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Securities and Exchange Commission

Washington, D.C. 20549





FORM 10-KSB/A
Amendment No. 5




|[X] | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ------------------------------------------------------------------------------
|    | For the fiscal year ended December 31, 2001.                                  



|[   ] | 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.

(Name of Small Business Issuer in its Charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|New York                                                       |  | 16-1363082                          
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer
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)


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

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X]

Issuers revenues for the fiscal year ended December 31, 2001 aggregated
$10,000

The aggregate market value for the Issuers voting stock held by
non-affiliates of the Issuer, based upon the $2.65 per share closing sale price
of the Common Stock on September 17, 2002 as reported on the Nasdaq SmallCap
Market, was approximately $38,096,790. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of September 17, 2002, Registrant had 24,948,510 shares of Common Stock
outstanding.

Transitional Small Business Disclosure Format (check one):

Yes [   ]     No [X]





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TABLE OF CONTENTS



|             |                                                                                               |  |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART II     
|             | Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations
|             | Item 7. Financial Statements                                                                 
|PART III    
|             | ITEM 12. Certain Relationships and Related Transactions.                                     
|             | ITEM 13. Exhibits and Reports on Form 8-K.                                                   
|Exhibit 23.1
|EXHIBIT 99.1
|EXHIBIT 99.2



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PART II




Item 6. 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 financial
statements and related notes appearing elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. 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, customers reception of our products,
intensity of competition, quality control during manufacturing and those set
forth under Risk Factors.

Overview

We design microdisplays that provide high resolution images suitable for
applications such as rear projection computer monitors, high definition
television and video projectors, and potential applications such as use in
wireless communication devices, portable games and digital assistants. Our
revenues through December 31, 2001 have been derived from the sales of our
development kits. Since April 2001, in order to concentrate our efforts in the
Chinese market, we discontinued producing and selling development kits.

During 2001 we experienced negative cash flows from operating activities
of $4,476,039 and a net operating loss of $7,845,094. Our operations were
funded in 2001 by the exercise of warrants and by the sale of common stock
under private stock purchase agreements.

As of December 31, 2001 we have received $4,354,003 from the exercise of
options and warrants, including $470,833 in installment note payments, for
which we have issued 2,604,244 shares of common stock. An additional 50,000
shares held in escrow will be released upon receipt of the balance of $21,875
due on warrant installment notes.

In addition during 2001, we have sold 2,437,304 shares of stock under
private stock purchase agreements at prices ranging from $1.75 to $2.40. To
date we have received proceeds totaling $1,909,571, including $848,462 in
installment note payments, pursuant to the sales, and expect to receive the
balance of $2,161,000 in 2002. Of the total shares sold, 1,946,268 are held in
escrow and will be released upon the receipt of the balance due.

Liquidity and Capital Resources

Through December 31, 2001, we have sustained recurring net losses from
operations and, at December 31, 2001, we had a net capital deficiency of
$213,000 and a net working capital deficiency. These conditions raise
substantial doubts about our ability to continue as a going concern. The
report of our independent certified public accountants on the audited financial
statements for the year ended December 31, 2000 also contained an explanatory
paragraph regarding this doubt about our ability to continue as a going
concern. For further discussion of this matter, refer to Note 1 of the
financial statements.

As of December 31, 2001, the Company had $2,728,134 in cash and cash
equivalents, an increase of $1,692,177 from the December 31, 2000 amount of
$1,035,957. Our net working capital deficit at December 31, 2001 was $868,056,
compared to $2,061,234 at December 31, 2000. The increase in working capital
was primarily due to the cash received from warrant exercises and private sales
of common stock discussed above.

During 2001 we had negative cash flow from operations, resulting in the
need to fund ongoing operations from financing activities. Net cash used by
operating activities totaled $4,476,039 and $6,073,605 in 2001 and 2000,
respectively. Net cash provided by financing activities was $6,494,990 and
$6,397,699 in 2001 and 2000 respectively, principally resulting from the
exercise of warrants and options, and sales of common stock.

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As of December 31, 2001, we had an accumulated deficit of $39,729,909. 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 limited revenues and no profits from operations during
2001. The ramp up in manufacturing and commercialization of our displays will
require substantial expenditures during 2002. Consequently, we may continue to
operate at a loss during 2002 and there can be no assurance that our business
will operate on a profitable basis thereafter.

We anticipate that our cash expenditures during 2002 will run
approximately $400,000 per month without regard for any revenues that may occur
as a result of the technical trials now underway. We expect to meet our cash
needs with our existing cash balances and collections from stock subscriptions
receivable of approximately $2,500,000. There are outstanding warrants
expiring in 2002 that are currently in-the-money. We expect that if they are
still in-the-money at or near expiration date they will be exercised, resulting
in proceeds of approximately $3,400,000. In addition, it is possible that
other outstanding exercisable warrants that are in-the-money may be exercised.
However, there can be no assurance that the warrants will be exercised. If no
warrants are exercised, and if the technical trials do not result in revenues
during 2002, it is possible that we will need to seek to raise additional debt
or equity financing during the latter part of 2002. There can be no assurances
that such additional debt or equity funding will be available from our current
investors or from any other source.

Results of Operations

Revenues. Our total revenues were $10,000 and $65,650 in 2001 and 2000
respectively. Revenues in both 2001 and 2000 were the result of sales of our
display development kits. Revenue from the sales of development kits are not
indicative of the revenue we expect to realize on sales of our displays
produced in quantity. Development kits have a higher unit price than mass
produced displays, as they are custom made and require additional parts that
are not required for displays sold in quantity. During 2001, we discontinued
producing and selling development kits.

Cost of Revenues.Cost of revenues are the product costs associated with
the manufacture of display development kits. Costs of revenues were $1,000 and
$16,625 in 2001 and 2000, respectively. Gross margins associated with the
sales of development kits are higher and not indicative of the gross margins we
expect to realize on sales of our displays produced in quantity. Development
kits have a higher unit cost than we project the mass produced displays will
have as they are custom made, require additional parts and they require
additional time and effort spent with the customer.

Selling, general and administrative expenses.Selling, general and
administrative expenses were $2,489,442 and $2,785,737 in 2001 and 2000,
respectively, and include professional services, salaries and related taxes and
benefits, rent, depreciation, travel, insurance, and office expenses.
Professional services decreased from approximately $1,095,000 in 2000 to
approximately $995,000 due to the resolution of certain legal proceedings in
2000. Salaries and related taxes and benefits decreased from approximately
$561,000 in 2000 to approximately $416,000 in 2001 as a result of the
elimination of certain positions. Office expenses decreased from approximately
$182,000 in 2000 to approximately $70,000 in 2001, in large part because in
2000, we purchased $80,000 of software that was written off in the same year.

Stock-based general and administrative expenses.Stock-based general and
administrative expenses were $2,938,062 and $1,162,902 in 2001 and 2000,
respectively. The amounts incurred in 2001 and 2000 relate to common stock,
stock options and warrants issued in exchange for services. The increase in
2001 relates primarily to expenses associated with repricing of warrants to
induce conversion valued at $142,000, and 200,000 shares of common stock
granted as employee compensation valued at $740,000, neither of which had a
comparable expense in 2000. The 200,000 shares of common stock referred to
above were issued in December 2001 by the Company to its Director of Corporate
Development, Anne-Marie Ribes. The shares were issued in consideration of
services rendered by her with respect to assisting the Company in negotiating
the contractual relationships with its existing prospective customers. As
indicated above, these shares were valued at $740,000, the market value of such
shares on the date of grant. At this time, we have not

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determined future arrangements with respect to additional significant equity
compensation for Ms. Ribes. See Note 2 to the Financial Statements under Item
1 of this Report.

In addition, options granted by the Board of Directors to an executive
officer and a director in October 2000 were approved by the shareholders in
June 2001, resulting in a 2001 expense totaling $1,655,000 due to increases in
the common share price between the original grant date and the final
measurement date. These increases were partially offset by a non-recurring
charge of $962,000 in 2000, related to reinstatement of options to a former
employee pursuant to a settlement agreement with such former employee.

Research and development expenses.Research and development expense
decreased from $3,344,547 to $2,426,590 or 27%, from 2000 to 2001. This
decrease was due primarily to extensive wafer processing in 2000 resulting in a
reduced need for wafers in 2001, as well as more efficient development
processes implemented in 2001.

Interest income.Interest income was $34,369 and $87,427 in 2001 and 2000,
respectively. The 61% decrease in interest income in 2001 was due to lower
average cash balances during 2001 than during 2000.

Interest expense. Interest expense in 2001 increased approximately
$155,000, or 135% over the amount incurred in 2000. This was due to the
increase in notes payable in November 2000 when the second installment of
convertible notes was paid to the Company.

Stock-based interest expense.Stock-based interest expense of $1,824,864
and $561,346 in 2001 and 2000, respectively, relates to the valuation of the
beneficial conversion feature of interest converted and convertible into equity
based on the intrinsic value of the conversion feature. In 2001, approximately
$1.5 million relates to amortization of the discounts on notes payable.

Loss from operations before income taxes. Losses from operations before
income taxes were $9,904,494 and $7,832,269 in 2001 and 2000, respectively.
This increase is due primarily to an increase of approximately $3.0 million of
stock-based interest and stock-based general expenses. This increase was
offset by a decrease of approximately $1.2 million in general and
administrative and research and development expenses incurred as a result of
more efficient use of funds in 2001.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations(SFAS 141),and No. 142, Goodwill and
Other Intangible Assets(SFAS 142).SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method
of accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142 that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within
the first interim quarter after adoption of SFAS 142.

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The Company has not entered into any significant business combinations.
As a result, the Company does not anticipate that adoption of SFAS 141 & 142
will impact its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and For Long-Lived
Assets to Be Disposed Of. The statement retains the previously existing
accounting requirements related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as held for sale.
Management does not expect this statement to have a material impact on the
Companys financial position or results of operations upon adoption on January
1, 2002.

