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 September 30, 2004

|_|   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: 35,232,905 common shares as of
November 9, 2004.


                                       1
<PAGE>

                                SPATIALIGHT, INC.

                          Quarterly Report on Form 10-Q
          For the Quarter and the Nine Months Ended September 30, 2004

                                Table of Contents
                                -----------------

PART I            FINANCIAL INFORMATION

         Item 1.  Condensed Consolidated Financial Statements (unaudited)

                  Condensed Consolidated Balance Sheets dated
                  September 30, 2004 and December 31, 2003.....................3

                  Condensed Consolidated Statements of Operations
                  for the Three and Nine Months
                  Ended September 30, 2004 and 2003............................4

                  Condensed Consolidated Statements of Stockholders' Equity
                  for the Nine Months Ended September 30, 2004.................5

                  Condensed Consolidated Statements of Cash Flows
                  for the Nine Months Ended September 30, 2004 and 2003........6

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

         Item 2.  Management's Discussion and Analysis
                  of Financial Condition and Results of Operations............13

         Item 3.  Quantitative and Qualitative Disclosures about Market Risks.25

         Item 4.  Controls and Procedures.....................................25

PART II           OTHER INFORMATION

         Item 2.  Changes in Securities and Use of Proceeds...................27

         Item 6.  Exhibits and Reports on Form 8-K............................28


                                       2
<PAGE>

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

SPATIALIGHT, INC.
BALANCE SHEET (unaudited)

<TABLE>
<CAPTION>
                                                               September 30,   December 31,
                                                                   2004           2003
                                                               (unaudited)
<S>                                                            <C>             <C>
ASSETS

Current assets
  Cash and cash equivalents                                    $  1,089,278    $  6,359,969
  Accounts receivable                                             1,031,722         117,530
  Inventory                                                         942,310         779,617
  Prepaids and other current assets                                 354,861         175,848
  Prepaid non-cash interest to related party                        538,327         177,239
                                                               ------------    ------------
          Total current assets                                    3,956,498       7,610,203

Property and equipment, net                                         910,076         638,430
Other assets                                                        133,315         101,063
                                                               ------------    ------------

               Total assets                                    $  4,999,889    $  8,349,696
                                                               ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
  Accounts payable                                             $    898,111    $    863,284
  Accrued expenses and other current liabilities                    641,069         518,137
  Deferred revenue                                                  100,000              --
                                                               ------------    ------------
        Total current liabilities                                 1,639,180       1,381,421

Noncurrent liabilities
  Convertible notes                                               1,171,500       1,155,000
                                                               ------------    ------------

               Total liabilities                                  2,810,680       2,536,421
                                                               ------------    ------------

Commitments

Stockholders' equity:
  Common stock, $.01 par value:
     50,000,000 shares authorized;
     34,926,905 and 33,229,191 shares issued and outstanding        349,269         332,292
Additional paid-in capital                                       67,628,441      61,046,425
Notes receivable                                                 (1,084,054)     (1,096,926)
Common shares issuable                                                   --       3,805,685
Other comprehensive income (loss)                                    (2,024)             --
Accumulated deficit                                             (64,702,423)    (58,274,201)
                                                               ------------    ------------
        Total stockholders' equity                                2,189,209       5,813,275
                                                               ------------    ------------

Total liabilities and stockholders' equity                     $  4,999,889    $  8,349,696
                                                               ============    ============
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>

SPATIALIGHT, INC.
STATEMENTS OF OPERATIONS (unaudited)

<TABLE>
<CAPTION>
                                                            Three months ended September 30,   Nine months ended September 30,
                                                                   2004            2003            2004            2003
                                                               ------------    ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>             <C>
Revenue                                                        $    268,200    $     82,152    $  1,128,075    $     82,152
Cost of revenue                                                    (125,190)        (73,875)       (897,521)       (174,565)
                                                               ------------    ------------    ------------    ------------
          Gross margin                                              143,010           8,277         230,554         (92,413)
                                                               ------------    ------------    ------------    ------------

Selling, general and administrative expenses:
   Selling, general and administrative expenses                   1,432,458         972,882       3,917,460       2,346,211
   Stock-based compensation                                           8,250          71,705         269,424       1,730,637
                                                               ------------    ------------    ------------    ------------
          Total selling, general and administrative expenses      1,440,708       1,044,587       4,186,884       4,076,848

   Research and development expenses                                662,124         597,148       1,913,682       1,988,449
                                                               ------------    ------------    ------------    ------------

          Total operating expenses                                2,102,832       1,641,735       6,100,566       6,065,297
                                                               ------------    ------------    ------------    ------------

          Operating loss                                         (1,959,822)     (1,633,458)     (5,870,012)     (6,157,710)
                                                               ------------    ------------    ------------    ------------

Other income (expenses):

  Interest expense:
          Interest expense                                          (17,820)        (71,418)        (53,942)       (180,607)
          Non-cash interest expense                                (187,696)       (138,416)       (563,087)       (417,393)
                                                               ------------    ------------    ------------    ------------
            Total interest expense                                 (205,516)       (209,834)       (617,029)       (598,000)

   Interest and other income                                         17,662          18,350          60,294          56,326
                                                               ------------    ------------    ------------    ------------

          Total other expenses                                     (187,854)       (191,484)       (556,735)       (541,674)
                                                               ------------    ------------    ------------    ------------

   Loss before income tax expense                                (2,147,676)     (1,824,942)     (6,426,747)     (6,699,384)

Income tax expense (benefit)                                            675              --           1,475              (8)
                                                               ------------    ------------    ------------    ------------

Net loss                                                       $ (2,148,351)   $ (1,824,942)   $ (6,428,222)   $ (6,699,376)
                                                               ============    ============    ============    ============

Net loss per share - basic and diluted                         $      (0.06)   $      (0.06)   $      (0.19)   $      (0.25)
                                                               ============    ============    ============    ============

Weighted average shares used in computing
 net loss per share- basic and diluted                           33,824,409      29,194,477      33,122,270      27,260,754
                                                               ============    ============    ============    ============
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       4
<PAGE>

SPATIALIGHT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2004

<TABLE>
<CAPTION>
                                                                               COMMON      ADDITIONAL
                                                                COMMON         SHARES        PAID-IN          NOTES
                                                                SHARES         AMOUNT        CAPITAL        RECEIVABLE
                                                             ------------   ------------   ------------    ------------
<S>                                                            <C>          <C>            <C>             <C>
Balance at January 1, 2004                                     33,229,191   $    332,292   $ 61,046,425    $ (1,096,926)

Exercise of stock options and warrants                            613,596          6,136      1,204,374

Issuance of common shares issuable                                820,082          8,201      3,797,484              --

Issuance of options to employees and directors                         --             --         59,424              --

Issuance of warrant for services                                       --             --        210,000              --

Exercise of warrant in exchange for note receivable                50,000            500        174,500        (175,000)

Issuance of stock for prepayment of related party interest        214,036          2,140      1,136,234              --

Payments on notes receivable                                           --             --             --         229,851

Accrued interest on notes receivable from stockholder                  --             --             --         (41,979)

Translation adjustment                                                 --             --             --              --

