**United
      States**


**Securities
      and Exchange Commission**


**Washington,
      D.C. 20549**







**FORM
      10-Q/A**


**(Amendment
      No. 2)**


(Mark
      One)





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





For
      the
      quarterly period ended June 30, 2007





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





For
      the
      transition period from ______________ to
      ______________





Commission
      File Number 000-19828





**SpatiaLight,
      Inc.**


(Exact
      name of registrant as specified in its charter)





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





Five
      Hamilton Landing, Suite 100, Novato, California 94949


(Address
      of principal executive offices)





(415)
      883-1693


(Issuer’s
      telephone number)





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
x
      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 x
            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 x





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 17, 2007, there were
      97,388,513 common shares of the registrant’s common stock, par value $0.01 per
      share, issued and outstanding.







**Explanatory
      note**





This
      Amendment No. 2 to our Quarterly Report on Form 10-Q/A is being filed to amend
      our Quarterly Report on Form 10-Q for the period ended June 30, 2007, as filed
      with the Securities and Exchange Commission on August 9, 2007, as amended by
      our
      amendment on Quarterly Report on Form 10-Q/A (Amendment No. 1) for the period
      ended June 30, 2007, as filed with the Securities and Exchange Commission on
      August 13, 2007 (collectively, the “Original Filing”) for the purpose of
      reversing the impairment loss of $1,429,925 recorded against our building in
      South Korea during the first quarter of 2007. On July 24, 2007, we received
      evidence that LG Electronics (“LGE”) communicated its intention to terminate our
      Supply Agreement to Mr. Don Suh, in October 2006, in the form of an email to
      Mr.
      Suh’s personal email account. The mid-October email to Mr. Suh from LGE was
      first disclosed to SpatiaLight executives during settlement discussions by
      LGE’s
      legal counsel on July 24, 2007. At the time of the October 2006 email, Mr.
      Suh
      was our Senior Vice President for Marketing and Sales. He was later appointed
      to
      Chief Executive Officer on November 6, 2006, and was subsequently terminated
      on
      December 12, 2006. O n
      March
      9, 2007, we received oral notification from LGE of their intent to discontinue
      the production of all rear projection televisions. As a result of the October
      2006 email, we concluded that the asset impairment loss related to our building
      in South Korea should be recorded in the fourth quarter of 2006. We had
      previously recorded the impairment loss in the first quarter of 2007, based
      upon
      the March 9, 2007 notification from LGE.




This
      Amendment No. 2 to our Quarterly Report on Form 10-Q/A includes the addition
      of
      a risk factor and modifies Note 13 - Commitments and Contingencies to the
      condensed consolidated financial statements related to our potential required
      rights offering related to our August 2006 financing.




Except
        for the items described above, no other information in the Original Filing
        is
        amended hereby, and this amendment does not reflect events occurring after
        the
        Original Filing or modify or update those disclosures affected by subsequent
        events. This Amendment continues to speak as of the date of the Original
        filing,
        and does not modify or update any other item or disclosures in the Original
        Filing.





2




SPATIALIGHT,
      INC.


Quarterly
      Report on Form 10-Q/A


(Amendment
      No. 2)


For
      the
      Quarter Ended June 30, 2007





Table
      of Contents





**PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                StatementsCondensed
                Consolidated Balance Sheets as ofJune
                30, 2007 and December 31, 2006
            4Condensed
                Consolidated Statements of Operationsfor
                the Three and Six Months EndedJune
                30, 2007 and 2006
            5Condensed
                Consolidated Statement of Stockholders’Deficit
                for the Six Months Ended June 30, 2007
            6Condensed
                Consolidated Statements of Cash Flowsfor
                the Six Months Ended June 30, 2007 and 2006
            7Notes
                to Condensed Consolidated Financial Statements
            8Item
                2.
            Management’s
                Discussion and Analysisof
                Financial Condition and Results of Operations
            27Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risks
            40Item
                4.
            Controls
                and Procedures
            41**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings.
            42Item
                1A.
            Risk
                Factors.
            42Item
                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
            48Item
                6.
            Exhibits
            48SIGNATURES
            
