<PAGE>




                       Securities and Exchange Commission
                             Washington, D.C. 20549
--------------------------------------------------------------------------------
                                   FORM 10-KSB

[X]    Annual report under Section 13 or 15(d) of the Securities Exchange Act of
       1934 For the fiscal year ended December 31, 2002.

[ ]    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                       (I.R.S. Employer
 of incorporation or organization)                 Identification No.)

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

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

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

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

     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, 2002 aggregated $0

     The aggregate market value for the Issuer's voting stock held by
non-affiliates of the Issuer, based upon the $2.91 per share closing sale price
of the Common Stock on February 28, 2003 as reported on the Nasdaq SmallCap
Market, was approximately $59,905,260. 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 April 10, 2003, Registrant had 26,956,748 shares of Common Stock
outstanding.

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


<PAGE>




                                SPATIALIGHT, INC.
                            FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                        Page

                                        PART I


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

 ITEM 2            Description of Property...........................................................  7

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

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

                                         PART II

 ITEM 5            Market for Common Equity and Related
                   Stockholder Matters...............................................................  8

 ITEM 6            Management's Discussion and Analysis
                   of Financial Conditions and Plan of Operation ....................................  10

 ITEM 7            Financial Statements..............................................................  22

 ITEM 8            Changes in and Disagreements with Accountants
                   On Accounting and Financial Disclosure............................................  43

                                         PART III

 ITEM 9            Directors, Executive Officers, Promoters and Control
                   Persons; Compliance with Section 16(a) of the Exchange Act........................  44

 ITEM 10           Executive Compensation............................................................  46

 ITEM 11           Security Ownership of Certain Beneficial Owners and Management....................  47

 ITEM 12           Certain Relationships and Related Transactions....................................  48

 ITEM 13           Exhibits and Reports on Form 8-K..................................................  50

 ITEM 14           Controls and Procedures ..........................................................  51

</TABLE>

                                       2

<PAGE>



                                     PART I

This annual report on Form 10-KSB contains  certain  forward-looking  statements
within the meaning of Section 21E of the Securities and Exchange Act of 1934, as
amended,  and is subject to the Safe Harbor provisions  created by that statute.
In this  report,  the  words  "anticipates,"  "believes,"  "expects,"  "future",
"intends," and similar expressions  identify  forward-looking  statements.  Such
statements are subject to risks and  uncertainties,  including,  but not limited
to, those discussed herein which are specific to the Company's business,  and in
particular, those contained in "Item 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the caption "Risk Factors,"
that could cause actual results to differ  materially from those projected.  You
are cautioned not to place undue reliance on these  forward-looking  statements,
which speak only as of the date hereof.  We undertake no  obligation to publicly
update  or  revise  these  forward-looking   statements  to  reflect  events  or
circumstances  after the date of this  report or to reflect  the  occurrence  of
unanticipated  events and thus you should not assume that silence by  management
over time  means  that  actual  events  are  bearing  out as  estimated  in such
forward-looking statements.

Item 1. Description of Business

Introduction

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

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

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

         o        large-screen   rear-projection  television  systems,  in  both
                  standard  television  format  and high  definition  television
                  formats;

         o        large-screen rear-projection computer monitors in a variety of
                  resolutions;

         o        video projectors for presentations;

         o        head-mounted  displays  which  are  used for  virtual  reality
                  systems, defense, aerospace and gaming applications;

         o        and other  potential  applications  such as point of  purchase
                  displays, optical computing and data storage.

         Our technology  uses liquid crystals and silicon chips. An advantage of
these  materials is that  processes  for working with them are already known and
they  may  be  produced  more  quickly  than  competing   technologies  offering
comparable quality.  By using existing  manufacturing  processes,  we believe we
will  be

                                       3

<PAGE>

able to obtain economies of scale. We are currently  working in conjunction with
Fuji Photo  Optical  Company  for the  manufacture  of light  engines  using our
microdisplays to be sold to our customers.

         Since late  October  2001,  we have entered  into seven  agreements  or
memoranda of understanding with eight original equipment  manufacturers in China
contemplating the purchase by these  prospective  customers of our display units
and/or  SpatiaLight  imagEngine(TM)  microdisplays  for use in  certain of their
products.  All of these  agreements  require  that we supply  prototypes  of our
display units and/or SpatiaLight imagEngine(TM) microdisplays and that they meet
technical  criteria  satisfactory  to each of such  prospective  customers.  The
Company has been advised by certain of these prospective customers that they are
satisfied  with  the  results  of the  testing  of the  prototypes  under  their
agreements  with the Company and that they are prepared to negotiate final terms
of  purchase  orders for our display  units  and/or  SpatiaLight  imagEngine(TM)
microdisplays.

         In addition,  in January 2003 we entered into an Agreement of Principal
Terms with one original  equipment  manufacturer  (OEM) in the Republic of South
Korea  contemplating the purchase of our display units for use in certain of its
products. This agreement requires that we supply a prototype of our display unit
and that it meet technical criteria satisfactory to the prospective customer.

     On  January  29, 2003, we announced that we had concluded negotiations with
Skyworth  Display  Ltd.,  resulting  in  a  signed agreement for the purchase by
Skyworth  of 14,100 display units from us during a one year delivery period. The
purchase  order  provides for the first shipment of 200 units to be delivered in
February  and  an additional 200 units in each of March and April 2003. Skyworth
and  we  subsequently  agreed  to  delay the first delivery of units to Skyworth
until May 2003. Beginning in August, we are scheduled to deliver 1,500 units per
month until the order is completed. Pursuant to the terms of the purchase order,
the  obligations of Skyworth will be backed by letters of credit in our favor to
be  issued  monthly,  the  first  of which has already been issued. The purchase
order  is  cancelable by Skyworth on a quarterly basis and is subject to pricing
contingencies  and  other  customary terms and conditions. We have delivered the
requisite  number of our SpatiaLight imagEngine (TM) microdisplays to Fuji Photo
Optical  Co.,  Ltd.  for incorporation into the display units to be delivered to
Skyworth  in  the  first  of  the  twelve  monthly  deliveries.

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

Technology and Products under Development

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

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


                                       4
<PAGE>

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

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

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

         Our continued  existence is dependent upon our ability to  successfully
develop, market and sell our products. In September 2002 we accepted delivery of
the first  pre-production  SpatiaLight/Fuji  display units. These pre-production
display units,  which have been provided to our prospective  customers in China,
incorporate  mechanical  changes and  technical  enhancements  that we initiated
based upon the results of extensive testing of the prototype display units.

Marketing, Sales and Distribution

Application and Markets

         We are working with a number of  international  OEMs to use our display
units in their end product applications.  Our ability to design end products for
any of these  markets,  as well as the ability to sell and  distribute  in these
diverse markets is beyond the current resources of our company. We are therefore
establishing relationships with OEMs to incorporate our display units into their
products.  In high  volume  applications,  we will be able to custom  design our
display units to fit a specific  manufacturer's  need for a specific product. We
will also consider licensing large manufacturers who have the ability and desire
to manufacture  our displays for use in their final  products.  Our  SpatiaLight
imagEngine(TM) microdisplays can be incorporated into a wide variety of products
such as rear-projection  televisions,  rear-projection  computer monitors, video
projectors, and head mounted displays.

         Our  strategy is to focus our  abilities on original  equipment  design
(OED)  of LCOS  microdisplays,  and to work  closely  with  OEMs to  market  end
products utilizing our microdisplays. We are therefore dependent upon these OEMs
for the manufacturing and marketing of end products.

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


                                       5
<PAGE>

Manufacturing and Supply

         While  in the  past we  have  had  working  arrangements  with  several
independent  liquid crystal  display  fabricators to manufacture  certain of our
prototype  products,  we are now manufacturing our microdisplays  ourselves in a
500 square foot Class 100 cleanroom and a 1200 square foot Class 1000 cleanroom.
We have enhanced  quality  control and we have more effective  protection of our
proprietary  technology in our products.  Internal  manufacturing  is subject to
certain risks  described under "Risk Factors." We perform product testing of our
microdisplay,  analyze the results and take actions to refine the  manufacturing
process  and enhance  product  design.  We have  developed  statistical  quality
control procedures for our manufacturing process.

         We  currently  obtain  silicon  backplanes,  a vital  component  in our
microdisplays,  from  the Far  East.  The  supply  of  silicon  backplanes  from
suppliers does fluctuate, and we may be subject to problems of availability.

         In  September  2002 we accepted  delivery  of the first  pre-production
SpatiaLight/Fuji  display units. These pre-production  display units, which have
been  provided to our  prospective  customers in China,  incorporate  mechanical
changes and technical  enhancements  that we initiated based upon the results of
extensive  testing of the prototype  display units. In January 2003 we concluded
negotiations  with Skyworth Display,  Ltd.,  resulting in a signed agreement for
the purchase by Skyworth of 14,100  display  units from us upon terms more fully
described under the "Introduction" section of this Item 1.

         Any  termination  of a  manufacturing  or supply  contract could have a
material  adverse effect on our ability to meet our  anticipated  commitments to
customers  while we identify  and qualify  replacement  manufacturers.  We could
become  dependent on any manufacturer and any termination or cancellation of our
agreement  with  the   manufacturer   could  adversely  affect  our  ability  to
manufacture our products.

Competition

         Microdisplays  are a subset of the display market.  This display market
subset consists of 1) reflective  microdisplays  produced on silicon backplanes,
2)  transmissive  microdisplays  and 3) emissive  microdisplays.  The reflective
microdisplay  competition  includes  companies such as Aurora,  eLCOS,  Hitachi,
Hughes/JVC,  Philips,  Sony, and  Three-Five  Systems.  These  companies are all
producing different forms of a liquid crystal display on a silicon backplane.  A
competitor  in the  reflective  microdisplay  market,  although not using liquid
crystals  in  the  display,   is  Texas   Instruments,   which  is  producing  a
micro-mechanical structure of moving mirrors on a silicon backplane.