Net loss                                                               --             --             --              --
                                                             ------------   ------------   ------------    ------------

                                                               34,926,905   $    349,269   $ 67,628,441    $ (1,084,054)
                                                             ============   ============   ============    ============

<CAPTION>
                                                                                OTHER                           TOTAL
                                                                              COMPREHEN-        COMMON          STOCK-
                                                             ACCUMULATED     SIVE INCOME        SHARES         HOLDERS'
                                                               DEFICIT          (LOSS)         ISSUABLE         EQUITY
                                                             ------------    ------------    ------------    ------------
<S>                                                          <C>             <C>             <C>             <C>
Balance at January 1, 2004                                   $(58,274,201)   $         --    $  3,805,685    $  5,813,275

Exercise of stock options and warrants                                 --              --              --       1,210,510

Issuance of common shares issuable                                     --              --      (3,805,685)             --

Issuance of options to employees and directors                         --              --              --          59,424

Issuance of warrant for services                                       --              --              --         210,000

Exercise of warrant in exchange for note receivable                    --              --              --              --

Issuance of stock for prepayment of related party interest             --              --              --       1,138,374

Payments on notes receivable                                           --              --              --         229,851

Accrued interest on notes receivable from stockholder                  --              --              --         (41,979)

Translation adjustment                                                 --          (2,024)             --          (2,024)

Net loss                                                       (6,428,222)             --              --      (6,428,222)
                                                             ------------    ------------    ------------    ------------

                                                             $(64,702,423)   $     (2,024)   $         --    $  2,189,209
                                                             ============    ============    ============    ============
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       5
<PAGE>

SPATIALIGHT, INC.
STATEMENTS OF CASH FLOWS (unaudited)

<TABLE>
<CAPTION>
                                                                            Nine months ended September 30,
                                                                            -------------------------------
Cash flows from operating activities:                                             2004           2003
                                                                              -----------    -----------
<S>                                                                           <C>            <C>
Net loss                                                                      $(6,428,222)   $(6,699,376)
Adjustments to reconcile net loss to net cash used by operating activities:

  Depreciation and amortization                                                   416,427        271,467
  Stock-based compensation                                                        269,424      1,730,637
  Non-cash interest expense                                                       563,087        417,393
  Inventory writedown                                                                  --        100,690
  Translation adjustment                                                           (2,024)
  Accrued interest on notes receivable from shareholders                          (41,979)       (56,326)
  Changes in operating assets and liabilities:
     Accounts receivable                                                         (914,192)       (84,452)
     Inventory                                                                   (162,693)      (811,934)
     Prepaid and other current assets                                              51,686        300,625
     Other assets                                                                 (32,252)       (33,038)
     Accounts payable                                                              34,827     (1,377,723)
     Accrued expenses and other current liabilities                               122,932        378,285
     Deferred revenue                                                             100,000             --
                                                                              -----------    -----------

                                 Net cash used in operating activities         (6,022,979)    (5,863,752)
                                                                              -----------    -----------

Cash flows from investing activities:
  Purchase of property and equipment                                             (688,073)      (409,399)
                                                                              -----------    -----------

                                 Net cash used in investing activities           (688,073)      (409,399)
                                                                              -----------    -----------

Cash flows from financing actitivies:
  Proceeds from issuance of short term notes                                           --        917,500
  Payment on short term notes and convertible notes                                    --       (505,000)
  Payments on notes receivable from shareholders                                  229,851        152,500
  Proceeds from the sale of common shares                                              --      7,513,786
  Proceeds from exercise of warrants and options                                1,210,510         38,363
                                                                              -----------    -----------

                             Net cash provided by financing activities          1,440,361      8,117,149
                                                                              -----------    -----------

Net increase (decrease) in cash and cash equivalents                           (5,270,691)     1,843,998

Cash and cash equivalents at beginning of period                                6,359,969        575,663
                                                                              -----------    -----------
Cash and cash equivalents at end of period                                    $ 1,089,278    $ 2,419,661
                                                                              ===========    ===========
Supplemental disclosure of cash flow information:

  Income taxes paid during the period                                         $     1,475    $        --
                                                                              -----------    -----------
  Interest paid during the period                                             $        --    $    26,474
                                                                              -----------    -----------
Non cash financing activities:

  Exercise of warrant in exchange for notes receivable                        $   175,000    $        --
                                                                              -----------    -----------
  Common stock issued upon conversion of interest and notes                   $ 1,138,374    $   354,477
                                                                              -----------    -----------
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       6
<PAGE>

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

NOTE 1. BUSINESS DESCRIPTION

SpatiaLight,  Inc. and its subsidiaries  (SpatiaLight or the Company) are in the
business  of  manufacturing  high-resolution  liquid  crystal on silicon  (LCoS)
microdisplays  for  applications  such as high definition  television,  computer
monitors,  video  projectors  and other  applications.  The Company is currently
offering  two types of  products  to its  customers  and  prospective  customers
primarily in the Republic of Korea,  China,  Taiwan and Japan.  One product is a
set of three proprietary  SpatiaLight  imagEngine(TM)  LCoS microdisplays  (LCoS
Sets).  The Company's other product,  the display unit, is comprised of three of
its LCoS  microdisplays  fitted onto a light engine  designed by SpatiaLight and
Fuji Photo Optical Co., Ltd. (Fuji) and manufactured by Fuji.

NOTE 2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes necessary for a fair presentation of financial  condition,  results of
operations and cash flows in conformity  with  accounting  principles  generally
accepted  in  United  States  of  America.  In  the  opinion  of  management  of
SpatiaLight,  the interim condensed  consolidated  financial statements included
herewith contain all adjustments  (consisting of normal  recurring  accruals and
adjustments)  necessary  for their  fair  presentation.  The  unaudited  interim
condensed  consolidated  financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K,  which contains the audited  financial
statements  and notes  thereto,  together with the  Management's  Discussion and
Analysis,  for the year ended  December  31, 2003.  The interim  results for the
period ended  September 30, 2004 are not  necessarily  indicative of results for
the full fiscal year.

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

NOTE 3. LIQUIDITY

As of September 30, 2004, the Company had net equity of approximately $2,190,000
and net working capital of approximately $2,317,000. The Company expects to meet
its cash needs and fund its working capital requirements by obtaining additional
financing.  The Company  believes that it is in the final phases of negotiations
for such financing with multiple prospective  sources. In addition,  the Company
expects  to  receive  cash  upon  the  collection  of  notes   receivable   from
shareholders and from the exercise of warrants held by existing investors. There
can be no assurances  that  SpatiaLight  will be able to obtain such  additional
financing,  collect upon such notes  receivable or that existing  investors will
exercise their warrants.

