United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549
--------------------------------------------------------------------------------
                                   FORM 10-K/A
                                 AMENDMENT NO. 4

                  FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
           SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 For the fiscal year ended December 31, 2004.

                                       OR

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934 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                          (I.R.S. 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)

       Securities registered under Section 12(b) of the Exchange Act: None

         Securities registered under Section 12(g) of the Exchange Act:

                          Common Shares, $.01 par value
                                (Title of Class)

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

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

      The aggregate market value for the registrant's voting Shares held by
non-affiliates of the registrant, based upon the $6.05 per share closing sale
price of the common shares on June 30, 2004, as reported on the Nasdaq SmallCap
Market, was approximately $182,522,511. Common shares held by each officer and
director and by each person who owns 5% or more of the outstanding common shares
have been excluded because such persons are deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

      As of July 8, 2005, registrant had 36,141,013 common shares outstanding.

<PAGE>

                                SPATIALIGHT, INC.
                             FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                               Page
                                     PART I

<S>     <C>                                                                                     <C>
ITEM 1  Business..................................................................................3

ITEM 2  Properties................................................................................7

ITEM 3  Legal Proceedings.........................................................................7

ITEM 4  Submission of Matters to a Vote
        Of Security Holders.......................................................................7

                                     PART II

ITEM 5  Market for Registrant's Common Equity, Related Shareholder Matters and Issuer
        Purchases of Equity Securities............................................................8

ITEM 6  Selected Consolidated Financial Data......................................................9

ITEM 7  Management's Discussion and Analysis of Financial Condition
        and Results of Operations.................................................................10

ITEM 7A Quantitative and Qualitative Disclosures About Market Risk ...............................24

ITEM 8. Consolidated Financial Statements.........................................................24

ITEM 9  Changes in and Disagreements with Accountants
        On Accounting and Financial Disclosure....................................................51

ITEM 9A Controls and Procedures ..................................................................51

ITEM 9B Other Information ........................................................................56

                                    PART III

ITEM 10 Directors and Executive Officers of the Registrant........................................56

ITEM 11 Executive Compensation....................................................................56

ITEM 12 Security Ownership of Certain Beneficial Owners and Management
        and Related Shareholder Matters...........................................................56

ITEM 13 Certain Relationships and Related Transactions............................................56

ITEM 14 Principal Accountant Fees and Services....................................................56

                                     PART IV

ITEM 15 Exhibits, Consolidated Financial Statement Schedules
        and Reports on Form 8-K...................................................................56
</TABLE>


                                       2
<PAGE>

                                     PART I

This annual report on Form 10-K contains certain forward-looking statements
within the meaning of Section 21E of the Securities and Exchange Act of 1934, as
amended, and is 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 risks and uncertainties, including, but not limited
to, those discussed herein which are specific to the Company's business, and in
particular, those contained in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the caption "Risk Factors,"
that could cause actual results to differ materially from those projected. You
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. We undertake no obligation to publicly
update or revise these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events and thus you should not assume that silence by management
over time means that actual events are bearing out as estimated in such
forward-looking statements.

Item 1. Business

Description of Business

      We are in the business of manufacturing high-resolution LCoS
microdisplays. Our current customers and current prospective customers are OEMs
engaged in the businesses of manufacturing high definition televisions or
manufacturing light engines for incorporation into high definition televisions.
Our products are also suitable for incorporation into other potential
applications including rear projection computer monitors, wireless communication
devices, portable games and digital assistants, although we are not currently
working with OEMs of any of these products.

      We were incorporated under the laws of the State of New York in 1989. Our
executive offices are located at Five Hamilton Landing, Suite 100, Novato,
California 94949.

      Agreement with LG Electronics, Inc.

      In July 2004, we entered into an agreement with LG Electronics, providing
for us to sell a specially tailored version of our T-3 LCoS Sets to LG
Electronics. (See "Technology and Products under Development" for a description
of our products). For a more detailed discussion of our agreement with LG
Electronics, see Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In January 2005, LG Electronics announced
in a joint press release with us that they are currently planning an initial
rollout of 71-inch and 62-inch LCoS televisions incorporating our T-3 LCoS Sets
commencing in the second quarter of 2005, subject to the completion of
pre-production requirements.

      Chinese Customers and Prospective Customers

      To date, we have made deliveries of our microdisplay products to our
Chinese customers in limited commercial quantities. We have entered into
business transactions with approximately ten customers and prospective customers
in China. Current Chinese customers are at different stages in the development
and product introduction processes, but at a slower rate than we originally
anticipated. There were no shipments to our Chinese customers in the fourth
quarter of 2004, but we expect that shipments will resume in the second quarter
of 2005. We are maintaining our plans to ship our products to our Chinese
customers, although at a slower rate of shipment than originally expected.

      We are currently developing working relationships with other prospective
customers located primarily in Japan and other parts of the Pacific Rim region.
While we have made significant progress with respect to product integration and
negotiating purchase orders with certain of these prospective customers, we
cannot assure that we will receive any purchase orders binding on any of these
companies for their purchase of our products in the near future. Even assuming
that we receive purchase orders that are binding on the prospective customers,
these orders and our sales to these customers and to our existing customers are
subject to certain contingencies described under "Risk Factors" in Item 7A.

      In 2004, sales to Skyworth Display, Ltd., and China Display Co., Ltd.
accounted for 51% and 31%, respectively, of our aggregate annual revenues. In
2003, sales to Skyworth Display, Ltd. and China Display Co., Ltd. accounted for
47% and 43%, respectively, of our aggregate annual revenues. We believe that
loss of any or all of such customers would not have a material adverse effect on
our business as we do not currently anticipate that such customers will account
for a substantial percentage of our revenues in 2005 in light of our anticipated
sales to LG Electronics.

      In May 2004, we opened a representative office in Shanghai, China, for the
purpose of conducting, coordinating and supporting our business relations with
our Chinese customers and prospective customers.


                                       3
<PAGE>

Technology and Products under Development

      Our microdisplays are high-resolution liquid crystal displays. They are
constructed with a silicon chip, a layer of liquid crystals and a glass cover
plate in contrast to the more common construction of liquid crystals sandwiched
between two glass plates. Our displays are also known as, and commonly referred
to as, liquid crystal on silicon (LCoS), liquid crystal displays (LCD), active
matrix liquid crystal displays and spatial light modulators.

      We are currently offering two types of products to our customers and
prospective customers, all of whom are located primarily in Asia. One product is
our LCoS Set, which is comprised of three of our proprietary SpatiaLight
imagEngine(TM) LCoS microdisplays. Our other product, the display unit, is
comprised of LCoS Sets fitted onto a light engine designed by SpatiaLight and
Fuji Photo Optical Co., Ltd. (Fuji) and manufactured by Fuji. We do not
currently have any formal agreement in place with Fuji.

      We currently manufacture two models of our LCoS Sets. The "T-1" model has
a 1280 pixels by 960 pixels configuration and the newer generation "T-3" model
has a higher resolution 1920 pixels by 1080 pixels configuration. In 2004, 48%
and 50% of our aggregate revenues were derived from the sale of LCoS Sets and
display units, respectively. With respect to sales of LCoS Sets in 2004, 12% and
88% of aggregate revenues relating to sales of such products were derived from
sales of our T-3 and T-1 models, respectively.

      The image on a microdisplay can be projected onto a screen or other
surface for individual or group viewing or used in a portable application that
is viewed through a magnifying device similar to a viewfinder. Potential
microdisplay applications include:

      o     large-screen rear-projection television systems, in both high
            definition television format and standard television formats;
      o     large-screen rear-projection computer monitors in a variety of
            resolutions;
      o     video projectors for applications such as presentations;
      o     head-mounted displays which are used for virtual reality systems,
            defense, aerospace and gaming applications; and
      o     other potential applications such as point of purchase displays,
            optical computing and data storage.

      Our technology uses liquid crystals and silicon chips. An advantage of
these materials is that processes for working with them are already known and
they may be produced more quickly than competing technologies which offer
comparable quality. By using existing manufacturing processes at our new
manufacturing facility in the Republic of Korea, in which we intend to commence
manufacturing operations in the second quarter of 2005, we believe we will be
able to obtain economies of scale.

      A typical liquid crystal display, as might be found in a notebook
computer, basically consists (along with other associated materials and
processes) of liquid crystal material sandwiched between two pieces of glass,
polarizers, color filters, a data signal and a light source. As the data signal
is applied across the sandwich of the liquid crystals, the electric field
created by this data signal causes the liquid crystals to tilt. This tilting,
combined with the polarizers, makes each pixel change from opaque to
transparent, thereby controlling either the transmission or reflection of light
from each pixel.

      Departing from typical liquid crystal displays utilizing circuitry on two
pieces of glass, we design integrated circuits that control individual
reflective pixels on a silicon substrate. This silicon substrate is manufactured
using a conventional complementary metal oxide semiconductor (CMOS) process.
This processed silicon substrate, also known as a silicon backplane, then has
the liquid crystal material and a cover glass applied to it. When the data
signal is sent to the circuitry in the silicon, the liquid crystals again tilt
from opaque to transparent states. When polarizers are added and light is
reflected from the pixels on the silicon, images can be viewed directly or,
using standard optical techniques, projected into larger images on a screen.

      As is common with all LCDs, the images produced are inherently black and
white. The varying of the electrical signal to each pixel produces gray scaling
(various shades of gray going from black to white). Utilizing this gray scaling,
there are three basic techniques for achieving color displays: (1) optically
combining different colors of light, (2) sequential color systems and (3) color
filters. We believe our displays can be adapted for use in all of these types of
color display processes.

      The display industry has undergone and continues to undergo rapid and
significant technological change. We expect display technologies to continue to
develop rapidly, and our success will depend significantly on our ability to
attain and maintain a competitive position. Rapid technological development may
result in our products or processes becoming obsolete before we recoup a
significant portion of related research and development, acquisition and
commercialization costs.

      Our ability to compete will depend in part upon many factors, including
the quality of the display images, manufacturing, capacity, delivery, pricing
and technical specifications. In addition, there will be factors within and
outside of our control, including customer support and the success and timing of
product introduction and distribution by our customers. Our competitors may
succeed in developing technologies and products that are equally or more
efficient than any which we are developing, which will render our technology,
displays and other products obsolete and non-competitive.


                                       4
<PAGE>

Marketing, Sales and Distribution

Application and Markets

      We are currently working with a number of OEM customers and prospective
customers, located primarily in the Republic of Korea, China, Japan and Taiwan,
to use our microdisplay products in their high definition television end product
applications. We do not believe that designing, selling and distributing end
products for these diverse markets is in our own best interests. In high volume
applications, we currently are and expect to continue custom designing our
microdisplay products to fit a specific manufacturer's need for a specific
product. Our LCoS Sets can be incorporated into a wide variety of products such
as high definition televisions, rear-projection computer monitors, video
projectors and head mounted displays.

      Our current strategy is to focus our abilities on original equipment
design (OED) of LCoS Sets and to work closely with high definition television
OEMs and light engine OEMs to market end products utilizing our microdisplays.
We are therefore dependent upon these OEMs for the manufacturing, marketing and
selling of end products.

Manufacturing and Supply

      We lease clean room space in California where we currently manufacture our
SpatiaLight imagEngine(TM) microdisplays (or LCoS Sets) in limited commercial
quantities. Internal manufacturing is subject to certain risks described under
"Risk Factors."

      In July 2004, we formed SpatiaLight Korea, Inc. (SpatiaLight Korea), a
Republic of Korea corporation and wholly-owned subsidiary of SpatiaLight, Inc.,
for the purpose of establishing a large-scale manufacturing facility in Korea
and for facilitating business relationships in Korea and throughout all of Asia.

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

      In October 2004, we contracted with Sung Do Engineering, a designer and
manufacturer of high-technology processing plants, as the lead contractor for
constructing our new manufacturing facility in Jinsa. In October 2004, Sung Do
Engineering commenced construction of our new facility. Under the agreement with
Sung Do Engineering, we are required to make periodic payments for an aggregate
total of 4,400,000,000 Korean Won (approximately $3,800,000) over a four-month
period concluding in the first quarter of 2005. We have incurred costs of
2,873,060,000 Korean Won (approximately $2,800,000) with the contractor as of
December 31, 2004. Construction of the manufacturing facility was completed in
January 2005. We are currently completing the installation of manufacturing and
related equipment in the facility and we are actively hiring and training
manufacturing personnel. We expect that the facility will commence producing
products for commercial sale in the second quarter of 2005.

      In our manufacturing facilities, we perform product testing of our LCoS
Sets, analyze the results and take actions to refine the manufacturing process
and enhance product design. We have developed statistical quality control
procedures for our manufacturing process. We believe that these current
arrangements provide us with strong quality controls and effectively protect our
proprietary technology in our products.

      We currently obtain silicon backplanes, a vital component in our LCoS
Sets, from Taiwan Semiconductor Manufacturing Company, located in Taiwan. We are
currently working to qualify a second supply source for our silicon backplanes,
located in the Republic of Korea. Historically, the supply of silicon backplanes
from suppliers fluctuates and we may be subject to problems of availability,
although we have not experienced any such problems to date.

      Other key components include coated glass and flex circuitry. We currently
obtain glass from Unaxis Optics, located in Germany. Our flex circuits are
obtained from multiple sources located in Asia and the United States. We are
subject to some supply fluctuations and there may be availability problems that
arise. In all cases, we are attempting to find and qualify additional supply
sources to mitigate supply risk, but this process is not complete.

      We do not currently have any long-term agreements with any of our
suppliers. Any termination of a relationship with one or more of our suppliers
could have a material adverse effect on our ability to meet our anticipated
commitments to customers while we identify and qualify replacement manufacturers
or sources of supply. We could become dependent on a manufacturer for components
of our LCoS Sets and any termination of our relationship with such a
manufacturer could adversely affect our ability to manufacture our products.


                                       5
<PAGE>

Competition

      Microdisplays are a subset of the display market (including television and
video display). This display market subset consists of (1) reflective
microdisplays produced on silicon backplanes, (2) transmissive microdisplays and
(3) emissive microdisplays. Companies competing in the reflective microdisplay
market include Sony, JVC, Aurora, Brillian, and eLCOS. These companies are all
producing different forms of a liquid crystal display on a silicon backplane.
During the past several months, two former LCoS competitors, Philips and Intel,
have formally departed the market. A major competitor in the reflective
microdisplay market, although not using liquid crystals in the display, is Texas
Instruments, which is producing a micro-mechanical structure of moving mirrors
on a silicon backplane, a technology known as digital light processing, or DLP.
Texas Instruments has had significant success selling its DLP products to its
customers in the business front projector market and the rear projection
television market.

      Rapid and significant technological advances have characterized the
microdisplay market. There can be no assurance that we will be able to effect
any of such technological advances or that we will have sufficient funds to
invest in new technologies or products or processes. Although we believe that
our displays have specifications and capabilities, which equal or exceed that of
commercially available LCD, cathode ray tube (CRT) and DLP based display
products, the manufacturers of these products may develop further improvements
of their existing technology that would eliminate or diminish our anticipated
advantage. In addition, numerous competitors have substantially greater
financial, technical, marketing, distribution and other resources than we have.
We may also face an aggressive, well-financed competitive response that may
include misappropriation of our intellectual property or predatory pricing.

Patents and Intellectual Property

      Our ability to compete effectively with other companies will depend, in
part, on our ability to maintain the proprietary nature of our technologies. We
currently have five U.S. patents and we have other U.S. and international patent
applications pending. The scope of the issued patents includes physical
structure design of the metal layers used for light blocking in the silicon die
(or backplane), several silicon die (or backplane) circuitry designs, and a dual
panel system design. The applications are in the area of light engine level
system enhancements and drive circuitry concepts. The duration of coverage on
the issued patents runs from 2011 to 2017. There can be no assurance respecting
the degree of protection offered by these patents or as to the likelihood that
pending patents will be issued. Our competitors, in both the United States and
foreign countries, many of which have substantially greater resources and have
made substantial investments in competing technologies, may seek to apply for
and obtain patents that will prevent, limit or interfere with our ability to
make and sell our products or intentionally infringe upon our patents. We may
undertake to expand our intellectual property portfolio by continuing to file
new patent applications and/or by purchasing or licensing existing patents
currently owned by other companies.

      The defense and prosecution of patent suits is both costly and
time-consuming, even if the outcome is favorable to us. This can be particularly
true in foreign countries. In addition, there is an inherent unpredictability
regarding obtaining and enforcing patents in foreign countries. An adverse
outcome in the defense of a patent suit could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties, or require us to cease selling our products.

      We also rely on unpatented proprietary technology and there can be no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to our proprietary technology. To protect
our rights in these areas, we require all employees and technology consultants,
advisors and collaborators to enter into confidentiality agreements. However,
these agreements may not provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. To date, we have no experience in enforcing our
confidentiality agreements.

Research and Development

      We incurred research and development expenses of approximately $2,306,000
in 2004 and $2,681,000 in 2003. Research and development expenses are those
costs incurred for personnel and experimental materials for the design and
development of new products. We believe that the development of new products
will be required to allow us to compete effectively and to achieve future
revenues. As of December 31, 2004, we had nine employees in the U.S. whose
significant duties included research and development. We intend to continue our
product development programs, focusing on increasing the display specifications
including resolution, color and manufacturing processes. We believe that such
developments will be required to exploit future markets.

Employees

      As of December 31, 2004, we had thirty-four full-time employees and one
part-time engineering contractor located in California. Full-time employment is
divided among three functional areas with nine in research and development,
eleven in manufacturing and fourteen in management/finance/administration. As of
December 31, 2004, we had three full-time employees classified as


                                       6
<PAGE>

management/finance/administration in Korea. We have recently hired three
engineers, thirty technicians and three additional employees in
management/finance/administrative in Korea. We expect to hire and train an
additional fifteen to twenty manufacturing personnel in Korea by the end of the
first quarter of 2005 and an additional five engineers and 150 manufacturing
personnel by the end of 2005. We consider our relations with our employees to be
good.

Available Information

      We make available on our website www.spatialight.com under "Investors" -
"SEC Filings," free of charge, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports as soon as reasonably practicable after we electronically file with or
furnish such material to the Securities and Exchange Commission (SEC).

      We have adopted a Code of Business Conduct and Ethics and a written
charter for our Audit Committee. All employees and members of our Board of
Directors including the Chief Executive Officer, who is also the Principal
Financial and Accounting Officer are expected to adhere to the principles and
procedures set forth in the Code of Business Conduct and Ethics that apply to
them. Each of the foregoing are available on our website at www.spatialight.com
and in print to any shareholder who requests it, in writing to the Corporate
Secretary, SpatiaLight, Inc., Five Hamilton Landing, Suite 100, Novato,
California 94949. In accordance with the SEC rules, we intend to disclose any
amendment (other than technical, administrative, or other non-substantive
amendment) to, or any waiver from, a provision of the Code of Business Conduct
and Ethics on our website within four business days following such amendment or
waiver.

Item 2. Description of Property

      Our headquarters are located at Five Hamilton Landing, Suite 100, Novato,
California. Our premises, which were designed and built-out to our
specifications, encompass our corporate offices, quality assurance and testing
facilities and optics laboratories. The facility aggregates 14,000 square feet
and the lease continues through August 2009. We also lease "clean room" space in
California where we currently manufacture our LCoS Sets in limited quantities.
In September 2004, we entered into a fifty-year term lease with the Gyeongnam
provincial government for 8.3 acres of undeveloped land in Jinsa, Gyeongnam
province in the Republic of Korea where we are locating our new manufacturing
facility. For a more detailed discussion of our Korean manufacturing facility,
see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. We believe that our current facilities are adequate to
fulfill our business commitments for the immediate foreseeable future.

Item 3. Legal Proceedings

      We are not currently involved in any material legal proceedings. We are a
party to routine claims and lawsuits from time to time in the ordinary course of
business. While the outcome of such ordinary course proceedings cannot be
predicted with certainty, we believe that the resolution of any future ordinary
course matters individually or in the aggregate will not have a material adverse
effect on our business, financial condition or results of operations.

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

      There were no matters submitted to a vote of our security holders during
the fourth quarter of fiscal 2004.


                                       7
<PAGE>

                                     PART II

Item 5. Market for Common Equity and Related Stockholders Matters

      Trading in our common shares has been conducted on the Nasdaq SmallCap
Market since May 24, 2000, under the symbol "HDTV." Because we are traded on the
SmallCap Market, our securities may be less liquid, receive less coverage by
security analysts and news media and generate lower prices than might otherwise
be obtained.

      The following table sets forth, for the calendar quarters indicated, the
range of high and low quotations for our common shares, as reported by Commodity
Systems, Inc.

                               HDTV Common Shares

                                                    Fiscal 2004
                                                High           Low

              First Quarter                    $6.32          $3.69
              Second Quarter                    6.16           3.26
              Third Quarter                     6.50           4.38
              Fourth Quarter                    9.21           5.20

                                                    Fiscal 2003
                                                High           Low

              First Quarter                    $3.95          $2.03
              Second Quarter                    3.05           1.89
              Third Quarter                     5.00           2.40
              Fourth Quarter                    6.39           4.29


      The quotations listed above reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not represent actual transactions.

      As of March 11, 2005, there were approximately 477 holders of record of
our common shares and the closing price per share was $4.79 as reported on the
Nasdaq SmallCap Market. The common shares represent the only class of securities
outstanding as of the date of this filing.

      To date, we have not paid a dividend on our common shares. The payment of
future dividends is subject to our earnings and financial position and such
other factors, including contractual restrictions, as the Board of Directors may
deem relevant. Under the terms of the financing completed on November 30, 2004
(November 2004 Financing), which is more fully described under Item 7
"Overview," we are prohibited from paying cash dividends while the 2004 Senior
Secured Convertible Notes issued in the November 2004 Financing remain
outstanding. It is therefore unlikely that dividends will be paid in the
foreseeable future.

Sales of Unregistered Securities

      On November 30, 2004, we issued senior secured convertible notes totaling
$10,000,000. The notes are convertible into our common shares at the conversion
price of $9.72 per share. Interest payable under the notes at 10% per year may
be paid in our common shares, at our option (if certain conditions are met), at
a conversion price that will be calculated at the end of each quarterly interest
period while the 2004 Senior Secured Convertible Notes are outstanding.

      In October 2004, we issued 125,000 common shares upon the exercise of a
warrant. The purchase price was $3.50 per share and total cash received was
$437,500.

      None of the above securities transactions involved any underwriters.

      All of the purchasers of our securities in the above-described securities
transactions were "Accredited Investors" within the meaning of Rule 501 under
Regulation D of the Securities Act of 1933, as amended (the 1933 Act) and,
accordingly, all of these transactions were exempt from registration under the
1933 Act by reason of Section 4(2) thereof.

      We have used proceeds from the above-described securities transactions to
reduce our liabilities, for working capital purposes, to fund the construction
and equipment for our new manufacturing facility in the Republic of Korea and
for other general corporate purposes.


                                       8
<PAGE>

Securities Authorized for Issuance under Equity Compensation Plans

      The following table provides information as of December 31, 2004 regarding
compensation plans (including individual compensation arrangements) under which
equity securities are authorized for issuance.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                               EQUITY COMPENSATION PLAN INFORMATION
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                Number of
                                                                                                                Securities
                                                                                                                Remaining
                                                                                                                Available
                                                                                                                For Future
                                                              Number of                                          Issuance
                                                            Securities to                                      Under Equity
                                                              Be Issued                                        Compensation
                                                            Upon Exercise        Weighted-Average            Plans (Excluding
                                                            of Outstanding      Exercise Price of          Securities Reflected
                     Plan Category                             Options          Outstanding Options           in Column (a))
-----------------------------------------------------------------------------------------------------------------------------------
                                                                  (a)                   (b)                         (c)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                      <C>                      <C>
Equity Compensation Plans (1999 Stock
 Option Plan) Approved by Security Holders                      3,783,500                $3.31                    1,444,166
-----------------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans (Outside the 1999
 Stock Option Plan) Not Approved by Security Holders            1,675,000 *              $5.07                           --
-----------------------------------------------------------------------------------------------------------------------------------

*  For more information see Note 6 to the Consolidated Financial Statements.
</TABLE>

Item 6. Selected Condensed Consolidated Financial Data

      The selected consolidated financial data as of, and for the periods ended,
December 31, 2004, 2003, 2002, 2001 and 2000 presented below have been derived
from the audited Consolidated Financial Statements of SpatiaLight. The selected
financial data should be read in conjunction with our Consolidated Financial
Statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein, in
order to fully understand factors that may affect the comparability of the
financial data presented below.

