<PAGE>

                                  United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549
-------------------------------------------------------------------------------
                                    FORM 10-Q

(Mark One)

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

                  For the quarterly period ended June 30, 2003

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

 For the transition period from _____________________ to ______________________

                        Commission File Number 000-19828

                               SpatiaLight, Inc.
             (Exact name of registrant as specified in its charter)


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


           Five Hamilton Landing, Suite 100, Novato, California 94949
           ----------------------------------------------------------
                    (Address of principal executive offices)


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


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


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


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

         State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 31,020,887 shares of common
stock as of August 12, 2003.






                                       1
<PAGE>



                                SPATIALIGHT, INC.

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


                                Table of Contents

PART I            FINANCIAL INFORMATION

         Item 1.  Condensed Financial Statements (unaudited)

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

                  Condensed Statements of Operations
                  for the Three months and Six Months
                  Ended June 30, 2003 and 2002..............................4

                  Condensed Statements of Stockholders' Deficit
                  for the Six months Ended June 30, 2003....................5

                  Condensed Statements of Cash Flows
                  for the Six months Ended June 30, 2003 and 2002...........6

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

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

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

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

PART II           OTHER INFORMATION

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

         Item 4.  Submission of Matters to a Vote of Security Holders.......33

         Item 6.  Exhibits and Reports on Form 8-K..........................34


                                       2
<PAGE>

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

SPATIALIGHT, INC.
BALANCE SHEET

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

Current assets
<S>                                                           <C>             <C>
  Cash and cash equivalents                                   $  2,316,225    $    575,663
  Inventory                                                        706,264         275,959
  Prepaids and other current assets                                509,690         565,515
                                                              ------------    ------------
          Total current assets                                   3,532,179       1,417,137

Property and equipment, net                                        402,951         506,968
Other assets                                                       182,157         134,349
                                                              ------------    ------------

               Total assets                                   $  4,117,287    $  2,058,454
                                                              ============    ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
  Accounts payable                                            $    635,824    $  2,018,230
  Other short-term notes                                           657,500              --
  Current portion of convertible notes                           4,398,188              --
  Accrued stock-based expenses                                     536,087              --
  Accrued expenses and other current liabilities                   328,370         206,796
                                                              ------------    ------------
        Total current liabilities                                6,555,969       2,225,026

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

               Total liabilities                                 6,555,969       6,432,258
                                                              ------------    ------------

Commitments

Stockholders' deficit:
  Common stock, $.01 par value:
     50,000,000 shares authorized;
     29,790,111 and 26,018,658 shares issued and outstanding       297,901         260,187
Additional paid-in capital                                      52,307,648      45,550,830
Notes and stock subscriptions receivable                        (1,412,475)     (1,426,999)
Accumulated deficit                                            (53,631,756)    (48,757,822)
                                                              ------------    ------------
        Total stockholders' deficit                             (2,438,682)     (4,373,804)
                                                              ------------    ------------

Total liabilities and stockholders' deficit                   $  4,117,287    $  2,058,454
                                                              ============    ============
</TABLE>


See accompanying notes to financial statements.

                                       3


<PAGE>

SPATIALIGHT, INC.
STATEMENTS OF OPERATIONS (unaudited)

<TABLE>
<CAPTION>
                                                                Three months ended June 30,            Six months ended June 30,
                                                                  2003               2002               2003               2002
                                                             ------------       ------------       ------------       ------------
Selling, general and administrative expenses:
<S>                                                          <C>                <C>                <C>                <C>
   Selling, general and administrative expenses              $    915,166       $    581,139       $  1,372,828       $  1,166,350
   Stock-based general and administrative expenses              1,485,179              2,992          1,658,932            268,969
                                                             ------------       ------------       ------------       ------------
     Total selling, general and administrative expenses         2,400,345            584,131          3,031,760          1,435,319


   Inventory writedown                                            100,690                 --            100,690                 --
   Research and development expenses                              666,705            668,260          1,391,302          1,375,966
                                                             ------------       ------------       ------------       ------------

          Total operating expenses                              3,167,740          1,252,391          4,523,752          2,811,285
                                                             ------------       ------------       ------------       ------------

          Operating loss                                       (3,167,740)        (1,252,391)        (4,523,752)        (2,811,285)
                                                             ------------       ------------       ------------       ------------

Other income (expenses):

  Interest expense:
          Interest expense                                        (38,239)           (64,734)          (109,189)          (127,867)
          Stock-based interest expense                           (142,812)          (487,171)          (278,977)          (974,307)
                                                             ------------       ------------       ------------       ------------
            Total interest expense                               (181,051)          (551,905)          (388,166)        (1,102,174)

   Interest and other income                                       18,588              1,180             37,976              8,598
                                                             ------------       ------------       ------------       ------------

          Total other expenses                                   (162,463)          (550,725)          (350,190)        (1,093,576)
                                                             ------------       ------------       ------------       ------------

   Loss before income tax expense                              (3,330,203)        (1,803,116)        (4,873,942)        (3,904,861)

Income tax expense (credit)                                          (808)                --                 (8)             1,425
                                                             ------------       ------------       ------------       ------------

Net loss                                                     $ (3,329,395)      $ (1,803,116)      $ (4,873,934)      $ (3,906,286)
                                                             ============       ============       ============       ============

Net loss per share - basic and diluted                       $      (0.13)      $      (0.07)      $      (0.19)      $      (0.16)
                                                             ============       ============       ============       ============

Weighted average shares used in computing
 net loss per share- basic and diluted                         26,354,526         24,133,985         25,963,626         23,996,653
                                                             ============       ============       ============       ============
</TABLE>

See accompanying notes to  financial statements


                                        4
<PAGE>


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

<TABLE>
<CAPTION>
                                                                              ADDITIONAL                                   TOTAL
                                                         COMMON STOCK          PAID-IN        NOTES       ACCUMULATED  STOCKHOLDERS'
                                                       SHARES      AMOUNT      CAPITAL      RECEIVABLE     (DEFICIT)      DEFICIT
                                                    ------------ ---------- -------------- ------------- -------------- ------------
<S>                                                  <C>         <C>         <C>           <C>           <C>             <C>
Balance, January 1, 2003                             26,018,658  $ 260,187   $ 45,550,830  $ (1,426,999) $ (48,757,822)  (4,373,804)

Exercise of stock options and warrants                    7,500         75          9,300                                     9,375

Payments on notes receivable from stockholders                                                   52,500                      52,500

Accrued interest on notes receivable from
 stockholders                                                                                   (37,976)                    (37,976)

Issuance of stock, stock options, and warrants
for services                                             79,000        790        467,390                                   468,180

Issuance of stock and options to employees
and directors                                                                      22,005                                    22,005

Conversion of accrued interest                          142,360      1,423        353,054                                   354,477

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

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

Private placement net of issuance cost of $175,065    2,796,325     27,963      4,946,972                                 4,974,935

Beneficial pricing on stock and warrants acquired in
   private placement                                                              958,913                                   958,913
Net loss                                                                                                    (4,873,934)  (4,873,934)
                                                    ------------ ---------- -------------- ------------- -------------- ------------
Balance, June 30, 2003                               29,790,111  $ 297,901   $ 52,307,648  $ (1,412,475) $ (53,631,756)  (2,438,682)
                                                    ============ ========== ============== ============= ============== ============
</TABLE>


See accompanying notes financial statements


                                       5
<PAGE>

SPATIALIGHT, INC.
STATEMENTS OF CASH FLOW (unaudited)

<TABLE>
<CAPTION>
                                                                                   Six months ended June 30,
                                                                                 -----------------------------
Cash flows from operating activities:                                                2003              2002
                                                                                 -----------       -----------
<S>                                                                              <C>               <C>
Net loss                                                                         $(4,873,934)      $(3,906,286)
Adjustments to reconcile net loss to net cash used by operating activities:

  Depreciation and amortization                                                      128,728           190,366
  Stock-based general and administrative expense                                   1,658,932           268,969
  Stock-based interest expense                                                       278,977           974,307
  Fees reimbursed to officer for stock financing                                     250,000                --
  Inventory adjustment                                                               100,690                --
  Changes in operating assets and liabilities:
     Inventory                                                                      (530,995)               --
     Prepaid and other current assets                                                267,713          (503,490)
     Accounts payable                                                             (1,382,406)          148,235
     Accrued expenses and other current liabilities                                  259,053            83,888
     Other assets                                                                    (85,795)          (34,292)
                                                                                 -----------       -----------

                                 Net cash used in operating activities            (3,929,037)       (2,778,303)
                                                                                 -----------       -----------

Cash flows from investing activities:
  Purchase of property and equipment                                                 (24,711)         (206,532)
                                                                                 -----------       -----------

