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

 (Mark One)

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

                  For the quarterly period ended March 31, 2003

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

         For the transition period from          to

                        Commission File Number 000-19828

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


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


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


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


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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest  practicable  date:  26,956,748 shares of common
stock as of May 13, 2003.


<PAGE>


                                SPATIALIGHT, INC.

                          Quarterly Report on Form 10-Q
                      For the Quarter Ended March 31, 2003


                                Table of Contents

PART I            FINANCIAL INFORMATION

         Item 1.  Condensed Financial Statements (unaudited)

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

                  Condensed Statements of Operations
                  for the Three months Ended March 31, 2003 and 2002..........4

                  Condensed Statements of Stockholders' Deficit
                  for the Three months Ended March 31, 2003...................5

                  Condensed Statements of Cash Flows
                  for the Three months Ended March 31, 2003 and 2002..........6

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

         Item 2.  Management's Discussion and Analysis
                  of Financial Condition and Results of Operations............15

         Item 3.  Quantitative and Qualitative Disclosures About Market Risks.19

         Item 4.  Controls and Procedures . . . . . . . . . . . . . . . . . ..19

PART II  OTHER INFORMATION

         Item 2.  Changes in Securities and Use of Proceeds...................29

         Item 6.  Exhibits and Reports on Form 8-K............................30


<PAGE>


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

SPATIALIGHT, INC.
BALANCE SHEET
                                                  March 31,        December 31,
                                                     2003              2002
                                                 (unaudited)
ASSETS

Current assets
  Cash and cash equivalents                            $ 10,731     $ 575,663
  Inventory                                             775,829       275,959
  Prepaids and other current assets                     900,958       565,515
                                                 ---------------  ------------
          Total current assets                        1,687,518     1,417,137

Property and equipment, net                             445,291       506,968
Other assets                                            135,893       134,349
                                                 ---------------  ------------

               Total assets                         $ 2,268,702   $ 2,058,454
                                                 ===============  ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
  Accounts payable                                  $ 2,371,168   $ 2,018,230
  Short-term convertible notes                          400,000             -
  Short-term notes                                      195,000             -
  Current portion of convertible notes                4,322,789             -
  Accrued expenses and other current liabilities        217,371       206,796
                                                 ---------------  ------------
        Total current liabilities                     7,506,328     2,225,026

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

               Total liabilities                      7,506,328     6,432,258
                                                 ---------------  ------------

Commitments

Stockholders' deficit:
  Common stock, $.01 par value:
     40,000,000 shares authorized;
    26,956,786 and 26,018,658 shares issued and
    outstanding at March 31, 2003 and
    December 31, 2002                                   269,568       260,187
Additional paid-in capital                           46,189,054    45,550,830
Notes and stock subscriptions receivable             (1,393,887)   (1,426,999)
Accumulated deficit                                 (50,302,361)  (48,757,822)
                                                 ---------------  ------------
        Total stockholders' deficit                  (5,237,626)   (4,373,804)
                                                 ---------------  ------------

Total liabilities and stockholders' deficit         $ 2,268,702   $ 2,058,454
                                                 ===============  ============


See accompanying notes to financial statements.

                                       3
<PAGE>


SPATIALIGHT, INC.
STATEMENTS OF OPERATIONS (unaudited)


<TABLE>
<CAPTION>
                                                                Three months ended March 31,
                                                                  2003                2002
                                                                -------            --------
Selling, general and administrative expenses:
<S>                                                               <C>              <C>
   Selling, general and administrative expenses                   $ 457,662        $ 585,211
   Stock-based general and administrative expenses                  173,753          265,977
                                                                -----------      -----------
          Total selling, general and administrative expenses        631,415          851,188

                                                                                           -

   Research and development expenses                                724,597          707,706

          Total operating expenses                                1,356,012        1,558,894
                                                                -----------      -----------

          Operating loss                                         (1,356,012)      (1,558,894)
                                                                -----------      -----------

  Other income (expenses):
    Interest expense:
          Interest expense                                          (70,950)         (63,133)
          Stock-based interest expense                             (136,165)        (487,136)
                                                                -----------      -----------
            Total interest expense                                 (207,115)        (550,269)

   Interest and other income                                         19,388            7,418
                                                                -----------      -----------

          Total other expenses                                     (187,727)        (542,851)
                                                                -----------      -----------

   Loss before income tax expense                                (1,543,739)      (2,101,745)

Income tax expense                                                      800            1,425
                                                                -----------      -----------

Net loss                                                       $ (1,544,539)    $ (2,103,170)
                                                               ============      ===========

Net loss per share - basic and diluted                              $ (0.06)         $ (0.09)
                                                               ============      ===========

Weighted average shares used in computing
 net loss per share- basic and diluted                           25,538,382       23,859,321
                                                               ============      ===========
</TABLE>

See accompanying notes to  financial statements


                                       4
<PAGE>


SPATIALIGHT, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT (unaudited)
THREE MONTHS ENDED MARCH 31, 2003

<TABLE>
<CAPTION>
                                                                  COMMON STOCK            ADDITIONAL
                                                                                            PAID-IN         NOTES
                                                             SHARES       AMOUNT           CAPITAL       RECEIVABLE
                                                           ---------    ---------      ------------    --------------