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Item 7. Financial Statements

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
SpatiaLight, Inc.
Novato, California

We have audited the accompanying balance sheets of SpatiaLight, Inc. as of
December 31, 2001 and 2000 and the related statements of operations,
stockholders deficit, and cash flows for the years 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 audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SpatiaLight, Inc. at December
31, 2001 and 2000, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sustained recurring losses from
operations and has net capital deficiencies and negative working capital at
December 31, 2001. These conditions raise substantial doubt about the ability
of the Company to continue as a going concern. Managements plans as to these
matters are also discussed in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

/s/ BDO Seidman, LLP

San Francisco, California

February 6, 2002

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SPATIALIGHT, INC.
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

|                                            |                                                |                                                                                                        |                             |                   |         |           |             |           |         |            |           | 
|------------------------------------------- | ---------------------------------------------- | ------------------------------------------------------------------------------------------------------ | --------------------------- | ----------------- | ------- | --------- | ----------- | --------- | ------- | ---------- | --------- | 
|                                            |                                                |                                                                                                        |                             |                   |         | 2001      |             | 2000     
|                                            |                                                |                                                                                                        |                             |                   |         |           |             |          
|ASSETS                                      |                                                |                                                                                                        |                             |                   |         |           |             |          
|Current assets                              |                                                |                                                                                                        |                             |                   |         |           |             |          
|                                            | Cash and cash equivalents                      |                                                                                                        | $                           | 2,728,134         |         |           | $           | 1,035,957 |        
|                                            | Accounts receivable                            |                                                                                                        |                             |                  |         |           |             | 2,500     |        
|                                            | Prepaids and other current assets              |                                                                                                        |                             | 105,158           |         |           |             | 159,534   |        
|                                            |                                                |                                                                                                        |                             |                   |         |           |             |          
|                                            |                                                |                                                                                                        | Total current assets        |                   |         | 2,833,292 |             |           |         | 1,197,991  |          
|Property and equipment, net                 |                                                |                                                                                                        | 607,066                     |                   |         |           | 570,585     |          
|Other assets                                |                                                |                                                                                                        | 47,644                      |                   |         |           | 31,954      |          
|                                            |                                                |                                                                                                        |                             |                   |         |           |             |          
|                                            |                                                |                                                                                                        |                             | Total assets      |         | $         | 3,488,002   |           |         | $          | 1,800,530 | 
|                                            |                                                |                                                                                                        |                             |                   |         |           |             |          
|LIABILITIES AND STOCKHOLDERS DEFICIT       |                                                |                                                                                                        |                             |                   |         |           |             |          
|Current liabilities                         |                                                |                                                                                                        |                             |                   |         |           |             |          
|                                            | Accounts payable                               |                                                                                                        | $                           | 394,028           |         |           | $           | 347,104   |        
|                                            | Short-term convertible notes                   |                                                                                                        |                             | 3,137,284         |         |           |             | 2,782,453 |        
|                                            | Accrued expenses and other current liabilities |                                                                                                        |                             | 170,036           |         |           |             | 129,668   |        
|                                            |                                                |                                                                                                        |                             |                   |         |           |             |          
|                                            |                                                |                                                                                                        | Total current liabilities   |                   |         | 3,701,348 |             |           |         | 3,259,225  |          
|Noncurrent liabilities                      |                                                |                                                                                                        |                             |                   |         |           |             |          
|                                            | Long term capital lease obligations            |                                                                                                        |                             |                  |         |           |             | 4,483     |        
|                                            |                                                |                                                                                                        |                             |                   |         |           |             |          
|                                            |                                                |                                                                                                        |                             | Total liabilities |         |           | 3,701,348   |           |         |            | 3,263,708 | 
|                                            |                                                |                                                                                                        |                             |                   |         |           |             |          
|Commitments                                 |                                                |                                                                                                        |                             |                   |         |           |             |          
|Stockholders deficit:                      |                                                |                                                                                                        |                             |                   |         |           |             |          
|                                            | Common stock, $.01 par value:                  |                                                                                                        |                             |                   |         |           |             |           |        
|                                            |                                                | 40,000,000 shares authorized;
25,811,786 and 20,273,229 shares issued and outstanding
at 2001 and 2000 |                             |                   | 258,118 |           |             |           | 202,732 |           
|Additional paid-in capital                  |                                                |                                                                                                        | 41,911,879                  |                   |         |           | 28,152,272  |          
|Notes and stock subscription receivable     |                                                |                                                                                                        | (2,653,434                  | )                 |         |           |            |          
|Accumulated deficit                         |                                                |                                                                                                        | (39,729,909                 | )                 |         |           | (29,818,182 | )        
|                                            |                                                |                                                                                                        |                             |                   |         |           |             |          
|                                            |                                                |                                                                                                        | Total stockholders deficit |                   |         | (213,346  | )           |           |         | (1,463,178 | )        
|                                            |                                                |                                                                                                        |                             |                   |         |           |             |          
|Total liabilities and stockholders deficit |                                                | $                                                                                                      | 3,488,002                   |                   |         | $         | 1,800,530   |          
|                                            |                                                |                                                                                                        |                             |                   |         |           |             |          

See accompanying notes to financial statements.

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SPATIALIGHT, INC.
STATEMENTS OF STOCKHOLDERS DEFICIT
YEARS ENDED DECEMBER 31, 2001 AND 2000

|                                                             |  |              |            |            |  |         |         |             |  |           |            |         |  |        |            |   |  |   |             |   |  |       |            |  
|------------------------------------------------------------ |  | ------------ | ---------- | ---------- |  | ------- | ------- | ----------- |  | --------- | ---------- | ------- |  | ------ | ---------- | - |  | - | ----------- | - |  | ----- | ---------- | -
|                                                             |  |              |            |            |  |         |         |             |  |           |            |         |  |        |            |   |  |   |             |   |  | TOTAL
|                                                             |  | COMMON STOCK |            | ADDITIONAL |  |         |         |             |  |           |            |         |  | STOCK-
|                                                             |  |              |            | PAID-IN    |  | NOTES   |         | ACCUMULATED |  | HOLDERS' 
|                                                             |  | SHARES       |            | AMOUNT     |  | CAPITAL |         | RECEIVABLE  |  | (DEFICIT) |            | DEFICIT
|                                                             |  |              |            |            |  |         |         |             |  |           |            |        
|Balance January 1, 2000                                      |  |              | 16,635,818 |            |  | $       | 166,359 |             |  | $         | 20,649,563 |         |  | $      |           |   |  | $ | (21,378,010 | ) |  | $     | (562,088   | )
|Conversion of interest on notes                              |  |              | 169,092    |            |  |         | 1,690   |             |  |           | 793,964    |         |  |        |           |   |  |   |            |   |  |       | 795,654    |  
|Issuance of common stock                                     |  |              | 2,307      |            |  |         | 23      |             |  |           | 14,977     |         |  |        |           |   |  |   |            |   |  |       | 15,000     |  
|Exercise of stock options and warrants                       |  |              | 3,466,012  |            |  |         | 34,660  |             |  |           | 4,939,563  |         |  |        |           |   |  |   |            |   |  |       | 4,974,223  |  
|Issuance of options and warrants for services                |  |              |           |            |  |         |        |             |  |           | 1,147,902  |         |  |        |           |   |  |   |            |   |  |       | 1,147,902  |  
|Incentive warrants                                           |  |              |           |            |  |         |        |             |  |           | 606,303    |         |  |        |           |   |  |   | (606,303    | ) |  |       |           |  
|Net loss                                                     |  |              |           |            |  |         |        |             |  |           |           |         |  |        |           |   |  |   | (7,833,869  | ) |  |       | (7,833,869 | )
|                                                             |  |              |            |            |  |         |         |             |  |           |            |         |  |        |            |   |  |   |             |   |  |       |            |  
|Balance December 31, 2000                                    |  |              | 20,273,229 |            |  |         | 202,732 |             |  |           | 28,152,272 |         |  |        |           |   |  |   | (29,818,182 | ) |  |       | (1,463,178 | )
|Sale of common stock under private stock
purchase agreements |  |              | 2,437,304  |            |  |         | 24,374  |             |  |           | 4,503,293  |         |  |        | (3,480,021 | ) |  |   |            |   |  |       | 1,047,646  |  
|Conversion of notes and accrued interest                     |  |              | 275,120    |            |  |         | 2,751   |             |  |           | 527,635    |         |  |        |           |   |  |   |            |   |  |       | 530,386    |  
|Discount on notes payable                                    |  |              |           |            |  |         |        |             |  |           | 1,443,000  |         |  |        |           |   |  |   |            |   |  |       | 1,443,000  |  
|Issuance of stock, stock options and
warrants for services   |  |              | 21,889     |            |  |         | 219     |             |  |           | 402,508    |         |  |        |           |   |  |   |            |   |  |       | 402,727    |  
|Issuance of stock and options to employees
and directors     |  |              | 200,000    |            |  |         | 2,000   |             |  |           | 2,533,335  |         |  |        |           |   |  |   |            |   |  |       | 2,535,335  |  
|Exercise of stock options and warrants                       |  |              | 2,604,244  |            |  |         | 26,042  |             |  |           | 4,349,836  |         |  |        | (492,708   | ) |  |   |            |   |  |       | 3,883,170  |  
|Payments on notes receivable                                 |  |              |           |            |  |         |        |             |  |           |           |         |  |        | 1,319,295  |   |  |   |            |   |  |       | 1,319,295  |  
|Net loss                                                     |  |              |           |            |  |         |        |             |  |           |           |         |  |        |           |   |  |   | (9,911,727  | ) |  |       | (9,911,727 | )
|                                                             |  |              |            |            |  |         |         |             |  |           |            |         |  |        |            |   |  |   |             |   |  |       |            |  
|                                                             |  |              | 25,811,786 |            |  | $       | 258,118 |             |  | $         | 41,911,879 |         |  | $      | (2,653,434 | ) |  | $ | (39,729,909 | ) |  | $     | (213,346   | )
|                                                             |  |              |            |            |  |         |         |             |  |           |            |         |  |        |            |   |  |   |             |   |  |       |            |  

