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


(Mark One)

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

           For the quarterly period ended September 30, 2001

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

           For the transition period from                   to
                                          -----------------    -----------------

                        Commission File Number 000-19828

                                SPATIALIGHT, INC.
        (Exact name of small business issuer as specified in its charter)


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


                 9 Commercial Blvd., Suite 200, Novato, CA 94949
                 -----------------------------------------------
                    (Address of principal executive offices)


                                 (415) 883-1693
                                 --------------
                           (Issuer's telephone number)


     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [_]


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 24,009,571 shares of common
stock as of October 29, 2001.

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

<PAGE>


                        SPATIALIGHT, INC. AND SUBSIDIARY

                         Quarterly Report on Form 10-QSB
                       For the Quarter Ended June 30, 2001


                                TABLE OF CONTENTS

PART I            FINANCIAL INFORMATION

         Item 1.  Condensed Consolidated Financial Statements (unaudited)

                  Condensed Consolidated Balance Sheets dated
                  September 30, 2001 and December 31, 2000...................  3

                  Condensed Consolidated Statements of Operations for the
                  Three months and Nine months Ended September 30, 2001
                  and 2000...................................................  4

                  Condensed Consolidated Statements of Cash Flows for the
                  Nine months Ended September 30, 2001
                  and 2000...................................................  5

                  Notes to Condensed Consolidated Financial Statements.......  6

         Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations........................  9

PART II  OTHER INFORMATION

         Item 2.  Changes in Securities and Use of Proceeds.................. 18

         Item 6.  Exhibits and Reports on Form 8-K........................... 19

                                       2
<PAGE>


PART I.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements (unaudited)

SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)

                                                  September 30,     December 31,
                                                      2001             2000
                                                  ------------     ------------

ASSETS

Current assets
   Cash and cash equivalents                      $     66,153     $  1,035,957
   Accounts receivable                                      --            2,500
   Other current assets                                173,769          159,534
                                                  ------------     ------------
      Total current assets                             239,922        1,197,991

Property and equipment, net                            482,193          570,585
Other assets                                            47,644           31,954
                                                  ------------     ------------

      Total assets                                $    769,759     $  1,800,530
                                                  ============     ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
   Accounts payable                               $    407,697     $    347,104
   Short term convertible notes                        257,161        2,742,925
   Accrued expenses and other
     current liabilities                               122,528          169,196
                                                  ------------     ------------
      Total current liabilities                        787,386        3,259,225

Noncurrent liabilities
    Convertible notes                                2,647,620               --
    Long term capital lease obligations                     83            4,483
                                                  ------------     ------------
      Total liabilities                              3,435,089        3,263,708

Commitments and contingencies

Stockholders' deficit
  Common stock, $.01 par value:
    40,000,000 shares authorized;
    issued and outstanding 23,888,443
    at September 30, 2001 and
    20,273,229 at December 31, 2000                    238,884          202,732
Additional paid-in capital                          37,185,316       28,152,272
Notes receivable for stock                            (268,750)              --
Stock subscription receivable                       (2,800,632)              --
Accumulated deficit                                (37,020,148)     (29,818,182)
                                                  ------------     ------------
      Total stockholders' deficit                   (2,665,330)      (1,463,178)

Total liabilities and stockholders' deficit       $    769,759     $  1,800,530
                                                  ============     ============

See accompanying notes to condensed consolidated financial statements

                                       3
<PAGE>


SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

<TABLE>
<CAPTION>
                                                            Three Months Ended                 Nine Months Ended
                                                               September 30,                     September 30,
                                                           2001             2000             2001             2000
                                                       -----------      -----------      -----------      -----------
<S>                                                    <C>              <C>              <C>              <C>
Revenues                                               $         0      $     6,790      $    10,000      $    61,900

Cost of revenues                                                 0            1,250            1,000           15,875
                                                       -----------      -----------      -----------      -----------
          Gross profits                                          0            5,540            9,000           46,025

General and administrative expenses:
   General and administrative expenses                     519,657          613,358        1,944,354        1,983,065
   Stock-based general and administrative expenses          72,946        1,136,060        1,846,330        1,151,060
                                                       -----------      -----------      -----------      -----------
          Total general and administrative expenses        592,603        1,749,418        3,790,684        3,134,125

   Research and development expenses                       653,024        1,029,033        1,849,974        2,709,393
                                                       -----------      -----------      -----------      -----------

          Total operating expenses                       1,245,627        2,778,451        5,640,658        5,843,518
                                                       -----------      -----------      -----------      -----------

          Operating loss                                (1,245,627)      (2,772,911)      (5,631,658)      (5,797,493)
                                                       -----------      -----------      -----------      -----------

Other income (expenses):

  Interest expense:
          Interest expense                                 (68,571)         (24,804)        (200,263)        (125,122)
          Stock-based interest expense                    (398,677)         (96,545)      (1,380,645)        (603,449)
                                                       -----------      -----------      -----------      -----------
            Total interest expense                        (467,248)        (121,349)      (1,580,908)        (728,571)

   Interest income                                           5,430           21,679           16,050           80,481
                                                       -----------      -----------      -----------      -----------