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


Patents and Intellectual Property

         Our ability to compete effectively with other companies will depend, in
part, on our ability to maintain the proprietary nature of our technologies.  We
have been awarded six U.S. patents and have other patent  applications  pending.
There can be no  assurance  as to the  degree  of  protection  offered  by these
patents  or as to the  likelihood  that  pending  patents  will be  issued.  Our
competitors, in both the United States and foreign countries, many of which have
substantially  greater  resources  and  have  made  substantial  investments


                                       6
<PAGE>

in competing  technologies,  may seek to apply for and obtain  patents that will
prevent,  limit or  interfere  with our ability to make and sell our products or
intentionally infringe upon our patents.

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

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

Research and Development

         We incurred  research and development  expenses of  approximately  $3.6
million  in 2002 and $2.6 million in 2001. Research and development expenses are
those costs incurred for personnel and experimental materials for the design and
development  of  new  products, approximately $800,000 in pre-production tooling
costs  for test designs in 2002. We believe that the development of new products
will  be  required  to  allow  us  to  compete effectively and to achieve future
revenues.  We  currently  have  six  full-time  employees  whose  duties include
research  and  development  and  seven  full-time employees whose duties include
manufacturing.  We intend to continue our product development programs, focusing
on  increasing  the  display  specifications  including  resolution,  color, and
manufacturing  processes.  We believe that such developments will be required to
exploit  future  markets.

Employees

         As of December 31, 2002, the Company had twenty full-time employees and
two part-time  engineering  contractors.  Full-time  employment is divided among
three  functional  areas  with  six  in  research  and  development,   seven  in
manufacturing and seven in finance/administration. We intend to actively recruit
for a Chief  Financial  Officer  and  other  key  employees.  Employees  are not
represented  by  any  collective  bargaining  organizations.   We  consider  our
relations with our employees to be good.

Item 2. Description of Property

         Our  headquarters  are  located at Five  Hamilton  Landing,  Suite 100,
Novato,  California.  Our new premises, which were designed and built-out to our
specifications,  encompass our corporate offices,  quality assurance and testing
facilities,  optics  laboratories  and,  pending  final  approval of permits and
licenses,  a 2,500 square foot  cleanroom.  The new facility  aggregates  14,000
square feet and the lease  continues  through August 2008. In order to prevent a
delay in the production of our SpatiaLight  imagEngine(TM)  microdisplays during
this  permitting  and licensing  process,  we have leased two clean rooms, a 500
square  foot Class 100 clean room and a 1200  square foot Class 1000 clean room,
where we are now  manufacturing our  microdisplays  ourselves.  We believe these
facilities are sufficient to meet our immediate needs.

Item 3. Legal Proceedings

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


                                       7
<PAGE>




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

         We submitted no matters to a vote of our  security  holders  during the
fourth quarter of fiscal 2002.




                                       8
<PAGE>


PART II

Item 5. Market for Common Equity and Related Shareholders Matters

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

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

                               HDTV Common Shares

                                          Fiscal 2002
                                          -----------
                                       High           Low
                                       ----           ---

    First Quarter                      8.15           3.18
    Second Quarter                     5.24           2.95
    Third Quarter                      3.95           2.05
    Fourth Quarter                     4.25           1.79

                                          Fiscal 2001
                                          -----------
                                       High           Low
                                       ----           ---

    First Quarter                      2.63           1.03
    Second Quarter                     4.60           1.50
    Third Quarter                      3.30           1.75
    Fourth Quarter                     7.35           1.78


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

         As of March 27, 2003, there were  approximately 483 holders of record
of our common  shares and the  closing  price per share was $2.24 as reported on
the Nasdaq  SmallCap  Market.  The  common  shares  represent  the only class of
securities outstanding as of this filing.

         To date, we have not paid a dividend on our common  stock.  The payment
of future  dividends is subject to our earnings and financial  position and such
other factors, including contractual restrictions, as the Board of Directors may
deem relevant.  It is unlikely that  dividends  will be paid in the  foreseeable
future, nor as a general matter of New York law can the Company pay dividends as
long as it has a capital deficit.

Sales of Unregistered Securities
--------------------------------

         On December 31, 2002,  the Company issued 50,000 shares of common stock
upon the exercise of a warrant.  The shares were purchased at $2.42;  total cash
received was $121,000.

         On December 31, 2002,  the Company issued 62,500 shares of common stock
upon  the  conversion  of a  short-term  convertible  note for  $125,000.  The
conversion price was $2.00 per share.

         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.



                                       9
<PAGE>

         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 $1.87 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, 2002 the remaining balance is $127,500.

         On October 5, 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.  The balance of $2,517,521 was received in the form of a non-interest
bearing  stock  subscription  receivable,  to be paid in  four  equal  quarterly
installments.  At December 31, 2001 the remaining balance was $2,504,058. During
the first quarter of 2002, the purchaser  defaulted  under the second  agreement
resulting in the  cancellation  of the stock purchase  agreement.  The 1,346,268
shares have been restored to the status of authorized but unissued  shares.  The
cancellation had no impact on the Company's results of operations.

         None of the above securities transactions involved any underwriters.

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

Securities Authorized for Issuance Under Equity Compensation Plans
------------------------------------------------------------------

         The  following  table  provides  information  as of  December  31, 2002
regarding  compensation plans (including individual  compensation  arrangements)
under which equity securities are authorized for issuance.

<TABLE>
<CAPTION>
                Number of Securities                                    Number of Securities Remaining
                to Be Issued Upon               Weighted-Average        Available For Future Issuance
                Exercise of Outstanding         Exercise Price of       Under Equity Compensation Plans
Plan Category   Options                         Outstanding Options     (Excluding Securities Reflected in Column (a)
-------------   -----------------------         ---------------------   ---------------------------------------------
                          (a)                            (b)                              (c)
<S>                   <C>                                <C>                            <C>
Equity
Compensation
Plans Approved
Security Holders      5,560,833                          3.17                           1,131,667
----------------------------------------------------------------------------------------------------------------------
</TABLE>

         Included in the above  compensation  plan are 2,875,000  options issued
outside  of the  1999  Stock  Option  Plan  (see  footnote  6 to  the  financial
statements).


                                       10
<PAGE>

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  manufacture  microdisplays  that  provide  high  resolution  images
suitable  for  applications  such as rear  projection  computer  monitors,  high
definition television and video projectors,  and potential  applications such as
use in wireless  communication  devices,  portable games and digital assistants.
Our revenues  through  December 31, 2002 have been derived from the sales of our
development  kits.  In April 2001,  in order to  concentrate  our efforts in the
Chinese market, we discontinued producing and selling development kits.

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

     On  January  29, 2003, we announced that we had concluded negotiations with
Skyworth  Display  Ltd.,  resulting  in  a  signed agreement for the purchase by
Skyworth  of 14,100 display units from us during a one year delivery period. The
purchase  order  provides for the first shipment of 200 units to be delivered in
February  and  an additional 200 units in each of March and April 2003. Skyworth
and  we subsequently agreed to delay the first delivery of the units to Skyworth
until May 2003. Beginning in August, we are scheduled to deliver 1,500 units per
month until the order is completed. Pursuant to the terms of the purchase order,
the  obligations of Skyworth will be backed by letters of credit in our favor to
be  issued  monthly,  the  first  of which has already been issued. The purchase
order  is  cancelable by Skyworth on a quarterly basis and is subject to pricing
contingencies  and  other  customary terms and conditions. We have delivered the
requisite  number  of our SpatiaLight imagEngine(TM) microdisplays to Fuji Photo
Optical  Co.,  Ltd.  for incorporation into the display units to be delivered to
Skyworth  Display  Ltd.  in  the  first  of  twelve  monthly  deliveries.

         During  2002  we   experienced   negative  cash  flows  from  operating
activities  of  approximately   $5,060,000  and  a  net  loss  of  approximately
$9,028,000.  Our operations  were funded in 2002 by the exercise of warrants and
options, and from payments receivable under warrant installment agreements.

         During 2002 we  received  $3,200,300  from the  exercise of options and
warrants,  including $1,082,443 in installment note payments,  for which we have
issued 1,355,584 shares of common stock.


                                       11
<PAGE>

Liquidity and Capital Resources

         Through December 31, 2002, we have sustained  recurring net losses from
operations  and, at  December  31,  2002,  we had a net  capital  deficiency  of
approximately  $4,374,000 and a net working capital  deficiency of approximately
$808,000.  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,
2002 also  contains  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, 2002, the Company had approximately $576,000 in cash
and cash equivalents,  a decrease of approximately  $2,152,000 from the December
31, 2001 amount of $2,728,000.  Our net working  capital deficit at December 31,
2002 was  approximately  $808,000,  compared to a net working capital deficit of
approximately $868,000 at December 31, 2001.

         During 2002 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 approximately $5,060,000 and $4,476,000 in 2002 and
2001,  respectively.  The  increase  was  due  to  the  increase in research and
development  and  general  and  administrative  expenses (other than stock-based
general  and  administrative expenses) of approximately $1,095,000. In addition,
we  began  purchasing  inventory  in 2002 for production needs in 2003. Net cash
provided  by financing activities was approximately $3,188,000 and $6,495,000 in
2002  and 2001 respectively, principally resulting from the exercise of warrants
and  options.

         As of December 31, 2002, we had an accumulated deficit of approximately
$48,758,000.  We have  realized  significant  losses in the past and expect that
these losses will continue until we start to receive  significant  revenues from
the  sale  of  our  products.  We  generated  no  revenues  and  no profits from
operations  during  2002.  The ramp up in manufacturing and commercialization of
our  displays will require substantial expenditures during 2003. For example, we
have  a contractual commitment to purchase certain inventory components over the
next  six  to eight months totaling $1,304,000 less prepayments of $564,000. The
agreement  is  cancelable  on  a  quarterly basis upon payment of certain orders
already in process. Although we are expecting to generate revenues from purchase
orders  in  2003, we may continue to operate at a loss during 2003. There can be
no  assurance  that  our business will operate on a profitable basis thereafter.

