389,493
            )
            
            (295,412
            )Total
                inventory, net
            
            $
            279,652
            
            $
            423,075





**Note
      11.** **Income
      taxes**





We
      adopted the provisions of FASB Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes – an Interpretation
      of FASB Statement No. 109* ”,
      or FIN
      48, on January 1, 2007.




We
      file
      income tax returns in the U.S. federal jurisdiction and various state
      jurisdictions. We are subject to U.S. federal or state income tax examinations
      by tax authorities for all years in which we reported net operating losses
      that
      are being carried forward for tax purposes. We do not believe there will be
      any
      material changes in our unrecognized tax positions over the next 12 months.





Interest
      recognized, to the extent applicable, is classified in the financial statements
      as interest expense. Penalties recognized, to the extent applicable, are
      reported in other income (expense). As of the date of adoption of FIN 48, we
      did
      not have any accrued interest or penalties associated with any unrecognized
      tax
      benefits, nor was any interest or penalty expense been recognized for the six
      month period ended June 30, 2007.





In
      addition, we have net operating loss carryforwards (“NOLs”) that may be subject
      to substantial annual limitations due to ownership change limitations provided
      by the Internal Revenue Code and similar state provisions. We have not evaluated
      whether there are any changes in ownership that would limit the future use
      of
      our NOLs.





**Note** **12.** **Recent
      Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes — an Interpretation of FASB Statement
      No. 109* (“FIN 48”),
      which provides clarification related to the process associated with accounting
      for uncertain tax positions recognized in financial statements. FIN 48
      prescribes a more-likely-than-not threshold for financial statement recognition
      and measurement of a tax position taken, or expected to be taken, in a tax
      return. FIN 48 also provides guidance related to, among other things,
      classification, accounting for interest and penalties associated with tax
      positions, and disclosure requirements. We adopted FIN 48 on
      January 1, 2007 and the impact on our financial statements was not
      material.




22




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


In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      No. 157, “ *Fair
      Value Measurements* ”
(“FAS
      157”). This statement defines fair value, establishes a framework for measuring
      fair value under generally accepted accounting principles (GAAP), and expands
      disclosures about fair value measurements. SFAS No. 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The transition adjustment, which
      is measured as the difference between the carrying amount and the fair value
      of
      those financial instruments at the date this statement is initially applied,
      is
      recognized as a cumulative effect adjustment to the opening balance of retained
      earnings for the fiscal year in which this statement is initially applied.
      The
      provisions of SFAS No. 157 are effective for us beginning January 1, 2008.
      We
      are currently evaluating the impact of adopting SFAS No. 157 on our consolidated
      financial statements.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities* (“SFAS No. 159”).
      SFAS No. 159 expands opportunities to use fair value measurement in
      financial reporting and permits entities to choose to measure many financial
      instruments and certain other items at fair value. SFAS No. 159 is
      effective for fiscal years beginning after November 15, 2007. We have not
      decided if we will choose to measure any eligible financial assets and
      liabilities at fair value.





**13.** **Commitments
      and Contingencies**





*Lease
      Commitments*





In
      September 2004, we entered into a 50 year term lease with the Gyeongnam
      provincial government for 8.3 acres of undeveloped land in Jinsa, Gyeongnam
      province in South Korea. We have received a 100% land lease payment exemption
      because the land has been designated a “free economic zone” by the South Korean
      national government and the South Korean government also certified us as a
“high
      technology” company. Under our agreement with the Gyeongnam provincial
      government we could lose our land lease payment exemption in the event that
      we
      lose our “high technology” certification, which could increase the costs of
      operating the facility and negatively impact our business. Additionally, if
      we
      were to lose the lease, we might be required to donate the building to the
      South
      Korean government.





*Alleged
      Events of Default on Senior Secured Convertible Notes*





Certain
      allegations of events of default related to the November 2004 Financing have
      been communicated to us as more fully described in Note 7.




23




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


*Guarantees
      and Indemnifications*




As
      permitted under New York law and in accordance with our Bylaws, we indemnify
      our
      officers and directors for certain events or occurrences while the officer
      or
      director is or was serving at the Company’s request in such capacity. The term
      of the indemnification period is for the officer’s or director’s lifetime. The
      maximum amount of potential future indemnification is unlimited. We are unable
      to estimate the fair value of these indemnification agreements and accordingly,
      we have not recorded any liabilities for these agreements as of June 30, 2007.





*Other*





Don
      Suh,
      our former Chief Executive Officer, has filed a claim against the Company
      alleging the Company terminated his employment in violation of the
      Sarbanes-Oxley Whistleblower laws and the Corporate and Criminal Fraud
      Accountability Act of 2002 and is seeking damages of at least $250,000 plus
      a
      year’s worth of benefits. The Company does not believe that his
      assertions have merit but cannot predict the ultimate outcome of any potential
      litigation.





On
      March
      28, 2007, Portside Growth & Opportunity Fund, holders of $4,500,000 of the
      Senior Secured Convertible Notes, filed suit against the Company and certain
      named directors and officers, claiming the Company was in breach of its
      obligations under the Senior Secured Convertible Notes and that certain
      directors and officers had breached their fiduciary duties in connection with
      loans made by them to the Company and loans made by certain South Korean banks
      to the Company’s South Korean subsidiary. On June 28, 2007, SpatiaLight and
      Portside agreed to a Stipulation of Discontinuance, without prejudice, with
      regard to their respective claims and counterclaims. This Stipulation includes
      a
      Standstill Period of 30 days to allow for the opportunity for productive
      discussions to take place between the parties or their agents prior to either
      party filing any subsequent claims. To the date of this filing, no further
      action has been taken by Portside.





On
      June
      15, 2007, as a result of our stock no longer trading on the Nasdaq Capital
      Market, the Senior Secured Convertible Notes issued in the November 2004
      Financing became redeemable on demand by the holders at 115% of the principal
      amount plus accrued interest and late charges. We have received redemption
      notices from two holders of the Senior Securied Convertible Notes. We have
      accrued $1,500,000 in redemption premiums as of June 30, 2007 and the rate
      at
      which we accrue and pay interest increased on June 15, 2007 from 10% per annum
      to 12% per annum in accordance with the terms of the Senior Secured Convertible
      Notes.





We
      are a
      party to other routine claims and lawsuits from time to time in the ordinary
      course of business. While the outcome of such matters cannot be predicted with
      certainty, we believe that the resolution of any such matters individually
      or in
      the aggregate will not have a material adverse effect on our business, financial
      condition or results of operations.


*U.S.
        Securities and Exchange Commission Investigations*
 As
          previously reported, we failed to obtain authorization from BDO Seidman
          LLP
          before filing their consent to certain registration statements filed in
          2005,
          incorporating their report on our financial statements for the fiscal years
          ended December 31, 2002 and 2003 as an exhibit to these certain registration
          statements. We received the requisite authorized consents from BDO Seidman,
          LLP
          to incorporate by reference their report on the consolidated financial
          statements into the registration statements when initially filed and in
          previous
          amendments thereto and BDO Seidman, LLP has not withdrawn these previous
          consents. Argyle Capital Management Corporation, a company controlled by
          our
          former Chief Executive Officer, President, Treasurer and Secretary, failed
          to
          report the sale of certain securities as required by Section 16 of the
          Securities Exchange Act of 1934. There were short swing profits associated
          with
          these sales and as previously reported, Mr. Olins has paid to the Company
          the
          gains he realized on the transactions totaling $22,273. Over the period
          of 1999
          through early 2005 the Company paid interest on a Convertible Note held
          by
          Argyle Capital Management through the issuance of shares in a manner prescribed
          by the Note. Over the period of 2000 to early 2005, these shares were issued
          free of legend and without restriction on the basis of an opinion of counsel
          provided by the Company’s corporate counsel at that time. We have received a
          Wells Notice dated May 25, 2007 from the SEC and have been advised that
          the SEC
          intends to pursue civil remedies against the Company in connection with
          the
          filing of the unauthorized BDO Seidman, LLP consents and our issuance of
          securities without legend or restrictions to Argyle for payment of interest
          on
          the Argyle Notes, specifically focusing on our prepayment of interest in
          late
          2004 and early 2005. We cannot predict the eventual outcome of this
          investigation, nor can a reasonable estimate of the costs that might result
          from
          the SEC’s investigation be made. However, the Company at this time does not
          believe the SEC to be seeking financial penalties against the Company.
          In the
          event of an adverse outcome, our business as well as our future results
          of
          operations, financial position and/ or cash flows could be materially affected.
          We have been cooperating fully with the SEC Staff with respect to these
          matters.


24




*Other
      matters*





Both
      registration statements that included the unauthorized BDO Seidman, LLP consents
      were used to sell common shares after the Staff of the SEC declared the
      registration statements effective. It is conceivable that there may be
      litigation against us or our officers or directors under Section 11 of the
      Securities Act. Although we do not believe that the filing of an invalid consent
      constitutes a materially misleading statement or an omission to disclose a
      material fact within the meaning of Section 11 of the Securities Act, a contrary
      determination could result in a liability for us.





At
      present, we are unable to ascertain the exact amount of damages, if any, to
      which we could potentially be subject under a Section 11 claim instituted by
      any
      persons who directly purchased shares pursuant to those registration statements.
      Furthermore, at this date, we cannot ascertain the amount of damages, if any,
      for which we could be liable for claims instituted by any subsequent purchasers
      who could trace the shares purchased by them to those registration statements.
      In August 2005, we sold 500,000 common shares to three institutional purchasers
      for $5.40 per share pursuant to the “shelf” registration statement referenced
      herein. Each of those investors has since represented to us in writing, in
      connection with a separate transaction, that they have disposed of all of those
      shares. One of those institutional investors has represented to us that it
      sold
      those shares at a sale price at or higher than its purchase price from us.
      We
      believe, based upon discussions with the other two investors, that they sold
      their shares at a sale price of not lower than $4.25 per share. Therefore,
      we
      believe that our maximum damages pursuant to Section 11 claims from direct
      purchasers, which we would fully contest, would be $391,000, or the difference
      between the two investor’s purchase price and lowest believed resale price,
      multiplied by the 340,000 shares that they purchased and then
      resold.