          Total other income (expenses)                   (461,818)         (99,670)      (1,564,858)        (648,090)
                                                       -----------      -----------      -----------      -----------

   Loss from operations before income taxes             (1,707,445)      (2,872,581)      (7,196,516)      (6,445,583)

Income tax expense                                               0                0            5,450            1,600
                                                       -----------      -----------      -----------      -----------

          Net loss                                     $(1,707,445)     $(2,872,581)     $(7,201,966)     $(6,447,183)

Incentive warrants issued                                       --               --               --         (606,303)
                                                       -----------      -----------      -----------      -----------

Net loss available to common shareholders              $(1,707,445)     $(2,872,581)     $(7,201,966)     $(7,053,486)
                                                       ===========      ===========      ===========      ===========

Net loss per share available to common
   shareholders- basic and diluted                     $     (0.08)     $     (0.14)     $     (0.34)     $     (0.37)
                                                       ===========      ===========      ===========      ===========
Weighted average shares used in computing
 net loss per share- basic and diluted                  21,400,293       20,079,004       20,981,838       18,843,208
                                                       ===========      ===========      ===========      ===========
</TABLE>

See accompanying notes to condensed consolidated financial statements

                                       4
<PAGE>


SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

                                                          Nine Months Ended
                                                            September 30,
                                                         2001          2000
                                                      ----------    ----------
Cash flows from operating activities:
Net loss                                             $(7,201,966)  $(6,447,183)
Adjustments to reconcile net loss to net
  cash used by operating activities:
   Depreciation and amortization                         204,144       153,315
   Stock-based general and administrative expense      1,846,330     1,151,060
   Stock-based interest expense                        1,380,645       603,449
   Changes in operating assets and liabilities:
     Accounts receivable                                   2,500       (15,750)
     Inventories                                              --        (4,506)
     Other current assets                                (14,235)      (79,694)
     Accounts payable                                     60,593       180,089
     Accrued expenses and other current liabilities      124,383      (111,602)
     Other assets                                        (15,690)           --
                                                      ----------    ----------
          Net cash used in operating activities       (3,613,296)   (4,570,822)

Cash flows from investing activities:
   Purchase of property and equipment                   (115,752)     (506,465)
                                                      ----------    ----------

          Net cash used in investing activities         (115,752)     (506,465)

Cash flows from financing activities:
  Payments on capital lease obligations                   (3,754)      (14,672)
  Proceeds from issuance of convertible notes            250,000            --
  Proceeds from sale of stock                            997,984            --
  Proceeds from exercise of warrants and options       1,380,639     4,974,140
  Proceeds from payments on notes receivable
    for stock                                            134,375            --
                                                      ----------    ----------
          Net cash provided by financing activities    2,759,244     4,959,468

Net decrease cash equivalents                           (969,804)     (117,819)
Cash at beginning of period                            1,035,957     1,236,609
                                                      ----------    ----------

Cash at end of period                                 $   66,153    $1,118,790
                                                      ==========    ==========

Supplemental disclosure of cash flow information:
   Income taxes paid during the period                $    5,450    $    1,600
                                                      ----------    ----------
   Interest paid during the period                    $   67,629    $   48,667
                                                      ----------    ----------

Non cash financing activities:
   Warrants issued to induce the exercise of
     certain warrants                                 $       --    $  606,303
   Exercise of warrants in exchange for
     notes receivable                                 $  403,125    $       --
   Sale of stock for stock subscription               $3,130,007    $       --
   Discount on convertible notes due to
     beneficial conversion feature                    $1,443,000    $       --
  Common stock issued upon conversion of interest     $  146,542    $       --


See accompanying notes to condensed consolidated financial statements

                                       5
<PAGE>


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

1.   Business Description

SpatiaLight, Inc. (SpatiaLight or the Company) and its subsidiary SpatiaLight of
California,  Inc.  (SOC)  are  in  the  business  of  designing  high-resolution
microdisplays,  which  measure 3/4 inch in  diagonal  and  basically  consist of
liquid  crystals and a glass cover on top of a silicon chip.  These displays are
also known as and are commonly  referred to as Liquid  Crystal  Displays  (LCD),
Active Matrix Liquid Crystal Displays (AMLCD), Liquid Crystal on Silicon (LCOS),
and Spatial Light Modulators (SLM). These displays are designed in a manner that
can provide  high-resolution  images suitable for applications  such as computer
monitors,  high definition  television,  video projectors and other applications
while  utilizing  the existing  manufacturing  processes of typical  silicon and
liquid crystal  displays to obtain  economies of scale and thereby reduce costs.
To date,  the  Company  has only  sold  sample  quantities  of its  displays  to
customers who are evaluating the displays for use in their products.

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

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

2.   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of Item 310(b) of
Regulation  S-B.  Accordingly  they do not  include all of the  information  and
footnotes necessary for a fair presentation of financial  condition,  results of
operations  and cash flows in  conformity  with  generally  accepted  accounting
principles.  In the opinion of management of SpatiaLight,  the interim condensed
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 the Company's  Annual Report on
Form 10-KSB,  which contains the audited financial statements and notes thereto,
together  with the  Management's  Discussion  and  Analysis,  for the year ended
December 31, 2000.