                                 Net cash used in investing activities               (24,711)         (206,532)
                                                                                 -----------       -----------

Cash flows from financing actitivies:
  Payments on capital lease obligations                                                   --            (2,922)
  Proceeds from issuance of short term notes                                         792,500                --
  Payment on short term notes                                                       (135,000)               --
  Payments on stock subscriptions and notes receivable from shareholders                  --            21,875
  Proceeds from issuance of common stock                                           4,974,935                --
  Accrued interest on notes receivable from shareholders                              52,500                --
  Proceeds from exercise of warrants and options                                       9,375           592,483
                                                                                 -----------       -----------

                             Net cash provided by financing activities             5,694,310           611,436
                                                                                 -----------       -----------

Net increase(decrease) in cash and cash equivalents                                1,740,562        (2,373,399)

Cash and cash equivalents at beginning of period                                     575,663         2,728,134
                                                                                 -----------       -----------
Cash and cash equivalents at end of period                                       $ 2,316,225       $   354,735
                                                                                 ===========       ===========
Supplemental disclosure of cash flow information:

  Income taxes paid during the period                                            $         8       $     1,425
                                                                                 -----------       -----------
  Interest paid during the period                                                $        --       $       294
                                                                                 -----------       -----------
Non cash financing activities:


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


See accompanying notes to financial statements.


                                       6
<PAGE>


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

NOTE 1.  Business Description

SpatiaLight,   Inc.   (SpatiaLight  or  the  Company)  is  in  the  business  of
manufacturing  high-resolution  microdisplays  for applications such as computer
monitors,  high definition television,  video projectors and other applications.
To date, the Company has entered into  agreements or memoranda of  understanding
with  eight  original  equipment  manufacturers  (OEMs)  in China  and two such
agreements with OEMs in the Republic of South Korea.

On January 29, 2003, the Company  announced  that it had concluded  negotiations
with Skyworth Display Ltd.  (Skyworth),  resulting in a signed agreement for the
purchase by Skyworth of 14,100 display units from SpatiaLight  during a one-year
delivery  period.  Beginning in August,  the Company is scheduled to deliver the
first 200 units and a total of 400  additional  units  during the third  quarter
2003.  After the  delivery of the first 600 units,  the Company is  scheduled to
deliver  1,500  units per month  until the order is  completed.  Pursuant to the
terms of the  purchase  order,  the  obligations  of Skyworth  will be backed by
letters of credit in the  Company's  favor to be issued  monthly.  The  purchase
order is cancelable  by Skyworth on a quarterly  basis and is subject to pricing
contingencies  and  other  customary  terms  and  conditions.  The  Company  has
delivered the requisite  number of SpatiaLight  imagEngine(TM)  microdisplays to
Fuji Photo  Optical Co.,  Ltd. for  incorporation  into the display  units to be
delivered to Skyworth in the first of the twelve monthly deliveries.

NOTE 2.  Basis of Presentation

The accompanying  unaudited condensed financial statements have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information  and with the  instructions  to Form 10-Q of Item 303 of  Regulation
S-K.  Accordingly,  they do not include  all of the  information  and  footnotes
necessary for a fair presentation of financial condition,  results of operations
and cash flows in conformity with generally accepted accounting  principles.  In
the  opinion of  management  of  SpatiaLight,  the interim  condensed  financial
statements  included  herewith  contain all  adjustments  (consisting  of normal
recurring accruals and adjustments)  necessary for their fair presentation.  The
unaudited interim condensed  financial  statements should be read in conjunction
with the  Company's  Annual  Report on Form 10-KSB,  which  contains the audited
financial   statements  and  notes  thereto,   together  with  the  Management's
Discussion  and  Analysis,  for the year ended  December 31,  2002.  The interim
results for the period  ended June 30, 2003 are not  necessarily  indicative  of
results for the full fiscal year.

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

NOTE 3.  Liquidity

As of June 30,  2003 the Company has  sustained  recurring  losses and had a net
capital  deficiency  of  approximately  $2,400,000,  and a net  working  capital
deficiency of approximately $3,000,000. Reflected in these amounts is $5,150,000
raised in a stock  financing  completed  in May 2003 (See Note 6). On August  8,
2003 the Company raised  $2,763,500 in a private  placement of 1,212,061 shares.
Management  believes  that  these  funds  along  with  existing  cash  balances,
anticipated collections of stock subscriptions  receivable of $1,400,000 and the
anticipated exercise of warrants


                                       7
<PAGE>


held by existing  investors will fund the Company's ongoing  operations  through
2004. Management anticipates that cash expenditures during 2003 will approximate
$400,000 per month, or approximately $5 million for the year,  without regard to
any revenues in 2003.  The Company's  continued  existence is dependent upon its
ability to generate revenue by successfully  marketing and selling its products;
however,  there  can  be  no  assurance  that  the  Company's  efforts  will  be
successful.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern.  This  contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company  incurred  significant  operating losses in each of the last five fiscal
years and  incurred  a net loss of  approximately  $4,874,000  in the six months
ended June 30,  2003.  Of this  amount,  approximately  $2,200,000  was non-cash
stock-based  expenses.   Additionally,  as  of  June  30,  2003,  the  Company's
accumulated deficit totaled approximately $53,600,000. The Company has generated
limited  revenues  to  date  and  the  commercialization  and  marketing  of the
Company's  products will require  substantial  expenditures  in the  foreseeable
future.  The  successful  completion  of the Company's  development  program and
ultimately,  the  attainment of profitable  operations is dependent  upon future
events. These events include successful  launching of the commercial  production
and  distribution  of its  products and  achieving a level of sales  adequate to
support the Company's cost structure.  These matters, among others, may indicate
that the Company will be unable to continue as a going  concern for a reasonable
period of time. The Company's  auditors  included a paragraph in their report on
the  audited  financial  statements  for  the  year  ended  December  31,  2002,
indicating that substantial doubt exists as to the Company's ability to continue
as a going concern.

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

NOTE 4.  Per Share Information

Basic loss per common share available to common  shareholders  excludes dilution
and is  computed  by  dividing  loss  available  to common  shareholders  by the
weighted-average  number of common shares for the period. Excluded from weighted
average  shares  outstanding  for the three months and six months ended June 30,
2003  are  1,346,268  shares  of  common  stock  issued  but held in  escrow  in
connection with private stock purchase agreements and warrant installment notes.
Diluted loss per common share  reflects the potential  dilution that could occur
if  securities  or other  contracts  to issue  common  stock were  exercised  or
converted  into common  stock.  Options and  warrants to acquire  5,968,289  and
6,696,268  shares of common stock,  and  3,767,980  and  3,425,603  common share
equivalents  relating to convertible secured notes, for the three and six months
ended June 30, 2003 and 2002, respectively, are excluded from the computation of
diluted loss per share  because the effect of their  assumed  exercise  would be
antidilutive.  The weighted  average  exercise price as of June 30, 2003 for the
options and  warrants is $2.37 and $3.05,  respectively;  the  weighted  average
conversion price for the common share  equivalents  related to convertible notes
is $1.16.

                                       8

<PAGE>


NOTE 5.  Notes Payable

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

Argyle Notes:

In 1998, the Company  received  $1,188,000 in cash in exchange for notes in that
amount to Argyle Capital Management  Corporation  (Argyle),  a company owned and
controlled  by Robert A.  Olins,  Acting  Chief  Executive  Officer,  Secretary,
Treasurer,  and a  Director  of the  Company.  The notes  accrue  interest  at a
contractual  rate of 6% per  annum,  and are  secured by  substantially  all the
assets of the Company.  Both  principal  and interest are  convertible  into the
Company's  common stock at $.50 per share.  On May 23, 2001, the due date of the
notes  was  extended  until  December  31,  2002.  On the  extension  date,  the
beneficial  conversion  effect  representing  the excess  aggregate value of the
common shares  receivable upon conversion of the notes based on the then current
market price of $1.90 per share,  over the aggregate  conversion  price for such
common shares (limited to the original proceeds of $1,188,000),  was recorded as
additional  paid-in  capital.  The  resulting  $1,188,000  discount  to the debt
arising  from the  beneficial  conversion  feature was being  amortized  through
December 31, 2002. The effective interest rate for financial  statement purposes
due to this discount differs from the actual  contractual  interest  received or
receivable  in  cash  or  shares  by  Argyle.  This  discount,  along  with  the
contractual 6% interest rate,  resulted in a new effective  interest rate of 72%
per annum as of the May 23, 2001 extension date when compared to the outstanding
principal  balances.  The effective  rate prior to extension had been the 6% per
annum  contractual  rate. On September 20, 2002, the due date was extended until
March 31, 2004. Accordingly, the remaining unamortized discount at the extension
date of $198,000 is being amortized  through March 31, 2004,  resulting in a new
effective  interest  rate of 17% per  annum  when  compared  to the  outstanding
principal balances.