In
      addition to any damage claims, which may be material to our financial condition,
      any lawsuit alleging securities law violations could require us to expend
      significant financial and managerial resources.





**Note
      14.** **Subsequent
      Events**





*Conversion
      of Senior Secured Convertible Notes*





We
      received notice on July 12, 2007 from Portside that it was withdrawing its
      redemption notice with respect to $100,000 of the Senior Secured Convertible
      Notes and electing to convert such amount into our common shares. We received
      notice on July 12, 2007 from Smithfield that it was withdrawing its redemption
      notice with respect to $50,000 of the Senior Secured Convertible Notes and
      electing to convert such amount into our common shares. Under the terms of
      the
      Senior Secured Convertible Notes, the holders may withdraw a redemption notice
      and the conversion rate with respect to such withdrawn amount is reset from
      $9.62 per share to the lowest weighted average price per common share between
      the date of the redemption notice and the date of the withdrawal. The conversion
      rate for both Portside and Smithfield is $0.0505 per share.





*Reverse
      Stock Split and Increase in Authorized Shares*





Pursuant
        to the recommendation of our Board of Directors and approval of our stockholders
        at the Annual Shareholders Meeting on July 13, 2007, on August 8, 2007, we
        filed
        an Amendment to our Amended and Restated Certificate of Incorporation that
        combined 50 existing common shares into one new common share (a 1-for-50
        reverse
        stock split) and increased the number of common shares we are authorized
        to
        issue after such combination to 15 million. We expect that the 1-for-50 reverse
        split will be effective on August 24, 2007.


25




**SPATIALIGHT,
          INC.**
 Notes
          to
          Condensed Consolidated Financial Statements (Unaudited)
  The
        reverse stock split will require retroactive restatement of all historical
        share
        and per share data when it becomes effective.
  All
        references to the number of shares and per share amounts in the accompanying
        condensed consolidated financial statements are presented on a pre-split
        basis.





Our
      historical earnings per share on a proforma basis, assuming the reverse stock
      split occurred on January 1, 2006, would be as follows:





Three
                months ended June 30,
            
            Six
                months ended June 30,2007
            
            2006
            
            2007
            
            2006Net
                loss per share - basic and diluted
            
            $
            (5.61
            )
            $
            (6.61
            )
            $
            (11.94
            )
            $
            (13.89
            )




26


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





*This
      Form 10-Q/A 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 Part II Item 1A and
      those
      discussed in the Company’s Annual Report on Form 10-K as filed with the U.S.
      Securities and Exchange Commission on March 16, 2007 and the Company’s Quarterly
      Report on Form 10-Q, as filed with the SEC on May 10. 2007. 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 June 30, 2007, and our results of operations for the three
      and
      six months ended June 30, 2007 and 2006. The following should be read in
      conjunction with our unaudited condensed consolidated financial statements
      and
      related notes appearing elsewhere herein and assumes that the reader has read
      the more detailed information found in our 2006 Annual Report on Form 10-K
      filed
      with the SEC on March 16, 2007.





OVERVIEW





We
      are in
      the business of manufacturing high-resolution liquid crystal on silicon (“LCoS”)
      microdisplays. Our current and prospective customers, almost all of whom are
      located primarily in Asia, include manufacturers of near-to-eye display systems
      such as head mounted displays (“HMDs”), and small projection displays
      (microprojectors or nanoprojectors), targeted for use with mobile electronics
      projects, in addition to makers of front and rear projection based televisions
      and monitors.




We
      are
      currently focused on manufacturing one core product, our T-3 LCoS Set,
      consisting of three of our proprietary SpatiaLight imagEngineTM LCoS
      microdisplays with a 1920 pixels by 1080 pixels configuration. Our previously
      offered product, the T-1 LCoS Set had lower resolution with a 1280 pixels by
      960
      pixels configuration. LCoS displays 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. We are
      currently focusing on manufacturing our T-3 LCoS Sets because we believe that
      the market demand for the higher resolution product will be significantly
      greater and the higher resolution product will command a higher price. We are
      developing a new product, designated the T-3S LCoS Set, which will maintain
      the
      high resolution of 1920 pixels by 1080 pixels and enable single panel operation
      for products such as HMDs and microprojectors.





We
      are
      also working with other manufacturers to develop and market a light engine
      incorporating our microdisplays and a solid state light source. These solid
      state light sources (LED and laser) are attractive to both consumer and
      commercial display makers because of their longer life compared to high pressure
      mercury arc lamps. The lower angular divergence associated with laser sources
      also facilitate much thinner cabinet designs.




27




*Status
      of Business with LG Electronics, Inc.*




In
      2005
      and 2006, the majority of our product deliveries, which were in small
      quantities, were made to LGE. Since the third quarter of 2006, we have been
      in a
      position to supply LGE’s requirements with quality product meeting all agreed
      upon specifications .
      We do
      not, however, expect significant future sales to LGE and are negotiating
      with LGE for termination compensation under our LCoS Supply Agreement, although
      no assurance can be given that we will receive any compensation from
      LGE .
      The
      decision by LGE to cease accepting deliveries of the T-3 Sets significantly
      reduces our expected future sales and results of operations and our substantial
      dependence on a single customer resulted in significant risks as more fully
      described under Item 1A. Risk Factors.




*Status
      of Business in China*




We
      have
      provided sample products to Jiangxi Greatsource Display Tech Co., Ltd. (“KHD”),
      a Chinese manufacturer of LCoS light engines and televisions. KHD demonstrated
      an 85” commercial product employing our imagers at the January 2007 Consumer and
      Electronics show (“CES”). At this time, we do not have any purchase orders from
      KHD.





*Other
      Business Development*




We
      have
      signed a Joint Marketing Agreement with Foreal Spectrum, Inc. to jointly offer
      a
      light engine developed by Foreal using their light source and our T-3 LCoS
      Sets.
      We estimate that full production volumes for customers targeted for these
      products will be approximately 20,000 sets per month but have not entered into
      a
      commercial supply agreement at this time, nor can we provide assurance with
      the
      regard to the level of future purchases.





We
      have
      entered a Memorandum of Understanding with Deocom Co., Ltd. of South Korea
      relating to the development and manufacture of HMDs using
      our LCoS imager in full High Definition (“HD”) mode. We have also signed a
      Purchase Agreement with and received the first purchase order from Deocom to
      supply LCoS imagers for use in HMDs. Initial supply quantities are limited
      to
      prototype and low volume production levels. The Purchase Agreement anticipates
      this market to grow as HMDs are adopted by the video game and entertainment
      industries.





We
      have
      also signed a Memorandum of Understanding with SI InfoComm, Inc. and SCRAM
      Technologies for the joint development of a micro-projector, a new category
      of
      product targeted at mobile electronics driven applications. Demonstrations
      of a
      microprojector employing our imager were made by SCRAM in June of
      2007.





*Manufacturing
      of LCoS Sets*




We
      completed construction of our South Korean manufacturing facility in January
      2005. The facility began producing products for commercial sale in limited
      quantities in the second quarter of 2005 and is designed with the capacity,
      on
      full employment, to produce up to 28,000 LCoS Sets per month. The facility
      has
      been specially designed for expansion to a capacity of 120,000 LCoS Sets per
      month in several expansion phases.





During
      2006, we moved our entire manufacturing from California to South Korea. As
      part
      of the transition process, we experienced some manufacturing problems as the
      line was set up and restarted in South Korea, all of which have been resolved.
      We believe that the combination of a new facility designed to our specifications
      and highly qualified personnel provides us with more exacting controls over
      the
      external variables that can impact our manufacturing process. Since the third
      quarter of 2006, we have been in position to manufacture commercial quantities
      of high quality product according to customer specifications.




28




*Business
      Strategy*




In
      reviewing the risk factors for our business, it is clear that there are some
      overriding concerns and issues. One of these is the high level of focus and
      reliance in recent periods on one customer, LGE. In addition, flat panel
      displays continue to make progress in the market relative to microdisplay-based
      rear projection televisions (“RPTV’s”). Another factor is that our product focus
      has been on the RPTV application. While we certainly continue to work for
      success with the RPTV product, we also need to manage the risks inherent in
      this
      situation.




For
      these
      reasons, we have taken the following initiatives:




·
            Engage
                in new product development for applications other than RPTV (including
                Near-To-Eye (NTE) displays such as HMDs and micro-projector
                products).


·
            Improve
                the competitiveness of LCoS based microdisplay products by working
                with
                firms involved in LED and laser diode light sources (instead of the
                standard high pressure mercury arc lamp light
                source).


·
            Find
                additional customers for the RPTV product





We
      are
      currently offering one core product, our T-3 LCoS Set, with a 1920 pixels by
      1080 pixels configuration, to our current and prospective customers. Our LCoS
      Set is comprised of three of our proprietary SpatiaLight imagEngineTM 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 commonly
      referred to as LCoS, liquid crystal displays (“LCD”), active matrix liquid
      crystal displays and spatial light modulators. For applications such as large
      screen RPTV, the LCoS cell (“T3P”) is designed for a three panel configuration
      for maximum brightness. We are working to find a solution using the LGE light
      engine platform that will allow other customers quick market entry. We are
      focusing on manufacturing the T-3 model of our LCoS Sets (as opposed to our
      old
      T-1 LCoS Set with a resolution of 1280 pixels by 960 pixels) for projection
      TV
      applications because we believe that the market demand for the higher resolution
      product will be significantly greater. When a new smaller diagonal
      product (T4P) which will still maintain the high resolution of 1920 pixels
      by
      1080 pixels completes development, we will introduce that to allow lower price
      points in conjunction with smaller screen sizes (50” to 60” for T4P as opposed
      to 60” + for T3P).