<TABLE>
<CAPTION>
Statements of Operations:
                                                                      Year Ended December 31,

                                                2004            2003            2002            2001            2000
                                            ------------    ------------    ------------    ------------    ------------
<S>                                         <C>             <C>             <C>             <C>             <C>
Revenue                                     $  1,160,978    $    221,252    $         --    $         --    $         --

Gross margin                                $    178,696    $   (487,068)   $   (286,000)   $         --    $     49,025

Total operating expenses                    $  9,046,876    $  8,308,470    $  6,714,882    $  7,845,094    $  7,293,186

Net loss                                    $ (9,367,001)   $ (9,516,377)   $ (9,027,913)   $ (9,911,727)   $ (7,833,869)

Net loss per share - basic and diluted      $      (0.27)   $      (0.34)   $      (0.37)   $      (0.46)   $      (0.41)

Weighted average shares used in computing
   net loss per share- basic and diluted      34,154,057      28,173,770      24,578,226      21,469,960      19,178,639
</TABLE>

<TABLE>
<CAPTION>
Balance Sheet Data:                                                December 31,
                                           2004          2003          2002           2001           2000
                                       -----------   -----------   -----------    -----------    -----------
<S>                                    <C>           <C>           <C>            <C>            <C>
Cash and cash equivalents              $ 9,087,551   $ 6,359,969   $   575,663    $ 2,728,134    $ 1,035,957

Inventory                              $ 1,173,314   $   779,617   $   275,959    $        --    $        --

Working capital (deficit)              $ 8,593,704   $ 6,228,782   $  (807,891)   $  (868,056)   $(2,061,234)

Total assets                           $19,646,411   $ 8,349,696   $ 2,058,454    $ 3,488,002    $ 1,800,530

Secured convertible notes              $ 9,885,140   $ 1,155,000   $ 4,207,232    $ 3,137,284    $ 2,782,453

Total stockholders' equity (deficit)   $ 5,966,457   $ 5,813,275   $(4,373,806)   $  (213,346)   $(1,463,178)
</TABLE>


                                       9
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

      The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes appearing elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions as indicated in the introductory paragraphs to
Item 1 of this Report. The actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to, customers reception of our products, intensity of
competition, quality control during manufacturing and those set forth under
"Risk Factors."

Overview

      We are in the business of manufacturing high-resolution LCoS
microdisplays. Our current customers and current prospective customers are OEMs
engaged in the businesses of manufacturing high definition televisions or
manufacturing light engines for incorporation into high definition televisions.
Our products are suitable for incorporation into other potential applications
including rear projection computer monitors, wireless communication devices,
portable games and digital assistants, although we are not currently working
with OEMs of these products.

      Status of Business with LG Electronics, Inc.

      In July 2004, we entered into an agreement with LG Electronics, providing
for us to sell a specially tailored version of our T-3 LCoS Sets to LG
Electronics (see above for a description of our products). Under the agreement,
LG Electronics agreed to purchase from us a minimum of 21,000 LCoS Sets over an
initial six-month delivery period. Based upon progress to date, we currently
anticipate that the initial six-month delivery period for the LCoS Sets, which
was scheduled to commence in January, will begin in the second quarter of 2005,
subject to LG Electronics' completion of pre-production requirements. Subsequent
deliveries scheduled under our agreement with LG Electronics (which is filed as
Exhibit 10.5 to this Report) are now scheduled to follow the first delivery on a
monthly basis. Under the agreement, commencing in the first delivery month, LG
Electronics is required to provide us with rolling monthly firm purchase orders
six months in advance of the scheduled delivery and rolling twelve-month advance
projections of its anticipated future orders. Although the agreement does not
contain any minimum purchase requirements after the initial six-month delivery
period, it projects that LG Electronics will commence larger mass-production
scale purchases of LCoS Sets from us in the seventh delivery month, which we
currently expect to occur in the fourth quarter of 2005. The agreement is
scheduled to have a two-year delivery term with monthly deliveries of LCoS Sets.
All of the rights and obligations of the parties under the agreement are subject
to a limited quantity of trial LCoS Sets, all of which have been delivered to LG
Electronics, meeting certain final technical specifications for product
performance. As provided in our agreement, LG Electronics and we have been
cooperating to the extent necessary to assure that the trial LCoS Sets meet the
final specifications called for by the agreement. We are currently working with
LG Electronics on the final stage integration of our LCoS Sets into LG
Electronics' rear projection televisions and we expect that this final
integration process will be completed and we expect to receive written
confirmation from LG Electronics that we have met the final technical
specifications during the second quarter of 2005.

      Our agreement with LG Electronics provides that we will be their exclusive
supplier of three-chip LCoS microdisplay products for twelve months beginning
from the date that we commence shipments under the agreement. Furthermore, our
agreement provides that LG Electronics will have the exclusive right in Korea to
purchase T-3 microdisplay products from SpatiaLight for the twelve months
beginning from the date that we commence shipments under the agreement. In the
event that LG Electronics purchases more than 60,000 LCoS Sets for delivery
between the seventh (7th) and twelfth (12th) delivery months of our agreement,
LG Electronics has the right to extend its exclusivity period for twelve
additional months.

      The agreement with LG Electronics occurred as the result of LG Electronics
working with us pursuant to a joint development agreement entered into in May
2003. During the course of that work, we made specially tailored modifications
to our new generation of T-3 microdisplays for LG Electronics' development of a
new line of state-of-the-art high definition televisions.

      In January 2005, LG Electronics announced in a joint press release with us
that they are currently planning an initial rollout of 71-inch and 62-inch LCoS
televisions incorporating our LCoS Sets commencing in the second quarter of
2005, subject to the completion of pre-production requirements. LG Electronics
also announced that its initial product rollout will be into the United States,
Korean and Australian consumer markets, with future plans for expansion into
other markets.

      Commencing in the second quarter of 2005, we expect that a substantial
percentage of our product deliveries will be made to LG Electronics. The loss of
LG Electronics as a customer or any delays in our delivery schedule to LG
Electronics, could harm our future sales or results of operations; and our
substantial dependence on one customer is subject to risks set forth under the
heading "Risk Factors."


                                       10
<PAGE>

      Status of Business in China

      To date, we have made deliveries of our microdisplay products to our
Chinese customers in limited quantities. The quantities of our products that we
have delivered to our Chinese customers are sufficient for engineering testing
and pilot program purposes. To date, our Chinese customers have not ordered
quantities of our products that would enable them to launch commercial sales of
LCoS high definition televisions. A substantial portion of our product
deliveries were in 2004. We have entered into business transactions with
approximately ten customers and prospective customers in China. Current Chinese
customers are at different stages in the development and product introduction
processes, and their efforts are progressing at a slower rate than we originally
anticipated. There were no shipments to our Chinese customers in the fourth
quarter of 2004, but we expect that shipments will resume in the second quarter
of 2005. We are maintaining our plans to ship our products to our Chinese
customers, although at a slower rate of shipment than originally expected. While
we have purchase orders in place with our Chinese customers, such orders are for
limited quantities of our products and they are cancelable at any time by such
customers. We therefore cannot provide assurances that we will sell significant
quantities to our Chinese customers in the future.

      Although our Chinese customers' progression from product prototyping to
mass production has been far slower than we had anticipated, we remain positive
about our business prospects in China and the potential for China to become a
large market for us. We currently believe that Chinese television manufacturers
tend to apply a market strategy of following the successful business models of
global television manufacturing leaders, rather than acting as leaders
themselves in terms of introducing new technologies to the marketplace. We
therefore believe that if the LCoS technology gains greater acceptance in the
high definition television marketplace, and if industry leaders, such as Sony,
JVC and LG Electronics, present their LCoS based televisions to the worldwide
consumer markets in a prominent fashion, it will then be more likely that the
Chinese television manufacturers will follow these business models and ramp up
their own lines of LCoS high definition televisions. We believe that our present
course of continuing to transact business with major Chinese television
manufacturers is positioning us to be a leading LCoS supplier in China in the
future.

      Business Development

      We are currently developing working relationships with prospective
customers, located primarily in Japan and other parts of the Pacific Rim region.
These prospective customers fall into two general categories: television
manufacturers and light engine suppliers. We have provided samples of our LCoS
Sets to certain of such prospective customers, but we do not have any formal
agreements with such parties. While we have made significant progress with
respect to product integration and negotiating purchase orders with certain of
these prospective customers, we cannot assure that we will receive any purchase
orders binding on any of these companies for their purchase of our products in
the near future. Even assuming that we receive purchase orders that are binding
on the prospective customers, these orders and our sales to these customers and
to our existing customers are subject to certain contingencies described under
"Risks Factors."

      Manufacturing Capacity

      We have completed construction on our new manufacturing facility located
in the Republic of Korea. We have provided periodically updated photographs of
the facility on our website, www.spatialight.com. The Korean facility will serve
as our central commercial manufacturing base. We expect that the facility will
commence producing products for commercial sale in the second quarter of 2005.
The facility is designed with the capacity, on full employment, to produce up to
28,000 LCoS Sets per month. The facility has been specially designed for
expansion to a capacity of 120,000 LCoS Sets per month in several expansion
phases. We believe that the facility can be expanded in an expedient manner in
the event that such expansion becomes necessary based upon increased or
perceived increased demand for our products from our customers.

      We are actively hiring personnel for our Korean manufacturing facility. We
are currently training our new operators and supervisors in key processes and
equipment familiarization prior to beneficial occupancy of the new facility. We
believe that this will make our production transition more efficient and reduce
the chances of our incurring unexpected delays in the transition process. While
we cannot provide any assurances against unexpected delays, we believe that our
transition approach constitutes a proactive, measured and responsible plan to
deal with facility completion risks and to prepare ourselves to manage our
manufacturing facility in Korea on a basis consistent with the anticipated
demand for our products.

      Currently we manufacture our microdisplays in limited commercial
quantities at our facility in California. Once the Korean facility reaches
full-production mode, we intend to transition the California facility to
research and development and special project operations. We will not lay off any
U.S. employees as the result of opening the Korean facility.

      Business Strategy

      We currently offer two types of products to our customers and prospective
customers - LCoS Sets and display units. See Item 1, "Technology and
Development," for a more detailed description of our products.


                                       11
<PAGE>

      Since we commenced delivering our products to our customers in the third
quarter of 2003, there has been a significant shift in the type of product that
we have delivered to our customers based upon their demand. The shift in
deliveries has been in the direction of more LCoS Sets and less display units.
We believe that this shift is significant because LCoS Sets are a higher margin
product line and require less working capital than display units, although LCoS
Sets yield less revenue than display units per unit sold. It is our short-term
strategic objective to operate primarily as a seller of LCoS Sets and decrease
our supply of display units to our customers. It is our longer-term strategic
goal to exclusively sell LCoS Sets to our customers.

      A number of our Chinese customers currently purchase display units because
they have not yet developed their own light engines. We believe that the display
unit, which is a turnkey product offering, has served as a short-term solution
and helped us to capture market share in China because many of our competitors
did not possess a turnkey solution.

      While we will continue to offer display units to those current customers
who do not have their own light engine solution, we expect that new customer
business in the future will exclusively be for LCoS Sets rather than display
units. Our supply agreement with LG Electronics is exclusively for LCoS Sets, as
LG Electronics has developed its own light engine designed to incorporate our
LCoS Sets. We expect that there will be a shift in products demanded by our
Chinese customers, over time, from display units to LCoS Sets. These trends are
consistent with our overall product strategy.

      We currently manufacture two models of our LCoS Sets - the T-3 and the T-1
models. See Item 1, "Technology and Products Under Development," for a more
detailed description of our LCoS Set models.

      We believe that the T-3 model will become the standard for the next
generation of rear projection display devices and will provide the most cost
effective, high-resolution microdisplays in the industry and will position us to
be a potential market leader. We believe that the T-3's ability to deliver 2
megapixel resolution in a high performance, reliable, and cost effective manner
was a key factor in our obtaining the supply agreement with LG Electronics. The
T-3 model is the central component of our ongoing customer acquisition strategy
described above.

Liquidity and Capital Resources

      Through December 31, 2004, we have sustained recurring net losses from
operations and, at December 31, 2004, we had total equity of approximately
$5,966,000. During 2004, we experienced negative cash flows from operating
activities of approximately $8,517,000 and a net loss of approximately
$9,367,000. Our operations were funded in 2004 by the proceeds derived from
exercises of warrants and options of approximately $2,889,000, the sale of
$10,000,000 of senior secured convertible securities and financing transactions
raising an aggregate total of approximately $7,500,000 consummated in August and
December 2003.

      As of December 31, 2004, we had approximately $9,088,000 in cash and cash
equivalents, an increase of approximately $2,728,000 from the December 31, 2003
amount of $6,360,000. Our net working capital at December 31, 2004, was
approximately $8,594,000, compared to a net working capital of approximately
$6,229,000 at December 31, 2003. In addition to the increase in cash of
approximately $2,728,000, our current prepaids increased approximately
$1,511,000 due to an increase in prepaid interest to Argyle Capital Management
Corporation, a company wholly-owned by Robert A. Olins, Chief Executive Officer
and a director of SpatiaLight, and prepaid financing costs related to the
November 2004 Financing (see Note 3 to the Consolidated Financial Statements for
a more detailed description of the November 2004 Financing). This was offset by
our accrued liabilities, which increased by approximately $2,015,000 due to
liabilities associated with our manufacturing plant construction in Korea.

      Net cash used in operating activities totaled approximately $8,517,000 and
$7,563,000 in 2004 and 2003, respectively. This increase was due primarily to
increase in inventory and prepaid expenses, including certain financing costs
incurred in the November 2004 Financing. Net cash provided by financing
activities was approximately $12,967,000 and $13,872,000 in 2004 and 2003,
respectively, resulting from the issuance of the 2004 Senior Secured Convertible
Notes totaling $10,000,000 in 2004 and the aggregate net proceeds of $12,500,000
raised in three separate equity private placement transactions in 2003.

      As of December 31, 2004, we had an accumulated deficit of approximately
$67,641,000. We have realized significant losses in the past and expect that
these losses will continue until we start to receive significant revenues from
the sale of our products. We generated revenue of $1,160,978 during 2004. The
ramp up in manufacturing and commercialization of our microdisplay products will
require substantial expenditures during 2005. Although we are expecting to
generate revenues from the sale of our products in 2005, we may continue to
operate at a loss during 2005. There can be no assurance that our business will
operate on a profitable basis thereafter.

      In September 2004, Robert A. Olins, our Chief Executive Officer and a
director, disposed of 11,800 of our common shares at a sale price of $5.73 per
share. Pursuant to the "short-swing profit" provisions of the Exchange Act, Mr.
Olins subsequently disgorged $25,982 to us for the profit that he realized from
his sale of our common shares. The total aggregate profit was calculated by
using the lowest sale prices at which Mr. Olins purchased 11,800 of our common
shares during the six months immediately preceding September 20, 2004.


                                       12
<PAGE>

      We anticipate that our cash expenditures during 2005 will approximate
$675,000 per month, or approximately $8 million for the year, without regard to
any revenue in 2005. We expect to meet our cash needs and fund our working
capital requirements with our existing cash balances and from additional sources
as follows: the purchasers in the November 2004 Financing have the option, which
expires on August 31, 2005, to lend us an additional $5,000,000 on the same
terms as the November 2004 Financing. Robert A. Olins, our Chief Executive
Officer and a director of SpatiaLight, and Greenpark Limited, an unaffiliated
shareholder, jointly and severally committed to provide us with up to an
additional $6,000,000 in financing, subject to certain reductions, as more fully
described in Note 3 to the Consolidated Financial Statements. We also expect to
receive cash payments from our customers and from the exercises of options and
warrants. There can be no assurances that existing investors will exercise their
warrants or that the purchasers in the November 2004 Financing will exercise
their right to make the additional lending investment. We also filed a "shelf"
registration statement on Form S-3 with the SEC on January 31, 2005, for the
sale of up to two million of our common shares, in one or more offerings. As of
the date hereof, such registration statement has not been declared effective by
the SEC, and we cannot offer any assurances as to when such registration
statement may become effective. We believe that our current cash and cash
equivalents combined with the financing commitment from Robert A. Olins and
Greenpark Limited will be sufficient to meet our capital and liquidity
requirements for our operations for twelve months from March 14, 2005 (the date
that we filed the Form 10-K that is the subject of this amendment).

Off Balance Sheet Arrangements

      None.

Contractual Obligations and Contingent Liabilities and Commitments

      We have long-term contractual obligations and commitments primarily with
regards to payment of debt and lease arrangements.

      The following table aggregates our expected contractual obligations and
commitments subsequent to December 31, 2004:

                                                        Payments Due By Period

<TABLE>
<CAPTION>
                                                                                                                   2009
                 Contractual obligations               2005           2006          2007            2008        and beyond
-------------------------------------------------  ------------   ------------   ------------   ------------   ------------
<S>                                                <C>            <C>            <C>            <C>            <C>
Employment agreements                              $    180,000   $         --   $         --   $         --   $         --

Long-term convertible debt (1)                               --             --             --      1,188,000             --

Senior secured convertible notes                             --             --     10,000,000             --             --

Interest on senior secured convertible notes (2)      1,000,000      1,000,000      1,000,000             --             --

Operating lease commitments                             720,000        497,000        459,000        472,000        321,000
                                                   ------------   ------------   ------------   ------------   ------------

Total contractual cash obligations                 $  1,900,000   $  1,497,000     11,459,000   $  1,660,000   $    321,000
                                                   ============   ============   ============   ============   ============

<CAPTION>

                 Contractual obligations               Total
-------------------------------------------------  ------------
<S>                                                <C>
Employment agreements                              $    180,000

Long-term convertible debt (1)                        1,188,000

Senior secured convertible notes                     10,000,000

Interest on senior secured convertible notes (2)      3,000,000

Operating lease commitments                           2,469,000
                                                   ------------

Total contractual cash obligations                 $ 16,837,000
                                                   ============
</TABLE>

(1) All interest underlying the notes, at the contractual rate of 6%, has been
prepaid through the issuance of common shares (See Note 3 to consolidated
financial statements.)

(2) Subject to certain conditions, interest is payable in cash or common shares
at the option of the Company. (See note 3 of the consolidated financial
statement.)

Results of Operations

      Revenue. We recognized revenue of $1,161,000 and $221,000 for the years
ended December 31, 2004 and 2003, respectively. Revenue in 2004 was related to
deliveries made pursuant to agreements relating to the sale of our products. See
"Status of Business with LG Electronics" and "Status of Business in China" under
this Item 7 for a more detailed description of the agreements relating to the
sale of our products. Revenue in 2003 was related to initial shipments against
purchase orders signed in 2003. No revenue was recognized in 2002.

      Cost of Revenue. Cost of revenue was $982,000, $708,000 and $286,000 in
2004, 2003 and 2002, respectively. Cost of revenue consists primarily of product
costs. The high cost of revenue incurred in 2004 and 2003 is attributable to the
low quantities of our products sold during these years. As the volumes of our


                                       13
<PAGE>

product deliveries increase in the future, we anticipate that our cost of
revenue per product sold will decrease. In addition, gross profits increased in
2004 and 2003, respectively, as compared to the previous years, as the margins
on LCoS Sets are greater than those on display units. In 2002, cost of revenue
consisted of an inventory adjustment to lower of cost of market of $286,000.

      Selling, general and administrative expenses. Selling, general and
administrative expenses were approximately $5,810,000, $3,641,000 and $2,363,000
in 2004, 2003 and 2002, respectively, and include professional services,
salaries and related taxes and benefits, rent, depreciation, travel, insurance,
and office expenses. Salaries and related taxes and benefits increased
approximately $1,600,000 in 2004 over 2003 as a result of the reassignment of
employees from research and development to general and administrative and an
additional increase in the number of general and administrative and sales staff.
The amount of the salary and related costs increase was approximately
$1,500,000. In addition, travel and entertainment increased by approximately
$300,000 due to travel by our sales and marketing team as well as by management
to generate new business. In addition, in 2004 we recorded an allowance for
doubtful accounts of approximately $350,000 to reserve a receivable from one of
our Chinese customers. We reserved this receivable based upon information
provided to us by our Chinese sales representative that this customer was
awaiting additional pending corporate financing and would likely not be able to
pay us for our product deliveries prior to receiving that additional financing.
Salaries and related taxes and benefits increased approximately $889,000 in 2003
over 2002 as a result of the reassignment of employees from research and
development activities to general and administrative duties and an additional
increase in the number of general and administrative staff, which was due to the
transition toward commercial manufacturing of our microdisplay products. An
additional increase in 2003 is due to fees of $250,000 reimbursed to Robert A.
Olins, our Chief Executive Officer and a director of SpatiaLight, for fees he
incurred in conjunction with the May 2003 private financing transaction (see
Note 2 to the Consolidated Financial Statements under Item 8 of this Report) and
an increase in rent expense of $137,000.

      Stock-based general and administrative expenses. Stock-based general and
administrative expenses were approximately $932,000, $1,986,000 and $713,000 in
2004, 2003 and 2002, respectively. The amounts incurred relate to common shares,
options to purchase common shares and warrants issued in exchange for services.
The amounts incurred in 2004 and 2002 relate primarily to stock and options
granted to employees and directors, and warrants issued in exchange for
services. In addition, the amounts incurred in 2004 include a $600,000 reduction
in a note receivable from one of our shareholders in exchange for a commitment
to invest an additional $6,000,000. (See Note 3 to Consolidated Financial
Statements.) The amounts incurred in 2003 relate primarily to stock-based
expense of approximately $1,300,000 associated with the May 2003 private
financing transaction. Of this amount, $959,000 related to the deemed beneficial
pricing of shares and warrants purchased by Robert A. Olins, Chief Executive
Officer and a director of SpatiaLight. For more information concerning the
foregoing, see Note 2 to the Consolidated Financial Statements under Item 8 of
this Report. The amounts incurred in 2004 and 2003 relate primarily to stock and
options granted to employees and directors, and warrants issued in exchange for
services. In addition, the amounts incurred in 2004 include a $600,000 reduction
in a note receivable from one of our shareholders in exchange for a commitment
to invest an additional $6,000,000. (See Note 3 to Consolidated Financial
Statements.)

      Research and development expenses. Research and development expenses were
approximately $2,306,000, $2,681,000 and $3,639,000 in 2004, 2003 and 2002,
respectively. The decrease in 2004 as compared to 2003 is due to the
reclassification of existing employees to general and administrative duties,
offset by an increase in consulting services related to our integrated circuit
design. The decrease from 2002 to 2003 is due to costs of approximately $800,000
expensed in 2002 related to test units and the purchase of prototype engines for
testing purposes.

      Interest expense. Interest expense was approximately $157,000, $213,000,
and $261,000 in 2004, 2003, and 2002, respectively. These amounts are consistent
with the balances in notes payable.

      Non-cash interest expense. Non-cash interest expense of approximately
$791,000, $584,000 and $1,779,000 in 2004, 2003 and 2002, respectively, relates
to the valuation of the beneficial conversion feature of interest converted and
convertible into equity on the notes payable to Argyle Capital Management
Corporation, a company wholly-owned by Robert A. Olins, Chief Executive Officer
and a director of SpatiaLight, based on the intrinsic value of the conversion
feature. The beneficial conversion interest represents the excess market value
of the shares issued or issuable at current market prices over accrued interest
payable. In November 2004, the notes were extended until December 31, 2008. In
addition, amortization of the discount on the Argyle notes is included in
non-cash interest expense.

      Also included in non-cash interest expense is the amortization of note
discounts related to the November 2004 financing. The note discounts primarily
resulted from the valuation of the additional investment rights or note purchase
option, and beneficial conversion feature. (See Note 3 to the Consolidated
Financial Statements.)