NOTE 4. PER SHARE INFORMATION

Basic loss per common  share  excludes  dilution and is computed by dividing net
loss by the weighted average number of common shares outstanding for the period.
Excluded from weighted average shares  outstanding for the three months and nine
months ended  September 30, 2004 are 1,396,268  common shares issued but held in
escrow in  connection  with a  private  stock  purchase  agreement  and  warrant
installment notes. Diluted loss per common share reflects the potential dilution
that could occur if  securities  or other  contracts to issue common shares were
exercised or converted  into common  shares.  Excluded from the  computation  of
diluted loss per share for the three months and nine months ended  September 30,
2004 and 2003,  respectively,  are options and warrants to acquire 6,682,528 and
6,046,216 common shares,  and 2,376,000 and 3,702,966  common share  equivalents
relating to  convertible  secured  notes,  because  the effect of their  assumed
exercise  would be  antidilutive.  The  weighted  average  exercise  price as of
September   30,  2004  for  the  options  and   warrants  is  $3.83  and  $3.19,
respectively;  the  weighted  average  conversion  price  for the  common  share
equivalents related to convertible notes is $0.50.


                                       7
<PAGE>

NOTE 5. NOTES PAYABLE

In 1998, the Company received $1,188,000 in cash in exchange for notes issued to
Argyle Capital Management  Corporation  (Argyle), a company owned and controlled
by Robert  A.  Olins,  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 shares at $0.50
per  share.  On May 23,  2001,  the due date of the  notes  was  extended  until
December 31, 2002. On the  extension  date,  the  beneficial  conversion  effect
representing  the excess  aggregate  value of the common shares  receivable upon
conversion  of the notes  based on the then  current  market  price of $1.90 per
share,  over the aggregate  conversion  price for such common shares (limited to
the  original  proceeds  of  $1,188,000),  was  recorded as  additional  paid-in
capital.  The  resulting  $1,188,000  discount  to the  debt  arising  from  the
beneficial  conversion  feature was originally being amortized  through December
31, 2002.  The notes were extended in September  2002 to March 31, 2004,  and on
December 31, 2003 were extended until June 30, 2005. At each extension date, the
amortization rate of the remaining  unamortized  discount was also extended over
the new life of 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 or shares by Argyle.  The current  amortization
rate of the discount, along with the contractual 6% interest rate, resulted in a
new  effective  interest  rate  of 8% per  annum  as of the  December  31,  2003
extension date when compared to the outstanding principal balances.

On January 7, 2004,  the Company issued 142,360 common shares for the prepayment
of interest of $800,063  for the year ended  December  31,  2004.  Interest  was
computed  using the  closing  price of the  common  shares on January 6, 2004 of
$5.62, and is being amortized  through December 31, 2004. In addition,  on March
4, 2004,  the Company  issued 71,676 common shares on the prepayment of interest
of $338,311 for the six months ended June 30, 2005 in order to coincide with the
maturity date of the notes. Interest was computed using the closing price of the
common shares on March 3, 2004 of $4.72,  and is not currently being  amortized.
At September  30, 2004,  the carrying  value of the Argyle notes is  $1,171,500,
which includes the $1,188,000  principal balance net of the unamortized discount
of $16,500.


                                       8
<PAGE>

Activity in notes payable for the nine months ended September 30, 2004 follows:

<TABLE>
<CAPTION>
                      BALANCE AT                  (PAYMENT) OR   CONVERSION     BALANCE AT
                     DECEMBER 31,     ACCRUED        DISCOUNT        TO         SEPTEMBER 30,
DEBT PRINCIPAL:          2003         INTEREST     AMORTIZATION    EQUITY          2004
                      -----------    -----------   -----------   -----------    -----------
<S>                   <C>            <C>           <C>           <C>            <C>
Argyle                $ 1,188,000    $        --   $        --   $        --    $ 1,188,000
Argyle discount           (33,000)            --        16,500            --        (16,500)
                      -----------    -----------   -----------   -----------    -----------
Total                   1,155,000             --        16,500            --      1,171,500
                      -----------    -----------   -----------   -----------    -----------

INTEREST:
Accrued Argyle 6%              --         53,460            --       (53,460)            --
Beneficial interest            --        546,587            --      (546,587)            --
                      -----------    -----------   -----------   -----------    -----------
Total                          --        600,047            --      (600,047)            --

                      -----------    -----------   -----------   -----------    -----------
TOTAL                 $ 1,155,000    $   600,047   $    16,500   $  (600,047)   $ 1,171,500
                      ===========    ===========   ===========   ===========    ===========
</TABLE>

Non-cash interest expense is as follows:

                                                             Nine months ended
                                                               September 30,
                                                          ----------------------
                                                            2004          2003
                                                          --------      --------
Amortization of note discount                             $ 16,500      $198,349
Effect of beneficial conversion privileges
  on accrued interest                                      546,587       212,397
Other                                                           --         6,647
                                                          --------      --------
                                                          $563,087      $417,393
                                                          ========      ========

NOTE 6. ISSUANCE OF SECURITIES

Exercise of Stock  Options and Warrants in the nine months ended  September  30,
2004

During the first nine months of 2004,  206,500 and  457,069  common  shares were
issued upon the exercise of employee  stock options and warrants,  respectively.
Total cash received was $1,210,510.

Issuance  of  Shares,  Stock  Options  and  Warrants  in the nine  months  ended
September 30, 2004

In December 2003, the Company  completed a private placement of 1,000,000 common
shares that were registered with the SEC in a "Shelf" Registration  Statement at
a price of $5.00 per share for net proceeds of  $4,955,255  received in December
2003.  300,000 of these  shares were  issued  prior to December  31,  2003.  The
remaining  700,000 shares were  reflected in common shares  issuable at December
31, 2003 and were  issued in January  2004.  In  addition,  120,082  shares were
issued  pursuant  to  a  warrant   exercised  late  in  2003.  The  proceeds  of
approximately  $306,000  had been  received and were  included in common  shares
issuable as of  December  31,  2003.  Other  expenses  in the nine months  ended
September 30, 2004 related to the valuation of options  granted to directors for
additional  services and employee  options  issued with an exercise  price lower
than  the  market  price  totaled   $59,424  and  are  included  in  stock-based
compensation.


                                       9
<PAGE>

In April 2004,  the Company  issued a fully vested  warrant to purchase  250,000
common  shares as payment to a sales agent.  A value of $210,000 was assigned to
the warrant using a Black-Scholes  pricing model and the following  assumptions:
stock price $3.58,  exercise price $3.75,  historical  volatility 59%, risk free
rate 4%, dividend yield of 0% and a contractual life of 13 months.

Installment Notes

In July 2004, a warrant to purchase  50,000 common shares was exercised at $3.50
under a warrant installment agreement totaling $175,000. The total is payable in
six equal  installments of $29,167 beginning on the date of the execution of the
agreement.  The  shares  are being  held in escrow  pending  the  receipt of the
remaining balance of $87,500.

In November  2002, a warrant to purchase  746,268 common shares was exercised at
$2.00 under a warrant installment  agreement totaling  $1,492,536.  A payment of
$142,350  was  received in 2004,  which  included  accrued  interest of $92,350.
Interest  accrues  at 6% per  annum  and is due with the  final  payment.  As of
September 30, 2004, approximately $29,000 of accrued interest has been recorded.
The shares  were issued in 2003,  but are held in escrow by the Company  pending
receipt of the remaining balance of $869,055.