See accompanying notes to financial statements

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STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2001 AND 2000

|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |           |   |          |            |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------------------ | ---------------------------------------------- | ----------------------------------------- | --------- | ------- | ---------- | --------- | - | -------- | ---------- | -
|                                                                            |                                                                        |                                                                    |                                                |                                           |           | 2001    |            | 2000     
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|Cash flows from operating activities:                                       |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|Net loss                                                                    |                                                                        | $                                                                  | (9,911,727                                     | )                                         |           | $       | (7,833,869 | )        
|Adjustments to reconcile net loss to net cash used by
operating activities: |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|                                                                            | Depreciation and amortization                                          |                                                                    |                                                | 290,293                                   |           |         |            | 218,176   |  
|                                                                            | Stock-based general and administrative expense                         |                                                                    |                                                | 2,938,062                                 |           |         |            | 1,162,902 |  
|                                                                            | Stock-based interest expense                                           |                                                                    |                                                | 1,824,864                                 |           |         |            | 561,346   |  
|                                                                            | Other                                                                  |                                                                    |                                                |                                          |           |         |            | 57,838    |  
|                                                                            | Changes in operating assets and liabilities:                           |                                                                    |                                                |                                           |           |         |            |           |  
|                                                                            |                                                                        |                                                                    | Accounts receivable                            |                                           |           | 2,500   |            |           |   | (2,500   | )         
|                                                                            |                                                                        |                                                                    | Inventories                                    |                                           |           |        |            |           |   | 5,036    |           
|                                                                            |                                                                        |                                                                    | Prepaid and other current assets               |                                           |           | 54,376  |            |           |   | (66,117  | )         
|                                                                            |                                                                        |                                                                    | Accounts payable                               |                                           |           | 46,924  |            |           |   | 60,363   |           
|                                                                            |                                                                        |                                                                    | Accrued expenses and other current liabilities |                                           |           | 294,359 |            |           |   | (227,496 | )         
|                                                                            |                                                                        |                                                                    | Other assets                                   |                                           |           | (15,690 | )          |           |   | (9,284   | )         
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|                                                                            |                                                                        |                                                                    |                                                | Net cash used in operating activities     |           |         | (4,476,039 | )         |   |          | (6,073,605 | )
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|Cash flows from investing activities:                                       |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|                                                                            | Purchase of property and equipment                                     |                                                                    |                                                | (326,774                                  | )         |         |            | (524,746  | )
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|                                                                            |                                                                        |                                                                    |                                                | Net cash used in investing activities     |           |         | (326,774   | )         |   |          | (524,746   | )
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|Cash
flows from financing activities:                                       |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|                                                                            | Payments on capital lease obligations                                  |                                                                    |                                                | (5,121                                    | )         |         |            | (14,024   | )
|                                                                            | Proceeds from issuance of convertible notes with warrants attached     |                                                                    |                                                |                                          |           |         |            | 1,437,500 |  
|                                                                            | Proceeds from issuance of convertible notes                            |                                                                    |                                                | 250,000                                   |           |         |            |          |  
|                                                                            | Payments on stock subscriptions and notes receivable from
shareholders |                                                                    |                                                | 1,319,295                                 |           |         |            |          |  
|                                                                            | Proceeds from sales of stock                                           |                                                                    |                                                | 1,047,646                                 |           |         |            |          |  
|                                                                            | Proceeds from exercise of warrants and options                         |                                                                    |                                                | 3,883,170                                 |           |         |            | 4,974,223 |  
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|                                                                            |                                                                        |                                                                    |                                                | Net cash provided by financing activities |           |         | 6,494,990  |           |   |          | 6,397,699  |  
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|Net increase (decrease) in cash                                             |                                                                        |                                                                    | 1,692,177                                      |                                           |           |         | (200,652   | )        
|Cash at beginning of period                                                 |                                                                        |                                                                    | 1,035,957                                      |                                           |           |         | 1,236,609  |          
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|Cash at end of period                                                       |                                                                        | $                                                                  | 2,728,134                                      |                                           |           | $       | 1,035,957  |          
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|Supplemental disclosure of cash flow information:                           |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|                                                                            | Income taxes paid during the period                                    |                                                                    | $                                              | 7,233                                     |           |         | $          | 1,600     |  
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|                                                                            | Interest paid during the period                                        |                                                                    | $                                              | 15,551                                    |           |         | $          | 14,133    |  
|                                                                            |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|Non cash financing activities:                                              |                                                                        |                                                                    |                                                |                                           |           |         |            |          
|                                                                            | Common stock issued upon conversion of notes and interest              |                                                                    | $                                              | 530,386                                   |           |         | $          | 795,654   |  
|                                                                            | Warrants issued to incent the exercise of certain warrants             |                                                                    | $                                              |                                          |           |         | $          | 606,303   |  
|                                                                            |                                                                        | Sale of stock for stock subscription                               |                                                | $                                         | 3,567,521 |         |            | $         |  |         
|                                                                            |                                                                        | Exercise of warrants in exchange for notes receivable              |                                                | $                                         | 492,708   |         |            | $         |  |         
|                                                                            |                                                                        | Discount on convertible notes due to beneficial conversion
feature |                                                | $                                         | 1,443,000 |         |            | $         |  |         

See accompanying notes to consolidated financial statements.

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##### Table of Contents



1. Description of Business and Summary of Significant Accounting Policies

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

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

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

Going Concern Through December 31, 2001, the Company had sustained
recurring losses from operations and, at December 31, 2001, had a net capital
deficiency and a net working capital deficiency. These conditions raise
substantial doubt about the ability of the Company to continue as a going
concern. During fiscal 2002, the Company expects to meet its working capital
and other cash requirements with cash derived from the payment of subscriptions
receivable and from the exercise of warrants held by existing investors. One
group of warrantholders includes a trust for the benefit of a director, Steven
F. Tripp. Mr. Tripp is not the trustee of this trust and has no power to vote
or dispose of the Common Shares of the Company or any other securities held by
that trust. In the opinion of the Company, no other investor in the Alabama
Group is an affiliate of the Company and Mr. Tripp is not an affiliate of any
other investor in the Alabama Group. The Companys continued existence is
dependent upon its ability to successfully market and sell its products.
However, there can be no assurance that the Companys efforts will be
successful. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

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.

Cash Equivalents The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. At December 31, 2001 and 2000, $1,523,653 and $1,007,402,
respectively, of money market securities, the fair value of which approximates
cost, are included in cash and cash equivalents. The Company deposits cash and
cash equivalents with high credit quality financial institutions.

Property and Equipment Property and equipment are recorded at cost
while repairs and maintenance costs are expensed in the period incurred.
Depreciation and amortization of property and

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SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000

equipment is calculated on a straight-line basis over the estimated useful
lives of the assets, generally three years for computer equipment and building
improvements and seven years for office furniture and equipment.

Revenue Recognition The Company recognizes revenue when there is
persuasive evidence of an arrangement, the product has been delivered, the
sales price is fixed or determinable, and collectibility is reasonably assured.
The product is considered delivered to the customer once it has been shipped,
and title and risk of loss have transferred. The Company reduces product
revenue for estimated customer returns and sales allowances.

Income Taxes The Company utilizes 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 are charged to
expense when incurred.

Financial Instruments The Companys financial instruments include cash
and cash equivalents and debt. At December 31, 2001 and 2000 the fair values
of cash and cash equivalents and debt issued without equity components
approximated their financial statement carrying amounts. For certain debt
issued with equity instruments attached, little or no value has been assigned
to the debt and the fair value of the debt on a stand-alone basis is not easily
determinable.

Stock-based Compensation The Company accounts for its stock-based
compensation arrangements for employees and directors using the intrinsic value
method pursuant to Accounting Principles Board Opinion (APB) No. 25, as
clarified by Financial Accounting Standards Board (FASB) Interpretation No. 44.
As such, compensation expense is recorded when, on the date of grant, the fair
value of the underlying common stock exceeds the exercise price for stock
options or the purchase price for issuances or sales of common stock. Pursuant
to Statement of Financial Accounting Standard (SFAS) No. 123, the Company
discloses the proforma effects of using the fair value method of accounting for
stock-based compensation arrangements and records compensation expense for the
fair value of options granted to non-employees.

Impairment of Long-lived Assets and Long-lived Assets to be Disposed of
The Company evaluates its 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 loss attributable to common stockholders 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 stock were exercised or converted
into common stock. Common share equivalents are excluded from the computation
in loss periods, as their effect would be antidilutive.

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##### Table of Contents



SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

Recently Issued Accounting Standards In June 2001, the Financial
Accounting Standards Board finalized FASB Statements No. 141, Business
Combinations(SFAS 141),and No. 142, Goodwill and Other Intangible Assets
(SFAS 142).SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the
acquired intangible assets meet certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142 that the Company reclassify the carrying amounts of any
intangible assets and goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within
the first interim quarter after adoption of SFAS 142.

The Company has not entered into any significant business combinations.
As a result, the Company does not anticipate that adoption of SFAS 141 & 142
will impact its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.This statement supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and For Long-Lived
Assets to Be Disposed Of.The statement retains the previously existing
accounting requirements related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as held for sale.
Management does not expect this statement to have a material impact on the
Companys financial position or results of operations upon adoption on January
1, 2002.

