##### Table of Contents



United States
Securities and Exchange CommissionWashington D.C. 20549

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FORM 10-QSB


(Mark One)



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

For the quarterly period ended June 30, 2002



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

For the transition period from ________________ to ________________

Commission File Number 000-19828

SpatiaLight, Inc.(Exact name of small business issuer as specified in its charter)

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

9 Commercial Blvd., Suite 200, Novato, CA 94949*

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(Address of principal executive offices)


(415) 883-1693

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(Issuers telephone number)


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

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 25,487,864 shares of common
stock as of August 8, 2002.

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



|* |  | Registrant plans to move into new premises in September 2002
|- |  | ------------------------------------------------------------





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TABLE OF CONTENTS



|                              |                                                                                                |                                         |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Condensed Financial Statements                                                        
|                              |                                                                                                | BALANCE SHEETS                         
|                              |                                                                                                | STATEMENTS OF OPERATIONS               
|                              |                                                                                                | STATEMENT OF STOCKHOLDERS DEFICIT     
|                              |                                                                                                | STATEMENTS OF CASH FLOWS               
|                              |                                                                                                | Notes to Condensed Financial Statements
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|PART II. OTHER INFORMATION   
|                              | ITEM 2 Changes in Securities and Use of Proceeds                                              
|                              | ITEM 4 Submission of Matters to a Vote of Security Holders                                    
|                              | ITEM 6 Exhibits and Reports on Form 8-K                                                       
|SIGNATURES                   
|Form 10QSB                   
|Exhibit 10.18                



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##### Table of Contents



SPATIALIGHT, INC.

Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 2002

Table of Contents

|        |  |                       |    |                                                                                                                             |   
|------- |  | --------------------- | -- | --------------------------------------------------------------------------------------------------------------------------- | --
|PART I  |  | FINANCIAL INFORMATION |   
|       
|        |  | Item 1.               |    | Condensed Financial Statements
        (unaudited)                                                                          | 3 
|       
|        |  |                       |    | Condensed Balance Sheets dated
        June 30, 2002 and December 31, 2001                                                  | 3 
|       
|        |  |                       |    | Condensed Statements of Operations
        for the Three months and Six months
        ended June 30, 2002 and 2001         | 4 
|       
|        |  |                       |    | Condensed Statements of Stockholders
        Deficit
        for the Six months ended June 30, 2002                        | 5 
|       
|        |  |                       |    | Condensed Statements of Cash
        Flows
        for the Three months and Six months
        ended June 30, 2002 and 2001 | 6 
|       
|        |  |                       |    | Notes to Condensed Financial
        Statements                                                                             | 7 
|       
|        |  | Item 2.               |    | Managements Discussion
        and Analysis
        of Financial Condition and Results of Operations                       | 12
|       
|PART II |  | OTHER INFORMATION     | 25
|       
|        |  | Item 2.               |    | Changes in Securities and Use
        of Proceeds                                                                           | 25
|       
|        |  | Item 4.               |    | Submission of Matters to a
        Vote of Security Holders                                                                 | 27
|       
|        |  | Item 6.               |    | Exhibits and Reports on Form 8-K                                                                                            | 27

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Condensed Financial
Statements (unaudited)


SPATIALIGHT, INC.




BALANCE SHEETS


|                                            |                                                |   |                                                                                                                              |                             |  |             |             |              |  |         |           |  
|------------------------------------------- | ---------------------------------------------- | - | ---------------------------------------------------------------------------------------------------------------------------- | --------------------------- |  | ----------- | ----------- | ------------ |  | ------- | --------- | -
|                                            |                                                |   |                                                                                                                              |                             |  | June 30,    |             | December 31,
|                                            |                                                |   |                                                                                                                              |                             |  | 2002        |             | 2001        
|                                            |                                                |   |                                                                                                                              |                             |  |             |             |             
|                                            |                                                |   |                                                                                                                              |                             |  | (unaudited) |             |              |  |        
|ASSETS                                      |                                                |   |                                                                                                                              |                             |  |             |             |             
|Current assets                              |                                                |   |                                                                                                                              |                             |  |             |             |             
|                                            | Cash and cash equivalents                      |   | $                                                                                                                            | 354,735                     |  |             | $           | 2,728,134    | 
|                                            | Prepaids and other current assets              |   |                                                                                                                              | 888,065                     |  |             |             | 105,158      | 
|                                            |                                                |   |                                                                                                                              |                             |  |             |             |             
|                                            |                                                |   |                                                                                                                              | Total current assets        |  |             | 1,242,800   |              |  |         | 2,833,292 |  
|Property and equipment, net                 |                                                |   | 623,232                                                                                                                      |                             |  |             | 607,066     |             
|Other assets                                |                                                |   | 81,936                                                                                                                       |                             |  |             | 47,644      |             
|                                            |                                                |   |                                                                                                                              |                             |  |             |             |             
|                                            |                                                |   |                                                                                                                              | Total assets                |  | $           | 1,947,968   |              |  | $       | 3,488,002 |  
|                                            |                                                |   |                                                                                                                              |                             |  |             |             |             
|LIABILITIES AND STOCKHOLDERS DEFICIT       |                                                |   |                                                                                                                              |                             |  |             |             |             
|Current liabilities                         |                                                |   |                                                                                                                              |                             |  |             |             |             
|                                            | Accounts payable                               |   | $                                                                                                                            | 542,262                     |  |             | $           | 394,028      | 
|                                            | Short-term convertible notes                   |   |                                                                                                                              | 3,769,360                   |  |             |             | 3,137,284    | 
|                                            | Accrued expenses and other current liabilities |   |                                                                                                                              | 141,251                     |  |             |             | 170,036      | 
|                                            |                                                |   |                                                                                                                              |                             |  |             |             |             
|                                            |                                                |   |                                                                                                                              | Total current liabilities   |  |             | 4,452,873   |              |  |         | 3,701,348 |  
|                                            |                                                |   |                                                                                                                              |                             |  |             |             |             
|Commitments                                 |                                                |   |                                                                                                                              |                             |  |             |             |             
|Stockholders deficit:                      |                                                |   |                                                                                                                              |                             |  |             |             |             
|                                            | Common stock, $.01 par value:                  |   |                                                                                                                              |                             |  |             |             |              | 
|                                            |                                                |   | 40,000,000 shares authorized; 25,487,864 and 25,811,786 shares issued and outstanding
at June 30, 2002 and December 31, 2001 |                             |  | 254,879     |             |              |  | 258,118 |          
|Additional paid-in capital                  |                                                |   | 42,751,258                                                                                                                   |                             |  |             | 41,911,879  |             
|Notes and stock subscription receivable     |                                                |   | (1,874,847                                                                                                                   | )                           |  |             | (2,653,434  | )           
|Accumulated deficit                         |                                                |   | (43,636,195                                                                                                                  | )                           |  |             | (39,729,909 | )           
|                                            |                                                |   |                                                                                                                              |                             |  |             |             |             
|                                            |                                                |   |                                                                                                                              | Total stockholders deficit |  |             | (2,504,905  | )            |  |         | (213,346  | )
|                                            |                                                |   |                                                                                                                              |                             |  |             |             |             
|Total liabilities and stockholders deficit |                                                | $ | 1,947,968                                                                                                                    |                             |  | $           | 3,488,002   |             
|                                            |                                                |   |                                                                                                                              |                             |  |             |             |             

See accompanying notes to financial statements.

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SPATIALIGHT, INC.