3.   Liquidity

The Company's  operations are constrained by an  insufficient  amount of working
capital.  The  Company  continues  to  experience  negative  cash  flows and net
operating losses. The Company's  operations in recent months have been funded by
the exercise of warrants and the issuance of convertible  securities,  which are
secured by substantially  all the assets of the Company.  The Company  continues
its efforts to locate sources of additional financing. There can be no assurance
that  additional  financing  will be available to the Company.  For this reason,
there is  uncertainty  whether  the Company  can  continue  as a going  concern.
Further,  the  Company's  auditors  included a paragraph  in their report on the
audited

                                       6
<PAGE>


financial  statements as of the year ended  December 31, 2000,  indicating  that
substantial  doubt  exists as to the  Company's  ability to  continue as a going
concern.

The accompanying  consolidated  financial statements have been prepared assuming
that the  Company  will  continue  as a going  concern.  This  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business.  The Company incurred  significant  operating losses in each of the
last five fiscal years and incurred a net loss of  $7,201,966 in the nine months
ended  September 30, 2001. Of this amount,  $3,226,975 was non-cash  stock-based
expenses.  Additionally,  as of September 30, 2001,  the  Company's  accumulated
deficit totaled $37,020,148.  The Company has generated limited revenues to date
and the development,  commercialization  and marketing of the Company's products
will require substantial  expenditures in the foreseeable future. The successful
completion of the Company's  development program and ultimately,  the attainment
of profitable  operations are dependent upon future events. These events include
obtaining adequate financing to fulfill its development  activities,  successful
launching of the  commercial  production  and  distribution  of its products and
achieving a level of sales  adequate to support the  Company's  cost  structure.
These  matters,  among  others,  may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time.

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

4.   Per Share Information

Basic loss per common share available to common  shareholders  excludes dilution
and is  computed  by  dividing  loss  available  to common  shareholders  by the
weighted-average  number of common shares for the period. Excluded from weighted
average shares  outstanding for the three months and nine months ended September
30,  2001 are  2,253,410  shares of common  stock  issued  but held in escrow in
connection  with the private stock purchase  agreements and warrant  installment
notes  (see note 6).  Diluted  loss per  common  share  reflects  the  potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.  Excluded from the computation of
diluted  loss per share for the nine months  ended  September  30, 2001 and 2000
respectively, are options and warrants to acquire 8,452,812 and 5,922,312 shares
of common stock, and 3,568,460 and 2,876,714 common share  equivalents  relating
to convertible secured notes, because the effect of their assumed exercise would
be  antidilutive.  The weighted  average exercise price as of September 30, 2001
for the options,  warrants and common share  equivalents  is $3.19,  $3.16,  and
$1.21, respectively.

5.   Convertible Notes

Convertible notes at September 30, 2001 consist of the following:

A convertible note totaling $216,414, inclusive of accrued interest and net of a
discount of $990,000 issued to Argyle Capital Management Corporation,  a company
affiliated with Robert A. Olins, a Director, Chief Executive Officer,  Secretary
and Treasurer of the Company. The outstanding principal as of September 30, 2001
is  $1,188,000,  and  accrues  interest  at 6%. On May 23, 2001 the due date was
extended  until  December 31, 2002, and as a result a discount of $1,188,000 was
recorded as additional paid-in capital due to the beneficial  conversion feature
at the date of extension.  The principal  and interest is  convertible  into the
Company's  common stock at $.50 per share.  At September  30, 2001,  stock-based
interest  expense of  approximately  $64,000 was recorded due to the  beneficial
conversion feature of the accrued interest. The note is secured by substantially
all the assets of the Company.

                                       7
<PAGE>


Convertible notes totaling $2,431,206 inclusive of accrued interest and net of a
discount of $680,697,  issued to a group of investors  associated with Steven F.
Tripp,  a Director  of the  Company.  The  outstanding  principal  balance as of
September  30, 2001 is $2,875,000  and accrues  interest at 6%. On June 15, 2001
the due date was extended  until December 31, 2002 and as a result a discount of
$255,000  was  recorded  as  additional  paid in capital  due to the  beneficial
conversion  feature at the date of extension.  Of the total amount of the notes,
$1,437,500  is  convertible  at $3.50 per share;  the  remaining  $1,437,500  is
convertible at $2.25 per share.

A convertible  note for  $257,161,  inclusive of accrued  interest,  issued to a
shareholder.  The note  accrues  interest at 6% and is due on December 31, 2001.
The note is convertible at $1.75 per share.

6.   Issuance of Securities

During the third  quarter of 2001,  the Company  issued  38,000 shares of common
stock upon the exercise of employee  stock  options and 170,000  shares of stock
upon the exercise of warrants. Total cash received was $334,110.

In July 2001,  the  Company  sold 71,429  shares of stock under a private  stock
purchase  agreement.  The  stock was sold at a price of $1.75  per  share.  Cash
received was $125,001.