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

2. Issuance of Securities

Issuance and Exercise of Stock Options, Warrants and Stock in 2001

During 2001, the Company issued 629,300 and 1,367,801 shares of common
stock upon the exercise of employee stock options and warrants, respectively.
Total cash received was $440,878 and $2,872,500, respectively.

On April 18, 2001 the Company issued warrants to purchase 607,143 shares
of common stock at an exercise price of $1.75 to a group of investors which
includes a trust for the benefit of Steven F. Tripp, a director of the Company.
Mr. Tripp is not the trustee of this trust and has no power to vote or dispose
of the

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SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

Common Shares of the Company or any other securities held by that trust.
Marcia K. Tripp, Steven F. Tripps mother, is the trustee of this trust and
directs and is responsible for all of the investment decisions of this trust.
In the opinion of the Company, no other investor in the Alabama Group is an
affiliate of the Company and Mr. Tripp is not an affiliate of any other
investor in the Alabama Group. The warrants were issued in exchange for the
warrant holders offer to assist the Company by augmenting its working capital
through the purchase of common shares. The warrants were valued at $68,852
using the Black-Scholes option pricing model and the following assumptions:
stock price $1.75, historical volatility 114%, risk free rate 6%, a dividend
yield of zero, and a contractual term of 7 days. The value of these warrants is
reflected in the statement of operations as a component of stock-based general
and administrative expense.

During the seven days following their issuance, the warrants referred to
above were exercised. Total proceeds were $1,062,500. Of this amount, cash
totaling $525,000 was received in exchange for the issuance of 300,000 shares
of common stock. The remaining 307,143 warrants were exercised under warrant
installment notes totaling $492,708 with a payment of $44,792 made on the date
of exercise. The notes were due in eleven equal monthly installments. Interest
of 6% is due and payable on the maturity date. At December 31, 2001 the
remaining balance is $21,875. An escrow agent is holding 50,000 shares issued
under the warrant installment notes until the notes have been paid in full.

On October 22, 2001 the Company issued a warrant to purchase 100,000
shares of common stock at an exercise price of $2.20 in exchange for consulting
services rendered over the previous year. A value of $132,089 was assigned to
the warrants using the Black-Scholes option pricing model and the following
assumptions: stock price $2.20, historical volatility 114%, risk free rate 6%,
a dividend yield of 0, and a contractual term of 2 years. The value of the
warrant is reflected in the statement of operations as stock-based general and
administrative expense.

During 2001, 21,889 shares of common stock and 10,000 consultant options
to purchase common stock at $2.02 were issued in exchange for services valued
at $60,181. In addition, expenses related to the repricing of certain warrants
previously issued to purchase 120,000 shares of common stock from $2.00 to
$1.75 per share, and 600,000 shares from $3.50 to $2.50 per share, totaled
$141,605. The repriced warrants were exercised, and are included in warrant
exercises above.

On October 18, 2000 the Board of Directors approved a grant of stock
options to purchase 150,000 shares of common stock at an exercise price of
$1.50 to Steven F. Tripp, a director of the Company. The options were issued
outside of the employee stock option plan and were subject to shareholder
approval at the annual meeting of shareholders in June 2001. The options were
issued in exchange for consulting services provided by Mr. Tripp and were
ratified by the shareholders at the annual shareholders meeting on June 8,
2001. The options were valued at $440,172 using the Black-Scholes option
pricing model and the following assumptions: stock price $3.12, historical
volatility 100%, risk free rate 4.75%, a dividend yield of zero, and a
contractual term of 10 years. The value of these options is reflected in the
statement of operations as a component of stock-based general and
administrative expense.

On October 18, 2000 the Board of Directors approved a grant of stock
options to purchase 750,000 shares of common stock at an exercise price of
$1.50 to Robert A. Olins, Acting Chief Executive Officer. The options were
issued outside of the employee stock option plan subject to shareholder
approval and were ratified by the shareholders at the annual shareholders
meeting on June 8, 2001. The intrinsic value of $1,215,000 was recorded in
stock-based general and administrative expenses. The recording of that
intrinsic value was required for financial statement reporting purposes because
these stock options could only be valued as of the date of their approval by
Shareholders on June 8, 2001 rather than the date of their grant to Mr. Olins
on October 18, 2000.

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SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

In December 2001, the Company issued 200,000 Common Shares to its Director
of Corporate Development. The Shares were issued in consideration of services
rendered by the employee with respect to assisting the Company in negotiating
the contractual relationships with its existing prospective customers.
These shares were valued at $740,000, the market value of such Shares on the
date of grant. Other expenses related to the extension of certain employee
stock options and the valuation of other employee and director options totaled
$140,163, included in stock-based general and administrative expenses in the
accompanying statements of operations. Of this amount, $49,360 related to
employee related charges and $90,803 related to officer and director related
charges.

Sales of Stock Under Private Stock Purchase Agreements in 2001

During 2001, the Company sold 391,036 shares of common stock under private
stock purchase agreements. The purchase prices range from $1.75 to $2.40; total
cash received was $785,146.

On October 1, 2001, the Company sold 100,000 shares of common stock under
a private stock purchase agreement. The stock was sold at $1.75 per share and
was due in four equal installments. The entire amount was paid on December 31,
2001.

On May 15, 2001, the Company sold 600,000 shares of common stock under a
private stock purchase agreement. The stock was sold at a price of $1.75 per
share. Cash received was $262,500. The balance of $787,500 was to be paid in
three equal quarterly installments of $262,500. An escrow agent is holding the
certificates for the shares being purchased until all three installments have
been paid in full. At December 31, 2001 the remaining balance is $127,500.

On May 15, 2001, the Company sold 1,346,268 shares of common stock under a
private stock purchase agreement. The stock was sold at a price of $1.75 per
share. Cash received was $13,462. The balance of $2,342,507 was received in the
form of a non-interest bearing stock subscription receivable, to be paid in
four equal quarterly installments of $585,626. The purchaser was unable to make
the first installment payment of $585,626 for reasons unrelated to the Company
or its performance under the agreement, thereby defaulting under the agreement.
On October 5, 2001, the Company entered into a new agreement with the
purchaser, under which the purchaser agreed to forfeit the initial payment made
under the prior agreement and pay a price per share of $1.87, or $2,517,521 in
total. The remaining terms of the agreement did not change. At December 31,
2001 the remaining balance is $2,504,058. An escrow agent is holding the
certificates for the shares being purchased until all four installments have
been paid in full.

Note and Interest Conversions in 2001

During 2001, the Company issued 142,857 shares upon the conversion of a
$250,000 convertible note.

During 2001, the Company issued 132,264 shares of common stock upon the
conversion of accrued interest of $280,386 under certain convertible notes,
which includes additional deemed interest of $208,165 due to beneficial
conversion features of the interest on the underlying notes.

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##### Table of Contents



SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

Year 2000 Transactions

During the third quarter of 2000, the Company issued a warrant to purchase
150,000 shares of common stock in exchange for consulting services rendered
over a 3-month period. The warrant has an exercise price of $4.00. A value of
$173,935 was assigned to the option, using the Black-Scholes option pricing
model and the following assumptions: volatility 100%, risk-free interest rate
6.25%, a dividend yield of 0, and a contractual term of three years, and the
stock price of $2.1875. This warrant was recorded as stock-based general and
administrative expense.

During the fourth quarter of 2000, the Company issued an option to
purchase 10,000 shares of Company stock as compensation for consulting services
previously rendered. The options have an exercise price of $1.25. A value of
$11,842 was assigned to the option, using the Black-Scholes option pricing
model and the following assumptions: volatility 114%, risk-free interest rate
6%, a dividend yield of $0, an expected life of 10 years, and a stock price of
$1.25. The value of this option was recorded as stock-based general and
administrative expense.

On February 10, 2000, the Company issued warrants to purchase 170,815
shares of the Companys common stock at an exercise price of $8.00 (the
incentive warrants) in consideration of and to induce the exercise of warrants
originally issued in August and September 1999. The incentive warrants, which
expire on February 10, 2002, were valued at $606,303 using the Black-Scholes
option pricing model and the following assumptions: stock price $6.38,
historical volatility 114%, risk free rate 6%, a dividend yield of 0, and a
contractual term of two years. The value of these incentive warrants is
reflected in the statement of operations as a component of the net loss
available to common shareholders.

During the first quarter of 2000, the Company issued 1,899,015 shares of
common stock upon the exercise of previously issued warrants. Net cash
proceeds received were $4,178,793. During 2000, the Company issued an
additional 1,251,977 and 315,000 shares of common stock upon the exercise of
other warrants and employee stock options, respectively. Total cash received
was $795,430. In addition, 2,307 shares of stock valued at $15,000 were issued
in exchange for services. 169,092 shares of stock were issued upon the
conversion of accrued interest of $795,654, which includes additional deemed
interest of $711,108 due to beneficial conversion features of the interest on
the underlying notes.

During 2000, as part of a settlement agreement the Company reinstated a
grant of 500,000 options that had lapsed on termination of a former employee.
The options, with an exercise price of $0.75 and expiring in March 2001,
resulted in compensation expense of $962,125. The fair value was calculated
using the Black-Scholes options pricing model and the following assumptions:
stock price $2.63, historical volatility 105%, risk free interest rate 6%, a
dividend yield of zero, and a contractual life of seven months. This expense
was recorded in stock-based general and administrative expense. These options
were exercised in the first quarter of 2001.