STATEMENTS OF OPERATIONS (unaudited)


|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |   |            |            |            |  
|-------------------------------------------------------------------------------- | ----------------- | ----------------------------------------------- | -------------------------------------------------- | ---------------------- | ---------- | ------------------ | ---------- | ---------------- | ---------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                                                 |                   |                                                 |                                                    |                        |            | Three Months Ended |            | Six Months Ended
|                                                                                 |                   |                                                 |                                                    |                        |            | June 30,           |            | June 30,        
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                 
|                                                                                 |                   |                                                 |                                                    |                        |            | 2002               |            | 2001             |            | 2002       |            | 2001
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |     
|Revenues                                                                         |                   | $                                               |                                                   |                        |            | $                  | 10,000     |                  |            | $          |           |      |            | $          | 10,000     |  
|Cost of revenues                                                                 |                   |                                                 |                                                   |                        |            |                    | 1,000      |                  |            |            |           |      |            |            | 1,000      |  
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|                                                                                 |                   |                                                 | Gross profits                                      |                        |            |                   |            |                  |            | 9,000      |            |      |            |           |            |   |            | 9,000      |           
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|Selling general and administrative expenses:                                     |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|                                                                                 |                   | Selling, general and administrative expenses    |                                                    |                        | 663,273    |                    |            |                  | 785,274    |            |            |      | 1,374,079  |            |            |   | 1,424,697  |           
|                                                                                 |                   | Stock-based general and administrative expenses |                                                    |                        | 2,992      |                    |            |                  | 1,724,024  |            |            |      | 268,969    |            |            |   | 1,773,384  |           
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|                                                                                 |                   |                                                 | Total selling, general and administrative expenses |                        |            | 666,265            |            |                  |            | 2,509,298  |            |      |            | 1,643,048  |            |   |            | 3,198,081  |           
|                                                                                 |                   | Research and development expenses               |                                                    |                        | 586,126    |                    |            |                  | 593,149    |            |            |      | 1,168,237  |            |            |   | 1,196,950  |           
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|                                                                                 |                   |                                                 | Total operating expenses                           |                        |            | 1,252,391          |            |                  |            | 3,102,447  |            |      |            | 2,811,285  |            |   |            | 4,395,031  |           
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|                                                                                 |                   |                                                 | Operating loss                                     |                        |            | (1,252,391         | )          |                  |            | (3,093,447 | )          |      |            | (2,811,285 | )          |   |            | (4,386,031 | )         
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|Other income (expenses):                                                         |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|                                                                                 | Interest expense: |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |   |           
|                                                                                 |                   |                                                 | Interest expense                                   |                        |            | (64,734            | )          |                  |            | (67,629    | )          |      |            | (127,867   | )          |   |            | (131,694   | )         
|                                                                                 |                   |                                                 | Stock-based interest expense                       |                        |            | (487,171           | )          |                  |            | (863,536   | )          |      |            | (974,307   | )          |   |            | (981,967   | )         
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|                                                                                 |                   |                                                 |                                                    | Total interest expense |            |                    | (551,905   | )                |            |            | (931,165   | )    |            |            | (1,102,174 | ) |            |            | (1,113,661 | )
|                                                                                 |                   | Interest and other income                       |                                                    |                        | 1,180      |                    |            |                  | 5,063      |            |            |      | 8,598      |            |            |   | 10,620     |           
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|                                                                                 |                   |                                                 | Total other income (expenses)                      |                        |            | (550,725           | )          |                  |            | (926,102   | )          |      |            | (1,093,576 | )          |   |            | (1,103,041 | )         
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|                                                                                 |                   | Loss before income taxes                        |                                                    |                        | (1,803,116 | )                  |            |                  | (4,019,549 | )          |            |      | (3,904,861 | )          |            |   | (5,489,072 | )         
|Income tax expense                                                               |                   |                                                 | 0                                                  |                        |            |                    | 1,600      |                  |            |            | 1,425      |      |            |            | 5,450      |  
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|                                                                                 |                   |                                                 | Net loss                                           |                        | $          | (1,803,116         | )          |                  | $          | (4,021,149 | )          |      | $          | (3,906,286 | )          |   |            | (5,494,522 | )         
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|Net loss per share-basic and diluted                                             |                   | $                                               | (0.07                                              | )                      |            | $                  | (0.19      | )                |            | $          | (0.16      | )    |            | $          | (0.26      | )
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  
|Weighted average shares used in computing
net loss per share  basic and diluted |                   |                                                 | 24,133,985                                         |                        |            |                    | 21,003,692 |                  |            |            | 23,996,653 |      |            |            | 20,772,610 |  
|                                                                                 |                   |                                                 |                                                    |                        |            |                    |            |                  |            |            |            |      |            |            |            |  

See accompanying notes to condensed consolidated financial statements

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SPATIALIGHT, INC.




STATEMENT OF STOCKHOLDERS DEFICIT
SIX MONTHS ENDED JUNE 30, 2002 (unaudited)


|                                                            |  |              |            |            |  |         |         |             |  |               |            |         |  |       |            |   |  |   |             |   |  |   |            |  
|----------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | ------- | ------- | ----------- |  | ------------- | ---------- | ------- |  | ----- | ---------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                            |  | COMMON STOCK |            | ADDITIONAL |  |         |         |             |  |               |            |         |  | TOTAL
|                                                            |  |              |            | PAID-IN    |  | NOTES   |         | ACCUMULATED |  | STOCKHOLDERS'
|                                                            |  | SHARES       |            | AMOUNT     |  | CAPITAL |         | RECEIVABLE  |  | DEFICIT       |            | DEFICIT
|                                                            |  |              |            |            |  |         |         |             |  |               |            |        
|Balance as of January 1, 2002                               |  |              | 25,811,786 |            |  | $       | 258,118 |             |  | $             | 41,911,879 |         |  | $     | (2,653,434 | ) |  | $ | (39,729,909 | ) |  | $ | (213,346   | )
|Conversion of interest on notes                             |  |              | 178,992    |            |  |         | 1,790   |             |  |               | 689,610    |         |  |       |            |   |  |   |             |   |  |   | 691,400    |  
|Exercise of stock options and warrants                      |  |              | 783,354    |            |  |         | 7,834   |             |  |               | 2,331,996  |         |  |       | (1,747,347 | ) |  |   |             |   |  |   | 592,483    |  
|Issuance of stock, stock options, and warrants for services |  |              | 60,000     |            |  |         | 600     |             |  |               | 268,369    |         |  |       |            |   |  |   |             |   |  |   | 268,969    |  
|Payments on notes receivable                                |  |              |            |            |  |         |         |             |  |               |            |         |  |       | 21,875     |   |  |   |             |   |  |   | 21,875     |  
|Repricing of warrants                                       |  |              |            |            |  |         |         |             |  |               | 40,000     |         |  |       |            |   |  |   |             |   |  |   | 40,000     |  
|Recission of stock purchase agreement                       |  |              | (1,346,268 | )          |  |         | (13,463 | )           |  |               | (2,490,596 | )       |  |       | 2,504,059  |   |  |   |             |   |  |   | 0          |  
|Net loss                                                    |  |              |            |            |  |         |         |             |  |               |            |         |  |       |            |   |  |   | (3,906,286  | ) |  |   | (3,906,286 | )
|                                                            |  |              |            |            |  |         |         |             |  |               |            |         |  |       |            |   |  |   |             |   |  |   |            |  
|Balance as of June 30, 2002                                 |  |              | 25,487,864 |            |  | $       | 254,879 |             |  | $             | 42,751,258 |         |  | $     | (1,874,847 | ) |  | $ | (43,636,195 | ) |  | $ | (2,504,905 | )
|                                                            |  |              |            |            |  |         |         |             |  |               |            |         |  |       |            |   |  |   |             |   |  |   |            |  

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##### Table of Contents



SPATIALIGHT, INC.