On January 3, 2003 the Company  issued  142,360  shares of common stock upon the
conversion of prepaid interest of $354,477.  Prepaid interest was computed using
the  closing  price of the common  stock on December  31, 2002 of $2.49,  and is
being  amortized  through  December 31, 2003.  For the six months ended June 30,
2003,  additional  stock-based  interest expense of  approximately  $141,600 was
recorded  due to the  beneficial  conversion  feature of the  prepaid  interest,
representing  the excess value of the common shares  received upon conversion of
the prepaid  interest.  At June 30, 2003, the carrying value of the Argyle notes
totals  $1,089,000,  which  includes  the  $1,188,000  principal  balance net of
unamortized discounts of $99,000. See also Note 6.

Alabama Group Notes:

In December  1999, the Company  received  $1,437,500 in cash and issued notes in
that amount to a group of investors  (the  "Alabama  Group"),  which  includes a
trust for the benefit of Steven F. Tripp,  a Director of the Company.  Mr. Tripp
is not the  trustee  of this  trust and has no power to vote or  dispose  of the
Common Shares of the Company or any other securities held by that trust.  Marcia
K. Tripp, Steven F. Tripp's mother, is the trustee of this trust and directs and
is responsible for all of the investment decisions of this trust. In the opinion
of the Company,  no other  investor in the Alabama  Group is an affiliate of the
Company and Mr. Tripp is not an  affiliate of any other  investor in the Alabama
Group.  The notes accrue interest at a contractual rate of 6% per annum, and are
secured by substantially all the assets of the Company. At the time of issuance,
this portion of the notes was  convertible  into shares of the Company's  common
stock at $3.50 per share.  Upon  issuance of the notes,  the Company also issued
warrants to purchase 821,429 shares of common stock. The warrants were exercised
on  June  28,   2002.   The  warrants   were  valued  using  the   Black-Scholes
option-pricing model and the following assumptions: contractual life 2.5 years;


                                       9


<PAGE>


volatility 114%; risk-free interest rate 6%; and dividend yield of $0. The total
cash received from the issuance of this tranche of notes of $1,437,500  was less
than the calculated  value  associated with the warrants.  Therefore,  the value
assigned to the warrants was limited to the original proceeds of $1,437,500, and
has been recorded as a discount on the notes.  The  effective  interest rate for
financial  statement  purposes  due to this  discount  differs  from the  actual
contractual  interest  received  or  receivable  in cash by the  holders  of the
Alabama Group Notes.  This  discount,  along with the  contractual  6% per annum
interest  rate,  resulted in an  effective  interest  rate of 70% per annum when
compared to the outstanding principal balances.

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

On June 15, 2001,  the due date of both tranches was extended until December 31,
2002. On the extension date, the excess  $255,000  aggregate value of the common
shares  receivable upon conversion of the notes based on the then current market
price of $2.65 per  share,  over the  aggregate  conversion  price for the notes
convertible  at $2.25 per share,  was recorded as a debt discount and additional
paid-in  capital.  The resulting  $255,000  discount to the debt, along with the
remaining  unamortized  discount  for the first  tranche,  was  being  amortized
through December 31, 2002. The effective  interest rate for financial  statement
purposes due to these discounts  differed from the actual  contractual  interest
received  or  receivable  by the  holders  of the  Alabama  Group  Notes.  These
discounts,  along with the contractual 6% per annum interest rate, resulted in a
new effective  interest rate upon extension of 25% per annum as of the extension
date when compared to the outstanding principal balances. On September 20, 2002,
the due  date of both  tranches  was  extended  until  March  31,  2004.  On the
extension  date,  the  excess  $58,000  aggregate  value  of the  common  shares
receivable  upon  conversion of the notes based on the then current market price
of $2.34 per share over the aggregate conversion price for the notes convertible
at  $2.25  per  share,   was  recorded  as  a  debt   discount  and   additional
paid-in-capital.   Accordingly,   the  remaining  unamortized  discount  at  the
extension  date of  $194,195  including  the new  discount  of  $58,000 is being
amortized through March 31, 2004,  resulting in a new effective interest rate of
10.5% per annum when compared with to the  outstanding  principal  balances.  At
June 30, 2003, the carrying value of the Alabama notes totals $3,309,000,  which
includes principal balance plus accrued interest of $531,000, net of unamortized
discounts of $97,000.

On May 21, 2003, the Alabama Group released its security  interest in the assets
of the Company in  consideration  for a reduction in the conversion price of the
first  tranche  of notes from  $3.50 to $2.25.  The  market  price on the day of
conversion,  which was deemed to be the commitment date for accounting purposes,
was lower than the new  conversion  price;  therefore,  there was no  beneficial
conversion effect.

Other Short-term Notes

During the first quarter of 2003, the Company received proceeds of $595,000 from
borrowings under short-term  notes. Of this amount,  $135,000 was retired during
the second quarter and an additional  $197,500 was issued.  At June 30, 2003 the
outstanding balance on short-term notes,  excluding the Alabama and Argyle notes


                                       10


<PAGE>


discussed  above,  was  $658,000.  Of this  outstanding  balance,  $315,000 were
convertible  notes,  with conversion  prices ranging from $2.67 to $3.16,  which
approximate  the stock price on the dates of  issuance.  Therefore,  there is no
beneficial  conversion effect associated with these notes. A warrant to purchase
10,000 shares of the Company's common stock was issued in lieu of interest for a
short-term  note.  Interest  expense of $6,647 was  recorded  during the quarter
using a  Black-Scholes  option pricing model.  (See Note 6). The note was repaid
during the quarter. All outstanding notes at June 30, 2003 accrue interest at 6%
per annum and have maturity dates ranging from immediately to 184 days.

Activity in notes payable for the six months ended June 30, 2003 follows:


<TABLE>
<CAPTION>
                                                                                  (Payment) or
                                               Balance at        Addition or       Discount         Conversion to      Balance at
Debt Principal:                            December 31, 2002    New Discount     Amortization          Equity        June 30, 2003
                                         ------------------------------------------------------------------------------------------
<S>                                            <C>               <C>             <C>                <C>                <C>
Argyle                                         $ 1,188,000       $         -     $             -    $            -     $ 1,188,000
Argyle discount                                   (165,000)                -              66,000                 -         (99,000)
Alabama Group                                    2,875,000                 -                   -                 -       2,875,000
Alabama Group Discount                            (161,829)                -              64,732                 -         (97,097)
Other short term notes (convertible and other)           -           792,500            (135,000)                -         657,500
                                         ------------------  ---------------- ------------------- -----------------  --------------
                 Total                           3,736,171           792,500              (4,268)                -       4,524,403
                                         ------------------  ---------------- ------------------- -----------------  --------------
Interest:
Accrued Argyle 6%                                        -            35,640                   -           (35,640)              -
Accrued Alabama 6%                                 471,061            60,224                   -                 -         531,285
Beneficial interest                                      -           141,598                   -          (141,598)              -
                                         ------------------  ---------------- ------------------- -----------------  --------------
                 Total                             471,061           237,462                   -          (177,238)        531,285

                                         ------------------  ---------------- ------------------- -----------------  --------------
Total                                          $ 4,207,232       $ 1,029,962     $        (4,268)   $     (177,238)    $ 5,055,688
                                         ==================  ================ =================== =================  ==============
</TABLE>


Stock-based interest expense discussed above is as follows:




                                                  Six months ended June 30,
                                               ------------------------------
                                                   2003              2002
                                               -------------   --------------
Amortization of Alabama group discount         $   64,732       $     272,386

Amortization of Argyle Capital discount            66,000             396,000
Effect of beneficial conversion priviledges
   on accrued interest                            141,598             265,921

Other                                               6,647              40,000
                                               -------------   --------------
                                               $  278,977       $     934,307
                                               =============   ==============


                                       11
<PAGE>


NOTE 6.  Issuance of Securities

Issuance of Stock during the six months ended June 30, 2003

In May 2003,  the Company issued  2,796,325  shares of common stock at $1.84 per
share and 699,080 fully vested warrants with a strike price of $2.65 in exchange
for net  proceeds of  $4,974,935.  Of this amount  1,357,441  shares and 339,360
warrants were purchased by Robert A. Olins, Acting Chief Executive Officer and a
director.  Consequently,  the Company  recognized  non-cash  expense of $958,913
related to the deemed beneficial  pricing Robert A. Olins received;  the expense
consists of two components. First, an expense of $538,106, representing the fair
value  of the  warrant  issued  to  Robert  A.  Olins  has  been  recognized  in
stock-based  general and  administrative  expense in the quarter  ended June 30,
2003, using a Black-Scholes option pricing model and the following  assumptions:
stock price $2.15, historical volatility 105%, risk free rate of 2.27%, dividend
rate of 0, and a contractual term of five years.  Second, since the market price
on the day of  closing of $2.15 was higher  than the  issuance  price of $1.84 a
charge of $420,807 was  recognized  in  stock-based  general and  administrative
expenses for the 1,357,441 shares purchased by Robert A. Olins.