<S>                                                        <C>          <C>            <C>             <C>
Balance, January 1, 2003                                   26,018,658   $ 260,187      $ 45,550,830    $ (1,426,999)

Exercise of stock options and warrants                          2,500          25             3,100

Payments on notes receivable from stockholders                                                               52,500

Accrued interest on notes receivable from stockholders                                                      (19,388)

Issuance of stock, stock options, and warrants for services    47,000         470           277,248

Issuance of stock and options to employees and directors                                     12,285

Conversion of notes and accrued interest                      142,360       1,424           353,053

Shares issued on exercise of warrant under installment note   746,268       7,462            (7,462)

Net loss
                                                          ----------    ---------      ------------    --------------
                                                           26,956,786     269,568        46,189,054      (1,393,887)
</TABLE>


<TABLE>
<CAPTION>
                                                                                        TOTAL
                                                                   ACCUMULATED       STOCKHOLDERS'
                                                                   (DEFICIT)            DEFICIT
                                                                  --------------     -------------
<S>                                                             <C>                  <C>
Balance, January 1, 2003                                        $ (48,757,822)       $ (4,373,804)

Exercise of stock options and warrants                                                      3,125

Payments on notes receivable from stockholders                                             52,500

Accrued interest on notes receivable from stockholders                                    (19,388)

Issuance of stock, stock options, and warrants for services                               277,718

Issuance of stock and options to employees and directors                                   12,285

Conversion of notes and accrued interest                                                  354,477

Shares issued on exercise of warrant under installment note                                     -

Net loss                                                           (1,544,539)         (1,544,539)
                                                                  --------------     -------------
                                                                  (50,302,361)         (5,237,626)
</TABLE>


See accompanying notes financial statements

                                       5
<PAGE>


SPATIALIGHT, INC.
STATEMENTS OF CASH FLOW (unaudited)

<TABLE>
<CAPTION>
                                                                  Three months ended March 31,
                                                                ------------------------------
Cash flows from operating activities:                               2003             2002
                                                                ------------     -------------
<S>                                                             <C>              <C>
Net loss                                                        $ (1,544,539)    $ (2,103,170)
Adjustments to reconcile net loss to net cash used
  by operating activities:
  Depreciation and amortization                                       68,843           96,106
  Stock-based general and administrative expense                     173,753          265,977
  Stock-based interest expense                                       136,165          487,136
  Changes in operating assets and liabilities:
     Inventories                                                    (499,870)               -
     Prepaid and other current assets                                (51,765)          89,530
     Accounts payable                                                406,938         (212,742)
     Accrued expenses and other current liabilities                  123,016          (15,226)
     Other assets                                                    (20,932)            (887)
                                                                ------------     -------------
                    Net cash used in operating activities         (1,208,391)      (1,393,276)
                                                                ------------     -------------

Cash flows from investing activities:
  Purchase of property and equipment                                  (7,166)        (102,966)
                                                                ------------     -------------

                    Net cash used in investing activities             (7,166)        (102,966)
                                                                ------------     -------------

Cash flows from financing actitivies:
  Payments on capital lease obligations                                    -           (1,429)
  Proceeds from issuance of short term notes                         195,000                -
  Proceeds from the issuance of short term convertible notes         400,000                -
  Payments on stock subscriptions and notes
    receivable from shareholders                                      52,500           21,875
  Proceeds from exercise of warrants and options                       3,125            2,590
                                                                ------------     -------------

                    Net cash provided by financing activities        650,625           23,036
                                                                ------------     -------------

Net decrease in cash                                                (564,932)      (1,473,206)

Cash and cash equivalents at beginning of period                     575,663        2,728,134
                                                                ------------     -------------
Cash and cash equivalents at end of period                          $ 10,731      $ 1,254,928
                                                                ============     =============

Supplemental disclosure of cash flow information:

  Income taxes paid during the period                                  $ 800          $ 1,425
                                                                ------------     -------------
  Interest paid during the period                                        $ -            $ 180
                                                                ------------     -------------
Non cash financing activities:

  Common stock issued upon conversion of notes                     $ 354,477        $ 691,400
                                                                ------------     -------------
  Recission of stock purchase agreement                                  $ -      $ 2,504,059
                                                                ------------     -------------
</TABLE>

See accompanying notes to financial statements.

                                       6
<PAGE>



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

1.   Business Description

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

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

2.   Basis of Presentation

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

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

3.   Liquidity

The Company's  operations are constrained by an  insufficient  amount of working
capital. As of March 31, 2003 the Company has sustained recurring losses and had
a net capital deficiency of approximately $5,240,000,  and a net working capital
deficiency of approximately $5,800,000. These conditions raise substantial doubt
about the ability of the Company to continue as a going  concern.  We anticipate
that our cash expenditures  during 2003 will approximate  $400,000 per month, or
approximately  $5 million for the year,  without regard to any revenues in 2003.