      Gain from revaluation of note purchase option liability. The gain of
approximately $412,000 recorded in 2004 arises from the revaluation of the
additional investment rights (AIR) which is being treated as a derivative and is
recorded on the balance sheet as a note purchase option liability. (See Note 3
to Consolidated Financial Statements.)


                                       14
<PAGE>

      Interest and other income. Interest income was approximately $38,000,
$76,000, and $16,000 in 2004, 2003, and 2002, respectively. The increase in
interest income in 2003 was due to interest earned on a stock subscription
receivable from a shareholder. See Note 2 to the Consolidated Financial
Statements under Item 8 of this Report. Interest in 2004 and 2002 is primarily
bank interest.

      Loss before income taxes. Losses before income taxes were approximately
$9,366,000, $9,516,000, and $9,026,000 in 2004, 2003 and 2002, respectively. The
decrease in these losses from 2003 to 2004 is due to an increase in gross margin
of approximately $666,000 as well as a decrease in stock-based compensation of
approximately $1,055,000, offset by an increase in selling general and
administrative expense. The increase from 2002 to 2003 is due primarily to
increases of approximately $1,272,000 of stock-based general and administrative
expenses, an increase of $1,278,000 in general and administrative expenses in
2003 compared to 2002, offset by a decrease of approximately $958,000 in
research and development expenses incurred as a result of pre-production tooling
costs and purchase of prototype engines of approximately $800,000 and a decrease
in non-cash interest expense of approximately $1,195,000, due to decrease in
monthly amortization of beneficial conversion feature on notes payable.

      Income taxes. Income taxes consist primarily of minimum state tax
requirements. See Note 5 to the Consolidated Financial Statements under Item 8
of this Report.

      Inflation. Our management currently believes that inflation has not had a
material impact on continuing operations.

Critical Accounting Policies and Estimates

      Management's discussion and analysis of our results of operations and
liquidity and capital resources are based on our Consolidated Financial
Statements. To prepare our Consolidated Financial Statements in accordance with
accounting principles generally accepted in the United States of America, we
must make estimates and assumptions that affect the amounts reported in the
Consolidated Financial Statements. We regularly evaluate these estimates and
assumptions, particularly in areas we consider to be critical accounting
estimates, where changes in the estimates and assumptions could have a material
impact on our results of operations, financial position and, generally to a
lesser extent, cash flows. Senior management and the Audit Committee of the
Board of Directors have reviewed the disclosures included herein about our
critical accounting estimates, and have reviewed the processes to determine
those estimates.

      Revenue Recognition - We evaluate revenue recognition for these
transactions using the following criteria (collectively called the Revenue
Recognition Criteria):

o     Evidence of an arrangement: Before revenue is recognized, we must have
      evidence of an agreement with the customer reflecting the terms and
      conditions to deliver our products.
o     Delivery: For products, delivery is considered to occur when title and
      risk of loss have been transferred, which generally occurs upon shipment.
o     Fixed or determinable fee: We consider a fee to be fixed or determinable
      if the fee is not subject to refund or adjustment. If a portion of the
      arrangement fee is not fixed or determinable, we recognize that amount as
      revenue when the amount becomes fixed or determinable. We do not consider
      a fee to be fixed and determinable if any amount is due more than 180 days
      from the delivery date. Payment terms of less than 180 days are evaluated
      based upon the laws or trade practices of the country in which the
      arrangement is entered into to assess whether the fee is fixed and
      determinable.
o     Collection is deemed reasonably assured: Collection is deemed reasonably
      assured if we expect the customer to be able to pay amounts under the
      arrangement as those amounts become due. We reduce product revenue for
      customer returns and sales allowances and record an allowance for doubtful
      accounts should collectibility become questionable. If it is determined
      that an account is uncollectible, the account is written off against the
      allowance.

      Inventory valuation - We value inventories at the lower of cost (based on
the first-in, first-out method) or market value. We include materials, labor and
manufacturing overhead in the cost of inventories. In determining inventory
market values, we give substantial consideration to the expected selling price
of the product based on historical recovery rates. If we assess the market value
of our inventory to be less than 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.

      Research and Development - Our research and development costs, including
costs of prototype LCoS Sets and display units, are charged to expense when
incurred.

      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


                                       15
<PAGE>

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.

Recent Accounting Pronouncements

      In March 2004, the Financial Accounting Standards Board (FASB) approved
the consensus reached by the Emerging Issues Task Force (EITF) Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its application to Certain
Investments" ("EITF 03-1"). The objective of EITF 03-1 was to provide guidance
for identifying impaired investments. EITF 03-1 also provided new disclosure
requirements for investments that are deemed to be temporarily impaired. The
accounting provisions of EITF 03-1 were effective for all reporting periods
beginning after June 15, 2004, while the disclosure requirements were effective
only for annual periods ending after June 15, 2004. In September 2004, the FASB
deferred the requirement to record impairment losses caused by the effect of
increases in "risk-free" interest rates and "sector spreads" on debt securities
subject to paragraph 16 of EITF 03-1 and excludes minor impairments from the
requirement until new guidance becomes effective. We have evaluated the impact
of the adoption of EITF 03-1 and do not believe the impact is significant to the
Company's overall results of operations or financial position.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" (FAS
151), which requires certain inventory-related costs to be expensed as incurred.
FAS 151 is effective January 1, 2006. The Company has not assessed the effect of
FAS 151 on its consolidated financial statements.

      In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" to
revise SFAS No. 123. "Accounting for Stock-Based Compensation," and supersede
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance. It requires companies to measure and recognize
compensation expense for all share-based payments at fair value. SFAS No. 123R
is to be applied in the first quarter of 2006. We have not yet evaluated the
impact that the adoption of SFAS No. 123R will have on our consolidated
financial statements; however, the adoption could materially impact our results
of operations.


                                       16
<PAGE>

                                  Risk Factors

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

      We have incurred losses to date and have experienced cash shortages. In
2004 and 2003, we incurred net losses of approximately $9,367,000 and
$9,516,000, respectively. In addition, we had an accumulated deficit of
approximately $67,641,000 as of December 31, 2004. We expect additional losses
as we continue spending for production and other business activities as well as
further research and development of our products. As a result, we will need to
generate substantial sales to support our costs of doing business before we can
begin to recoup our operating losses and accumulated deficit and achieve
profitability.

While we have obtained financing and financing commitments that we expect will
be sufficient to fund our currently anticipated financial needs through the
second quarter of 2006, if we are unable to obtain further financing in the
future or generate required working capital for future capital needs, our
ability to operate could suffer or cease.

      Our operations to date have consumed substantial amounts of cash and will
continue to require substantial amounts of capital in the future. In order to
remain competitive, we must continue to make significant investments essential
to our ability to operate profitably, including further investments in research
and development, equipment, facilities and production activities. Our financial
condition and liquidity have been strongly assisted through private sales of our
common shares, the $10 million, less expenses, raised by us in the November 2004
Financing, the approximately $4,955,000 raised from the sale in December 2003 of
one million of our common shares which were registered for sale by means of a
"shelf" registration process, and $2,888,703 raised through exercises of stock
options and warrants during 2004. The purchasers in the November 2004 Financing
also have the option, which expires on August 31, 2005, to lend an additional $5
million on the same terms, as more fully described in Note 3 to the Consolidated
Financial Statements. In addition, Robert A. Olins, Chief Executive Officer and
a director of SpatiaLight and Greenpark Limited, jointly committed to provide us
with up to $6 million in future financing, subject to the conditions more fully
described in Note 3 to the Consolidated Financial Statements. Despite these
financing and commitments, we may still require additional financing to satisfy
our increasing working capital requirements in the future. Reliance on private
equity purchase agreements and public offerings and exercises of derivative
securities to finance our future operations entails the additional risks of
default by purchasers under such equity purchase agreements or our inability to
sell publicly registered shares and an insufficient number of warrants being
exercised owing to the prevailing market prices of our underlying common shares.
In the event that we require additional financing in the future and we are
unable to obtain further financing on satisfactory terms, or we are unable to
generate sales sufficient to offset our costs, or if our costs of development
and operations are greater than we anticipate, we may be unable to increase the
size of 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.

The obligations arising from the November 2004 Financing restricts our future
financing alternatives and may result in financial difficulties for us in the
future.

      The $10,000,000 2004 Senior Secured Convertible Notes issued pursuant to
the November 2004 Financing bear a 10% rate of interest and are not prepayable,
in whole or in part, prior to their maturity on November 30, 2007. Therefore, we
do not have the ability to refinance the 2004 Senior Secured Convertible Notes
with debt obligations bearing more favorable terms to us or out of the proceeds
of an equity financing until their above-noted maturity date. However, after the
first anniversary of the November 2004 Financing's closing, we have the right to
force conversion of the 2004 Senior Secured Convertible Notes into our common
shares in the event that our common shares trade at or above $14.58 (150% of the
$9.72 conversion price of the 2004 Senior Secured Convertible Notes) for twenty
consecutive trading days. Furthermore, the 2004 Senior Secured Convertible Notes
are secured by virtually all of the assets of our Company, other than those
located in Korea, and it may therefore be difficult for us to obtain future debt
financing; however, the terms of the November 2004 Financing allow us to
subordinate the security interests of the 2004 Senior Secured Convertible Notes
to a security interest given to a bank or other institution arising from
accounts receivable, contractual rights, inventory or similar financing. If we
default in meeting our obligations under the 2004 Senior Secured Convertible
Notes, the indebtedness which they evidence will become immediately due and
payable, and the holders of such 2004 Senior Secured Convertible Notes will be
entitled to foreclose on our assets to the serious detriment of our future
operations. As noted elsewhere in this 10-K, the 2004 Senior Secured Convertible
Notes are convertible into our common shares and the issuance of such shares
(including any shares issued in payment of interest on such Notes) may have a
dilutive effect on the value of our outstanding common shares.

      We are required to file a registration statement for resale of the shares
issuable upon conversion of the Senior Secured Convertible Notes and have the
registration statement declared effective no later than 120 days after November
30, 2004. Pursuant to our amended registration rights agreement with the
noteholders, because the registration did not become effective by April 20,
2005, we are subject to the obligation to pay each noteholder cash equal to 1%
of the purchase price of the notes (which equals an aggregate total amount of
$100,000), and 1% for every 30 days thereafter until the registration becomes
effective.


                                       17
<PAGE>

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

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

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

      We currently have nine full-time engineering and ten full-time
manufacturing personnel based in California working on microdisplays. We are
currently actively hiring personnel for our manufacturing facility located in
the Republic of Korea. We currently have six full-time engineering and 27
full-time manufacturing personnel based in the Republic of Korea and we expect
to hire an additional five engineers and 150 manufacturing personnel by the end
of 2005. This staffing creates significant operational and research and
development costs that may not be recouped. Even if our current LCoS Sets become
accepted and/or successful, we must continue to use, and may increase in number,
our engineering and manufacturing personnel to develop future generations of our
microdisplays because of the rapid technological changes in our industry. As a
result, we expect to continue incurring significant operational and research and
development costs.

We are currently manufacturing and shipping our products in limited commercial
quantities, but unanticipated difficulties in manufacturing our products in
larger quantities may make it difficult to meet customer demands from time to
time and our operating results could be significantly harmed by such
difficulties.

      Problems in production of our LCoS Sets or display units 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
current and prospective customers to seek other sources.

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

      Our LCoS Sets are assembled by combining the silicon backplanes with
electronic components. The design and manufacture of LCoS Sets and display units
are highly complex processes that are sensitive to a wide variety of factors,
including the level of contaminants in the manufacturing environment, impurities
in the materials used, and the performance of personnel and equipment. We lease
clean room space in California where we currently manufacture our LCoS Sets. We
believe that these current arrangements provide us with strong quality controls
and effectively protect our proprietary technology in our products, but the
risks discussed above associated with the highly complex processes of
manufacturing these liquid crystal microdisplays remain applicable.

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

      Because the manufacture of our LCoS Sets involves highly complex processes
and technical problems may arise as we manufacture our liquid crystal
microdisplays, we cannot assure the manufacturing yields of our products.
Although we believe that we will be able to mass produce our LCoS Sets, other
companies, including some with substantially greater resources than us, have
found great difficulty or failed to do so. Current purchase orders and
anticipated future purchase orders, which we cannot assure, will require us to
produce greater quantities of our LCoS Sets than we have produced in the past.
Problems in production, including problems associated with increasing our
production output or lower than expected manufacturing yields could
significantly harm our business and operating results. In addition, the
complexity of our manufacturing processes will increase as the sophistication of
our LCoS Sets and display units increases, and such complexities may lend to
similar difficulties that could harm our business and operating results.


                                       18
<PAGE>

While we intend, in the near future, to commence operations in our new
manufacturing facility in the Republic of Korea, which will serve as our
principal facility for manufacturing our microdisplay products, we may encounter
difficulties in transitioning our manufacturing operations and difficulties in
maintaining our quality controls over the manufacturing and production
processes, any of which would be likely to cause significant harm to our
business.

      Our decision to locate our principal manufacturing operations in the
Republic of Korea may cause us to encounter one or more potential problems that
could harm our business. Such potential problems could arise in connection with
transitioning our manufacturing operations to the new facility in Korea. Other
problems may arise in the training of employees, which may occur as the result
of cultural or language differences, which may create misunderstandings or cause
inefficiencies in our operations. The geographic separation between our
corporate offices in the United States and our principal manufacturing operation
in Korea could result in managerial or supervisory problems, which could lead to
decreased quality controls and a subsequent material harm to our business.

Geopolitical conditions or potential military conflicts between allies the
United States and the Republic of Korea and North Korea may negatively impact
our business.

      We intend to operate our principal manufacturing operations in the
Republic of Korea commencing in the second quarter of 2005 and our largest
expected customer, LG Electronics, resides in the Republic of Korea. The
Republic of Korea and North Korea are technically at war with each other,
despite the sanctioned existence of the Demilitarized Zone and the relative
absence of physical conflict for several decades. Any escalation in the existing
military conflict between these countries or any commencement, or perceived
commencement of a military conflict between the United States and North Korea,
may limit our ability to effectively operate our manufacturing facility in the
Republic of Korea and also may substantially limit our ability to sell products
into the Republic of Korea because of the negative economic, physical or other
destructive impact that such a conflict could have on our most important
customer. Any such disruptions to our manufacturing operations and/or ability to
consummate sales to a substantial customer could adversely affect the
development of our business and our financial condition.

If the high definition television market does not continue to develop and if
other potential markets for our products do not materialize, then our business
will likely be significantly harmed.

      High definition television programming has only recently become available
to consumers, and widespread market acceptance, although anticipated, is
uncertain at this time. The market demand for high definition televisions is
considered contingent upon such widespread acceptance of high definition
television programming. Our current sales and marketing efforts are focused on
OEMs of high definition televisions and OEMs of light engines designed for
incorporation into high definition televisions. Therefore, if the market for
high definition televisions does not continue to grow and develop, then we will
have significant difficulty selling our products, which will have a material
adverse effect on our results of operations.

      Various potential target markets for our products, including projectors,
monitors, and portable microdisplays, are uncertain and may be slow to develop.
In addition, companies in those markets could utilize competing technologies.
For us to succeed in selling our products into these potential markets we must
offer end-product manufacturers better and less expensive microdisplay products
than our competitors, and the manufacturers themselves will also have to develop
commercially successful products using our products. In the event that we
attempt to market and sell our products into these potential target markets, if
we are not able to succeed in selling our products into these potential markets,
then our results of operations and overall business may be negatively affected.

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

      Our microdisplays may not be accepted by a widespread market. Even if we
successfully obtain customer orders, our customers may determine not to
introduce or may terminate products utilizing the technology for a variety of
reasons, including the following:

o     superior technologies developed by our competitors;

o     price considerations; and

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

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


                                       19
<PAGE>

We may become largely dependent on one customer for our future revenues, and
failure to expand our customer base or receive additional orders from our
existing customer base will make us vulnerable to substantial loss of potential
revenues.

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

      Our ability to retain and receive additional purchase orders from our
current customers and to attract and receive purchase orders from prospective
customers may depend upon the acceptance of LG Electronics' products in the
consumer marketplace. If LG Electronics' television products incorporating our
LCoS technology are not commercially successful, demand for our products from
our current and prospective customers may not materialize, which could
negatively impact our results of operations and our financial condition.

We cannot assure you that we will obtain additional purchase orders from our
current or prospective customers, or, if we do, that such orders will generate
significant revenues.

      Even though we have received purchase orders for our LCoS Sets and/or
display units from LG Electronics and from several Chinese OEMs and we may
receive additional purchase orders from our prospective customers, we may have
problems implementing volume production of such microdisplay products.
Furthermore, sales to manufacturers in the electronics industry are subject to
severe competitive pressures, rapid technological change and product
obsolescence. Customers may, at any time, cancel purchase orders or commitments
or reduce or delay orders, thereby increasing our inventory and overhead risks.
In addition, purchase orders received from our Chinese customers are for limited
quantities of our products. Therefore, despite the purchase orders received from
current customers and other purchase orders that we may receive from prospective
customers, we cannot assure you that these agreements will result in significant
revenues to us.

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

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

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

o     maintain customer satisfaction with our design and manufacturing services;

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

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

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

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

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

      We serve the highly competitive high definition television industry that
is characterized by price erosion, rapid technological change and competition
from major domestic and international companies. This intense competition could
result in downward pricing pressures, lower sales, reduced margins and lower
market share.

      Companies competing in the LCoS microdisplay market include Sony and JVC,
although we presently believe that Sony has developed LCoS microdisplays for its
own use and not for sale to other companies. A major competitor of ours in the
reflective microdisplay market, although not using liquid crystals in the
display, is Texas Instruments, which is producing a micro-mechanical structure
of moving mirrors on a silicon backplane, a technology known as digital light


                                       20
<PAGE>

processing, or DLP. Texas Instruments has had significant success selling its
DLP products to its customers in the business front projector market and the
rear projection high definition television market. Some of our competitors,
including Texas Instruments and JVC, have greater market recognition, larger
customer bases, and substantially greater financial, technical, marketing,
distribution and other resources than we possess. As a result, they may be able
to introduce new products and respond to customer requirements more quickly and
effectively than we can.

      Rapid and significant technological advances have characterized the
microdisplay market. There can be no assurance that we will be able to effect
any of such technological advances or that we will have sufficient funds to
invest in new technologies or products or processes. Although we believe that
our displays have specifications and capabilities, which equal or exceed that of
commercially available LCD, cathode ray tube (CRT) and DLP based display
products, the manufacturers of these products may develop further improvements
of their existing technology that would eliminate or diminish our anticipated
advantage. In addition, numerous competitors have substantially greater
financial, technical, marketing, distribution and other resources than we have.
The acceptance of our LCoS Sets and/or display units will be dependent upon the
pricing, quality, reliability and useful life of these units compared to
competing technologies, as to which there can be no assurance.

      Our competitive position could suffer if one or more of our customers
decide to design and manufacture their own microdisplay products, to contract
with our competitors, or to use alternative technologies. In addition, customers
in the television manufacturing industry typically develop a second source.
Second source suppliers may win an increasing share of our customers product
demands. 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 products or technologies introduced by our competitors.

Fluctuations in the exchange rate of the United States dollar and foreign
currencies could have a material adverse effect on our financial performance and
profitability.

      A portion of our costs is denominated in foreign currencies, including the
Korean Won, the Euro and the Japanese Yen. As a result, changes in the exchange
rates of these currencies or any other applicable currencies to the U.S. dollar
will affect our costs of good sold and operating margins, and could result in
exchange losses. We cannot fully predict the impact of future exchange rate
fluctuations on our profitability. From time to time, we may engage in exchange
rate hedging activities in an effort to mitigate the impact of exchange rate
fluctuations, although we have not engaged in any such hedging activities to
date. However, we cannot offer assurance that any hedging technique we may
implement will be effective. If it is not effective, we may experience reduced
operating margins.

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

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

Our operating results are subject to significant fluctuations.

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


                                       21
<PAGE>

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 highly volatile, reflecting
among other things reported losses, receipts of additional financing and
investors' perceptions about our business prospects. Some research has shown
that similar volatility in other companies correlates with class action
securities lawsuits although to date we have not been a defendant in any such
lawsuit. The trading price of our common shares in the future could continue to
be subject to wide fluctuations in response to various factors, including the
following:

o     quarterly variations in our operating results;

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

o     public announcements regarding our business developments;

o     changes in analysts' estimates of our financial performance;

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

o     general conditions in the electronics industry; and

o     worldwide economic and financial conditions.

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

By further increasing the number of our common shares that may be sold into the
market, any future offerings of our equity securities could cause the market
price of our common shares to decrease significantly, even if our business
operations are performing well.

      The total number of common shares included in the Amendment No. 4 to Form
S-3 Registration Statement that we filed with the SEC on July 13, 2005
(Registration Number 333-122391), principally relating to the November 2004
Financing represents approximately 5.79% of the total number of our common
shares that were issued and outstanding as of December 31, 2004. Sales of these
shares, as well as the 2,000,000 common shares included in the Amendment No. 2
to Form S-3 "Shelf" Registration Statement filed by us with the SEC on July 13,
2005 (Registration Number 333-122392), into the public market, or the perception
that future sales of these common shares could occur, might adversely affect the
prevailing market price of our common shares in the near future.

Our common shares may not be liquid.

      Our common shares are currently traded on The NASDAQ SmallCap Market. Our
shareholders may find that it is more difficult to sell our common shares than
shares that are listed on The NASDAQ National Market, American Stock Exchange or
New York Stock Exchange. The trading volume of our common shares has
historically been adversely affected due to their limited marketability, but
such volume has increased significantly in recent periods. Nevertheless, any
substantial sales of our common shares may result in a material reduction in
price, reflecting the volatility of the trading market for our common shares.


                                       22
<PAGE>

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

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

Our future success depends on our ability to protect our proprietary technology
and our registered intellectual property.

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

o     pending patent applications may not be issued;

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

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

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

o     breach of confidentiality agreements;

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

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

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

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

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

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

      Our business is subject to significant political and economic
uncertainties and may be adversely affected by political, economic and social


                                       23
<PAGE>

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

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

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

We do not pay cash dividends.

      We have never paid any cash dividends on our common shares and do not
anticipate that we will pay cash dividends in the near future. Furthermore,
under the terms of the November 2004 Financing, we are prohibited from paying
cash dividends while the 2004 Senior Secured Convertible Notes issued in the
November 2004 Financing remain outstanding. Instead, we intend to apply any
future earnings to the expansion and development of our business.

Our reported financial results may be adversely affected by changes in
accounting principles generally accepted in the United States.

      We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. These accounting principles
are subject to interpretation by the Financial Accounting Standards Board, the
American Institute of Certified Public Accountants, the SEC and various bodies
formed to interpret and create appropriate accounting policies. A change in
these policies or interpretations could have a significant effect on our
reported financial results, and could affect the reporting of transactions
completed before the announcement of a change. For example, the FASB has
implemented changes to U.S. GAAP that require us to record a charge to earnings
for employee stock option grants for all awards unvested at and granted after
December 31, 2005. This regulation will negatively impact our earnings.
Technology companies generally, and our Company, specifically, rely on stock
options as a major component of our employee compensation packages. Due to the
new requirement to expense options, we are less likely to achieve profitability
and we may consider decreasing or eliminating option grants. Decreasing or
eliminating option grants may negatively impact our ability to attract and
retain qualified employees.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      We place all of our excess cash and cash equivalents in a checking account
or money market account in the United States. We do not expect any material
losses from our placement of such cash balances and we believe that our interest
rate exposure is modest. As of December 31, 2004, our cash and cash equivalents
totaled $9,087,551.

      A portion of our costs is denominated in foreign currencies, including the
South Korean Won, the Euro and the Japanese Yen. As a result, changes in the
exchange rates of these currencies or any other applicable currencies to the
U.S. dollar will affect our financial results, including costs of revenue and
operating expenses, and could result in exchange losses or gains. We cannot
fully predict the impact of future exchange rate fluctuations on our
profitability. From time to time, we may engage in exchange rate hedging
activities in an effort to mitigate the impact of exchange rate fluctuations,
although we have not engaged in any such hedging activities to date.