In August 2001,  the Company sold 152,940  shares of stock under a private stock
purchase  agreement.  The  stock was sold at a price of $1.75  per  share.  Cash
received was $267,645.

During the third  quarter of 2001,  the Company  issued  35,640  shares upon the
conversion of accrued interest.

7.   Segment Information

The Company's chief operating decision-maker, the Chief Executive Officer (CEO),
reviews the Company's  financial  information as a single "operating segment" to
make  decisions  about  the  Company's   performance  and  resource  allocation.
Therefore  the Company  has  determined  that it  operates in a single  business
segment. The Company's revenues for 2001 consisted of sales of prototypes. There
were no foreign sales.

8.   Subsequent Event

On May 15,  2001,  the Company  sold  1,346,268  shares of stock under a private
stock purchase agreement. The stock was sold at a price of $1.75 per share. Cash
received was  $13,462.  The balance of  $2,342,507  was to be paid in four equal
quarterly  installments.  An escrow  agent is holding  the  certificate  for the
shares being purchased until all four  installments  have been paid in full. The
purchaser  was  unable to make the first  installment  payment of  $585,626  for
reasons unrelated to the Company or its performance under the agreement, thereby
defaulting  under the agreement.  On October 5, 2001, the Company entered into a
new agreement  with the purchaser,  under which the purchaser  agreed to forfeit
the initial  payment made under the prior agreement and pay a price per share of
$1.87,  or  $2,517,521 in total.  The  remaining  terms of the agreement did not
change.

9.   New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141,  BUSINESS  COMBINATIONS  (SFAS 141),  and No. 142,  GOODWILL  AND OTHER
INTANGIBLE  ASSETS (SFAS 142).  SFAS 141 requires the use of the purchase method
of  accounting  and  prohibits  the use of the  pooling-of-interests

                                       8
<PAGE>


method of accounting for business  combinations  initiated  after June 30, 2001.
SFAS 141 also requires that the Company  recognize  acquired  intangible  assets
apart from  goodwill if the acquired  intangible  assets meet certain  criteria.
SFAS 141 applies to all business combinations  initiated after June 30, 2001 and
for purchase business  combinations  completed on or after July 1, 2001. It also
requires,  upon adoption of SFAS 142, that the Company  reclassify  the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

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

The Company has not entered into any  significant  business  combinations.  As a
result,  the Company does not  anticipate  that  adoption of SFAS 141 & 142 will
impact its financial position and results of operations.


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

THIS FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING  STATEMENTS WITHIN THE MEANING
OF SECTION 21E OF THE  SECURITIES  AND EXCHANGE ACT OF 1934,  AS AMENDED,  WHICH
STATEMENTS ARE SUBJECT TO THE SAFE HARBOR PROVISIONS CREATED BY THAT STATUTE. IN
THIS  REPORT,  THE  WORDS   "ANTICIPATES,"   "BELIEVES,"   "EXPECTS,"  "FUTURE,"
"INTENDS," AND SIMILAR EXPRESSIONS  IDENTIFY  FORWARD-LOOKING  STATEMENTS.  SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND  UNCERTAINTIES,  INCLUDING,  BUT NOT
LIMITED TO, THOSE  DISCUSSED  HEREIN,  THOSE CONTAINED IN THIS ITEM, 2 AND THOSE
DISCUSSED  IN THE  COMPANY'S  ANNUAL  REPORT ON FORM  10-KSB  AS FILED  WITH THE
SECURITIES AND EXCHANGE  COMMISSION ON APRIL 16, 2001. READERS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE
RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING  STATEMENTS THAT MAY BE NEEDED
TO REFLECT  EVENTS OR  CIRCUMSTANCES  AFTER THE DATE  HEREOF OR TO  REFLECT  THE
OCCURRENCE OF UNANTICIPATED EVENTS.

The  following  is a  discussion  and  analysis  of the  consolidated  financial
condition of the Company as of September 30, 2001, and the results of operations
for the Company for the three  months and nine months ended  September  30, 2001
and  2000.  The  following  should  be read in  conjunction  with the  unaudited
consolidated financial statements and related notes appearing elsewhere herein.

GENERAL

Our operations are constrained by an insufficient amount of working capital, and
we continue to experience  negative cash flows and net operating  expenses.  Our
operations  in recent  months have been funded by the  exercise of warrants  and
options,  the issuance of  convertible  securities and the sales of common stock
under private stock purchase agreements. We are continuing our efforts to locate
sources of additional  financing but there can be no assurance  that  additional
financing  will be  available.  Our


                                       9
<PAGE>


auditors  have  included a paragraph  in their  report on the audited  financial
statements as of the year ended December 31, 2000,  indicating that  substantial
doubt exists as to our ability to continue as a going concern.

During  fiscal  2001,  we  intend to meet our  working  capital  and other  cash
requirements  with cash derived  from the exercise of warrants  held by existing
investors  affiliated  with two of our  Directors,  and from the sale of  common
shares in one or more private placements to accredited  investors.  There can be
no  assurance  that such  private  placement(s)  will be  completed or that such
warrant exercise will occur.