We
      are
      also working cooperatively with firms such as Foreal Spectrum (Foreal) of San
      Jose, California, to jointly provide a solid state light source based LCoS
      light
      engine solution. The long lifetime of these solid state light sources is
      attractive to both the consumer and commercial display maker when compared
      to
      the standard high pressure mercury arc lamp. In the case of laser diode sources,
      the low angular divergence of the light source facilitates the optical system
      design enabling thin cabinets with form factors approaching those of plasma
      TV’s
      at much lower weight.




We
      have
      recently signed a Joint Market Agreement with Foreal for the LCoS/ LED based
      light engine developed by Foreal. Full production volumes amongst the four
      customers targeted by the two companies are expected to be in the vicinity
      of
      twenty thousand sets per month, although no assurance can be given that these
      production levels will be reached.




29




We
      have
      previously announced a Memorandum of Understanding (MOU) working with Deocom
      of
      South Korea on head mounted displays using initially our T-3 imager in a full
      HD
      mode. We expect our cooperative efforts to lead to some product sales in the
      short term and a growing commercial and consumer market. We have also recently
      signed a Purchase Agreement with Deocom to supply LCoS imagers for use in HMDs.
      This agreement anticipates immediate shipments of samples for prototype and
      pre-production runs, followed by mass production later this year. We expect
      this
      market to grow significantly over time.





We
      have
      also announced an MOU between SpatiaLight, SI InfoComm and SCRAM Technologies
      for the joint development of a micro-projector, a new category of product
      targeted at mobile electronics driven applications.




We
      believe we have a solid core technology that can be used to meet the needs
      of a
      number of large and potentially high growth market segments. We believe that
      the
      manufacturing competence we have established at SpatiaLight Korea gives us
      a
      base from which to supply our current and future customers. To help us match
      these technical possibilities and capabilities successfully with market needs,
      we have established a new business and product development function operating
      out of Seoul, South Korea, that has already paid dividends in some of the
      agreements mentioned above.





*Contingent
      Liability Relating to Senior Secured Convertible Debt
      Financing*





On
      November 30, 2004, we completed a non-brokered private placement of $10 million
      in our Senior Secured Convertible Notes. Under the terms of the agreements
      entered in connection with the sale of our Senior Secured Convertible Notes,
      we
      were required to file and maintain the effectiveness of registration statement
      relating to the resale of common shares issuable upon conversion. The required
      registration statement (Reg. No. 333-122391) was filed on January 31, 2005,
      and
      became effective on July 29, 2005. However, as a result of our failure to obtain
      authorization from our former auditors, BDO Seidman, LLP, to file their consent
      to incorporate their report into certain pre-effective amendments to the
      registration statement, we notified the holders of the Senior Secured
      Convertible Notes that sales of our common shares under the registration
      statement could result in potential liability until an amendment could be filed
      correcting the lack of authorization. Portside Growth & Opportunity Fund,
      the holder of $4,500,000 of the Senior Secured Convertible Notes, filed a claim
      for liquidated damages in the amount of $307,000 on the basis that the
      registration statement was not effective and sales of our common shares could
      not be made from August 2005 until February 2006, when an amendment correcting
      the lack of authorization by BDO Seidman, LLP was filed.





Portside
      Growth & Opportunity Fund has also claimed additional events of default
      under the Senior Secured Convertible Notes relating to (i) an alleged failure
      to
      make an interest payment due in November 2005 on a timely basis; (ii) an
      incurrence of prohibited indebtedness to our former officers and/or directors
      of
      the Company; (iii) an incurrence of prohibited indebtedness by our South Korean
      subsidiary to certain banks in South Korea; (iv) a grant of a security interest
      by our South Korean subsidiary in certain assets located in South Korea; and
      (v)
      a repayment by us of indebtedness to our officers or directors and by our South
      Korean subsidiary of indebtedness under bank credit facilities. Smithfield
      Fiduciary LLC, another noteholder, that holds $4.5 million of the Senior Secured
      Convertible Notes, joined in the claim that a default occurred as a result
      of
      the failure to make the November 2005 interest payment in a timely fashion.
      These notices call for us to redeem $9.0 million in the aggregate principal
      amount of our Senior Secured Convertible Notes and to pay a redemption premium
      of $675,000 to each of these noteholders. Furthermore, the noteholders claim
      that the interest rate on the Senior Secured Convertible Notes has increased
      from 10% per annum to 12% per annum as a result of the claimed
      defaults.




30




On
      March
      28, 2007, Portside Growth & Opportunity Fund, holders of $4,500,000 of the
      Senior Secured Convertible Notes, filed suit against the Company and certain
      named directors and officers, claiming the Company was in breach of its
      obligations under the Senior Secured Convertible Notes and that certain
      directors and officers had breached their fiduciary duties in connection with
      loans they made to the Company and loans made by certain South Korean banks
      to
      the Company’s South Korean subsidiary. On June 28, 2007, SpatiaLight and
      Portside agreed to a Stipulation of Discontinuance, without prejudice, with
      regard to their respective claims and counterclaims. This Stipulation includes
      a
      Standstill Period of 30 days to allow for the opportunity for productive
      discussions to take place between the parties or their agents prior to either
      party filing any subsequent claims. To the date of this filing, no further
      action has been taken by Portside.





On
      June
      15, 2007, as a result of our stock no longer trading on the Nasdaq Capital
      Market, the Senior Secured Convertible Notes were in default under the Senior
      Secured Convertible Note agreement and became redeemable on demand by the
      holders at 115% of the principal amount plus accrued interest and late charges.
      We have received a notice of redemption from Portside and Smithfield calling
      for
      us to redeem their $9 million in the aggregate principal amount, plus accrued
      interest and late charges, but have not yet redeemed any of the Senior Secured
      Convertible Notes. In early July 2007, Portside elected to withdraw its notice
      of redemption with respect to $100,000 and Smithfield elected to withdraw its
      notice of redemption with respect to $50,000. Under the terms of the Senior
      Secured Convertible Notes, the conversion rate with respect to the withdrawn
      amounts has been reset from $9.72 per share to $0.0505 per share. However,
      we do
      not presently have sufficient authorized and unissued common shares to convert
      the withdrawn amounts. We have filed an amendment to our Certificate of
      Incorporation increasing the authorized number of common shares and intend
      to
      convert the withdrawn amounts when that amendment is effective. The noteholders
      may withdraw their redemption notices with respect to additional amounts in
      the
      future and the conversion rate with respect to such withdrawn amounts will
      be
      reset to the lowest weighted average price for common shares between June 15,
      2007 and the date of such withdrawal. We
      have
      accrued $1,500,000 in redemption premiums as of June 30, 2007 and have increased
      the rate at which we accrue and pay interest from 10% per annum to 12% per
      annum
      in accordance with the terms of the Senior Secured Convertible Notes, commencing
      on June 15, 2007.





*Contingent
      Liability Relating to Registration of Securities*





We
      failed
      to obtain an express authorization from BDO Seidman, LLP to file their consent
      to incorporate their report on our consolidated financial statements for the
      years ended December 31, 2002 and December 31, 2003 in Pre-effective Amendment
      Nos. 5 and 6 to our registration statement on Form S-3 (File No. 333-122391)
      and
      in Pre-effective Amendment Nos. 3 and 4 to our registration statement on Form
      S-3 (File No. 333-122392). We did receive the requisite authorization from
      BDO
      Seidman, LLP to incorporate by reference their report on the consolidated
      financial statements into the registration statements when initially filed
      and
      in earlier amendments to the registration statements and BDO Seidman, LLP has
      not withdrawn these previous consents.




31




Both
      of
      the registration statements containing the unauthorized BDO Seidman, LLP
      consents were declared effective in July 2005. In August 2005, we filed
      Post-effective Amendments Number 1 to both of these registration statements
      (those post-effective amendments were subsequently withdrawn and replaced by
      additional post-effective amendments), which disclosed the filing of the
      unauthorized consents. Because both registration statements were used to sell
      common shares after the SEC declared the registration statements effective,
      it
      is conceivable that there may be litigation against us or our officers or
      directors under Section 11 of the Securities Act. Although we do not believe
      that the filing of an invalid consent constitutes a materially misleading
      statement or an omission to disclose a material fact within the meaning of
      Section 11 of the Securities Act, a contrary determination could result in
      a
      liability for us. We are unable to ascertain the exact amount of damages, if
      any, to which we could be subject under a Section 11 claim instituted by any
      persons who directly purchased shares pursuant to those registration statements.
      Furthermore, we cannot ascertain the amount of damages, if any, for which we
      could be liable for claims instituted by any subsequent purchasers who could
      trace the shares purchased by them to those registration statements. In addition
      to any damage claims, which may be material to our financial condition, any
      lawsuit alleging securities law violations could require us to expend
      significant financial and managerial resources.





*SEC
      Investigations*





We
      received a Wells Notice from the SEC dated May 25, 2007 and have been advised
      by
      the Staff of the SEC that the Staff intends to recommend civil remedies,
      including an injunction against future violations of securities laws, in
      connection with our filing of the unauthorized BDO Seidman, LLP consents and
      our
      issuance of securities without legend or restrictions to Argyle for payment
      of
      interest on the Argyle Notes, specifically focusing on our prepayment of
      interest in late 2004 and early 2005. We have received and responded to a
      request from the Staff for all information relating to transactions in our
      securities by Mr. Olins and the entity he controls. We have been cooperating
      with the Staff with respect to this matter. We cannot determine whether we
      or
      our management will be adversely affected by any remedies which may be imposed
      by the SEC.





LIQUIDITY
      AND CAPITAL RESOURCES




As
      of
      June 30, 2007, we had approximately $202,000 in cash and cash equivalents,
      a
      decrease of approximately $18,000 from the December 31, 2006 balance of
      approximately $220,000. Our net working capital deficiency at June 30, 2007
      was
      approximately $15.7 million compared to approximately $12.9 million at December
      31, 2006.