                                       24
<PAGE>

Item 8. Consolidated Financial Statements

To the Board of Directors and Stockholders of SpatiaLight, Inc.

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying consolidated balance sheet of SpatiaLight, Inc.
and its subsidiaries as of December 31, 2004, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of SpatiaLight, Inc.
and its subsidiaries at December 31, 2004, and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of SpatiaLight,
Inc.'s internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal Control -- Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 2, 2005 expressed an adverse opinion thereon.


/s/ ODENBERG, ULLAKKO, MURANISHI & CO. LLP

San Francisco, California
March 2, 2005


                                       25
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
SpatiaLight, Inc.
Novato, California

      We have audited the accompanying consolidated balance sheet of
SpatiaLight, Inc. as of December 31, 2003 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the two years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on those financial statements based on
our audits.

      We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financing reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SpatiaLight,
Inc. at December 31, 2003, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.


 /s/ BDO Seidman, LLP

San Francisco, California

March 5, 2004

                                       26
<PAGE>

SPATIALIGHT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                    2004            2003
                                                                ------------    ------------
<S>                                                             <C>             <C>
ASSETS

Current assets
  Cash and cash equivalents                                     $  9,087,551    $  6,359,969
  Accounts receivable, net of allowance of $345,030 and $0
     at December 31, 2004 and 2003, respectively                     264,053         117,530
  Inventory                                                        1,173,314         779,617
  Prepaids and other current assets                                  949,711         353,087
  Prepaid non-cash interest to related party                         913,889              --
                                                                ------------    ------------
          Total current assets                                    12,388,518       7,610,203

  Property and equipment, net                                        858,212         638,430
  Construction in progress                                         2,801,521              --
  Prepaid non-cash interest to related party                       3,474,386              --
  Other assets                                                       123,774         101,063
                                                                ------------    ------------

               Total assets                                     $ 19,646,411    $  8,349,696
                                                                ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
  Accounts payable                                              $    601,394    $    863,284
  Note purchase option liability                                     659,874              --
  Accrued expenses and other current liabilities                   2,533,546         518,137
                                                                ------------    ------------
        Total current liabilities                                  3,794,814       1,381,421

Senior secured and other convertible notes                         9,885,140       1,155,000
                                                                ------------    ------------

               Total liabilities                                  13,679,954       2,536,421
                                                                ------------    ------------

Commitments

Stockholders' equity:
  Common stock, $.01 par value:
     50,000,000 shares authorized;
     35,326,436 and 33,229,191 shares issued and outstanding,
     at December 31, 2004 and 2003, respectively                     353,264         332,292
Additional paid-in capital                                        69,384,146      61,046,425
Notes receivable                                                    (241,462)     (1,096,926)
Common shares issuable                                             4,038,149       3,805,685
Other comprehensive income                                            73,562              --
Accumulated deficit                                              (67,641,202)    (58,274,201)
                                                                ------------    ------------
        Total stockholders' equity                                 5,966,457       5,813,275
                                                                ------------    ------------

Total liabilities and stockholders' equity                      $ 19,646,411    $  8,349,696
                                                                ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       27
<PAGE>

SPATIALIGHT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 and 2002

<TABLE>
<CAPTION>
                                                                        2004            2003            2002
                                                                    ------------    ------------    ------------
<S>                                                                 <C>             <C>             <C>
Revenue                                                             $  1,160,978    $    221,252    $         --
Cost of revenue                                                         (982,282)       (708,320)       (286,000)
                                                                    ------------    ------------    ------------
          Gross margin                                                   178,696        (487,068)       (286,000)
                                                                    ------------    ------------    ------------

Selling, general and administrative expenses:
   Selling, general and administrative expenses                        5,809,702       3,641,422       2,362,865
   Stock-based general and administrative expenses                       931,524       1,985,720         713,001
                                                                    ------------    ------------    ------------
          Total selling, general and administrative expenses           6,741,226       5,627,142       3,075,866

   Research and development expenses                                   2,305,650       2,681,328       3,639,016
                                                                    ------------    ------------    ------------

          Total operating expenses                                     9,046,876       8,308,470       6,714,882
                                                                    ------------    ------------    ------------

          Operating loss                                              (8,868,180)     (8,795,538)     (7,000,882)
                                                                    ------------    ------------    ------------

Other income (expense):
  Interest expense:
          Interest expense                                              (156,693)       (213,362)       (261,314)
          Non-cash interest expense                                     (791,036)       (583,672)     (1,779,147)
                                                                    ------------    ------------    ------------
            Total interest expense                                      (947,729)       (797,034)     (2,040,461)
                                                                    ------------    ------------    ------------

  Other income:
          Gain from revaluation of note purchase option liability        412,374              --              --
          Interest and other income                                       38,009          76,195          15,655
                                                                    ------------    ------------    ------------
            Total other income                                           450,383          76,195          15,655
                                                                    ------------    ------------    ------------

          Total other income (expenses)                                 (497,346)       (720,839)     (2,024,806)
                                                                    ------------    ------------    ------------

 Loss before income tax expense                                       (9,365,526)     (9,516,377)     (9,025,688)

 Income tax expense                                                        1,475              --           2,225
                                                                    ------------    ------------    ------------

Net loss                                                            $ (9,367,001)   $ (9,516,377)   $ (9,027,913)
                                                                    ============    ============    ============

Net loss per share - basic and diluted                              $      (0.27)   $      (0.34)   $      (0.37)
                                                                    ============    ============    ============

Weighted average shares used in computing
 net loss per share- basic and diluted                                34,154,057      28,173,770      24,578,226
                                                                    ============    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements


                                       28
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                                                       ADDITIONAL
                                                                               COMMON STOCK              PAID-IN          NOTES
                                                                         SHARES          AMOUNT          CAPITAL        RECEIVABLE
                                                                      ------------    ------------    ------------    ------------
<S>                                                                     <C>           <C>             <C>             <C>
Balance, January 1, 2002                                                25,811,786    $    258,119    $ 41,911,879    $ (2,653,434)

Exercise of stock options and warrants, net of costs of
$132,610                                                                 1,355,854          13,559       3,619,035      (1,747,347)

Payments on notes receivable                                                    --              --              --         982,443

Reversal of notes receivable                                              (197,005)         (1,970)       (614,765)        643,416

Repricing of warrants                                                           --              --          49,283         143,362

Installment note for shares not yet issued, net of related payments             --              --       1,492,536      (1,292,536)

Accrued interest on notes receivable from shareholders                          --              --              --          (6,962)

Issuance of stock, stock options and warrants for services                  92,799             928         396,162              --

Issuance of stock and options to employees and directors                    60,000             600         315,311              --

Conversion of notes and accrued interest                                   241,492           2,415         813,985              --

Discount on notes payable                                                       --              --          58,000              --

Rescission of stock purchase agreement                                  (1,346,268)        (13,463)     (2,490,596)      2,504,059

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

<CAPTION>
                                                                                        OTHER         COMMON          TOTAL
                                                                      ACCUMULATED     COMPREHEN-       STOCK       STOCKHOLDERS'
                                                                        DEFICIT      SIVE INCOME      ISSUABLE     EQUITY (DEFICIT)
                                                                     ------------    ------------   ------------   ------------
<S>                                                                  <C>             <C>            <C>            <C>
Balance, January 1, 2002                                             $(39,729,911)   $         --   $         --   $   (213,347)

Exercise of stock options and warrants, net of costs of
$132,610                                                                       --              --             --      1,885,247

Payments on notes receivable                                                   --              --             --        982,443

Reversal of notes receivable                                                   --              --             --         26,681

Repricing of warrants                                                          --              --             --        192,645

Installment note for shares not yet issued, net of related payments            --              --             --        200,000

Accrued interest on notes receivable from shareholders                         --              --             --         (6,962)

Issuance of stock, stock options and warrants for services                     --              --             --        397,090

Issuance of stock and options to employees and directors                       --              --             --        315,911

Conversion of notes and accrued interest                                       --              --             --        816,400

Discount on notes payable                                                      --              --             --         58,000

Rescission of stock purchase agreement                                         --              --             --             --

Net loss                                                               (9,027,913)             --             --     (9,027,913)
                                                                     ------------    ------------   ------------   ------------
</TABLE>

See accompanying notes to consolidated financial statements


                                       29
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                                                 ADDITIONAL
                                                                           COMMON STOCK            PAID-IN        NOTES
                                                                       SHARES         AMOUNT       CAPITAL      RECEIVABLE
                                                                     -----------   -----------   -----------    -----------
<S>                                                                   <C>              <C>        <C>            <C>
Balance, December 31, 2002                                            26,018,658       260,188    45,550,830     (1,426,999)

Exercise of stock options and warrants, 120,082 shares issued
 in January 2004                                                         365,624         3,657       541,124             --

Payments on notes receivable from stockholders                                --            --            --        402,500

Accrued interest on notes receivable from stockholders                        --            --            --        (72,427)

Issuance of stock, stock options, and warrants for services               79,000           790       569,937             --

Issuance of options to employees and directors                                --            --       195,387             --

Conversion of debt and accrued interest                                1,580,820        15,807     3,929,439             --

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

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

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

Issuance of shares to third party for finder's fee in conjunction
 with May Private placement                                              130,435         1,304       375,653             --

August Private placement net of issuance cost of $224,648              1,212,061        12,120     2,526,731             --

December private placement, 300,000 issued, 700,000 issuable in
 January 2004                                                            300,000         3,000     1,452,255             --

Beneficial pricing on stock and warrants acquired in private
 placement                                                                    --            --       958,913             --

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

<CAPTION>
                                                                                       OTHER         COMMON         TOTAL
                                                                      ACCUMULATED    COMPREHEN-      STOCK       STOCKHOLDERS'
                                                                        DEFICIT      SIVE INCOME    ISSUABLE    EQUITY (DEFICIT)
                                                                      -----------    -----------   -----------   -----------
<S>                                                                   <C>            <C>           <C>            <C>
Balance, December 31, 2002                                            (48,757,824)            --            --    (4,373,805)

Exercise of stock options and warrants, 120,082 shares issued
 in January 2004                                                               --             --       305,685       850,466

Payments on notes receivable from stockholders                                 --             --            --       402,500

Accrued interest on notes receivable from stockholders                         --             --            --       (72,427)

Issuance of stock, stock options, and warrants for services                    --             --            --       570,727

Issuance of options to employees and directors                                 --             --            --       195,387

Conversion of debt and accrued interest                                        --             --            --     3,945,246

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

Shares issued on exercise of warrant under 2002 installment note               --             --            --            --

May Private placement, net of issuance cost of $175,065                        --             --            --     4,974,935

Issuance of shares to third party for finder's fee in conjunction
 with May Private placement                                                    --             --            --       376,957

August Private placement net of issuance cost of $224,648                      --             --            --     2,538,851

December private placement, 300,000 issued, 700,000 issuable in
 January 2004                                                                  --             --     3,500,000     4,955,255

Beneficial pricing on stock and warrants acquired in private
 placement                                                                     --             --            --       958,913

Net loss                                                               (9,516,377)            --            --    (9,516,377)
                                                                      -----------    -----------   -----------   -----------
</TABLE>

See accompanying notes to consolidated financial statements


                                       30
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                                               ADDITIONAL
                                                                        COMMON STOCK            PAID-IN         NOTES
                                                                   SHARES         AMOUNT        CAPITAL       RECEIVABLE
                                                                ------------   ------------   ------------   ------------
<S>                                                             <C>            <C>            <C>            <C>
Balance, December 31, 2003                                        33,229,191        332,292     61,046,425     (1,096,926)

Exercise of stock options and warrants, 132,737 shares
  issued in January 2005                                           1,013,127         10,131      2,484,387             --

Issuance of options to employees and directors                            --             --         67,674             --

Issuance of warrant for services                                          --             --        263,850             --

Issuance of shares for prepayment of related party interest          264,036          2,640      1,541,734             --

Shares issuable for prepayment of related party interest,
 448,764 issued in January 2005                                           --             --             --             --

Payments on notes receivable from stockholders                            --             --             --        269,851

Reduction of note receivable in exchange for financing
 commitment                                                               --             --             --        600,000

Accrued interest on notes receivable from stockholder                     --             --             --        (14,387)

Beneficial pricing on conversion feature on convertible notes             --             --        156,610             --

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

Short swing profit                                                        --             --         25,982             --

Comprehensive loss:

   Net loss                                                               --             --             --             --

   Foreign currency translation adjustments                               --             --             --             --


         Total comprehensive loss                                         --             --             --             --
                                                                ------------   ------------   ------------   ------------

Balance, December 31, 2004                                        35,326,436   $    353,264   $ 69,384,146   $   (241,462)
                                                                ============   ============   ============   ============

<CAPTION>
                                                                                    OTHER         COMMON           TOTAL
                                                                 ACCUMULATED      COMPREHEN-       STOCK        STOCKHOLDERS'
                                                                   DEFICIT       SIVE INCOME      ISSUABLE     EQUITY (DEFICIT)
                                                                 ------------    ------------   ------------    ------------
<S>                                                              <C>             <C>            <C>             <C>
Balance, December 31, 2003                                        (58,274,201)             --      3,805,685       5,813,275

Exercise of stock options and warrants, 132,737 shares
  issued in January 2005                                                   --              --        394,185       2,888,703

Issuance of options to employees and directors                             --              --             --          67,674

Issuance of warrant for services                                           --              --             --         263,850

Issuance of shares for prepayment of related party interest                --              --             --       1,544,374

Shares issuable for prepayment of related party interest,
 448,764 issued in January 2005                                            --              --      3,643,964       3,643,964

Payments on notes receivable from stockholders                             --              --             --         269,851

Reduction of note receivable in exchange for financing
 commitment                                                                --              --             --         600,000

Accrued interest on notes receivable from stockholder                      --              --             --         (14,387)

Beneficial pricing on conversion feature on convertible notes              --              --             --         156,610

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

Short swing profit                                                         --              --             --          25,982

Comprehensive loss:

   Net loss                                                        (9,367,001)             --             --      (9,367,001)

   Foreign currency translation adjustments                                --          73,562             --          73,562
                                                                                                                ------------

         Total comprehensive loss                                          --              --             --      (9,293,439)
                                                                 ------------    ------------   ------------    ------------

Balance, December 31, 2004                                       $(67,641,202)   $     73,562   $  4,038,149    $  5,966,457
                                                                 ============    ============   ============    ============
</TABLE>

See accompanying notes to consolidated financial statements


                                       31
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                                  2004            2003            2002
                                                                              ------------    ------------    ------------
<S>                                                                           <C>             <C>             <C>
Cash flows from operating activities:
Net loss                                                                      $ (9,367,001)   $ (9,516,377)   $ (9,027,913)
Adjustments to reconcile net loss to net cash used by operating activities:

  Allowance for doubtful accounts                                                  345,030              --              --
  Inventory adjustment                                                            (210,000)        516,382         286,000
  Depreciation and amortization                                                    575,391         393,302         381,916
  Stock-based general and administrative expenses                                  931,524       1,985,720         713,001
  Non-cash interest expense                                                        791,036         583,672       1,779,147
  Gain from revaluation of note purchase option liability                         (412,374)             --              --
  Accrued interest on notes receivable from stockholder                            (14,387)        (72,427)             --
  Changes in operating assets and liabilities:
     Accounts receivable                                                          (491,553)       (117,530)             --
     Inventory                                                                    (183,697)     (1,020,040)       (561,959)
     Prepaid and other current assets                                             (411,437)        212,428        (406,895)
     Accounts payable                                                             (261,890)     (1,154,946)      1,624,202
     Accrued expenses and other current liabilities                                214,806         470,799         240,345
     Other assets                                                                  (22,711)        156,079         (86,704)
                                                                              ------------    ------------    ------------

Net cash used in operating activities                                           (8,517,263)     (7,562,938)     (5,058,860)
                                                                              ------------    ------------    ------------
Cash flows from investing activities:
  Purchase of property and equipment                                              (795,173)       (524,764)       (281,818)
  Construction in progress                                                        (950,627)             --              --
                                                                              ------------    ------------    ------------

  Net cash used in investing activities                                         (1,745,800)       (524,764)       (281,818)
                                                                              ------------    ------------    ------------

Cash flows from financing actitivies:
  Payments on capital lease obligations                                                 --              --          (4,483)
  Proceeds from issuance of short-term notes                                            --         792,500         125,000
  Payment on short-term notes                                                           --        (542,500)             --
  Proceeds from the issuance of convertible notes                               10,000,000              --              --
  Payments on notes receivable from stockholders                                   269,851         402,500       1,182,443
  Payments on convertible notes                                                         --        (100,000)             --
  Stock issuance costs                                                                  --              --        (132,610)
  Financing costs for convertible notes                                           (217,162)             --              --
  Short swing profits                                                               25,982              --              --
  Proceeds from sales of common shares and warrants                                     --      12,469,042              --
  Proceeds from exercise of warrants and options                                 2,888,703         850,466       2,017,857
                                                                              ------------    ------------    ------------

Net cash provided by financing activities                                       12,967,374      13,872,008       3,188,207
                                                                              ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents                             2,704,311       5,784,306      (2,152,471)

Effect of exchange rate changes on cash                                             23,271              --              --

Cash and cash equivalents at beginning of period                                 6,359,969         575,663       2,728,134
                                                                              ------------    ------------    ------------
Cash and cash equivalents at end of period                                    $  9,087,551    $  6,359,969    $    575,663
                                                                              ============    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       32
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                                2004           2003           2002
                                                                            ------------   ------------   ------------
<S>                                                                         <C>            <C>            <C>
Supplemental disclosure of cash flow information:

  Income taxes paid during the period                                       $      1,475   $         --   $      2,225
                                                                            ------------   ------------   ------------
  Interest paid during the period                                           $        482   $     45,319   $        348
                                                                            ------------   ------------   ------------
Non cash financing activities:
   Common shares issued upon conversion of interest and notes               $         --   $  3,945,246   $    861,400
                                                                            ------------   ------------   ------------
   Exercise of warrants in exchange for notes receivable                    $         --   $         --   $  1,392,536
                                                                            ------------   ------------   ------------
   Discount on convertible notes due to purchase option liability           $  1,072,248   $         --   $         --
                                                                            ------------   ------------   ------------
   Discount on convertible notes due to beneficial conversion feature       $    156,610   $         --   $     58,000
                                                                            ------------   ------------   ------------
   Common shares issued or issuable for prepaid interest to related party   $  4,388,275   $         --   $         --
                                                                            ------------   ------------   ------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                       33
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

1.    Description of Business and Summary of Significant Accounting Policies

      Description of Business - We are in the business of manufacturing
high-resolution LCoS microdisplays. Our current customers and current
prospective customers are OEMs engaged in the businesses of manufacturing high
definition televisions or manufacturing light engines for incorporation into
high definition televisions. Our products are suitable for incorporation into
other potential applications including rear projection computer monitors,
wireless communication devices, portable games and digital assistants, although
we are not currently working with OEMs of these products.

      Our principal executive offices are located in Novato, California. We were
organized under the laws of the State of New York in 1989. Our wholly-owned
subsidiary, SpatiaLight Korea, Inc., was incorporated in 2004 under the laws of
the Republic of Korea. Our inactive wholly-owned subsidiary, SpatiaLight
Technologies, Inc., was incorporated in 2003 under the laws of the State of New
York.

      Basis of Consolidation - The consolidated financial statements incorporate
the accounts of SpatiaLight, Inc. and its wholly-owned subsidiaries, SpatiaLight
Technologies, Inc. and SpatiaLight Korea. All significant intercompany business
and transactions have been eliminated in consolidation.

      Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires that management make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include those related to accounts receivable reserves and inventory
reserves and write-downs, which can be affected by a change in the market value
and replacement cost of materials or a change in market price of products.

      Cash and Cash Equivalents - We consider all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. At December 31, 2004 and 2003, approximately $9,088,000 and
$6,360,000, respectively, of checking and money market accounts, the fair value
of which approximates cost, are included in cash and cash equivalents. We
deposit cash and cash equivalents with high credit quality financial
institutions.

      Accounts Receivable - Accounts receivable are due under negotiated terms.
Although we generally do not require collateral, letters of credit may be
required from our customers in certain circumstances. Senior management reviews
accounts receivable on a quarterly basis to determine if any receivables are
uncollectible. In the event that payment of a customer's account receivable is
questionable, we would reserve the receivable under an allowance for doubtful
accounts. If all attempts to collect a receivable fail, the receivable would be
written off against the allowance.

      Inventory. Inventory is valued at the lower of cost (based on the
first-in, first-out method) or market value. Materials, labor and manufacturing
overhead are included in the cost of inventories. In determining inventory
market values, substantial consideration is given to the expected selling price
of the product based on historical recovery rates. If the market value of
inventory is assessed to be less than cost, it is written down to its
replacement cost or its net realizable value. 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. The adjustment to
record inventory at lower of cost or market value was $0, $311,000 and $286,000
in 2004, 2003 and 2002, respectively.

      Property and Equipment - Property and equipment is recorded at cost while
repairs and maintenance costs are expensed in the period incurred. Depreciation
and amortization is computed for financial reporting purposes using the
straight-line method over the following estimated useful lives, 3-5 years for
furniture and office equipment, 3 years for machinery and 18 months for tooling.
Building improvements are amortized over the shorter of eight years or the life
of the lease.

      Debt Issuance Costs - Debt issuance costs related to the 2004 Senior
Secured Convertible Notes are being amortized over the term of the notes using
the interest method.


                                       34
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

Revenue Recognition - We evaluate revenue recognition for these transactions
using the following criteria (collectively called the Revenue Recognition
Criteria):

o     Evidence of an arrangement: Before revenue is recognized, we must have
      evidence of an agreement with the customer reflecting the terms and
      conditions to deliver our products.

o     Delivery: For products, delivery is considered to occur when title and
      risk of loss have been transferred, which generally occurs upon shipment.

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

o     Collection is deemed reasonably assured: Collection is deemed reasonably
      assured if we expect the customer to be able to pay amounts under the
      arrangement as those amounts become due. We reduce product revenue for
      customer returns and sales allowances and record an allowance for doubtful
      accounts should collectibility become questionable. If it is determined
      that an account is uncollectible, the account is written off against the
      allowance.

      Shipping and Handling Costs - Shipping and handling costs to date have not
been charged to our customers. These costs have not been material to date and
they have been recorded in selling, general, and administrative costs in both
2004 and 2003. Beginning in the first quarter of 2005, all shipping and handling
costs relating to sales of our products will be recorded in cost of revenue. To
the extent that such costs are recouped from the customers, such amounts will be
included in revenue.

      Income Taxes - We utilize the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce deferred tax
assets to an amount whose realization is more likely than not. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

      Research and Development - Research and development costs, including the
costs of prototype and pre-production display units are charged to expense when
incurred.

      Foreign Currency Translation - We translate the assets and liabilities of
our foreign subsidiary to U.S. dollars at the rate of exchange in effect at the
end of the accounting period. Revenues and expenses are translated at the
average rates of exchange for the accounting period. Translation adjustments
attributable to our foreign subsidiary are included in stockholders' equity as a
component of other comprehensive income (loss).

      Comprehensive Loss- Comprehensive loss is comprised of net loss and other
comprehensive income. The only component of other comprehensive income is
foreign currency translation adjustments in 2004. Other comprehensive income is
disclosed in the statement of stockholders' equity (deficit).

      Fair Value of Financial Instruments - Our financial instruments include
cash equivalents, accounts receivable, and debt. The carrying value of cash
equivalents and accounts receivable approximates their fair value. The face
amount of the convertible notes approximates their fair value and is offset by
the calculated value of the beneficial conversion feature, additional investment
rights or note purchase option embedded in the notes, and reimbursement to a
noteholder of certain costs.

      Derivative Financial Instruments - Our derivative financial instruments
consist of a note purchase option attached to senior secured convertible notes.
The fair value is calculated based on the Black-Scholes option-pricing model.