STATEMENTS OF CASH FLOWS (unaudited)


|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |        |           |         |            |  
|--------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------------------------ | ---------------------------------------------- | ----------------------------------------- | --------- | ---------------- | ---------- | ------ | --------- | ------- | ---------- | -
|                                                                            |                                                 |                                                                    |                                                |                                           |           | Six Months Ended
|                                                                            |                                                 |                                                                    |                                                |                                           |           | June 30,        
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                 
|                                                                            |                                                 |                                                                    |                                                |                                           |           | 2002             |            | 2001  
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|Cash flows from operating activities:                                       |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|Net loss                                                                    |                                                 | $                                                                  | (3,906,286                                     | )                                         |           | $                | (5,494,522 | )     
|Adjustments to reconcile net loss to net cash used by
operating activities: |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 | Depreciation and amortization                                      |                                                |                                           | 190,366   |                  |            |        | 134,165   |        
|                                                                            |                                                 | Stock-based general and administrative expense                     |                                                |                                           | 268,969   |                  |            |        | 1,773,384 |        
|                                                                            |                                                 | Stock-based interest expense                                       |                                                |                                           | 974,307   |                  |            |        | 981,967   |        
|                                                                            |                                                 | Changes in operating assets and liabilities:                       |                                                |                                           |           |                  |            |        |           |        
|                                                                            |                                                 |                                                                    | Accounts receivable                            |                                           |           |                 |            |        |           | 2,500   |           
|                                                                            |                                                 |                                                                    | Prepaid and other current assets               |                                           |           | (503,490         | )          |        |           | (50,041 | )         
|                                                                            |                                                 |                                                                    | Accounts payable                               |                                           |           | 148,235          |            |        |           | 45,197  |           
|                                                                            |                                                 |                                                                    | Accrued expenses and other current liabilities |                                           |           | 83,888           |            |        |           | 134,348 |           
|                                                                            |                                                 |                                                                    | Other assets                                   |                                           |           | (34,292          | )          |        |           | (16,002 | )         
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 |                                                                    |                                                | Net cash used in operating activities     |           |                  | (2,778,303 | )      |           |         | (2,489,004 | )
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|Cash flows from investing activities:                                       |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 | Purchase of property and equipment                                 |                                                |                                           | (206,532  | )                |            |        | (96,031   | )      
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 |                                                                    |                                                | Net cash used in investing activities     |           |                  | (206,532   | )      |           |         | (96,031    | )
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|Cash flows from financing activities:                                       |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 | Payments on capital lease obligations                              |                                                |                                           | (2,922    | )                |            |        | (2,446    | )      
|                                                                            |                                                 | Payments on notes receivable from shareholders                     |                                                |                                           | 21,875    |                  |            |        |          |        
|                                                                            |                                                 | Proceeds from issuance of convertible notes                        |                                                |                                           |          |                  |            |        | 250,000   |        
|                                                                            |                                                 | Proceeds from sale of stock                                        |                                                |                                           |          |                  |            |        | 275,963   |        
|                                                                            |                                                 | Proceeds from exercise of warrants and options                     |                                                |                                           | 592,483   |                  |            |        | 1,046,528 |        
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 |                                                                    |                                                | Net cash provided by financing activities |           |                  | 611,436    |        |           |         | 1,570,045  |  
|Net decrease cash equivalents                                               |                                                 |                                                                    | (2,373,399                                     | )                                         |           |                  | (1,014,990 | )     
|Cash and cash equivalents at beginning of period                            |                                                 |                                                                    | 2,728,134                                      |                                           |           |                  | 1,035,957  |       
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|Cash and cash equivalents at end of period                                  |                                                 | $                                                                  | 354,735                                        |                                           |           | $                | 20,967     |       
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|Supplemental disclosure of cash flow information:                           |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 | Income taxes paid during the period                                |                                                | $                                         | 1,425     |                  |            | $      | 5,450     |        
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 | Interest paid during the period                                    |                                                | $                                         | 294       |                  |            | $      | 2,729     |        
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|Non cash financing activities:                                              |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 | Exercise of warrants in exchange for notes receivable              |                                                | $                                         | 1,747,347 |                  |            | $      | 403,125   |        
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 | Sale of stock for stock subscription                               |                                                | $                                         |          |                  |            | $      | 3,130,007 |        
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            |                                                 | Discount on convertible notes due to beneficial conversion feature |                                                | $                                         |          |                  |            | $      | 1,443,000 |        
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       
|                                                                            | Common stock issued upon conversion of interest |                                                                    | $                                              | 691,400                                   |           |                  | $          | 69,425 |          
|                                                                            |                                                 |                                                                    |                                                |                                           |           |                  |            |       

See accompanying notes to condensed consolidated financial statements

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SPATIALIGHT, INC.




Notes to Condensed Financial Statements (Unaudited)

1. Business Description

SpatiaLight, Inc. (SpatiaLight or the Company) is in the business of designing
high-resolution microdisplays, which consist of liquid crystals and a glass
cover on top of a silicon chip. These displays are also known as and commonly
referred to as Liquid Crystal Displays (LCD), Active Matrix Liquid Crystal
Displays (AMLCD), Liquid Crystal on Silicon (LCOS), and Spatial Light
Modulators (SLM). These displays provide high-resolution images suitable for
applications such as rear projection computer monitors, high definition
television and video projectors and potential applications such as those used
in wireless communication devices, portable games and digital assistants. The
Company has recently entered into five agreements with six original equipment
manufacturers in China to provide display units for use in their products. In
the event that the display units meet certain technical criteria satisfactory
to the manufacturer upon the conclusion of the respective test periods
specified in these agreements, as to which there can be no assurance, the
Company expects to obtain purchase orders from these manufacturers for these
display units. These agreements are subject to various technical contingencies
and there can be no assurance that these agreements will result in significant
revenues, if any.

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

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

2. Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB of Item 310(b) of
Regulation S-B. Accordingly they do not include all of the information and
footnotes necessary for a fair presentation of financial condition, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management of SpatiaLight, the interim condensed
financial statements included herewith contain all adjustments (consisting of
normal recurring accruals and adjustments) necessary for their fair
presentation. The unaudited interim condensed financial statements should be
read in conjunction with the Companys Annual Report on Form 10-KSB, which
contains the audited financial statements and notes thereto, together with the
Managements Discussion and Analysis, for the year ended December 31, 2001.
The interim results for the periods ended June 30, 2002 are not necessarily
indicative of results for the full fiscal year.

3. Liquidity

The Companys operations are constrained by an insufficient amount of working
capital. As of June 30, 2002 the Company has sustained recurring losses and
had a net capital deficiency of $2,504,905, and a net working capital
deficiency of $3,210,073. These conditions raise substantial doubt about the
ability of the Company to continue as a going concern. During 2002 the Company
plans to meet its working

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capital and other cash requirements through the exercise of warrants held by
existing investors. The Companys continued existence is dependent upon its
ability to successfully market and sell its products, and obtain additional
financing. However, there can be no assurance that the Companys efforts will
be successful. The Company continues its efforts to locate sources of
additional financing. There can be no assurance that additional financing will
be available to the Company. For this reason, there is uncertainty whether the
Company can continue as a going concern. Further, the Companys auditors
included a paragraph in their report on the audited financial statements for
the year ended December 31, 2001, indicating that substantial doubt exists as
to the Companys ability to continue as a going concern.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
The Company incurred significant operating losses in each of the last five
fiscal years and incurred a net loss of $3,906,286 in the six months ended June
30, 2002. Of this amount, $1,243,276 was non-cash stock-based expenses.
Additionally, as of June 30, 2002, the Companys accumulated deficit totaled
$43,636,195. The Company has generated limited revenues to date and the
development, commercialization and marketing of the Companys products will
require substantial expenditures in the foreseeable future. The successful
completion of the Companys development program and ultimately, the attainment
of profitable operations are dependent upon future events. These events
include obtaining adequate financing to fulfill its development activities,
successful launching of the commercial production and distribution of its
products and achieving a level of sales adequate to support the Companys cost
structure. These matters, among others, may indicate that the Company will be
unable to continue as a going concern for a reasonable period of time.

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

4. Per Share Information

Basic loss per common share available to common shareholders excludes dilution
and is computed by dividing loss available to common shareholders by the
weighted-average number of common shares for the period. Excluded from
weighted average shares outstanding for the three months and six months ended
June 30, 2002 are 649,998 and 1,300,000 shares of common stock issued but held
in escrow in connection with the private stock purchase agreements and warrant
installment notes. Diluted loss per common share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. Excluded from the
computation of diluted loss per share for the six months ended June 30, 2002
and 2001 respectively, are options and warrants to acquire 6,696,268 and
8,105,812 shares of common stock, and 3,425,603 and 3,568,460 common share
equivalents in each period relating to convertible secured notes, because the
effect of their assumed exercise would be antidilutive. The weighted average
exercise price as of June 30, 2002 for the options and warrants is $3.26 and
$2.78, respectively; the weighted average conversion price for the common share
equivalents related to convertible notes is $1.19.