Net
      cash
      used in operating activities totaled approximately $1.8 million and $3.5 million
      for the three months ended June 30, 2007 and 2006, respectively, and
      approximately $4.2 million and $7.7 million for the six months ended June 30,
      2007 and 2006, respectively. Cash used in operating activities decreased for
      the
      three and six month periods ended June 30, 2007 as compared to the same periods
      in 2006 primarily due to decreased operations due to financial
      constraints.





Net
      cash
      provided by investing activities totaled approximately $3,000 for the three
      months ended June 30, 2007 and used in investing activities approximately
      $88,000 for the three months ended June 30, 2006. Net cash used in investing
      activities totaled approximately $11,000 and $315,000 for the six months ended
      June 30, 2007 and 2006, respectively. Cash used in investing activities in
      2007
      and 2006 were primarily related to equipment purchases for use in our South
      Korean facility.





Net
      cash
      provided by financing activities in the three months ended June 30, 2007 and
      2006 was approximately $2.0 million and $2.7 million, respectively, and
      approximately $4.2 million and $8.5 million for the six months ended June 30,
      2007 and 2006, respectively. In the first quarter of 2007, cash was provided
      by
      the gross proceeds of approximately $2.3 million that we received from the
      sale
      of 2,190,476 of our common shares in February 2007. During the second quarter
      of
      2007, cash was primarily provided by the gross proceeds of approximately $2.1
      million that we received from the sale of 16,711,495 of our common shares under
      the Equity Credit Agreement entered into in April 2007 (see below). The funds
      from these financings were used to fund our operations for the first half of
      2007. In the first quarter of 2006, cash was primarily provided by the net
      proceeds of approximately $3.3 million that we received from the sale of
      1,300,000 of our common shares in mid-January 2006, at a purchase price of
      $2.62
      per share, and approximately $1.1 million that we received from the sale of
      500,000 shares sold on March 17, 2006, at a purchase price of $2.18 per share.
      We also borrowed approximately $1.4 million on our lines of credit with South
      Korean banks during the first quarter of 2006, which was repaid early in the
      second quarter of 2006. In the second quarter of 2006, cash was primarily
      provided by the net proceeds of approximately $2.4 million that we received
      from
      the sale of 750,000 of our common shares on April 7, 2006 at a purchase price
      of
      $3.26 per share and approximately $1.7 million that we received from the sale
      of
      601,000 of our common shares on June 6, 2006 at a purchase price of $2.80 per
      share.




32




On
      April
      26, 2007, we entered into an Equity Credit Agreement with six Investors that
      participated in the November 2006 and February 2007 financings, under which
      we
      may elect to sell and the Investors are required to purchase from time to time
      our common shares having an aggregate market value of $15,400,000 over a period
      of eighteen months. The first $3,700,000 in common shares sold by us pursuant
      to
      the Equity Credit Agreement will be priced at 100% of the closing bid price
      on
      the date of sale. The balance of the common shares may be sold under the Equity
      Credit Agreement will be priced at 95% of the closing bid price on the date
      of
      sale. We
      expect
      to meet our immediate cash needs and fund our immediate working capital
      requirements with the Equity Credit Agreement, cash payments from our customers;
      the exercises of stock options and warrants; and additional sales of our common
      shares.





In
      connection with the Equity Credit Agreement, we also entered into a Waiver,
      Rescission and Settlement Agreement effective as of April 24, 2007 (the
“Settlement Agreement”) with the Investors under which the Investors (i)
      released disputed claims under the November 2006 Financing Securities Purchase
      Agreement and Registration Rights Agreement, the February 2007 Financing
      Securities Purchase Agreement and Registration Rights Agreement, and the
      February 2007 Waiver; (ii) returned for cancellation warrants to purchase
      4,800,000 common shares that were issued in the November 2006 Financing; (iii)
      cancelled the future financings restriction under which we could not sell common
      shares less than $1.30 per share without the Investors’ consent, and (iv)
      entered into an Escrow Agreement pursuant to which we will issue in escrow,
      from time to time, an unspecified number of common shares, and the Investors
      will deliver to escrow 4,002,307 common shares previously issued pursuant to
      the
      November 2006 Financing and the February 2007 Financing. Under the terms of
      the
      Settlement Agreement, the Investors’ shares and the shares we contribute to the
      escrow account will be periodically removed from escrow and sold, with the
      sales
      proceeds provided to the Investors until they receive a total of $4,347,147.
      We
      recorded a settlement liability in the amount of $4,347,147 based on the
      Investors' gross investment in the November 2006 and February 2007 financings,
      in aggregate $5.3 million, plus a one-time commitment fee to the Investors
      of
      $185,000 as consideration for the $15.4 million equity line of credit, less
      proceeds previously received by the Investors from the sale of their common
      shares. We recorded a $1.627 million loss on the settlement as part of non-cash
      interest expense in the three month period ended June 30, 2007. The settlement
      loss was calculated by reducing the $4.3 million settlement liability to the
      Investors by: 1) the fair value of the warrants returned for cancellation of
      $602,055, recorded as a reduction of additional paid-in capital; 2) the fair
      market value of the 4,002,307 common shares placed in escrow by the Investors,
      or $1.64 million, recorded as treasury stock; 3) the reversal of a $292,000
      accrued liability for liquidated damages, waived under the Settlement Agreement;
      and 4) the $185,000 prepaid financing commitment fee for the Equity Credit
      Agreement. The fair value of the warrants to purchase 4,800,000 common shares
      was calculated at $602,055 at April 24, 2007 using the Black-Scholes option
      pricing model, using the following assumptions: stock price $0.34, exercise
      price $1.75, volatility 86%, risk free interest rate 4.58%, remaining
      contractual life 4.6 years and dividend yield of zero. At June 30, 2007,
      $837,710 remained as the settlement liability reflecting the issuance and sale
      by the Investors of 22,580,508 shares of our common stock.




33




RESULTS
      OF OPERATIONS





*Three
      months ended June 30, 2007 and 2006*





*Revenue* . ** We
      recognized revenue of approximately $3,000 and $59,000 during the quarters
      ended
      June 30, 2007 and 2006, respectively. Revenue in both periods was derived
      primarily from sales of LCoS Sets to LGE.





The
      following table summarizes our sales revenue by product for the second quarter
      2007 and 2006.





Three
                months ended June 30,2007
            
            2006LCoS
                (T-3) sets
            
            
            100
            %
            
            85
            %Other
                (primarily supporting electronics)
            
            
            -
            
            
            15
            %Total
            
            
            100
            %
            
            100
            %





Revenue
      from one customer, LGE, accounted for 100% of our total revenue for the three
      months ended June 30, 2006. In March 2007, LGE informed us that they intended
      to
      discontinue production of RPTVs (both LCoS and DLP). The loss of this customer
      and our inability to obtain additional purchase orders from our current or
      prospective customers to replace the loss in expected revenue in a timely manner
      could harm our sales or results of operations. Revenues during the second
      quarter of 2007 were from Deocom.




*Gross
      Margin* .
      Gross
      margin was reduced from approximately negative $1,543,000 during the second
      quarter of 2006 to negative gross margin of approximately $561,000 during the
      second quarter of 2007. The second quarter of both periods includes the costs
      to
      operate our South Korean manufacturing facility. We reduced staffing in our
      South Korean manufacturing facility during the first half 2007 in light of
      significantly reduced sales and our expectations of reduced future sales in
      the
      near-term. Additionally, cost of revenue during the second quarter of 2007
      included an addition to inventory reserve of approximately $93,000, which was
      recorded to reserve some components used in the T-3 Set that are unlikely to
      have alternative uses.





*Selling,
      general and administrative costs.* Cash-based selling, general and administrative costs were approximately
      $1,431,000 and $1,918,000 during the three months ended June 30, 2007 and 2006,
      respectively, a decrease of $487,000 or 25%. Salaries, wages and other payroll
      related expenses decreased approximately $478,000 and included an aggregate
      reduction in headcount of nine individuals including our former Executive Vice
      President of Strategic Planning, our former Senior Vice President, Marketing
      and
      Sales and our former Assistant Vice President, Legal Counsel. Legal expenses
      decreased approximately $85,000. While both periods included legal expenses
      associated with the routine review of our registration statements on Form S-3
      and involvement with the ongoing SEC investigations, these expenses were more
      concentrated during the second quarter of 2006. Accounting and consulting
      expenses increased by approximately $55,000 due to the use of an external
      consultant for investor relation services. The remaining increase in costs
      between periods is primarily due to timing differences.




34




*Stock-based
      compensation included in selling, general and administrative
      costs.* Stock-based compensation was approximately $186,000 and $976,000 for the three
      months ended March 31, 2007 and 2006, respectively. The decline is due to fewer
      options being issued during 2007 at a lower exercise price due to an overall
      decline in the market price of our stock.





*Research
      and development costs* .
      Research and development costs were approximately $405,000 and $411,000 for
      the
      three months ended June 30, 2007 and 2006, respectively, a decrease of $6,000
      or
      1%. The decrease is due primarily to timing differences and reflects limited
      resources available during the second quarter of 2007.





*Interest
      expense.* Cash-based interest expense for the three months ended June 30, 2007 increased
      approximately $273,000 from $32,000 during second quarter 2006 to $305,000
      for
      the second quarter 2007. Approximately $252,000 of the increase was due to
      issuing our common shares in lieu of cash to the Senior Secured noteholders
      for
      the payment of one quarter’s interest during 2006. The remaining increase was
      due to higher interest rates on the lines of credit in South Korea.





*Non-cash
      interest expense.*  ** Non-cash
      interest expense was approximately $3,637,000 and $474,000 for the three months
      ended June 30, 2007 and 2006, respectively and is detailed as follows.