                                       7
<PAGE>

We expect to meet our cash needs with our existing cash balances and collections
from stock  subscriptions  receivable of  approximately  $1,400,000 and from the
exercise of warrants held by existing investors.  In addition, we expect to fund
working capital requirements by drawing on letters of credit issued by customers
in connection with signed purchase  orders and by additional  equity  financing.
The  Company's  continued  existence is  dependent  upon its ability to generate
revenue  by  successfully   marketing  and  selling  its  products,  and  obtain
additional  financing.  The Company  continues its efforts to locate  sources of
additional  financing.  However,  there can be no assurance  that the  Company's
efforts will be successful,  or that additional debt or equity 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, 2002, 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  approximately  $1,550,000  in the three months
ended March 31,  2003.  Of this  amount,  approximately  $310,000  was  non-cash
stock-based  expenses.  Additionally,  as  of  March  31,  2003,  the  Company's
accumulated deficit totaled approximately $50,300,000. 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  ended  March  31,  2003 are
1,346,268  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 three  months  ended March 31, 2003 and 2002  respectively,  are options and
warrants  to  acquire  4,502,083  and  7,592,697  shares  of common  stock,  and
3,577,584  and 3,425,603  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 March 31, 2003 for the
options and  warrants is $2.38 and $2.47,  respectively;  the  weighted  average
conversion price for the common share  equivalents  related to convertible notes
is $1.25.

5.   Notes Payable


                                       8
<PAGE>


Convertible notes at March 31, 2003 consist of the following:

Argyle Notes:

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

On January 3, 2003 the Company  issued  142,360  shares of common stock upon the
conversion of prepaid interest of $354,477.  Prepaid interest was computed using
the  closing  price of the common  stock on December  31, 2002 of $2.49,  and is
being amortized  through December 31, 2003. For the three months ended March 31,
2003,  additional  stock-based  interest  expense of  approximately  $70,800 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 March 31, 2003, the carrying value of the Argyle notes
totals  $1,056,000,  which  includes  the  $1,188,000  principal  balance net of
unamortized discounts of $132,000. See also Note 6.

Alabama Group Notes:

In December  1999, the Company  received  $1,437,500 in cash and issued notes in
that amount to a group of investors  (the  "Alabama  Group"),  which  includes a
trust for the benefit of Steven F. Tripp,  a Director of the Company.  Mr. Tripp
is not the  trustee  of this  trust and has no power to vote or  dispose  of the
Common Shares of the Company or any other securities held by that trust.  Marcia
K. Tripp, Steven F. Tripp's mother, is the trustee of this trust and directs and
is responsible for all of the investment decisions of this trust. In the opinion
of the Company,  no other  investor in the Alabama  Group is an affiliate of the
Company and Mr. Tripp is not an  affiliate of any other  investor in the Alabama
Group.  The notes accrue interest at a contractual rate of 6% per annum, and are
secured by  substantially  all the assets of the  Company.  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  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


                                       9
<PAGE>


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  10.5%  per  annum  when  compared  with to the  outstanding  principal
balances.  At March 31,  2003,  the carrying  value of the Alabama  notes totals
$3,266,789,  which includes principal balance plus accrued interest of $521,252,
net of unamortized discounts of $129,463.

Other Short-term Notes

During the first quarter of 2003 the Company received  $595,000 under short-term
notes. Of this amount $400,000 were convertible  notes,  with conversion  prices
ranging from $2.25 to $3.16,  which  approximate  the stock price on the date of
issuance.  There is no beneficial conversion effect associated with these notes.
All of the notes accrue interest at 6% per annum and have maturity dates ranging
from  thirty (30) days to two  hundred  and  seventy  (270)  days.  Notes for an
aggregate of $145,000 were issued to Steven F. Tripp, a director of the Company,
and a note for $65,000 was issued to Marcia Tripp.

Activity in notes payable for the three months ended March 31, 2003 follows:


                                       10
<PAGE>

<TABLE>
<CAPTION>

                                        DECEMBER 31,      ADDITION OR NEW    DISCOUNT      CONVERSION TO     BALANCE AT
DEBT PRINCIPAL:                              2002           DISCOUNT        AMORTIZATION      EQUITY       MARCH 31, 2003
                                        ---------------   -------------   ---------------   ------------   -------------
<S>                                        <C>             <C>               <C>             <C>            <C>
Argyle                                     $ 1,188,000                -                -              -     $ 1,188,000
Argyle discount                               (165,000)               -           33,000              -        (132,000)
Alabama Group                                2,875,000                -                -              -       2,875,000
Alabama Group Discount                        (161,829)               -           32,366              -        (129,463)
Other short term notes (convertible and other)       -          595,000                -              -         595,000
                                        ---------------   --------------   --------------   ------------   -------------
                 Total                       3,736,171          595,000           65,366              -       4,396,537
                                        ---------------   --------------   --------------   ------------   -------------


Interest:
Accrued Argyle 6%                                    -           17,820                -        (17,820)              -
Accrued Alabama 6%                             471,061           50,191                -              -         521,252
Beneficial interest                                  -           70,799                -        (70,799)              -
                                        ---------------   --------------   --------------   ------------   -------------
                 Total                         471,061          138,810                -        (88,619)        521,252

                                        ---------------   --------------   --------------   ------------   -------------
TOTAL                                      $ 4,207,232        $ 733,810         $ 65,366      $ (88,619)    $ 4,917,789
                                        ===============   ==============   ==============   ============   =============
</TABLE>


Stock-based interest expense discussed above is as follows:

                                              Three months ended March 31,
                                               ---------------------------
                                                    2003          2002
                                               ---------------  ------------
Amortization of Alabama group discount               $ 32,366     $ 136,193
Amortization of Argyle Capital discount                33,000       198,000
Effect of beneficial conversion priviledges
   on accrued interest                                 70,799       152,943
                                                   $  136,165     $ 487,136
                                                   ==========    ==========

6.   Issuance of Securities

Interest Conversion

On January 3, 2003 the Company  issued  142,360  shares of common stock upon the
conversion of prepaid interest of $354,477.  Prepaid interest was computed using
the  closing  price of the common  stock on December  31, 2002 of $2.49,  and is
being amortized  through December 31, 2003. For the three months ended March 31,
2003,  additional  stock-based  interest  expense of  approximately  $70,800 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 March 31, 2003, the carrying value of the Argyle notes
totals  $1,056,000,  which  includes  the  $1,188,000  principal  balance net of
unamortized discounts of $132,000.