            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 doubtfulaccounts
                    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
                
                
                5,205,926Other
                    assets
                
                
                77,440
                
                
                37,121Total
                    assets
                
                $
                5,892,284
                
                $
                6,246,044LIABILITIES
                    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 sharesissued;
                    83,062,788 and 44,482,616 shares outstanding atJune
                    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
                )
                
                (102,062,828
                )Total
                    stockholders' deficit
                
                
                (11,934,697
                )
                
                (8,838,593
                )Total
                    liabilities and stockholders' deficit
                
                $
                5,892,284
                
                $
                6,246,044
  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
              
              2006(Restated
                  -See
                  Note 2)Revenue
              
              $
              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 (includingstock-based
                  compensation of $185,766 and$976,156
                  for  the three month periods endedJune
                  30, 2007 and 2006, respectively, and$462,753
                  and $1,644,933 for the six monthperiods
                  ended June 30, 2007and
                  2006, respectively)
              
              
              1,616,655
              
              
              2,894,372
              
              
              2,878,484
              
              
              5,534,466Research
                  and development expenses
              
              
              405,389
              
              
              411,175
              
              
              699,491
              
              
              653,246Total
                  operating expenses
              
              
              2,022,044
              
              
              3,305,547
              
              
              3,577,975
              
              
              6,187,712Operating
                  loss
              
              
              (2,583,126
              )
              
              (4,848,413
              )
              
              (4,840,814
              )
              
              (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
              )
              
              (10,897,005
              )
              
              (10,936,450
              )Income
                  tax expense
              
              
              -
              
              
              -
              
              
              1,800
              
              
              800Net
                  loss
              
              $
              (6,443,275
              )
              $
              (5,304,581
              )
              $
              (10,898,805
              )
              $
              (10,937,250
              )Net
                  loss per share - basic and diluted
              
              $
              (0.11
              )
              $
              (0.13
              )
              $
              (0.21
              )
              $
              (0.28
              )Weighted
                  average shares used in computingnet
                  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****INTEREST**
                
                
                
                **OTHER**
                
                **TOTAL****COMMON**
                
                **ADDITIONAL**
                
                **TREASURY**
                
                **TO**
                
                
                
                **COMPRE-**
                
                **STOCK****STOCK**
                
                **PAID-IN**
                
                **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
                )
                $
                (102,062,828
                )
                $
                336,975
                
                $
                (8,838,593
                )Stock-based
                    compensation expense
                
                
                -
                
                
                -
                
                
                462,753
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                462,753Issuance
                    of common shares, net ofissuance
                    costs of $223,196
                
                
                2,190,476
                
                
                21,904
                
                
                2,054,900
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,076,804Issuance
                    of common sharesunder
                    the April 2007Equity
                    Credit Agreement
                
                
                16,711,495
                
                
                167,116
                
                
                1,933,094
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,100,210Issuance
                    of common shares for waivers ofcertain
                    contractual rights by September and
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -November
                    2006 investors
                
                
                1,100,000
                
                
                11,000
                
                
                1,320,000
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,331,000Return
                    of common shares and warrantsunder
                    the Settlement Agreement
                
                
                -
                
                
                -
                
                
                (602,055
                )
                
                4,002,307
                
                
                (1,640,946
                )
                
                -
                
                
                -
                
                
                -
                
                
                (2,243,001
                )Issuance
                    and sale of commonshares
                    from Escrow underthe
                    Settlement Agreement
                
                
                22,580,508
                
                
                225,805
                
                
                3,283,632
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,509,437Amortization
                    of pre-paid interest
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                578,567
                
                
                -
                
                
                -
                
                
                578,567Comprehensive
                    loss:Net
                    loss (Restated. See Note 2)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (10,898,805
                )
                
                -
                
                
                (10,898,805
                )Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (13,069
                )
                
                (13,069
                )Total
                    comprehensive loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (10,898,805
                )
                
                (13,069
                )
                