On May 15, 2001,  the Company sold 600,000  common  shares under a private stock
purchase  agreement.  The shares  were sold at a price of $1.75 per share.  Cash
received  was  $262,500.  The balance of $787,500  was to be paid in three equal
quarterly  installments of $262,500. An escrow agent is holding the certificates
for the shares being  purchased until all three  installments  have been paid in
full. At September 30, 2004 the remaining balance is $127,500.

Stock-based compensation is as follows:

<TABLE>
<CAPTION>
                                                                  Nine months ended
                                                                     September 30,
                                                                  2004         2003
                                                               ----------   ----------
<S>                                                            <C>          <C>
Common shares and options granted to employees and directors   $   59,424   $   42,839
Common shares and warrants expensed for services                  210,000      283,128
Stock issued in connection with May 2003 stock purchase                --      376,957
Beneficial pricing on sale of stock and warrants to officers           --      958,913
Other                                                                  --       68,800
                                                               ----------   ----------
                                                               $  269,424   $1,730,637
                                                               ==========   ==========
</TABLE>

NOTE 7. DEFERRED REVENUE

In the third quarter of 2004,  the Company  received a purchase order from a new
customer.  Upon reviewing the order, it was noted that not all elements required
for revenue recognition were present.  The product was shipped at the end of the
third  quarter.  The  revenue of  $216,000  and the  related  cost of revenue of
$116,000 were recorded as deferred  revenue until all of the necessary  elements
for  revenue  recognition  had been met.  These  elements  were met early in the
fourth quarter.


                                       10
<PAGE>

NOTE 8. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMER INFORMATION

The Company's  chief  operating  decision-maker,  the Chief  Executive  Officer,
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.

During the nine months ended  September 30, 2004, all revenues were derived from
customers  abroad.  Revenues  from mainland  China totaled  $1,078,400 or 96% of
total revenue.  The remaining 4%, or $49,675 were derived from customers in Hong
Kong, Taiwan and the Republic of Korea.  Revenues in 2003 were derived 100% from
customers in China.

Revenue  from two  customers  accounted  for 51% and 47%,  respectively,  of the
Company's  total revenues for the nine months ended September 30, 2004. The loss
of any one of these  customers and the inability to obtain  additional  purchase
orders from  current or  prospective  customers to replace the lost revenue in a
timely manner could harm the Company's sales or results of operations.  Accounts
receivable from these two customers accounted for 33% and 45%, respectively,  of
total accounts receivable as of September 30, 2004.

NOTE 9. 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 shares 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 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.

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


                                       11
<PAGE>

The table  below  shows net loss per share for the three  months and nine months
ended  September  30, 2004 and 2003 as if the Company had elected the fair value
method of accounting for stock options.

<TABLE>
<CAPTION>
                                                           Three months ended             Nine months ended
                                                              September 30,                  September 30,
                                                          2004            2003           2004           2003
                                                       -----------    -----------    -----------    -----------
<S>                                                    <C>            <C>            <C>            <C>
Net loss as reported                                   $(2,148,351)   $(1,824,942)   $(6,428,222)   $(6,699,376)

Stock-based employee/director compensation
  included in reported net loss, net of any
  applicable related tax effects                             8,250         20,834         59,424         42,839
Deduct: total stock-based employee compensation
  determined under fair value method for all awards,
  net of any applicable related tax effects               (329,912)      (288,546)    (1,111,590)    (1,044,432)
                                                       -----------    -----------    -----------    -----------

Proforma net loss, as adjusted                         $(2,470,013)   $(2,092,654)   $(7,480,388)   $(7,700,969)
                                                       ===========    ===========    ===========    ===========

Loss per share:
Basic and diluted, as reported                         $     (0.06)   $     (0.06)   $     (0.19)   $     (0.25)
Basic and diluted, as adjusted                         $     (0.07)   $     (0.07)   $     (0.22)   $     (0.29)
</TABLE>

NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB issued  Statement of Financial  Accounting  Standards,  or
SFAS No. 150, Accounting for Certain Financial  Instruments with Characteristics
of both  Liabilities  and Equity.  SFAS No. 150  establishes  standards  for how
companies   classify   and   measure   certain   financial    instruments   with
characteristics  of both  liabilities  and  equity.  It  requires  companies  to
classify a financial  instrument  that is within its scope as a liability or, in
some circumstances, an asset. SpatiaLight adopted the provisions of SFAS No. 150
effective  beginning  with the second  quarter of fiscal 2004, and such adoption
did not have a  significant  impact  on  SpatiaLight's  financial  position  and
results of operations.

In November 2003, the Emerging  Issues Task Force ("EITF")  issued EITF No. 03-6
"Participating  Securities  and the  Two-Class  Method under FASB  Statement No.
128," which provides for a two-class  method of  calculating  earnings per share
computations  that relate to certain  securities  that would be considered to be
participating  in conjunction  with certain  common stock rights.  This guidance
would be  applicable to the Company  starting  with the third quarter  beginning
July 1, 2004. The Company is currently  evaluating the potential  impact of this
pronouncement on its financial statements.

NOTE 11. SUBSEQUENT EVENTS

In September 2004, SpatiaLight entered into a long-term lease with the Gyeongnam
provincial  government  for 8.3 acres of  undeveloped  land in Jinsa,  Gyeongnam
province in the  Republic of Korea.  SpatiaLight  has received a 100% land lease
payment  exemption  based  upon the  location  of the land in a Korean  national
government   designated  "free  economic  zone"  and  the  Korean   government's
certification of SpatiaLight as a "high technology" company.

In October 2004, SpatiaLight contracted with Sung Do Engineering, a designer and
manufacturer  of  high-tech  processing  plants,  as  the  lead  contractor  for
SpatiaLight's new manufacturing  facility to be located on the leased land. Also
in October 2004,  Sung Do Engineering  commenced  construction  of the facility.
Under  SpatiaLight's  agreement  with Sung Do  Engineering,  the Company will be
required to make  periodic  payments  for an  aggregate  total of  4,400,000,000
Korean Won (approximately $3,800,000) over a four-month period concluding in the
first  quarter of 2005.  The Company  made its first  payment of $500,000 to the
contractors  in November  2004.  SpatiaLight  expects that  construction  of the
manufacturing  facility  will be  completed  and  the  facility  will  be  fully
operational in the first quarter of 2005.


                                       12
<PAGE>

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

This Form 10-Q contains certain forward-looking statements within the meaning of
Section 21E of the  Securities  and  Exchange  Act of 1934,  as  amended,  which
statements are subject to the Safe Harbor provisions created by that statute. In
this  report,  the  words   "anticipates,"   "believes,"   "expects,"  "future,"
"intends," and similar expressions  identify  forward-looking  statements.  Such
statements are subject to certain risks and  uncertainties,  including,  but not
limited to, those  discussed  herein,  those contained in this Item, 2 and those
discussed  in the  Company's  Annual  Report  on Form  10-K as  filed  with  the
Securities and Exchange  Commission on March 30, 2004. 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  condensed  consolidated
financial  condition of the Company as of September 30, 2004, and the results of
operations for the Company for the three months and nine months ended  September
30,  2004  and  2003.  The  following  should  be read in  conjunction  with the
unaudited financial statements and related notes appearing elsewhere herein.