In order to  complete  this stock  financing,  the  outside  investors  required
significant  participation  from Robert A. Olins.  To achieve  this,  Mr.  Olins
borrowed  funds  to  purchase  his  share  of the  stock  financing.  The  board
subsequently  approved  the  reimbursement  of certain  costs to obtain the debt
incurred by Mr. Olins as follows: the issuance of 130,435 shares of common stock
as a finder's fee to an unrelated third party,  and payment of $250,000 in other
loan costs.  The $326,086  fair value of the 130,435  shares was accrued at June
30, 2003 and is included in stock-based  general and administrative  expense, as
the shares  remained  unissued as of June 30,  2003.  $210,000 of the loan costs
(included in other general and  administrative  expense) remained unpaid at June
30, 2003.

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

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

Interest Conversion

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

In May 2003, the Company issued a fully vested warrant to purchase 10,000 shares
of the Company's  common stock in lieu of interest on a short-term note. A value
of $6,647,  was assigned to this warrant using a  Black-Scholes  option  pricing
model and the following  assumptions:  stock price $2.15,  historical volatility
79%, risk free rate of 1.01%,  dividend yield of 0, and a contractual  term of 1
year. The value of this warrant was recorded in non-cash interest expense in the
quarter ended June 30, 2003.

Exercise of Stock Options and Warrants for services, during the six months ended
June 30, 2003

During the first six months of 2003,  7,500  shares of common  stock were issued
upon the exercise of employee stock options. Total cash received was $9,375.

Issuance of Stock,  Stock  Options and Warrants in the six months ended June 30,
2003



                                       12
<PAGE>


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

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

In May 2003, the Company issued a fully vested option to purchase  25,000 shares
of the  Company's  common stock in exchange for  services  rendered.  A value of
$49,734,  was assigned to this option using a Black-Scholes option pricing model
and the following  assumptions:  stock price $2.14,  historical volatility 112%,
risk free rate of 3.33%,  a dividend  yield of 0, and a  contractual  term of 10
years.  The  value of this  option  was  recorded  in  stock-based  general  and
administrative expense in the quarter ended June 30, 2003.

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

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

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

Other expenses in 2003 related to the valuation of options  granted to directors
for additional  services totaled $22,005 and are included in stock-based general
and administrative.

Issuance of Stock Under Installment Note

In November  2002, a warrant to purchase  746,268 common shares was exercised at
$2.00  per share  under a warrant  installment  agreement  totaling  $1,492,536.
Payments of $200,000 were made in 2002.  An  additional  $52,500 was received in
2003.  Interest accrues at 6% per annum and is due with the final payment. As of
June 30, 2003,  approximately  $45,000 of accrued  interest  has been  recorded,


                                       13


<PAGE>


including  interest of approximately  $38,000 in 2003. The shares were issued in
2003,  but are held in escrow by the Company  pending  receipt of the  remaining
balance of  $1,266,400.  In May 2003,  the  Company  extended  the  schedule  of
repayment with the next payment due August 22, 2003.

Payments under notes receivable from shareholder  resulting from the exercise of
warrants in 2002 totaled $52,500 for the six months ended June 30, 2003.

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

<TABLE>
<CAPTION>
                                                         Six months ended June 30,
                                                          2003               2002
                                                     ---------------    ---------------
<S>                                                  <C>                <C>
Stock and options granted to employees and directors       $ 22,005          $ 223,192
Common stock  and warrants expensed for services            283,128             45,777
Stock to be issued in connection with stock purchase        326,086                 --
Beneficial pricing on sale of stock and warrants
   to officer                                               958,913
Other                                                        68,800                 --
                                                     ---------------    ---------------
                                                        $ 1,658,932          $ 268,969
                                                     ===============    ===============
</TABLE>

NOTE 7.  Segment Information

The Company's chief operating decision-maker, the Chief Executive Officer (CEO),
reviews the Company's  financial  information as a single "operating segment" to
make  decisions  about  the  Company's   performance  and  resource  allocation.
Therefore  the Company  has  determined  that it  operates in a single  business
segment. There were no sales in the six months ended June 30, 2003.

NOTE 8.  Stock-based Compensation

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

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

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


                                       14


<PAGE>


<TABLE>
<CAPTION>
                                                       Three months ended June 30,      Six months ended June 30,
                                                         2003           2002              2003               2002
                                                    -------------  ----------------     -------------    ---------------

<S>                                                  <C>              <C>                <C>               <C>
Net loss as reported                                 $(3,329,395)     $(1,803,116)       $(4,873,934)      $(3,906,286)


Deduct: total stock-based employee compensation
determined under fair value method for all awards,
net of any applicable related tax effects               (501,587)        (932,026)          (866,255)       (1,796,765)
                                                     -----------      -----------        -----------       -----------
Proforma net loss, as adjusted                       $(3,830,982)     $(2,735,142)       $(5,740,189)      $(5,703,051)

Loss per share:
Basic and diluted, as reported                       $     (0.15)     $     (0.11)       $     (0.22)      $     (0.24)
Basic and diluted, as adjusted                       $     (0.15)     $     (0.11)       $     (0.22)      $     (0.24)

</TABLE>


NOTE 9. Recent Accounting Pronouncements


In July 2002, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
146,  "Accounting for Costs Associated with Exit or Disposal  Activities," which
addresses  financial  accounting and reporting for costs associated with exit or
disposal  activities.  SFAS  No.  146  requires  that  a  liability  for a  cost
associated with an exit or disposal activity be recognized when the liability is
incurred.  This Statement also  establishes that fair value is the objective for
initial measurement of the liability.  Severance pay under SFAS No. 146, in many
cases,  would be recognized  over time rather than up front.  The  provisions of
this statement are effective for exit or disposal  activities that are initiated
after  December 31,  2002.  Adoption of this  Statement  did not have a material
impact on the Company's financial condition or results of operations.

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

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


                                       15

<PAGE>


NOTE 10. Subsequent Events

On August 8, 2003, the Company entered into an agreement for the private sale of
$2,763,500 of common shares and warrants to purchase  common  shares.  As of the
date hereof, the transaction has not closed. However, the purchase price for the
common  shares and warrants is being held in escrow and the Company  anticipates
that the transaction  will be closed  shortly.  Under the terms of the agreement
the Company will sell 1,212,061 shares at a price of $2.28 per share, equal to a
20% discount to the trailing  30-day average closing price of the shares through
August 5, 2003.  Warrants to purchase an aggregate of 312,500 common shares will
be issued at an exercise  price of $3.29,  a 15%  premium to the  aforementioned
30-day  trailing  average  closing  price.  The  shares  to be  issued  in  this
transaction were previously authorized but unissued shares of the Company.

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

This Form 10-Q contains certain forward-looking statements within the meaning of
Section 21E of the  Securities  and  Exchange  Act of 1934,  as  amended,  which
statements are subject to the Safe Harbor provisions created by that statute. In
this  report,  the  words   "anticipates,"   "believes,"   "expects,"  "future,"
"intends," and similar expressions  identify  forward-looking  statements.  Such
statements are subject to certain risks and  uncertainties,  including,  but not
limited to, those  discussed  herein,  those contained in this Item, 2 and those
discussed  in the  Company's  Annual  Report on Form  10-KSB  as filed  with the
Securities and Exchange  Commission on April 14, 2003. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking  statements that may be needed
to reflect  events or  circumstances  after the date  hereof or to  reflect  the
occurrence of unanticipated events.

The  following  is a  discussion  and  analysis  of the  consolidated  financial
condition of the Company as of June 30, 2003,  and the results of operations for
the  Company for the three  months and six months  ended June 30, 2003 and 2002.
The  following  should  be read in  conjunction  with  the  unaudited  financial
statements and related notes appearing elsewhere herein.

GENERAL

Our operations are constrained by an insufficient amount of working capital, and
we continue to experience  negative cash flows and net operating  expenses.  Our
ongoing  operations  are  expected  to be  funded  by the  $5.15  million  stock
financing  completed in May 2003,  the $2.76  million  raised in the August 2003
stock  financing,  and funds from the  exercise of  warrants  and  options.  Our
auditors  have  included a paragraph  in their  report on the audited  financial
statements as of the year ended December 31, 2002,  indicating that  substantial
doubt exists as to our ability to continue as a going concern.

