##### Table of Contents



United States
Securities and Exchange Commission


Washington, D.C. 20549


---

FORM 10-QSB




|(Mark One)                                                                          
|------------------------------------------------------------------------------------
|                                                                                    
|[X]                                                                                 
|                                                                                    
|For the quarterly period ended September 30, 2002                                   
|                                                                                    
|[   ]                                                                               
|                                                                                    
|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                                                      
|                                                              
|(State or other jurisdiction of
Incorporation or organization)
|                                                              
|Five Hamilton Landing, Suite 100, Novato, CA 94949            
|                                                              
|(Address of principal executive offices)                      
|                                                              
|(415) 883-1693                                                
|                                                              
|(Issuers telephone
 number)                                  

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the
 number of shares outstanding of each of the issuers classes of common equity, as of the latest
 practicable date: 25,513,000 shares of common stock as of November 11, 2002.

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



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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 FLOW                
|                              |                                                                                               | Notes to Condensed Financial Statements
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 2 Changes in Securities and Use of Proceeds                                             
|                              | Item 6. Exhibits and Reports on Form 8-k                                                     
|SIGNATURES                   
|Exhibit 99.1                 



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##### Table of Contents



SPATIALIGHT, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended September 30, 2002
Table of Contents

|PART I  |  | FINANCIAL
 INFORMATION                                                                                      |   
|------- |  | ----------------------------------------------------------------------------------------------------------- | --
|Item 1. |  | Condensed Financial
 Statements (unaudited)                                                                 | 3 
|        |  | Condensed Balance
 Sheets dated September 30, 2002 and December 31, 2001                                    | 3 
|        |  | Condensed Statements
 of Operations for the Three months and Nine months ended September 30, 2002 and 2001  | 4 
|        |  | Condensed
 Statements of Stockholders Deficit for the Nine months ended September 30, 2002                 | 5 
|        |  | Condensed
 Statements of Cash Flows for the Three months and Nine months ended
 September 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                      | 15
|Item 3. |  | Disclosure Controls and
 Procedure                                                                          | 19
|PART II |  | OTHER INFORMATION                                                                                           |   
|Item 2. |  | Changes in Securities
 and Use of Proceeds                                                                  | 27
|Item 6. |  | Exhibits and Reports
 on Form 8-K                                                                           | 29

2



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##### Table of Contents






PART I.       
FINANCIAL INFORMATION
Item 1.          Condensed
 Financial Statements (unaudited)
SPATIALIGHT, INC.
BALANCE SHEETS

|                                                                                                     | September 30,
2002(unaudited) |             | December 31,
2001
|---------------------------------------------------------------------------------------------------- | ----------------------------- | ----------- | -----------------
|                                                                                                     |                               |             |                  
|ASSETS                                                                                               |                               |             |                  
|Current assets                                                                                       |                               |             |                  
|Cash and cash equivalents                                                                            | $                             | 104,656     |                  
|Inventory                                                                                            |                               | 94,809      |                  
|Prepaids and other current assets                                                                    |                               | 752,117     |                  
|                                                                                                     |                               |             |                  
|Total current assets                                                                                 |                               | 951,582     |                  
|Property and equipment, net                                                                          |                               | 763,566     |                  
|Other assets                                                                                         |                               | 128,449     |                  
|                                                                                                     |                               |             |                  
|Total assets                                                                                         | $                             | 1,843,597   |                  
|                                                                                                     |                               |             |                  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                |                               |             |                  
|Current liabilities                                                                                  |                               |             |                  
|Accounts payable                                                                                     | $                             | 987,092     |                  
|Short-term convertible notes                                                                         |                               |            |                  
|Accrued expenses and other current liabilities                                                       |                               | 100,933     |                  
|                                                                                                     |                               |             |                  
|Total current liabilities                                                                            |                               | 1,088,025   |                  
|Non-current liabilities                                                                              |                               |             |                  
|Convertible notes                                                                                    |                               | 4,093,973   |                  
|                                                                                                     |                               |             |                  
|Total liabilities                                                                                    |                               | 5,181,998   |                  
|                                                                                                     |                               |             |                  
|Commitments                                                                                          |                               |             |                  
|Stockholders deficit:                                                                               |                               |             |                  
|Common stock, $.01 par value:                                                                        |                               |             |                  
|40,000,000 shares authorized;                                                                        |                               |             |                  
|25,470,078 and 25,811,786 shares issued and outstanding at
 September 30, 2002 and December 31, 2001 |                               | 254,701     |                  
|Additional paid-in capital                                                                           |                               | 42,662,380  |                  
|Notes and stock subscription receivable                                                              |                               | (387,089    | )                
|Accumulated deficit                                                                                  |                               | (45,868,393 | )                
|                                                                                                     |                               |             |                  
|Total stockholders deficit                                                                          |                               | (3,338,401  | )                
|                                                                                                     |                               |             |                  
|Total liabilities and stockholders deficit                                                          | $                             | 1,843,597   |                  
|                                                                                                     |                               |             |                  

See accompanying
 notes to condensed financial statements.