Three
                months ended June 30,2007
            
            2006Amortization
                of discounts on Senior Secured Convertible Notes
            
            $
            110,993
            
            $
            110,994Senior
                Secured Convertible Notes 10% interest paid in common
                stock
            
            
            -
            
            
            252,055Redemption
                premium on the Senior Secured Convertible Notes
            
            
            1,500,000
            
            
            -Liquidated
                    damages on the October 2005, January 2006, September 2006 and
                    November
                    2006 financings
            
            
            112,000
            
            
            (176,640
            )Beneficial
                conversion privileges of interest on Argyle note
            
            
            271,463
            
            
            271,463Loss
                  associated with the Settlement Agreement
            
            
            1,627,146
            
            
            -Amortization
                of prepaid financing costs
            
            
            15,858
            
            
            15,857Total
                non-cash interest expense
            
            $
            3,637,460
            
            $
            473,729




As
      a
      result of our stock no longer trading on the Nasdaq Capital Market, the Senior
      Secured Convertible Notes became redeemable on demand by the holders at 115%
      of
      the principal amount plus accrued interest and late charges. Therefore we have
      accrued $1,500,000 in redemption premiums as of June 30, 2007. The beneficial
      conversion privileges of interest represents the excess value of the shares
      received or receivable at current market prices over the $0.50 per share
      conversion price related to the amortization of the beneficial conversion price
      of shares issued to prepay interest on the notes payable to Argyle Capital
      Management Corporation, a company wholly owned by Robert A. Olins, our former
      Chief Executive Officer, Secretary, Treasurer, Principal Financial and
      Accounting Officer and a former Director. The three months ended June 30, 2007
      also includes approximately $1.6 million of expense associated with the
      Settlement Agreement (see Note 8 to the condensed consolidated financial
      statements) with the Investors from our November 2006 and February 2007
      financings under which the Investors (i) released disputed claims under the
      November 2006 Financing, the February 2007 Financing, and the February 2007
      Waiver; (ii) returned for cancellation warrants to purchase 4,800,000 common
      shares that were issued in the November 2006 Financing; (iii) cancelled the
      future financings restriction under which we could not sell common shares less
      than $1.30 per share without the Investors’ consent, and (iv) entered into an
      Escrow Agreement pursuant to which we will issue in escrow, from time to
      time, an unspecified number of common shares, and the Investors delivered to
      escrow 4,002,307 common shares previously issued pursuant to the November 2006
      Financing and the February 2007 Financing. Liquidated damages accrued during
      the
      three months ended June 30, 2006 related to our October 2005 and January 2006
      financings whereas liquidated damages accrued during the three months ended
      June
      30, 2007 related to our September 2006 and November 2006
      financings.




35




*Six
      months ended June 30, 2007 and 2006*





*Revenue* . ** We
      recognized revenue of approximately $50,000 and $145,000 during the six months
      ended June 30, 2007 and 2006, respectively. Revenue in both periods was derived
      primarily from sales of LCoS Sets to LGE.





The
      following table summarizes our sales revenue by product for the first half
      of
      2007 and 2006.





Six
                months ended June 30,2007
            
            2006LCoS
                (T-3) sets
            
            
            100
            %
            
            88
            %Other
                (primarily supporting electronics)
            
            
            -
            
            
            12
            %Total
            
            
            100
            %
            
            100
            %




Revenue
      from one customer, LGE, accounted for 90% and 89% of our total revenue for
      the
      six months ended June 30, 2007 and 2006, respectively. In March 2007, LGE
      informed us of their intent to discontinue production of RPTVs (both LCoS and
      DLP). The loss of this customer and our inability to obtain additional purchase
      orders from our current or prospective customers to replace the lost in expected
      revenue in a timely manner could harm our sales or results of operations.




*Gross
      Margin* .
      Gross
      margin was reduced from approximately negative $3,006,000 during the first
      six
      months of 2006 to negative gross margin of approximately $1,263,000 during
      the
      first half of 2007. Both periods include the costs to operate our South Korean
      manufacturing facility. We reduced staffing in our South Korean manufacturing
      facility during the first half 2007 in light of significantly reduced sales
      and
      our expectations of reduced future sales in the near-term. Additionally, cost
      of
      revenue during the second quarter of 2007 included an addition to inventory
      reserve of approximately $93,000, which was recorded to reserve some components
      used in the T-3 Set that are unlikely to have alternative uses. Cost of revenue
      during the first half of 2006 included a reserve of approximately $386,000,
      which was recorded to reserve the remaining value of our T-1 LCoS Set inventory
      as well as a percentage of our light engine inventory. We believe there are
      still opportunities to sell both products, but we have shifted our focus to
      the
      manufacture and sale of our T-3 LCoS Set products. We are not currently
      manufacturing either the T-1 LCoS Set or the light engine products and had
      no
      sales of either of these products during 2007.




36




*Selling,
      general and administrative costs.* Cash-based selling, general and administrative costs were approximately
      $2,416,000 and $3,890,000 during the six months ended June 30, 2007 and 2006,
      respectively, a decrease of $1,474,000 or 38%. Salaries, wages and other payroll
      related expenses decreased approximately $814,000 and included an aggregate
      reduction in headcount of nine individuals including our former Executive Vice
      President of Strategic Planning, our former Senior Vice President, Marketing
      and
      Sales and our former Assistant Vice President, Legal Counsel. Legal expenses
      decreased approximately $240,000. While both periods included legal expenses
      associated with the routine review of our registration statements on Form S-3
      and involvement with the ongoing SEC investigations, these expenses were more
      concentrated during the first half of 2006. Accounting and consulting expenses
      decreased by approximately $126,000 due primarily to costs associated with
      filing registration statements during the first half of 2006 compared with
      the
      first half of 2007. The remaining decrease in costs between periods is primarily
      due to reduced activities related to resource constraints.





*Stock-based
      compensation included in selling, general and administrative
      costs.* Stock-based compensation was approximately $463,000 and $1,645,000 in the six
      months ended June 30, 2007 and 2006, respectively. The decline is due to fewer
      options being issued during 2007 at a lower exercise price due to an overall
      decline in the market price of our stock.





*Impairment
      loss* . We
      recorded an asset impairment loss of $1,429,925 related to our building in
      South
      Korea in the quarter ended March 31, 2007, in accordance with SFAS 144,
“ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ”
based
      upon the estimated fair value of the building. On March 9, 2007, we received
      notification from LGE of their intent to discontinue the production of rear
      RPTVs. We deemed the loss of LGE as a customer a significant change in
      circumstances which indicated the need for an impairment analysis, based on
      undiscounted cash flows. While we believe that we will find other customers
      for
      our products, we do not currently have existing customers to support estimated
      cash flows to achieve the recoverability of the asset and our forecast of future
      revenues, at this point, is speculative. Further, we receive
      a 100% land lease payment exemption because the facility is located on land
      designated a “free economic zone” by the South Korean national government and
      the South Korean government has certified us as a “high technology” company.
      Under our agreement with the Gyeongnam provincial government we could lose
      our
      land lease payment exemption in the event that we lose our “high technology”
certification. If we were to lose the lease, we might be required to donate
      the
      building to the South Korean government.




The
      fair
      value of the building and equipment were estimated based on a preliminary
      appraisal which took into account the building’s overall structure, used
      materials, and current condition. The equipment was appraised considering such
      items as structure, standard, form, capacity, and acquisition cost. Based upon
      this appraisal, the building’s fair value was less than the net book value
      whereas the equipment was valued at greater than the net book
      value.




As
      a
      result, the carrying value of the building during the first half of 2007 has
      been reduced by $1,429,925 with a corresponding charge to impairment loss on
      the
      condensed consolidated statement of operations.




*Research
      and development costs* .
      Research and development costs were approximately $699,000 and $653,000 for
      the
      six months ended June 30, 2007 and 2006, respectively, an increase of $46,000
      or
      7% and reflects an increase in spending related to new projects that are in
      the
      development stage.





*Interest
      expense.* Cash-based interest expense for the six months ended June 30, 2007 increased
      approximately $277,000 from $315,000 during the first half of 2006 to $592,000
      for the first half of 2007. Approximately $252,000 of the increase was due
      to
      issuing our common shares in lieu of cash to the Senior Secured noteholders
      for
      the payment of one quarter’s interest during 2006, whereas we paid the interest
      in cash during 2007. The remaining increase was due to higher interest rates
      on
      the lines of credit in South Korea.




37




*Non-cash
      interest expense.*  ** Non-cash
      interest expense was approximately $5,527,000 and $1,487,000 for the six months
      ended June 30, 2007 and 2006, respectively and is detailed as follows:




Six
                months ended June 30,2007
            
            2006Amortization
                of Senior Secured Convertible Notes
            
            $
            221,987
            
            $
            221,987Senior
                Secured Convertible Notes 10% interest paid in common
                stock
            
            
            -
            
            
            252,055Redemption
                premium on the Senior Secured Convertible Notes
            
            
            1,500,000
            
            
            -Liquidated
                  damages on the October 2005, January 2006, September2006
                  and November 2006 financings
            
            
            302,806
            
            
            437,817Beneficial
                conversion privileges of interest on Argyle note
            
            
            542,926
            
            
            542,926Expense
                associated with waiver agreements with February 2007 andNovember
                2006 investors to be settled in stock
            
            
            1,300,194
            
            
            -Loss
                  associated with the Settlement Agreement
            
            
            1,627,146
            
            
            -Amortization
                of prepaid financing costs
            
            
            31,716
            
            
            31,715Total
                non-cash interest expense
            
            $
            5,526,775
            
            $
            1,486,500




As
      a
      result of our stock no longer trading on the Nasdaq Capital Market, the Senior
      Secured Convertible Notes became redeemable on demand by the holders at 115%
      of
      the principal amount plus accrued interest and late charges. Therefore we
      accrued $1,500,000 in redemption premiums as of June 30, 2007. The beneficial
      conversion privileges of interest represents the excess value of the shares
      received or receivable at current market prices over the $0.50 per share
      conversion price related to the amortization of the beneficial conversion price
      of shares issued to prepay interest on the notes payable to Argyle Capital
      Management Corporation, a company wholly owned by Robert A. Olins, our former
      Chief Executive Officer, Secretary, Treasurer, Principal Financial and
      Accounting Officer and a former Director. The six months ended June 30, 2007
      included approximately $1.6 million of expense associated with the Settlement
      Agreement (see Note 8 to the condensed consolidated financial statements) with
      the Investors from our November 2006 and February 2007 financings under which
      the Investors (i) released disputed claims under the November 2006 Financing,
      the February 2007 Financing, and the February 2007 Waiver; (ii) returned for
      cancellation warrants to purchase 4,800,000 common shares that were issued
      in
      the November 2006 Financing; (iii) cancelled the future financings restriction
      under which we could not sell common shares less than $1.30 per share without
      the Investors’ consent, and (iv) entered into an Escrow Agreement pursuant to
      which we will issue in escrow, from time to time, an unspecified number of
      common shares, and the Investors delivered to escrow 4,002,307 common
      shares previously issued pursuant to the November 2006 Financing and the
      February 2007 Financing. Liquidated damages accrued during six months ended
      June
      30, 2006 related to our October 2005 and January 2006 financings whereas
      liquidated damages accrued during six months ended June 30, 2007 related to
      our
      September 2006 and November 2006 financings. Additionally the six months ended
      June 30, 2007 includes approximately $1.3 million of expense associated with
      obtaining waivers for certain contractual provisions from our September and
      November 2006 investors.