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



                                       16


<PAGE>


OVERVIEW

We manufacture  microdisplays  that provide high resolution  images suitable for
applications  such  as  rear  projection  computer  monitors,   high  definition
television and video projectors,  and potential  applications such as those used
in wireless  communication devices,  portable games and digital assistants.  Our
microdisplays  are  designed  for  use in end  products  of  original  equipment
manufacturers,  and  therefore  we work  closely  with  prospective  and  actual
customers to incorporate our microdisplays  into their final products.  While in
the  past we have had  working  arrangements  with  several  independent  liquid
crystal display fabricators to manufacture certain of our prototype products, we
are now manufacturing our microdisplays ourselves in a 500 square foot Class 100
cleanroom and a 1200 square foot Class 1000 cleanroom.  We have enhanced quality
control and we have more effective  protection of our proprietary  technology in
our products. Internal manufacturing is subject to certain risks described under
"Business  Risks  and  Uncertainties."  We have  patents  covering  parts of our
designs;  however,  the key  designs  of the  circuitry  in the  silicon,  drive
electronics,  and liquid crystal  assembly  techniques are  proprietary  and not
covered by patents.

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

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

In January 2003, we concluded negotiations with Skyworth,  resulting in a signed
agreement for the purchase by Skyworth of 14,100  display units from us during a
one-year  delivery  period.  The first  shipment of 200 units will be shipped in
August  2003,  and the Company is  scheduled to ship a total of 600 units in the
third quarter  2003.  After  completion  of the first 600 units,  the Company is
scheduled  to  deliver  1,500  units  per month  until  the order is  completed.
Pursuant to the terms of the purchase order, the obligations of Skyworth will be
backed by  letters  of credit in our favor to be issued  monthly.  The  purchase
order is cancelable  by Skyworth on a quarterly  basis and is subject to pricing
contingencies  and other customary  terms and conditions.  We have delivered the
requisite number of our SpatiaLight  imagEngine(TM)  microdisplays to Fuji Photo
Optical Co.,  Ltd. for  incorporation  into the display units to be delivered to
Skyworth in the first of the twelve monthly deliveries.

LIQUIDITY AND CAPITAL RESOURCES

As of  June  30,  2003,  we  had  approximately  $2,316,000  in  cash  and  cash
equivalents,  a increase of approximately  $1,741,000 from the December 31, 2002
amount  of  $575,000.  Our net  working  capital  deficit  at June 30,  2003 was


                                       17


<PAGE>



approximately   $3,000,000   compared  to  a  net  working  capital  deficit  of
approximately $800,000 at December 31, 2002. This change is primarily due to the
reclassification  of the Argyle and Alabama  group notes to current  liabilities
based on their maturity date of March 31, 2004 and recurring  losses,  offset by
the proceeds of the May stock issuance.

Net cash used in  operating  activities  totaled  approximately  $3,900,000  and
$2,800,000 for the six months ended June 30, 2003 and 2002,  respectively.  Cash
was used primarily to fund the operating loss.

Net cash provided by financing  activities in the six months ended June 30, 2003
was approximately  $5,700,000 as compared to approximately  $611,000 for the six
months ended June 30,  2002.  In the second  quarter of 2003,  cash was provided
primarily  from  the  issuance  of 2.7  million  shares  of  common  shares  and
short-term notes (see Note 5 and Note 6 to the accompanying  condensed financial
statements).

On August 8, 2003, the Company entered into an agreement for the private sale of
$2,763,500 of common shares and warrants to purchase  common  shares.  As of the
date hereof, the transaction has not closed. However, the purchase price for the
common  shares and warrants is being held in escrow and the Company  anticipates
that the transaction  will be closed  shortly.  Under the terms of the agreement
the Company will sell 1,212,061 shares at a price of $2.28 per share, equal to a
20% discount to the trailing  30-day average closing price of the shares through
August 5, 2003.  Warrants to purchase an aggregate of 312,500 common shares will
be issued at an exercise  price of $3.29,  a 15%  premium to the  aforementioned
30-day  trailing  average  closing  price.  The  shares  to be  issued  in  this
transaction were previously authorized but unissued shares of the Company.

As of June 30, 2003, we had an accumulated deficit of approximately $53,600,000.
We have realized  significant losses in the past and we expect that these losses
will continue at least  through  2003. It is likely that we will have  quarterly
and annual losses in 2003 and beyond.  We have generated limited revenues and no
profits from operations. The development, commercialization and marketing of our
products  will require  substantial  expenditures  for the  foreseeable  future.
Consequently,  we may continue to operate at a loss for the  foreseeable  future
and there can be no  assurance  that our  business  will operate on a profitable
basis or will be able to continue as a going concern.


RESULTS OF OPERATIONS

Selling,  general and administrative costs. Selling,  general and administrative
costs were  approximately  $915,000  and $581,000 in the three months ended June
30, 2003 and 2002,  respectively and $1,373,000 and $1,166,000 in the six months
ended June 30, 2003 and 2002,  respectively,  and include professional services,
salaries and related taxes and benefits, rent,  depreciation,  travel, insurance
and office expenses. General and administrative expense increased year over year
due to the  reimbursement  of banking  fees of  $250,000  incurred  by Robert A.
Olins,  Acting Chief Executive  Officer and a director,  in conjunction with his
participation in the May 2003 stock financing.

Stock-based   general  and  administrative   costs.   Stock-based   general  and
administrative  costs  were  approximately  $1,485,000  and  $3,000 in the three
months ended June 30, 2003 and 2002, respectively,  and approximately $1,659,000
and $269,000 in the six months ended June 30, 2003 and 2002,  respectively.  The
increase  in  the  three  months  ended  June  30,  2003  relates  primarily  to
stock-based costs of,  $1,500,000  associated with the May 2003 stock financing.
(See Note 6 to the accompanying condensed financial statements).

Research  and   development   costs.   Research  and   development   costs  were
approximately  $1,391,000  and  $1,376,000 in the six months ended June 30, 2003
and 2002,  respectively  and  $667,000  and $668,000 in each of the three months
ended June 30,  2003 and 2002,  respectively.  We expect to  continue  incurring


                                       18


<PAGE>


significant  research  and  development  costs in  order  to meet the  technical
criteria from current and prospective customers.

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

Interest  expense.  Interest  expense  for the six months  ended  June 30,  2003
decreased approximately $19,000 from the same period in 2002.

Stock-based  interest  expense.  Stock-based  interest expense was approximately
$279,000  and  $974,000  for the six  months  ended  June  30,  2003  and  2002,
respectively, and $143,000 and $487,000 for the three months ended June 30, 2003
and 2002,  respectively.  Stock-based interest expense relates to the beneficial
conversion  feature of interest  converted  and  convertible  into equity on the
notes payable to Argyle Capital Management  Corporation,  a company wholly owned
by  Robert  A.  Olins,  Acting  Chief  Executive  Officer  of the  Company.  The
beneficial  conversion  interest  represents  the  excess  value  of the  shares
received  or  receivable  at  current  market  prices  over the  $0.50 per share
conversion price.  Interest expense related to the beneficial conversion feature
decreased approximately $233,000 due to the extension of the amortization period
resulting from an extension of the due date of the note until March 31, 2004. In
addition,  stock-based interest expense relates to amortization of the discounts
on notes payable to Argyle  Capital  Management  Corporation  and to the Alabama
Group, a group of investors, which includes a trust for the benefit of Steven F.
Tripp,  a director of the Company.  In September 2002 the notes were extended 18
months, thereby reducing the monthly amortization of the discount. Also included
in stock-based  interest is a warrant with a fair value of $6,700 issued in lieu
of  interest on a  short-term  note  payable,  which note was issued and retired
during the second quarter.

Interest income. Interest income for the six months ended June 30, 2003 and 2002
was  approximately  $38,000 and $8,600,  respectively.  Interest  income for the
three months ended June 30, 2003 and 2002 was approximately  $18,600 and $1,200,
respectively.  The increase is due to accrued interest on a note received from a
shareholder in the six months of 2003.

Critical Accounting Policies

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

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

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


                                       19


<PAGE>


Inventory  valuation - We value  inventories  at the lower of cost (based on the
first-in,  first-out  method) or market value. We include  materials,  labor and
manufacturing  overhead in the cost of  inventories.  In  determining  inventory
market values, we give substantial consideration to the expected product selling
price based on historical  recovery  rates. If we assess the market value of our
inventory to be less than costs we write it down to its replacement  cost or its
net  realizable  value.  Our estimates may differ from actual results due to the
quantity  and quality and mix of products in  inventory,  consumer  and retailer
preferences and economic conditions.  At June 30, 2003, inventories  (consisting
entirely of raw materials  components) were written down by $100,690,  as prices
on initial order  quantities were higher than those expected in the future,  and
would otherwise have resulted in losses on sales of finished goods in 2003.