5. Notes Payable

Convertible notes at June 30, 2002 consist of the following:

A convertible note totaling $792,000, net of a discount of $396,000 issued to
Argyle Capital Management Corporation, a company affiliated with Robert A.
Olins, a Director, Acting Chief Executive Officer, Secretary and Treasurer of
the Company. The outstanding principal as of June 30, 2002 is $1,188,000, with
stated interest at 6%. Both principal and interest are convertible into the

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Companys common shares at $.50 per share. On May 23, 2001 the due date was
extended until December 31, 2002. On the extension date, 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 discount to the debt
arising from the beneficial conversion feature is being amortized over the life
of the extended note. On March 31, 2002 the Company issued 106,920 shares of
common stock upon the conversion of prepaid interest of $392,396. Prepaid
interest was computed using the closing price of the common stock of $3.67, and
is being amortized through December 31, 2002. For the six months ended June
30, 2002, additional stock-based interest expense of approximately $266,000 was
recorded due to the beneficial conversion feature of the prepaid interest,
representing the excess value of the common shares received upon conversion of
the prepaid interest. The note is secured by substantially all the assets of
the Company.

Convertible notes totaling $2,977,360, inclusive of accrued interest and net of
a discount of $272,388, issued to a group of investors which includes a trust
for the benefit of Steven F. Tripp, a director of the Company (the Alabama
Group). Mr. Tripp is not the trustee of this trust and has no power to vote
or dispose of the common shares of the Company or any other securities held by
that trust. In the opinion of the Company, no other investor in the Alabama
Group is an affiliate of the Company and Mr. Tripp is not an affiliate of any
other investor in the Alabama Group. The outstanding principal balance as of
June 30, 2002 is $2,875,000 with stated interest at 6%. Of the total amount of
the notes, $1,437,500 is convertible at $3.50 per share; the remaining
$1,437,500 is convertible at $2.25 per share. On June 15, 2001 the due date
was extended until December 31, 2002. On the extension date, the $255,000
excess aggregate value based on the then current market price of $2.65 per
share of the common shares receivable upon conversion of the notes, over the
aggregate conversion price for the common shares convertible at $2.25 per share
was recorded as additional paid in capital. The resulting discount to the debt
is being amortized over the life of the extended note.

Activity in notes payable for the six months ended June 30, 2002 follows:

|                                   |       |   |                   |           |                 |   |              |         |               |   |                 |         |  |   |          |          |   |   |           |           | 
|---------------------------------- | ----- | - | ----------------- | --------- | --------------- | - | ------------ | ------- | ------------- | - | --------------- | ------- |  | - | -------- | -------- | - | - | --------- | --------- | 
|                                   |       |   |                   |           |                 |   |              |         |               |   | (Payment) or    |         |  |   |          |          |   |   |          
|                                   |       |   | Balance at        |           | Addition or New |   | Discount     |         | Conversion to |   | Balance at June
|                                   |       |   | December 31,
2001 |           | Discount        |   | Amortization |         | Equity        |   | 30, 2002       
|                                   |       |   |                   |           |                 |   |              |         |               |   |                
|Debt Principal:                    |       |   |                   |           |                 |   |              |         |               |   |                 |         |  |   |          |          |   |   |           |          
|Alabama Group                      |       | $ | 2,875,000         |           |                 | $ |             |         |               | $ |                |         |  | $ |         |          |   | $ | 2,875,000 |          
|Alabama Group Discount             |       |   | (544,774          | )         |                 |   |             |         |               |   | 272,386         |         |  |   |         |          |   |   | (272,388  | )        
|Argyle                             |       |   | 1,188,000         |           |                 |   |             |         |               |   |                |         |  |   |         |          |   |   | 1,188,000 |          
|Argyle discount                    |       |   | (792,000          | )         |                 |   |             |         |               |   | 396,000         |         |  |   |         |          |   |   | (396,000  | )        
|                                   |       |   |                   |           |                 |   |              |         |               |   |                 |         |  |   |          |          |   |   |           |          
|                                   | Total |   |                   | 2,726,226 |                 |   |              |        |               |   |                 | 668,386 |  |   |          |         |   |   |           | 3,394,612 | 
|                                   |       |   |                   |           |                 |   |              |         |               |   |                 |         |  |   |          |          |   |   |           |          
|Interest:                          |       |   |                   |           |                 |   |              |         |               |   |                 |         |  |   |          |          |   |   |           |          
|Accrued Argyle 6%                  |       |   | 18,216            |           |                 |   | 35,640       |         |               |   |                |         |  |   | (53,856  | )        |   |   |          |          
|Accrued Alabama 6%                 |       |   | 282,815           |           |                 |   | 91,933       |         |               |   |                |         |  |   |         |          |   |   | 374,748   |          
|Beneficial interest                |       |   | 110,027           |           |                 |   | 152,943      |         |               |   |                |         |  |   | (262,970 | )        |   |   |          |          
|                                   |       |   |                   |           |                 |   |              |         |               |   |                 |         |  |   |          |          |   |   |           |          
|                                   | Total |   |                   | 411,058   |                 |   |              | 280,516 |               |   |                 |        |  |   |          | (316,826 | ) |   |           | 374,748   | 
|                                   |       |   |                   |           |                 |   |              |         |               |   |                 |         |  |   |          |          |   |   |           |          
|Total Short-term Convertible Notes |       | $ | 3,137,284         |           |                 | $ | 280,516      |         |               | $ | 668,386         |         |  | $ | (316,826 | )        |   | $ | 3,769,360 |          
|                                   |       |   |                   |           |                 |   |              |         |               |   |                 |         |  |   |          |          |   |   |           |          

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Stock-based interest expense discussed above is as follows:

|                                           |  |                           |         |      |  |   |         | 
|------------------------------------------ |  | ------------------------- | ------- | ---- |  | - | ------- | 
|                                           |  | Six months ended June 30,
|                                           |  |                          
|                                           |  | 2002                      |         | 2001
|                                           |  |                           |         |     
|Amortization of Alabama group discount     |  | $                         | 272,386 |      |  | $ | 804,437 | 
|Amortization of Argyle Capital discount    |  |                           | 396,000 |      |  |   | 67,288  | 
|Repricing of warrants (see note 6)         |  |                           | 40,000  |      |  |   |        | 
|Effect of beneficial conversion privileges |  |                           | 265,921 |      |  |   | 110,242 | 
|                                           |  |                           |         |      |  |   |         | 
|                                           |  | $                         | 974,307 |      |  | $ | 981,967 | 
|                                           |  |                           |         |      |  |   |         | 

6. Issuance of Securities

Issuance and Exercise of Stock Options, Warrants, and Stock during the six
months ended June 30, 2002

On June 28, 2002, warrants to purchase 329,355 shares of common stock were
exercised by a group of investors (the Alabama Group), which includes a trust
for the benefit of Steven F. Tripp, a director of the Company. Mr. Tripp is
not the trustee of this trust and has no power to vote or dispose of the common
shares of the Company or any other securities held by that trust. In the
opinion of the Company, no other investor in the Alabama Group is an affiliate
of the Company and Mr. Tripp is not an affiliate of any other investor in the
Alabama Group. On the same day, warrants to purchase 370,645 shares of common
stock were reassigned for no consideration and exercised by other investors,
none of whom are affiliates of the Company or of any of its directors. When
originally granted, all of the warrants had an exercise price of $3.50 and an
expiration date of June 30, 2002. To induce the holders to exercise, the
exercise price was reduced to $3.13, the average closing price for the previous
four days, a price slightly below the closing price on the commitment date.
The resulting intrinsic value of approximately $40,000 was recorded as a charge
to stock-based interest. The warrants were exercised under warrant installment
agreements totaling $1,747,347 with initial payments of $443,643 made on the
date of exercise. Payments under the agreements are due in four equal monthly
installments. In addition, 16,354 shares of common stock were issued upon the
cashless exercise of 171,429 warrants by investors associated with the Alabama
Group.