38




Critical
      Accounting Policies





*Revenue
      Recognition* –
      We evaluate
      revenue recognition for transactions using the following criteria (collectively
      called the Revenue Recognition Criteria):





·
            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.


·
            Delivery:
                For products, delivery is considered to occur when title and risk
                of loss
                have been transferred, which generally occurs upon shipment.


·
            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 laws or trade practices of the country in which the
                arrangement is entered into to assess whether the fee is fixed and
                determinable.


·
            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. We reduce product revenue for customer
                returns
                and sales allowances and record an allowance for doubtful accounts
                should
                collectibility become questionable. If it is determined that an account
                is
                uncollectible, the account is written off against the allowance.





*Inventory
      valuation* –
We
      value inventories at the lower of cost (based on the first-in, first-out method)
      or market value. We include raw 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 costs we write it down to its replacement cost or its net realizable
      value. Our estimates may differ from actual results due to the quantity, quality
      and mix of products in inventory, consumer and retailer preferences and economic
      conditions.




*Stock-based
      Payments*– Effective January 1, 2006 we adopted SFAS 123R using the modified prospective
      method and therefore have not restated prior periods’ results for the adoption
      of SFAS 123R. Under the fair value recognition provisions of SFAS 123R, we
      recognize stock-based compensation net of an estimated forfeiture rate and
      therefore only recognize compensation cost for those shares expected to vest
      over the service period of the award. Prior to SFAS 123R adoption, we accounted
      for share-based payments under APB 25 and accordingly, generally recognized
      compensation expense related to stock options with intrinsic value and accounted
      for forfeitures as they occurred. Equity instruments issued to non-employees
      are
      recorded at their fair market value as determined in accordance with SFAS 123R
      and EITF Issue No. 96-18, “ *Accounting
      for Equity Instruments that are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods and Services* ”
(“EITF
      96-18”).




39




We
      estimated the fair value of options granted using the Black-Scholes option
      pricing model and the assumptions shown in Note 4, Stock-Based Compensation,
      to
      our condensed consolidated financial statements or, in the case of options
      granted with a market condition, we use a lattice model. Calculating stock-based
      compensation expense under the provisions of SFAS 123R requires the input of
      highly subjective assumptions, including the expected term of the stock-based
      awards, stock price volatility, and pre-vesting option forfeitures. We estimate
      the expected life of options granted based on the simplified method provided
      in
      Staff Accounting Bulletin No. 107 for “plain vanilla” options. We estimate the
      volatility of our common stock at the date of grant based on the historical
      volatility of our common stock.  In addition, we are required to estimate
      the expected forfeiture rate and only recognize expense for those shares
      expected to vest. We estimate the forfeiture rate based on historical experience
      of our stock-based awards that are granted, exercised and cancelled. If our
      actual forfeiture rate is materially different from our estimate, the
      stock-based compensation expense could be significantly different from what
      we
      have recorded in the current period. The assumptions used in calculating the
      fair value of stock-based awards represent our best estimates, but these
      estimates involve inherent uncertainties and the application of management
      judgment. As a result, if factors change and we use different assumptions,
      our
      stock-based compensation expense could be materially different in the future.
      As
      required under SFAS 123R, we review our valuation assumptions at each grant
      date
      and, as a result, are likely to periodically change the valuation assumptions
      used to value employee stock-based awards granted in future periods. The
      guidance in SFAS 123R is relatively new and best practices are not well
      established. The application of the various valuation assumptions may be subject
      to further interpretation and refinement over time. There are significant
      differences among valuation models and there is a possibility that we will
      adopt
      different valuation models and assumptions in the future. This may result in
      a
      lack of comparability with other companies that use different models, methods
      and assumptions and in a lack of consistency in future periods. See Note
      4-“Stock-Based Compensation” in the condensed consolidated financial statements
      for additional information.





*Research
      and Development* –
      Research and development costs, including the costs of prototype and
      pre-production LCoS Sets, pre-production display units, and other pre-production
      activities at our South Korean manufacturing facility are charged to expense
      when incurred.





*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, 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 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.





*Impairment
      of Long-Lived Assets* –
We
      account for the impairment of long-lived assets in accordance with SFAS
      No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .
      An
      impairment of a long-lived asset exists when the carrying value of an asset
      exceeds its fair value and when the carrying value is not recoverable through
      future undiscounted cash flows from operations. We review the carrying value
      of
      long-lived assets for impairment when events or changes in circumstances
      indicate that the carrying amount of assets may not be recoverable.




40




Considerable
      management judgment is required in determining if and when a condition would
      trigger an impairment assessment of our long-lived assets and once such a
      determination has been made, considerable management judgment is required to
      determine the fair market value of the long-lived asset. In determining the
      fair
      value of the asset, we consider the associated net present value of estimated
      future cash flows and/ or independently performed appraisals. Such estimated
      future cash flows are based on assumptions about our expected future operating
      performance. Our estimates of future cash flows may differ from actual cash
      flows due to, among other things, technological changes, economic conditions
      or
      changes to our business operations. Impairments are recognized in operating
      results to the extent that the carrying value exceeds this calculated fair
      value
      of the long-lived assets or estimated fair value based on
      appraisals.





**ITEM
      3. Quantitative and Qualitative Disclosures About Market
      Risk.**





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 and our lines of credit in South Korea. 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 June 30, 2007, our cash and cash equivalents totaled approximately
      $202,000. Short term debt under our South Korean lines of credit totaled
      approximately $633,000 at June 30, 2007.





*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 or loss. Changes in the functional currency value of these assets and
      liabilities create fluctuations that will lead to a transaction gain or loss.
      When appropriate, we may enter into hedging transactions in order to mitigate
      our risk from foreign currency fluctuations. We may use hedging programs in
      the
      future and may use currency forward contracts, currency options and/ or other
      derivative financial instruments commonly utilized to reduce financial market
      risks if it is determined that such hedging activities are appropriate to reduce
      risk. We do not hold or purchase any foreign currency contracts for trading
      purposes. As of June 30, 2007, we had no hedging contracts. During the first
      six
      months of 2007, the foreign currency transaction gains were not
      material.





**ITEM
      4. Controls and Procedures.**




**Disclosure
      Controls and Procedures.** As
      of
      June 30, 2007, 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 our
      "internal controls and procedures for financial reporting" (“Internal
      Controls”).




41




*Limitations
      on the Effectiveness of Controls.* Our CEO
      does not expect that our Disclosure Controls or our Internal Control 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 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 the 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.* As
      defined under Sections 13a-15(e) and 15d-15(e) of the Exchange Act, the term
      “disclosure controls and procedures” means controls and other procedures of an
      issuer that are designed to ensure that information required to be disclosed
      by
      the issuer in the reports that it files or submits under the Exchange Act is
      recorded, processed, summarized and reported, within the time periods specified
      in the SEC’s rules and forms. Disclosure Controls include, without limitation,
      controls and procedures designed to ensure that information required to be
      disclosed by an issuer in the reports that it files or submits under the
      Exchange Act is accumulated and communicated to the issuer’s management,
      including the issuer’s CEO, to allow timely decisions regarding required
      disclosure. Based on his evaluation, as described in Item 9A “Controls and
      Procedures” in our Annual report on Form 10-K filed with the SEC on March 16,
      2007, the CEO has concluded that our disclosure controls and procedures were
      not
      effective to ensure that material information is recorded, processed, summarized
      and reported by management on a timely basis in order to comply with our
      disclosure obligations under the Exchange Act, and the rules and regulations
      promulgated thereunder.





**Changes
      in Internal Controls.** There
      have been no significant changes in the Company’s Internal Control 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.





**PART
      II.**  **OTHER
      INFORMATION**





**ITEM
      1.** **Legal
      Proceedings.**





On
      March
      28, 2007, Portside Growth and Opportunity Fund, holders of $4,500,000 of the
      Senior Secured Convertible Notes, filed suit against the Company and certain
      named directors and officers, in the Supreme Court of the State of New York,
      claiming the Company was in breach of its obligations under the Senior Secured
      Convertible Notes and that certain directors and officers had breached their
      fiduciary duties in connection with loans made by them to the Company and loans
      made by certain South Korean banks to the Company’s South Korean subsidiary. On
      June 28, 2007, SpatiaLight and Portside agreed to a Stipulation of
      Discontinuance, without prejudice, with regard to their respective claims and
      counterclaims. This Stipulation includes a Standstill Period of 30 days to
      allow
      for the opportunity for productive discussions to take place between the parties
      or their agents prior to either party filing any subsequent claims. To the
      date
      of this filing, no further action has been taken by Portside.




42




We
      have
      received notice that the SEC intends to pursue civil remedies in connection
      with
      our filing of an unauthorized consent by BDO Seidman, LLP in connection with
      certain registration statements our issuance of securities without legend or
      restrictions to Argyle for payment of interest on the Argyle Notes, specifically
      focusing on our prepayment of interest in late 2004 and early 2005. No legal
      proceeding has been commenced against us and we are cooperating with the SEC
      in
      their investigation.