                                       11
<PAGE>


EXERCISE OF STOCK  OPTIONS,  WARRANTS,  DURING THE THREE  MONTHS ENDED MARCH 31,
2003

During the first three months of 2003,  2,500 shares of common stock were issued
upon the exercise of employee stock options. Total cash received was $3,125.

Payments under notes receivable from shareholder  resulting from the exercise of
warrants in 2002 totaled $52,500.

ISSUANCE OF STOCK,  STOCK  OPTIONS AND  WARRANTS IN THE THREE MONTHS ENDED MARCH
31, 2003

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

On October  14,  2002 the  Company  issued a fully  vested  warrant to  purchase
250,000  shares of common  stock at an exercise  price of $3.50 in exchange  for
consulting  services  rendered over a six-month  period.  A value of $76,068 was
assigned to the warrants for the portion of the services  rendered in 2003 using
the  Black-Scholes  option  pricing model and the following  assumptions:  stock
price $1.84,  historical volatility 100%, risk free rate 5%, a dividend yield of
0, and a contractual  term of two years. The portion of the value of the warrant
earned,  $76,068,  in the first quarter of 2003 is reflected in the statement of
operations as stock-based general and administrative expense.

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

Other expenses in 2003 related to the valuation of options  granted to directors
for additional  services totaled $12,285 and are included in stock based general
and administrative.

ISSUANCE OF STOCK DURING THE THREE MONTHS ENDED MARCH 31, 2002

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

ISSUANCE OF STOCK UNDER INSTALLMENT NOTE

In November  2002, a warrant to purchase  746,268 common shares was exercised at
$2.00 under a warrant  installment  agreement totaling  $1,492,536.  Payments of
$200,000 were made in 2002. An additional $52,500 was received in 2003. Interest
accrues at 6% per annum and is due with the final payment. As of March 31, 2003,
approximately $26,000 of accrued interest has been recorded,  including interest
of  approximately  $19,000 in 2003. The shares were issued in 2003, but are held
in escrow by the Company pending receipt of the remaining balance of $1,266,400.
With the acquiescence of the Company,  the shareholder has not met the due dates
of two previously  scheduled  installment payments under the warrant installment
agreement which, as of March 31, 2003 equaled $100,000 and as of April 30, 2003,
equaled an additional $100,000.




                                       12
<PAGE>

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

                                                    Three months ended March 31,

                                                        2003            2002
                                                       ---------      ---------
Stock and options granted to employees and directors    $ 12,285      $ 220,000
Common stock  and warrants expensed for services         161,468              -
Warrant and other charges                                      -         45,777
                                                       ---------      ---------
                                                       $ 173,753      $ 265,777
                                                       =========      =========

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 first quarter of 2003.

8.   Stock-based Compensation

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

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


                                       13
<PAGE>


he table below shows net income per share for the three  months ended March 31,
2003 and 2002 as if the Company had elected the fair value method of  accounting
for stock options.

                                                   2003           2002
                                                  -------------  -------------

Net loss as reported                              $ (1,544,539)  $ (2,103,170)


Deduct: total stock-based employee compensation
determined under fair value method for all awards,
net of any applicable related tax effects             (364,667)      (864,739)
                                                  -------------  -------------

Proforma net loss, as adjusted                    $ (1,909,206)  $ (2,967,909)

Loss per share:
Basic and diluted, as reported                         $ (0.06)       $ (0.09)
Basic and diluted, as adjusted                         $ (0.08)       $ (0.13)


9.   Recent Accounting Pronouncements

In August  2001  Statement  of  Financial  Accounting  Standards  SFAS No.  144,
"Accounting  for the  Impairment or Disposal of  Long-lived  Assets" was issued,
superseding SFAS No. 121, "Accounting for the Impairment of Long-lived Assets to
be  Disposed  of." Among other  things,  SFAS No. 144  provides  guidance on how
long-lived  assets used as part of a group should be evaluated  for  impairment,
establishes  criteria  for  when  long-lived  assets  are  held  for  sale,  and
prescribes the  accounting for long-lived  assets that will be disposed of other
than by sale.  SFAS No.  144 is  effective  for  fiscal  years  beginning  after
December 15, 2001.  The Company's  financial  position and results of operations
have not been affected by the adoption of SFAS No. 144 as of January 1, 2003.