         We anticipate that our cash  expenditures  during 2003 will approximate
$500,000 per month,  or $6 million for the year,  without regard to any revenues
in 2003.  We expect to meet our cash needs with our existing  cash  balances and
collections from stock subscriptions  receivable of approximately $1,427,000 and
from the exercise of warrants held by existing investors. In addition, we expect
to fund working  capital  requirements by drawing on letters of credit issued by
customers in connection  with signed  purchase  orders and by additional  equity
financing.  There can be no assurances that such additional  equity funding will
be available from our current investors or from the exercise of warrants.

Contractual Obligations and Contingent Liabilities and Commitments

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

                                       12
<PAGE>


         The following table aggregates our expected contractual obligations and
commitments subsequent to December 31, 2002:


<TABLE>
<CAPTION>
                                            Payments Due By Period
                                                                                                 2007
        Contractual obligations           2003          2004          2005          2006      and beyond
        -----------------------        ---------     ---------     ---------     ---------     ---------
<S>                                    <C>           <C>           <C>           <C>           <C>
Long-term convertible debt             $    --       4,207,232     $    --       $    --       $    --

Operating lease commitments            $ 329,307       422,479       434,666       446,853       770,483
                                       ---------     ---------     ---------     ---------     ---------

Total contractual cash obligations     $ 329,307     4,629,711       434,666       446,853       770,483
                                       =========     =========     =========     =========     =========
</TABLE>


Critical Accounting Policies and Estimates

         Our critical  accounting policies upon which our financial position and
results of  operations  depend are those  relating to inventory  valuation,  and
income tax assets and  liabilities.  We summarize our most  critical  accounting
policies below.

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

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

Results of Operations

         Selling,  general and  administrative  expenses.  Selling,  general and
administrative expenses were approximately $2,360,000 and $2,260,000 in 2002 and
2001,  respectively,  and include  professional  services,  salaries and related
taxes and benefits, rent, depreciation,  travel, insurance, and office expenses.
Salaries and related taxes and benefits decreased from approximately $411,000 in
2001 to  approximately  $284,000  in  2002 as a  result  of the  termination  of
payments  under a severance  package in the first  quarter of 2001, as well as a
decrease in medical insurance due to a new employee contribution  requirement in
2002.  Insurance  expense  decreased  approximately  $90,000  due to a change in
carrier and a decrease in insurance  coverage,  and employee expenses  increased
$70,000 for fees related to the hiring of our Chief Operating Officer.


                                       13
<PAGE>

         Stock-based  general and administrative  expenses.  Stock-based general
and administrative  expenses were approximately  $713,000 and $2,940,000 in 2002
and 2001,  respectively.  The amounts incurred in 2002 and 2001 relate to common
stock, stock options and warrants issued in exchange for services.  The decrease
in 2002 relates  primarily to expenses incurred in 2001 related to stock options
granted  as  compensation  to  directors  valued at  $1,655,000,  as well as the
issuance of 200,000  shares of common  stock  granted as  employee  compensation
valued at $740,000,  the market value of the stock at the date of issuance.  The
200,000 shares of common stock referred to above in December 2001 were issued to
our Director of Corporate Development,  Anne-Marie Ribes. In 2002, 60,000 shares
were issued to Ms. Ribes as compensation valued at $220,000, the market value of
the stock at the date of issuance.  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. See Note
2 to the Financial Statements under Item 1 of this Report.

         Research and development  expenses.  Research and  development  expense
increased  from  approximately  $2,650,000 to $3,640,000  from 2001 to 2002. The
increase  was due to  preproduction  tooling  costs  of  approximately  $800,000
related to test units and the purchase of prototype engines for testing purposes
in 2002.

         Inventory Adjustment.  The adjustment to restate inventory at the lower
of cost or  market  value  was  $286,000  in 2002  and $0 in 2001.  Our  initial
purchases of inventory  components were at a cost higher than we expect to incur
for future purchases.

         Interest income.  Interest income was approximately $15,700 and $34,000
in 2002 and 2001, respectively.  The decrease in interest income in 2001 was due
to lower average cash balances during 2002 than during 2001.

         Interest  expense.  Interest  expense was  approximately  $261,000  and
$269,000 in 2002 and 2001,  respectively.  These amounts are consistent with the
balances in notes payable.

         Stock-based   interest   expense.   Stock-based   interest  expense  of
$1,780,000  and  $1,825,000  in 2002  and  2001,  respectively,  relates  to the
valuation  of the  beneficial  conversion  feature  of  interest  converted  and
convertible  into  equity on the notes  payable  to  Argyle  Capital  Management
Corporation  a company  wholly owned by Robert  Olins,  Acting  Chief  Executive
Officer of the Company based on the intrinsic  value of the conversion  feature.
The  beneficial  conversion  interest  represents the excess value of the shares
received  or  receivable  at  current  market  prices  over the  $0.50 per share
conversion  price.  In  addition,  amortization  of  discounts on the Argyle and
Alabama Group notes is included in stock-based interest expense.

         Loss before  income taxes.  Losses before income taxes were  $9,026,000
and $9,904,000 in 2002 and 2001, respectively. This decrease is due primarily to
a  decrease  of   approximately   $2.0  million  of   stock-based   general  and
administrative expenses in 2002 compared to 2001. This decrease was offset by an
increase of  approximately  $1.1  million in research and  development  expenses
incurred as a result of pre-production  tooling costs of approximately  $800,000
and the purchase of prototype light engines for testing purposes.

         Income  taxes.  Income taxes  consist  primarily  of minimum  state tax
requirements, see also footnote 5 to the Financial Statements.

Recent Accounting Pronouncements

         In August 2001 Statement of Financial  Accounting Standards (SFAS) 144,
"Accounting  for the  Impairment or Disposal of  Long-lived  Assets" was issued,
superseding SFAS 121,  "Accounting for the Impairment of Long-lived Assets to be
Disposed of." Among other things,  SFAS 144 provides  guidance on how long-lived
assets used as part of a group should be evaluated for  impairment,  establishes
criteria  for when  long-lived  assets  are held for sale,  and  prescribes  the
accounting  for  long-lived  assets that will be


                                       14
<PAGE>

disposed of other than by sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. Our financial  position and results of operations  have
not been affected by the adoption of SFAS 144.

         In July 2002 the Finanacial  Accounting  Standards  Board (FASB) issued
SFAS 146,  "Accounting for Costs  Associated with Exit or Disposal  Activities,"
which  addresses  financial  accounting and reporting for costs  associated with
exit or disposal  activities.  SFAS 146  requires  that a  liability  for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred.  This Statement also  establishes that fair value is the objective for
initial  measurement  of the  liability.  Severance  pay under SFAS 146, in many
cases,  would be recognized  over time rather than up front.  The  provisions of
this statement are effective for exit or disposal  activities that are initiated
after December 31, 2002. We do not expect the adoption of this Statement to have
a material impact on the Company's financial condition or results of operations.

         In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition  and Disclosure," which provides  alternative methods of
transition  for a voluntary  change to fair value based method of accounting for
stock-based  employee  compensation  as prescribed in SFAS 123,  "Accounting for
Stock-Based  Compensation."  Additionally,  SFAS 148 requires more prominent and
more  frequent   disclosures  in  financial  statements  about  the  effects  of
stock-based  compensation.  The  provisions of this  Statement are effective for
fiscal years ending after December 15, 2002, with early application permitted in
certain circumstances. We do not expect the adoption of this Statement to have a
material impact on the Company's  financial condition or results of operation as
we are not  currently  planning  to make a  voluntary  change to the fair  value
method of accounting for stock-based employee compensation.

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


                                       15
<PAGE>

                                  Risk Factors

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

We have  incurred  losses  over the past five  years and have  experienced  cash
shortages. In 2002 and 2001, we incurred net losses of approximately  $9,028,000
and  $9,912,000,  respectively.  In addition,  we had an accumulated  deficit of
$48,758,000  as of  December  31,  2002.  We may incur  additional  losses as we
continue spending for production and other business activities.  As a result, we
will need to generate  substantial sales to support our cost structure before we
can begin to recoup our  operating  losses and  accumulated  deficit and achieve
profitability.

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

Our  operations  to date  have  consumed  substantial  amounts  of cash and will
continue to require  substantial  amounts of capital in the future.  In order to
remain competitive,  we must continue to make significant  investments essential
to our ability to operate profitably,  including investments in further research
and development,  equipment,  facilities and production activities. Although our
financial  condition  and liquidity  have been assisted  through the exercise of
warrants  and private  purchases  of our common  shares,  we will still  require
additional financing to provide for our required capital expenditures.  Reliance
for financing  upon exercise of warrants and private stock  purchase  agreements
entails the additional  risks of  non-exercise  of such warrants  because of the
prevailing market prices of our underlying shares or default by stock purchasers
under these  agreements.  We experienced  such a default as disclosed  under the
"Liquidity  and  Capital  Resources"  section of  "Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations"  in our  quarterly
report on Form 10-QSB for the period ended September 30, 2002. In the event that
we are  unable to obtain  further  financing  on  satisfactory  terms or at all,
generate sales  sufficient to offset our costs,  or the costs of development and
operations  are  greater  than we  anticipated,  we may be  unable  to grow  our
business  at the rate  desired or may be  required  to delay,  reduce,  or cease
certain of our operations,  any of which could  materially harm our business and
financial  results.  Our  independent  auditors  have  included  an  explanatory
paragraph in their report in our Form 10-KSB on our financial statements for our
last fiscal year regarding our ability to continue as a going concern.