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

OVERVIEW

SpatiaLight  is  developing  and  commercializing  a miniature,  high-resolution
active matrix liquid crystal display.  Our display is designed to be a component
in  high-resolution,  projected display systems,  which may be produced at lower
costs  than  current  or  anticipated   projection  systems.  We  have  produced
development  kits,  which  have  been made  available  to  potential  customers.
Potential  applications of this technology include projection  computer monitors
and televisions;  head mounted displays, and other display applications. We have
made only limited sales to date, and there can be no assurance that we will ever
be able to commercialize our technology.

LIQUIDITY AND CAPITAL RESOURCES

Most of our revenues to date have been derived from sales of our  prototypes and
developer kits.  Although we are producing prototype displays in anticipation of
mass production,  we have not yet completed our goal of mass production.  Delays
in  development   may  result  in  the   introduction  of  products  later  than
anticipated,  which  may  have an  adverse  effect  on both  our  financial  and
competitive  position.  Moreover,  we may never be  successful  in developing or
manufacturing  a commercially  viable  display and in addition,  we may never be
able  to  manufacture  adequate  quantities  of  our  displays  at  commercially
acceptable cost levels or on a timely basis.

As of  September  30,  2001,  we had  approximately  $66,000  in cash  and  cash
equivalents, and our net working capital at September 30, 2001 was approximately
a negative of $550,000.

Net cash used by  operating  activities  totaled  approximately  $3,600,000  and
$4,600,000 for the nine months ended September 30, 2001 and 2000,  respectively.
Cash was used primarily to fund the operating loss.

Net cash provided by financing activities in the nine months ended September 30,
2001 was  approximately  $2,800,000 as compared to approximately  $5,000,000 for
the nine months ended  September  30, 2000.  Cash was  provided  primarily  from
proceeds  from the exercise of warrants and options to purchase our common stock
and from the sales of common stock under private stock purchase agreements.

As of  September  30,  2001,  we had an  accumulated  deficit  of  approximately
$37,000,000.  We have realized significant losses in the past and we expect that
these losses will continue at least through 2001.

                                       10
<PAGE>


It is likely that we will have  quarterly  and annual losses in 2001 and beyond.
We  have  generated  limited  revenues  and  no  profits  from  operations.  The
development,  commercialization  and  marketing  of our  products  will  require
substantial  expenditures  for  the  foreseeable  future.  Consequently,  we may
continue  to  operate at a loss for the  foreseeable  future and there can be no
assurance  that our business will operate on a profitable  basis or will be able
to continue as a going concern.

RESULTS OF OPERATIONS

REVENUES. Total revenues were $10,000 and $0 for the nine and three months ended
September  30,  2001.  Total  revenues  were  $61,900 for the nine months  ended
September  30, 2000,  and $6,790 for the three months ended  September 30, 2000.
Revenues in both years were the result of sales of our display  developer  kits.
Revenue from the sales of prototypes is not  indicative of the revenue we expect
to realize on sales of our  displays  produced in  quantity.  Prototypes  have a
higher  unit  price than mass  produced  displays,  as they are custom  made and
require additional parts that are not required for displays sold in quantity.

COST OF REVENUES.  Cost of revenues represents product costs associated with the
production of display prototypes. Cost of revenues for prototypes was $1,000 and
$0 for the nine months and three months ended  September  30, 2001,  and $15,875
and $1,250 for the nine and three months ended September 30, 2000, respectively.
Gross margins associated with sales are not indicative of the gross margins that
we expect to realize on sales of units  produced  in  quantity.  Prototypes  and
developer kits have a higher unit price than mass-produced units due to the time
and effort spent with customer.

GENERAL  AND  ADMINISTRATIVE   COSTS.  General  and  administrative  costs  were
approximately  $1,900,000 and $2,000,000 in the nine months ended  September 30,
2001 and 2000, respectively. General and administrative costs were approximately
$500,000 and $600,000 in the three  months  ended  September  30, 2001 and 2000,
respectively.  This  decrease  was due  primarily  to the cost  associated  with
accrued severance payable in the second quarter of 2000.

STOCK-BASED   GENERAL  AND  ADMINISTRATIVE   COSTS.   Stock-based   general  and
administrative  costs were approximately  $1,800,000 and $73,000 in the nine and
three  months  ended  September  30,  2001,   respectively,   and  approximately
$1,200,000 and $1,100,000 in the nine and three months ended September 30, 2000,
respectively.  The amounts  incurred  relate to the  valuation of common  stock,
stock   options,   and  options  issued  in  exchange  for  services  and  other
consideration.  The amounts  incurred in 2001 relate to the issuance of warrants
and options to employees and to directors for additional services provided.  The
amount incurred in 2000 relates to stock issued in exchange for services.

RESEARCH  AND   DEVELOPMENT   COSTS.   Research  and   development   costs  were
approximately  $1,800,000 and $2,800,000 in the nine months ended  September 30,
2001 and 2000,  respectively.  Research and development costs were approximately
$700,000 and  $1,000,000 in the three months ended  September 30, 2001 and 2000,
respectively.  These decreases were due primarily to a more focused  approach in
designing our product, resulting in reduced fabrication costs.