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##### Table of Contents



SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

Stock-based administrative expense discussed above is summarized as
follows:

|                                           |  |                       |           |      |  |   |           | 
|------------------------------------------ |  | --------------------- | --------- | ---- |  | - | --------- | 
|                                           |  | Year-end December 31,
|                                           |  |                      
|                                           |  | 2001                  |           | 2000
|                                           |  |                       |           |     
|Warrants issued to investors               |  | $                     | 68,852    |      |  | $ |          | 
|Warrants issued to consultants             |  |                       | 132,089   |      |  |   | 173,935   | 
|Options and stock grants to consultants    |  |                       | 60,181    |      |  |   | 26,842    | 
|Repricing to induce exercise of warrants   |  |                       | 141,605   |      |  |   |          | 
|Options granted to officer and director    |  |                       | 1,655,172 |      |  |   |          | 
|Stock grant to employee                    |  |                       | 740,000   |      |  |   |          | 
|Other employee-related charges             |  |                       | 49,360    |      |  |   |          | 
|Other officer and director-related charges |  |                       | 90,803    |      |  |   |          | 
|Reinstatement of options                   |  |                       |          |      |  |   | 962,125   | 
|                                           |  |                       |           |      |  |   |           | 
|                                           |  | $                     | 2,938,062 |      |  | $ | 1,162,902 | 
|                                           |  |                       |           |      |  |   |           | 

The exercised numbers include some cashless exercises, resulting in 12,199
and 6,003 fewer shares actually issued in 2001 and 2000, respectively. The
2001 exercises include 120,000 shares repriced from $2.00 to $1.75 prior to
exercise and 600,000 shares repriced from $3.50 to $2.50 prior to exercise.

3. Notes Payable

Convertible notes at December 31, 2001 consist of the following:

Argyle Notes:

In 1998, the Company received $1,188,000 in cash in exchange for notes in that
amount to Argyle Capital Management Corporation (Argyle), a company owned and
controlled by Robert A. Olins, Acting Chief Executive Officer, Secretary,
Treasurer, and a Director of the Company. The notes accrue interest at a
contractual rate of 6% per annum, and are secured by substantially all the
assets of the Company. Both principal and interest are convertible into the
Companys common stock at $.50 per share. On May 23, 2001, the due date of the
notes was extended until December 31, 2002. On the extension date, the
beneficial conversion effect representing the excess aggregate value of the
common shares receivable upon conversion of the notes based on the then current
market price of $1.90 per share, over the aggregate conversion price for such
common shares (limited to the original proceeds of $1,188,000), was recorded as
additional paid-in capital. The resulting $1,188,000 discount to the debt
arising from the beneficial conversion feature is being amortized over the life
of the extended 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. This discount, along with
the contractual 6% interest rate, results 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.

For the years ended December 31, 2001 and 2000, additional stock-based interest
expense of approximately $285,000 and $548,000, respectively, was recorded due
to the beneficial conversion feature of the accrued interest, based on average
prices during the periods, over the conversion price for such shares. At
December 31, 2001, the carrying value of the Argyle notes totals $524,243,
which includes the $1,188,000 principal balance plus accrued and beneficial
interest totaling $128,243, net of unamortized discounts of $792,000.

16



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##### Table of Contents



SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

Alabama Group Notes:

In December 1999, the Company received $1,437,500 in cash and issued notes in
that amount to a group of investors (the Alabama Group) which includes a
trust for the benefit of Steven F. Tripp, a Director of the Company. Mr. Tripp
is not the trustee of this trust and has no power to vote or dispose of the
Common Shares of the Company or any other securities held by that trust.
Marcia K. Tripp, Steven F. Tripps mother, is the trustee of this trust and
directs and is responsible for all of the investment decisions of this trust.
In the opinion of the Company, no other investor in the Alabama Group is an
affiliate of the Company and Mr. Tripp is not an affiliate of any other
investor in the Alabama Group. The notes accrue interest at a contractual rate
of 6% per annum, and are secured by substantially all the assets of the
Company. This portion of the notes is convertible into shares of the Companys
common stock at $3.50 per share. Upon issuance of the notes, the Company also
issued warrants to purchase 821,429 shares of common stock. The warrants are
exercisable through June 30, 2002 at $3.50 per share; none of these warrants
have been exercised as of December 31, 2001. The warrants were valued using
the Black-Scholes option-pricing model and the following assumptions:
contractual life 2.5 years; volatility 114%; risk-free interest rate 6%; and
dividend yield of $0. The total cash received from the issuance of this
tranche of notes of $1,437,500 was less than the calculated value associated
with the warrants. Therefore, the value assigned to the warrants was limited
to the original proceeds of $1,437,500, and has been recorded as a discount on
the notes. The effective interest rate for financial statement purposes due to
this discount differs from the actual contractual interest received or
receivable in cash by the holders of the Alabama Group Notes. This discount,
along with the contractual 6% per annum interest rate, resulted in an effective
interest rate of 70% per annum when compared to the outstanding principal
balances.

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

On June 15, 2001 the due date of both tranches was extended until December 31,
2002. On the extension date, the excess $255,000 aggregate value of the common
shares receivable upon conversion of the notes based on the then current market
price of $2.65 per share, over the aggregate conversion price for the notes
convertible at $2.25 per share, was recorded as additional paid-in capital.
The resulting $255,000 discount to the debt, along with the remaining
unamortized discount for the first tranche, is being amortized over the life
of the extended notes. The effective interest rate for financial statement
purposes due to these discounts differs from the actual contractual interest
received or receivable by the holders of the Alabama Group Notes. These
discounts, along with the contractual 6% per annum interest rate, result in a
new effective interest rate upon extension of 25% per annum as of the extension
date when compared to the outstanding principal balances.

17



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SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

At December 31, 2001, the carrying value of the Alabama Group notes totals
$2,613,042, which includes the $2,875,000 principal balance plus accrued
interest of $282,815, net of unamortized discounts of $544,774.

Activity in Convertible notes payable for 2001 and 2000 is as follows:

|                                        |       |   |            |           |                 |   |              |            |               |   |           |           |   |   |            |          |   |   |           |           | 
|--------------------------------------- | ----- | - | ---------- | --------- | --------------- | - | ------------ | ---------- | ------------- | - | --------- | --------- | - | - | ---------- | -------- | - | - | --------- | --------- | 
|                                        |       |   | Balance at |           |                 |   |              |            | (Payment) or  |   |           |           |   |   | Balance at
|                                        |       |   | Dec. 31,   |           | Addition or New |   | Discount     |            | Conversion to |   | Dec. 31, 
|                                        |       |   | 2000       |           | Discount        |   | Amortization |            | Equity        |   | 2001     
|                                        |       |   |            |           |                 |   |              |            |               |   |          
|Debt Principal:                         |       |   |            |           |                 |   |              |            |               |   |           |           |   |   |            |          |   |   |           |          
|Argyle                                  |       | $ | 1,188,000  |           |                 | $ |             |            |               | $ |          |           |   | $ |           |          |   | $ | 1,188,000 |          
|Argyle discount                         |       |   |           |           |                 |   | (1,188,000   | )          |               |   | 396,000   |           |   |   |           |          |   |   | (792,000  | )        
|Alabama Group                           |       |   | 2,875,000  |           |                 |   |             |            |               |   |          |           |   |   |           |          |   |   | 2,875,000 |          
|Alabama Group Discount                  |       |   | (1,433,885 | )         |                 |   | (255,000     | )          |               |   | 1,144,111 |           |   |   |           |          |   |   | (544,774  | )        
|Convertible Note  Other                |       |   |           |           |                 |   | 250,000      |            |               |   |          |           |   |   | (250,000   | )        |   |   |          |          
|                                        |       |   |            |           |                 |   |              |            |               |   |           |           |   |   |            |          |   |   |           |          
|                                        | Total |   |            | 2,629,115 |                 |   |              | (1,193,000 | )             |   |           | 1,540,111 |   |   |            | (250,000 | ) |   |           | 2,726,226 | 
|                                        |       |   |            |           |                 |   |              |            |               |   |           |           |   |   |            |          |   |   |           |          
|Interest:                               |       |   |            |           |                 |   |              |            |               |   |           |           |   |   |            |          |   |   |           |          
|Accrued
Argyle  6%                     |       |   | 12,078     |           |                 |   | 72,270       |            |               |   |          |           |   |   | (66,132    | )        |   |   | 18,216    |          
|Beneficial conversion
interest  Argyle |       |   | 39,528     |           |                 |   | 284,753      |            |               |   |          |           |   |   | (214,254   | )        |   |   | 110,027   |          
|Accrued
Alabama  6%                    |       |   | 101,732    |           |                 |   | 181,083      |            |               |   |          |           |   |   |           |          |   |   | 282,815   |          
|Convertible
Note  Other  6%           |       |   |           |           |                 |   | 11,125       |            |               |   | (11,125   | )         |   |   |           |          |   |   |          |          
|                                        |       |   |            |           |                 |   |              |            |               |   |           |           |   |   |            |          |   |   |           |          
|                                        | Total |   |            | 153,338   |                 |   |              | 549,231    |               |   |           | (11,125   | ) |   |            | (280,386 | ) |   |           | 411,058   | 
|                                        |       |   |            |           |                 |   |              |            |               |   |           |           |   |   |            |          |   |   |           |          
|Total Short-term Convertible
Notes      |       | $ | 2,782,453  |           |                 | $ | (643,769     | )          |               | $ | 1,528,986 |           |   | $ | (530,386   | )        |   | $ | 3,137,284 |          
|                                        |       |   |            |           |                 |   |              |            |               |   |           |           |   |   |            |          |   |   |           |          