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

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

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

We currently have six full-time  engineering and seven  full-time  manufacturing
personnel based in California  working on  microdisplays.  This staffing creates
significant research and development costs that may not be recouped. Even if our
current   microdisplays  become  accepted  or  successful,   due  to  the  rapid
technological


                                       16
<PAGE>

change in our industry, we must continue to use, and may increase in number, our
engineering  and  manufacturing  personnel to develop future  generations of our
microdisplays. As a result, we expect to continue incurring significant research
and development costs.

In recent months we have commenced  manufacturing and shipping our microdisplays
in  commercial  quantities,  but  difficulties  in  continuing  the  process  of
mass-producing  our microdisplays may make it difficult to meet customer demands
from time to time and our  operating  results could be  significantly  harmed by
such difficulties.

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

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

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

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

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

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

Various target markets for our microdisplays,  including  projectors,  monitors,
high-definition televisions,  and portable microdisplays,  are uncertain, may be
slow  to  develop  or  could  utilize  competing  technologies.  High-definition
television  has only  recently  become  available to consumers,  and  widespread
market  acceptance  is uncertain.  In addition,  the  commercial  success of the
portable  microdisplay market is uncertain.  The acceptance of our display units
and/or  SpatiaLight  imagEngine(TM)  microdisplays  will be  dependent  upon the
pricing,  quality,  reliability  and  useful  life of these  units  compared  to
competing  technologies,  as to which there can be no assurance. In order for us
to succeed,  not only must we offer  end-product  manufacturers  better and less
expensive microdisplays than our competitors,  but the manufacturers  themselves
must  also  develop  products  using  our  microdisplays  that are  commercially
successful.  SpatiaLight's marketing efforts


                                       17
<PAGE>


are focused on developing  strategic customer and governmental  relationships in
China and the Republic of South Korea. Our failure to sell our  microdisplays to
such  manufacturers  or the failure of the ultimate target markets to develop as
we expect will negatively affect our anticipated growth.

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

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

         o        superior technologies developed by our competitors;

         o        price considerations; and

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

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

To  date, we have only received one firm purchase order from one customer and we
cannot  assure  you  that  we  will  obtain additional purchase orders from that
customer  or  our  other  prospective  customers,  or,  if we do, that they will
generate  significant  revenues.

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

On  January  29,  2003,  we  announced  that  we had concluded negotiations with
Skyworth  resulting in a signed agreement for the purchase by Skyworth of 14,100
display  units  from  us  over  a  one year delivery period. This purchase order
agreement  is  cancelable by Skyworth on a quarterly basis, however, which could
result  in  us  not  deriving  all of our anticipated revenues from the purchase
order.

The  Company  has  been  advised by the other prospective Chinese customers that
they are satisfied with the results of the testing of the prototypes under their
agreements  with  the Company and we are currently negotiating terms of purchase
orders  for  our  display units and/or SpatiaLight imagEngine (TM) microdisplays
with  each of them. There remain open issues that have to be finally negotiated,
including  prices  and  quantities  of our products. We cannot assure whether we
will  receive  purchase  orders  binding  on  any  of  these companies for their
purchase of commercial quantities of our microdisplay products commencing in the
near  future.

In  addition,  even  if  we receive purchase orders from our current customer or
prospective  customers  for our display units, we may have problems implementing
volume production of such display units.  Furthermore, sales to manufacturers in
the  electronics  industry  are  subject  to severe competitive pressures, rapid
technological change, and product obsolescence.  Manufacturers may, at any time,
cancel  purchase  orders  or  commitments  or  reduce  or  delay orders, thereby
increasing  our  inventory  and  overhead  risks.  Therefore,  even if we obtain
purchase  orders from several current or prospective customers, we cannot assure
you  that  these  agreements  will  result  in  significant  revenues  to  us.

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

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

                                       18
<PAGE>

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

         o        maintain   customer   satisfaction   with   our   design   and
                  manufacturing services;

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

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

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

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

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

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

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

         o        our  success  in  designing  and   manufacturing  new  display
                  technologies;

         o        our ability to address the needs of customers;

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

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

         o        the quality of our customer services;

         o        the efficiency of our production sources;

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

         o        products or technologies introduced by our competitors.

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

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

                                       19
<PAGE>


Our operating results are subject to significant fluctuations.

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

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

         o        timing of expenditures in anticipation of future orders;

         o        changes in our cost structure;

         o        availability of labor and components;

         o        pricing and availability of competitive products and services;

         o        the timing of orders;

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

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

         o        changes or anticipated changes in economic conditions.

The market price of our common shares is highly volatile.

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

         o        quarterly variations in our operating results;

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

         o        public announcements regarding our business developments;

         o        changes in analysts' estimates of our financial performance;

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

         o        general conditions in the electronics industry; and

         o        worldwide economic and financial conditions.

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

                                       20
<PAGE>

Our common shares may not be liquid.

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

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

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

If we are unable to protect our intellectual property from use by third parties,
our ability to compete in the industry will be harmed.

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

         o        pending patent applications may not be issued;

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

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

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

         o        breach of confidentiality agreements;

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

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

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

                                       21
<PAGE>

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

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

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

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

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

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

We do not pay cash dividends.

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


                                       22
<PAGE>


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,  2002  and  2001  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 those 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, 2002 and 2001,  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,
2002. 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

March 3, 2003



                                       23
<PAGE>

SPATIALIGHT, INC.
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                         2002                2001
                                                                    ------------         ------------
ASSETS

Current assets
<S>                                                                 <C>                  <C>
  Cash and cash equivalents                                         $    575,663         $  2,728,134
  Inventory                                                              275,959                   --
  Prepaids and other current assets                                      565,515              105,158
                                                                    ------------         ------------
          Total current assets                                         1,417,137            2,833,292

Property and equipment, net                                              506,968              607,066
Other assets                                                             134,349               47,644
                                                                    ------------         ------------

               Total assets                                         $  2,058,454         $  3,488,002
                                                                    ============         ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
  Accounts payable                                                  $  2,018,230         $    394,028
  Short-term convertible notes                                                --            3,137,284
  Accrued expenses and other current liabilities                         206,796              170,036
                                                                    ------------         ------------
        Total current liabilities                                      2,225,026            3,701,348

Noncurrent liabilities
  Convertible notes                                                    4,207,232                   --
                                                                    ------------         ------------

               Total liabilities                                       6,432,258            3,701,348
                                                                    ------------         ------------

Commitments

Stockholders' deficit:
  Common stock, $.01 par value:
     40,000,000 shares authorized;
     26,018,658 and 25,811,786 shares issued and outstanding
     at 2002 and 2001                                                    260,187              258,118
Additional paid-in capital                                            45,550,830           41,911,879
Notes and stock subscription receivable                               (1,426,999)          (2,653,434)
Accumulated deficit                                                  (48,757,822)         (39,729,909)
                                                                    ------------         ------------
        Total stockholders' deficit                                   (4,373,804)            (213,346)
                                                                    ------------         ------------

Total liabilities and stockholders' deficit                         $  2,058,454         $  3,488,002
                                                                    ============         ============
</TABLE>


See accompanying notes to financial statements.


                                       24
<PAGE>



SPATIALIGHT, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                        2002                 2001
                                                                    ------------         ------------

Selling, general and administrative expenses:
<S>                                                                    <C>                  <C>
   Selling, general and administrative expenses                     $  2,362,865         $  2,259,942
   Stock-based general and administrative expenses                       713,001            2,938,062
                                                                    ------------         ------------
          Total selling, general and administrative expenses           3,075,866            5,198,004

    Inventory adjustment                                                 286,000                   --
   Research and development expenses                                   3,639,016            2,647,090


          Total operating expenses                                     7,000,882            7,845,094
                                                                    ------------         ------------

          Operating loss                                              (7,000,882)          (7,845,094)
                                                                    ------------         ------------

Other income (expenses):

  Interest expense:
          Interest expense                                              (261,314)            (268,905)
          Stock-based interest expense                                (1,779,147)          (1,824,864)
                                                                    ------------         ------------
            Total interest expense                                    (2,040,461)          (2,093,769)

   Interest and other income                                              15,655               34,369
                                                                    ------------         ------------

          Total other income (expenses)                               (2,024,806)          (2,059,400)
                                                                    ------------         ------------

   Loss before income taxes                                           (9,025,688)          (9,904,494)

Income tax expense                                                         2,225                7,233
                                                                    ------------         ------------

Net loss                                                            $ (9,027,913)        $ (9,911,727)
                                                                    ============         ============

Net loss per share - basic and diluted                              $      (0.37)        $      (0.46)
                                                                    ============         ============

Weighted average shares used in computing
 net loss per share- basic and diluted                                24,578,226           21,469,960
                                                                    ============         ============
</TABLE>


See accompanying notes to  financial statements


                                       25
<PAGE>


SPATIALIGHT, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                                        ADDITIONAL
                                                                COMMON STOCK             PAID-IN         NOTES         ACCUMULATED
                                                            SHARES          AMOUNT       CAPITAL       RECEIVABLE       (DEFICIT)
                                                          ------------   ------------   ------------   ------------   ------------
<S>                                                       <C>          <C>            <C>            <C>            <C>
Balance January 1, 2001                                   20,273,229   $    202,732   $ 28,152,272   $         --   $(29,818,182)

Sale of common stock under private stock purchase
  agreements                                               2,437,304         24,374      4,503,293     (3,480,021)            --

Conversion of notes and accrued interest                     275,120          2,751        527,635             --             --

Discount on notes payable                                         --             --      1,443,000             --             --

Issuance of stock, stock options and
    warrants for services                                     21,889            219        402,508             --             --

Issuance of stock and options to employees and
    directors                                                200,000          2,000      2,533,335             --             --

Exercise of stock options and warrants                     2,604,244         26,042      4,349,836       (492,708)            --