3



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##### Table of Contents






SPATIALIGHT, INC.
STATEMENTS OF OPERATIONS (unaudited)

|                                                                                 | Three
 Months Ended September 30, |            | Nine Months
 Ended September 30,
|-------------------------------------------------------------------------------- | --------------------------------- | ---------- | --------------------------------
|                                                                                 | 2002                              |            | 2001                            
|                                                                                 |                                   |            |                                 
|Revenues                                                                         | $                                 |           |                                 
|Cost of revenues                                                                 |                                   |           |                                 
|                                                                                 |                                   |            |                                 
|Gross profits                                                                    |                                   |           |                                 
|                                                                                 |                                   |            |                                 
|Selling general and administrative expenses:                                     |                                   |            |                                 
|Selling general and administrative expenses                                      |                                   | 716,740    |                                 
|Stock-based general and administrative expenses                                  |                                   | 141,737    |                                 
|                                                                                 |                                   |            |                                 
|Total selling general and administrative expenses                                |                                   | 858,477    |                                 
|Research and development expenses                                                |                                   | 771,040    |                                 
|                                                                                 |                                   |            |                                 
|Total operating expenses                                                         |                                   | 1,629,517  |                                 
|                                                                                 |                                   |            |                                 
|Operating loss                                                                   |                                   | (1,629,517 | )                               
|                                                                                 |                                   |            |                                 
|Other income (expenses):                                                         |                                   |            |                                 
|Interest expense:                                                                |                                   |            |                                 
|Interest expense                                                                 |                                   | (66,294    | )                               
|Stock-based interest expense                                                     |                                   | (536,478   | )                               
|                                                                                 |                                   |            |                                 
|Total interest expense                                                           |                                   | (602,772   | )                               
|Interest and other income                                                        |                                   | 91         |                                 
|                                                                                 |                                   |            |                                 
|Total other income (expenses)                                                    |                                   | (602,681   | )                               
|                                                                                 |                                   |            |                                 
|Loss before income taxes                                                         |                                   | (2,232,198 | )                               
|Income tax expense                                                               |                                   |           |                                 
|                                                                                 |                                   |            |                                 
|Net loss                                                                         | $                                 | (2,232,198 | )                               
|                                                                                 |                                   |            |                                 
|Net loss per share basic and diluted                                             | $                                 | (0.09      | )                               
|                                                                                 |                                   |            |                                 
|Weighted average shares used in computing net
 loss per share- basic and diluted |                                   | 24,263,706 |                                 
|                                                                                 |                                   |            |                                 

See accompanying
 notes to condensed financial statements.

4



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SPATIALIGHT, INC.
STATEMENT OF STOCKHOLDERS DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited)



|                                                          | COMMON STOCK |   | ADDITIONALPAID-IN |   | NOTES   |   | ACCUMULATED |   | TOTALSTOCKHOLDERS
|--------------------------------------------------------- | ------------ | - | ----------------- | - | ------- | - | ----------- | - | ------------------
|                                                          | SHARES       |   | AMOUNT            |   | CAPITAL |   | RECEIVABLE  |   | DEFICIT           
|                                                          |              |   |                   |   |         |   |             |   |                   
|Balance as of January 1, 2002                             | 25,811,786   |   |                   | $ | 258,118 |   |             | $ | 41,911,879        
|Conversion of interest on notes                           | 178,992      |   |                   |   | 1,790   |   |             |   | 689,610           
|Exercise of stock options and warrants                    | 903,354      |   |                   |   | 9,034   |   |             |   | 2,630,797         
|Stock-based compensation                                  | 100,647      |   |                   |   | 1,006   |   |             |   | 409,700           
|Payments of notes receivable                              |              |   |                   |   |         |   |             |   |                   
|Repricing of warrents                                     |              |   |                   |   |         |   |             |   | 9,813             
|Reversal of notes receivable                              | (178,433     | ) |                   |   | (1,784  | ) |             |   | (556,823          
|Recission of stock purchase agreement                     | (1,346,268   | ) |                   |   | (13,463 | ) |             |   | (2,490,596        
|Discount on notes payable - beneficial conversion feature |              |   |                   |   |         |   |             |   | 58,000            
|Net loss                                                  |              |   |                   |   |         |   |             |   |                   
|                                                          |              |   |                   |   |         |   |             |   |                   
|Balance Sepetember 30, 2002                               | 25,470,078   |   |                   | $ | 254,701 |   |             | $ | 42,662,380        
|                                                          |              |   |                   |   |         |   |             |   |                   

See accompanying
 notes to financial statements.