|                                        |       |   |            |           |              |   |              |           |               |   |          |       |  |   |            |          |   |   |            |           | 
|--------------------------------------- | ----- | - | ---------- | --------- | ------------ | - | ------------ | --------- | ------------- | - | -------- | ----- |  | - | ---------- | -------- | - | - | ---------- | --------- | 
|                                        |       |   | Balance at |           |              |   |              |           | (Payment) or  |   |          |       |  |   | Balance at
|                                        |       |   | Dec. 31,   |           | Addition or  |   | Discount     |           | Conversion to |   | Dec. 31,
|                                        |       |   | 1999       |           | New Discount |   | Amortization |           | Equity        |   | 2000    
|                                        |       |   |            |           |              |   |              |           |               |   |         
|Debt Principal:                         |       |   |            |           |              |   |              |           |               |   |          |       |  |   |            |          |   |   |            |          
|Argyle                                  |       | $ | 1,188,000  |           |              | $ |             |           |               | $ |         |       |  | $ |           |          |   | $ | 1,188,000  |          
|Argyle discount                         |       |   |           |           |              |   |             |           |               |   |         |       |  |   |           |          |   |   |           |          
|Alabama Group                           |       |   | 1,437,500  |           |              |   | 1,437,500    |           |               |   |         |       |  |   |           |          |   |   | 2,875,000  |          
|Alabama Group Discount                  |       |   | (1,437,500 | )         |              |   |             |           |               |   | 3,615    |       |  |   |           |          |   |   | (1,433,885 | )        
|                                        |       |   |            |           |              |   |              |           |               |   |          |       |  |   |            |          |   |   |            |          
|                                        | Total |   |            | 1,188,000 |              |   |              | 1,437,500 |               |   |          | 3,615 |  |   |            |         |   |   |            | 2,629,115 | 
|                                        |       |   |            |           |              |   |              |           |               |   |          |       |  |   |            |          |   |   |            |          
|Interest:                               |       |   |            |           |              |   |              |           |               |   |          |       |  |   |            |          |   |   |            |          
|Accrued
Argyle  6%                     |       |   | 24,156     |           |              |   | 72,468       |           |               |   |         |       |  |   | (84,546    | )        |   |   | 12,078     |          
|Beneficial conversion
interest  Argyle |       |   | 202,587    |           |              |   | 548,049      |           |               |   |         |       |  |   | (711,108   | )        |   |   | 39,528     |          
|Accrued
Alabama  6%                    |       |   | 4,181      |           |              |   | 97,551       |           |               |   |         |       |  |   |           |          |   |   | 101,732    |          
|                                        |       |   |            |           |              |   |              |           |               |   |          |       |  |   |            |          |   |   |            |          
|                                        | Total |   |            | 230,924   |              |   |              | 718,068   |               |   |          |      |  |   |            | (795,654 | ) |   |            | 153,338   | 
|                                        |       |   |            |           |              |   |              |           |               |   |          |       |  |   |            |          |   |   |            |          
|Total Short-term Convertible
Notes      |       | $ | 1,418,924  |           |              | $ | 2,155,568    |           |               | $ | 3,615    |       |  | $ | (795,654   | )        |   | $ | 2,782,453  |          
|                                        |       |   |            |           |              |   |              |           |               |   |          |       |  |   |            |          |   |   |            |          

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SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

Total stock-based interest expense for 2001 and 2000 is as follows:

|                                                                           |  |      |           |      |  |   |         | 
|-------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | ------- | 
|                                                                           |  | 2001 |           | 2000
|                                                                           |  |      |           |     
|Amortization of Alabama group discount                                     |  | $    | 1,144,111 |      |  | $ | 3,615   | 
|Amortization of Argyle Capital discount                                    |  |      | 396,000   |      |  |   |         | 
|Effect of beneficial conversion privileges on
Argyle Capital debt interest |  |      | 284,753   |      |  |   | 548,049 | 
|Other, net                                                                 |  |      |           |      |  |   | 9,682   | 
|                                                                           |  |      |           |      |  |   |         | 
|                                                                           |  | $    | 1,824,864 |      |  | $ | 561,346 | 
|                                                                           |  |      |           |      |  |   |         | 

4. Property and Equipment

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

|                              |  |      |           |      |  |   |           | 
|----------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                              |  | 2001 |           | 2000
|                              |  |      |           |     
|Office furniture and fixtures |  | $    | 353,717   |      |  | $ | 353,717   | 
|Machinery and equipment       |  |      | 1,056,645 |      |  |   | 729,871   | 
|Building and improvements     |  |      | 73,600    |      |  |   | 73,600    | 
|                              |  |      |           |      |  |   |           | 
|                              |  |      | 1,483,962 |      |  |   | 1,157,188 | 
|Less accumulated depreciation |  |      | 876,896   |      |  |   | 586,603   | 
|                              |  |      |           |      |  |   |           | 
|                              |  | $    | 607,066   |      |  | $ | 570,585   | 
|                              |  |      |           |      |  |   |           | 

The Company incurred depreciation expense of $290,292 and $218,176 for the
years ended December 31, 2001 and 2000, respectively.

Included in fixed assets at December 31, 2001 and 2000 is equipment
acquired under capital leases of $133,640 with accumulated depreciation of
$133,640 and $117,519, respectively.

The following is a summary of the future lease obligations as of December
31, 2001:

|                             |                                                                   |   |         |       |           |   |        |        | 
|---------------------------- | ----------------------------------------------------------------- | - | ------- | ----- | --------- | - | ------ | ------ | 
|                             |                                                                   |   | Capital |       | Operating
|                             |                                                                   |   |         |       |          
|Year ended December 31, 2002 |                                                                   | $ | 4,823   |       |           | $ | 78,522 |       
|                             |                                                                   |   |         |       |           |   |        |       
|                             | Total minimum lease payments                                      |   |         | 4,823 |           |   |        | 78,522 | 
|                             |                                                                   |   |         |       |           |   |        |       
|                             | Less amount representing interest                                 |   |         | 340   |           |   |        |        | 
|                             |                                                                   |   |         |       |           |   |        |       
|                             | Present value of net minimum
capital lease payments  all
current |   | $       | 4,483 |           |   |        |        | 
|                             |                                                                   |   |         |       |           |   |        |       

Rent expense related to operating leases for the years ended December 31,
2001 and 2000 was $314,402 and $252,785, respectively.

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SPATIALIGHT INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

5. Income Taxes

Income taxes for the year ended December 31, are comprised of the
following:

|                             |  |         |       |          |  |       |   |  |  |   |       | 
|---------------------------- |  | ------- | ----- | -------- |  | ----- | - |  |  | - | ----- | 
|                             |  | Current |       | Deferred |  | Total
|                             |  |         |       |          |  |      
|Year ended December 31, 2001 |  |         |       |          |  |       |   |  |  |   |       | 
|Federal                      |  | $       |      |          |  | $     |  |  |  | $ |      | 
|State                        |  |         | 7,233 |          |  |       |  |  |  |   | 7,233 | 
|                             |  |         |       |          |  |       |   |  |  |   |       | 
|Total                        |  | $       | 7,233 |          |  | $     |  |  |  | $ | 7,233 | 
|                             |  |         |       |          |  |       |   |  |  |   |       | 
|Year ended December 31, 2000 |  |         |       |          |  |       |   |  |  |   |       | 
|Federal                      |  | $       |      |          |  | $     |  |  |  | $ |      | 
|State                        |  |         | 1,600 |          |  |       |  |  |  |   | 1,600 | 
|                             |  |         |       |          |  |       |   |  |  |   |       | 
|Total                        |  | $       | 1,600 |          |  | $     |  |  |  | $ | 1,600 | 
|                             |  |         |       |          |  |       |   |  |  |   |       | 

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:

|                                                    |  |      |            |      |  |   |            |  
|--------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                    |  | 2001 |            | 2000
|                                                    |  |      |            |     
|Computed expected tax benefit                     |  | $    | (3,369,988 | )    |  | $ | (2,663,514 | )
|Permanent differences                               |  |      | 813,818    |      |  |   | (482,404   | )
|Losses for which no benefit has been recognized     |  |      | 2,975,831  |      |  |   | 3,575,489  |  
|State tax benefit, net of federal income tax effect |  |      | (412,428   | )    |  |   | (427,971   | )
|                                                    |  |      |            |      |  |   |            |  
|Total tax expense                                   |  | $    | 7,233      |      |  | $ | 1,600      |  
|                                                    |  |      |            |      |  |   |            |  

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:

|                     |                                  |                           |   |            |             |      |   |            |             |  
|-------------------- | -------------------------------- | ------------------------- | - | ---------- | ----------- | ---- | - | ---------- | ----------- | -
|                     |                                  |                           |   | 2001       |             | 2000
|                     |                                  |                           |   |            |             |     
|Deferred tax assets: |                                  |                           |   |            |             |      |   |           
|                     | Net operating loss carryforwards |                           | $ | 13,270,887 |             |      | $ | 10,170,507 |            
|                     | Equity investment losses         |                           |   | 99,865     |             |      |   | 99,865     |            
|                     | Accrued expenses                 |                           |   | 22,184     |             |      |   | 15,997     |            
|                     | Research and development credits |                           |   | 1,049,622  |             |      |   | 998,524    |            
|                     | Options and warrants             |                           |   | 829,352    |             |      |   | 457,210    |            
|                     |                                  |                           |   |            |             |      |   |           
|                     |                                  | Gross deferred tax assets |   |            | 15,271,910  |      |   |            | 11,742,083  |  
|                     |                                  | Valuation allowance       |   |            | (15,271,910 | )    |   |            | (11,742,083 | )
|                     |                                  |                           |   |            |             |      |   |           
|                     | Net deferred tax assets          |                           | $ |           |             |      | $ |           |            
|                     |                                  |                           |   |            |             |      |   |           

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SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

The net change in the total valuation allowance was $3,529,827 and
$3,613,015 for the years ending December 31, 2001 and 2000, respectively. As
of December 31, 2001, the Company had net operating loss carryforwards of
approximately $33,800,000 for federal and $30,300,000 for state tax purposes,
respectively, which expire in varying amounts from 2005 for federal and have
already begun to expire for state. In addition, as of December 31, 2001, the
Company had research and development carryforwards of approximately $659,000
for federal, which will begin to expire in 2008 and $592,200 for state tax
purposes, which will begin to expire in 2009.

Under the provisions of the Internal Revenue Code, should substantial
changes in the Companys ownership occur, the utilization of net operating loss
carryforwards may be limited.