On January 23, 2002, the Company issued a warrant to purchase 30,000 shares of
common stock at an exercise price of $3.00.The warrant was issued to an
investor in consideration of the failure of the Company to file a registration
statement with the Securities and Exchange Commission with respect to the
shares underlying a prior issuance of warrants by an earlier agreed-upon
outside date.The warrant was valued at $37,111 using the Black-Scholes option
pricing model and the following assumptions: stock price $3.73, historical
volatility 114%, risk-free rate 5%, a dividend yield of zero, and a contractual
term of 103 days. The value of the warrant is reflected in the statement of
operations as a component of stock-based general and administrative expense.

On March 27, 2002, the Company issued an option to purchase 2,500 shares of the
Companys common stock. The option was issued in exchange for consulting
services rendered during the previous period and was valued at $8,666.

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During the first six months of 2002, 67,000 shares of common stock were issued
upon the exercise of warrants, and employee stock options. Total cash received
was $148,840.

Other expenses related to the valuation of options granted to a director for
consulting services totaled $2,992 and are included in stock-based general and
administrative expenses in the accompanying statement of operations.

Stock-Based Compensation

On March 28, 2002 the Company issued 60,000 shares of common stock to its
Director of Corporate Development at their then current market value of $220,200.
The shares were issued in consideration of services rendered by the employee
with respect to assisting the Company in negotiating the contractual
relationships with its existing prospective customers.

Interest Conversion

On January 15, 2002, the Company issued 36,432 shares of common stock upon the
conversion of accrued interest of $128,243, for the fourth quarter of 2001,
under certain convertible notes, which includes additional deemed interest of
$110,027 due to beneficial conversion features of the interest on the
underlying notes.

On March 28, 2002, the Company issued 35,640 shares of common stock upon the
conversion of accrued interest of $170,763 under certain convertible notes,
which includes additional deemed interest of $152,943. In addition, the Company
issued 106,920 shares of common stock upon the conversion of prepaid interest
of $392,394 under certain convertible notes. The prepaid interest is being
amortized to expense over nine months beginning in April 2002.

Rescission of Stock Purchase Agreement

During the first quarter of 2002, a stock purchase agreement was cancelled as a
result of a default by the purchaser. The stock purchase agreement was entered
into in October 2001 and called for four equal installments due quarterly
beginning January 5, 2002. A check for the $626,014 payment due in January was
received and deposited by the Company at the end of March 2002, but was
subsequently not honored by the purchasers bank. As a result, the stock
purchase agreement, by its terms, has been cancelled and the 1,346,268 shares
have been restored to the status of authorized but unissued shares. The
initial payment of $13,462 was forfeited by the purchaser and was transferred
from common stock par value to additional paid in capital. The subscription
receivable of $2,504,059 and the related additional paid in capital have been
eliminated from the Companys balance sheet. The cancellation of the stock
purchase agreement had no effect on the Companys results of operations.

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

|                                                     |  |                           |         |      |  |   |           | 
|---------------------------------------------------- |  | ------------------------- | ------- | ---- |  | - | --------- | 
|                                                     |  | Six months ended June 30,
|                                                     |  |                          
|                                                     |  | 2002                      |         | 2001
|                                                     |  |                           |         |     
|Stock and options granted to employees and directors |  | $                         | 223,192 |      |  | $ | 1,655,172 | 
|Reinstatement of options                             |  |                           |        |      |  |   | 49,360    | 
|Warrant and other charges                            |  |                           | 45,777  |      |  |   | 68,852    | 
|                                                     |  |                           |         |      |  |   |           | 
|                                                     |  | $                         | 268,969 |      |  | $ | 1,773,384 | 
|                                                     |  |                           |         |      |  |   |           | 

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7. Segment Information

The Companys chief operating decision-maker, the Chief Executive Officer
(CEO), reviews the Companys financial information as a single operating
segment to make decisions about the Companys performance and resource
allocation. Therefore the Company has determined that it operates in a single
business segment. There were no sales in the second quarter of 2002.

8. Accounting Pronouncements Issued But Not Yet Adopted

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. This statement eliminates the current
requirement that gains and losses on debt extinguishment must be classified as
extraordinary items in the income statement. Instead, such gains and losses
will be classified as extraordinary items only if they are deemed to be unusual
and infrequent, in accordance with the current GAAP criteria for extraordinary
classification. In addition, SFAS No. 145 eliminates an inconsistency in lease
accounting by requiring that modifications of capital leases that result in
reclassification as operating leases be accounted for consistent with
sale-leaseback accounting rules. The statement also contains other
nonsubstantive corrections to authoritative accounting literature. The changes
related to debt extinguishment will be effective for fiscal years beginning
after May 15, 2002, and the changes related to lease accounting will be
effective for transactions occurring after May 15, 2002. Adoption of this
standard will not have any immediate effect on the Companys financial
statements. The Company will apply this guidance prospectively.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will
adopt the provisions of SFAS No. 146 for any restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized
at the date of a companys commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amount recognized.

9. Lease Agreement

The Company entered into a lease agreement for new
office headquarters. The lease is expected to commence in September
2002 and provides for the following annual base rent payments:

|                         |  |  |  |   |          
|------------------------ |  |  |  | - | ---------
|Year
ending December 31,
|2002                     |  |  |  | $ | 68,000   
|2003                     |  |  |  |   | 275,000  
|2004                     |  |  |  |   | 422,000  
|2005                     |  |  |  |   | 435,000  
|2006                     |  |  |  |   | 447,000  
|2007                     |  |  |  |   | 459,000  
|2008                     |  |  |  |   | 311,000  
|                         |  |  |  |   |          
|                         |  |  |  | $ | 2,417,000
|                         |  |  |  |   |          




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

This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 21E of the Securities and Exchange Act of 1934, as amended, which
statements are subject to the Safe Harbor provisions created by that statute.
In this report, the words anticipates, believes, expects, future,
intends, and similar expressions identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including, but not
limited to, those discussed herein, those contained in this Item, 2 and those
discussed in the Companys Annual Report on Form 10-KSB as filed with the
Securities and Exchange Commission on March 21, 2002. 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.

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The following is a discussion and analysis of the consolidated financial
condition of the Company as of June 30, 2002, and the results of operations for
the Company for the three months and six months ended June 30, 2002 and 2001.
The following should be read in conjunction with the unaudited financial
statements and related notes appearing elsewhere herein.

GENERAL

In September, we are moving from our current premises to a new premises located
at Five Hamilton Landing, Suite 100, Novato, California. The new premises
aggregate 14,000 square feet. The rent for the first year of the term of this
new lease will be $203,115, compared to $314,095 annual rent under our existing
lease. Our annual rent commencing the second year of the new lease of these
new premises will be $418,417.

Our operations are constrained by an insufficient amount of working capital,
and we continue to experience negative cash flows and net operating expenses.
Our operations in recent months have been funded by the exercise of warrants
and options, and the sales of common stock under private stock purchase
agreements. We are continuing our efforts to locate sources of additional
financing but there can be no assurance that additional financing will be
available. Our auditors have included a paragraph in their report on the
audited financial statements as of the year ended December 31, 2001, indicating
that substantial doubt exists as to our ability to continue as a going concern.