5



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SPATIALIGHT, INC.
STATEMENTS OF CASH FLOW (unaudited)

|                                                                             | Nine
 Months EndedSeptember 30,
|---------------------------------------------------------------------------- | -------------------------------
|                                                                             | 2002                           
|                                                                             |                                
|Cash flows from operating activities:                                        |                                
|Net loss                                                                     | $                              
|Adjustments to reconcile net loss to net
 cash used by operating activities: |                                
|Depreciation and amortization                                                |                                
|Stock-based general and administrative expense                               |                                
|Stock-based interest expense                                                 |                                
|Changes in operating assets and liabilities:                                 |                                
|Accounts receivable                                                          |                                
|Prepaid and other current assets                                             |                                
|Inventory                                                                    |                                
|Accounts payable                                                             |                                
|Accrued expenses and other current liabilities                               |                                
|Other assets                                                                 |                                
|                                                                             |                                
|Net cash used in operating activities                                        |                                
|                                                                             |                                
|Cash flows from investing activities:                                        |                                
|Purchase of property and equipment                                           |                                
|                                                                             |                                
|Net cash used in investing activities                                        |                                
|                                                                             |                                
|Cash flows from financing activities:                                        |                                
|Payments on capital lease obligations                                        |                                
|Payments on notes receivable from shareholders                               |                                
|Proceeds from issuance of convertible notes                                  |                                
|Proceeds from sale of stock                                                  |                                
|Proceeds from exercise of warrants and options                               |                                
|Proceeds from payments on notes receivable for stock                         |                                
|                                                                             |                                
|Net cash provided by financing activities                                    |                                
|Net decrease in cash and cash equivalents                                    |                                
|Cash and cash equivalents at beginning of period                             |                                
|                                                                             |                                
|Cash and cash equivalents at end of period                                   | $                              
|                                                                             |                                
|Supplemental disclosure of cash flow information:                            |                                
|Income taxes paid during the period                                          | $                              
|                                                                             |                                
|Interest paid during the period                                              | $                              
|                                                                             |                                
|Non cash financing activities:                                               |                                
|Exercise of warrants in exchange
 for notes receivable                       | $                              
|                                                                             |                                
|Sale of stock for stock subscription                                         | $                              
|                                                                             |                                
|Discount on convertible notes due to
 beneficial conversion feature          | $                              
|                                                                             |                                
|Common stock issued upon conversion of interest                              | $                              
|                                                                             |                                

See accompanying
 notes to condensed 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 seven agreements with eight original equipment manufacturers in China to provide
 display units and/or SpatiaLight imagEngine microdisplays for use in their products.
 In the event that the display units and/or SpatiaLight imagEngine microdisplays
 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 and/or SpatiaLight imagEngine microdisplays. 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 period ended September 30,
 2002 are not necessarily indicative of results for the full fiscal year.

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3.     Liquidity

The Companys operations are constrained
 by an insufficient amount of working capital. As of September 30, 2002 the Company
 has sustained recurring losses and had a net capital deficiency of $3,338,401, and
 a net working capital deficiency of $136,443. These conditions raise substantial
 doubt about the ability of the Company to continue as a going concern. During the
 next twelve months, the Company plans to meet its working capital and other
 cash requirements, without giving effect to any revenues that may be derived from
 sales of our products, through the exercise of warrants held by existing investors.
 The Companys continued existence is dependent upon its ability to generate
 revenue by successfully marketing and selling 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 $6,138,484 in the
 nine months ended September 30, 2002. Of this amount, $1,921,491 was non-cash stock-based
 expenses. Additionally, as of September 30, 2002, the Companys accumulated
 deficit totaled $45,868,393. 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 nine
 months ended September 30, 2002 are 1,121,567 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 nine months ended September 30, 2002 and 2001 respectively, are options
 and warrants to acquire 6,953,768 and 8,622,812 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 September 30, 2002 for the options and warrants
 is $3.04 and $2.82, respectively; the weighted average conversion price for the
 common share equivalents related to convertible notes is $1.19.

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5.     Convertible Notes Payable

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

Argyle Notes:

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

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 nine months ended September
 30, 2002, additional stock-based interest expense of approximately $379,000 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.
 At September 30, 2002, the carrying value of the Argyle notes totals $990,000,
 which includes the $1,188,000 principal balance net of unamortized discounts of
 $198,000.