      Stock-Based Compensation - We account for our 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 clarified by Financial Accounting Standards Board
(FASB) Interpretation No. 44 "Accounting for Certain Transactions Involving
Stock Compensation." 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
shares. Pursuant to Statement of Financial Accounting Standard (SFAS) No. 123
"Accounting for Stock-Based Compensation", we


                                       35
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

disclose the proforma effects of using the fair value method of accounting for
stock-based employee and director compensation arrangements, and record
compensation expense for the fair value of options granted to non-employees.

      If we had elected the fair value method of accounting for employee and
director stock options, compensation cost would be accrued at the estimated fair
value of stock option grants over the service period, regardless of later
changes in stock prices and price volatility. The fair values at date of grant
for options granted have been estimated based on a Black-Scholes pricing model
with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                                                       2004             2003             2002
                                                                                   ------------     ------------     ------------
<S>                                                                                          <C>              <C>             <C>
Dividend yield                                                                               --               --               --

Expected volatility                                                                          89%              82%             100%

Risk-free interest rates                                                                    2.5%               2%               5%

Expected lives                                                                        3.2 years        4.8 years        5.6 years
</TABLE>

      The table below shows net loss per share as if the Company had elected the
fair value method of accounting for stock options

<TABLE>
<CAPTION>
                                                                                       2004             2003             2002
                                                                                   ------------     ------------     ------------
<S>                                                                                <C>              <C>              <C>
Net loss as reported                                                               $ (9,367,001)    $ (9,516,377)    $ (9,027,913)

Add: stock-based employee compensation included
in reported net loss, net of any related tax effects                                     67,674          195,387           38,951

Deduct: total stock-based employee compensation
determined under fair value method for all awards,
net of any applicable related tax effects                                            (2,723,586)      (1,267,299)      (1,491,535)
                                                                                   ------------     ------------     ------------

Proforma net loss, as adjusted                                                     $(12,022,913)    $(10,588,289)    $(10,480,497)
                                                                                   ============     ============     ============

Loss per share:
Basic and diluted, as reported                                                     $      (0.27)    $      (0.34)    $      (0.37)
Basic, as adjusted                                                                 $      (0.35)    $      (0.38)    $      (0.43)
</TABLE>

      Impairment of Long-lived Assets and Long-lived Assets to be Disposed of -
We evaluate our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets or intangibles
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less cost to sell.

      Loss per Common Share - Basic loss per common share excludes dilution and
is computed by dividing the net loss by the weighted-average number of common
shares outstanding for the period. Diluted loss per common share reflects the
potential dilution that could occur if securities or other contracts to issue
common shares were exercised or converted into common shares. Common share
equivalents are excluded from the computation in loss periods, as their effect
would be antidilutive.

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

      Recently Issued Accounting Standards - In March 2004, the Financial
Accounting Standards Board (FASB) approved the consensus reached by the Emerging
Issues Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its application to Certain Investments." The objective of this
Issue was to provide guidance for identifying impaired investments.


                                       36
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

EITF 03-1 also provided new disclosure requirements for investments that are
deemed to be temporarily impaired. The accounting provisions of EITF 03-1 were
effective for all reporting periods beginning after June 15, 2004, while the
disclosure requirements were effective only for annual periods ending after June
15, 2004. In September 2004, the FASB deferred the requirement to record
impairment losses caused by the effect of increases in "risk-free" interest
rates and "sector spreads" on debt securities subject to paragraph 16 of EITF
03-1 and excludes minor impairments from the requirement until new guidance
becomes effective. We have evaluated the impact of the adoption of EITF 03-1 and
do not believe the impact is significant to our overall results of operations or
financial position.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" (FAS
151), which requires certain inventory-related costs to be expensed as incurred.
FAS 151 is effective January 1, 2006. We have not assessed the effect of FAS 151
on our consolidated financial statements.

      In December 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 123R, "Share-Based Payment" to revise SFAS No. 123
"Accounting for Stock-Based Compensation," and supersede APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and its related implementation
guidance. It requires companies to measure and recognize compensation expense
for all share-based payments at fair value. SFAS No. 123R is to be applied in
the first quarter of 2006. We have not yet evaluated the impact that the
adoption of SFAS No. 123R will have on our financial statements; however, the
adoption could materially impact our results of operations.

2.    Issuance of Securities

Issuance of Shares in 2004

      In December 2003, we completed a private placement of 1,000,000 common
shares that were registered with the SEC in a "Shelf" Registration Statement at
a price of $5.00 per share for net proceeds of $4,955,255 received in December
2003. Prior to December 31, 2003, 300,000 of these shares were issued. The
remaining 700,000 shares were reflected in common shares issuable at December
31, 2003 and were issued in January 2004. In addition, 120,082 shares were
issued in 2004 pursuant to a warrant exercised in late 2003. The proceeds of
approximately $306,000 had been received and were included in common shares
issuable as of December 31, 2003.

      On January 7, 2004, we issued 142,360 common shares with a value of
$800,063 as a prepayment of interest on the Argyle notes for the interest due
for 2004 (See Note 3). Prepaid interest was computed using the closing price of
the shares on January 6, 2004 of $5.62. This amount is fully amortized at
December 31, 2004. On March 4, 2004, we issued an additional 71,676 common
shares with a value of $338,311 as a prepayment of interest on the Argyle notes
for the period January 1, 2005 to June 30, 2005. Prepaid interest was computed
using the closing price of the shares of $4.72 on March 3, 2004. On December 22,
2004, we issued an additional 50,000 shares, and 448,764 shares became issuable
(and were issued in January 2005) as a prepayment of interest on the Argyle
notes for the period from July 1, 2005 through December 31, 2008. These shares
had a value of $4,049,964 based on the closing price of the shares of $8.12 on
December 21, 2004. The total prepaid interest on the Argyle notes for the period
January 1, 2005 through December 31, 2008 is $4,388,275 at December 31, 2004,
with $913,889 classified as a current asset and $3,474,386 classified as a
noncurrent asset.

Exercise of Stock Options and Warrants in 2004

      During 2004, employee stock options for 465,083 common shares were
exercised for $1,158,022 and warrants for 680,781 common shares were exercised
for $1,730,681. We issued 132,737 of the shares in early January 2005.

Issuance of Warrant and Option for services in 2004

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

      In October 2004, we issued a fully vested option to purchase 10,000 common
shares to a consultant. The option was assigned a value of $53,850 using the
Black-Scholes option pricing model and the following assumptions: stock price
$5.75,


                                       37
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

exercise price $5.75, historical volatility 113%, a risk free rate of 3%, a
dividend yield of 0 and a contractual life of 10 years. This amount is included
in stock-based general and administrative expenses.

      Other expenses in 2004 totaling $67,674 relate to the valuation of options
granted to employees with an exercise price lower than the market price on the
date of grant, and options granted to a director for additional services. All of
these options were issued in years previous to 2004.

Issuance of Shares Under Installment Note

      In November 2002, a warrant to purchase 746,268 common shares was
exercised by the purchaser of the warrant at $2.00 per share under a warrant
installment agreement totaling $1,492,536. Payments of $200,000 were made in
2002. An additional $402,500 was received in 2003. In 2004, a payment of
$142,350 was made which represented interest accrued through March 2004 of
$92,350, and an installment payment of $50,000 for April 2004. Interest accrues
at 6% per annum and is due with the final payment. The 746,268 shares were
issued to the purchaser in the third quarter of 2003. On July 7, 2004, the Board
of Directors approved an agreement with the purchaser that, in consideration for
the purchaser's involvement in our efforts to obtain financing, we would suspend
the warrant installment payments through the end of the third quarter of 2004,
at which time the Board would evaluate the financing efforts and the involvement
attributed to the purchaser. On November 30, 2004, the Board resolved that in
connection with the November 2004 Financing, the purchaser and Robert A. Olins,
the Chief Executive Officer and a director SpatiaLight, were each entitled to
receive due consideration from us for their respective financing commitments
(See Note 3). Mr. Olins communicated with the Board his desire to forego any
consideration in favor of the purchaser. We agreed with the purchaser to reduce
the amount owed by the purchaser, under the warrant installment agreement by
$600,000. This amount was included in stock-based general and administrative
expense. At December 31, 2004, the remaining balance of the note receivable
under the warrant installment agreement is $241,462.

      On May 15, 2001, we sold 600,000 common shares under a private stock
purchase agreement. The shares were sold at a price of $1.75 per share. Cash
received was $262,500. The balance of $787,500 was to be paid in three equal
quarterly installments of $262,500. An escrow agent held the certificates for
the shares being purchased until all three installments were paid in full. At
December 31, 2004 the remaining balance was paid and the shares were released
from escrow.

Issuance of Shares in 2003

      On December 31, 2003, we issued 93,633 common shares upon the conversion
of a short-term convertible note with an outstanding balance of $250,000. The
conversion price was $2.67 per share (See Note 3). During 2003, we issued
1,344,827 common shares upon conversion to notes payable of $2,775,000 and
accrued interest of $565,770 (See Note 3).

      In August 2003, in a private equity financing transaction, we issued
1,212,061 common shares at $2.28 per share and 303,015 fully vested warrants,
with a strike price of $3.29, and a term of five years in exchange for net
proceeds of $2,538,852, with six purchasers, none of who is an affiliate of
SpatiaLight. In addition, warrants to purchase 48,482 shares were granted to the
placement agent for the financing. There was no earnings impact for these
warrants, as they were part of the net issuance costs.

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

      In order to complete this equity financing, the outside investors required
significant participation from Robert A. Olins. To achieve this, Mr. Olins
borrowed funds to purchase his share of the financing. Our board of directors
unanimously (except for Mr. Olins, who did not vote on this matter) approved
reimbursements of $250,000 for certain expenses incurred in connection with the
personal loan to Mr. Olins made by a bank, and $300,000, payable through the
issuance of 130,435 common shares, for a finder's fee that Mr. Olins was
obligated to pay to an unaffiliated third party. Another shareholder of
SpatiaLight, to whom we subsequently


                                       38
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

issued the 130,435 Shares, undertook Mr. Olins' obligations to the finder. The
$376,957 fair value of the 130,435 shares is included in stock-based general and
administrative expense.

      Additionally, warrants in the aggregate of 77,126 shares were issued to
the placement agent affecting the financing. There was no earnings impact for
these warrants, as they were a part of the net issuance costs.

      We became aware that the then current interpretations of the NASDAQ rules
by the NASDAQ staff require shareholder approval of the sale by us to Mr. Olins
of 1,357,441 shares at the same discount received by the other investors in that
transaction. Upon review, we determined that we were required to seek
shareholder ratification of the sale to Mr. Olins at our 2004 annual meeting of
shareholders. Mr. Olins informed us that in the interim he would not dispose of,
nor vote, these shares until such ratification was obtained. Such ratification
was obtained on July 7, 2004.

Issuance of Stock and Warrants for Interest in 2003

      On January 3, 2003, we issued 142,360 common shares with a fair value of
$354,476 as a prepayment of interest. Prepaid interest was computed using the
closing price of the common shares on December 31, 2002 of $2.49, and was
amortized through December 31, 2003 (See Note 3).

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

Exercise of Stock Options and Warrants in 2003

      During 2003, we issued 215,874 and 149,750 common shares upon the exercise
of warrants and employee and director stock options, respectively. Total cash
received was $376,542 and $168,239, respectively. Included in the warrant
exercise are 69,547 shares issued upon the cashless exercise of 250,000
warrants. Additionally, proceeds of $305,685 were received prior to December 31,
2003, for the exercise of warrants. At December 31, 2003, these proceeds were
included in common stock issuable and 120,082 common shares were issued in
January 2004 for these warrants.

Issuance of Stock, Stock Options and Warrants for services in 2003

      In October 2002, we issued a fully vested warrant for consulting services
rendered in 2002 and 2003. An expense of $91,000 was recognized for the portion
of the services rendered in 2003. The warrant to purchase 250,000 common shares
had an exercise price of $3.50. The following assumptions were used in
determining the value: stock price $1.84, historical volatility 100%, risk free
rate 5%, a dividend yield of 0, and a contractual term of two years, and is
reflected in the statement of operations as stock-based general and
administrative expense.

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

      In March 2003, we issued 47,000 common shares in exchange for consulting
services provided in 2002 totaling $116,250. The expense associated with these
services was recorded in stock-based general and administrative expense in 2002.

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

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


                                       39
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

      In May 2003, we issued 32,000 common shares to an outside consultant. The
shares were issued in consideration of services rendered by the consultant in
2003. These shares were valued at $68,800, the market value of the shares on the
date of grant. The value of these shares was recorded in stock-based general and
administrative expense.

      In July 2003, we issued an option to one of our officers to purchase
800,000 common shares. The stock option was granted pursuant to the Amended and
Restated Time Accelerated Restricted Stock Award Plan ("TARSAP"). The TARSAP was
granted to the officer in the following manner: (i) 125,000 options which vested
as of July 7, 2003 and which options expire on July 7, 2006 (35,000 options have
an exercise price of $2.55 and 90,000 options have an exercise price of $12.50),
and (ii) 675,000 options which vest upon the earlier of the achievement of
certain performance tests within two years after the date of the grant or the
second anniversary of the grant date. The options expire three years after they
vest and become exercisable (175,000 of such options have an exercise price of
$5.00, which vested on January 27, 2004, 225,000 of such options have an
exercise price of $7.50 and 275,000 of such options have an exercise price of
$12.50). Of the vested options, 25,000 were exercised at a price of $2.55 on
December 30, 2004. The total expense recognized in 2003 under this agreement was
$86,750 included in stock based general and administrative expense.

      In October 2003, we issued a fully vested option to purchase 5,000 common
shares in exchange for services rendered in 2003. A value of $22,003 was
assigned to this option using a Black-Scholes option pricing model and the
following assumptions: stock price $4.69, historical volatility 112%, risk free
rate of 4.27%, dividend yield of 0 and contractual life of 10 years.

      In October 2003, we issued a fully vested warrant to purchase 50,000
common shares to a consultant in exchange for services rendered in 2003. A value
of $80,546 was assigned to the warrant using a Black-Scholes option pricing
model and the following assumptions: stock price $4.68, exercise price $3.50,
historical volatility 63%, risk free rate of 1%, a dividend yield of 0 and
contractual life of nine months.

      Other expenses in 2003 related to the valuation of options granted to
directors for additional services and employee options issued with an exercise
price lower than market price totaled $108,637 and are included in stock-based
general and administrative expense.

Exercise of Stock Options and Warrants in 2002

      During 2002, we issued 646,354 and 9,500 shares of common shares upon the
exercise of warrants and employee stock options, respectively. Total cash
received was $1,568,500 and $5,713, respectively. Included in the warrant
exercises are 16,354 shares issued upon the cashless exercise of 171,429
warrants by investors associated with the Alabama Group (described below).

      On June 28, 2002, warrants to purchase 329,355 common shares were
exercised by a group of investors that we call the Alabama Group, which includes
a trust for the benefit of Steven F. Tripp, a director of SpatiaLight as of
December 31, 2003. 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 our opinion, no other investor in the Alabama Group is an
affiliate of SpatiaLight and Mr. Tripp is not an affiliate of any other investor
in the Alabama Group. On the same day, warrants to purchase 370,645 common
shares were reassigned for no consideration and exercised by other investors,
none of whom is an affiliate of SpatiaLight or of any of our directors. When
originally granted, all of the warrants had an exercise price of $3.50 and an
expiration date of June 30, 2002. To induce the holders to exercise, the
exercise price was reduced to $3.13, the average closing price for the previous
four days, a price slightly below the closing price on the commitment date. The
warrants were exercised under warrant installment agreements totaling $1,747,347
with initial payments totaling $443,644.

      Share issuance costs associated with the above transactions totaled
$132,610 and has been recorded as a reduction in additional paid-in capital.

      Payments totaling $960,568 were made under the warrant installment
agreements, as well as $21,875 relating to notes receivable from shareholders
that were outstanding as of December 31, 2001. The exercise price for each
installment was marked to market based on the closing price the day prior to the
due date. The resulting intrinsic value of $210,042, based on the change in
exercise price, was recorded as non-cash interest expense of $156,825, and
additional paid in capital of $53,217. Of the 700,000 shares held in escrow,
197,005 were restored to the status of authorized but unissued shares in
exchange for the reversal in 2002 of notes receivable totaling $643,416.


                                       40
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

      In connection with the above warrant exercises and note reversals,
including repricing for certain warrantholders who are also debt holders, a
total of $219,325 in pricing concessions has been charged as additional non-cash
interest expense (see Note 3), including the marked-to-market charge described
above.

Issuance of Shares, Stock Options and Warrants in 2002

      On October 14, 2002, we issued a fully vested warrant expiring in October
2003 to purchase 31,250 common shares at an exercise price of $3.50 in exchange
for consulting services rendered in the fourth quarter. A value of $12,337 was
assigned to the warrants 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 one year. The value of
the warrant is reflected in the statement of operations as stock-based general
and administrative expense.

      On October 14, 2002, we issued a fully vested warrant to purchase 250,000
common shares at an exercise price of $3.50 in exchange for consulting services
rendered over a 6-month period. A value of $88,192 was assigned to the warrants
for the portion of the services rendered in 2002 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 in 2002 is
reflected in the statement of operations as stock-based general and
administrative expense.

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

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

      During 2002, 92,799 common shares and 12,500 fully vested consultant
options expiring in 2012 to purchase common shares at prices ranging from $1.99
to $3.67 were issued in exchange for services valued at $235,450.

      In March 2002, we issued 60,000 common shares to our Director of Corporate
Development. The shares were issued in consideration of services rendered by the
employee with respect to assisting usany in negotiating the contractual
relationships with our existing prospective customers. These shares were valued
at $220,200, the market value of the shares on the date of grant. Other expenses
related to the valuation of options granted to directors for additional services
totaled $95,711, included in stock-based general and administrative expenses in
the accompanying statements of operations.

Note and Interest Conversions in 2002

      During 2002, we issued 62,500 common shares in exchange for a $125,000
convertible note.

      During 2002, we issued 178,992 common shares upon the conversion of
accrued interest of $691,400 under certain convertible notes, which includes
additional deemed interest of $491,877 in 2002 and $128,241 in 2001 due to
beneficial conversion features of the interest on the underlying notes (See Note
3).


                                       41
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

Rescission of Stock Purchase Agreement in 2002

      During the first quarter of 2002 a stock purchase agreement was cancelled
as a result of a default by the purchaser. The stock purchase agreement was
entered into in October 2001 and called for four equal installments due
quarterly beginning January 5, 2002. A check for the $626,014 payment due in
January was received and deposited at the end of March 2002, but was
subsequently not honored by the purchaser's bank. As a result, the stock
purchase agreement, by its terms, was cancelled and the 1,346,268 shares have
been restored to the status of authorized but unissued shares. The initial
payment of $13,463 was forfeited by the purchaser and was transferred from
stated capital to additional paid in capital. The subscription receivable of
$2,504,059 and the related additional paid in capital have been eliminated from
the balance sheet. The cancellation of the stock purchase agreement did not have
any effect on results of operations.

      Stock-based general and administrative expenses discussed above are as
follows:

<TABLE>
<CAPTION>
                                                                         Year-end December 31,
                                                                   2004           2003           2002
                                                               ------------   ------------   ------------
<S>                                                            <C>            <C>            <C>
Financing costs related to reduction of stockholder note       $    600,000   $         --   $         --
Warrants issued to investors                                             --             --         28,435
Stock and options granted to employees and directors                 67,674        195,387        276,960
Common stock and warrants expensed for services                     263,850        385,663        368,655
Stock issued in connection with May stock purchase                       --        376,957             --
Beneficial pricing on sale of stock and warrants to officers             --        958,913             --
Other                                                                    --         68,800         38,951
                                                               ------------   ------------   ------------
                                                               $    931,524   $  1,985,720   $    713,001
                                                               ============   ============   ============
</TABLE>

3.    Notes Payable

      Convertible notes at December 31, 2004 consist of the following:

            Argyle Notes:

            In 1998, we received $1,188,000 in cash in exchange for notes
      payable in that amount to Argyle Capital Management Corporation (Argyle),
      a company owned and controlled by Robert A. Olins, Chief Executive
      Officer, Secretary, Treasurer, and a Director of SpatiaLight. The notes
      accrue interest at a contractual rate of 6% per annum, and are secured by
      substantially all of our assets. Both principal and interest are
      convertible into our common shares at $0.50 per share. On May 23, 2001,
      the due date of the notes was extended until December 31, 2002. On the
      extension date, the beneficial conversion effect representing the excess
      aggregate value of the common shares receivable upon conversion of the
      notes based on the then current market price of $1.90 per share, over the
      aggregate conversion price for such common shares (limited to the original
      proceeds of $1,188,000), was recorded as additional paid-in capital. The
      resulting $1,188,000 discount to the debt arising from the beneficial
      conversion feature was originally being amortized through December 31,
      2002. The 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 was 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 December 31, 2003, the due date was
      extended until June 30, 2005. Accordingly, the remaining unamortized
      discount of $33,000 at the extension date was being amortized through June
      30, 2005, resulting in a new effective interest rate of 8% per annum when
      compared to the outstanding principal balances. On November 30, 2004, the
      due date was extended until December 31, 2008. The remaining unamortized
      discount of $11,000 at the extension date will be amortized through
      December 31, 2008.


                                       42
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

            We paid interest payable on the Argyle notes by issuing 142,560
      common shares with a market value of $563,157 in 2002, 142,360 common
      shares with a market value of $354,476 in 2003, and 142,360 common shares
      with a market value of $800,063 in 2004. The market value of the shares
      was based on the closing price of the shares on the day before issuance,
      and was recorded as interest expense. This interest expense includes
      non-cash interest expense of $491,887 in 2002, $283,196 in 2003, and
      $728,780 in 2004. The non-cash interest expense results from the
      beneficial conversion price of interest payable, which is convertible into
      common shares at $0.50 per share, and was computed as the excess of the
      market price of the shares issued for the interest over accrued interest
      payable.

            On March 4, 2004, we issued 71,676 common shares with a market value
      of $338,311 as a prepayment of interest payable on the Argyle notes of
      $35,640 for the period January 1, 2005 to June 30, 2005. Prepaid interest
      was computed using the closing price of the shares of $4.72 on March 3,
      2004. On December 22, 2004, we issued 50,000 common shares, and 448,764
      common shares became issuable (and were issued in January 2005), as a
      prepayment of interest payable on the Argyle notes of $249,480 for the
      period July 1, 2005 through December 31, 2008. These shares had a market
      value of $4,049,964, based on the closing price of the shares of $8.12 on
      December 21, 2004. Total prepaid interest on the Argyle notes for the
      period January 1, 2005 to December 31, 2008 is $4,388,275 at December 31,
      2004, with $913,889 classified as a current asset, and $3,474,386
      classified as a noncurrent asset.

            At December 31, 2004, the carrying value of the Argyle notes totals
      $1,177,000, which includes the $1,188,000 principal balance net of the
      unamortized discount of $11,000.

      The November 2004 Financing:

            On November 30, 2004, we completed a non-brokered private placement
      of $10 million of senior secured notes (the 2004 Senior Secured
      Convertible Notes). The notes accrue interest at 10%, payable quarterly,
      and the interest is payable in cash or common shares, at the option of the
      Company (if certain conditions are met). The value of the shares for the
      purposes of calculating interest payments shall be equal to the 20-day
      trailing average of the volume weighted average prices of our common
      shares at the end of each quarterly interest period. The notes are due
      November 30, 2007.

            The 2004 Senior Secured Convertible Notes are convertible, at the
      option of the holders, into our common shares at the conversion price of
      $9.72 per share. The conversion price of the principal amount of the 2004
      Senior Secured Convertible Notes is equal to a 25% premium above the
      ten-day trailing average of the volume weighted average price of our
      common shares for the period ended November 29, 2004, which was $7.78. As
      part of the November 2004 Financing, the purchasers required Argyle to
      enter into an intercreditor and subordination agreement (the Intercreditor
      Agreement) pursuant to which Argyle agreed to subordinate our obligations
      to Argyle and the senior security interest in substantially all of our
      assets that were granted under the Argyle Notes to the interest
      represented by the purchasers of the 2004 Senior Secured Convertible
      Notes. In addition, under the terms of the November 2004 Financing, we are
      prohibited from using the funds to repay debt and are prohibited from
      paying dividends.