                (10,911,874
                )Balance,
                    June 30, 2007 (Restated. See Note 2)
                
                
                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
              
              2006(Restated
                  -See
                  Note 2)Cash
                  flows from operating activities:Net
                  loss
              
              $
              (10,898,805
              )
              $
              (10,937,250
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Inventory
                  reserve adjustment
              
              
              92,716
              
              
              386,329Depreciation
                  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 (Amendment No. 2), 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/A
        filed
        with the SEC on August 21, 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/A, 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”). 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.
  9
 **SPATIALIGHT,
          INC.**
 Notes
          to
          Condensed Consolidated Financial Statements (Unaudited)
  *Restatement*
  This
        Amendment No. 2 to our Quarterly Report on Form 10-Q/A is being filed to
        amend
        our Quarterly Report on Form 10-Q for the period ended June 30, 2007, as
        filed
        with the Securities and Exchange Commission on August 9, 2007, as amended
        by our
        amendment on Quarterly Report on Form 10-Q/A (Amendment No. 1) for the period
        ended June 30, 2007, as filed with the Securities and Exchange Commission
        on
        August 13, 2007 (collectively, the “Original Filing”) for the purposes of
        reversing an impairment loss of $1,429,925 recorded against our building
        in
        South Korea during the first quarter of 2007. On July 24, 2007, we received
        evidence that LG Electronics (“LGE”) communicated its intention to terminate our
        Supply Agreement to Mr. Don Suh, in October 2006, in the form of an email
        to Mr.
        Suh’s personal email account. The mid-October email to Mr. Suh from LGE was
        first disclosed to SpatiaLight executives during settlement discussions by
        LGE’s
        legal counsel on July 24, 2007. At the time of the October 2006 email, Mr.
        Suh
        was our Senior Vice President for Marketing and Sales. He was later appointed
        to
        Chief Executive Officer on November 6, 2006, and was subsequently terminated
        on
        December 12, 2006. O n
        March
        9, 2007, we received oral notification from LGE of their intent to discontinue
        the production of all rear projection televisions. As a result of the October
        2006 email, we concluded that the asset impairment loss related to our building
        in South Korea should be recorded in the fourth quarter of 2006. We had
        previously recorded the impairment loss in the first quarter of 2007, based
        upon
        the March 9, 2007 notification from LGE.
 
 Therefore,
        we have restated our condensed consolidated financial statements for the
        six
        months ended June 30, 2007.
  The
        following table outlines the effects of the restatement described above for
        the
        period that has been previously reported as of and for the six month period
        ended June 30, 2007. The three month period ended June 30, 2007 remains
        unchanged
  Previously
              
              AsReported
                  $
              
              Restated
                  $**Condensed
                  Consolidated Statement of Operations:**Impairment
                  loss
              
              
              1,429,925
              
              
              -Total
                  operating expenses
              
              
              5,007,900
              
              
              3,577,975Operating
                  loss
              
              
              (6,270,739
              )
              
              (4,840,814
              )Loss
                  before income tax expense
              
              
              (12,326,930
              )
              
              (10,897,005
              )Net
                  loss
              
              
              (12,328,730
              )
              
              (10,898,805
              )Net
                  loss per share: basic and diluted
              
              
              (0.24
              )
              
              (0.21
              )
 
 **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
        $10.9 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.
   10


**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.
  11




**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.
  12


**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
                    
                    $
                    3,305,102Other
                        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
                    
                    
                    8,680,524Accumulated
                        depreciation
                    
                    
                    (3,112,662
                    )
                    
                    (3,474,598
                    )Property,
                        plant and equipment, net
                    
                    $
                    4,889,070
                    
                    $
                    5,205,926
  13


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




**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.
 
 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.
  14


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


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.
 
 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.






15


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




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.
 