Alabama Group Notes:

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

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life 2.5 years; volatility 114%; risk-free interest
 rate 6%; and dividend yield of $0. The total cash received from the issuance of
 this tranche of notes of $1,437,500 was less than the calculated value associated
 with the warrants. Therefore, the value assigned to the warrants was limited to
 the original proceeds of $1,437,500, and has been recorded as a discount on the
 notes. The effective interest rate for financial statement purposes due to this
 discount differs from the actual contractual interest received or receivable in
 cash by the holders of the Alabama Group Notes. This discount, along with the contractual
 6% per annum interest rate, resulted in an effective interest rate of 70% per annum
 when compared to the outstanding principal balances.

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

On June 15, 2001 the due date of both tranches
 was extended until December 31, 2002. On the extension date, the excess $255,000
 aggregate value of the common shares receivable upon conversion of the notes based
 on the then current market price of $2.65 per share, over the aggregate conversion
 price for the notes convertible at $2.25 per share, was recorded as additional paid-in
 capital. The resulting $255,000 discount to the debt, along with the remaining
 unamortized discount for the first tranche, was being amortized through December
 31, 2002. The effective interest rate for financial statement purposes due to these
 discounts differs from the actual contractual interest received or receivable by
 the holders of the Alabama Group Notes. These discounts, along with the contractual
 6% per annum interest rate, result in a new effective interest rate upon extension
 of 25% per annum as of the extension date when compared to the outstanding principal
 balances. On September 20, 2002, the due date of both tranches was extended until
 March 31, 2004. On the extension date, the excess $58,000 aggregate value of the
 common shares receivable upon conversion of the notes based on the then current
 market price of $2.34 per share over the aggregate conversion price for the notes
 convertible at $2.25 per share, was recorded as additional pain-in-capital. Accordingly,
 the remaining unamortized discount at the extension date of $194,195 including
 the new discount of $58,000 is being amortized through March 31, 2004 resulting
 in a new effective interest rate of 10% per annum when compared with to the outstanding
 principal balances. The notes have been reclassified as long term. At September
 30, 2002, the carrying value of the Alabama notes totals $3,103,973, which includes
 principal balance plus accrued interest of $423,168, net of unamortized discounts
 of $194,195.

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Activity in notes payable for the nine months
 ended September 30, 2002 follows:

|                                   | Balance
 atDecember
 31,2001 |           | Addition or New
Discount |  | (Payment) or
DiscountAmortization | Conversion to
Equity | Balance at
September 30,2002
|---------------------------------- | ---------------------------- | --------- | ------------------------ |  | --------------------------------- | -------------------- | ----------------------------
|                                   |                              |           |                          |  |                                   |                      |                             
|Debt Principal:                    |                              |           |                          |  |                                   |                      |                             
|Alabama Group                      | $                            | 2,875,000 |                          |  | $                                 |                     |                             
|Alabama Group Discount             |                              | (544,774  | )                        |  |                                   | (58,000              | )                           
|Argyle                             |                              | 1,188,000 |                          |  |                                   |                     |                             
|Argyle discount                    |                              | (792,000  | )                        |  |                                   |                     |                             
|                                   |                              |           |                          |  |                                   |                      |                             
|Total                              |                              | 2,726,226 |                          |  |                                   | (58,000              | )                           
|                                   |                              |           |                          |  |                                   |                      |                             
|Interest:                          |                              |           |                          |  |                                   |                      |                             
|Accrued Argyle 6%                  |                              | 18,216    |                          |  |                                   | 53,460               |                             
|Accrued Alabama 6%                 |                              | 282,815   |                          |  |                                   | 140,353              |                             
|Beneficial interest                |                              | 110,027   |                          |  |                                   | 152,943              |                             
|                                   |                              |           |                          |  |                                   |                      |                             
|Total                              |                              | 411,058   |                          |  |                                   | 346,756              |                             
|                                   |                              |           |                          |  |                                   |                      |                             
|Total Short-term Convertible Notes | $                            | 3,137,284 |                          |  | $                                 | 288,756              |                             
|                                   |                              |           |                          |  |                                   |                      |                             

Stock-based interest expense discussed above
 is as follows:

|                                                                 | Nine months
 ended September 30,
|---------------------------------------------------------------- | --------------------------------
|                                                                 |                                 
|                                                                 | 2002                            
|                                                                 |                                 
|Amortization of Alabama group discount                           | $                               
|Amortization of Argyle Capital discount                          |                                 
|Repricing of warrants (see note 6)                               |                                 
|Effect of beneficial conversion priviledges
 on accrued interest |                                 
|                                                                 |                                 
|                                                                 | $                               
|                                                                 |                                 

6.     Issuance
 of Securities

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.

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Issuance and Exercise of Stock Options,
 Warrants, and Stock during the nine months ended September 30, 2002

During the first nine months of 2002, 187,000
 shares of common stock were issued upon the exercise of warrants and employee stock
 options. Total cash received was $448,840.