Payments on notes receivable                                      --             --             --      1,319,295             --

Net loss                                                          --             --             --             --     (9,911,727)
                                                          ------------   ------------   ------------   ------------   ------------

Balance December 31, 2001                                 25,811,786   $    258,118   $ 41,911,879   $ (2,653,434)  $(39,729,909)

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

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

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

Repricing of warrants                                             --             --         49,282        143,362             --

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

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

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

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

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

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

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

Net loss                                                          --             --             --             --     (9,027,913)
                                                          ------------   ------------   ------------   ------------   ------------

Balance, December 31, 2002                                26,018,658   $    260,187   $ 45,550,830   $ (1,426,999)  $(48,757,822)
                                                          ============   ============   ============   ============   ============
</TABLE>


<TABLE>
<CAPTION>
                                                             TOTAL
                                                           STOCKHOLDERS'
                                                             DEFICIT
                                                           ------------
<S>                                                      <C>
Balance January 1, 2001                                  $ (1,463,178)

Sale of common stock under private stock purchase
  agreements                                                1,047,646

Conversion of notes and accrued interest                      530,386

Discount on notes payable                                   1,443,000

Issuance of stock, stock options and
    warrants for services                                     402,727

Issuance of stock and options to employees and
    directors                                               2,535,335

Exercise of stock options and warrants                      3,883,170

Payments on notes receivable                                1,319,295

Net loss                                                   (9,911,727)
                                                           ------------

Balance December 31, 2001                                $   (213,346)

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

Payments on notes receivable                                  982,443

Reversal of notes receivable                                   26,681

Repricing of warrants                                         192,644

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

Accrued interest on notes receivable from stockholders         (6,962)

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

Issuance of stock and options to employees and
    Directors                                                 315,911

Conversion of notes and accrued interest                      816,400

Discount on notes payable                                      58,000

Rescission of stock purchase agreement                             --

Net loss                                                   (9,027,913)
                                                           ------------

                                                         $ (4,373,804)
                                                           ============
</TABLE>

See accompanying notes to financial statements



                                       26
<PAGE>


STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
Cash flows from operating activities:                                                  2002                2001
                                                                                   -----------         -----------

<S>                                                                                <C>                 <C>
Net loss                                                                           $(9,027,913)        $(9,911,727)

Adjustments to reconcile net loss to net cash used by operating activities:
  Inventory adjustment                                                                 286,000                  --
  Depreciation and amortization                                                        381,916             290,293
  Stock-based general and administrative expense                                       713,001           2,938,062
  Stock-based interest expense                                                       1,779,147           1,824,864
  Changes in operating assets and liabilities:
     Inventories                                                                      (561,959)                 --
     Prepaid and other current assets                                                 (406,895)             56,876
     Accounts payable                                                                1,624,202              46,924
     Accrued expenses and other current liabilities                                    240,345             294,359
     Other assets                                                                      (86,704)            (15,690)
                                                                                   -----------         -----------

           Net cash used in operating activities                                    (5,058,860)         (4,476,039)
                                                                                   -----------         -----------

Cash flows from investing activities:
  Purchase of property and equipment                                                  (281,818)           (326,774)
                                                                                   -----------         -----------

           Net cash used in investing activities                                      (281,818)           (326,774)
                                                                                   -----------         -----------

Cash flows from financing activities:
  Payments on capital lease obligations                                                 (4,483)             (5,121)
  Proceeds from issuance of convertible notes                                          125,000             250,000
  Payments on stock subscriptions and notes receivable from shareholders             1,082,443           1,319,295
  Capital acquisition costs                                                           (132,610)                 --
  Proceeds from sales of stock                                                              --           1,047,646
  Proceeds from exercise of warrants and options                                     2,117,857           3,883,170
                                                                                   -----------         -----------

           Net cash provided by financing activities                                 3,188,207           6,494,990
                                                                                   -----------         -----------

Net increase (decrease) in cash                                                     (2,152,471)          1,692,177

Cash at beginning of period                                                          2,728,134           1,035,957
                                                                                   -----------         -----------
Cash at end of period                                                              $   575,663         $ 2,728,134
                                                                                   ===========         ===========
Supplemental disclosure of cash flow information:

  Income taxes paid during the period                                              $     2,225         $     7,233
                                                                                   -----------         -----------
  Interest paid during the period                                                  $       348         $    15,551
                                                                                   -----------         -----------
Non cash financing activities:

  Common stock issued upon conversion of notes                                     $   861,400         $   530,386
                                                                                   -----------         -----------
   Sale of stock for stock subscription                                            $        --         $ 3,567,521
                                                                                   -----------         -----------
   Exercise of warrants in exchange for notes receivable                           $ 1,392,536         $   492,708
                                                                                   -----------         -----------
   Discount on convertible notes due to beneficial conversion feature              $    58,000         $ 1,443,000
                                                                                   -----------         -----------
</TABLE>

See accompanying notes to financial statements


                                       27
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001

1.  Description of Business and Summary of Significant Accounting Policies

     Description of Business - SpatiaLight, Inc. (SpatiaLight or the Company) is
in the business of manufacturing  high-resolution microdisplays for applications
such  as  computer  monitors,  high  definition television, video projectors and
other  applications. To date, the Company has entered into seven agreements with
eight  original  equipment  manufacturers  (OEMs)  in  China  and one OEM in the
Republic  of South Korea. In September 2002 the Company accepted delivery of the
first  pre-production  SpatiaLight/Fuji  display  units.  These  pre-production
display  units,  which  have  been  provided  to prospective customers in China,
incorporate  mechanical  changes  and  technical  enhancements  that the Company
initiated  based  upon the results of extensive testing of the prototype display
units.

         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,  2002,  the  Company  sustained
recurring  losses from  operations  and, at December 31, 2002, 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 2003, the Company expects to meet its working capital and
other cash requirements partially with cash derived from the payment of note and
subscriptions  receivable  and from the  exercise of  warrants  held by existing
investors  as well as from sales of display  units.  In  addition,  the  Company
expects to fund  working  capital  requirements  by drawing on letters of credit
issued by customers in connection  with signed purchase orders and by additional
equity  financing.  The  Company's  continued  existence is  dependent  upon its
ability  to  successfully  market  and sell its  products  and raise  additional
working capital  through equity  infusions.  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,  2002  and  2001,   $575,663  and   $2,728,134,
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.


                                       28
<PAGE>



                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

         Inventory.  Inventories  are valued at the lower of cost  (based on the
first-in,  first-out method) or market value. Materials, labor and manufacturing
overhead  are  included in the cost of  inventories.  In  determining  inventory
market  values,  substantial  consideration  is  given to the  expected  product
selling  price  based on  historical  recovery  rates.  If the  market  value of
inventory  is  assessed  to be  less  than  costs,  it is  written  down  to its
replacement cost or its net realizable  value.  Estimates may differ from actual
results due to the  quantity  and  quality  and mix of  products  in  inventory,
consumer and retailer preferences and economic conditions. At December 31, 2002,
inventories  (consisting entirely of raw materials components) were written down
by  $286,000,  as prices on initial  order  quantities  were  higher  than those
expected  in the future, and would otherwise have resulted in losses on finished
goods  in  2003.  The  Company  has a contractual commitment to purchase certain
inventory  components over the next six to eight months totaling $1,304,000 less
prepayments  totaling  $564,000 (included in prepaid and other current assets in
the  accompanying  balance  sheet  at  December  31,  2002).  The  agreement  is
cancelable  on  a  quarterly  basis  upon  payment for certain orders already in
process.

         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  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. The Company has not recognized
any revenue in 2002 or 2001.

         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, including the
costs  of  prototype  and  pre-production  display units provided to prospective
customers  in  China,  were  charged  to  expense  when  incurred.

         Financial  Instruments - The Company's  financial  instruments  include
cash and cash  equivalents  and debt.  At  December  31,  2002 and 2001 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, "Accounting
for Stock Issued to Employees",  as clarified by Financial  Accounting Standards
Board  (FASB)   Interpretation  No.  44  (Accounting  for  Certain  Transactions
Involving Stock Compensation).  As such,  compensation expense is recorded when,
on the date of grant, the fair value of the underlying  common stock exceeds the
exercise price for stock options or the purchase price for issuances or sales of
common stock.  Pursuant to Statement of Financial Accounting Standard (SFAS) No.
123  "Accounting  for  Stock-Based  Compensation",  the  Company  discloses  the
proforma  effects of using the fair value method of accounting  for  stock-based
compensation arrangements and records compensation expense for the fair value of
options granted to non-employees.

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



                                       29
<PAGE>




                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

         If the  Company had elected  the fair value  method of  accounting  for
stock-based  compensation,  compensation  cost would be accrued at the estimated
fair value of stock option grants over the service  period,  regardless of later
changes in stock prices and price  volatility.  The fair values at date of grant
for  options  granted in 2001 and 2002 have been  estimated  based on a modified
Black-Scholes pricing model with the following weighted average assumptions:

<TABLE>
<CAPTION>

                                                                   2002             2001
                                                             ----------------- ----------------
<S>                                                          <C>               <C>
Dividend yield                                                              -                -

Expected volatility                                                      100%             114%

Risk-free interest rates                                                   5%               6%

Expected lives                                                      24 months        24 months

         The table  below shows net income per share for 2001 and 2002 as if the
Company had elected the fair value method of accounting for stock options.

                                                                   2002             2001
                                                             ----------------- ----------------

Net loss as reported                                             $ (9,027,913)    $ (9,911,727)

Add: stock-based employee compensation included
in reported net income, net of any applicable related tax effects      38,951        1,795,323

Deduct: total stock-based employee compensation
determined under fair value method for all awards,
net of any applicable related tax effects                          (3,610,346)      (3,369,151)
                                                             ----------------- ----------------

Performa net loss, as adjusted                                  $ (12,599,308)   $ (11,485,555)

Loss per share:
Basic, as reported                                                    $ (0.37)         $ (0.46)
Basic, as adjusted                                                    $ (0.52)         $ (0.54)

</TABLE>



         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.