 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:
 **Balance
                        at December 31, 2006**
                    
                    **Addition
                        or New Discount**
                    
                    **(Payment)
                        or Discount Amortization**
                    
                    **Conversion
                        to Equity**
                    
                    **Balance
                        at June 30, 2007****Debt
                        Principal:**Argyle
                        note
                    
                    $
                    1,188,000
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    1,188,000Senior
                        Secured Convertible Notes
                    
                    
                    10,000,000
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    10,000,000Senior
                        Secured Convertible Notesbeneficial
                        conversion feature
                    
                    
                    (47,860
                    )
                    
                    -
                    
                    
                    26,100
                    
                    
                    -
                    
                    
                    (21,760
                    )Reimbursement
                        of investor's legal fees
                    
                    
                    (30,556
                    )
                    
                    -
                    
                    
                    16,667
                    
                    
                    -
                    
                    
                    (13,889
                    )Senior
                        Secured Convertible NotesAIR
                        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.
  17


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


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, 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 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
  Activity
        in notes payable for the three months ended June 30, 2007 is as
        follows:
  **Balance
                    at March 31, 2007**
                
                **Addition
                    or New Discount**
                
                **(Payment)
                    or Discount Amortization**
                
                **Conversion
                    to Equity**
                
                **Balance
                    at June 30, 2007****Debt
                    Principal:**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.
 
 18




**SPATIALIGHT,
        INC.**
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
  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.
 
 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.
  19
 **SPATIALIGHT,
          INC.**
 Notes
          to
          Condensed Consolidated Financial Statements (Unaudited)
 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.
 
 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.
  20
 **SPATIALIGHT,
          INC.**
 Notes
          to
          Condensed Consolidated Financial Statements (Unaudited)
 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”.
 
 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
  21
 **SPATIALIGHT,
          INC.**
 Notes
          to
          Condensed Consolidated Financial Statements (Unaudited)
  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.
  **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.
  22
 **SPATIALIGHT,
          INC.**
 Notes
          to
          Condensed Consolidated Financial Statements (Unaudited)
 **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. 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. Upon adoption of FIN 48, we commenced a review
        of our tax positions taken in our tax returns that remain subject to
        examination. Based upon our review, we do not believe we have any unrecognized
        tax benefits or that there is a material impact on our financial condition
        or
        results of operations as a result of implementing FIN 48.
 
 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.
  23
 **SPATIALIGHT,
          INC.**
 Notes
          to
          Condensed Consolidated Financial Statements (Unaudited)
 *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.
  *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.
  *Potential
        Required Rights Offering:*
 As
          part
          of the August 2006 Financing, we agreed to file a “shelf” registration
          statement covering subscription rights of at least $20,000,000 (the “Required
          Rights Offering”) to be offered to the holders of our common stock unless we
          raised at least $10,000,000
          in additional financing between August 9, 2006 and 30 days after the effective
          date of the registration statement, which was declared effective on February
          14,
          2007, or March 15, 2007 (“Additional Financing Deadline”). On October 25, 2006,
          these requirements were amended to (i) extend the Additional Financing
          Deadline
          by 30 days if we raised at least $1,000,000 in additional financing; (ii)
          extend
          the Additional Financing Deadline by 30-60 days, pro-rated, if we raised
          between
          $3,000,000 and $5,000,000 in additional financing; (iii) extend the Additional
          Financing Deadline by 60 days and reduce the Required Rights Offering pro
          rata
          if we raised more than $5,000,000 in additional financing. As of May 15,
          2007,
          the Additional Financing Deadline, we raised $6,700,000 in additional financing.
          Because we did not raise $10,000,000, we may be obligated to file a “shelf” registration
          statement covering subscription rights of $13,300,000.
 
 We
          believe that the Equity Credit Agreement signed on April 26, 2007, 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, is consistent with the intent of the additional
          financing requirements, which was to insure the Company had access to adequate
          funding to support operations for an extended period of time.
 