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

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


                                       14
<PAGE>


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

Note 10. Subsequent Events

Subsequent to March 31, 2003, the Company has agreed to issue approximately 2.72
million  common shares for a total of $5,000,000 to several  private  investors.
The shares to be issued in this transaction consist of previously authorized but
unissued shares of the Company.  The shares are priced at $1.84 per share, equal
to 80% of the trailing  30-day  average  closing price of the shares through May
12,  2003.  As part of this stock  purchase  transaction,  the Company will also
issue,  for each four  shares  issued,  one  five-year  warrant to  purchase  an
additional  common  share at $2.65  per  share,  equal to a 15%  premium  to the
trailing 30-day average closing price of the shares through May 12, 2003. Of the
total $5,000,000  stock purchase,  $2,500,000 has been subscribed for personally
by Robert A.  Olins,  Acting  Chief  Executive  Officer  and a  Director  of the
Company.



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

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

The  following  is a  discussion  and  analysis  of the  consolidated  financial
condition of the Company as of March 31, 2003, and the results of operations for
the Company for the three  months ended March 31, 2003 and 2002.  The  following
should  be read in  conjunction  with the  unaudited  financial  statements  and
related notes appearing elsewhere herein.

GENERAL

Our operations are constrained by an insufficient amount of working capital, and
we continue to experience  negative cash flows and net operating  expenses.  Our
operations  in recent  months have been funded by the  exercise of warrants  and
options,  and the issuance of short-term notes. 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


                                       15
<PAGE>


in their  report  on the  audited  financial  statements  as of the  year  ended
December 31, 2002, indicating that substantial doubt exists as to our ability to
continue as a going concern.

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

OVERVIEW

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

Since late October 2001,  we have 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(TM)  microdisplays for use in certain of their products.
All of these agreements  require that we supply  prototypes of our display units
and/or  SpatiaLight  imagEngine(TM)  microdisplays  and that they meet technical
criteria  satisfactory to each of such prospective  customers.  In addition,  in
January 2003 we entered  into an Agreement of Principal  Terms with one original
equipment  manufacturer  (OEM) in the Republic of South Korea  contemplating the
purchase of our display units for use in certain of its products. This agreement
requires  that we  supply  a  prototype  of our  display  unit  and that it meet
technical criteria satisfactory to the prospective customer.


                                       16
<PAGE>


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


LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2003, we had approximately $11,000 in cash and cash equivalents,
a decrease  of  approximately  $565,000  from the  December  31,  2002 amount of
$575,000.  Our net working capital  deficit at March 31, 2003 was  approximately
$5,800,000  compared to a net working capital deficit of approximately  $800,000
at December 31, 2002. This change is due to the  reclassification  of the Argyle
and Alabama Group notes to the current  liabilities based on their maturity date
of March 31, 2004.

Net cash used in  operating  activities  totaled  approximately  $1,200,000  and
$1,400,000  for the three  months  ended March 31, 2003 and 2002,  respectively.
Cash was used primarily to fund the operating loss.

Net cash  provided by financing  activities  in the three months ended March 31,
2003 was  approximately  $650,000 as compared to  approximately  $23,000 for the
three  months  ended  March 31,  2002.  In the first  quarter of 2003,  cash was
provided primarily from proceeds from the issuance of short-term notes.

As  of  March  31,  2003,  we  had  an  accumulated   deficit  of  approximately
$50,300,000.  We have realized significant losses in the past and we expect that
these losses will continue at least through 2003. It is likely that we will have
quarterly  and  annual  losses in 2003 and  beyond.  We have  generated  limited
revenues and no profits from operations. The development,  commercialization and
marketing  of  our  products  will  require  substantial  expenditures  for  the
foreseeable future.  Consequently,  we may continue to operate at a loss for the
foreseeable  future and there can be no assurance that our business will operate
on a profitable basis or will be able to continue as a going concern.

Subsequent  to  March  31,  2003,  we agreed to issue approximately 2.72 million
Common  Shares  in  exchange  for  a  total  of  $5,000,000  to  several private
investors,  including  Robert  A.  Olins,  Acting  Chief Executive Officer and a
Director  of the Company. This transaction is more fully described in Note 10 to
the Condensed Financial Statements in Item 1 of Part I of this Report. We expect
this  transaction  to  significantly  enhance  our  liquid capital resources and
working  capital  thereby  giving us a stronger financial platform to expand our
manufacturing  business.

RESULTS OF OPERATIONS

Selling,  general and administrative costs. Selling,  general and administrative
costs were  approximately  $460,000 and $585,000 in the three months ended March
31, 2003 and 2002, respectively and include professional services,  salaries and
related taxes and benefits,  rent,  depreciation,  travel,  insurance and office
expenses.  Employment  expenses  decreased $30,000 due to fees paid in the first
quarter of 2002  related to hiring of  employees.  Consulting,  legal and public
relations fees decreased  approximately $110,000 due to a decrease in legal fees
as well as the elimination of certain consultants and public relations firms.

Stock-based   general  and  administrative   costs.   Stock-based   general  and
administrative costs were approximately $174,000 in the three months ended March
31, 2003, and  approximately  $266,000 in the three months ended March 31, 2002.


                                       17
<PAGE>


The amounts incurred relate to common stock, stock options,  and warrants issued
in exchange for  services.  The  decrease in 2003 relates  primarily to expenses
incurred in 2002  associated  with stock granted as  compensation to an employee
valued at $220,000,  which had no comparable expense in 2003, offset by expenses
incurred in 2003  related to the  issuance of warrants in exchange  for services
totaling $130,000.