Deferred tax assets resulting from net operating losses attributable to
stock option exercises and warrant issuances could result in a $1,413,000
credit to additional paid-in capital if realized.

6. Stockholders Equity

Stock Option Plans In 1999 the Shareholders approved the 1999 Stock
Option Plan, which replaced the Companys 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 the Companys common stock. 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.

Under the Plan, the Company 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.

These options expire 10 years from the date of grant and become vested and
exercisable 50% at the end of year one and 50% at the end of year two. Options
under the Plan are granted at the discretion of the Board of
Directors/Compensation Committee. All options granted through 2001 have been
granted at fair market value.

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 2001 and 2000:

|                                 |  |           |           |                  |  |   |      | 
|-------------------------------- |  | --------- | --------- | ---------------- |  | - | ---- | 
|                                 |  | Number of |           | Weighted Average
|                                 |  | Shares    |           | Price           
|                                 |  |           |           |                 
|Outstanding January 1, 2000      |  |           | 2,873,800 |                  |  | $ | 2.71 | 
|Options granted under the plan   |  |           | 240,000   |                  |  |   | 2.72 | 
|Options exercised                |  |           | (315,000  | )                |  |   | .57  | 
|Options canceled                 |  |           | (782,500  | )                |  |   | 5.75 | 
|                                 |  |           |           |                  |  |   |      | 
|Outstanding December 31, 2000    |  |           | 2,016,300 |                  |  | $ | 1.84 | 
|Options granted under the plan   |  |           | 655,000   |                  |  |   | 2.20 | 
|Options granted outside the plan |  |           | 2,875,000 |                  |  |   | 3.77 | 
|Options exercised                |  |           | (629,300  | )                |  |   | .70  | 
|Options cancelled                |  |           | (292,500  | )                |  |   | 2.68 | 
|                                 |  |           |           |                  |  |   |      | 
|Outstanding December 31, 2001    |  |           | 4,624,500 |                  |  | $ | 3.20 | 
|                                 |  |           |           |                  |  |   |      | 

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SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

At December 31, 2001, 2,875,000 of the options outstanding were granted
outside of the plan. Options exercisable as of December 31, 2001 and 2000
totaled approximately 1,920,750 and 1,591,300 options, respectively, at a
weighted average exercise price of $1.90 and $1.27 per share, respectively. Of
the options exercisable as of December 31, 2001, 900,000 options were issued
outside of the Plan at a weighted average exercise price of $1.50.

The weighted average fair value of options granted during 2001 and 2000:

|                                         |  |      |      |      |  |   |      | 
|---------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | 
|                                         |  | 2001 |      | 2000
|                                         |  |      |      |     
|Exercise price equals market price       |  | $    | 1.53 |      |  | $ | 1.25 | 
|Exercise price is less than market price |  | $    | 2.42 |      |  | $ |     | 

Additional information regarding options outstanding as of December 31,
2001 is as follows:

|                |  |                     |           |             |  |                |      |             |  |                |      |  |  |          |           |  |  |   |      | 
|--------------- |  | ------------------- | --------- | ----------- |  | -------------- | ---- | ----------- |  | -------------- | ---- |  |  | -------- | --------- |  |  | - | ---- | 
|                |  |                     |           |             |  |                |      |             |  |                |      |  |  | OPTIONS 
|                |  | OPTIONS OUTSTANDING |           | EXERCISABLE | 
|                |  |                     |           |             | 
|                |  |                     |           |             |  | Weighted       |      |             |  |                |      |  |  |          |           |  |  |  
|                |  |                     |           |             |  | Average        |      |             |  |                |      |  |  |          |           |  |  |  
|                |  |                     |           |             |  | Remaining      |      | Weighted    |  |                |      |  |  | Weighted
|Range of        |  | Outstanding at      |           | Contractual |  | Average        |      | Number      |  | Average       
|Exercise Prices |  | December 31, 2001   |           | Life (Yrs.) |  | Exercise Price |      | Exercisable |  | Exercise Price
|                |  |                     |           |             |  |                |      |             |  |               
|$6.01 - 7.00    |  |                     | 12,500    |             |  |                | 10.0 |             |  | $              | 7.00 |  |  |          | 0         |  |  | $ | 0.00 | 
|$5.01 - 6.00    |  |                     | 285,000   |             |  |                | 8.1  |             |  | $              | 5.75 |  |  |          | 270,000   |  |  | $ | 5.75 | 
|$4.01 - 5.00    |  |                     | 2,005,000 |             |  |                | 9.5  |             |  | $              | 4.80 |  |  |          | 15,000    |  |  | $ | 4.92 | 
|$3.01 - 4.00    |  |                     | 25,000    |             |  |                | 7.5  |             |  | $              | 3.81 |  |  |          | 25,000    |  |  | $ | 3.81 | 
|$2.01 - 3.00    |  |                     | 590,000   |             |  |                | 9.5  |             |  | $              | 2.21 |  |  |          | 35,000    |  |  | $ | 2.72 | 
|$1.01 - 2.00    |  |                     | 1,095,000 |             |  |                | 9.4  |             |  | $              | 1.49 |  |  |          | 963,750   |  |  | $ | 0.08 | 
|$0.25 - 1.00    |  |                     | 612,000   |             |  |                | 5.2  |             |  | $              | 0.65 |  |  |          | 612,000   |  |  | $ | 0.65 | 
|                |  |                     |           |             |  |                |      |             |  |                |      |  |  |          |           |  |  |   |      | 
|                |  |                     | 4,624,500 |             |  |                |      |             |  |                |      |  |  |          | 1,920,750 |  |  |   |      | 
|                |  |                     |           |             |  |                |      |             |  |                |      |  |  |          |           |  |  |   |      | 

At December 31, 2001, 1,037,500 shares were available for future grants
under the Plan.

SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss and loss per share had the Company adopted the
fair value method. Under SFAS No. 123, the fair value
of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Companys stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values.

The Companys calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions: expected
life 24 months in 2001 and 2000, historical volatility 114% in 2001 and 2000,
and risk-free interest rates of 6% in 2001 and 2000. No dividends are expected
for the term of the options. The Companys calculations are based on a
multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the 2001 and 2000 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been as follows:

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##### Table of Contents



SPATIALIGHT INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000 (Continued)

|                                                                                  |  |   |                          |   |      |   |             |   | 
|--------------------------------------------------------------------------------- |  | - | ------------------------ | - | ---- | - | ----------- | - | 
|                                                                                  |  |   | Years ended December 31,
|                                                                                  |  |   |                         
|                                                                                  |  |   | 2001                     |   | 2000
|                                                                                  |  |   |                          |   |     
|Net loss attributable to common shareholders, as reported                         |  | $ | (9,911,727               | ) |      | $ | (8,440,172  | )
|Pro forma net loss attributable to common shareholders                            |  | $ | (12,693,467              | ) |      | $ | (11,404,941 | )
|Net loss per share attributable to common shareholders 
basic and diluted        |  | $ | (0.46                    | ) |      | $ | (0.44       | )
|Pro forma net loss per share available to common
shareholders  basic and diluted |  | $ | (0.59                    | ) |      | $ | (0.59       | )

Diluted net loss per share

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

|                                                                               |  |      |           |      |  |  |           | 
|------------------------------------------------------------------------------ |  | ---- | --------- | ---- |  |  | --------- | 
|                                                                               |  | 2001 |           | 2000
|                                                                               |  |      |           |     
|Shares issuable under stock options                                            |  |      | 4,624,500 |      |  |  | 2,016,300 | 
|Shares issuable pursuant to warrants to purchase common shares                 |  |      | 2,588,512 |      |  |  | 3,868,512 | 
|Shares of convertible notes and accrued interest on an as if
converted basis |  |      | 3,462,035 |      |  |  | 3,425,603 | 

The weighted average exercise price of stock options outstanding was $3.20
and $1.84 as of December 31, 2001 and 2000, respectively. The weighted average
exercise price of warrants was $3.37 and $3.11 per share as of December 31,
2001 and 2000, respectively.

7. Segment Information

The Companys chief operating decision-maker is the Acting 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, the Company has determined that it
operates in a single business segment. The Companys revenue for 2001 and 2000
consisted of sales of development kits. All assets are located in the United
States.

23



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##### Table of Contents






PART III




ITEM 12. Certain Relationships and Related Transactions.

Argyle Notes:

In 1998, the Company received $1,188,000 in cash in exchange for notes in that
amount to Argyle Capital Management Corporation (Argyle), a company
affiliated with Robert A. Olins, Acting Chief Executive Officer, Secretary,
Treasurer, and a Director of the Company. The notes accrue interest at a
contractual rate of 6%, and are secured by substantially all the assets of the
Company. Both principal and interest are convertible into the Companys common
shares at $.50 per share. On May 23, 2001 the due date of the notes was
extended until December 31, 2002. On the extension date, the beneficial
conversion effect representing the excess aggregate value of the common shares
receivable upon conversion of the notes based on the then current market price
of $1.90 per share, over the aggregate conversion price for such common shares
(limited to the original proceeds of $1,188,000) was recorded as additional
paid-in capital. The resulting $1,188,000 discount to the debt arising from
the beneficial conversion feature is being amortized over the life of the
extended note. 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, results in a new effective interest rate of 72%
as of the May 23, 2001 extension date when compared to the then outstanding
principal balance. The effective rate prior to extension had been the 6%
contractual rate.

For the years ended December 31, 2001 and 2000, additional stock-based interest
expense of approximately $285,000 and $548,000, respectively, was recorded due
to the beneficial conversion feature of the accrued interest, based on average
prices during the periods, over the conversion price for such shares. Since
inception, Argyle has received a total of approximately $2,280,000 in
contractual and beneficial conversion interest, substantially all of which was
in the form of common shares of the Company. At December 31, 2001, the
carrying value of the Argyle notes totals $524,243, which includes the
$1,188,000 principal balance plus accrued and beneficial interest totaling
$128,243, net of unamortized discounts of $792,000.