            We are required to file a registration statement for resale of the
      shares issuable upon conversion of the Senior Secured Convertible Notes
      and have the registration statement declared effective no later than 120
      days after November 30, 2004. Pursuant to our amended registration rights
      agreement with the noteholders, because the registration did not become
      effective by April 20, 2005, we are subject to the obligation to pay each
      noteholder cash equal to 1% of the purchase price of the notes (which
      equals an aggregate total amount of $100,000), and 1% for every 30 days
      thereafter until the registration becomes effective.

            In consideration for Argyle entering into the Intercreditor
      Agreement, our Board of Directors authorized us to enter into an extension
      and modification agreement between SpatiaLight and Argyle with respect to
      the Argyle Notes (the Extension Agreement) under which the due date of the
      Argyle Notes was extended to December 31, 2008.

            Under the terms of the November 2004 Financing, Robert A. Olins and
      Greenpark Limited, an unaffiliated shareholder of SpatiaLight, jointly and
      severally committed, in the event that the Board determines that such
      financing is necessary, to provide us with up to $6 million in future
      financing on terms and conditions to be determined at the time of any such
      transaction. That financing commitment shall be reduced by any funds that
      we receive from future sales or exercises of our equity, debt or
      derivative securities, including the sale of our common shares under the
      Prospectus that we filed with the SEC on January 28, 2005, as a part of a
      "shelf" registration process. At December 31, 2004, we had received an
      aggregate total of $676,000 of such funds, thereby reducing the commitment
      by Mr. Olins and Greenpark Limited by such aggregate amount.


                                       43
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

            Under the terms of the November 2004 Financing, the purchasers
      received the right to purchase up to an additional $5 million of senior
      secured convertible notes (additional investment rights or AIR) subject to
      the same terms and conditions, including the same conversion price as the
      notes issued in the November 2004 Financing. The AIR originally expired on
      November 30, 2005, but was amended on December 21, 2004 to expire on
      August 31, 2005. The fair value of the AIR was calculated on the November
      30, 2004 issuance date at $1,072,248 using the Black-Scholes option
      pricing model and the following assumptions: stock price $8.83, exercise
      price $9.72, volatility 67%, risk free interest rate 2.50%, a contractual
      term of one year and a dividend yield of 0. This AIR is being treated as a
      derivative and has been recorded as a note purchase option liability and
      as a discount on the 2004 Senior Secured Convertible Notes. The AIR is not
      a hedging derivative. The fair value of the derivative will be
      recalculated on a quarterly basis until exercise or expiration to reflect
      the changing market price of the stock, the remaining contractual term,
      and the changing volatility. The objective in entering into the agreement
      for the AIR was that it was required by the lenders in order to complete
      the financing agreement.

            The fair value was recalculated as of December 31, 2004 at $659,874
      using the Black-Scholes option pricing model and the following
      assumptions: stock price on December 31, 2004 of $8.95, exercise price
      $9.72, volatility 52%, risk free interest rate 2.50%, the remaining
      contractual term of eight months and a dividend yield of 0. The reduction
      in the liability of $412,374 was recorded as a gain from the revaluation
      of the note purchase option liability and is included in other income. The
      assumptions changed from the November valuation date in that the market
      price of our common shares had changed, the contractual life had changed
      due to the December 21, 2004 amendment, and the volatility changed as a
      result of the changes in market price and contractual life.

            The liability was revalued at $659,874 as of December 31, 2004 using
      the Black-Scholes option pricing model and the following assumptions:
      stock price $8.95, exercise price $9.72, volatility 52%, risk free
      interest rate 2.50%, a remaining contractual term of eight months and a
      dividend yield of 0. The reduction in the liability of $412,374 was
      recorded as a gain from the revaluation of the note purchase option
      liability and is included in other income.

            The $1,072,248 discount referred to above gave rise to a beneficial
      conversion feature of $156,610 resulting from the excess aggregate value
      of the common shares issuable upon conversion of the 2004 Senior Secured
      Convertible Notes into common shares over the discounted carrying value of
      the 2004 Senior Secured Convertible Notes at the issuance date. The
      resulting beneficial conversion feature is treated as an additional
      discount to the 2004 Senior Secured Convertible Notes and an increase in
      additional paid-in capital, and will be amortized, along with the original
      discount related to the value of the AIR, over the life of the Notes. In
      addition, $100,000 of legal fees reimbursed to one of the lenders was
      recorded as a note discount and is being amortized over the life of the
      notes. Additional financing costs of $117,162 were recorded in prepaid
      expenses and are being amortized over the life of the notes.

      Other Notes Paid or Converted in 2003

            In each of the months of December 1999 and November 2000, we
      received cash and issued convertible notes of $1,437,500, for a total of
      $2,875,000. The notes and accrued interest were convertible at $2.75 per
      share. The notes were extended on June 15, 2001, and again on September
      30, 2002. During 2003, we were repaid $100,000 and the remaining principal
      balance of $2,775,000 plus accrued interest of $565,770 was converted into
      1,344,827 common shares.


                                       44
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

      Activity in convertible notes payable for 2004 and 2003 is as follows:

<TABLE>
<CAPTION>
                                         Balance at                      (Payment) or                   Balance at
                                         December 31,    Addition or      Discount      Conversion to  December 31,
Debt Principal:                              2003        New Discount    Amortization      Equity          2004
                                         ------------    ------------    ------------   ------------    ------------
<S>                                      <C>             <C>             <C>            <C>             <C>
Argyle                                   $  1,188,000    $         --    $         --   $         --    $  1,188,000
Argyle discount                               (33,000)             --          22,000             --         (11,000)
November financing                                 --      10,000,000              --             --      10,000,000
November financing discounts for:
Beneficial conversion feature                      --        (156,610)          4,350             --        (152,260)
Reimbursement of investor's legal fees             --        (100,000)          2,778             --         (97,222)
AIR or note purchase option                        --      (1,072,248)         29,870             --      (1,042,378)
                                         ------------    ------------    ------------   ------------    ------------
      Total Convertible Notes            $  1,155,000    $  8,671,142    $     58,998   $         --    $  9,885,140
                                         ============    ============    ============   ============    ============


Accrued Interest:
Accrued Argyle 6%                        $         --    $     71,280    $         --   $    (71,280)   $         --
Beneficial interest                                --         728,780              --       (728,780)             --
November financing                                 --          84,932              --             --          84,932
                                         ------------    ------------    ------------   ------------    ------------
      Total Accrued Interest             $         --    $    884,992    $         --   $   (800,060)   $     84,932
                                         ============    ============    ============   ============    ============
</TABLE>

<TABLE>
<CAPTION>
                                 Balance at                     (Payment) or                    Balance at
                                December 31,    Addition or       Discount     Conversion to    December 31,
Debt Principal:                     2002        New Discount    Amortization      Equity            2003
                                ------------    ------------    ------------    ------------    ------------
<S>                             <C>             <C>             <C>             <C>             <C>
Argyle                          $  1,188,000    $         --    $         --    $         --    $  1,188,000
Argyle discount                     (165,000)             --         132,000              --         (33,000)
Alabama Group                      2,875,000              --        (100,000)     (2,775,000)             --
Alabama Group discount              (161,829)             --         161,829              --              --
Convertible notes-Other                   --         917,500        (667,500)       (250,000)             --
                                ------------    ------------    ------------    ------------    ------------
      Total Convertible Notes   $  3,736,171    $    917,500    $   (473,671)   $ (3,025,000)   $  1,155,000
                                ============    ============    ============    ============    ============


Accrued Interest:
Accrued Argyle 6%               $         --    $     71,280    $         --    $    (71,280)   $         --
Accrued Alabama 6%                   471,061          94,709              --        (565,770)             --
Beneficial interest                       --         283,196              --        (283,196)             --
Convertible notes-Other                   --              --              --              --              --
                                ------------    ------------    ------------    ------------    ------------
      Total Accrued Interest    $    471,061    $    449,185    $         --    $   (920,246)   $         --
                                ============    ============    ============    ============    ============
</TABLE>

      Non-cash interest expense is as follows:

<TABLE>
<CAPTION>
                                                                              2004           2003           2002
                                                                          ------------   ------------   ------------
<S>                                                                       <C>            <C>            <C>
Amortization of Alabama Group discount                                    $         --   $    161,829   $    440,945
Amortization of Argyle discount                                                 22,000        132,000        627,000
Amortization of 2004 notes discounts                                            36,998             --             --
Beneficial conversion privileges of interest on Argyle convertible debt        728,780        283,196        491,877
Amortization of prepaid financing costs                                          3,258             --             --
Repricing of warrants (See Note 2)                                                  --             --        219,325
Other (See Note 2)                                                                  --          6,647             --
                                                                          ------------   ------------   ------------
                                                                          $    791,036   $    583,672   $  1,779,147
                                                                          ============   ============   ============
</TABLE>


                                       45
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

4.    Balance Sheet Components

Inventory as of December 31 consists of the following:

                                           2004           2003
                                       ------------   ------------

Raw materials                          $    691,168   $    171,812
Work-in-progress                             31,684        665,842
Finished goods                              450,462        151,963
                                       ------------   ------------
                                          1,173,314        989,617

Inventory reserve                                --       (210,000)
                                       ------------   ------------
                                       $  1,173,314   $    779,617
                                       ============   ============

Property and equipment as of December 31, consists of the following:

                                     2004           2003
                                 ------------   ------------

Office furniture and equipment   $    545,201   $    522,718
Machinery and equipment             1,901,333      1,404,154
Tooling                               344,890        254,270
Building improvements                 175,654         35,803
                                 ------------   ------------
                                    2,967,078      2,216,945

Less accumulated depreciation       2,108,866      1,578,515
                                 ------------   ------------
                                 $    858,212   $    638,430
                                 ============   ============

Accrued expenses and other current liabilities as of December 31, consist of the
following:


                                           2004           2003
                                       ------------   ------------

Deferred rent                          $    314,611   $    243,604
Accrued compensation                        246,967        206,936
Construction in progress liabilities      1,800,603             --
Accrued interest on senior secured
  convertible notes                          84,932             --
Other                                        86,433         67,597
                                       ------------   ------------
                                       $  2,533,546   $    518,137
                                       ============   ============

      We incurred depreciation expense of $575,391, $393,302 and $412,833 for
the years ended December 31, 2004, 2003 and 2002, respectively.

      Rent expense related to operating leases for 2004, 2003 and 2002 was
$585,897, $523,995 and $387,357, respectively.

      We lease our office space under a non-cancelable operating lease. The
lease expires in August 2009 and is subject to escalations in rent. Rent expense
is recorded evenly over the lease. Deferred rent of $314,611 is recorded as of
December 31, 2004.


                                       46
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

      Future lease obligations under non-cancelable operating leases as of
December 31, 2004 are as follows:

                    Year                               Amount
      ---------------------------------   ---------------------------------
                                  2005                           $ 720,107
                                  2006                             497,182
                                  2007                             459,040
                                  2008                             471,768
                                  2009                             320,651
                                          ---------------------------------
                                 TOTAL                         $ 2,468,748
                                          =================================

5.    Income Taxes

      Income taxes consist primarily of state minimum taxes. Income tax expense
(benefit) differed from the amounts computed by applying the U.S. federal income
tax rate of 34% to pretax losses from operations as a result of the following:

<TABLE>
<CAPTION>
                                                              2004           2003           2002
                                                           -----------    -----------    -----------
<S>                                                        <C>            <C>            <C>
Computed tax benefit at federal statutory rate             $(3,185,000)   $(3,236,000)   $(3,069,500)

Federal research and development credit                        (91,000)      (103,000)      (190,500)
Permanent differences, primarily nondeductible interest        401,000        207,000        611,625
Changes in valuation allowances                              3,869,000      3,339,000      4,209,200
State tax benefit, net of effect on federal income taxes      (252,000)      (586,000)    (1,004,300)
Other, net                                                    (740,525)       379,000       (554,300)
                                                           -----------    -----------    -----------

Total tax expense                                          $     1,475    $        --    $     2,225
                                                           ===========    ===========    ===========
</TABLE>

      The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
is presented below:

                                               2004            2003
                                           ------------    ------------

Deferred tax assets:

Federal net operating loss carryforwards   $ 20,140,000    $ 16,849,000
State income tax effects and credits          4,128,000       3,876,000
Accrued expenses                                 26,000          21,000
Federal research and development credits        978,000         885,000
Options and warrants                          1,139,000       1,060,000
Other                                           279,000         130,000
                                           ------------    ------------
Gross deferred tax assets                    26,690,000      22,821,000
Valuation allowance                         (26,690,000)    (22,821,000)
                                           ------------    ------------

Net deferred tax assets                    $         --    $         --
                                           ============    ============

      The net change in the total valuation allowance was $3,869,000 $3,339,900
and $4,112,500 in 2004, 2003 and 2002, respectively. As of December 31, 2004, we
had net operating loss carryforwards of approximately $57.6 million for federal
and $51.0 million for state tax purposes, respectively, which expire in varying
amounts from 2005 for federal purposes, and have already begun to expire for
state purposes. In addition, as of December 31, 2004, we had research and
development carryforwards of approximately $978,000 for federal tax purposes,
which will begin to expire in 2008 and $1,078,000 for state tax purposes, which
will begin to expire in 2008.


                                       47
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

      Under the provisions of the Internal Revenue Code, should substantial
changes in our ownership occur, the utilization of net operating loss
carryforwards might be limited.

      Deferred tax assets resulting from net operating losses attributable to
certain stock option exercises and warrant issuances could result in a
cumulative $2,200,000 credit to additional paid-in capital instead of reducing
income tax expense if realized.

6.    Stockholders' Equity

      Stock Option Plans - In 1999 the Stockholders approved the 1999 Stock
Option Plan (the Plan), which replaced our 1993 Non-Statutory Employee Stock
Option Plan, the 1993 Non-Statutory Director Stock Option Plan, and the 1991
Stock Option Plan. The Plan authorizes the issuance of options to purchase up to
4,000,000 shares of our common shares. The Plan provides for options which may
be issued as nonqualified or qualified incentive stock options under Section
422A of the Internal Revenue Code of 1986, as amended.

      In June 2002, the Stockholders approved an amendment to the Stock Option
Plan to increase the maximum number of shares that can be issued pursuant to
award grants made under the Plan by 1,000,000 common shares, raising the total
number of common shares reserved for issuance thereunder to 5,000,000.

      In July 2004, the Stockholders approved an amendment to the Stock Option
Plan to increase the maximum number of shares that can be issued pursuant to
award grants made under the Plan by 2,000,000 common shares, raising the total
number of common shares reserved for issuance thereunder to 7,000,000.

      Under the Plan, we may grant options to employees at prices not less than
85% of fair market value for non-statutory stock options, and to directors at
the fair market value at the date of grant.

      Options under the Plan are granted at the discretion of the Board of
Directors/Compensation Committee. Options expire 10 years from the date of grant
and, in general, vest and become exercisable 50% at the end of year one and 50%
at the end of year two. Changes to the vesting period may be made at the
discretion of the Board of Directors/Compensation Committee.

      The following is a status of the options under the Plan and outside of the
Plan and a summary of the changes in options outstanding during 2004, 2003 and
2002:

                                                          Weighted Average
                                    Number of Shares       Exercise Price
                                   ------------------    ------------------
Outstanding January 1, 2002                 4,624,500    $             3.20

Options granted under the plan              1,057,500    $             3.20
Options exercised                              (9,500)   $             0.60
Options cancelled                            (111,667)   $             4.81
                                   ------------------

Outstanding December 31, 2002               5,560,833    $             3.17
Options granted under the plan                738,750    $             2.36
Options granted outside the plan              800,000    $             7.89
Options exercised                            (149,750)   $             1.12
Options cancelled                          (1,987,500)   $             4.79
                                   ------------------

Outstanding December 31, 2003               4,962,333    $             3.26
Options granted under the plan              1,122,500    $             5.39
Options exercised                            (465,083)   $             2.49
Options cancelled                            (161,250)   $             4.43
                                   ------------------

Outstanding December 31, 2004               5,458,500    $             3.89
                                   ==================


                                       48
<PAGE>

                                SPATIALIGHT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2004, 2003 AND 2002

      At December 31, 2004, 1,675,000 of the options outstanding were granted
outside of the Plan. Options exercisable as of December 31, 2004 and 2003
totaled 4,128,917 and 3,276,458 options, respectively, at a weighted average
exercise price of $2.84 and $2.19 per share, respectively. Of the options
exercisable as of December 31, 2004, 1,175,000 options were issued outside of
the Plan at a weighted average exercise price of $2.87.

      The weighted average fair value of options granted during 2004, 2003 and
2002:

<TABLE>
<CAPTION>
                                               2004           2003           2002
                                           ------------   ------------   ------------
<S>                                        <C>            <C>            <C>
Exercise price equals market price         $       2.18   $       2.49   $       1.75
Exercise price is less than market price             --           4.07             --
Exercise price is more than market price             --           2.24             --
</TABLE>


      Additional information regarding options outstanding as of December 31,
2004 is as follows:

<TABLE>
<CAPTION>
                            Options Outstanding                                Options Exercisable

                                             Weighted Average
                                                Remaining
        Range of        Outstanding at       Contractual Life   Weighted Average     Number                 Weighted Average
    Exercise Prices    December 31, 2004           (Yrs.)         Exercise Price   Exercisable                Exercise Price
--------------------------------------------------------------------------------------------------------------------------------
<S>                   <C>                      <C>               <C>              <C>                       <C>
$9.01 - 12.50                         365,000       8.5               $12.50                  90,000             $12.50
$8.01 - 9.00                           20,000       9.9               $ 8.35                       -             $    -
$7.01 - 8.00                          225,000       8.5               $ 7.50                       -             $    -
$6.01 - 7.00                            5,000       7.0               $ 7.00                   5,000             $ 7.00
$5.01 - 6.00                        1,220,000       9.2               $ 5.37                 675,417             $ 5.22
$4.01 - 5.00                          212,500       8.6               $ 4.76                  72,500             $ 4.58
$3.01 - 4.00                          505,000       7.1               $ 3.60                 500,000             $ 3.60
$2.01 - 3.00                        1,540,000       7.6               $ 2.38               1,402,500             $ 2.35
$1.01 - 2.00                        1,003,000       6.5               $ 1.51               1,020,500             $ 1.42
$0.25 - 1.00                          363,000       3.3               $ 0.65                 363,000             $ 0.45
                      -----------------------                                      -----------------
                                    5,458,500                                              4,128,917
                      =======================                                      =================
</TABLE>

At December 31, 2004, 1,444,166 options were available for future grants under
the Plan.

Diluted net loss per share

Diluted net loss per share does not include the effect of the following
potential common shares at December 31:

<TABLE>
<CAPTION>
                                                                     2004           2003           2002
                                                                 ------------   ------------   ------------
<S>                                                                 <C>            <C>            <C>
Shares issuable under stock options                                 5,458,500      4,962,333      5,560,833

Shares issuable pursuant to warrants to purchase common shares        746,761      1,297,626        531,250

Shares of convertible notes on an "as if converted" basis           3,404,807      2,376,000      3,425,603
</TABLE>

      The weighted average exercise price of stock options outstanding was
$3.89, $3.26, and $3.17 as of December 31, 2004, 2003, and 2002 respectively.
The weighted average exercise price of warrants was $3.12, $2.92, and $3.40 per
share as of December 31, 2004, 2003 and 2002, respectively.


                                       49
<PAGE>

7.    Segment Information

      Our chief operating decision-maker is our Chief Executive Officer. The
chief operating decision-maker reviews only financial information prepared on a
basis substantially consistent with the accompanying financial statements of
operations. Therefore, we have determined that we operate in a single business
segment. All assets of the Company are located at our facilities in the United
States at December 31, 2004, except for approximately $598,666 of inventory
components held for production by Fuji Photo Optical Co. Ltd. at their
facilities in Japan, and $277,441 of inventory in our Hong Kong warehouse.
Additionally, we are constructing a facility in Korea, which includes costs of
$2.8 million at December 31, 2004. Of our total revenue in 2004, 91% was derived
from the sales of our microdisplay products to customers located in China. The
remaining 9% was derived from customers in Hong Kong, Taiwan, and the Republic
of Korea. Revenues in 2003 were derived 100% from customers in China. In 2004,
47% and 43% of revenue was derived from two customers. Such customers
collectively made up 90% of the accounts receivable balance at December 31,
2004. In 2003, 51% and 34% of revenue was derived from two customers. Such
customers collectively made up 99% of the accounts receivable at December 31,
2003.

8.    Quarterly Results (Unaudited)

      Summarized unaudited results of operations for each quarter of the years
ended December 31, 2004 and December 31, 2003 are as follows:

<TABLE>
<CAPTION>
Fiscal Year Ended                  First Quarter  Second Quarter Third Quarter  Fourth Quarter
                                   -----------    -----------    -----------    -----------
      December 31, 2004
<S>                                <C>            <C>            <C>            <C>
Revenue                            $   319,100    $   540,775    $   268,200    $    32,903
Gross margin                       $   (27,582)   $   115,126    $   143,010    $   (84,762)
Net loss                           $ 1,945,893    $ 2,333,977    $ 2,148,351    $ 2,938,778
Basic and diluted loss per share   $     (0.06)   $     (0.07)   $     (0.06)   $     (0.08)
</TABLE>


<TABLE>
<CAPTION>
Fiscal Year Ended                  First Quarter  Second Quarter Third Quarter  Fourth Quarter
                                   -----------    -----------    -----------    -----------
      December 31, 2003
<S>                                <C>            <C>            <C>            <C>
Revenue                            $        --    $        --    $    82,152    $   139,100
Gross margin                       $        --    $  (100,690)   $     8,277    $  (394,655)
Net loss                           $ 1,544,539    $ 3,329,395    $ 1,824,942    $ 2,817,001
Basic and diluted loss per share   $     (0.06)   $     (0.13)   $     (0.06)   $     (0.09)
</TABLE>

9.    Valuation Accounts

<TABLE>
<CAPTION>
                                                                  Deductions -
                                      Balance at    Additions     and Writeoffs   Balance at
                                      Beginning     Charged to     Charged to      End of
                                      of Period      Expense        Reserves       Period
                                      ----------    ----------    -------------   ----------
<S>                                   <C>           <C>              <C>          <C>
Year ended December 31, 2004
  Inventory allowance                 $ 210,000     $      --        $ 210,000    $      --
Year ended December 31, 2003
  Inventory allowance                 $ 286,000     $ 311,000        $ 387,000    $ 210,000
</TABLE>

10.   Commitments

      We entered into an agreement for the construction of our manufacturing
facility in the Republic of Korea. The total contract price is approximately
$3.8 million. At December 31, 2004, we had paid approximately $950,000 to the
contractor.

      Our lease commitments are described in Note 4.


                                       50
<PAGE>

Item 9. Changes in and Disagreements with Accountant on Accounting and Financial
Disclosure.

      We mutually agreed that BDO Seidman, LLP would resign as our independent
public accountant and on December 6, 2004; we received a letter from BDO
Seidman, confirming such resignation.

      During each of the fiscal year ended December 31, 2003 and the fiscal year
ended December 31, 2002, and the subsequent interim period from January 1, 2004
through December 6, 2004, we had no disagreements with BDO Seidman on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of BDO Seidman, LLP, would have caused BDO Seidman to make
reference to the subject matter of the disagreement(s) in connection with its
report on the consolidated financial statements for such periods.

      With respect to the fiscal year ended December 31, 2003 and the fiscal
year ended December 31, 2002, BDO Seidman report on the financial statements of
the Company did not contain an adverse opinion or a disclaimer opinion and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles, except that BDO Seidman report, dated March 3, 2003, included in
Item 7 of our Form 10-KSB filed with the SEC on April 15, 2003, with respect to
our financial statements for the fiscal year ended December 31, 2002, included
an explanatory paragraph regarding substantial doubt about our ability to
continue as a going concern.

      During each of the fiscal year ended December 31, 2003 and the fiscal year
ended December 31, 2002, and the subsequent interim period from January 1, 2004
through December 6, 2004, there were no "reportable events" as that term is
defined in Item 304(a)(1)(v) of Regulation S-K.