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

BUSINESS RISKS AND UNCERTAINTIES

We have a history  of losses and may incur  losses in the  future and  therefore
cannot assure you that we will achieve profitability.

We have  incurred  losses  over the past five  years and have  experienced  cash
shortages.  For the six months  ended June 30, 2003 and 2002,  we  incurred  net
losses of approximately $4,874,000 and $3,900,000, respectively. In addition, we
had an  accumulated  deficit  of  $53,600,000  as of June 30,  2003.  We  expect
additional  losses as we continue  spending for  production  and other  business
activities as well as further  research and  development  of our products.  As a
result, we will need to generate substantial sales to support our costs of doing
business  before we can begin to recoup our  operating  losses  and  accumulated
deficit and achieve profitability.

If we are  unable to obtain  further  financing  or  generate  required  working
capital our ability to operate could suffer or cease. Our auditors have issued a
report on our  financial  statements  which  contains an  explanatory  paragraph
regarding our ability to continue as a going concern.

Our  operations  to date  have  consumed  substantial  amounts  of cash and will
continue to require  substantial  amounts of capital in the future.  In order to
remain competitive,  we must continue to make significant  investments essential
to our ability to operate profitably,  including investments in further research
and development,  equipment,  facilities and production activities. Although our
financial  condition  and  liquidity  have been  assisted  through the  previous
exercises of warrants and private  purchases of our Common Shares  including the
approximately  $8.0  million  raised by us in the two recently  completed  stock
financings,  we may still require additional financing to satisfy our increasing


                                       20


<PAGE>


working capital  requirements.  Reliance for financing upon exercise of warrants
and  private  stock  purchase   agreements   entails  the  additional  risks  of
non-exercise  of such warrants  because of the  prevailing  market prices of our
underlying  Common Shares or default by stock purchasers under these agreements.
In the event  that we are unable to obtain  further  financing  on  satisfactory
terms or at all,  generate sales sufficient to offset our costs, or if the costs
of development and operations are greater than we anticipated,  we may be unable
to grow our business at the rate desired or may be required to delay, reduce, or
cease certain of our operations, any of which could materially harm our business
and financial  results.  Our  independent  auditors have included an explanatory
paragraph in their report in our Form 10-KSB on our financial statements for our
last fiscal year regarding our ability to continue as a going concern.

We are subject to lengthy  development  periods and  product  acceptance  cycles
which may significantly harm our business.

Our business model requires us to develop microdisplays that perform better than
existing  technologies,  contract with one or more third-party  manufacturers to
manufacture  our display units in bulk, and sell the resulting  display units to
original  equipment  manufacturers  that will then  incorporate  them into their
products.  Original equipment  manufacturers make the determination during their
product  development  programs  whether or not to  incorporate  our  SpatiaLight
imagEngine(TM)  microdisplays  and/or  display  units  in their  products.  This
requires us to invest  significant  amounts of time and capital in designing our
SpatiaLight  imagEngine(TM)  microdisplays and/or display units before we can be
assured that we will  generate any  significant  sales to our  customers or even
recover  our  investment.  If  we  fail  to  recover  our  investment  from  the
SpatiaLight   imagEngine(TM)   microdisplays  and/or  display  units,  it  could
seriously harm our financial condition. In addition, the length of time that our
products may be  successfully  received by our customers could be limited by the
acceptance of new technologies developed by our competitors.

We  incur  substantial   research  and  development  costs  in  connection  with
technologies that may not be successful.

We currently have eleven full-time  engineering and six full-time  manufacturing
personnel based in California  working on  microdisplays.  This staffing creates
significant research and development costs that may not be recouped. Even if our
current   microdisplays  become  accepted  or  successful,   due  to  the  rapid
technological change in our industry,  we must continue to use, and may increase
in number,  our  engineering  and  manufacturing  personnel  to  develop  future
generations of our  microdisplays.  As a result, we expect to continue incurring
significant research and development costs.

In recent months we have commenced  manufacturing and shipping our microdisplays
in commercial  quantities,  but  unanticipated  difficulties  in continuing  the
process  of  mass-producing  our  microdisplays  may make it  difficult  to meet
customer  demands  from  time  to  time  and  our  operating  results  could  be
significantly harmed by such difficulties.

We need to  work  closely  with  our  manufacturing  sources  to  assure  volume
production  of our  current  display  units.  Problems  in  implementing  volume
production or lower than expected  manufacturing yields could significantly harm
our business  because we will have already  incurred the costs for the materials
used in the  microdisplay  manufacturing  process.  These  problems  could cause
delays that might lead our potential customers to seek other sources.


                                       21


<PAGE>


We currently obtain silicon backplanes,  a vital component in our microdisplays,
from the Far East. Some Asian countries are subject to earthquakes, typhoons and
political instability. Unless we obtain an alternative source, any disruption or
termination   of  our  silicon   manufacturing   operations  in  Taiwan  or  air
transportation with the Far East could significantly harm our operations.

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

We continue to have  working  arrangements  with the  manufacturer  of the light
engines and lamps required in the assembly of our display units. We have entered
into an agreement  for the supply of prisms and filters  which are also required
for the  assembly  of such  units.  Except  for that  agreement,  we do not have
written  agreements  which  are  binding  upon the  manufacturers  of the  other
components  and no such  manufacturer  is bound to furnish us with any  specific
quantities of their products at previously  specified  prices.  At this date, we
are not aware that any of our component  manufacturers  have known  shortages of
critical material.

Because the manufacture of our SpatiaLight imagEngine(TM) microdisplays involves
highly complex  processes and technical  problems may arise, we, in our capacity
as  internally  manufacturing  the liquid  crystal  microdisplays,  which are an
integral part of the display units,  cannot assure the  manufacturing  yields of
our products.  Problems in mass-production or lower than expected  manufacturing
yields could significantly harm our business and operating results. In addition,
the   complexity   of  our   manufacturing   processes   will  increase  as  the
sophistication of our microdisplays and display units increases.

If a market for our  products  does not  develop,  our  business  will likely be
significantly harmed.

Various target markets for our microdisplays,  including  projectors,  monitors,
high-definition televisions,  and portable microdisplays,  are uncertain and may
be slow to develop.  In  addition,  companies  in those  markets  could  utilize
competing  technologies.  High-definition  television  has only recently  become
available to consumers,  and  widespread  market  acceptance  is  uncertain.  In
addition,  the  commercial  success  of  the  portable  microdisplay  market  is
uncertain. The acceptance of our display units and/or SpatiaLight imagEngine(TM)
microdisplays  will be dependent  upon the  pricing,  quality,  reliability  and
useful life of these units compared to competing technologies, as to which there
can be no  assurance.  In  order  for us to  succeed,  not  only  must we  offer
end-product  manufacturers  better  and less  expensive  microdisplays  than our
competitors,  but the  manufacturers  themselves must also develop  commercially
successful products using our microdisplays. SpatiaLight's marketing efforts are
focused on developing strategic customer and governmental relationships in China
and the Republic of South Korea.  Our failure to sell our  microdisplays to such
manufacturers  or the failure of the  ultimate  target  markets to develop as we
expect will negatively affect our anticipated growth.


                                       22


<PAGE>


If our  microdisplays  do not become  widely  accepted by our  customers  or the
end-users, our business could be significantly harmed.

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

          o    superior technologies developed by our competitors;

          o    price considerations; and

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

We currently have  agreements  with a limited  number of customers.  Despite our
reasonable  efforts to retain these customers,  we may not be successful in this
regard. The loss of, or significant  reduction in sales attributable to, any one
or more of these  customers  could  materially  harm our business and  financial
condition.

To date,  we have only  received  one  purchase  order from one  customer and we
cannot  assure you that we will  obtain  additional  purchase  orders  from that
customer or our other prospective customers, or, if we do, that such orders will
generate significant revenues.

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

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



                                       23


<PAGE>


If our customers' products are not successful, our business would be materially
harmed.

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

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

          o    maintain customer  satisfaction with our design and manufacturing
               services;

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

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

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

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

The electronics  industry is highly competitive,  which may result in lost sales
or lower gross margins.

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

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

          o    our  success  in   designing   and   manufacturing   new  display
               technologies;

          o    our ability to address the needs of customers;

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

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

          o    the quality of our customer services;


                                       24

<PAGE>


          o    the efficiency of our production sources;

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

          o    products or technologies introduced by our competitors.