                                       30
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

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

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

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

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

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

2. Issuance of Securities

Exercise of Stock Options and Warrants in 2002
----------------------------------------------

         During  2002,  the Company  issued  646,354  shares and 9,500 of common
stock  upon  the  exercise of warrants and employee stock options, respectively.
Total  cash  received  was  $1,568,500 and $5,715, respectively. Included in the
warrant exercises are 16,354 shares issued upon the cashless exercise of 171,429
warrants  by  investors  associated  with  the  Alabama  Group.


         On June 28, 2002,  warrants to purchase  329,355 shares of common stock
were exercised by a group of investors (the "Alabama  Group"),  which includes a
trust for the benefit of Steven F. Tripp,  a director of the Company.  Mr. Tripp
is not the  trustee  of this  trust and has no power to vote or  dispose  of the
common shares of the Company or any other  securities held by that trust. In the
opinion of the Company,  no other  investor in the Alabama Group is an affiliate
of the Company and Mr. Tripp is not an  affiliate  of any other  investor in the
Alabama Group.  On the same day,  warrants to purchase  370,645 shares of common
stock were  reassigned for no  consideration  and exercised by other  investors,
none of whom are affiliates of the Company or of any of its



                                       31
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

directors. When originally granted, all of the warrants had an exercise price of
$3.50  and an  expiration  date of June 30,  2002.  To  induce  the  holders  to
exercise, the exercise price was reduced to $3.13, the average closing price for
the  previous  four  days,  a price  slightly  below  the  closing  price on the
commitment   date.  The  warrants  were  exercised  under  warrant   installment
agreements totaling $1,747,347 with initial payments totaling $443,644.

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

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

         In November 2002, a warrant to purchase  746,268 shares of common stock
was  exercised.  When  originally  issued,  the warrant had an exercise price of
$2.81 and an  expiration  date of November  14, 2002.  On October 14,  2002,  to
induce the holder to  exercise,  the  exercise  price was reduced to $2.00.  The
closing market price of the common stock on that date was $1.84. The warrant was
exercised  under a warrant  installment  agreement  totaling  $1,392,536 with an
initial  payment of  $100,000.  As of December 31,  2002,  installment  payments
totaling  $100,000 have been made under this agreement.  Interest  accrues at 6%
per  annum  and  is  due  with  the  final  payment.  As of  December  31,  2002
approximately $7,000 of accrued interest has been recorded.

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

Issuance of stock, stock options and warrants in 2002
-----------------------------------------------------

         On October  14, 2002 the  Company  issued a fully-vested warrant
expiring  in  October  2003  to  purchase  31,250  shares  of common stock at an
exercise  price  of  $3.50  in  exchange for consulting services rendered in the
fourth  quarter.  A  value  of  $12,337  was  assigned to the warrants using the
Black-Scholes  option  pricing  model and the following assumptions: stock price
$1.84, historical volatility 100%, risk free rate 5%, a dividend yield of 0, and
a  contractual  term  of  one year. The value of the warrant is reflected in the
statement  of  operations  as  stock-based  general  and administrative expense.

         On  October  14,  2002 the  Company  issued a fully  vested  warrant to
purchase  250,000  shares  of  common  stock  at an  exercise  price of $3.50 in
exchange for  consulting  services  rendered over a 6-month  period.  A value of
$88,192 was assigned to the warrants for the portion of the services rendered in
2002 using the Black-Scholes option pricing model and the following assumptions:
stock price $1.84,  historical  volatility  100%,  risk free rate 5%, a dividend
yield of 0, and a contractual term of two years. The portion of the value of the
warrant  earned  in  2002  is  reflected  in  the  statement  of  operations  as
stock-based general and administrative expense.

                                       32
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

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

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

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

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

Note and Interest Conversions in 2002
-------------------------------------

         During 2002,  the Company issued 62,500 shares upon the conversion of a
$125,000 convertible note.

         During 2002, the Company issued 178,992 shares of common stock upon the
conversion  of accrued  interest of $691,400  under certain  convertible  notes,
which  includes  additional  deemed  interest of $491,877 in 2002 and 128,241 in
2001 due to  beneficial  conversion  features of the interest on the  underlying
notes.  See also Note 6 for  additional  note  discounts  of $58,000  related to
extension of these notes.

Rescission of Stock Purchase Agreement in 2002
----------------------------------------------

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

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.

                                       33
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)


         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 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,  including accrued  interest,  are paid in full and the
shares were released from escrow.

         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.

                                       34
<PAGE>


                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

         In December  2001, the Company  issued  200,000  shares of common stock
to  its  Director  of  Corporate  Development.  The  shares  were  issued  in
consideration of services rendered by the employee with respect to assisting the
Company  in  negotiating  the  contractual  relationships  with  its  existing
prospective customers. These shares were valued at $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, 2002 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 was $2,504,058.  The stock purchase agreement was rescinded in
March 2002 as described above.


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.

                                       35
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

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

                                                     Year-end December 31,
                                                      2002           2001
                                                  ------------   ------------

  Warrants issued to investors                    $    28,435    $    68,852
  Warrants issued to consultants                      265,292        132,089
  Options and stock grants to consultants             103,363         60,181
  Repricing to induce exercise of warrants                  -        141,605
  Options granted to officer and director              56,760      1,655,172
  Stock grant to employee                             220,200        740,000
  Other employee-related charges                            -         49,360
  Other officer and director-related charges           38,951         90,803
                                                  ------------   ------------
                                                  $   713,001    $ 2,938,062
                                                  ============   ============


         The exercised  warrants and options include some cashless  exercises in
connection with awards to  non-employees,  resulting in 155,075 and 12,199 fewer
shares  actually  issued  in 2002 and  2001,  respectively.  The 2002  exercises
include 171,429 shares repriced from $3.50 to $3.13 prior to exercise.

3. Notes Payable

Convertible notes at December 31, 2002 consist of the following:

Argyle Notes:

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

         On September 20, 2002,  the due date was extended until March 31, 2004.
Accordingly,  the  remaining  unamortized  discount  at the  extension  date  of
$198,000 is being amortized through March 31, 2004, resulting in a new effective
interest  rate of 17% per  annum  when  compared  to the  outstanding  principle
balances. The notes have been reclassified as long term.



                                       36
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

         In 2002,  the Company  issued  178,992  shares of common stock upon the
conversion of interest.  Of these shares, 36,432 were issued upon the conversion
of accrued  interest of $128,243 for the fourth  quarter of 2001.  The remaining
142,560  shares were issued in exchange for interest of $563,157  which includes
additional  stock-based  interest  expense  of  $491,877  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,
2002, the carrying value of the Argyle notes totals  $1,023,000,  which includes
the principal balance of $1,188,000, less the unamortized discount of $165,000.

Alabama Group Notes:

         In December  1999, the Company  received  $1,437,500 in cash and issued
notes in that amount to a group of investors (the Alabama Group), which includes
a trust for the benefit of Steven F. Tripp, a Director of the Company. Mr. Tripp
is not the  trustee  of this  trust and has no power to vote or  dispose  of the
Common Shares of the Company or any other securities held by that trust.  Marcia
K. Tripp, Steven F. Tripp's mother, is the trustee of this trust and directs and
is responsible for all of the investment decisions of this trust. In the opinion
of the Company,  no other  investor in the Alabama  Group is an affiliate of the
Company and Mr. Tripp is not an  affiliate of any other  investor in the Alabama
Group.  The notes accrue interest at a contractual rate of 6% per annum, and are
secured by  substantially  all the assets of the  Company.  This  portion of the
notes is  convertible  into shares of the  Company's  common  stock at $3.50 per
share.  Upon issuance of the notes, the Company also issued warrants to purchase
821,429 shares of common stock.  The warrants were exercised on June 28, 2002 at
$3.50 per share. 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% per annum interest rate,
resulted in an  effective  interest  rate of 70% per annum when  compared to the
outstanding principal balances.

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

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


                                       37
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

amortized  through March 31, 2004 resulting in a new effective  interest rate of
10.5% per annum when compared with the outstanding principal balances. The notes
have been reclassified as long term. At December 31, 2002, the carrying value of
the Alabama Group notes totals  $3,184,232,  which includes principal balance of
$2,875,000 plus accrued  interest of $471,061,  net of unamortized  discounts of
$161,829.