We anticipate that our net cash expenditures during 2002 will run approximately
$400,000 per month without regard for any revenues that may be derived from
sales of our products. We expect to meet our cash needs with our existing cash
balances and collections from payments on warrant installment agreements
receivable of approximately $1,750,000. There are outstanding warrants to
purchase shares expiring in 2002 at exercise prices ranging from $2.50 per
share to $3.50 per share. We expect that if they are in-the-money at or near
expiration date, all of these will be exercised, resulting in proceeds to the
Company of approximately $3,400,000. In addition, it is possible that other
outstanding exercisable warrants that expire in later periods may also be
exercised. However, there can be no assurance that any significant number of
these other warrants will be exercised. If no warrants are exercised, and the
Company does not derive any significant revenues from its operations during
2002, it is likely that we will need to raise additional debt or equity
financing during the latter part of 2002. There can be no assurances that such
additional debt or equity funding will be available from our current investors
or from any other source.

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

OVERVIEW

We develop microdisplays that provide high resolution images suitable for
applications such as rear projection computer monitors, high definition
television and video projectors, and potential applications such as those used
in wireless communication devices, portable games and digital assistants. Our
microdisplays are designed for use in end products of original equipment
manufacturers, and therefore we work closely with customers to incorporate our
microdisplays into their final products. Because our microdisplays can be
manufactured using existing silicon and liquid crystal processes, we contract
with existing manufacturers for the production of our silicon. We have patents
covering parts of our designs;

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however the key designs of the circuitry in the silicon, drive electronics, and
liquid crystal assembly techniques are proprietary and not covered by patents.

Since late October 2001, we entered into five agreements or memoranda of
understanding with six original equipment manufacturers in China contemplating
the purchase by these prospective customers of our display units for use in
certain of their products. All of these agreements require that we supply
prototypes of our display units and that they meet technical criteria
satisfactory to each of such prospective customers. If these tests of our
display units satisfy these prospective customers manufacturers, three of these
agreements require such customers to place purchase orders for designated
quantities of our display units. The remaining agreements indicate that under
such circumstances the parties will negotiate such purchase orders. Three of
these agreements provide for one or more specific periods for the testing of
our display units; the fourth Agreement leaves open the number of months for
testing of prototypes; and the fifth Agreement is silent on the matter. Three
of these agreements also have clauses, which prohibit these prospective
customers from working with any of our competitors during the testing periods.

The testing of our display units by certain of these prospective customers
commenced after these agreements were signed. The Company has recently been
advised by certain of these prospective customers that they are satisfied with
the results of the testing of the prototypes under their agreements with the
Company and that they are prepared to negotiate final terms of purchase orders
for our microdisplay units in the near future. Similar to all agreements for
the sale of technology products to foreign customers, these agreements are
subject to various other contingencies and, by reason of these contingencies;
we cannot assure that they will result in significant revenues, if any, to us
as of this date.

LIQUIDITY AND CAPITAL RESOURCES

Although we have produced displays based on our technology, we have not yet had
our displays incorporated in any commercial end use application. Delays in
development may result in the introduction of our displays later than
anticipated, which may have a material adverse effect on both our financial and
competitive position. Moreover, we may never be successful in developing or
manufacturing a commercially viable display. In addition, our displays may not
be technically or commercially successful, we may not obtain suppliers or
manufacturers for adequate quantities of our displays, or we may not reach
commercially acceptable cost levels on a timely basis.

As of June 30, 2002, we had approximately $350,000 in cash and cash
equivalents, and our net working capital deficit at June 30, 2002 was
approximately $3,210,000.

Net cash used in operating activities totaled approximately $2,780,000 and
$2,490,000 for the six months ended June 30, 2002 and 2001, respectively. Cash
was used primarily to fund the operating loss.

Net cash provided by financing activities in the six months ended June 30, 2002
was approximately $610,000 as compared to approximately $1,570,000 for the six
months ended June 30, 2001. In the second quarter of 2002, cash was provided
primarily from proceeds from the exercise of warrants. In the second quarter
of 2001, cash was provided primarily from proceeds from the exercise of
warrants and sales of stock under private stock purchase agreements.

As of June 30, 2002, we had an accumulated deficit of approximately
$43,640,000. We have realized significant losses in the past and we expect
that these losses will continue at least through 2002. It is likely that we
will have quarterly and annual losses in 2002 and beyond. We have generated
limited revenues and no profits from operations. The development,
commercialization and marketing of our products will require substantial
expenditures for the foreseeable future. Consequently, we may

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continue to operate at a loss for the foreseeable future and there can be no
assurance that our business will operate on a profitable basis or will be able
to continue as a going concern.

During the first quarter 2002 a stock purchase agreement was cancelled as a
result of a default by the purchaser. The stock purchase agreement was entered
into in October 2001 and called for four equal installments due quarterly
beginning January 5, 2002. A check for the $626,014 payment due in January was
received and deposited at the end of March 2002, but was subsequently not
honored by the purchasers bank. As a result, the stock purchase agreement, by
its terms, has been cancelled and the 1,346,268 shares have been restored to
the status of authorized but unissued shares. The initial payment of $13,462
was forfeited by the purchaser and was transferred from common stock par value
to additional paid in capital. The subscription receivable of $2,504,059 and
the related additional paid in capital have been eliminated from our balance
sheet. The cancellation of the stock purchase agreement did not have any
effect on our results of operations.

RESULTS OF OPERATIONS

Revenues. Total revenues were $0 for the six and three months ended June 30,
2002. Total revenues were $10,000 for the six and three months ended June 30,
2001. Revenues in 2001 were the result of sales of our display developer kits.
Since April 2001, in order to concentrate our efforts in the Chinese market,
we discontinued producing and selling development kits.

Cost of Revenues. Cost of revenues represents product costs associated with
the production of display prototypes. Cost of revenues for prototypes was $0
for the six and three months ended June 30, 2002, and $1,000 for the six and
three months ended June 30, 2001, respectively. Gross margins associated with
sales are not indicative of the gross margins that we expect to realize on
sales of units produced in quantity.

Selling, general and administrative costs.Selling, general and administrative
costs were approximately $660,000 and $790,000 in the three months ended June
30, 2002 and 2001, respectively, and $1,370,000 and $1,420,000 in the six
months ended June 30, 2002, and 2001 respectively, and include professional
services, salaries and related taxes and benefits, rent, depreciation, travel,
insurance and office expenses. Salaries and related benefits decreased by
approximately $260,000 in 2001 to $140,000 in 2002 due to the elimination of
certain positions as well as the termination of a severance package in the
first quarter of 2001. In addition, medical insurance decreased due to an
employee contribution requirement. Other office expenses, including rent and
travel and entertainment decreased approximately $20,000 while depreciation
increased approximately $50,000 and employment expense and trade show increased
$40,000 and $30,000, respectively.

Stock-based general and administrative costs.Stock-based general and
administrative costs were approximately $3,000 and $270,000 in the three and
six months ended June 30, 2002, respectively, and approximately $1,720,000 and
$1,780,000 in the three and six months ended June 30, 2001, respectively. The
amounts incurred relate to common stock, stock options, and warrants issued in
exchange for services. The decrease in 2002 relates primarily to expenses
incurred in 2001 associated with common stock granted as compensation to
directors valued at $1,660,000, which had no comparable expense in 2001.

Research and development costs. Research and development costs were
approximately $1,170,000 and $1,200,000 in the six months ended June 30, 2002
and 2001, respectively and $590,000 in each of the three months ended June 30,
2002 and 2001, respectively. Salaries and related benefits decreased
approximately $80,000 due to a reduction in personnel while travel and
entertainment increased $17,000

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as a result of more overseas trips. General research and development costs
increased approximately $30,000 due to a gearing up for production.

Interest income.Interest income for the six months ended June 30, 2002 and
2001 was approximately $8,600 and $10,600, respectively. Interest income for
the three months ended June 30, 2002 and 2001 was approximately $1,100 and
$5,000, respectively. The increase is consistent with lower cash balances
resulting from the decrease in cash flow from financing activities.

Interest expense.Interest expense for the six months ended June 30, 2002
remained substantially unchanged from 2001 at approximately $70,000 in each
quarter. This is consistent with the unchanged face amounts of the convertible
note balances from 2001 to 2002.