Research  and   development   costs.   Research  and   development   costs  were
approximately $725,000 and $707,000 in the three months ended March 31, 2003 and
2002.  Salaries  and related  benefits  increased  approximately  $76,000 due to
hiring of research and  development  personnel.  Other research and  development
expenses  decreased  approximately  $60,000  due to a  reduction  in  consulting
expenses.

Interest  income.  Interest income for the three months ended March 31, 2003 and
2002 was approximately $19,000 and $7,400, respectively.  The increase is due to
accrued  interest on a note received from a shareholder  in the first quarter of
2003.

Interest  expense.  Interest  expense for the three  months ended March 31, 2003
increased  approximately  $7,000  from the  same  period  in 2002 due to  annual
compounding of interest.  This is consistent  with the unchanged face amounts of
the convertible note balances from 2002 to 2003.

Stock-based  interest  expense.  Stock-based  interest expense was approximately
$136,000  and  $487,000  for the three  months  ended  March 31,  2003 and 2002,
respectively.  Stock-based interest expense relates to the beneficial conversion
feature of interest  converted and convertible  into equity on the notes payable
to Argyle  Capital  Management  Corporation,  a company  wholly  owned by Robert
Olins, Acting Chief Executive Officer of the Company. The beneficial  conversion
interest  represents  the excess value of the shares  received or  receivable at
current  market  prices  over the  $0.50 per share  conversion  price.  Interest
expense related to the beneficial  conversion  feature  decreased  approximately
$80,000  due to the change in the stock  price from 2002 to 2003.  In  addition,
stock-based  interest  expense relates to amortization of the discounts on notes
payable to Argyle  Capital  Management  Corporation  and to the Alabama Group, a
group of investors, which includes a trust for the benefit of Steven F. Tripp, a
director of the Company.  In September  2002 the notes were  extended 18 months,
thereby reducing the monthly amortization of the discount.

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.


                                       18
<PAGE>


Inventory  valuation - We value  inventories  at the lower of cost (based on the
first-in,  first-out  method) or market value. We include  materials,  labor and
manufacturing  overhead in the cost of  inventories.  In  determining  inventory
market values, we give substantial consideration to the expected product selling
price based on historical  recovery  rates. If we assess the market value of our
inventory to be less than costs we write it down to its replacement  cost or its
net  realizable  value.  Our estimates may differ from actual results due to the
quantity  and quality and mix of products in  inventory,  consumer  and retailer
preferences  and  economic  conditions.   At  December  31,  2002,   inventories
(consisting entirely of raw materials components) were written down by $286,000,
as prices on initial  order  quantities  were higher than those  expected in the
future, and would otherwise have resulted in losses on finished goods in 2003.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risks.

SpatiaLight  places  all  of  its excess cash and cash equivalents in a checking
account  or  money  market account with a nationally reputable bank. As of March
31,  2003,  the  Company's  cash  and  cash  equivalents  totaled  $10,731.

Item 4. 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-Q, we
evaluated  the  effectiveness  of the design and  operation  of our  "disclosure
controls and procedures"  (Disclosure Controls),  and our "internal controls and
procedures for financial reporting"  (Internal  Controls).  This evaluation (the
Controls  Evaluation) was done under the supervision and with the  participation
of our principal executive officer,  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


                                       19
<PAGE>


potential future conditions;  over time, specific controls may or may not become
inadequate  (e.g.,  when we  commence  to sell our  products  in  volume  in the
ordinary course of business) because of changes in conditions,  or the degree of
compliance  with the  policies or  procedures  may  deteriorate.  Because of the
inherent  limitations in a cost-effective  control system,  misstatements due to
error or fraud may occur and not be detected.

Internal  Controls.  In accordance  with SEC  requirements,  the 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.  During 2002, we were advised
by our independent public accountants of a "reportable  condition" in our system
of  internal  controls,  resulting  in large part  because we do not have a full
time,  qualified on-site Chief Financial Officer or similar accounting  officer.
The Company  acknowledges  this condition,  which has been reported to our audit
committee,  and is in the process of addressing this need  concurrently with the
increase in our  operations  as a result of the  expected  ramp-up for sales and
production activity.

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 three months ended March 31, 2003 and 2002,  we incurred net
losses of approximately $1,550,000 and $2,100,000, respectively. In addition, we
had an  accumulated  deficit of  $50,300,000  as of March 31, 2003. We may incur
additional  losses as we continue  spending for  production  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 assisted  through the exercise of
warrants  and private  purchases  of our common  shares,  we will 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.  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


                                       20
<PAGE>


auditors  have  included an  explanatory  paragraph  in their report in our Form
10-KSB on our  financial  statements  for our last  fiscal  year  regarding  our
ability to continue as a going concern.