         Activity in convertible notes payable for 2002 and 2001 is as follows:

<TABLE>
<CAPTION>
                                              Balance at                      (Payment) or                              Balance at
                                              December 31,    Addition or       Discount         Conversion to         December 31,
Debt Principal:                                   2001       New Discount      Amortization          Equity               2002
                                         ----------------- ---------------- ----------------- ----------------- ------------------
<S>                                           <C>                      <C>                                 <C>        <C>
Argyle                                        $ 1,188,000              $ -                                 $ -        $ 1,188,000
Argyle discount                                  (792,000)                           627,000                 -           (165,000)
Alabama Group                                   2,875,000                -                 -                 -          2,875,000
Alabama Group discount                           (544,774)         (58,000)          440,945                 -           (161,829)
Convertible note-Other                                             125,000                            (125,000)                 -
                                         ----------------- ---------------- ----------------- ----------------- ------------------
                 Total                          2,726,226           67,000         1,067,945          (125,000)         3,736,171
                                         ----------------- ---------------- ----------------- ----------------- ------------------

Interest:
Accrued Argyle 6%                                  18,216           71,280                 -           (89,496)                 -
Accrued Alabama 6%                                282,815          188,246                 -                 -            471,061
Beneficial interest                               110,027          491,877                 -          (601,904)                 -
Convertible note- Other                                 -                -                 -                 -                  -
                                         ----------------- ---------------- ----------------- ----------------- ------------------
                 Total                            411,058          751,403                 -          (691,400)           471,061
                                         ----------------- ---------------- ----------------- ----------------- ------------------

Total Convertible Notes                       $ 3,137,284        $ 818,403       $ 1,067,945        $ (816,400)       $ 4,207,232
                                         ================= ================ ================= ================= ==================


                                              Balance at                      (Payment) or                              Balance at
                                              December 31,    Addition or       Discount         Conversion to         December 31,
Debt Principal:                                   2000       New Discount      Amortization          Equity               2001
                                         ----------------- ---------------- ----------------- ----------------- ------------------
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
Accrued Alabama 6%                                101,732          181,083                 -                 -            282,815
Beneficial interest                                39,528          284,753                 -          (214,254)           110,027
Convertible note- Other                                 -           11,125           (11,125)                -                  -
                                         ----------------- ---------------- ----------------- ----------------- ------------------
                 Total                            153,338          549,231           (11,125)         (280,386)           411,058
                                         ----------------- ---------------- ----------------- ----------------- ------------------

Total Convertible Notes                       $ 2,782,453       $ (643,769)      $ 1,528,986        $ (530,386)       $ 3,137,284
                                         ================= ================ ================= ================= ==================
</TABLE>


                                       38
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

<TABLE>
<CAPTION>
Stock-based interest charges consist of
                                                                            2002              2001
                                                                        ----------        ----------
<S>                                                                     <C>                <C>
Amortization of Alabama Group discount                                  $  440,945         1,144,111
Amortization of Argyle discount                                            627,000           396,000
Effect of beneficial conversion privileges of interest on Argyle
convertible debt                                                           491,877           284,753
Repricing of warrants (See Note 2)                                         219,325                --
                                                                        ----------        ----------
                                                                        $1,779,147        $1,824,864
                                                                        ==========        ==========
</TABLE>

4.       Property and Equipment


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

                                        2002              2001
                                     ----------        ----------

Office furniture and fixtures        $  254,073        $  353,717
Machinery and equipment               1,405,793         1,056,645
Building and improvements                32,315            73,600
                                     ----------        ----------
                                      1,692,181         1,483,962

Less accumulated depreciation         1,185,213           876,896
                                     ----------        ----------
                                     $  506,968        $  607,066
                                     ==========        ==========

         The Company incurred  depreciation expense of $412,833 and $290,293 for
the years ended December 31, 2002 and 2001, respectively.

         Included  in  fixed  assets  at  December  31,  2002  and 2001 is fully
depreciated equipment acquired under capital leases totaling $133,640.

         Rent expense  related to operating  leases for the years ended December
31, 2002 and 2001 was $387,357 and $314,402, respectively.

         The Company  leases its office  space under a  non-cancelable operating
lease.  The lease expires in August 2008 and is subject to  escalations in rent.
Rent  expense is  recorded  evenly over the lease.  Deferred  rent of $66,577 is
recorded.  Future lease obligations under non-cancelable  operating leases as of
December 31, 2002 are as follows:



   Year                                     $ Amount
------------                               ----------
   2003                                    $  329,300
   2004                                       422,500
   2005                                       434,700
   2006                                       446,900
   2007                                       459,000
   2008                                       311,000
                                           ----------
TOTAL                                      $2,403,400
                                           ==========


                                       39
<PAGE>


                                 SPATIALIGHT INC
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

5. Income Taxes

         Income  taxes  for 2002 and 2001  consist  primarily  of state  minimum
taxes.  Income tax  expense  (benefit)  differed  from the  amounts  computed by
applying  the  U.S.  federal  income  tax  rate  of 34% to  pretax  losses  from
operations as a result of the following:

<TABLE>
<CAPTION>
                                                                    2002                2001
                                                                -----------         -----------
<S>                                                             <C>                 <C>
Computed tax benefit at federal statutory rate                  $(3,069,500)        $(3,369,900)

Federal research and development credit                            (190,500)           (133,600)
Permanent differences, primarily nondeductible interest             611,625             813,800
Changes in valuation allowances                                   4,209,200           3,529,800
State tax benefit, net of effect on federal income taxes         (1,004,300)           (552,967)
Other, net                                                         (554,300)           (279,900)
                                                                -----------         -----------

Total tax expense                                               $     2,225         $     7,233
                                                                ===========         ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                        2002                 2001
                                                                    ------------         ------------
Deferred tax assets:
<S>                                                                 <C>                  <C>
Federal net operating loss carryforwards                            $ 14,380,300         $ 12,026,400
State income tax effects and credits                                   3,289,800            1,819,000
Accrued expenses                                                          16,000               18,500
Federal research and development credits                                 849,100              658,600
Options and warrants                                                     790,000              713,000
Other                                                                    155,900               36,400
                                                                    ------------         ------------
                                   Gross deferred tax assets          19,481,100           15,271,900
                                         Valuation allowance         (19,481,100)         (15,271,900)
                                                                    ------------         ------------

Net deferred tax assets                                             $         --         $        --
                                                                    ============         ============
</TABLE>


                                       40
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

         The net change in the total  valuation  allowance  was  $4,112,500  and
$3,529,800 for the years ending December 31, 2002 and 2001, respectively.  As of
December  31,  2002,  the  Company  had  net  operating  loss  carryforwards  of
approximately  $42.7  million  for  federal  and  $35.0  million  for  state tax
purposes,  respectively,  which expire in varying  amounts from 2005 for federal
purposes,  and have already begun to expire for state purposes.  In addition, as
of December 31, 2002, the Company had research and development  carryforwards of
approximately  $849,000 for federal tax purposes,  which will begin to expire in
2008 and $942,000 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 might be limited.

         Deferred tax assets resulting from net operating losses attributable to
certain  stock  option  exercises  and  warrant  issuances  could  result  in  a
cumulative  $191,800  credit to additional  paid-in  capital instead of reducing
income tax expense 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.

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

         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.

         Options  under the Plan are granted at the  discretion  of the Board of
Directors/Compensation Committee. Options expire 10 years from the date of grant
and, in general,  vest and become exercisable 50% at the end of year one and 50%
at the  end of  year  two.  Changes  to the  vesting  period  may be made at the
discretion of the Board of Directors/Compensation Committee. All options granted
through 2002 have been granted at fair market value.


                                       41
<PAGE>

                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

         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  2002 and
2001:

                                                       Weighted Average
                                    Number of Shares    Exercise Price
                                    ----------------    --------------

Outstanding January 1, 2001              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)         0.70
Options cancelled                         (292,500)         2.68
                                        ----------         -----

Outstanding December 31, 2001            4,624,500          3.20

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

Outstanding December 31, 2002            5,560,833         $3.17
                                        ==========         =====



         At December 31, 2002, 2,875,000 of the options outstanding were granted
outside  of the plan.  Options  exercisable  as of  December  31,  2002 and 2001
totaled  2,672,708 and 1,920,750  options,  respectively,  at a weighted average
exercise  price of $2.05 and  $1.90  per  share,  respectively.  Of the  options
exercisable  as of December 31, 2002,  1,050,000  options were issued outside of
the Plan at a weighted average exercise price of $1.98.

         The  weighted  average  fair value of options  granted  during 2002 and
2001:

                                                  2002          2001
                                                --------      --------

Exercise price equals market price              $   1.75      $   1.53
Exercise price is less than market price        $     --      $   2.20


         Additional information regarding options outstanding as of December 31,
2002 is as follows:

<TABLE>
<CAPTION>
            Options Outstanding                                            Options Exercisable

                                        Weighted Average
                                           Remaining
   Range of         Outstanding at      Contractual Life   Weighted Average         Number    Weighted Average
Exercise Prices    December 31, 2002         (Yrs.)         Exercise Price       Exercisable   Exercise Price
-------------------------------------------------------------------------------------------------------------------
<S>                            <C>            <C>                <C>                     <C>          <C>
$6.01 - 7.00                   12,500         9.0                $7.00                   6,250        $7.00
$5.01 - 6.00                  243,333         7.3                $5.66                 208,333        $5.75
$4.01 - 5.00                2,030,000         8.5                $4.79                 189,375        $4.78
$3.01 - 4.00                  527,500         9.0                $3.61                  27,500        $3.80
$2.01 - 3.00                1,052,500         9.1                $2.37                 575,000        $2.18
$1.01 - 2.00                1,090,000         8.4                $1.49               1,061,250        $1.49
$0.25 - 1.00                  605,000         5.4                $0.65                 605,000        $0.65
                   ------------------- ------------------- ------------------ ----------------- -------------------
                            5,560,833         8.3                $3.17               2,672,708        $2.05
                   =================== =================== ================== ================= ===================
</TABLE>

         At December 31, 2002, 1,131,667 options were available for future
grants under the Plan.

                                       42
<PAGE>


                                SPATIALIGHT INC.
                          NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 2002 AND 2001 (Continued)

         Diluted net loss per share

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

<TABLE>
<CAPTION>
                                                                                         2002             2001
                                                                                      ---------        ---------
<S>                                                                                   <C>              <C>
Shares issueable under stock options                                                  5,560,833        4,624,500

Shares issuable pursuant to warrants to purchase common shares                          531,250        2,588,512

Shares of convertible notes and accrued interest on an "as if converted" basis        3,425,603        3,462,035
</TABLE>


         The weighted  average  exercise price of stock options  outstanding was
$3.17 and $3.20 as of December  31, 2002 and 2001,  respectively.  The  weighted
average  exercise price of warrants was $3.40 and $3.37 per share as of December
31, 2002 and 2001, respectively.

7. Segment Information

         The  Company's  chief  operating  decision-makers  are the Acting Chief
Executive   Officer   and  Chief   Operating   Officer.   The  chief   operating
decision-makers   review  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. All assets of the Company are located at its facilities in the
United States except for approximately $200,000 of inventory components held for
production by Fuji Photo Optical Co. Ltd. at its facilities in Japan.