OVERVIEW

We are in the  business  of  manufacturing  liquid  crystal  on  silicon  (LCoS)
microdisplays  that provide high  resolution  images  suitable for  applications
including high  definition  television,  rear projection  computer  monitors and
video  projectors,  and  potential  applications  such as those used in wireless
communication devices, portable games and digital assistants. Our imagEngine(TM)
microdisplays  are  designed  for  use in end  products  of  original  equipment
manufacturers,  and  therefore we work closely with  customers  and  prospective
customers to incorporate our microdisplays  into their final products.  We lease
clean room space in California  where we currently  manufacture  our SpatiaLight
imagEngine(TM)   microdisplays  in  limited  commercial   quantities.   Internal
manufacturing  is subject to certain risks  described  under "Business Risks and
Uncertainties."

In  September  2004,  we  entered  into a  long-term  lease  with the  Gyeongnam
provincial  government  for 8.3 acres of  undeveloped  land in Jinsa,  Gyeongnam
province  in the  Republic  of Korea.  We  leased  the land for the  purpose  of
constructing  a  state-of-the-art  manufacturing  facility with the  anticipated
capacity to meet mass production-scale demand from our customers and prospective
customers. We have received a 100% land lease payment exemption because the land
has been designated a "free economic zone" by the Korean national government and
the Korean government also certified us as a "high technology" company.


                                       13
<PAGE>

In  October  2004,  we  contracted  with Sung Do  Engineering,  a  designer  and
manufacturer  of  high-tech  processing  plants,  as  the  lead  contractor  for
constructing our new manufacturing facility on the leased land. In October 2004,
Sung Do  Engineering  commenced  construction  of our new  facility.  Under  the
agreement  with  Sung  Do  Engineering,  we will be  required  to make  periodic
payments  for an  aggregate  total of  4,400,000,000  Korean Won  (approximately
$3,800,000) over a four-month period concluding in the first quarter of 2005. We
made an initial  payment of $500,000 to the  contractor  in  November  2004.  We
expect that construction of the manufacturing facility will be completed and the
facility will be fully operational in the first quarter of 2005.

We are currently offering two types of products to our customers and prospective
customers  primarily  in the  Republic of Korea,  China,  Taiwan and Japan.  One
product is a set of three of our  proprietary  SpatiaLight  imagEngine(TM)  LCoS
microdisplays (LCoS Sets). Our other product,  the display unit, is comprised of
three  of  our  LCoS  microdisplays  fitted  onto a  light  engine  designed  by
SpatiaLight and Fuji Photo Optical Co., Ltd. (Fuji) and manufactured by Fuji. We
currently manufacture two models of our LCoS microdisplays.  The "T-1" model has
an  active  matrix  of 1280  pixels by 960  pixels  configuration  and the newer
generation  "T-3"  model has an  active  matrix  of 1920  pixels by 1080  pixels
configuration.

To date,  we have  completed  deliveries  of our  microdisplay  products  to our
customers  in  limited  quantities.  A  substantial  portion  of such  delivered
products  have been to our customers  located in China.  Commencing in the first
quarter of 2005, we expect that a greater  percentage of future  deliveries will
be made  to LG  Electronics,  our  Korean  customer,  pursuant  to our  purchase
agreement with them. The loss of LG Electronics as a customer,  or any delays in
our delivery schedule to LG Electronics,  could harm our future sales or results
of operations and our substantial dependence on one customer is subject to risks
set forth in "Business  Risks and  Uncertainties."  We are currently  developing
working  relationships  with other prospective  customers,  located primarily in
Japan and other parts of the Pacific Rim region.  While we have made significant
progress with respect to product  integration  and  negotiating  purchase orders
with  certain of these  prospective  customers,  we cannot  assure  that we will
receive any purchase orders binding on any of these companies for their purchase
of our products in the near future.

LIQUIDITY AND CAPITAL RESOURCES

As of  September  30, 2004,  we had  approximately  $1,090,000  in cash and cash
equivalents,  a decrease of approximately  $5,270,000 from the December 31, 2003
amount  of  $6,360,000.  Our net  working  capital  at  September  30,  2004 was
approximately  $2,317,000  compared  to a net working  capital of  approximately
$6,229,000 at December 31, 2003. This working capital change is primarily due to
the use of cash to fund  operating  expenses  offset by an  increase in accounts
receivable.

Net cash used in  operating  activities  totaled  approximately  $6,020,000  and
$5,860,000 for the nine months ended September 30, 2004 and 2003,  respectively.
Cash was used primarily to fund the operating loss.

Net cash provided by financing activities in the nine months ended September 30,
2004 was  approximately  $1,440,000 as compared to approximately  $8,120,000 for
the nine months ended September 30, 2003. In the third quarter of 2004, cash was
provided primarily from the exercise of employee stock options and warrants.  In
the same period in 2003,  cash was  provided  primarily  from the sale of common
shares and issuance of short-term notes.


                                       14
<PAGE>

We expect to meet our cash needs and fund our working  capital  requirements  by
obtaining  additional  financing.  We believe that we are in the final phases of
negotiations for such financing with multiple  prospective sources. In addition,
we  expect  to  receive  cash  upon  the  collection  of notes  receivable  from
shareholders and from the exercise of warrants held by existing investors. There
can be no assurances that we will be able to obtain such  additional  financing,
collect upon such notes  receivable  or that  existing  investors  will exercise
their warrants.

RESULTS OF OPERATIONS

Revenue.  We recognized revenue of approximately  $268,000 and $1,128,000 in the
three and nine months ended September 30, 2004,  respectively.  Revenues for the
nine-month  period were  approximately  $508,000 from the sale of LCoS Sets, and
$620,000 from the sales of display units.  Revenues for the  three-month  period
were  primarily  from the sales of our LCoS  Sets.  Revenue in 2003 was from the
sale of display units.

In the third quarter of 2004,  the Company  received a purchase order from a new
customer.  Upon reviewing the order, it was noted that not all elements required
for revenue recognition were present.  The product was shipped at the end of the
third  quarter.  The  revenue of  $216,000  and the  related  cost of revenue of
$116,000 were recorded as deferred  revenue until all of the necessary  elements
for  revenue  recognition  had been met.  These  elements  were met early in the
fourth quarter.

Revenue from two customers accounted for 51% and 47%, respectively, of our total
revenues for the nine months ended  September  30, 2004.  The loss of any one of
these customers and our inability to obtain additional  purchase orders from our
current or prospective  customers to replace the lost revenue in a timely manner
could harm our sales or results of operations.  Accounts  receivable  from these
two  customers  accounted  for 33% and  45%,  respectively,  of  total  accounts
receivable as of September 30, 2004.

Cost of revenue. Cost of revenue was approximately  $125,000 and $898,000 in the
three and nine months ended September 30, 2004, respectively,  and approximately
$74,000 and $175,000 in the three and nine months ended September 30, 2003. Cost
of revenue consists primarily of product costs. Cost of revenue in 2003 includes
an adjustment to restate inventory at the lower of cost or market as our initial
purchases were at a cost higher than we expected to incur for future purposes.

Gross margin.  Gross margin increased overall in 2004, due to increased sales of
our LCoS Sets, which have a higher gross margin than our display units.