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

Our business model requires us to develop microdisplays that perform better than
existing  technologies,  contract with one or more third-party  manufacturers to
manufacture  our display units in bulk, and sell the resulting  display units to
original  equipment  manufacturers  that will then  incorporate  them into their
products.  Original equipment  manufacturers make the determination during their
product  development  programs  whether or not to  incorporate  our  SpatiaLight
imagEngine(TM)  microdisplays  and/or  display  units  in their  products.  This
requires us to invest  significant  amounts of time and capital in designing our
SpatiaLight  imagEngine(TM)  microdisplays and/or display units before we can be
assured that we will  generate any  significant  sales to our  customers or even
recover  our  investment.  If  we  fail  to  recover  our  investment  from  the
SpatiaLight   imagEngine(TM)   microdisplays  and/or  display  units,  it  could
seriously  harm our  financial  condition.  In addition,  the length of time 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 six full-time  engineering and seven  full-time  manufacturing
personnel based in California  working on  microdisplays.  This staffing creates
significant research and development costs that may not be recouped. Even if our
current   microdisplays  become  accepted  or  successful,   due  to  the  rapid
technological change in our industry,  we must continue to use, and may increase
in number,  our  engineering  and  manufacturing  personnel  to  develop  future
generations of our  microdisplays.  As a result, we expect to continue incurring
significant research and development costs.

IN RECENT MONTHS WE HAVE COMMENCED  MANUFACTURING AND SHIPPING OUR MICRODISPLAYS
IN  COMMERCIAL  QUANTITIES,  BUT  DIFFICULTIES  IN  CONTINUING  THE  PROCESS  OF
MASS-PRODUCING  OUR MICRODISPLAYS MAY MAKE IT DIFFICULT TO MEET CUSTOMER DEMANDS
FROM TIME TO TIME AND OUR  OPERATING  RESULTS COULD BE  SIGNIFICANTLY  HARMED BY
SUCH DIFFICULTIES.

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

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


                                       21
<PAGE>


protect more  effectively  our proprietary  interest in those products,  but the
risks  discussed  above   associated  with  the  highly  complex   processes  of
manufacturing these liquid crystal microdisplays remain applicable.

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

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

IF A MARKET FOR OUR  PRODUCTS  DOES NOT  DEVELOP,  OUR  BUSINESS  WILL LIKELY BE
SIGNIFICANTLY HARMED.

Various target markets for our microdisplays,  including  projectors,  monitors,
high-definition televisions,  and portable microdisplays,  are uncertain, 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(TM)  microdisplays  will be  dependent  upon the
pricing,  quality,  reliability  and  useful  life of these  units  compared  to
competing  technologies,  as to which there can be no assurance. In order for us
to succeed,  not only must we offer  end-product  manufacturers  better and less
expensive microdisplays than our competitors,  but the manufacturers  themselves
must  also  develop  products  using  our  microdisplays  that are  commercially
successful.  SpatiaLight's marketing efforts are focused on developing strategic
customer  and  governmental  relationships  in China and the  Republic  of South
Korea.  Our  failure  to sell our  microdisplays  to such  manufacturers  or the
failure of the ultimate  target markets to develop as we expect will  negatively
affect our anticipated growth.

IF OUR  MICRODISPLAYS  DO NOT BECOME  WIDELY  ACCEPTED BY OUR  CUSTOMERS  OR THE
END-USERS, OUR BUSINESS COULD BE SIGNIFICANTLY HARMED.

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

     o    superior technologies developed by our competitors;

     o    price considerations; and

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

We currently have  agreements  with a limited  number of customers.  Despite our
reasonable  efforts to retain these customers,  we may not be successful in this


                                       22
<PAGE>


regard. The loss of, or significant  reduction in sales attributable to, any one
or more of these  customers  could  materially  harm our business and  financial
condition.

TO DATE, WE HAVE ONLY RECEIVED ONE FIRM PURCHASE  ORDER FROM ONE CUSTOMER AND WE
CANNOT  ASSURE YOU THAT WE WILL  OBTAIN  ADDITIONAL  PURCHASE  ORDERS  FROM THAT
CUSTOMER  OR OUR  OTHER  PROSPECTIVE  CUSTOMERS,  OR,  IF WE DO,  THAT THEY WILL
GENERATE SIGNIFICANT REVENUES.

Since late October 2001, we entered into seven  agreements  with eight  original
equipment  manufacturers  in China and one OEM in the  Republic  of South  Korea
contemplating   the   purchase  of  our   display   units   and/or   SpatiaLight
imagEngine(TM)   microdisplays.   The  testing  of  our  display   units  and/or
SpatiaLight  imagEngine(TM)   microdisplays  by  certain  of  these  prospective
customers commenced after these agreements were signed.

In January 2003, we concluded  negotiations with Skyworth  resulting in a signed
agreement  for the purchase by Skyworth of 14,100  display  units from us over a
one year  delivery  period.  This  purchase  order  agreement is  cancelable  by
Skyworth on a quarterly  basis,  however,  which could result in us not deriving
all of our anticipated revenues from the purchase order.

The Company has been advised by the other  prospective  Chinese  customers  that
they are satisfied with the results of the testing of the prototypes under their
agreements with the Company and we are currently  negotiating  terms of purchase
orders for our display  units and/or  SpatiaLight  imagEngine(TM)  microdisplays
with each of them. There remain open issues that have to be finally  negotiated,
including  prices and  quantities of our products.  We cannot assure  whether we
will  receive  purchase  orders  binding  on any 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 current  customer or
prospective  customers for our display units, we may have problems  implementing
volume production of such display units. Furthermore,  sales to manufacturers in
the  electronics  industry are subject to severe  competitive  pressures,  rapid
technological change, and product obsolescence.  Manufacturers may, at any time,
cancel  purchase  orders  or  commitments  or reduce  or delay  orders,  thereby
increasing  our  inventory  and  overhead  risks.  Therefore,  even if we obtain
purchase orders from several current or prospective customers,  we cannot assure
you that these agreements will result in significant revenues to us.