      We provided a copy of the foregoing disclosures to BDO Seidman prior to
our filing of the Current Report on Form 8-K/A on December 22, 2004 (the "Form
8-K/A") and requested that BDO Seidman furnish us with a letter addressed to the
SEC stating whether or not it agrees with the statements in Item 4.01 of the
Form 8-K/A. A copy of the letter furnished in response to that request (as
required by Item 304 (a)(3) of Regulation S-K) dated December 10, 2004, is filed
as Exhibit 16.1 to the Form 8-K/A.

      On December 10, 2004, our Audit Committee engaged Odenberg, Ullakko,
Muranishi & Co. LLP (OUM) as our independent public accountant. We did not, nor
did anyone on our behalf, consult OUM during our two (2) most recent fiscal
years and during the subsequent interim period prior to our engagement of OUM
regarding the application of accounting principles to a specified transaction
(completed or proposed) or the type of audit opinion that might be rendered on
our financial statements. The Audit Committee's decision was based upon a review
of competitive bids submitted from various accounting firms.

      The information contained in this Item 9 was previously disclosed in the
Form 8-K/A that we filed with the SEC on December 22, 2004.

Item 9A. Controls and Procedures.

Disclosure Controls and Internal Controls. As of December 31, 2004, management
of our Company, under the supervision of our principal executive and financial
officer (CEO), evaluated (the Controls Evaluation) the effectiveness of the
design and operation of our "disclosure controls and procedures", as such term
is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended (Disclosure Controls), and our "internal controls and
procedures for financial reporting" (Internal Controls).

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


                                       51
<PAGE>

creditworthiness and/or credit considerations for new customers. Although these
control deficiencies did not result in a misstatement of revenues and/or
receivables, they relate closely to assuring the fulfilling of critical
components of revenue recognition criteria. Our Management addressed this
material weakness through our ongoing evaluation of Internal Controls and
management believes that this material weakness has been remedied by the
implementation of the new requirement that the CEO must review and approve all
outgoing invoices.

Conclusion regarding the Effectiveness of Disclosure Controls and Procedures

      Based on all of the material weaknesses related to our internal control
over financial reporting, which are set forth below, and which were identified
during the Controls Evaluation, the CEO concluded that our disclosure controls
and procedures were not effective as of the end of the period covered by this
10-K/A.

Management's Report on Internal Control Over Financial Reporting

      The management of SpatiaLight, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting. SpatiaLight,
Inc.'s internal control system was designed to provide reasonable assurance to
the company's management and board of directors regarding the preparation and
fair presentation of published financial statements.

      An internal control material weakness is a significant deficiency, or
aggregation of deficiencies, that does not reduce to a relatively low level the
risk that material misstatements in financial statements will be prevented or
detected on a timely basis by employees in the normal course of their work. An
internal control significant deficiency, or aggregation of deficiencies, is one
that could result in a misstatement of the financial statements that is more
than inconsequential.

      The management of SpatiaLight, Inc. assessed the effectiveness of the
      company's internal control over financial reporting as of December 31,
      2004, and this assessment identified the following material weaknesses in
      the company's internal control over financial reporting.

      The material weaknesses identified were:

      o     The Company's corporate governance and disclosure controls and
            procedures do not provide reasonable assurance that material
            transactions are timely and accurately reported in the financial
            statements and related disclosures, or that the unauthorized
            disposition of assets are prevented and detected. In particular:

      o     The Company does not have a corporate governance or disclosure
            committee.

            o     The Company does not have a fraud training program for
                  employees, or a mechanism to report fraud to the audit
                  committee.

            o     The audit committee does not have a financial expert (as
                  defined by SEC rules) or procedures for archiving minutes of
                  its meetings.

            o     The Company does not have adequate controls over (1) the
                  process for issuance of common shares to a company
                  wholly-owned by the Company's chief executive officer; and (2)
                  the safeguarding of its common shares held in connection with
                  notes receivable.

      o     The Company does not currently have a chief financial officer to
            work with the chief executive officer and chief operating officer in
            overseeing and monitoring complex and significant transactions in
            order to provide reasonable assurance that such transactions are
            reflected accurately and fairly in the financial statements.

      o     The Company has inadequate controls and procedures (1) to monitor
            the tracking and movement of inventory, and (2) to prevent and
            detect the unauthorized use of inventory due to an inadequate
            segregation of duties. The employee who performs the periodic
            physical inventory counts also has access to the inventory and
            inventory records.

      o     The Company lacks information technology controls and procedures
            that would likely prevent unauthorized access to the accounting and
            financial systems, and ensure that the accounting and financial
            records are recoverable in the event of a disaster.

      In making its assessment of internal control over financial reporting
management used the criteria issued by the Committee of Sponsoring Organizations


                                       52
<PAGE>

of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Because of the material weaknesses described in the preceding paragraph,
management believes that, as of December 31, 2004, the company's internal
control over financial reporting was not effective based on those criteria.

      SpatiaLight, Inc.'s independent auditors have issued an attestation report
on management's assessment of the company's internal control over financial
reporting. Such report immediately follows this report.

      Management is taking the following steps to address some of the material
weaknesses set forth in this report:

            Fraud training program - We are in the process of implementing a
      procedure for the reporting of fraud to the Audit Committee of the Board.
      This procedure will include informing employees in writing about what
      constitutes fraud. Our Audit Committee is establishing related procedures
      for the receipt, retention and treatment of complaints regarding
      accounting, internal accounting controls or auditing matters and the Audit
      Committee is establishing procedures that will provide a mechanism for the
      confidential, anonymous submission by employees of concerns regarding
      questionable accounting or auditing matters. We expect that these
      procedures will be implemented during the second quarter of 2005.

            Procedures for archiving audit committee meeting minutes - We have
      implemented procedures for archiving minutes of meetings of the Audit
      Committee and such procedures were in place for the most recent meeting of
      the Audit Committee, which occurred in March 2005.

            Issuance of common shares to a company wholly owned by our Chief
      Executive Officer - The material weakness relating to issuance of common
      shares arose in connection with a situation where the Board in March 2005,
      authorized the issuance of common shares to Argyle in January 2005, but a
      portion of the authorized common shares was delivered to Argyle in
      December 2004. Through action taken by the Board in March 2005, we have
      implemented new controls over the process for issuance of common shares to
      Robert Olins, our CEO, secretary, treasurer and director, and to Argyle
      Capital Management Corporation (Argyle), a company wholly-owned by Mr.
      Olins, whereby American Stock Transfer & Trust Company, our transfer
      agent, is not permitted to transfer any shares from our treasury account
      to Mr. Olins or to Argyle, without prior written authorization executed by
      a majority of Board members excluding Mr. Olins.

            Safeguarding of our common shares held in connection with notes
      receivable - Through action taken by the Board in March 2005, we have
      implemented new procedures with respect to the safeguarding of our common
      shares held in connection with notes receivable. We have established
      controls and procedures for maintaining escrow accounts for common shares
      that are deliverable to other parties upon the performance of certain
      future conditions, such as fulfillments of payments under notes
      receivable.

            Our management believes that the actions described in the two
      immediately preceding paragraphs have fully and adequately addressed the
      material weakness "We do not have adequate controls over (1) the process
      for issuance of common shares to a company wholly-owned by the Company's
      chief executive officer; and (2) the safeguarding of its common shares
      held in connection with notes receivable."

            Chief Financial Officer - We are currently conducting a search for
      the position of full-time corporate controller and are in the process of
      interviewing potential candidates. We have discontinued our search for a
      CFO. Management believes that in the event that we are able to hire a
      highly qualified full-time corporate controller, such person will obviate
      the need for us to hire a CFO. We will reassess that position following
      the hiring of a controller. We expect to hire a full-time corporate
      controller in the second quarter of 2005.

            Information technology controls and procedures - In March 2005, we
      entered into an International Program License Agreement with Microsoft
      Business Solutions Corporation, pursuant to which we are licensing the
      Microsoft Business Solutions Navision software system (Navision). Navision
      is an advanced IT-ERP system that has the capability to support our
      management's accounting and financial systems. We also have contracted
      with a reputable company to lead the company-wide implementation of the
      Navision system. In connection with the implementation of Navision, we are
      implementing systematic controls designed to prevent unauthorized access
      to our accounting and financial systems, which we believe that Navision
      will facilitate. We are also implementing physical and electronic back-up
      and storage procedures to help ensure that our accounting and financial
      records will be recoverable in the event of a disaster.

            Our management presently expects that implementation of Navision in
      our California and South Korea offices will be completed


                                       53
<PAGE>

      and the system will become active by the end of the second quarter of
      2005.

            Controls and procedures of inventory - We are in the process of
      implementing the Navision ERP system referred to in the preceding
      paragraph. Management believes that this will assist in addressing the
      identified inadequate controls and procedures described in the Controls
      Evaluation.

      We have not taken any steps, as of the date of this filing, to address the
material weaknesses relating to the facts that we do not have a corporate
governance or disclosure committee, and that the audit committee does not have a
financial expert, as defined by SEC rules. We do not presently have specific
plans with respect to adding a director who would constitute a financial expert
or with respect to establishing a corporate governance or disclosure committee.


                                       54
<PAGE>

               REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Stockholders of
   SpatiaLight, Inc.

      We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
SpatiaLight, Inc. did not maintain effective internal control over financial
reporting as of December 31, 2004, because of the effect of material weaknesses
identified in management's assessment, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). SpatiaLight,
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

      A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

      A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment:

      o     The Company's corporate governance and disclosure controls and
            procedures do not provide reasonable assurance that material
            transactions are timely and accurately reported in the financial
            statements and related disclosures, or that the unauthorized
            disposition of assets are prevented and detected. In particular:

            o     The Company does not have a corporate governance or disclosure
                  committee.

            o     The Company does not have a fraud training program for
                  employees, or a mechanism to report fraud to the audit
                  committee.

            o     The audit committee does not have a financial expert (as
                  defined by SEC rules) or procedures for archiving minutes of
                  its meetings.

            o     The Company does not have adequate controls over (1) the
                  process for issuance of common stock to a company wholly-owned
                  by the Company's chief executive officer; and (2) the
                  safeguarding of its common shares held in connection with
                  notes receivable.


                                       55
<PAGE>

      o     The Company does not currently have a chief financial officer to
            work with the chief executive officer and chief operating officer in
            overseeing and monitoring complex and significant transactions in
            order to provide reasonable assurance that such transactions are
            reflected accurately and fairly in the financial statements.

      o     The Company has inadequate controls and procedures (1) to monitor
            the tracking and movement of inventory, and (2) to prevent and
            detect the unauthorized use of inventory due to an inadequate
            segregation of duties. The employee who performs the periodic
            physical inventory counts also has access to the inventory and
            inventory records.

      o     The Company lacks information technology controls and procedures
            that would likely prevent unauthorized access to the accounting and
            financial systems, and ensure that the accounting and financial
            records are recoverable in the event of a disaster.

      These material weaknesses were considered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2004 financial
statements, and this report does not affect our report dated March 2, 2005 on
those financial statements.

      In our opinion, management's assessment that SpatiaLight, Inc. did not
maintain effective internal control over financial reporting as of December 31,
2004 is fairly stated, in all material respects, based on the COSO criteria.
Also, in our opinion, because of the effect of the material weakness described
above on the achievement of the objectives of the control criteria, SpatiaLight,
Inc. has not maintained effective internal controls over financial reporting as
of December 31, 2004 based on the COSO criteria.


/s/ ODENBERG, ULLAKKO, MURANISHI & CO. LLP

San Francisco, California
March 2, 2005


Item 9B.    Other Information.

            None


                                       56
<PAGE>

                                    PART III

ITEM 10.    Directors and Executive Officers

                 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

       Name              Age                     Position(s)

   Robert A. Olins       48    Director, Acting Chief Executive Officer
   David F. Hakala       53    Chief Operating Officer
   Michael S. Jin        41    Chief Technology Officer
   Don S. Suh            48    Sr. Vice President - Sales and Marketing
   Je Won Yuen           54    President, SpatiaLight Korea, Inc.
   Theodore H. Banzhaf   39    Executive Vice President of Strategic Planning
   Lawrence J. Matteson  65    Director
   Claude Piaget         63    Director
   Robert C. Munro       77    Director

      All Directors serve for terms of one year and until their successors are
duly elected.

      Robert A. Olins, director since February 1998, Chief Executive Officer,
Secretary and Treasurer since June 2000 and Principal Financial and Accounting
Officer since June 2004. Mr. Olins has served as President of Argyle Capital
Management Corporation during the past twenty years. Argyle Capital Management
Corporation is a private investment advisory company.

      David F. Hakala, Chief Operating Officer since September 2002. During the
course of his career, Dr. Hakala has been directly responsible for the
manufacturing startup and ramp-up of numerous products, and their associated
manufacturing facilities, including several models of HDTV and of HDTV-ready
televisions, the DTC-100 HD TV/DBS decoder box, the decoder box for the DirecTV
DBS satellite system as well as 31" and 35" Very Large Screen (VLS) direct view
CRTs. Prior to joining SpatiaLight, from 1994 to 2001, Dr. Hakala served in
various senior management positions with Thomson Multimedia, including Vice
President of Manufacturing Operations, and most recently as Vice President,
Product Development, Americas, in which he was responsible for the design and
development of television and video systems including digital television with
integrated HDTV decoders, projection systems and other advanced display systems,
including the Thomson RCA L50000 LCoS project.

      Michael S. Jin, Chief Technology Officer since July 7, 2004, joined
SpatiaLight in April 2000, and has directed SpatiaLight's efforts to develop and
enhance LCoS cell structure, processing technologies and overall product
performance. Dr. Jin has also served as a leader on the technical front in
growing our relationships with television OEMs throughout Asia. Prior to joining
SpatiaLight, Dr. Jin served as a Vice President and the Principal investigator
for New Interconnect and Packaging Technology, Inc., based in San Diego, CA,
working on numerous DARPA, STTR and SBIR programs in the areas of Optoelectronic
Interconnects, Volumetric 3-D Displays Based on 2-Photon Transition Materials,
MEMS Laser Beam Steering Devices, 3-D Optoelectronic and IC Packaging
Technologies and Phase-Shift Masks for High-Resolution Lithography. Previously,
Dr. Jin was engaged in developing thin film devices for laser fusion research at
the University of Rochester Laboratory for Laser Energetics. Dr. Jin received
his bachelor's and master's degrees in Optics from the University of Rochester
and his Ph.D. in Applied Physics from the University of California at San Diego.

      Don S. Suh, Senior Vice President - Marketing and Sales since July 19,
2004, Mr. Suh previously served as Senior Vice President, Display and Multimedia
for LG Electronics in San Jose, California from 1999 to May 2004. Prior to that,
since 1984, Mr. Suh worked within the LG Electronics organization, serving as a
leader in a variety of consumer electronics, information technology and
convergence product groups. Mr. Suh has worked as a senior manager within LG
Electronics for groups based in Asia, Europe and the United States. Mr. Suh
received the LG Electronics' Best Honored Employee of the Year Award in 1998 and
received the South Korean President's 1999 Gold Tower-Order Medal given for
achievement of outstanding export results.

      Je Won Yeun, President of SpatiaLight Korea, Inc. has over 25 years of
experience in managing and directing large manufacturing operations, mostly for
various divisions of Hyundai Group. Mr. Yeun holds a degree in physics from Sung
Kyun Kwan University, and began his career as an engineer at Philips Electronics
Co., Ltd. He then joined Hyundai Group as a senior engineer, contributing to the
design and construction of heating, ventilating and air conditioning systems for
nuclear and thermal power plants. Mr. Yeun has served the bulk of his career
within Hyundai Group as a senior level manager and director of several
manufacturing and construction operations. Most recently, Mr. Yeun served as
president and chief executive officer of two Korean enterprises: Kyoung Won Co.,
Ltd., a designer and manufacturer of high voltage power transformers and Kang
Lim Construction Co., Ltd., a major construction firm.


                                       57
<PAGE>

      Theodore H. Banzhaf, Executive Vice President of Strategic Planning, and
President and CEO of SpatiaLight Technologies, Inc., an inactive wholly owned
subsidiary of SpatiaLight, Inc., since July 2003. Before joining SpatiaLight,
Mr. Banzhaf worked from 2002 to 2003 in the institutional equities group as a
Senior Vice President at C. E. Unterberg, Towbin, an investment bank, and as a
Senior Vice President at Friedman, Billings Ramsey, an investment bank, in 2002.
Mr. Banzhaf served as a Managing Director and Managing Member of Fulcrum Global
Partners, a hedge fund, from 2000 to 2002. Mr. Banzhaf was a Senior Vice
President at Raymond James & Associates in the capital markets group from
1995-2000. Mr. Banzhaf received an MBA from Southern Methodist University in
Dallas, Texas, and a Bachelor of Arts from Miami University in Oxford, Ohio.

      Lawrence J. Matteson, Chairman of the Board since April 2001, has served
as director since 1991, and previously served as the Chairman of the Board from
1995 through 1997. He has served as an executive professor of business policy at
the William E. Simon Graduate School of Business Administration, University of
Rochester since 1992. Mr. Matteson was Senior Vice President and General
Manager, Electronic Imaging for Eastman Kodak Company until December 1991. Mr.
Matteson began his career with Eastman Kodak in 1965 as a research engineer and
worked at Eastman Kodak in various positions continuously from that date until
December 1991. He holds degrees in engineering and an MBA from the University Of
Rochester Graduate School Of Business.

      Claude Piaget, director since June 2001, served as Chief Executive Officer
and Senior Vice President, International Relations of Digital Video
Broadcasting, a global consortium involved in the promotion of unified worldwide
standards for digital television. Dr. Piaget's broad industry experience
includes several executive positions with Philips Electronics, including market
development manager from 1995 to 1997, company strategy expert from 1994 to 1995
and development manager from 1986 to 1994. Previously he was involved in
researching semiconductor physics, components, devices and systems. He has
participated in the development of information and communication technologies
and consortiums in Europe, Asia and Latin America. He holds a Masters degree in
Physics Engineering and a Ph.D. in Physics from the University of Paris.

      Robert C. Munro, director since February 2004, has served as a private
business consultant in the finance, banking and retail industries in the United
States, the United Kingdom and throughout Europe since 1985. He currently sits
on the board of directors of UNET 2 Corporation, a privately held electronic
publishing company based in New York. Mr. Munro is a Fellow of the Institute of
Directors in the United Kingdom. He has extensive global business experience in
the banking, real estate and shipping industries. Mr. Munro received a master's
degree from Edinburgh University in Scotland.

Audit Committee

      The Audit Committee is comprised of three of our non-employee directors:
Messrs. Matteson, Munro (Chair), and Piaget. It met four times during 2004. The
Audit Committee is responsible for the appointment, retention and termination of
a firm of independent registered public accountants and monitors the
effectiveness of the audit effort, our financial and accounting organization and
our system of internal accounting and disclosure controls. Each member of the
Audit Committee is independent within the meaning of Securities and Exchange
Commission (SEC) regulations and the NASD listing standards. We do not currently
have a financial expert serving on the Audit Committee of the Board of
Directors. We do not presently have specific plans with respect to adding a
director who would constitute a financial expert, as defined by SEC rules. The
Audit Committee Charter is available on our website.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors, executive officers and persons who beneficially own more than 10% of
our common shares to file with the SEC initial reports of ownership and reports
of changes in ownership of common shares and other equity securities. Executive
officers, directors and greater than 10% shareholders are required by SEC
regulations to furnish us with copies of all Section 16(a) reports they file. To
our knowledge, based solely on a review of the copies of such reports furnished
to the Corporation for fiscal 2004, executive officers, directors and greater
than 10% shareholders filed the required Section 16(a) reports of material
transactions in a timely manner in 2004, except that: (i) each of David F.
Hakala, Je Won Yeun and Don S. Suh filed the required Form 3 late; and (ii) each
of David F. Hakala, Je Won Yeun, Don S. Suh, and Theodore H. Banzhaf had one
option grant with respect to which the required Form 4 was filed late; and (iii)
Robert A. Olins on one occasion acquired shares with respect to which the
required Form 4 was filed late; and (iv) Robert A. Olins disposed of shares with
respect to which the required Form 4 was filed late.

Code of Ethics

      We have a Code of Business Conduct and Ethics which is applicable to all
of our employees including the principal executive officer, the principal
financial officer and the principal accounting officer. The Code of Business
Conduct and Ethics is available on the our website www.spatialight.com under
Corporate Governance. We intend to post amendments to or waivers from our Code
of Business Conduct and Ethics (to the extent applicable to our chief executive
officer, principal financial and accounting officer) at this location on our
website.


                                       58
<PAGE>

ITEM 11.  Executive Compensation

      The following table sets forth the compensation paid by us for the fiscal
years ended December 31, 2002 to 2004, to our Chief Executive Officer and all of
the other executive officers as of December 31, 2004.

<TABLE>
<CAPTION>
                                                                   Summary Compensation Table

                                                                                    Securities
                                                                                    Underlying
                                                                                     Options/          All other
        Name & Principal Position                           Year      Salary($)       SARS (#)      compensation ($)
<S>                                                         <C>      <C>            <C>             <C>
Robert A. Olins, Chief Executive Officer,                    2004    $       -         500,000            $ -
  Treasurer, Secretary and Principal Financial               2003    $       -         500,000            $ -
    and Accounting Officer                                   2002    $       -         500,000            $ -

David F. Hakala, Chief Operating Officer                     2004    $ 240,000               0            $ -
                                                             2003    $ 240,000               0            $ -
                                                             2002    $  68,308(1)      360,000 (2)        $ -

Michael S. Jin, Chief Technology Officer                     2004    $ 200,000(3)      125,000            $ -
                                                             2003    $ 150,000               0            $ -
                                                             2002    $ 130,000          35,000            $ -

Theodore H. Banzhaf, Executive Vice President                2004    $ 360,000         N/A                $ -
  of Strategic Planning                                      2003    $ 103,385(4)      800,000 (5)        $ -
                                                             2002    N/A               N/A                $ -

Je Won Yeun, President, SpatiaLight Korea, Inc.              2004    $  91,735(6)      100,000 (7)        $ -
                                                             2003    N/A               N/A                $ -
                                                             2002    N/A               N/A                $ -

Don S. Suh, Senior Vice President, Marketing & Sales         2004    $  48,467(8)      150,000 (9)
                                                             2003    N/A               N/A                $ -
                                                             2002    N/A               N/A                $ -

</TABLE>

(1)   Employment commenced on September 3, 2002.

(2)   This stock option granted September 2002 vests over a three-year period.

(3)   Promoted to CTO on July 7, 2004 and received an increase in salary from
      $150,000 to $200,000.

(4)   Employment commenced on July 7, 2003.

(5)   This stock option was granted pursuant to the Amended and Restated Time
      Accelerated Restricted Stock Award Plan (TARSAP) dated as of July 7, 2003,
      between Mr. Banzhaf and the Corporation. The TARSAP granted to Mr. Banzhaf
      options to purchase 800,000 common shares, in the aggregate, in the
      following manner: (i) 125,000 options which vested as of July 7, 2003 and
      which options expire on July 7, 2006 (35,000 options have an exercise
      price of $2.55, of which 25,000 were exercised on December 30, 2004, and
      90,000 options have an exercise price of $12.50), and (ii) 675,000 options
      which vest upon the earlier of the achievement of certain performance
      tests within two years after the date of the grant or the second
      anniversary of the grant date. The options expire three years after such
      options vest and become exercisable (175,000 of such options have an
      exercise price of $5.00, which vested on January 27, 2004, 225,000 of such
      options have an exercise price of $7.50 and 275,000 of such options have
      an exercise price of $12.50).

(6)   Employment commenced on July 29, 2004.

(7)   This stock option granted July 29, 2004 vests over a three-year period.


(8)   Employment commenced on July 19, 2004.

(9)   This stock option granted July 19, 2004 vests over a three-year period.

Stock Option Grants

      The following table sets forth certain information for the year ended
December 31, 2004, with respect to stock options granted to the individuals
named in the Summary Compensation Table.