Our business is significantly affected by conditions or events occurring in the
electronics industry generally.

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

Our operating results are subject to significant fluctuations.

Our results of operations have varied  significantly  from quarter to quarter in
the past and are likely to vary  significantly  in the  future,  which  makes it
difficult to predict our future operating results.  Accordingly, we believe that
quarter-to-quarter  comparisons of our operating  results are not meaningful and
should not be relied upon as an indicator of our future performance. Some of the
factors which cause our operating results to fluctuate include the following:

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

          o    timing of expenditures in anticipation of future orders;

          o    changes in our cost structure;

          o    availability of labor and components;

          o    pricing and availability of competitive products and services;

          o    the timing of orders;

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

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

          o    changes or anticipated changes in economic conditions.

The market price of our Common Shares is highly volatile.

The market price of our Common Shares has been  extremely  volatile,  reflecting
reported  losses,  receipt of additional  financing  and changes of  management.
Other  companies  have found  similar  volatility  correlates  with class action
securities  lawsuits  although to date we have not been a defendant  in any such
lawsuit.  The trading price of our Common Shares in the future could continue to
be subject to wide  fluctuations in response to various  factors,  including the
following:

          o    quarterly variations in our operating results;


                                       25


<PAGE>


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

          o    public announcements regarding our business developments;

          o    changes in analysts' estimates of our financial performance;

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

          o    general conditions in the electronics industry; and

          o    worldwide economic and financial conditions.

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

Increasing  the  number of our  common  shares  that may be sold into the market
could cause the market  price of our common  shares to  decrease  significantly,
even if our business operations are performing well.

We recently  registered  for resale  3,745,408  shares  issued or issuable  upon
exercise of the warrants in  conjunction  with the May 2003 stock  financing and
shares issuable upon exercise of warrants that were issued in  consideration  of
consulting  services  rendered.  All of these  shares  are freely  salable.  The
3,745,408 shares  (including  949,080 shares issuable upon exercise of warrants)
represent approximately 12.57% of the total number of our Common Shares that are
issued and outstanding as of June 30, 2003.  Sales of these shares in the public
market,  or the perception that future sales of these shares could occur,  might
adversely  affect the  prevailing  market price of our Common Shares in the near
future.

Our Common Shares may not be liquid.

Our  Common  Shares are  currently  traded on The Nasdaq  SmallCap  Market.  Our
shareholders  may find that it is more  difficult to sell our Common Shares than
shares that are listed on The Nasdaq National Market, American Stock Exchange or
New York  Stock  Exchange.  The  trading  volume  of our  Common  Shares  may be
adversely  affected due to the limited  marketability of our Common Shares.  Any
substantial  sales of our Common  Shares may result in a material  reduction  in
price  because  relatively  few buyers may be  available  to purchase our Common
Shares.

If we lose our key  personnel  or are  unable to attract  and retain  additional
personnel, our ability to compete could be harmed.

Our development and operations depend substantially on the efforts and abilities
of our senior management and qualified technical personnel. Our products require
sophisticated  production,  research and development and technical support.  The
competition  for qualified  management and technical  personnel is intense.  The
loss of services of one or more of our key employees or the inability to add key
personnel  could  have a  material  adverse  affect  on us,  particularly  since
currently  we do not have any life  insurance  policies  in place to cover  that
contingency.  Our  success  will  depend  upon our ability to attract and retain
highly qualified scientific, marketing,  manufacturing,  financial and other key
management  personnel.  We face intense  competition  for the limited  number of


                                       26


<PAGE>


people available with the necessary  technical  skills and  understanding of our
products and technology. We cannot assure you that we will be able to attract or
retain such personnel or not incur significant costs in order to do so.

If we are unable to protect our intellectual property from use by third parties,
our ability to compete in the industry will be harmed.

We believe  that our  success  depends  in part on  protecting  our  proprietary
technology. We rely on a combination of patent,  copyright,  trademark and trade
secret laws, as well as confidentiality and assignment of inventions  agreements
from our employees,  consultants and advisors and other contractual  provisions,
to establish and protect our intellectual property rights. Policing unauthorized
use of our products and technology is difficult, however. Despite our efforts to
protect our proprietary rights, we face the following risks:

          o    pending patent applications may not be issued;

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

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

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

          o    breach of confidentiality agreements;

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

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

There can be no assurance  that we will have adequate  remedies in the event any
of the  foregoing  materializes.  Failure to protect our  intellectual  property
would limit our ability to produce and market our products in the future,  which
would  materially  adversely  affect our revenues  generated by the sale of such
products.  In  addition,  third  parties  could  assert  that our  products  and
technology  infringe their patents or other  intellectual  property rights. As a
result,  we  may  become  subject  to  future  patent   infringement  claims  or
litigation,  the  defense of which is costly,  time-consuming  and  diverts  the
attention of management and other personnel.

Political,   economic  and  regulatory  risks   associated  with   international
operations may limit our ability to do business abroad.

A substantial number of our  manufacturers,  customers and suppliers are located
outside of the United States,  principally  in the Far East.  Our  international
operations  are  subject  to  political  and  economic  conditions  abroad,  and


                                       27


<PAGE>


protectionist   trade  legislation  in  either  the  United  States  or  foreign
countries,  such as a change in the current tariff structures,  export or import
compliance  laws, or other trade policies,  any of which could adversely  affect
our ability to manufacture  or sell displays in foreign  markets and to purchase
materials  or equipment  from  foreign  suppliers.  All of our  agreements  with
customers are governed by foreign law and therefore,  are subject to uncertainty
with regard to their enforceability.

Risks related to doing business in China may negatively affect our business.

Our business is subject to significant political and economic  uncertainties and
may be adversely  affected by  political,  economic and social  developments  in
China. Over the past several years, the Chinese  government has pursued economic
reform policies  including the  encouragement of private  economic  activity and
greater economic  decentralization.  The Chinese  government may not continue to
pursue these policies or may significantly alter them to our detriment from time
to time with little, if any, prior notice.

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

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

The recent outbreak of Severe Acute Respiratory  Syndrome ("SARS") may adversely
impact our business.

The SARS outbreak has been  significantly  focused on Asia, and  specifically in
China where our  current  customer  and many of our  prospective  customers  are
located.  The SARS  outbreak may have already  begun to impact on our ability to
sell our products.  The demand in China for high  definition  televisions,  rear
projection   monitors  and  other  end  products  that  would   incorporate  our
microdisplay products is seasonal, with one typically high demand season arising
in early  May.  However,  because of the  outbreak  of SARS and  related  market
uncertainties, demand for our customer's and prospective customers' products was
unusually low in May 2003. Should the SARS illness spread to new regions in Asia
or elsewhere or intensify in severity in areas already affected,  causing demand
for our existing  customer's and prospective  customers' products to remain low,
our operating results could be adversely impacted.

We do not pay cash dividends.

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risks.

We place all of our excess cash and cash  equivalents  in a checking  account or
money market account with a nationally  reputable bank. As of June 30, 2003, our
cash and cash equivalents totaled $2,316,000.


                                       28


<PAGE>


Item 4.  Controls and Procedures.

Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
As of the end of the quarterly fiscal period related to this Quarterly Report on
Form 10-Q,  we evaluated  the  effectiveness  of the design and operation of our
"disclosure controls and procedures"  (Disclosure  Controls),  and our "internal
controls and  procedures  for financial  reporting"  (Internal  Controls).  This
evaluation (the Controls Evaluation) was done under the supervision and with the
participation of our principal executive officer.

Limitations on the  Effectiveness of Controls.  Our Chief Executive Officer does
not expect that our  Disclosure  Controls or our Internal  Controls 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
objectives  of the  control  system  are 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 not had
any revenue  derived from the sale of our  microdisplay  products in the current
reporting period.  While the Controls  Evaluation has accounted for such absence
of sales and revenue, new or additional controls may or may not be required once
we begin selling our  microdisplay  products in volume in the ordinary course of
business.  Because  of the  inherent  limitations  in all  control  systems,  no
evaluation of controls can provide  absolute  assurance  that all control issues
and instances of fraud,  if any,  within the Company have been  detected.  These
inherent limitations include the 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  control.  The design of any system of  controls  also is based in part upon
certain  assumptions about the likelihood of future events,  and there can be no
assurance  that any design will succeed in achieving  its stated goals under all
potential future conditions;  over time, specific controls may or may not become
inadequate  (e.g.,  when we  commence  to sell our  products  in  volume  in the
ordinary course of business) because of changes in conditions,  or the degree of
compliance  with the  policies or  procedures  may  deteriorate.  Because of the
inherent  limitations in a cost-effective  control system,  misstatements due to
error or fraud may occur and not be detected.