INTEREST  INCOME.  Interest  income for the nine months ended September 30, 2001
and 2000 was approximately  $16,000 and $80,000,  respectively.  Interest income
for the three months ended September 30, 2001 and 2000 was approximately  $5,000
and $22,000,  respectively.  The decrease is consistent with lower cash balances
resulting from the decrease in cash flow from financing activities.

INTEREST EXPENSE.  Interest expense for the nine months ended September 30, 2001
and 2000 was approximately $200,000 and $125,000, respectively. Interest expense
for the three months ended


                                       11
<PAGE>


September 30, 2001 and 2000 was $70,000 and $25,000,  respectively. The increase
is consistent with the increased convertible note balances in 2001.

STOCK-BASED  INTEREST EXPENSE.  Stock-based interest expense for the nine months
ended  September 30, 2001 and 2000 was  approximately  $1,400,000  and $600,000,
respectively.  Stock-based interest expense for the three months ended September
30, 2001 and 2000 was  approximately  $400,000 and $100,000,  respectively.  The
amounts  incurred in 2001 relate  primarily to the  amortization of the discount
associated  with the  convertible  notes issued in December  1999.  The discount
related to the warrants  issued in conjunction  with the notes and was amortized
over the term of the note  using  the  interest  method.  In 2001  approximately
$965,000 of this discount was recorded.  The amount  incurred in 2000 related to
the beneficial conversion feature on interest on certain convertible notes.


BUSINESS RISKS AND UNCERTAINTIES

IF WE ARE UNABLE TO OBTAIN FURTHER FUNDING, OUR ABILITY TO OPERATE COULD SUFFER

In the  event  that we are  unable to obtain  further  funding,  or the costs of
development and operations prove greater than anticipated, we may be required to
curtail our operations or seek alternative  financing  arrangements.  Additional
financing  may not be available  to us on favorable  terms or at all. If we have
insufficient  funds or are unable to raise additional  funds, we may be required
to delay,  reduce or cease certain of our programs.  This would  materially  and
adversely affect our business. Our auditors have included a qualifying paragraph
in their  opinion in the Form 10KSB on our  financial  statements  stating  that
substantial doubt exists about our ability to continue as a going concern. Also,
refer  to  Management's   Discussion  of  Financial  Condition  and  Results  of
Operations.

WE ARE SUBJECT TO LENGTHY DEVELOPMENT PERIODS AND PRODUCT ACCEPTANCE CYCLES.

Our business model requires us to develop microdisplays that perform better than
existing  technologies,  contract with one or more third-party  manufacturers to
manufacture our prototypes in bulk, and sell the resulting  displays to original
equipment  manufacturers that will then incorporate it into their products. OEMs
make the determination  during their product development programs whether or not
to incorporate our display modules in their products. This requires us to invest
significant amounts of time and capital in designing display modules well before
our customers  introduce their products  incorporating these displays and before
we can be sure that we will generate any  significant  sales to our customers or
even recover our investment. Even if a product is successful for a short period,
competition from other sellers could limit the length of time it is successful.

WE ARE INCURRING SUBSTANTIAL RESEARCH AND DEVELOPMENT COSTS.

We currently have fourteen  engineers  based in California  working on prototype
microdisplays.  This staffing creates significant research and development costs
that may not be  recouped.  We have sold our current  prototypes  to a number of
companies  that have  indicated  they may be  willing to  incorporate  them into
products if they could buy such  displays in volume.  As we begin the process of
working  with  third  parties to  manufacture  our  designs  in  volume,  we are
continuing  to use  our  engineers  to  develop  subsequent  generations  of our
microdisplays. As a result, our overhead is expected to increase.

WE MAY EXPERIENCE DIFFICULTIES MASS-PRODUCING MICRODISPLAYS.

We need to work  closely  with our  manufacturing  sources  to  commence  volume
production of our current prototype.  Problems in implementing volume production
or lower than expected  manufacturing

                                       12
<PAGE>


yields could  significantly and adversely affect us because we will have already
incurred  the costs for the  materials  used in the  microdisplay  manufacturing
process.  These  problems  could  cause  delays  that might  lead our  potential
customers to seek other sources.

We currently  obtain silicon  backplanes from the Far East. Some Asian countries
are subject to earthquakes and typhoons.  Unless we obtain a second source,  any
disruption or termination of our silicon  manufacturing  operations in Taiwan or
air transportation with the Far East could adversely affect our operations.

Our silicon backplanes are assembled in Hong Kong with electronic  components to
create  microdisplays.  Because  our  assembly  contract  is  relatively  new we
anticipate that technical  issues in the  manufacturing  process will need to be
resolved.  The design and  manufacture  of LCDs and  display  modules are highly
complex processes that are sensitive to a wide variety of factors, including the
level  of  contaminants  in the  manufacturing  environment,  impurities  in the
materials  used,  and the  performance  of  personnel  and  equipment.  Contract
manufacturers  do not guarantee their  manufacturing  yields.  In addition,  the
complexity of manufacturing  processes will increase along with increases in the
sophistication  of our display  modules.  Low  manufacturing  yields or delivery
problems could adversely affect our operating results.