                                       59
<PAGE>

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                         (a)               (b)                              (c)                           (d)


                                                                  % of Total Options/SARs
                               Number of Shares Underlying        Granted to Employees in
                        Name     Options/SARs Granted (#)                Fiscal Year             Exercise or Base Price ($/Sh)
   ------------------------------------------------------------------------------------------------------------------------------
   <S>                            <C>                             <C>                           <C>
   Robert A. Olins                       320,417                            29%                             $5.21
                                         179,583                            16%                             $5.60

   David F. Hakala                          0                              -                                 -

   Theodore H. Banzhaf                      0                                -                             -

   Michael S. Jin                        125,000                            11%                             $5.60

   Je Won Yeun                           100,000                            9%                              $4.99

   Don Suh                               150,000                            13%                             $5.55

<CAPTION>
                                    (e)              (f)                                 (g)

                                                           Potential Realizable Value
                                                             at Assumed Annual Rates
                                 Expiration                of Stock Price Appreciation
                                    Date                         for Option Term
   ---------------------------------------------------------------------------------------------------
   <S>                         <C>                <C>                                <C>
                                                    5%($)                               10%($)
                                                    -----                               ------

   Robert A. Olins                01/05/14        $1,049,859                          $2,660,550
                                  07/07/14         $632,457                           $1,602,771

   David F. Hakala                   -                 -                                  -

   Theodore H. Banzhaf               -                -                                   -

   Michael S. Jin                 07/07/14         $440,226                           $1,115,620

   Je Won Yeun                    07/29/14         $313,818                            $795,277

   Don Suh                        07/19/14         $523,555                           $1,326,791
</TABLE>

Option Exercises and Fiscal 2004 Year End Values

      The following table sets forth information with respect to options to
purchase common shares granted to our named executive officers including: (i)
the number of common shares purchased upon exercise of options in the fiscal
year ended December 31, 2004; (ii) the net value realized upon such exercise;
(iii) the number of unexercised options outstanding at December 31, 2004; and
(iv) the value of such unexercised options at December 31, 2004.

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                         DECEMBER 31, 2004 OPTION VALUES

<TABLE>
<CAPTION>
                  Name                   Shares     Value Realized   Number of Unexercised   Value of Unexercised
                                       Acquired on        ($)         Options at Dec. 31,    In-the-Money options
                                      Exercise (#)                          2004 (#)         at Dec. 31, 2004 ($)
                                                                         Exercisable /          Exercisable /
                                                                         Unexercisable          Unexercisable
         <S>                            <C>           <C>            <C>                      <C>
         Robert A. Olins                    0             $0           2,595,417/179,583     $18,665,860/$601,603
         David F. Hakala                 25,000        $195,346         215,000/120,000       $1,352,350/$754,800
         Theodore H. Banzhaf             25,000        $218,950         275,000/500,000        $755,250/$326,250
         Michael S. Jin                     0             $0             75,000/125,000        $406,740/$931,250
         Don S. Suh                         0             $0               0/150,000              $0/$510,000
         Je Won Yeun                        0             $0               0/100,000              $0/$396,000
         Steven F. Tripp                 50,000         $61,500            150,000/0             $1,117,500/$0
</TABLE>

Employment Arrangements and Agreements

      Robert A. Olins has served as one of our directors since 1998 and has also
served as our Chief Executive Officer, Secretary and Treasurer of the
Corporation since July 2000. Mr. Olins does not have an employment agreement
with the Corporation. Mr. Olins has received no cash compensation from us for
his services to date, but has been granted options as reported under "Summary
Compensation Table - Option Grants In Last Fiscal Year."

      David F. Hakala has served as our Chief Operating Officer since September
3, 2002. We have extended Dr. Hakala's employment by one-year extensions on the
anniversary of his employment. Dr. Hakala receives an annual salary of $240,000
and received a grant of Incentive Stock Options to purchase


                                       60
<PAGE>

360,000 common shares vesting over a three-year period. Dr. Hakala exercised
25,000 of his vested options on December 15, 2004. As of December 31, 2004, Dr.
Hakala has 215,000 fully-vested options.

      We are party to an employment agreement dated July 7, 2003, with Theodore
H. Banzhaf, for him to serve as our Executive Vice President of Strategic
Planning, which is in effect through July 7, 2005. As currently in effect, the
agreement provides for an annual salary of $360,000. We agreed to grant Mr.
Banzhaf equity incentive compensation in the form of stock options to purchase
an aggregate of 800,000 common shares, $.01 par value, of SpatiaLight pursuant
to the provisions of an Amended and Restated Time Accelerated Restricted Stock
Award Agreement (TARSAP). The options under this plan are not granted under our
1999 Stock Option Plan or any other stock option plan. Mr. Banzhaf exercised
25,000 of his vested options on December 30, 2004. As of the record date, Mr.
Banzhaf has 275,000 fully-vested options.

      Michael S. Jin was promoted to Chief Technology Officer on July 7, 2004.
We do not have an employment agreement with Dr. Jin. As of July 7, 2004, Dr. Jin
receives an annual salary of $200,000 and he received a grant of Incentive Stock
Options to purchase 125,000 common shares vesting over a two-year period. Dr.
Jin has a total of 300,000 options, 75,000 which were fully vested as of the
record date.

      Don S. Suh has served as our Senior Vice President - Marketing and Sales
since July 19, 2004. We do not have an employment agreement with Mr. Suh. Mr.
Suh received an initial annual salary of $165,000, which was increased to
$175,000 in December 2004, and he received a grant of Incentive Stock Options to
purchase 150,000 common shares vesting over a three-year period. In March 2005,
Mr. Suh received an increase in salary to $195,000. As of December 31, 2004 Mr.
Suh has no vested options. Mr. Suh has the right to earn a sales commission
equal to one-half of one percent (0.5%) of the gross sales of products made by
us to certain customers only if certain conditions are met.

      Je Won Yeun has served as the President of SpatiaLight Korea, Inc., a
wholly-owned subsidiary of SpatiaLight, Inc. since July 29, 2004. Prior to July
29, 2004, Mr. Yeun served as a consultant to us for approximately one month. We
do not have an employment agreement with Mr. Yeun, although the expected term of
his employment is three years. Mr. Yeun receives an annual salary of KRW
228,571,429.00 (approximately $200,000) and received a grant of Incentive Stock
Options to purchase 100,000 common shares vesting over a three-year period. As
of the record date, Mr. Yeun has no vested options.

      There was one repricing of options to purchase Shares in 2004. The
exercise price of 90,000 currently exercisable options granted to Mr. Banzhaf
under the TARSAP was increased from $2.55 to $12.50.

Compensation Committee Interlocks and Insider Participation

      The Compensation Committee of our Board recommending compensation for
executive officers during 2004 consisted of Lawrence J. Matteson, Claude Piaget
and Robert M. Munro.

      Mr. Olins served as our Chief Executive Officer, Secretary, Treasurer and
Principal Financial and Accounting Officer for fiscal 2004. During 2004 all
executive compensation issues were determined by our Board of Directors. Three
out four of the directors are independent directors. Mr. Olins participated in
all determinations of executive and director compensation.

      Argyle Capital Management Corporation, which is wholly owned by Mr. Olins,
entered into various transactions with the Corporation in 1998. As of November
30, 2004, we completed a non-brokered private placement of $10,000,000 original
principal amount of 10% senior secured convertible notes (the 2004 Senior
Secured Convertible Notes), due November 30, 2007 (the November 2004 Financing).
As a condition to our entering into the November 2004 Financing and pursuant to
the November 2004 Financing transaction documents, the investors required Argyle
Capital Management Corporation (Argyle), a company wholly owned by Robert A.
Olins, Chief Executive Officer and a director of SpatiaLight, to enter into an
intercreditor and subordination agreement (the Intercreditor Agreement) pursuant
to which Argyle agreed to subordinate our obligations to Argyle and the senior
security interest in substantially all of the assets of SpatiaLight that were
granted under certain notes (the Argyle Notes) to the interest represented by
the investors in the November 2004 Financing. For more information regarding
these transactions, refer to "Certain Relationships and Related Transactions"
under Proposal No. 1 herein.


                                       61
<PAGE>

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters.

      The following table sets forth information regarding beneficial ownership
of common shares as of April 11, 2005, by each person known by us to own
beneficially more than five percent of our outstanding common shares, by each of
our directors, and by each of our executive officers named in the Summary
Compensation Table contained in "Executive Compensation," and by all of our
directors and executive officers as a group. Except as otherwise noted, each
person named in the table has sole voting and investment power with respect to
all common shares shown as beneficially owned by him, her or it.

<TABLE>
<CAPTION>
                                                   Amount and
                                                    Nature of
      Name and Address                              Beneficial               Percent
      Beneficial Owner                              Ownership                of Class
<S>                                            <C>                        <C>
Robert A. Olins
Argyle Capital Management Corporation              9,065,622 (1)               21.6%

Adele Becker
215 E 68th Street                                  2,916,633 (2)
New York, NY 10021                                                              7.8%

Lawrence J. Matteson
Five Hamilton Landing, Suite 100                     275,000 (3)                   *
Novato, CA 94949

Claude Piaget
Five Hamilton Landing, Suite 100                      125,000 (4)                  *
Novato, CA 94949

Robert C. Munro
Five Hamilton Landing, Suite 100                       50,000 (5)                  *
Novato, CA 94949

David F. Hakala
Five Hamilton Landing, Suite 100                      335,000 (6)                  *
Novato, CA 94949

Michael S. Jin
Five Hamilton Landing, Suite 100                      322,400 (7)                  *
Novato, CA 94949

Theodore H. Banzhaf
Five Hamilton, Suite 100                              775,000 (8)               2.2%
Novato, CA 94949

Don S. Suh
Five Hamilton Landing, Suite 100                      155,000 (9)                  *
Novato, CA 94949

Je Won Yeun
Five Hamilton Landing, Suite 100                      100,000 (10)                 *
Novato, CA 94949

All directors and officers as a group (9 persons)  11,253,022                  25.8%
*Less than 1%
</TABLE>

(1)   Includes 2,376,000 Shares beneficially owned subject to conversion of
      principal and interest of convertible notes held by Argyle Capital
      Management Corporation, of which Mr. Olins is President and over which Mr.
      Olins exercises voting control, and 1,678,597 Shares owned by Argyle. Also
      includes 1,396,655 common shares and Warrants to purchase 339,360 common
      shares held by Mr. Olins. Also includes 2,775,000 Shares subject to
      outstanding stock options held by Mr. Olins that are exercisable as of
      April 11, 2005 and 500,000 Shares subject to options not exercisable
      within 60 days.
(2)   Based solely upon information filed in a Schedule 13G by named
      shareholder.


                                       62
<PAGE>

(3)   Includes 275,000 Shares subject to options exercisable as of April 11,
      2005 and 25,000 Shares subject to options not exercisable within 60 days.
(4)   Includes 125,000 Shares subject to options exercisable as of April 11,
      2005 and 25,000 Shares subject to options not exercisable within 60 days.
(5)   Includes 25,000 Shares subject to options exercisable as of April 11, 2005
      and 25,000 Shares subject to options not exercisable within 60 days.
(6)   Includes 215,000 Shares subject to outstanding stock options held by Dr.
      Hakala that are exercisable as of April 11, 2005 and 120,000 Shares
      subject to options not exercisable within 60 days.
(7)   Includes 75,000 Shares subject to options exercisable as of April 11, 2005
      and 225,000 Shares subject to options not exercisable within 60 days.
(8)   Includes 275,000 Shares subject to options exercisable as of April 11,
      2005 and 500,000 Shares subject to options not exercisable within 60 days.
(9)   Includes 150,000 Shares subject to options not exercisable within 60 days.
(10)  Includes 100,000 Shares subject to options not exercisable within 60 days.

ITEM 13. Certain Relationships and Related Transactions.

Argyle Notes:

      In 1998, the Corporation 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, our Chief Executive Officer, Secretary,
Treasurer, and Director. The notes accrue interest at a contractual rate of 6%
per annum, and are secured by substantially all of our assets. Both principal
and interest are convertible into our common shares at $0.50 per Share. On May
23, 2001, the due date of the notes was extended until December 31, 2002. On the
extension date, the beneficial conversion effect representing the excess
aggregate value of the common shares receivable upon conversion of the notes
based on the then current market price of $1.90 per Share, over the aggregate
conversion price for such common shares (limited to the original proceeds of
$1,188,000), was recorded as additional paid-in capital. The resulting
$1,188,000 discount to the debt arising from the beneficial conversion feature
was originally being amortized through December 31, 2002. The notes were
extended in September 2002 to March 31, 2004, and on December 31, 2003 were
extended until June 30, 2005. At each extension date, the amortization rate of
the remaining unamortized discount was also extended over the new life of the
notes. The effective interest rate for financial statement purposes due to this
discount differs from the actual contractual interest received or receivable in
cash or Shares by Argyle. The current amortization rate of the discount, along
with the contractual 6% interest rate, resulted in a new effective interest rate
of 8% per annum as of the December 31, 2003 extension date when compared to the
outstanding principal balances.

      On January 7, 2004, we paid interest payable on the Argyle Notes by
issuing 142,360 common shares with a market value of $800,063 for the year ended
December 31, 2004. The market value of the shares was based on the closing price
of the shares on the day before issuance, and was recorded as interest expense.
This interest expense includes non-cash interest expense of $728,780. The
non-cash interest expense results from the beneficial conversion price of
interest payable, which is convertible into common shares at $0.50 per share and
was computed as the excess of the market price of the shares issued over accrued
interest payable. In addition, on March 4, 2004, we issued 71,676 common shares
with a market value of $338,311 as prepayment of interest payable on the Argyle
notes of $35,640 for the six months ended June 30, 2005. Prepaid interest was
computed using the closing price of the common shares on March 3, 2004 of $4.72,
and is not currently being amortized. At December 31, 2004, the carrying value
of the Argyle notes total $1,177,000, which includes the $1,188,000 principal
balance net of unamortized discounts of $11,000.

      As a condition to our entering into the November 2004 Financing and
pursuant to the November 2004 Financing transaction documents, the investors
required Argyle Capital Management Corporation (Argyle), a company wholly owned
and controlled by Robert A. Olins, Chief Executive Officer and a director of
SpatiaLight, to enter into an intercreditor and subordination agreement (the
Intercreditor Agreement) pursuant to which Argyle agreed to subordinate our
obligations to Argyle and the senior security interest in substantially all of
the assets of SpatiaLight that were granted under certain notes (the Argyle
Notes) to the interest represented by the investors in the November 2004
Financing.

      In consideration for Argyle entering into the Intercreditor Agreement and
because, by their terms, the November 2004 Financing transaction documents
prohibit the use of the proceeds of the November 2004 Financing to repay Company
debt, our Board of Directors (Mr. Olins did not participate in this matter as a
member of the Board) authorized SpatiaLight to enter into an extension and
modification agreement between SpatiaLight and Argyle with respect to the Argyle
Notes (the Extension Agreement). The Argyle Notes were originally issued in 1998
in exchange for $1,188,000 in cash and, prior to the November Financing, the due
date of the Argyle Notes was extended from December 31, 2003 to June 30, 2005.
The Argyle Notes accrue interest at a contractual annual rate of 6%. Both
principal and interest under the Argyle Notes are convertible into our common
shares at $0.50 per share. Pursuant to the Extension Agreement, the due date of
the Argyle Notes was extended to December 31, 2008, and we issued 498,764 common
shares to Argyle as prepayment of interest payable of $249,480 for the period
July 1, 2005 through December 31, 2008. These shares had a market value of


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<PAGE>

$4,049,964 based on the closing price of the shares of $8.12 on December 21,
2004. In connection with the Intercreditor Agreement, the Board also authorized
the reimbursement of $50,000 to Argyle for a fee that Argyle was required to pay
to a bank to relinquish the bank's previously existing security interest in the
assets of our Company.

November 2004 Senior Secured Convertible Debt Financing:

      As of November 30, 2004, we completed a non-brokered private placement of
$10,000,000 original principal amount of 10% senior secured convertible notes
(the 2004 Senior Secured Convertible Notes), due November 30, 2007 (the November
2004 Financing). Under the terms of the November 2004 Financing, the purchasers
of the 2004 Senior Secured Convertible Notes, who, upon conversion of such notes
shall become selling shareholders, have a nine-month right to purchase, expiring
August 31, 2005, up to an additional $5,000,000 principal amount of notes
subject to the same terms and conditions, including the $9.72 conversion price,
as the 2004 Senior Secured Convertible Notes issued in the November 2004
Financing (the Additional Investment Rights). The 2004 Senior Secured
Convertible Notes are convertible, at the option of the holders, into
SpatiaLight common shares at the conversion price of $9.72 per share. At the
conversion price, each $1,000 principal amount of the 2004 Senior Secured
Convertible Notes is convertible into 102.88 of our common shares. The
conversion price of the principal amount of the 2004 Senior Secured Convertible
Notes is equal to a 25% premium above the ten-day trailing average of the volume
weighted average price of our common shares ended November 29, 2004, which was
$7.78.

      The 2004 Senior Secured Convertible Notes bear interest at an annual rate
of 10%, payable quarterly, and are senior secured obligations of SpatiaLight.
The interest is payable in cash or our common shares at our option, subject to
certain conditions being met. In the event that we elect to pay interest with
our common shares, the value of such shares shall be equal to the 20-day
trailing average of the volume weighted average price of our common shares at
the end of each quarterly interest period. For the quarterly interest period
ended February 28, 2005, we paid interest to holders of 2004 Senior Secured
Convertible Notes in cash. We are and expect to continue using the net proceeds
from the transaction to fund construction and equipping of our state of the art
manufacturing facility in the Republic of Korea and for general working capital
purposes.

      Under the terms of the November 2004 Financing, Robert A. Olins, the Chief
Executive Officer and a director of SpatiaLight, and Greenpark Limited, an
unaffiliated shareholder of SpatiaLight, jointly and severally committed, in the
event that the Board determines that such financing is necessary, to provide us
with up to $6,000,000 in future financing on terms and conditions to be
determined at the time of any such transaction. That financing commitment shall
be reduced by any funds that SpatiaLight receives from future sales or exercises
of its equity, debt or derivative securities, including the sale of our common
shares under the Prospectus that we filed with the SEC on January 31, 2005, as
part of a "shelf" registration process. As of March 28, 2005, we had received an
aggregate total of $726,075 of such funds, thereby reducing the commitment by
Mr. Olins and Greenpark Limited by such aggregate amount.

      In consideration for the financing commitment by Greenpark Limited, we
agreed to reduce by $600,000 the amount owed by Greenpark Limited to us under
that certain warrant installment agreement, dated as of October 14, 2002 (the
Installment Agreement). Mr. Olins advised the Board that any consideration that
the Board determined was owed to Mr. Olins for the financing commitment should
instead be given as consideration to Greenpark Limited for its participation in
the financing commitment. As a result, Mr. Olins was not, and is not to be,
compensated for his participation in the financing commitment and the Board
weighed that fact in their negotiation with Greenpark Limited with respect to
amending the Installment Agreement. Pursuant to the Installment Agreement, in
November 2002, Greenpark Limited exercised its warrant to purchase 746,268
common shares at the exercise price of $2.00 per share, for an aggregate
purchase price of $1,492,536. Under the Installment Agreement, the Commitment
Shareholder is required to make periodic installment payments towards such
aggregate purchase price. There is a 6% annual interest rate with respect to the
balance of the share purchase price owed to us and all accrued interest is due
with the final payment. We issued all of the 746,268 shares to Greenpark Limited
in 2003. As of March 28, 2005, Greenpark Limited owes to us a remaining adjusted
principal balance of $241,462 (reflecting the purchase price reduction) plus
accrued interest, which is due in periodic payments, with the final payment due
on or before May 17, 2005. We will not give any further financial consideration
to Greenpark Limited for such financing commitment.


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<PAGE>

ITEM 14. Principal Accountant Fees and Services

      The following represents the fees billed to us for the last two fiscal
years by OUM, our current independent registered public accountants for the year
ended December 31, 2004 and BDO, our former independent registered public
accountants for the first, second and third quarters of 2004 and the year ended
December 31, 2003.

SpatiaLight, Inc.
                                  2004          2003
                                ---------     ---------
Audit Fees              (1)     $172,965      $166,500
Audit-Related Fees      (2)        6,330        12,000
Tax Fees                          16,525        17,000
All Other Fees                       N/A           N/A

(1)   Includes services performed in connection with annual audits, quarterly
      reviews, and review of registration statements.
(2)   Includes accounting consultations.

      Our Audit Committee adopted a policy for engaging our independent
registered public accountants, OUM, for audit and non-audit services that
includes requirements for the Audit Committee to pre-approve audit and non-audit
services provided by the independent auditor. All of the audit services provided
by BDO and OUM in the fiscal year 2004 (described in the footnotes to the table
above) and related fees were approved in advance by our Audit Committee.

                                     PART IV

ITEM 15. Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K.


1.    Consolidated Financial Statements

      The following documents are filed as part of this Report under Item 8
herein:

(a)   Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                           Page
     <S>                                                                                    <C>
     Report of Independent Registered Public Accountants.....................................25
     Report of Independent Registered Public Accountants.....................................26
     Balance Sheets at December 31, 2004 and 2003............................................27
     Statement of Operations for years ended December 31, 2004, 2003 and 2002................28
     Statements of Stockholders' Equity (Deficit) for years ended
       December 31, 2004, 2003 and 2002......................................................29
     Statements of Cash Flows for years ended December 31, 2004, 2003 and 2002...............32
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..............................................34
     Quarterly Results (unaudited)...........................................................50
</TABLE>

(b)   Consolidated Financial Statement Schedules

      All schedules are omitted because the required information is inapplicable
or the information is presented in the Consolidated Financial Statements and/or
the Notes thereto in Item 8 herein.


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<PAGE>

2.    Exhibits

Exhibit #                            Description
---------                            -----------

3.1               Certificate of Incorporation, as amended (Amendments to
                  document filed as Exhibit 3.1 to the Company's Amendment No. 1
                  to Form S-3 Registration Statement filed November 18, 1999).
3.2               Bylaws (incorporated by reference to Exhibit B to the
                  Company's Form 8-K filed February 7, 1995).
10.1              1999 Stock Option Plan (incorporated by reference to Exhibit
                  10.4 to the Company's Amendment No. 1 to Form S-3 Registration
                  Statement filed on November 18, 1999).
10.2              Employment Agreement between the Company and Theodore H.
                  Banzhaf dated July 7, 2003 (incorporated by reference to
                  Exhibit 10.3 to the Company's Form 10Q filed on August 18,
                  2003).
10.3              Time Accelerated Restricted Stock Award Plan (TARSAP) between
                  SpatiaLight, Inc. and Theodore Banzhaf, dated as of July 7,
                  2003 (incorporated by reference to Exhibit 10.4 to the
                  Company's Form 10Q/A filed on February 13, 2004).
10.4              Amendment to Lease Agreement between the Company and Hamilton
                  Marin, LLC, dated May 17, 2002 (Lease Agreement filed as
                  exhibit 10.18 in Form 10-QSB filed on August 14, 2002).
10.5              LCoS Supply Agreement dated as of July 1, 2004, between
                  SpatiaLight, Inc. and LG Electronics Inc.*
14.1              Code of Business Conduct and Ethics+
16.1              Letter from KPMG LLP pursuant to Item 304(a)(3) of Regulation
                  S-B (incorporated by reference to Exhibit 1 of the Company's
                  Form 8-K filed April 9, 2001).
21.1              Principal subsidiaries of the Company.
23.1              Consent of Odenberg, Ullakko, Muranishi & Co. LLP.
23.2              Consent of BDO Seidman, LLP. +
31.1              Certification of Chief Executive Officer and Principal
                  Financial and Accounting Officer Pursuant to Rule 13a-14(a) or
                  15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1              Certification of Chief Executive Officer and Principal
                  Financial and Accounting Officer Pursuant to 18 U.S.C. Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002.

*Confidential Treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.

+ Previously filed


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<PAGE>

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 13th day of
July 2005.

                                      SPATIALIGHT, INC.


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


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