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 warrants were exercised under
 warrant installment agreements totaling $1,747,347 with initial payments received totaling
 $443,644.

As of September 30, 2002, payments totaling $809,658
 have been received under the warrant installment agreements. The exercise price for
 each installment was marked to market based on the closing price the day prior to
 the due date. The resulting intrinsic value of $129,306, based on the change in
 exercise price was recorded as stock-based interest expense. Of the 700,000 shares
 held in escrow, 178,433 have been restored to the status of authorized but unissued
 shares in exchange for the reversal of notes receivable totaling $582,588. 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.

In addition, payments totaling $21,875 were
 received in the first quarter of 2002 on notes receivable from shareholders that
 were outstanding as of December 31, 2001.

Stock-Based Compensation

On March 28, 2002, the Company issued 60,000
 common shares to its Director of Corporate Development, Anne-Marie Ribes. The shares
 were issued in consideration of services rendered by her with respect to assisting
 the Company in negotiating the contractual relationships with its existing prospective
 customers. These shares were valued at $220,200, the market value of such shares
 on the date of grant.



On August 19, 2002, the Company issued a
 warrant to purchase 50,000 shares of common stock at an exercise price of $3.13.
 The warrant was issued in consideration for consulting services. The warrant
 was valued at $24,000 using the Black-Scholes option pricing model and the following
 assumptions: stock price $2.70, historical volatility 100%, risk-free rate 5%, a
 dividend yield of zero, and a contractual term of 4 months. The value of the warrant
 is reflected in the statement of operations as a component of stock-based general
 and administrative expense.

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

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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.

During the first nine months of 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. In addition, 40,647 shares were issued in exchange
 for $103,652 of services.

Other expenses related to the valuation
 of options granted to a director for consulting services totaled $17,077 and are
 included in stock-based general and administrative expenses in the accompanying
 statement of operations.

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 $13,463 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:



|                                                     | Nine months ended September 30,
|---------------------------------------------------- | -------------------------------
|                                                     | 2002                           
|                                                     |                                
|Stock and options granted to employees and directors | $                              
|Issuance of common stock for services                |                                
|Reinstatement of options                             |                                
|Warrant and other charges                            |                                
|                                                     |                                
|                                                     | $                              
|                                                     |                                

Warrants

On October 24, 2002, the Company agreed
 to reprice warrants due to expire November 12, 2002 covering 746,268 shares of common
 stock from $2.81 to $2.00, the approximate market price on the date of the agreement.
 These warrants were subsequently exercised in early November for immediate cash
 proceeds of $100,000 and a note totaling $1,392,536, which will be paid in six installments.

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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 commenced in September 2002 and provides
 for the following annual base rent payments:



|Year ending December 31,
|------------------------
|2002                    
|2003                    
|2004                    
|2005                    
|2006                    
|2007                    
|2008                    
|                        
|                        
|                        

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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.

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

GENERAL

Our operations are constrained by an insufficient
 amount of working capital, and we continue to experience negative cash flows and
 net operating expenses. Our 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 and 2003 will run approximately $400,000 per month without giving
 effect to any revenues that may be derived from sales of our products. We expect
 to meet our cash needs with outstanding warrants to purchase shares expiring in
 2002 at exercise prices ranging from $2.00 per share to $2.50 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 $2,500,000. 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 and during 2003. 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. 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. In
 September 2002 we accepted delivery of the first pre-production SpatiaLight/Fuji
 display units. These pre-production display units, which have been provided to
 our prospective customers in China, incorporate mechanical changes and technical
 enhancements that we initiated based upon the results of extensive testing of the
 prototype display units.

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In September, we moved our headquarters
 from 9 Commercial Blvd, Suite 200, Novato, California to 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 is
 $203,115, compared to $314,095 annual rent under our previous lease. Our annual
 rent commencing the second year of the new lease of these new premises will be $418,417.
 Our new headquarters, which were designed and built-out to our specifications,
 encompasses our corporate offices, quality assurance and testing facilities, optics
 laboratories and, pending final permits and licenses, a clean room that is five
 times larger than our prior research and development-only clean room. In order
 to prevent a delay in the production of our SpatiaLight imagEngine LCoS microdisplays
 during this permitting and licensing process, we have leased a nearby clean room
 production facility and have commenced manufacturing operations. During the third
 quarter of 2002, we hired an experienced professional to serve as director of clean
 room operations.

In September 2002, we hired Dr. David
 Hakala as our Chief Operating Officer. Dr. Hakala is playing a central role in
 our transition into full scale production of our microdisplay products. Prior to
 joining us, from 1994 to 2001, Dr. Hakala served in various management positions
 with Thompson Multimedia, including Vice President of Manufacturing Operations,
 and most recently as Vice President, Product Development, Americas.