Internal  Controls.  In accordance  with SEC  requirements,  the Chief Executive
Officer  notes that,  since the date of the Controls  Evaluation  to the date of
this  Quarterly  Report,  there have been no  significant  changes  in  Internal
Controls or in other factors that could significantly  affect Internal Controls.
During 2002 and through June 30, 2003, we were advised by our independent public
accountants  of a  "reportable  condition"  in our system of internal  controls,
arising  from the  absence of a qualified  on-site  Chief  Financial  Officer or
similar  accounting  officer.  To address this  condition,  the Company  engaged
Timothy Descamps as Chief Financial Officer in July 2003.

Conclusions. Based upon the Controls Evaluation, our Chief Executive Officer has
concluded  that,  subject  to  the  limitations   mentioned  in  Limitations  on
Effectiveness of Controls above, our Disclosure Controls are effective to ensure
that  material  information  relating  to the Company is made known to the Chief
Executive Officer,  particularly during the period when our periodic reports are
being  prepared,  and  that our  Internal  Controls  are  effective  to  provide
reasonable  assurance  that our  financial  statements  are fairly  presented in
conformity with generally accepted accounting principles.


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<PAGE>


PART II.  OTHER INFORMATION

ITEM 2    Changes in Securities and Use of Proceeds

Issuance of Stock during the six months ended June 30, 2003

In May 2003,  the Company issued  2,796,325  shares of common stock at $1.84 per
share and 699,080 fully vested warrants with a strike price of $2.65 in exchange
for net  proceeds of  $4,974,935.  Of this amount  1,357,441  shares and 339,360
warrants were purchased by Robert A. Olins, Acting Chief Executive Officer and a
director.  Consequently,  the Company  recognized  non-cash  expense of $958,913
related to the deemed beneficial  pricing Robert A. Olins received;  the expense
consists of two components. First, an expense of $538,106, representing the fair
value  of the  warrant  issued  to  Robert  A.  Olins  has  been  recognized  in
stock-based  general and  administrative  expense in the quarter  ended June 30,
2003, using a Black-Scholes option pricing model and the following  assumptions:
stock price $2.15, historical volatility 105%, risk free rate of 2.27%, dividend
rate of 0, and a contractual term of five years.  Second, since the market price
on the day of  closing of $2.15 was higher  than the  issuance  price of $1.84 a
charge of $420,807 was  recognized  in  stock-based  general and  administrative
expenses for the 1,357,441 shares purchased by Robert A. Olins.

In order to  complete  this stock  financing,  the  outside  investors  required
significant  participation  from Robert A. Olins.  To achieve  this,  Mr.  Olins
borrowed  funds  to  purchase  his  share  of the  stock  financing.  The  board
subsequently  approved  the  reimbursement  of certain  costs to obtain the debt
incurred by Mr. Olins as follows: the issuance of 130,435 shares of common stock
as a finder's fee for an unrelated third party, and payment of $250,000 in other
loan costs.  The $326,086  fair value of the shares  130,435 was accrued at June
30, 2003 and is included in stock-based  general and administrative  expense, as
the shares were not issued until the third  quarter.  $210,000 of the loan costs
(included in other general and  administrative  expense) remained unpaid at June
30, 2003.

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

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

Interest Conversion

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

In May 2003, the Company issued a fully vested warrant to purchase 10,000 shares
of the Company's  common stock in lieu of interest on a short-term note. A value
of $6,647,  was assigned to this warrant using a  Black-Scholes  option  pricing
model and the following  assumptions:  stock price $2.15,  historical volatility
79%, risk free rate of 1.01%,  dividend yield of 0, and a contractual  term of 1
year. The value of this warrant was recorded in non-cash interest expense in the
quarter ended June 30, 2003.

Exercise of Stock  Options and  Warrants,  during the six months  ended June 30,
2003

During the first six months of 2003,  7,500  shares of common  stock were issued
upon the exercise of employee stock options. Total cash received was $9,375.

Issuance of Stock,  Stock  Options and  Warrants  for services in the six months
ended June 30, 2003


                                       30


<PAGE>


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

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

In May 2003, the Company issued a fully vested option to purchase  25,000 shares
of the  Company's  common stock in exchange for  services  rendered.  A value of
$49,734,  was assigned to this option using a Black-Scholes option pricing model
and the following  assumptions:  stock price $2.14,  historical volatility 112%,
risk free rate of 3.33%,  a dividend  yield of 0, and a  contractual  term of 10
years.  The  value of this  option  was  recorded  in  stock-based  general  and
administrative expense in the quarter ended June 30, 2003.

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

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

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

Other expenses in 2003 related to the valuation of options granted to directors
for additional services totaled $22,005 and are included in stock-based general
and administrative.

Issuance of Stock Under Installment Note

In November  2002, a warrant to purchase  746,268 common shares was exercised at
$2.00  per share  under a warrant  installment  agreement  totaling  $1,492,536.
Payments of $200,000 were made in 2002.  An  additional  $52,500 was received in
2003.  Interest accrues at 6% per annum and is due with the final payment. As of
June 30, 2003,  approximately  $45,000 of accrued  interest  has been  recorded,


                                       31


<PAGE>


including  interest of approximately  $38,000 in 2003. The shares were issued in
2003,  but are held in escrow by the Company  pending  receipt of the  remaining
balance of  $1,266,400.  In May 2003,  the  Company  extended  the  schedule  of
repayment with the next payment due August 22, 2003.

Payments under notes receivable from shareholder  resulting from the exercise of
warrants in 2002 totaled $52,500 for the six months ended June 30, 2003.

The securities issued by the Company and described in this Item 2 were issued on
a basis exempt from  registration  under the Securities Act of 1933, as amended,
in reliance upon the private  placement  exemption  available under Section 4(2)
thereof.



                                       32
<PAGE>




ITEM 4   Submission of Matters to a Vote of Security Holders

At the Annual Meeting of Shareholders held June 20, 20031, the shareholders
approved the following:

1.      The election of Lawrence J. Matteson as a director of the
       Corporation to serve for the ensuing year and until his successor
       is duly elected and qualified.

       For:  22,488,038        Against:  40,197           Abstain:  0

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

       For:  22,488,038        Against:  40,197           Abstain:  0

3.     The election of Steven F. Tripp as a director of the Corporation
       to serve for the ensuing year and until his successor is duly
       elected and qualified.

       For:  22,488,038        Against:  40,197           Abstain:  0

4.     The election of Claude Piaget as a director of the Corporation to
       serve for the ensuing year and until his successor is duly elected
       and qualified.

       For:  22,488,038        Against:  40,197           Abstain:  0

5.     The amendment to the Corporation's Certificate of Incorpation to
       increase the number of authorized Common Shares from 40,000,000 to
       50,000,000.

       For:  22,215,443        Against:  274,212          Abstain:  38,580

6.     The ratification of the appointment of BDO Seidman, LLP as the
       Corporation's independent public accountants for the fiscal year
       ending December 31, 2003.

       For:  22,482,334        Against:  12,748           Abstain:  33,153



                                       33


<PAGE>



ITEM 6   Exhibits and Reports on Form 8-K

(a)      Exhibits

         10.1     Securities  Purchase  Agreement  (incorporated by reference to
                  Exhibit 4.3 to  SpatiaLight's  Registration  Statement on Form
                  S-3, Registration No. 333-106608, filed on June 27, 2003).

         10.2     Registration  Rights  Agreement  (incorporated by reference to
                  Exhibit 4.4 to  SpatiaLight's  Registration  Statement on Form
                  S-3, Registration No. 333-106608, filed on June 27, 2003).

         10.3     Employment  Agreement between  SpatiaLight,  Inc. and Theodore
                  Banzhaf dated July 7, 2003.

         10.4     Time  Accelerated   Restricted  Stock  Award  Plan  ("TARSAP")
                  between SpatiaLight,  Inc. and Theodore Banzhaf, dated July 7,
                  2003.

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

         31.2     Rule 13a-14(a)/15d-14(a) Certification of Timothy Descamps.

         32.1     Certifications  of  Robert  A.  Olins  Pursuant  to 18  U.S.C.
                  Section  1350,  As  Adopted  Pursuant  to  Section  906 of the
                  Sarbanes-Oxley Act of 2002.

         32.2     Certification  of  Timothy  Descamps  Pursuant  to  18  U.S.C.
                  Section  1350,  As  Adopted  Pursuant  to  Section  906 of the
                  Sarbanes-Oxley Act of 2002.

(b)     Report on Form 8-K:

        None.



                                       34


<PAGE>







SIGNATURES

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

                                        Date: August 14, 2003
                                              ---------------------------------

                                        SpatiaLight, Inc.



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






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