Alabama Group Notes:

In December 1999, the Company received $1,437,500 in cash and issued notes in
that amount to a group of investors (the Alabama Group) which includes a
trust for the benefit of Steven F. Tripp, a Director of the Company. Mr. Tripp
is not the trustee of this trust and has no power to vote or dispose of the
Common Shares of the Company or any other securities held by that trust.
Marcia K. Tripp, Steven F. Tripps mother, is the trustee of this trust and
directs and is responsible for all of the investment decisions of this trust.
In the opinion of the Company, no other investor in the Alabama Group is an
affiliate of the Company and Mr. Tripp is not an affiliate of any other
investor in the Alabama Group. The notes accrue interest at a contractual rate
of 6%, and are secured by substantially all the assets of the Company. This
portion of the notes is convertible into shares of the Companys common stock
at $3.50 per share. Upon issuance of the notes, the Company also issued
warrants to purchase 821,429 shares of common stock. The warrants are
exercisable through June 30, 2002 at $3.50 per share; none of these warrants
have been exercised as of December 31, 2001. The warrants were valued using
the Black-Scholes option-pricing model and the following assumptions:
contractual life 2.5 years; volatility 114%; risk-free interest rate 6%; and
dividend yield of $0. The total cash received from the issuance of this
tranche of notes of $1,437,500 was less than the calculated value associated
with the warrants. Therefore, the value assigned to the warrants was limited
to the original proceeds of $1,437,500, and was recorded as a discount on the
notes. The effective interest rate for financial statement purposes due to
this discount differs from the actual contractual interest received or
receivable in cash by the holders of the Alabama Group Notes. This discount,
along with the contractual 6% interest rate, resulted in an effective interest
rate of 70% upon issuance when compared to the outstanding principal balances.

24



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##### Table of Contents



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

On June 15, 2001 the due date was of both tranches was extended until December
31, 2002. On the extension date, the excess $255,000 aggregate value of the
common shares receivable upon conversion of the notes based on the then current
market price of $2.65 per share, over the aggregate conversion price for the
notes convertible at $2.25 per share, was recorded as additional paid-in
capital. The resulting $255,000 discount to the debt, along with the remaining
unamortized discount for the first tranche, is being amortized over the life of
the extended notes. The effective interest rate for financial statement
purposes due to these discounts differs from the actual contractual interest
received or receivable by the holders of the Alabama Group Notes. These
discounts, along with the contractual 6% interest rate, result in a new
effective interest rate upon extension of 25% as of the extension date when
compared to the outstanding principal balances.

At December 31, 2001, the carrying value of the Alabama notes totals
$2,613,042, which includes the $2,875,000 principal balance plus accrued
interest of $282,815, net of unamortized discounts of $544,774.

In April 2001 the Company issued warrants to purchase 607,143, shares of common
stock at an exercise price of $1.75 per share, the market price at date of
issuance, to this same group of investors in order to raise cash for working
capital purposes. These warrants were immediately exercised in April 2001 in
exchange for cash and notes. $21,875 of these notes remained unpaid at
December 31, 2001.

Stock Based Compensation for Employee:




In December 2001, the Company issued 200,000 Common Shares to its Director of
Corporate Development, Anne-Marie Ribes. The Shares were issued in consideration of services
rendered by her with respect to assisting the Company in negotiating
the contractual relationships with its existing prospective customers. These
shares were valued at $740,000, the market value of such Shares on the date of
grant. At this time, we have not determined future arrangements with respect
to additional significant equity compensation for Ms. Ribes. See Note 2 to the
Financial Statements under Item 1 of this Report.




25



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##### Table of Contents






ITEM 13. Exhibits and Reports on Form 8-K.

1. Exhibits

|          |  |                                                                                                                                                                                                                                                                                                    
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         
|Exhibit # |  | Description                                                                                                                                                                                                                                                                                        
|          |  |                                                                                                                                                                                                                                                                                                    
|3.1       |  | Amended and Restated Certificate of Incorporation (incorporated by reference to
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      |  | 1991 Employee Stock Option Plan and Form of Stock Option Agreement thereunder
(incorporated by reference to Exhibit 10.1 to the Companys
Registration Statement on Form S-1 filed February 13, 1992).                                                                                             
|         
|         
|         
|         
|10.2      |  | 1993 Nonstatutory Employee Stock Option Plan and Form of Stock Option Agreement
thereunder (incorporated by reference to Exhibit 10.2 to the
Companys Registration Statement on Form S-1 filed February 13, 1992).                                                                                
|         
|         
|         
|         
|10.3      |  | 1993 Nonstatutory Directors Stock Option Plan (incorporated by reference to
Exhibit 10.3 to the Companys Registration Statement on Form S-1 filed February
13, 1992).                                                                                                                             
|         
|         
|         
|         
|10.4      |  | 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).                                                                                                                                 
|         
|         
|         
|         
|10.5      |  | Form of Convertible Secured Loan Agreement, dated as of December 1, 1999, between
SpatiaLight, and the twenty-two lenders listed on Exhibit A to such form
(incorporated by reference to Exhibit 10.9 to the Companys Form 10KSB filed
April 14, 2000).                                           
|         
|         
|         
|         
|10.6      |  | Form of Security Agreement, dated as of December 1, 1999, between SpatiaLight,
and the twenty-two lenders listed on Schedule A to such form (incorporated by
reference to Exhibit 10.10 to the Companys Form 10KSB
filed April 14, 2000).                                                         
|         
|         
|         
|         
|10.7      |  | Form of Registration Rights Agreement, dated as of December 1, 1999, between
SpatiaLight, and the twenty-two lenders listed on Exhibit A to such form
(incorporated by reference to Exhibit 10.11 to the Companys Form 10KSB filed
April 14, 2000).                                               
|         
|         
|         
|         
|10.8      |  | Form of Agreement and Warrant to Purchase Common Shares, dated as of December 1,
1999, between SpatiaLight, and the twenty-two lenders listed on the Exhibit A of
Convertible Secured Loan Agreement (incorporated by reference to Exhibit 10.12 to
the Companys Form 10KSB filed April 14, 2000).
|         
|         
|         
|         
|10.9      |  | Form of Convertible Secured Note, dated as of December 1, 1999, between
SpatiaLight, and the twenty-two lenders listed on Exhibit A of the Convertible
Secured Loan Agreement (incorporated by reference to Exhibit 10.13 to the
Companys Form 10KSB filed April 14, 2000).                       
|         
|         
|         
|         
|10.10     |  | Employment Agreement between the Company and Miles L. Scott dated December 31,
1999 (incorporated by reference to Exhibit 10.17 to the Companys Form 10KSB
filed on April 14, 2000).                                                                                                              
|         
|         
|         
|         
|10.11   |  | Settlement Agreement between the Company and Michael Burney dated August 23, 2000.                                                                                                                                                                                                                 
|         
|         
|         
|         
|10.12     |  | Standard Office Lease dated February 22, 1999, between Dennis A. and Susan Johann
Gilardi and SpatiaLight, Inc. (incorporated by reference to Exhibit 10.22 to the
Companys Form 10QSB filed on May 17, 1999).                                                                                    
|         
|         
|         
|         
|10.13*   |  | Memorandum of Understanding between China Electronics Corporation (CEC) and
SpatiaLight, Inc.                                                                                                                                                                                                      
|         
|         
|         
|         
|10.14   |  | Memorandum of Understanding between HiSense Electric Co., Ltd. / IRICO Group
Corp. and SpatiaLight, Inc.                                                                                                                                                                                           
|         
|         
|         
|         
|10.15   |  | Agreement of Principal Terms between Skyworth Display Ltd. and SpatiaLight, Inc.                                                                                                                                                                                                                   
|         
|         
|         
|         
|10.16*   |  | Agreement of Principal Terms between Shanghai Information Industry Co. Ltd.
(S.V.A.) and SpatiaLight, Inc.                                                                                                                                                                                         
|         
|         
|         
|         
|10.17   |  | Agreement of Principal Terms between Panda Electronics Group Co. Ltd. (Panda) and
SpatiaLight, Inc.                                                                                                                                                                                                
|         
|         
|         
|         
|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 BDO Seidman, LLP.                                                                                                                                                                                                                                                                       
|99.1      |  | Certification of Acting Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                          
|         
|         
|         
|         
|99.2      |  | Certification of Principal Executive, 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.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|  |  | Incorporated by reference to the Companys Form 10-KSB/A filed on July 16, 2002
(SEC File No. 000-19828).                                                                           
|  
|  
|  
|  
|  
|  
|  
|  
| |  | Incorporated by reference to the
Company's Form 10-KSB filed on March 21, 20002(SEC File
No. 000-19828).                                                                            




26



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##### Table of Contents



2. Reports on Form 8-K.

The Company has not filed any reports on Form 8-K during the last quarter
of the fiscal year ended December 31, 2001.

27



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##### Table of Contents



In accordance with 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 19th day of September 2002.

| |                                                                         |                    
| | ----------------------------------------------------------------------- | -------------------
| | SPATIALIGHT, INC.                                                      
|
| | By:                                                                     | /s/ ROBERT A. OLINS
| |                                                                        
| | Robert A. Olins
Acting Chief Executive Officer,
Treasurer and Secretary

28



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##### Table of Contents



CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert A. Olins, certify that:

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

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

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

Date: September 19, 2002

| |                                                | 
| | ---------------------------------------------- | 
|
| | /s/ Robert A. Olins                            | 
| |                                               
|
| | Robert A. Olins
Acting Chief Executive Officer | 

29



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##### Table of Contents



CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert A. Olins, certify that:

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

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

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

Date: September 19, 2002

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

30