Stock-based interest expense.Stock-based interest expense was approximately
$970,000 and $980,000 for the six months ended June 30, 2002 and 2001,
respectively, and $490,000 and $860,000 for the three months ended June 30,
2002 and 2001, respectively. Stock-based interest expense relates to the
beneficial conversion feature of interest converted and convertible into equity
on the notes payable to Argyle Capital Management, a company wholly owned by
Robert Olins, Acting Chief Executive Officer of the Company. The beneficial
conversion interest represents the excess value of the shares received or
receivable at current market prices over the $0.50 per share conversion price.
In addition, stock-based interest expense in the first and second quarters of
2002 and 2001 relates to amortization of the discounts on notes payable to
Argyle Capital Management and to the Alabama Group, a group of investors which
includes a trust for the benefit of Steven F. Tripp, a director of the Company.
Mr. Tripp is not the trustee of this trust and has no power to vote or dispose
of the common shares of the Company or any other securities held by that trust.
In the opinion of the Company, no other investor in the Alabama Group is an
affiliate of the Company and Mr. Tripp is not an affiliate of any other
investor in the Alabama Group.


Critical Accounting PoliciesOutlined below are accounting policies that we
believe are key to a full understanding of our operations and
financial results. All our accounting policies are in compliance with
accounting principles generally accepted in the United States of
America.Stock-based Compensation We account
for our stock-based compensation arrangements with employees and
directors using the intrinsic value method pursuant to Accounting
Principles Board Opinion (APB) No. 25, as clarified by Financial
Accounting Standards Board (FASB) Interpretation No. 44. As
such, compensation expense is recorded when, on the date of grant,
the fair value of the underlying common stock exceeds the exercise
price for stock options or the purchase price for issuances or sales
of common stock. Pursuant to Statement of Financial Accounting
Standard (SFAS) No. 123, we disclose the proforma effects of
using the fair value method of accounting for stock-based
compensation arrangements and records compensation expense for the
fair value of options granted to non-employees.Research and Development  Research and
development costs are charged to expense when incurred.

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BUSINESS RISKS AND UNCERTAINTIES

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

We have incurred losses over the past five years and have experienced cash
shortages. For the six months ended June 30, 2002 and 2001, we have incurred
net losses of approximately $3,910,000 and $5,500,000, respectively. In
addition, we had an accumulated deficit of $43,640,000 as of June 30, 2002. We
may incur additional losses as we continue spending for research and
development and other business activities. As a result, we will need to
generate substantial sales to support our cost structure before we can begin to
recoup our operating losses and accumulated deficit and achieve profitability.

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

Our operations to date have consumed substantial amounts of cash and will
continue to require substantial amounts of capital in the future. In order to
remain competitive, we must continue to make significant investments essential
to our ability to operate profitably, including investments in further research
and development, equipment, facilities and production activities. Although our
financial condition and liquidity have been strengthened through the exercise
of warrants and private purchases of our common shares, we may still require
additional financing to provide for our required capital expenditures.
Reliance for financing upon exercise of warrants and private stock purchase
agreements entails the additional risks of non-exercise of such warrants
because of the prevailing market prices of our underlying shares or default by
stock purchasers under these agreements. The Company experienced such a
default as disclosed under the Liquidity and Capital Resources section of
Managements Discussion and Analysis of Financial Condition and Results of
Operations in this Report. In the event that we are unable to obtain further
financing on satisfactory terms or at all, generate sales sufficient to offset
our costs, or the costs of development and operations are greater than we
anticipated, we may be unable to grow our business at the rate desired or may
be required to delay, reduce, or cease certain of our operations, any of which
could materially harm our business and financial results. Our independent
auditors have included an explanatory paragraph in their report in our Form
10-KSB on our financial statements for our last fiscal year regarding our
ability to continue as a going concern.

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

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

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

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

To date, we have only manufactured microdisplays in limited commercial
quantities, and difficulties in mass-producing our microdisplays may cause us
to be unable to meet customer demands and our operating results could be
significantly harmed.

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

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

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

We continue to have working arrangements with the manufacturer of the light
engines and lamps required in the assembly of our microdisplay units. We have
recently entered into an agreement for the supply of prisms and filters which
are also required for the assembly of such units. Except for that agreement,
we do not have written agreements which are binding upon the manufacturers of
the other components and any such manufacturer is not now bound to furnish us
with any specific quantities of their products at previously specified prices.
At this date, the Company is not aware that any of those manufacturers have
known shortages of critical material.

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

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

Various target markets for our microdisplays, including projectors, monitors,
high-definition televisions, and portable microdisplays, are uncertain, may be
slow to develop or could utilize competing technologies. High-definition
television has only recently become available to consumers, and widespread
market acceptance is uncertain. In addition, the commercial success of the
portable microdisplay market is uncertain. The acceptance of our microdisplay
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 products using our microdisplays
that are commercially successful. Our failure to sell our microdisplays to
such manufacturers or the failure of the ultimate target markets to develop as
we expect will negatively affect our anticipated growth.

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

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



| |  |  | superior technologies developed by our competitors;          
| | - |  | -------------------------------------------------------------
|
| |  |  | price considerations; and                                    
|
| |  |  | lack of anticipated or actual market demand for the products.

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

We do not have firm purchase orders from our customers and cannot assure you we
will obtain them or, if we do, that they will generate significant revenues.

Since late October 2001, we entered into five agreements with six original
equipment manufacturers in China to sell our display units. The primary
provisions are described under General Recent Developments.

The testing of our display units by certain of these prospective customers 
SVA, CEC, Skyworth, and Hisense/IRICO  commenced after these agreements were
signed. The Company has recently been advised by certain of these prospective
Chinese customers  SVA, CEC and Skyworth  that they are satisfied with the
results of the testing of the prototypes under their agreements with the
Company and that they are prepared to negotiate final terms of purchase orders
for our microdisplay units in the near future. We intend to negotiate the
terms of purchase orders for our products with SVA, CEC and Skyworth in the
immediate future. There are open issues that have to be finally negotiated,
including prices and quantities of our products. We cannot assure whether we
will receive purchase orders binding on all three or certain of these companies
for their purchase of commercial quantities of our microdisplay products
commencing in the near future.

In addition, even if we receive purchase orders from our prospective customers
for our display units, we may have problems implementing volume production of
such display units. Furthermore, sales to manufacturers in the electronics
industry are subject to severe competitive pressures, rapid technological

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change, and product obsolescence. Manufacturers may, at any time, cancel
purchase orders or commitments or reduce or delay orders, thereby increasing
our inventory and overhead risks. Therefore, even if we obtain purchase orders
from prospective customers, we cannot assure you that these agreements will
result in significant revenues, if any, to us.

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

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

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



| |  |  | maintain customer satisfaction with our design and
manufacturing services;                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | match our design and manufacturing capacity with
customer demand and maintain satisfactory delivery schedules;    
|
| |  |  | anticipate customer order patterns, changes in
order mix, and the level and timing of orders that we can meet;
and
|
| |  |  | adjust to the cyclical nature of the industries and
markets we serve.                                             

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

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

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

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



| |  |  | our success in designing and manufacturing new display technologies;                                                              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to address the needs of customers;                                                                                    
|
| |  |  | the quality, performance, reliability, features,
ease of use, pricing, and diversity of our display products;                     
|
| |  |  | foreign currency fluctuations, which may cause a
foreign competitors products to be priced significantly lower
than our displays;
|
| |  |  | the quality of our customer services;                                                                                             

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| |  |  | the efficiency of our production sources;                                        
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | the rate at which customers incorporate our displays into their own products; and
|
| |  |  | products or technologies introduced by our competitors.                          

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

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

Our operating results are subject to significant fluctuations.

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



| |  |  | introductions of displays and market acceptance of new generations of displays;
| | - |  | -------------------------------------------------------------------------------
|
| |  |  | timing of expenditures in anticipation of future orders;                       
|
| |  |  | changes in our cost structure;                                                 
|
| |  |  | availability of labor and components;                                          
|
| |  |  | pricing and availability of competitive products and services;                 
|
| |  |  | the timing of orders;                                                          
|
| |  |  | the volume of orders relative to the capacity we can contract to produce;      
|
| |  |  | evolution in the life cycles of customers products; and                       
|
| |  |  | changes or anticipated changes in economic conditions.                         