Selling,  general and administrative costs. Selling,  general and administrative
costs were  approximately  $1,432,000  and  $973,000 in the three  months  ended
September 30, 2004 and 2003, respectively,  and $3,917,000 and $2,346,000 in the
nine  months  ended  September  30,  2004 and 2003,  respectively,  and  include
professional   services,   salaries  and  related  taxes  and  benefits,   rent,
depreciation,  travel, insurance and office expenses. Salaries and related taxes
and benefits increased approximately  $1,480,000 as a result of the reassignment
of employees from research and development to general and administrative  duties
and the increase in the number of administrative  staff.  These changes were due
to the transition  toward  commercial-scale  manufacturing  of our  microdisplay
products and the hiring of technical support staff in Asia. In addition,  travel
and lodging  expenses  increased  by  approximately  $270,000 due to increase in
travel to Asia in the nine months  ended  September  30,  2004,  related to work
performed in connection with purchase order agreements  entered into during 2003
and other business  development  matters.  These  increases were offset by a one
time expense of $250,000 in 2003 related to costs of  obtaining  financing  that
had no comparable expense in 2004.

Stock-based compensation.  Stock-based compensation was approximately $8,200 and
$71,000 in the three months ended September 30, 2004 and 2003, respectively, and
approximately  $270,000 and  $1,730,000  in the nine months ended  September 30,
2004 and 2003, respectively. The amounts incurred relate to common shares, stock
options, and warrants issued. The decrease in stock-based compensation is due to
expenses  totaling  approximately  $960,000  incurred in 2003 related to the May
financing  and the  beneficial  pricing  received  by  Robert  A.  Olins,  Chief
Executive  Officer,  that had no  comparable  expense in 2004.  Expenses in 2004
relate  primarily  to a warrant  issued in exchange for services and issuance of
options to an employee in 2003 that are being expensed over the vesting period.


                                       15
<PAGE>

Research  and   development   costs.   Research  and   development   costs  were
approximately  $1,914,000 and $1,988,000 in the nine months ended  September 30,
2004 and 2003,  respectively  and  $662,000  and  $597,000  in each of the three
months ended  September  30, 2004 and 2003,  respectively.  Salaries and related
benefits  decreased  approximately  $1,060,000  due to the  reclassification  of
employees from research and development to selling,  general and administrative.
Other research and development expenses increased  approximately  $1,000,000 due
to an  increase in  consulting  services  as well as costs  associated  with the
development  of a  newer  generation  LCoS  microdisplay.  These  costs  include
primarily materials, equipment and design.

Interest expense.  Interest expense for the nine months ended September 30, 2004
decreased  approximately  $127,000  from  the  same  period  in 2003  due to the
conversion of $2,975,000 of convertible notes in November 2003.

Non-cash interest expense.. Non-cash interest expense was approximately $563,000
and  $417,000  for  the  nine  months  ended   September   30,  2004  and  2003,
respectively.  Non-cash  interest  expense  relates to the  beneficial  price of
shares  issued  to  prepay  interest  on the notes  payable  to  Argyle  Capital
Management  Corporation,  a  company  wholly  owned by Robert  A.  Olins,  Chief
Executive  Officer  and a director 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  increased  approximately
$146,000  due to the  increase  in the price of our common  shares  from 2003 to
2004.  Also included in non-cash  interest  expense is the  amortization of note
discounts.

Critical Accounting Policies

Revenue  Recognition  - We  enter  into  commercial  transactions  to  sell  our
products.  We evaluate  revenue  recognition  for these  transactions  using the
following criteria (collectively called the Revenue Recognition Criteria):

      o     Evidence of an  arrangement:  Before revenue is recognized,  we must
            have evidence of an agreement with the customer reflecting the terms
            and  conditions  to deliver  our  products.  Contracts  are used for
            specialized  arrangements with customers,  including deliveries over
            an extended period of time, and  arrangements for letters of credit.
            Standard agreements require receipt of a purchase order.

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

      o     Fixed  or  determinable  fee:  We  consider  a fee  to be  fixed  or
            determinable if the fee is not subject to refund or adjustment. If a
            portion  of the  arrangement  fee is not fixed or  determinable,  we
            recognize  that amount as revenue when the amount  becomes  fixed or
            determinable.  We do not consider a fee to be fixed and determinable
            if any  amount  is due more than 180 days  from the  delivery  date.
            Payment  terms of less than 180 days are  evaluated  based  upon the
            country in which the  arrangement  is entered into to assess whether
            the fee is fixed and determinable.

      o     Collection  is  deemed  reasonably  assured:  Collection  is  deemed
            reasonably  assured  if we  expect  the  customer  to be able to pay
            amounts under the  arrangement  as those  amounts  become due. If we
            determine that collection is not probable, we recognize revenue when
            collection   becomes   reasonably   assured   (generally  upon  cash
            collection).


                                       16
<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 selling price
of the product based on historical recovery rates. If we assess the market value
of our  inventory  to be less than cost given  current  prices and future  sales
commitments we write it down to its  replacement  cost or net realizable  value.
Our estimates may differ from actual results due to the quantity and quality and
mix of products in  inventory,  consumer and retailer  preferences  and economic
conditions.

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

BUSINESS RISKS AND UNCERTAINTIES

WE HAVE A HISTORY  OF LOSSES AND MAY INCUR  LOSSES IN THE  FUTURE AND  THEREFORE
CANNOT ASSURE YOU THAT WE WILL ACHIEVE PROFITABILITY.

We have incurred losses to date and have  experienced  cash  shortages.  For the
nine months ended  September 30, 2004,  we incurred net losses of  approximately
$6,428,000.  In  addition,  we  had  an  accumulated  deficit  of  approximately
$64,702,000 as of September 30, 2004. 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  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 exercises of
warrants and public and private  purchases of our common  shares,  including the
approximately  $12.5  million  raised  by  us  in  2003  equity  financings  and
$1,440,000  raised through  exercises of stock options and warrants during 2004,
we will still require  additional  financing to satisfy our  increasing  working
capital  requirements.  Reliance on the  exercise of  warrants,  private  equity
purchase  agreements and public offerings to finance our operations  entails the
additional  risks that such warrants may not be exercised due to the  prevailing
market prices of our underlying common shares,  default by purchasers under such
equity purchase  agreements or our inability to sell publicly registered shares.
In the event  that we are unable to obtain  further  financing  on  satisfactory
terms, or we are unable to generate sales  sufficient to offset our costs, or if
our costs of development  and operations are greater than we anticipate,  we may
be unable to 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.


                                       17
<PAGE>

WE ARE SUBJECT TO LENGTHY  DEVELOPMENT  PERIODS AND PRODUCT  ACCEPTANCE  CYCLES,
WHICH MAY SIGNIFICANTLY HARM OUR BUSINESS.

Our business model requires us to develop microdisplays that perform better than
existing technologies,  manufacture our SpatiaLight imagEngine(TM) microdisplays
and/or  display  units in bulk,  and sell  the  resulting  microdisplays  and/or
display units to original  equipment  manufacturers  that will then  incorporate
them  into  their   products.   Original   equipment   manufacturers   make  the
determination  during  their  product  development  programs  whether  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 in 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  demanded  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  twelve   full-time   engineering   and  eleven   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 changes 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.