 In
          the
          event that the purchasers of securities in our August 2006 Financing do
          not
          agree with our interpretation, they may be entitled to contractual damages
          and
          may also request that we specifically perform our obligations under the
          purchase
          agreement giving rise to our obligations. At present, we are unable to
          quantify
          the amount of contractual damages to which the purchasers would be entitled,
          and
          we are unable to estimate the likelihood that a court would grant any
          purchaser’s application that we specifically perform our obligations.
  *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. We do 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 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
        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.
  24
 **SPATIALIGHT,
          INC.**
 Notes
          to
          Condensed Consolidated Financial Statements (Unaudited)
 *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 proscribed
        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 provided
        by
        the Company’s corporate counsel at the 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.
 
 *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.
  25
 **SPATIALIGHT,
          INC.**
 Notes
          to
          Condensed Consolidated Financial Statements (Unaudited)
 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.
 
 The
        reverse stock split will require retroactive restatement of all historical
        shares 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
                )
                $
                (10.55
                )
                $
                (13.89
                )
   26
  **ITEM
        2.**  **Management’s Discussion and Analysis of Financial Condition and Results of
        Operations.**
 
 *This
        Form 10-Q/A Amendment No. 2 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/A as
        filed with the U.S. Securities and Exchange Commission on August 21, 2007,
        the
        Company’s Quarterly Report on Form 10-Q/A, as filed with the SEC on August 21,
        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/A
        filed with the SEC on August 21, 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 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
        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.
  32
 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.
 
 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. LGE has informed us that they intend 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
        significantly harm our sales and 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, 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
  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. LGE has 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 significantly harm our sales and 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.
 
 *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.
 
 *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 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.
  37
  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.
  38
  *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”).
  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.
 
 39
  *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.
  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 the estimated fair
        value
        of the long-lived assets.
 
 **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.
  40
 **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”).
  *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/A filed with the SEC on August 21,
        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.
 
 41
  **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.
 
 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/A filed with the SEC on August 21, 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.
  42
 **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.
 
 **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.
  43
 
 **We
            have a liability due to requirements to raise additional capital in the
            manner
            described in the purchase documents related to our private placement
            of common
            shares in August 2006.**
 
 As
            part
            of the August 2006 Financing, we agreed to file a “shelf” registration
            statement covering subscription rights of at least $20,000,000 (the “Required
            Rights Offering”) to be offered to the holders of our common stock unless we
            raised at least $10,000,000
            in additional financing between August 9, 2006 and 30 days after the
            effective
            date of the registration statement, which was declared effective on February
            14,
            2007, or March 15, 2007 (“Additional Financing Deadline”). On October 25, 2006,
            these requirements were amended to (i) extend the Additional Financing
            Deadline
            by 30 days if we raised at least $1,000,000 in additional financing;
            (ii) extend
            the Additional Financing Deadline by 30-60 days, pro-rated, if we raised
            between
            $3,000,000 and $5,000,000 in additional financing; (iii) extend the Additional
            Financing Deadline by 60 days and reduce the Required Rights Offering
            pro rata
            if we raised more than $5,000,000 in additional financing. As of May
            15, 2007,
            the Additional Financing Deadline, we raised $6,700,000 in additional
            financing.
            Because we did not raise $10,000,000, we may be obligated to file a “shelf” registration
            statement covering subscription rights of $13,300,000.
 
 We
            believe that the Equity Credit Agreement signed on April 26, 2007, 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, is consistent with the intent of the additional
            financing requirements, which was to insure the Company had access to
            adequate
            funding to support operations for an extended period of time.
 
 In
            the
            event that the purchasers of securities in our August 2006 Financing
            do not
            agree with our interpretation, they may be entitled to contractual damages
            and
            may also request that we specifically perform our obligations under the
            purchase
            agreement giving rise to our obligations. At present, we are unable to
            quantify
            the amount of contractual damages to which the purchasers would be entitled,
            and
            we are unable to estimate the likelihood that a court would grant any
            purchaser’s application that we specifically perform our obligations.
 44
 **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.
 
 **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;
  45
  ·
              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.
 
 **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
 
 46
  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
 
 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, 2007.
 
 For:
        36,955,570  Against:
        344,819   Abstain:
        211,100
  47
 **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.**
 4.1
                
                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.
  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
                22, 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