A MARKET FOR OUR PRODUCTS MAY NOT DEVELOP.

Various target markets for our micro-displays,  including projectors,  monitors,
high-definition televisions, and portable micro-displays,  are uncertain, may be
slow to  develop,  or  could  utilize  competing  technologies.  High-definition
television  has only  recently  become  available to consumers,  and  widespread
market  acceptance  is uncertain.  In addition,  the  commercial  success of the
portable microdisplay market is uncertain. Gaining acceptance in this market may
prove difficult because of the radically  different approach of microdisplays to
the  presentation of information.  In order for us to succeed,  not only must we
sell to those  manufacturers  that produce  end-product  microdisplays  that are
better and less expensive than the  alternatives  they would  otherwise use, but
also the  manufacturers  themselves  must develop  products that are  successful
commercially.  Our  failure  to  sell to  manufacturers  or the  failure  of the
ultimate  target  markets to develop as we expect  will  impede our  anticipated
growth.

OUR DISPLAYS MAY NOT SUCCEED COMMERCIALLY.

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

     o    superior technologies developed by our competitors;

     o    price considerations;

     o    lack of anticipated or actual market demand for the products; and

     o    difficulties in inducing companies to begin using our product.

WE DO NOT HAVE LONG-TERM PURCHASE COMMITMENTS FROM OUR PROSPECTIVE CUSTOMERS.

Our prospective customers have not yet provided us with firm or long-term volume
purchase  commitments.  Although we have begun to negotiate with our prospective
customers,  we currently do not have any contracts  with  customers.  Because we
have no firm, long-term volume purchase commitments

                                       13
<PAGE>


we do not have clear  order lead times or basis for  inventory  allocations.  In
addition, our prospective customers can cancel purchase commitments or reduce or
delay  orders at any time.  The  cancellation,  delay,  or reduction of customer
commitments could result in our holding excess and obsolete  inventory or having
unabsorbed  manufacturing  overhead.  Our sales to customers in the  electronics
industry, which are subject to severe competitive pressures, rapid technological
change, and product obsolescence, increases our inventory and overhead risks.

WE DEPEND ON THE MARKET ACCEPTANCE OF THE PRODUCTS OF OUR PROSPECTIVE CUSTOMERS.

We do not sell any products to  end-users.  Instead,  we design and  manufacture
various product  solutions that our prospective  customers may incorporate  into
their  products.  As a result,  our success  depends  almost  entirely  upon the
widespread  market  acceptance  of  our  prospective  customers'  products.  Any
significant slowdown in the demand for our prospective customers' products would
adversely affect our business.

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

     o    maintain  customer  satisfaction  with our  design  and  manufacturing
          services;

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

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

     o    adjust to the cyclical nature of the industries and markets we serve.

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

WE FACE INTENSE COMPETITION.

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

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

     o    our success in designing and manufacturing new display technologies;

     o    our ability to address the needs of customers;

                                       14
<PAGE>


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

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

     o    the quality of our customer services;

     o    the efficiency of our production sources;

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

     o    products or technologies introduced by our competitors.

THE ELECTRONICS INDUSTRY IS CYCLICAL.

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

WE MUST FINANCE THE GROWTH OF OUR BUSINESS AND THE DEVELOPMENT OF NEW PRODUCTS.

To remain  competitive,  we must  continue to make  significant  investments  in
research  and  development,  equipment  and  facilities.  Our  failure to obtain
financing  or  generate  sales to offset our costs  would  adversely  affect our
ability to continue operating.

We anticipate  the need for  additional  equity or debt financing to provide for
the capital  expenditures  required to maintain our research and development and
to move to production. If such financing is not available on satisfactory terms,
we may be unable to expand our  business at the rate  desired and our  operating
results may suffer.  Additional  equity  financing  could  result in  additional
dilution to existing  stockholders.  Debt financing increases expenses,  must be
repaid  regardless  of  operating  results,  and is secured  against our assets,
potentially leaving fewer resources available to equity holders.

OUR OPERATING RESULTS ARE NEGATIVE AND SUBJECT TO FLUCTUATIONS.

We have not achieved  profits in the past five years and have  experienced  cash
shortages.  We will  need to  achieve  substantial  sales  to  support  our cost
structure  before we can begin to recoup our  operating  losses and  accumulated
deficit.  Any progress toward profitability may not be steady and may be subject
to  significant  periodic  or  seasonal  quarterly  fluctuations  due to factors
including the following:

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

     o    timing of expenditures in anticipation of future orders;

     o    changes in our cost structure;

     o    availability of labor and components;

                                       15
<PAGE>


     o    pricing and availability of competitive products and services;

     o    the timing of orders;

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

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

     o    changes or anticipated changes in economic conditions.

THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.

The market price of our common  stock has been  extremely  volatile,  reflecting
reported  losses,  receipt of additional  financing  and changes of  management.
Other  companies  have found  similar  volatility  correlates  with class action
securities law suits.  The trading price of our common stock in the future could
continue to be subject to wide  fluctuations  in  response  to various  factors,
including the following:

     o    quarterly variations in our operating results;

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

     o    public announcements regarding our business developments;

     o    changes in analysts' estimates of our financial performance;

     o    general conditions in the electronics industry; and

     o    worldwide economic and financial conditions.