WE ARE CURRENTLY MANUFACTURING AND SHIPPING OUR MICRODISPLAYS, BUT UNANTICIPATED
DIFFICULTIES IN MANUFACTURING  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 production of
our  current  microdisplays.  Problems  in  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
customers and potential customers to seek other sources.

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


                                       18
<PAGE>

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.  We lease  clean room  space in  California  where we  currently
manufacture our SpatiaLight imagEngine(TM) microdisplays.  We believe that these
current  arrangements  provide us with strong quality  controls and  effectively
protect our  proprietary  technology  in our products,  but the risks  discussed
above associated with the highly complex processes of manufacturing these liquid
crystal microdisplays remain applicable.

We continue to have  working  arrangements  with the  manufacturer  of the light
engines and lamps required in the assembly of our display units. We have entered
into an agreement  for the supply of prisms and filters  which are also required
for the  assembly of such units.  We do not have other such  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,  in our capacity as
manufacturers  of  our  liquid  crystal  microdisplays,  we  cannot  assure  the
manufacturing  yields  of our  products.  Current  purchase  orders  and  future
purchase  orders,  which we cannot  assure,  will require us to produce  greater
quantities  of our  microdisplay  products  than we have  produced  in the past.
Problems in  production,  including  problems  associated  with  increasing  our
production   output  or  lower  than   expected   manufacturing   yields   could
significantly  harm  our  business  and  operating  results.  In  addition,  the
complexity of our manufacturing processes will increase as the sophistication of
our microdisplays and display units increases, and such complexities may lead to
similar difficulties that could harm our business and operating results.

WHILE WE INTEND TO OPEN A MANUFACTURING FACILITY IN THE REPUBLIC OF KOREA AS THE
PRINCIPAL FACILITY FOR MANUFACTURING OUR MICRODISPLAY PRODUCTS, WE MAY ENCOUNTER
DELAYS  IN  BUILDING  SUCH  A  FACILITY,   DIFFICULTIES  IN  TRANSITIONING   OUR
MANUFACTURING  OPERATIONS AND  DIFFICULTIES IN MAINTAINING OUR QUALITY  CONTROLS
OVER THE MANUFACTURING AND PRODUCTION PROCESSES, ANY OF WHICH WOULD BE LIKELY TO
CAUSE SIGNIFICANT HARM TO OUR BUSINESS.

Our decision to locate our principal manufacturing operations in the Republic of
Korea  may cause us to  encounter  one or more  potential  problems  that  could
severely harm our business.  Such  potential  problems could arise in connection
with constructing the facility to our specifications in a timely manner to allow
us to meet the product demand from our customers,  which would negatively impact
our ability to sustain current purchase orders and enter into new purchase order
arrangements  with our current and  prospective  customers.  Other  problems may
arise in the training of employees, which may occur as the result of cultural or
language differences, which may create misunderstandings or cause inefficiencies
in our operations.  The geographic  separation  between our corporate offices in
the United  States and our  principal  manufacturing  operation  in Korea  could
result in  managerial  or  supervisory  problems,  which could lead to decreased
quality controls and a subsequent material harm to our business.


                                       19
<PAGE>

IF MARKETS FOR OUR PRODUCTS DO NOT CONTINUE TO DEVELOP, OUR BUSINESS WILL LIKELY
BE SIGNIFICANTLY HARMED.

Various  target  markets  for  our  microdisplays,   including   high-definition
televisions, projectors, monitors, 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,  although anticipated,
is uncertain.  In addition,  the commercial success of the portable microdisplay
market  is  uncertain.   The  acceptance  of  our   SpatiaLight   imagEngine(TM)
microdisplays and/or display units 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 relationships with television OEMs, who
are located  principally  in the  Pacific  Rim  Region.  Our failure to sell our
microdisplays  to such  manufacturers  or the  failure  of the  ultimate  target
markets to develop as we expect will negatively effect our anticipated growth.

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  obtain  customer  orders,  our  customers  may  determine  not  to
introduce or may terminate  products  utilizing the  technology for a variety of
reasons, including the following:

      o     superior technologies developed by our competitors;

      o     price considerations; and

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

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

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

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


                                       20
<PAGE>

WE CANNOT  ASSURE YOU THAT WE WILL OBTAIN  ADDITIONAL  PURCHASE  ORDERS FROM OUR
CURRENT OR PROSPECTIVE  CUSTOMERS,  OR, IF WE DO, THAT SUCH ORDERS WILL GENERATE
SIGNIFICANT REVENUES.

Even though we have received purchase orders for our microdisplay  products from
a major Korean OEM and from several  Chinese OEMs and we may receive  additional
purchase   orders  from  our  prospective   customers,   we  may  have  problems
implementing volume production of such microdisplay products. 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,  despite
the purchase  orders  received from current  customers and other purchase orders
that we may receive from prospective customers,  we cannot assure you that these
agreements will result in significant revenues to us.

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

We do not  currently  sell any  products to  end-users.  Instead,  we design and
manufacture  various  product  solutions  that our  customers  (i.e.,  OEMs) may
incorporate  into  their  products.  As a result,  our  success  depends  almost
entirely upon the widespread market acceptance of our customers'  products.  Any
significant  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 and effectively than we can.

Our competitive  position could suffer if one or more of our customers decide to
design and manufacture  their own  microdisplay  products,  to contract with our
competitors,  or to use  alternative  technologies.  In addition,  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:


                                       21
<PAGE>

      o     our success in designing and manufacturing new display technologies;

      o     our ability to address the needs of customers;

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

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

      o     the quality of our customer services;

      o     the efficiency of our production sources;

      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 that cause our operating results to fluctuate include the following:

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

      o     timing of expenditures in anticipation of future orders;

      o     changes in our cost structure;

      o     availability of labor and components;

      o     pricing and availability of competitive products and services;

      o     the timing of orders;

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

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

      o     changes or anticipated changes in economic conditions.


                                       22
<PAGE>

THE MARKET PRICE OF OUR COMMON SHARES IS HIGHLY VOLATILE.

The market  price of our  common  shares has been  highly  volatile,  reflecting
reported losses and receipt of additional financing.  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;

      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.

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

The total  number of our  common  shares and  warrants  to  purchase  our common
shares,  sold in three separate equity  financings  completed in 2003 represents
approximately  14.22% of the total  number of our common  shares that are issued
and outstanding as of November 9, 2004.  Sales of these shares,  into and within
the public market,  or the  perception  that future sales of these common shares
could occur,  might adversely  affect the prevailing  market price of our common
shares in the near future.

OUR COMMON SHARES MAY NOT BE LIQUID.

Our  common  shares are  currently  traded on The NASDAQ  SmallCap  Market.  Our
shareholders  may find that it is more  difficult to sell our common shares than
shares that are listed on The NASDAQ National Market, American Stock Exchange or
New York  Stock  Exchange.  The  trading  volume  of our  common  shares  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.