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; 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
 seven agreements or memoranda of understanding with eight original equipment manufacturers
 in China contemplating the purchase by these prospective customers of our display
 units and/or SpatiaLight imagEngine microdisplays for use in certain of their products.
 All of these agreements require that we supply prototypes of our display units
 and/or SpatiaLight imagEngine microdisplays and that they meet technical criteria
 satisfactory to each of such prospective customers. If these tests of our display
 units and/or SpatiaLight imagEngine microdisplays satisfy these prospective customers,
 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. Four 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 display units and/or SpatiaLight imagEngine microdisplays
 in the near future. Similar to all agreements for the sale of technology products
 to foreign customers, these agreements are subject to various other

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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 September 30, 2002, we had approximately
 $105,000 in cash and cash equivalents, and our net working capital deficit at September
 30, 2002 was approximately $136,000.

Net cash used in operating activities totaled
 approximately $3,891,000 and $3,613,000 for the nine months ended September 30,
 2002 and 2001, respectively. Cash was used primarily to fund the operating loss.

Net cash provided by financing activities
 in the nine months ended September 30, 2002 was approximately $1,720,000 as compared
 to approximately $2,760,000 for the nine months ended September 30, 2001. In the
 third quarter of 2002, cash was provided primarily from proceeds from the exercise
 of warrants. In the third 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 September 30, 2002, we had an accumulated
 deficit of approximately $45,868,000. 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 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 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 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 $13,463 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 nine and three months ended September 30, 2002. Total revenues were $0
 and $10,000 for the nine and three months ended September 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.

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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 nine and three months ended September
 30, 2002, and $0 and $1,000 for the nine and three months ended September 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 $717,000 and $520,000
 in the three months ended September 30, 2002 and 2001, respectively, and $2,090,000
 and $1,944,000 in the nine months ended September 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 approximately $107,000, from $333,000 in 2001 to $226,000 in 2002, due
 to the termination of a severance package in the first quarter of 2001 as well as
 a decrease in medical insurance due to an employee contribution requirement. Other
 office expenses, including travel, entertainment and moving expenses increased approximately
 $44,000. Depreciation expense increased approximately $90,000 and employment expense
 and trade show increased $75,000 and $30,000, respectively.

Stock-based general and administrative
 costs. Stock-based general and administrative costs were approximately $142,000
 and $411,000 in the three and nine months ended September 30, 2002, respectively,
 and approximately $73,000 and $1,846,000 in the three and nine months ended September
 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 stock options granted as compensation
 to directors valued at $1,660,000, which had no comparable expense in 2002.

Research and development costs. Research
 and development costs were approximately $1,940,000 and $1,850,000 in the nine months
 ended September 30, 2002 and 2001, respectively and $771,000 and $653,000 in the
 three months ended September 30, 2002 and 2001, respectively. Salaries and related
 benefits decreased approximately $62,000 due to more employee stock option exercises
 in 2001 while travel and entertainment increased $20,000 as a result of more overseas
 trips. General research and development costs increased approximately $132,000
 due to a gearing up for production.



Interest income. Interest income for
 the nine months ended September 30, 2002 and 2001 was approximately $8,700 and $16,000,
 respectively. Interest income for the three months ended September 30, 2002 and
 2001 was approximately $90 and $5,400, respectively. The decrease is consistent
 with lower cash balances resulting from the decrease in cash flow from financing
 activities.

Interest expense. Interest expense
 for the nine months ended September 30, 2002 remained substantially unchanged from
 2001 at approximately $65,000 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 $1,511,000 and $1,381,000 for the nine months
 ended September 30, 2002 and 2001, respectively, and $536,000 and $399,000 for the
 three months ended September 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 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

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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 Policies

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

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




Item 3. Controls and Procedures.

Quarterly evaluation of the Companys
 Disclosure Controls and Internal Controls. Within the 90 days prior
 to the date of this Quarterly Report on Form 10-QSB, we evaluated the effectiveness
 of the design and operation of our disclosure controls and procedures (Disclosure
 Controls), and our internal controls and procedures for financial reporting (Internal
 Controls). This evaluation (the Controls Evaluation) was done under the supervision
 and with the participation of our principal executive officer, who is also our principal
 financial officer (collectively, CEO).