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

OUR COMMON STOCK MAY NOT BE LIQUID.

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

SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY  AFFECT THE PRICE OF OUR COMMON
STOCK.

Many of our  outstanding  shares are freely  tradable  without  restrictions  or
further  registration.  Sales of  substantial  amounts  of  common  stock by our
stockholders,  or even the  potential for such sales,  may adversely  affect the
market price of our common  stock and could impair our ability to raise  capital
through the sale of our equity securities.

                                       16
<PAGE>


WE DEPEND ON KEY PERSONNEL.

Our development and operations depend substantially on the efforts and abilities
of our senior management and technical personnel.  The competition for qualified
management  and technical  personnel is intense.  The loss of services of one or
more of our key  employees or the  inability to add key  personnel  could have a
material adverse affect on us. Our success depends on our ability to attract and
retain highly  qualified  scientific,  marketing,  manufacturing,  financial and
other key management personnel. We face competition for such personnel and there
can be no assurance that we will be able to attract or retain such personnel.

WE MUST PROTECT OUR INTELLECTUAL PROPERTY.

We believe  that our  success  depends  in part on  protecting  our  proprietary
technology. Third parties could claim that we are infringing on their patents or
other intellectual property rights. In the event that a third party alleges that
we are  infringing  on its  rights,  we may not be able to  obtain  licenses  on
commercially  reasonable  terms from that third party,  if at all, or that third
party may  commence  litigation  against  us. The  failure  to obtain  necessary
licenses or other rights or the  institution  of litigation  arising out of such
claims could materially and adversely affect us.

We rely on a  combination  of patent law,  trade  secret law,  attempts to limit
disclosure of our confidential information and contractual provisions to protect
our intellectual  property.  Trade secret laws and contractual provisions afford
only  limited  protection.  We  face  risks  associated  with  our  intellectual
property, including the following:

     o    pending patent applications may not be issued;

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

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

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

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

     o    effective protection of intellectual property rights may be limited or
          unavailable in some foreign countries,  such as China, in which we may
          operate.

WE FACE RISKS ASSOCIATED WITH INTERNATIONAL TRADE AND CURRENCY EXCHANGE.

Political  and  economic  conditions  abroad may  adversely  affect the  foreign
manufacture and sale of our displays.  Protectionist trade legislation in either
the United States or foreign  countries,  such as a change in the current tariff
structures,  export or import  compliance  laws, or other trade policies,  could
adversely  affect our ability to manufacture or sell displays in foreign markets
and to purchase materials or equipment from foreign suppliers.

                                       17
<PAGE>


WE MUST EFFECTIVELY MANAGE OUR GROWTH.

The  failure  to manage  our  growth  effectively  could  adversely  affect  our
operations. Our ability to manage our planned growth effectively will require us
to:

     o    enhance our operational, financial, and management systems;

     o    expand our facilities and equipment; and

     o    successfully hire, train, and motivate additional employees, including
          technical staff.

As we expand our overhead and selling  expenses  will  increase.  We also may be
required  to  increase  staffing  and  purchase  capital  equipment.  Customers,
however,  generally do not commit to firm  production  schedules for more than a
short time in advance.  Any increase in  expenditures  in anticipation of future
sales that do not materialize would adversely affect our profitability.

WE COULD BE LIABLE IN CONNECTION WITH PRODUCT LIABILITY CLAIMS.

Product liability claims may be asserted against us in the event that the use of
our products,  or products which incorporate our products,  are alleged to cause
injury or other  adverse  effects.  Our product  liability  insurance may not be
adequate to protect us against potential claims. As a result, a successful claim
against us could materially  affect our financial  stability.  In addition,  our
reputation may be affected by product  liability claims  regardless of the merit
or eventual outcome of the claim.

WE DO NOT PAY CASH DIVIDENDS.

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


PART II.  OTHER INFORMATION

ITEM 2    Changes in Securities and Use of Proceeds

During the third  quarter of 2001,  the Company  issued  38,000 shares of common
stock upon the exercise of employee  stock  options and 170,000  shares of stock
upon the exercise of warrants. Total cash received was $334,110.

In July 2001,  the  Company  sold 71,429  shares of stock under a private  stock
purchase  agreement.  The  stock was sold at a price of $1.75  per  share.  Cash
received was $125,001.

In August 2001,  the Company sold 152,940  shares of stock under a private stock
purchase  agreement.  The  stock was sold at a price of $1.75  per  share.  Cash
received was $267,645.

During the third  quarter of 2001,  the Company  issued  35,640  shares upon the
conversion of accrued interest.

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

                                       18
<PAGE>


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


ITEM 6.   Exhibits and Reports on Form 8-K


(a)       Report on Form 8-K:

          None

The 8-K report provided information pursuant to Item 4 thereof.

                                       19
<PAGE>


SIGNATURES

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

                     Date:    October 31, 2001
                              -----------------------------------

                     SpatiaLight, Inc.



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



                                       20