The market price of our common shares is highly volatile.

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



| |  |  | quarterly variations in our operating results;                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | actual or anticipated announcements of technical
innovations or new product developments by us or our
competitors;

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| |  |  | public announcements regarding our business developments;       
| | - |  | ----------------------------------------------------------------
|
| |  |  | changes in analysts estimates of our financial performance;    
|
| |  |  | sales of large numbers of our common shares by our shareholders;
|
| |  |  | general conditions in the electronics industry; and             
|
| |  |  | 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.

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
limited in part due to the marketability of our shares. Any swing in the price
of our common shares may result in a material reduction in price because
relatively few buyers may be available to purchase our common shares.

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

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



| |  |  | pending patent applications may not be issued;                       
| | - |  | ---------------------------------------------------------------------
|
| |  |  | patents issued to us may be challenged, invalidated, or circumvented;

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| |  |  | unauthorized parties may obtain and use information
that we regard as proprietary despite our efforts to protect
our proprietary rights;             
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | others may independently develop similar technology
or design around any patents issued to us;                                                       
|
| |  |  | breach of confidentiality agreements;                                                                                                                
|
| |  |  | intellectual property laws may not protect our intellectual property; and                                                                            
|
| |  |  | effective protection of intellectual property
rights may be limited or unavailable in some foreign countries,
such as China, in which we may operate.

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

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

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

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

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

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

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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.

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PART II. OTHER INFORMATION




ITEM 2 Changes in Securities and Use of Proceeds

Issuance and Exercise of Stock Options, Warrants, and Stock during the six
months ended June 30, 2002

On June 28, 2002, warrants to purchase 329,355 shares of common stock were
exercised by a group of investors (the Alabama Group), which includes a trust
for the benefit of Steven F. Tripp, a director of the Company. Mr. Tripp is
not the trustee of this trust and has no power to vote or dispose of the common
shares of the Company or any other securities held by that trust. In the
opinion of the Company, no other investor in the Alabama Group is an affiliate
of the Company and Mr. Tripp is not an affiliate of any other investor in the
Alabama Group. On the same day, warrants to purchase 370,645 shares of common
stock were reassigned for no consideration and exercised by other investors,
none of whom are affiliates of the Company or of any of its directors. When
originally granted, all of the warrants had an exercise price of $3.50 and an
expiration date of June 30, 2002. To induce the holders to exercise, the
exercise price was reduced to $3.13, the average closing price for the previous
four days, a price slightly below the closing price on the commitment date.
The resulting intrinsic value of approximately $40,000 was recorded as a charge
to stock-based interest. The warrants were exercised under warrant installment
agreements totaling $1,747,347 with initial payments of $443,643 made on the
date of exercise. Payments under the agreements are due in four equal monthly
installments. In addition, 16,354 shares of common stock were issued upon the
cashless exercise of 171,429 warrants by investors associated with the Alabama
Group.

On January 23, 2002, the Company issued a warrant to purchase 30,000 shares of
common stock at an exercise price of $3.00.The warrant was issued to an
investor in consideration of the failure of the Company to file a registration
statement with the Securities and Exchange Commission with respect to the
shares underlying a prior issuance of warrants by an earlier agreed-upon
outside date.The warrant was valued at $37,111 using the Black-Scholes option
pricing model and the following assumptions: stock price $3.73, historical
volatility 114%, risk-free rate 5%, a dividend yield of zero, and a contractual
term of 103 days. The value of the warrant is reflected in the statement of
operations as a component of stock-based general and administrative expense.

On March 27, 2002, the Company issued an option to purchase 2,500 shares of the
Companys common stock. The option was issued in exchange for consulting
services rendered during the previous period and was valued at $8,666.

During the first six months of 2002, 67,000 shares of common stock were issued
upon the exercise of warrants, and employee stock options. Total cash received
was $148,840.

Other expenses related to the valuation of options granted to a director for
consulting services totaled $2,992 and are included in stock-based general and
administrative expenses in the accompanying statement of operations.

Stock-Based Compensation

On March 28, 2002 the Company issued 60,000 shares of common stock to its
Director of Corporate Development at their current market value of $220,200.
The shares were issued in consideration of services rendered by the employee
with respect to assisting the Company in negotiating the contractual
relationships with its existing prospective customers.

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Interest Conversion

On January 15, 2002, the Company issued 36,432 shares of common stock upon the
conversion of accrued interest of $128,243, for the fourth quarter of 2001,
under certain convertible notes, which includes additional deemed interest of
$110,027 due to beneficial conversion features of the interest on the
underlying notes.

On March 28, 2002, the Company issued 35,640 shares of common stock upon the
conversion of accrued interest of $170,763 under certain convertible notes,
which includes additional deemed interest of $152,943. In addition, the Company
issued 106,920 shares of common stock upon the conversion of prepaid interest
of $392,394 under certain convertible notes. The prepaid interest is being
amortized to expense over nine months beginning in April 2002.

Rescission of Stock Purchase Agreement

During the first quarter of 2002, a stock purchase agreement was cancelled as a
result of a default by the purchaser. The stock purchase agreement was entered
into in October 2001 and called for four equal installments due quarterly
beginning January 5, 2002. A check for the $626,014 payment due in January was
received and deposited by the Company at the end of March 2002, but was
subsequently not honored by the purchasers bank. As a result, the stock
purchase agreement, by its terms, has been cancelled and the 1,346,268 shares
have been restored to the status of authorized but unissued shares. The
initial payment of $13,462 was forfeited by the purchaser and was transferred
from common stock par value to additional paid in capital. The subscription
receivable of $2,504,059 and the related additional paid in capital have been
eliminated from the Companys balance sheet. The cancellation of the stock
purchase agreement had no effect on the Companys results of operations.

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ITEM 4 Submission of Matters to a Vote of Security Holders

At the Annual Meeting of Shareholders held May 25, 2002, the shareholders
approved the following:



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

|                |  |                 |  |           
|--------------- |  | --------------- |  | ----------
|For: 22,547,249 |  | Against: 31,147 |  | Abstain: 0



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

|                |  |                 |  |           
|--------------- |  | --------------- |  | ----------
|For: 22,547,249 |  | Against: 31,147 |  | Abstain: 0



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

|                |  |                 |  |           
|--------------- |  | --------------- |  | ----------
|For: 22,547,249 |  | Against: 31,147 |  | Abstain: 0



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

|                |  |                 |  |           
|--------------- |  | --------------- |  | ----------
|For: 22,547,249 |  | Against: 31,147 |  | Abstain: 0



| | 5. |  | The amendment to the Corporations 1999 Stock Option Plan to increase
the maximum number of the Corporations common shares reserved for
issuance thereunder.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|                |  |                  |  |                
|--------------- |  | ---------------- |  | ---------------
|For: 21,725,662 |  | Against: 771,584 |  | Abstain: 81,150



| | 6. |  | The ratification of the appointment of BDO Seidman, LLP as the
Corporations independent public accountants for the fiscal year ending
December 31, 2002.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|                |  |                |  |                
|--------------- |  | -------------- |  | ---------------
|For: 22,484,709 |  | Against: 4,187 |  | Abstain: 89,500




ITEM 6 Exhibits and Reports on Form 8-K



|(a) |  | Exhibits:                                                                                
|--- |  | -----------------------------------------------------------------------------------------
|   
|    |  | 10.18  Office lease dated
May 17, 2002, between Hamilton Marin, LLC and SpatiaLight, Inc.
|   
|(b) |  | Report on Form 8-K:                                                                      
|   
|    |  | None.                                                                                    

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SIGNATURES

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



| | Date: | August 14, 2002
| | ----- | ---------------

| | SpatiaLight, Inc.
| | -----------------



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

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