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

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

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

          o    maintain customer  satisfaction with our design and manufacturing
               services;

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


                                       23
<PAGE>


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

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

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

THE ELECTRONICS  INDUSTRY IS HIGHLY COMPETITIVE,  WHICH MAY RESULT IN LOST SALES
OR LOWER GROSS MARGINS.

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

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

          o    our  success  in   designing   and   manufacturing   new  display
               technologies;

          o    our ability to address the needs of customers;

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

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

          o    the quality of our customer services;

          o    the efficiency of our production sources;

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

          o    products or technologies introduced by our competitors.

OUR BUSINESS IS SIGNIFICANTLY  AFFECTED BY CONDITIONS OR EVENTS OCCURRING IN THE
ELECTRONICS INDUSTRY GENERALLY.

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


                                       24
<PAGE>


OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

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

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

          o    timing of expenditures in anticipation of future orders;

          o    changes in our cost structure;

          o    availability of labor and components;

          o    pricing and availability of competitive products and services;

          o    the timing of orders;

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

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

          o    changes or anticipated changes in economic conditions.

THE MARKET PRICE OF OUR COMMON SHARES IS HIGHLY VOLATILE.

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

          o    quarterly variations in our operating results;

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

          o    public announcements regarding our business developments;

          o    changes in analysts' estimates of our financial performance;

          o    sales of large numbers of our common shares by our shareholders;

          o    general conditions in the electronics industry; and

          o    worldwide economic and financial conditions.

In  addition,  the stock  market has  experienced  significant  price and volume
fluctuations  that  have  particularly  affected  the  market  prices  for  many


                                       25
<PAGE>


high-technology  companies  and that often have been  unrelated to the operating
performance  of these  companies.  These  broad  market  fluctuations  and other
factors may adversely affect the market price of our common shares.

OUR COMMON SHARES MAY NOT BE LIQUID.

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

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

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

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY FROM USE BY THIRD PARTIES,
OUR ABILITY TO COMPETE IN THE INDUSTRY WILL BE HARMED.

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

          o    pending patent applications may not be issued;

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

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

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

          o    breach of confidentiality agreements;

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


                                       26
<PAGE>


          o    effective  protection  of  intellectual  property  rights  may be
               limited or unavailable in some foreign countries,  such as China,
               in which we may operate.

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

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

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

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

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

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

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

THE RECENT OUTBREAK OF SEVERE ACUTE RESPIRATORY SYNDROME ("SARS") MAY ADVERSELY
IMPACT OUR BUSINESS.

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

WE DO NOT PAY CASH DIVIDENDS.

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

PART II.          OTHER INFORMATION

ITEM 2   Changes in Securities and Use of Proceeds


                                       27
<PAGE>


On January 3, 2003 the Company  issued  142,360  shares of common stock upon the
conversion of prepaid interest of $354,477.  Prepaid interest was computed using
the  closing  price of the common  stock on December  31, 2002 of $2.49,  and is
being amortized  through December 31, 2003. For the three months ended March 31,
2003,  additional  stock-based  interest  expense of  approximately  $70,800 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 March 31, 2003, the carrying value of the Argyle notes
totals  $1,056,000,  which  includes  the  $1,188,000  principal  balance net of
unamortized discounts of $132,000.

EXERCISE OF STOCK  OPTIONS,  WARRANTS,  DURING THE THREE  MONTHS ENDED MARCH 31,
2003


During the first three months of 2003,  2,500 shares of common stock were issued
upon the exercise of employee stock options. Total cash received was $3,125.

Payments under notes receivable from shareholder  resulting from the exercise of
warrants in 2002 totaled $52,500.

ISSUANCE OF STOCK,  STOCK  OPTIONS AND  WARRANTS IN THE THREE MONTHS ENDED MARCH
31, 2003

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

On October  14,  2002 the  Company  issued a fully  vested  warrant to  purchase
250,000  shares of common  stock at an exercise  price of $3.50 in exchange  for
consulting  services  rendered over a six-month  period.  A value of $76,068 was
assigned to the warrants for the portion of the services  rendered in 2003 using
the  Black-Scholes  option  pricing model and the following  assumptions:  stock
price $1.84,  historical volatility 100%, risk free rate 5%, a dividend yield of
0, and a contractual  term of two years. The portion of the value of the warrant
earned,  $76,068,  in the first quarter of 2003 is reflected in the statement of
operations as stock-based general and administrative expense.

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

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


                                                    Three months ended March 31,

                                                        2003            2002
                                                       ---------     ---------
Stock and options granted to employees and directors    $ 12,285     $ 220,000
Common stock  and warrants expensed for services         161,468             -
Warrant and other charges                                      -        45,777
                                                       ---------     ---------
                                                       $ 173,753     $ 265,777
                                                       =========     =========

                                       28

<PAGE>



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
<PAGE>
SIGNATURES

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

                                           Date:     May 15, 2003

                                           SpatiaLight, Inc.



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




                                       30
<PAGE>


CERTIFICATION

I, Robert A. Olins, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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: May 15, 2003

-----------------------
Robert A. Olins
Chief Executive Officer and
Principal Financial Officer

<PAGE>