                                       23
<PAGE>

IF WE LOSE OUR KEY  PERSONNEL  OR ARE  UNABLE TO ATTRACT  AND RETAIN  ADDITIONAL
PERSONNEL, OUR ABILITY TO COMPETE COULD BE HARMED.

Our development and operations depend substantially on the efforts and abilities
of our senior management and qualified technical personnel. Our products require
sophisticated  production,  research and development and technical support.  The
competition  for qualified  management and technical  personnel is intense.  The
loss of services of one or more of our key employees or the inability to add key
personnel  could  have a  material  adverse  affect  on us;  particularly  since
currently  we do not  have  any  insurance  policies  in  place  to  cover  that
contingency.  Our  success  will  depend  upon our ability to attract and retain
highly qualified scientific, marketing,  manufacturing,  financial and other key
management  personnel.  We face intense  competition  for the limited  number of
people available with the necessary  technical  skills and  understanding of our
products and technology. We cannot assure you that we will be able to attract or
retain such  personnel or not incur  significant  costs in order to do so. 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  current  or  prospective  Chinese  or
            Korean  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 and Korean
            legal  systems  may  adversely  impact our  ability  to protect  our
            intellectual property.

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


                                       24
<PAGE>

POLITICAL,   ECONOMIC  AND  REGULATORY  RISKS   ASSOCIATED  WITH   INTERNATIONAL
OPERATIONS MAY LIMIT OUR ABILITY TO DO BUSINESS ABROAD.

A substantial  number of our customers,  manufacturers and suppliers are located
outside of the United States,  principally  in the Far East.  Our  international
operations  are  subject  to  political  and  economic  conditions  abroad,  and
protectionist   trade  legislation  in  either  the  United  States  or  foreign
countries,  such as a change in the current tariff structures,  export or import
compliance  laws, or other trade policies,  any of which could adversely  affect
our ability to manufacture  or sell displays in foreign  markets and to purchase
materials or equipment from foreign suppliers. All of our current purchase order
agreements with customers are governed by foreign law and therefore, are subject
to uncertainty with regard to their enforceability.

RISKS RELATED TO DOING BUSINESS IN CHINA MAY NEGATIVELY AFFECT OUR BUSINESS.

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

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

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

WE DO NOT PAY CASH DIVIDENDS.

We have never paid any cash dividends on our common shares and do not anticipate
that we will pay cash dividends in the near future.  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  nationally  reputable banks both in the United States
and South Korea. As of September 30, 2004, our cash and cash equivalents totaled
$1,090,000.

Item 4. Controls and Procedures.


                                       25
<PAGE>

Quarterly evaluation of the Company's Disclosure 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 Chief Executive  Officer,  who serves as our principal  executive officer
and  principal  financial  officer  (CEO).  Certain  new  procedures  related to
contract  /sales  processes and the accounts  payable/purchasing  processes have
been  initiated  during  the third  quarter  in order to  improve  our  internal
controls in these areas.

Limitations on the  Effectiveness of Controls.  Our CEO does not expect that our
Disclosure  Controls or our  internal  control  over  financial  reporting  will
prevent all error and all fraud. A control system,  no matter how well conceived
and operated,  can provide only  reasonable,  not absolute,  assurance  that the
control system's objectives will be met. Further, the design of a control system
must reflect the fact that there are resource  constraints,  and the benefits of
controls  must be considered  relative to their costs.  We have only had limited
revenue  derived  from  the sale of our  microdisplay  products  in the  current
reporting period.  While the Controls  Evaluation has accounted for such limited
sales and revenue, new or additional controls may or may not be required once we
begin  selling our  microdisplay  products in  increased  volume in the ordinary
course of business.  Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud,  if any,  within the Company have been  detected.  These
inherent limitations include the realities that judgments in decision-making can
be faulty,  and that  breakdowns  can occur  because  of simple  error or honest
mistake.  Additionally,  controls can be  circumvented by the individual acts of
some persons,  by collusion of two or more persons, or by management override of
the  controls.  The design of any system of controls  also is based in part upon
certain  assumptions about the likelihood of future events,  and there can be no
assurance  that any design will succeed in achieving  its stated goals under all
potential future conditions.  Over time, specific controls may or may not become
inadequate  (e.g.,  when we commence to sell our products in increased volume in
the  ordinary   course  of  business)   because  of  changes  in  conditions  or
deterioration  in the degree of compliance with policies or procedures.  Because
of the inherent  limitations in a cost-effective  control system,  misstatements
due to error or fraud may occur and not be detected. We were recently advised by
our independent registered public accounting firm of the existence of a material
weakness  in our system of internal  controls  over the  shipments,  billing and
revenue  cycle.  In the third quarter of 2004, we  implemented a Purchase  Order
Acceptance  Process;  however,  this process  failed to catch  discrepancies  in
shipping  and credit  terms on certain  invoices  produced and sent to a certain
customer  due to a lack of a formal  review by anyone other than the preparer of
the invoices and the shipping documents. In addition, we had no formal procedure
to  timely  document  creditworthiness  and/or  credit  considerations  for  new
customers.  Although these control deficiencies did not result in a misstatement
of revenues and/or  receivables,  they relate closely to assuring the fulfilling
of critical  components of revenue  recognition  criteria.  We have subsequently
changed our  procedures and review  processes  over the  shipments,  billing and
revenue cycle and do not foresee recurrence of such problem.

Conclusions.  Based upon the Controls  Evaluation,  our CEO 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 CEO, particularly during the period
when our periodic  reports are being  prepared.  There have been no  significant
changes in the Company's internal control over financial reporting that occurred
during the quarter covered by this report that have materially affected,  or are
reasonably  likely to materially  affect,  the Company's  internal  control over
financial reporting.


                                       26
<PAGE>

PART II. OTHER INFORMATION

ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS

In December  2003, we completed a private  placement of 1,000,000  common shares
that were registered with the SEC in a "Shelf" Registration Statement at a price
of $5.00 per share for net  proceeds of  $4,955,255  received in December  2003.
300,000 of these shares were issued in December 2003,  and the remaining  shares
were issued in January  2004. We have used  proceeds  from this  transaction  to
reduce our  liabilities,  for working  capital  purposes  and for other  general
corporate purposes.


                                       27
<PAGE>

ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

      4.1   Amended and Restated Certificate of Incorporation. *
      4.2   Bylaws. *
      31.1  Rule 13a-14(a)/15d-14(a) Certification of Robert A. Olins.
      32.1  Certifications  of Robert A.  Olins  Pursuant  to 18 U.S.C.  Section
            1350, As Adopted Pursuant to Section 906 of the  Sarbanes-Oxley  Act
            of 2002.

(b)   Report on Form 8-K:

The Company filed two reports on Form 8-K during the quarter ended September 30,
2004. Information regarding the items reported is as follows:

      Date Filed            Item Reported On
      ----------            ----------------

      August 27, 2004       Item 5.02(b)      Departure of Principal Officer

      November 15, 2004     Item 1.01.1       Entry into a Material Definitive
                                              Agreement -   Lease Agreement
                            Item 1.01.2       Entry into a Material Definitive
                                              Agreement - Construction Agreement

*Previously filed.


                                       28
<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: November 15, 2004

                                            SpatiaLight, Inc.


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


                                       29