Limitations on the Effectiveness of Controls. Our Chief Executive Officer does not expect that our Disclosure Controls or
 our Internal Controls will prevent all error and all fraud. A control system, no
 matter how well conceived and operated, can provide only reasonable, not absolute,
 assurance that the objectives of the control system are met. Further, the design
 of a control system must reflect the fact that there are resource constraints, and
 the benefits of controls must be considered relative to their costs. We have not
 had any revenue derived from the sale of our microdisplay products in the current
 reporting period. While the Controls Evaluation has accounted for such absence
 of sales and revenue, new or additional controls may or may not be required once
 we begin selling our microdisplay products in volume in the ordinary course of business.
 Because of the inherent limitations in all control systems, no evaluation of controls
 can provide absolute assurance that all control issues and instances of fraud, if
 any, within the Company have been detected. These inherent limitations include
 the realities that judgments in decision-making can be faulty, and that breakdowns
 can occur because of simple error or honest mistake. Additionally, controls can
 be circumvented by the individual acts of some persons, by collusion of two or more
 persons, or by management override of the control. The design of any system of
 controls also is based in part upon certain assumptions about the likelihood of
 future events, and there can be no assurance that any design will succeed in achieving
 its stated goals under all potential future conditions; over time, specific controls
 may or may not become inadequate (e.g., when we commence to sell our products in
 volume in the ordinary course of business) because of changes in conditions, or
 the degree of compliance with the policies or procedures may deteriorate. Because
 of the inherent

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limitations in a cost-effective
 control system, misstatements due to error or fraud may occur and not be detected.

Internal Controls. In accordance
 with SEC requirements, the CEO notes that, since the date of the Controls Evaluation
 to the date of this Quarterly Report, there have been no significant changes in
 Internal Controls or in other factors that could significantly affect Internal Controls.

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

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 nine months ended September
 30, 2002 and 2001, we have incurred net losses of approximately $6,138,000 and
 $7,202,000, respectively. In addition, we had an accumulated deficit of $45,868,000
 as of September 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.

20



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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.

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 display units. We have recently entered into an agreement for the supply

21



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##### Table of Contents



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 SpatiaLight
 imagEngine microdisplays involves highly complex processes and technical problems
 may arise, we, in our capacity as internally manufacturing the liquid crystal microdisplays
 which are an integral part of the display units, 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.

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 display
 units and/or SpatiaLight imagEngine microdisplays will be dependent upon the pricing,
 quality, reliability and useful life of these units compared to competing technologies,
 as to which there can be no assurance. In order for us to succeed, not only must
 we offer end-product manufacturers better and less expensive microdisplays than
 our competitors, but the manufacturers themselves must also develop 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
 seven agreements with eight original equipment manufacturers in China to
 sell our display units and/or SpatiaLight imagEngine microdisplays.

22



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The testing of our display units and/or
 SpatiaLight imagEngine microdisplays by certain of these prospective customers
  SVA, CEC, Skyworth, and Hisense/IRICO  commenced after these agreements
 were signed. The Company has 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 display units
 and/or SpatiaLight imagEngine microdisplays 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 and/or SpatiaLight
 imagEngine microdisplays, we may have problems implementing volume production of such display
 units and/or SpatiaLight imagEngine microdisplays. Furthermore, sales to manufacturers
 in the electronics industry are subject to severe competitive pressures, rapid technological
 change, and product obsolescence. Manufacturers may, at any time, cancel purchase
 orders or commitments or reduce or delay orders, thereby increasing our inventory
 and overhead risks. Therefore, even if we obtain purchase orders from 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.

23



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##### Table of Contents



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;                                                                                              
|
| |  | 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;      

24



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##### Table of Contents





| |  | 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;
|
| |  | 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

25



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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;                                                                                 
|
| |  | 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

26



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government has pursued economic reform policies including
 the encouragement of private economic activity and greater economic decentralization.
 The Chinese government may not continue to pursue these policies or may significantly alter them to our
 detriment from time to time with little, if any, prior notice.

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

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

We do not pay cash dividends.

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




PART II.     OTHER INFORMATION




ITEM 2        Changes in
 Securities and Use of Proceeds

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.

Issuance and Exercise of Stock Options,
 Warrants, and Stock during the nine months ended September 30, 2002

During the first nine months of 2002, 187,000
 shares of common stock were issued upon the exercise of warrants and employee stock
 options. Total cash received was $448,840.

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,

27



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a price slightly
 below the closing price on the commitment date. The warrants were exercised under
 warrant installment agreements totaling $1,747,347 with initial payments totaling
 $443,644.

To date, payments totaling $809,658
 have been made under the warrant installment agreements. The exercise price for
 each installment was marked to market based on the closing price the day prior to
 the due date. The resulting intrinsic value of $129,306, based on the change in
 exercise price was recorded as stock-based interest expense. Of the 700,000 shares
 held in escrow, 178,433 have been restored to the status of authorized but unissued
 shares in exchange for the reversal of notes receivable totaling $582,588. 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.