We
      are a
      party to other routine claims and lawsuits from time to time in the ordinary
      course of business. While the outcome of such ordinary course proceedings cannot
      be predicted with certainty, we believe that the resolution of any such matters
      individually or in the aggregate will not have a material adverse effect on
      our
      business, financial condition or results of operations.





**ITEM
      1A.**  **Risk
      Factors.**





The
      following risk factors are in addition to the risks disclosed in our 2006 Annual
      Report on Form 10-K filed with the SEC on March 16, 2007, to which you are
      directed for additional risks associated with our business.





**Certain
      holders of the Senior Secured Convertible Notes issued by us in November 2004
      have made claims of default, which could materially affect our financial
      conditions.**





On
      March
      28, 2007, Portside Growth & Opportunity Fund and Smithfield Fiduciary,
      holders of $9,000,000 of the Senior Secured Convertible Notes, have claimed
      that
      the Company is in breach of its obligations under the Senior Secured Convertible
      Notes. In the event that these claims are determined adversely to the Company,
      we may be obligated to repay $10,000,000 in principal amount of our outstanding
      Senior Secured Convertible Notes, together with accrued interest at 12% per
      annum, a premium of $1,500,000 and liquidated damages in the amount of $683,000.
      We do not presently have a source of funds with which to make such payments
      and
      we may be required to seek protection under applicable bankruptcy laws if such
      payments are required by the noteholders.





**Redemption
      of the Senior Secured Convertible Notes issued by us in November 2004 could
      materially affect our financial condition.**





On
      June
      15, 2007, as a result of our stock no longer trading on the Nasdaq Capital
      Market, the Senior Secured Convertible Notes became redeemable on demand by
      the
      holders at 115% of the principal amount plus accrued interest and late charges.
      We have received redemption notices from Portside and Smithfield. We have
      accrued $1,500,000 in redemption premiums as of June 30, 2007 and have increased
      the rate at which we accrue and pay interest from 10% per annum to 12% per
      annum
      in accordance with the terms of the Senior Secured Convertible Notes, commencing
      on June 15, 2007. We do not presently have a source of funds with which to
      redeem the Senior Secured Convertible Notes and may be required to seek
      protection under applicable bankruptcy laws if such redemption is required
      by
      the noteholders.




43




**The
      Conversion Rate under the Senior Secured Convertible Notes may be
      reset.**





Under
      the
      terms of the Senior Secured Convertible Notes, a noteholder that has provided
      us
      with a notice of redemption may withdraw the notice with respect to all or
      part
      of the Senior Secured Convertible Notes and elect to convert such portion at
      a
      conversion rate equal to the lowest weighted average price per common share
      between the date of the redemption notice and the date of the withdrawal. In
      early July 2007, we received withdrawal notices and elections to convert
      $100,000 from Portside and $50,000 from Smithfield. The conversion rate with
      respect to these conversions will be $0.0505 per common share and these and
      future conversions will result in significant dilution of the current common
      stockholders. We do not presently have sufficient authorized and unissued common
      shares to convert all of the Senior Secured Convertible Notes at these
      conversion rates and additional defaults and penalties under the Senior Secured
      Convertible Notes of the November 2004 Financing may occur if we fail to convert
      the Senior Secured Convertible Notes, fail to register additional shares for
      resale by the noteholders or fail to increase the number of authorized common
      shares.





**We
      are the subject of an investigation by the staff of the SEC regarding the
      circumstances surrounding our filing of certain consents of BDO Seidman, LLP
      without requisite authorization and our issuance of securities without legend
      or
      restrictions to Argyle for payment of interest on the Argyle Notes.**





We
      have
      been advised by the SEC that they intend to pursue civil remedies in connection
      with the unauthorized filing of a consent by BDO Seidman, LLC as an exhibit
      to a
      registration statement as well as our issuance of securities without legend
      or
      restrictions to Argyle for payment of interest on the Argyle Notes, specifically
      focusing on our prepayment of interest in late 2004 and early 2005. The Staff
      may impose sanctions against us in the form of an injunction against future
      violations of the securities laws and/ or fines and penalties, which could
      be
      material and adversely affect our financial condition.





**Future
      offerings of our common shares pursuant to the April 2007 Equity Credit
      Agreement could cause the market price of our common shares to decrease
      significantly, even if our business operations are performing well.**





We
      have
      entered into an Equity Credit Agreement providing for the sale from time to
      time
      of our common shares having an aggregate value of $15,400,000 and a Waiver,
      Rescission and Settlement Agreement (“Settlement Agreement”) providing for the
      issuance from time to time of our common shares having an aggregate value of
      up
      to $4,347,147. We may offer additional securities under the Equity Credit
      Agreement and may be required to issue additional securities under the
      Settlement Agreement which could materially affect the number of common shares
      outstanding and dilute the price per share of our presently outstanding common
      shares.





**We
      may offer additional securities under our registration statement related to
      $75,000,000 in common stock, warrants, subscription rights and units without
      notice to the stockholders.**





We
      could
      issue an unspecified number of additional common shares under our current
“Shelf” Registration Statement (Registration Number 333-137100). Sales of these
      shares into the public market, or the perception that future sales of these
      shares could occur, might adversely affect the prevailing market price of our
      common shares in the near future. Furthermore, market perceptions regarding
      the
      likelihood that we will be required to issue and sell additional common shares
      in the near future to fund our ongoing operations, thereby diluting the
      ownership interests of current owners of our common shares, could have a
      material adverse effect on the market price of our common shares.




44




**We amended
      our Certificate of Incorporation to declare a 50:1 reverse stock split and
      authorized up to 15,000,000 post-split common shares.**





We amended
      our Certificate of Incorporation to combine 50 current common shares into one
      common share and authorize up to 15,000,000 post combination common shares.
      As a
      result, we have authorized a significant number of authorized and unissued
      common shares which may be issued without notice or approval from our
      stockholders. The issuance of a significant number of these shares (or the
      perception that we may issue a significant number of these shares), whether
      pursuant to our Equity Credit Agreement, our registration statement, or
      otherwise may adversely affect the price of our common shares on the
      market.





**Our
      Common Stock may be subject to the “Penny Stock” rules of the SEC and the
      trading market in our securities is limited, which makes transactions in our
      stock cumbersome and may reduce the value of an investment in our
      stock.**





On
      June
      13, 2007, the Company received notice that the NASD intended to take necessary
      actions to remove the Company’s common stock from listing on the Nasdaq Capital
      Markets and trading in our common shares on the Nasdaq Capital Market has been
      halted pending determination of the delisting. If the Company’s common shares
      are delisted from the Nasdaq Capital Market, they would become “penny stock”
within the definition of that term under the Securities Exchange Act of 1934,
      as
      amended, and would become subject to additional requirements in connection
      with
      the purchase and sale of shares.





Under
      penny stock regulations, a broker-dealer selling a penny stock to anyone other
      than an established customer or accredited investor must make a special
      suitability determination regarding the purchaser and must receive the
      purchaser’s written consent to the transaction prior to the transaction, unless
      the broker-dealer is otherwise exempt.  Generally, an individual with a net
      worth in excess of $1,000,000, or annual income exceeding $100,000 individually
      or $300,000 together with his or her spouse is considered an accredited
      investor.  In addition, under penny stock regulations the broker-dealer is
      required to:





·
            Deliver,
                prior to any transaction involving a penny stock, a disclosure schedule
                prepared by the Securities and Exchange Commissions relating to the
                penny
                stock market, unless the broker-dealer or the transaction is otherwise
                exempt;·
            Disclose
                commissions payable to the broker-dealer and its registered
                representatives and current bid and offer quotations for the
                securities;·
            Send
                monthly statements disclosing recent price information pertaining
                to the
                penny stock held in a customer’s account, the account’s value and
                information regarding the limited market in penny stocks;
                and·
            Make
                a special written determination that the penny stock is a suitable
                investment for the purchaser and receive the purchaser’s written agreement
                to the transaction, prior to conducting any penny stock transaction
                in the
                customer’s account.




Because
      of these regulations, broker-dealers may encounter difficulties in their attempt
      to buy or sell our common shares, which may affect the ability of selling
      stockholders or other holders to sell their shares in the secondary market
      and
      have the effect of reducing the level of trading activity in the secondary
      market.  These additional sales practice and disclosure requirements could
      impede the buying or sale of our securities.  We believe it is likely that
      our shares will be subject to such penny stock rules and our stockholders may
      find it more difficult to sell their securities.




45




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





None.





**ITEM
      3.** **Defaults
      Upon Senior Securities.**





On
      June
      15, 2007, as a result of our stock no longer trading on the Nasdaq Capital
      Market, the Senior Secured Convertible Notes became redeemable on demand by
      the
      holders at 115% of the principal amount plus accrued interest and late charges.
      We have received redemption notices from Portside and Smithfield and have not
      redeemed either Note within the time required by the notice. As a result of
      our
      failure to redeem the Senior Secured Convertible Notes within five days after
      receipt of the redemption notice, the noteholders may withdraw any part of
      the
      redemption notice and elect to convert the withdrawn amount at a new conversion
      rate equal to the lowest weighted price of the common shares between June 15,
      2007 and the date of withdrawal. In early July 2007, Portside withdrew its
      redemption notice with respect to $100,000 and Smithfield withdrew its
      redemption notice with respect to $50,000. We have received a notice of
      conversion from each noteholder to convert the withdrawn amount at a conversion
      rate of $0.0505 per common share but do not presently have sufficient authorized
      common shares to convert the withdrawn amount. We
      have
      filed an amendment to our Certificate of Incorporation to effect a 50:1 reverse
      split of our existing common shares and provide additional authorized shares.
      The additional shares will be available for issuance when the reverse split
      is
      effective and we intend to convert the withdrawn amount at that time.We
      have accrued $1,500,000 in redemption premiums as of June 30, 2007 and have
      increased the rate at which we accrue and pay interest from 10% per annum to
      12%
      per annum in accordance with the terms of the Senior Secured Convertible Notes,
      commencing on June 15, 2007.





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





At
      the
      Annual Meeting of Stockholders held on July 13, 2007, the stockholders approved
      the following:




PROPOSAL
      NO. 1





The
      election of Robert C. Munro as a director of the Corporation to serve for the
      ensuing year and until his successor is duly elected and qualified.





For:
      36,516,853  Against:
      0   Withheld: 994,636





The
      election of Dr. David F. Hakala as a director of the Corporation to serve for
      the ensuing year and until his successor is duly elected and qualified.





For:
      36,525,248  Against:
      0   Withheld: 986,241





The
      election of Dr. Volkan H. Ozguz as a director of the Corporation to serve for
      the ensuing year and until his successor is duly elected and qualified.





For:
      36,567,343  Against:
      0   Withheld: 944,141




46




The
      election of Mr. Young Hwan Kim as a director of the Corporation to serve for
      the
      ensuing year and until his successor is duly elected and qualified.





For:
      36,564,903  Against:
      0   Withheld: 946,586





The
      election of Dr. Michael S. Jin as a director of the Corporation to serve for
      the
      ensuing year and until his successor is duly elected and qualified.





For:
      36,544,948  Against:
      0   Withheld: 966,541





PROPOSAL
      NO. 2





To
      approve a Certificate of Amendment to our Restated Certificate of Incorporation,
      as amended (the “Certificate”), to authorize the Board of Directors to combine
      outstanding Common Shares and/or increase the number of authorized Common Shares
      from 100,000,000 to 200,000,000.





For:
      34,216,830 Against:
      3,156,595 Abstain:
      144,063





PROPOSAL
      NO. 3





To
      approve the Equity Credit Agreement and authorization to issue common
      shares.





For:
      9,889,599 Against:
      1,197,045 Abstain:
      93,431





PROPOSAL
      NO. 4





The
      ratification of the appointment of Odenberg, Ullakko, Muranishi & Co. LLP
      (OUM) as the Corporation’s independent public accountants for the fiscal year
      ending December 31, 2006.





For:
      36,955,570 Against:
      344,819 Abstain:
      211,100





**ITEM
      5.** **Other
      Information.**




On
        August
        8, 2007, the Company filed a Certificate of Amendment to its Certificate
        of
        Incorporation providing for the combination of 50 shares of its common stock,
        $.01 par value, into one share of common stock, $.01 par value and providing
        for
        the authorization of 15,000,000 shares of Common Stock, $.01 par value on
        a
        post-combination basis. The Company expects that its common stock will begin
        trading on a post-combination basis on August 24, 2004.





**ITEM
      6.** **Exhibits.**




3.1
            
            Certificate
                of Incorporation, as amended (as filed with Amendment No.1 to Form
                S-3
                filed on November 18, 1999)3.2
            
            Certificate
              of Amendment dated December 18, 1991 (as
              filed with Form 10-Q filed on August 9, 2007)3.3
            
            Certificate
              of
              Amendment dated June 2, 2003 (as
              filed with Form 10-Q filed on August 9, 2007)3.4
            
            Certificate
              of
              Amendment dated June 29, 2006 (as filed with Form 10-Q
              filed on August 9, 2006)3.5
            
            Certificate
              of
              Amendment dated August 3, 2006 (as
              filed with Form 10-Q filed on August 9, 2007)3.6
            
            Bylaws*10.1
            
            Letter
                Agreement between SpatiaLight, Inc. and certain investors dated May
                26,
                2006*10.2
            
            General
                Release agreement between SpatiaLight, Inc. and Theodore H. Banzhaf
                signed
                June 13, 2006*10.3
            
            LCoS
                Supply Agreement between SpatiaLight, Inc. and LG Electronics, Inc.
                dated
                July 1, 2004*10.4
            
            SpatiaLight
                2006 Incentive Plan*




47




10.5
            
            Securities
                Purchase Agreement among SpatiaLight, Inc. and certain Purchasers
                dated as
                of August 9, 2006*10.6
            
            Registration
                Rights Agreement among SpatiaLight, Inc. and certain Purchasers dated
                as
                of August 9, 2006*10.7
            
            Securities
                Purchase Agreement among SpatiaLight, Inc. and certain Purchasers
                dated as
                of September 26, 2006*10.8
            
            Registration
                Rights Agreement among SpatiaLight, Inc. and certain Purchasers dated
                as
                of September 26, 2006*10.9
            
            Warrant
                to Purchase 62,432 Common Shares - Bluegrass Growth Fund
                LP*10.10
            
            Warrant
                to Purchase 26,757 Common Shares - Bluegrass Growth Fund
                Ltd.*10.11
            
            First
                Amendment to Securities Purchase Agreement among SpatiaLight, Inc.
                and
                certain Purchasers dated as of October 25, 2006*10.12
            
            Securities
                Purchase Agreement among SpatiaLight, Inc. and certain Purchasers
                dated
                November 28, 2006*10.13
            
            Registration
                Rights Agreement among SpatiaLight, Inc. and certain Purchaser dated
                November 28, 2006*10.14
            
            Securities
                Purchase Agreement among SpatiaLight, Inc. and certain Purchasers
                dated
                February 23, 2007*10.15
            
            Waiver
                between SpatiaLight and certain investors dated February 23,
                2007*10.16
            
            Equity
                Credit Agreement between SpatiaLight, Inc. and certain Investors
                dated
                April 24, 2007*10.17
            
            Waiver,
                Rescission and Settlement Agreement between SpatiaLight, Inc. and
                certain
                Investors dated April 24, 2007*10.18
            
            Escrow
                Agreement between SpatiaLight, Inc., certain Investors, and McLaughlin
                & Stern LLP as escrow agent dated April 24, 2007*31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of David F. Hakala32.1
            
            Certification
                of David F. Hakala Pursuant to 18 U.S.C. Section 1350, As Adopted
                Pursuant
                to Section 906 of the Sarbanes-Oxley Act of
                2002.




*Previously
      filed.


† Confidential
      Treatment has been requested with respect to certain portions of this exhibit.
      Omitted portions have been filed separately with the Securities and Exchange
      Commission.


48




**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the
      registrant has duly caused this report to be signed on its behalf by the
      undersigned thereunto duly authorized.




SpatiaLight,
              Inc.Date:   August 13, 2007
            By:
            /s/ David
              F.
              HakalaDavid
              F. HakalaActing
              Chief
              Executive Officer, Chief Operating     Officer,
              Principal Financial and Accounting
              Officer


49


EXHIBIT
      INDEX





3.1
            Certificate
                  of Incorporation, as amended (as filed with Amendment No.1 to Form
                  S-3
                  filed on November 18, 1999)3.2
            Certificate
              of
              Amendment dated December 18, 1991 (as
              filed with Form 10-Q filed on August 9, 2007)3.3
            Certificate
              of
              Amendment dated June 2, 2003 (as
              filed with Form 10-Q filed on August 9, 2007)3.4
            Certificate
              of
              Amendment dated June 29, 2006  (as filed with Form
              10-Q filed on August 9, 2006)3.5
            Certificate
              of
              Amendment dated August 3, 2006 (as
              filed with Form 10-Q filed on August 9, 2007)3.6
            Bylaws*10.1
            Letter
                Agreement between SpatiaLight, Inc. and certain investors dated May
                26,
                2006*10.2
            General
                Release agreement between SpatiaLight, Inc. and Theodore H. Banzhaf
                signed
                June 13, 2006*10.3
            LCoS
                Supply Agreement between SpatiaLight, Inc. and LG Electronics, Inc.
                dated
                July 1, 2004*10.4
            SpatiaLight
                2006 Incentive Plan*10.5
            Securities
                Purchase Agreement among SpatiaLight, Inc. and certain Purchasers
                dated as
                of August 9, 2006*10.6
            Registration
                Rights Agreement among SpatiaLight, Inc. and certain Purchasers dated
                as
                of August 9, 2006*10.7
            Securities
                  Purchase Agreement among SpatiaLight, Inc. and certain Purchasers
                dated as
                of September 26, 2006*10.8
            Registration
                Rights Agreement among SpatiaLight, Inc. and certain Purchasers dated
                as
                of September 26, 2006*10.9
            Warrant
                to Purchase 62,432 Common Shares - Bluegrass Growth Fund
                LP*10.10
            Warrant
                to Purchase 26,757 Common Shares - Bluegrass Growth Fund
                Ltd.*10.11
            First
                Amendment to Securities Purchase Agreement among SpatiaLight, Inc.
                and
                certain Purchasers dated as of October 25, 2006*10.12
            Securities
                Purchase Agreement among SpatiaLight, Inc. and certain Purchasers
                dated
                November 28, 2006*10.13
            Registration
                Rights Agreement among SpatiaLight, Inc. and certain Purchaser dated
                November 28, 2006*10.14
            Securities
                Purchase Agreement among SpatiaLight, Inc. and certain Purchasers
                dated
                February 23, 2007*10.15
            Waiver
                between SpatiaLight and certain investors dated February 23,
                2007*10.16
            Equity
                Credit Agreement between SpatiaLight, Inc. and certain Investors
                dated
                April 24, 2007*10.17
            Waiver,
                Rescission and Settlement Agreement between SpatiaLight, Inc. and
                certain
                Investors dated April 24, 2007*10.18
            Escrow
                Agreement between SpatiaLight, Inc., certain Investors, and McLaughlin
                & Stern LLP as escrow agent dated April 24, 2007*31.1
            Rule
                13a-14(a)/15d-14(a) Certification of David F. Hakala32.1
            Certification
                of David F. Hakala Pursuant to 18 U.S.C. Section 1350, As Adopted
                Pursuant
                to Section 906 of the Sarbanes-Oxley Act of
                2002.




*Previously
      filed.


† Confidential
      Treatment has been requested with respect to certain portions of this exhibit.
      Omitted portions have been filed separately with the Securities and Exchange
      Commission.




50