In addition, payments totaling $21,875 were
 received in the first quarter of 2002 on notes receivable from shareholders that
 were outstanding as of December 31, 2001.

Stock-Based Compensation

On March 28, 2002, the Company issued 60,000
 common shares to its Director of Corporate Development, Anne-Marie Ribes. The shares
 were issued in consideration of services rendered by her with respect to assisting
 the Company in negotiating the contractual relationships with its existing prospective
 customers. These shares were valued at $220,200, the market value of such shares
 on the date of grant.

On August 19, 2002, the Company issued a
 warrant to purchase 50,000 shares of common stock at an exercise price of $3.13.
 The warrant was issued in consideration for consulting services. The warrant
 was valued at $24,000 using the Black-Scholes option pricing model and the following
 assumptions: stock price $2.70, historical volatility 100%, risk-free rate 5%, a
 dividend yield of zero, and a contractual term of 4 months. The value of the warrant
 is reflected in the statement of operations as a component of stock-based general
 and administrative expense.

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.

During the first nine months of 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. In addition, 40,647 shares were issued in exchange
 for $103,652 of services.

Other expenses related to the valuation
 of options granted to a director for consulting services totaled $17,077 and are
 included in stock-based general and administrative expenses in the accompanying
 statement of operations.

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

28



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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 $13,463 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:



|                                                     | Nine months ended September 30,
|---------------------------------------------------- | -------------------------------
|                                                     | 2002                           
|                                                     |                                
|Stock and options granted to employees and directors | $                              
|Issuance of common stock for services                |                                
|Reinstatement of options                             |                                
|Warrant and other charges                            |                                
|                                                     |                                
|                                                     | $                              
|                                                     |                                

Warrants

On October 24, 2002, the Company agreed
 to reprice warrants due to expire November 12, 2002 covering 746,268 shares of common
 stock from $2.81 to $2.00, the approximate market price on the date of the agreement.
 These warrants were subsequently exercised in early November for immediate cash
 proceeds of $100,000 and a note totaling $1,392,536, which will be paid in six installments.






|ITEM 6 |  | Exhibits and Reports on Form 8-k                                                                                                      
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------
|      
|(a)    |  | Exhibit 99.1   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|      
|(b)    |  | Report on Form 8-K:                                                                                                                   
|      
|       |  | None.                                                                                                                                 

29



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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:                                                   | November 13, 2002  
| | ------------------------------------------------------- | -------------------
| |                                                         |                    
| |                                                         |                    
| | SpatiaLight,
 Inc.                                     
| |                                                         |                    
| |                                                         |                    
| | By:                                                     | /s/ ROBERT A. OLINS
| |                                                        
| | Robert A.
 Olins                                       
| | Acting Chief
 Executive Officer                        
| | (Principal
 Executive, Financial and Accounting Officer

30



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CERTIFICATION

I, Robert A. Olins, certify that:

1. I have reviewed this quarterly report
 on Form 10-QSB of SpatiaLight, Inc.;

2. Based on my knowledge, this quarterly
 report does not contain any untrue statement of a material fact or omit to state
 a material fact necessary to make the statements made, in light of the circumstances
 under which such statements were made, not misleading with respect to the period
 covered by this quarterly report;

3. Based on my knowledge, the financial
 statements, and other financial information included in this quarterly report, fairly
 present in all material respects the financial condition, results of operations
 and cash flows of the registrant as of, and for, the periods presented in this quarterly
 report;

4. I am responsible for establishing and
 maintaining disclosure controls and procedures (as defined in Exchange Act Rules
 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and
 procedures to ensure that material information relating to the registrant is made
 known to us by others within those entities, particularly during the period in which
 this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants
 disclosure controls and procedures as of a date within 90 days prior to the
 filing date of this quarterly report (the Evaluation Date); and

c) presented in this quarterly report our
 conclusions about the effectiveness of the disclosure controls and procedures based
 on our evaluation as of the Evaluation Date;

5. I have disclosed, based on my most recent
 evaluation, to the registrants auditors and the audit committee of registrants
 board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design
 or operation of internal controls which could adversely affect the registrants
 ability to record, process, summarize and report financial data and have identified
 for the registrants auditors any material weaknesses in internal controls;
 and

b) any fraud, whether or not material, that
 involves management or other employees who have a significant role in the registrants
 internal controls; and

6. I have indicated in this quarterly report
 whether or not there were significant changes in internal controls or in other factors
 that could significantly affect internal controls subsequent to the date of our
 most recent evaluation, including any corrective actions with regard to significant
 deficiencies and material weaknesses.

Date: November 13, 2002



| | /s/ Robert A. Olins        
| | ---------------------------
| |                            
| | Robert A. Olins            
| | Chief Executive Officer and
| | Principal Financial Officer