         None

8.     Subsequent  Events

     In  February  2003,  the Company received $250,000 in cash from a principal
shareholder  in exchange for a convertible note in that amount with a conversion
price  of  $2.67  per  share.  If  not  converted,  the  note is due and payable
December  31,  2003.

     In  March  2003,  the  Company  issued  a warrant to purchase up to 200,000
shares of the Company's common stock at $3.50 per share.  The warrant was issued
in  exchange  for  certain  consulting  services  and  expires  August 15, 2003.

                                       43
<PAGE>
ITEM 8.   Changes  in  and  disagreements  with  accountant  on  accounting
          and financial Disclosure

           None
                                    PART III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act.

                 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

<TABLE>
<CAPTION>
         Name                   Age                   Position(s)
         ----                   ---                   -----------
<S>                              <C>
     Robert A. Olins             46    Director, Acting Chief Executive Officer, and Principal Financial Officer
     David F. Hakala             51    Chief Operating Officer
     Miles L. Scott              52    Vice President Engineering/Manufacturing
     Lawrence J. Matteson        63    Director
     Claude Piaget               61    Director
     Steven F. Tripp             34    Director
</TABLE>


         All  Directors  serve for terms of one year and until their  successors
are duly elected. Miles L. Scott, Vice President Engineering/Manufacturing,  had
an  employment  contract  with the  Company for a one-year  period,  which as of
December  31,  2002,  was not renewed for a  subsequent  one-year  period at the
option  of the  Company.  David  F.  Hakala,  Chief  Operating  Officer,  has an
employment  agreement,  which is in effect  through  August 2003,  with one-year
extensions at the option of the Company.


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


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


         Miles L. Scott, Vice President  Engineering/Manufacturing since October
1998,  had been the Vice  President of Operations and Director of Development at
New  Interconnection  and Packaging  Technologies  (NIPT) from 1997 to 1998. Mr.
Scott was also Program Manager and Senior Process Engineer with Silicon Mountain
Design,  where he developed,  fabricated  and  commercialized  silicon based CCD
cameras and displays from 1995 to 1997. Before that position,  Mr. Scott was the
Principal   Engineer  and  Business   Development   Leader  for  Teledyne  Brown
Engineering  from 1991 to 1995.  Mr. Scott was also a Founder and Chief Engineer
for Optical  Transformations,  and worked at the MIT Lincoln Labs as part of his
19 years with the U.S.  Air Force.  Mr.  Scott has  productized  high-speed  CCD
cameras,  Liquid Crystal  Displays (LCD), and analog  micro-lens  arrays through
micro-machining  techniques. Mr. Scott received his BS in Electrical Engineering
from the University of Utah.

                                       44
<PAGE>

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


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


         Steven F.  Tripp,  Director  since June 1999,  is  President  and Chief
Executive  Officer of  KnoWare,  Inc.  since 1998.  KnoWare is a privately  held
software  development  company  focused on internet  based check image and check
fraud  detection  software for financial  institutions.  Mr. Tripp was Owner and
Vice President of Document  Solutions from 1990 to 1998. Mr. Tripp has worked in
the software  development  industry for 10 years with a primary focus on digital
imaging.



Section 16(a) Beneficial Ownership Reporting Compliance.

         Section  16(a) of the  Securities  Exchange  Act of 1934,  as  amended,
requires  directors,  executive  officers and persons who  beneficially own more
than 10% of our Common  Stock to file with the SEC initial  reports of ownership
and reports of changes in ownership of Common Stock and other equity  securities
of the Company. Executive officers,  directors and greater than 10% shareholders
are required by SEC  regulations  to furnish us with copies of all Section 16(a)
reports they file. To our  knowledge,  based solely on a review of the copies of
such  reports  furnished to us for fiscal 2001,  the Company  believes  that all
executive  officers,  directors  and  greater  than 10%  shareholders  filed the
required Section 16(a) reports in a timely manner.

                                       45
<PAGE>


ITEM 10. Executive Compensation

         The following table sets forth the compensation paid by the Company for
the fiscal year ended December 31, 2001 to the Company's Chief Executive Officer
and other  executive  officers  of the  Company who  received  total  salary and
bonuses in excess of $100,000 during fiscal 2002.


<TABLE>
<CAPTION>
                                                                                 Summary Compensation Table

                                                                                                                        All other
                                                                                               Securities Underlying   compensation
                                                                     Year      Salary($)          Options/SARS(#)            $
<S>                                                                  <C>       <C>                      <C>                 <C>
Robert A. Olins, Acting Chief Executive Officer
     and Principal Financial Officer                                 2002      $       -                500,000             $ -
                                                                     2001      $       -              1,275,000             $ -
                                                                     2000      $       -                      0             $ -

David F. Hakala, Chief Operating Officer                             2002      $  68,308                360,000 (2)         $ -
                                                                     2001      $       -                      0             $ -
                                                                     2000      $       -                      0             $ -

Miles L. Scott, Vice President, Engineering, Manufacturing           2002      $ 200,000                      0             $ -
                                                                     2001      $ 200,000                      0             $ -
                                                                     2000      $ 192,115                125,000 (1)         $ -
</TABLE>


(1) This stock option granted  December 1999 vests over a three-year  period and
is subject to the optionee meeting specific  performance targets. Of the 125,000
options  originally  granted  to Mr.  Scott,  83,334  shares  were  vested as of
December 31, 2002;  the remaining  41,667  options were cancelled when the final
performance targets were not met.
(2) This stock option granted September 2002 vests over a three-year period.


Compensation of Directors

         In fiscal 2002, all Directors  waived their  non-management  Director's
fee of $500 per board meeting.  In fiscal 2002,  500,000 options were granted to
Robert A. Olins in consideration for services rendered as Acting Chief Executive
Officer, Secretary,  Treasurer and Director during calendar year 2002. In fiscal
2002,  25,000  options  were  granted to Steven F. Tripp for his  services  as a
director.  In  addition,  Mr. Tripp was granted  25,000  options in exchange for
chairing the Audit  Committee.  In fiscal 2002,  25,000  options were granted to
Claude  Piaget for his services as a director.  In fiscal 2002,  25,000  options
were granted to Lawrence  Matteson for his services as a director.  In addition,
Mr. Matteson was granted 25,000 options for certain consulting  services,  which
vested immediately.

Employment Contracts

         The Company is party to an  employment  agreement  dated  September  3,
2002,  with David F.  Hakala to serve as Chief  Operating  Officer,  which is in
effect  through  August  2003,  with  one-year  extensions  at the option of the
Company. As currently in effect, the agreement provides for a salary of $240,000
and a grant of  Incentive  Stock  Options to purchase  360,000  shares of common
stock  vesting over a three-year  period.  As of December 31, 2002 none of these
shares have vested.

         The Company was party to an  employment  agreement  dated  December 31,
1999, with Miles L. Scott to serve as Vice President  Engineering/Manufacturing,
which was in effect through  December 31, 2002, with one-year  extensions at the
option of the Company.  The  agreement,  which provided for a salary of $200,000
and a grant of  Incentive  Stock  Options to purchase  125,000  shares of common
stock vesting over a three-year period depending upon the achievement of certain
performance criteria,  was not renewed. As of December 31, 2002, 83,334 of these
shares have vested.  The final  performance  criteria were not met and therefore
41,667 options were cancelled effective December 31, 2002.

                                       46
<PAGE>

ITEM 11. Security Ownership of Certain Beneficial Owners and Management

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership of the Company's  capital  stock,  as of December 31, 2002
based upon a total of 25,906,120 shares  outstanding,  (i) by each person who is
known by the Company to own beneficially  more than 5% of the Company's  capital
stock,  (ii) by each of the  executive  officers  mentioned  in the table  under
"Executive  Compensation" and by each of the Company's  directors,  and (iii) by
all officers and directors as a group.


<TABLE>
<CAPTION>
 Name and Address Beneficial Owner                   Amount and Nature of
                                                     Beneficial Ownership             Percent of Class
                                                     --------------------             ----------------
<S>                                                        <C>                  <C>         <C>
Argyle Capital Management Corporation                      4,697,466            (1)         18.1%
Robert A. Olins
Five Hamilton Landing, Suite 100
Novato, CA 94949

Estate of Isidore A. Becker                                3,832,243            (2)         14.8%
Harvey Krauss, Esq.,
Snow Becker Krauss P.C.
605 Third Avenue
New York, NY 10158-0125
                                                                                             4.8%
Raymond L. Bauch                                           1,236,100            (3)
19 Old Kings Road, Suite C105
Palm Coast, FL 32137

Steven F. Tripp                                              373,457            (4)          1.4%
Five Hamilton Landing, Suite 100
Novato, CA 94949

David F. Hakala                                              360,000            (5)          1.4%
Five Hamilton Landing, Suite 100
Novato, CA 94949

Lawrence J. Matteson                                         325,000            (6)          1.3%
Five Hamilton Landing, Suite 100
Novato, CA 94949

Miles L. Scott                                               208,334            (7)          0.8%
Five Hamilton Landing, Suite 100
Novato, CA 94949

Claude Piaget                                                 75,000            (8)          0.3%
Five Hamilton Landing, Suite 100
Novato, CA 94949

All directors and officers as a group (6 persons)          6,039,257            (9)         23.3%


</TABLE>


                                       47
<PAGE>


(1)      Includes  2,376,000 shares  beneficially owned subject to conversion of
         principal  and  interest of  convertible  notes held by Argyle  Capital
         Management Corporation,  of which Mr. Olins is President and over which
         Mr. Olins exercises  voting  control.  Also includes  1,275,000  shares
         subject  to  outstanding  stock  options  held by Mr.  Olins  that  are
         exercisable as of December 31, 2002.
(2)      Based  solely  upon  information  filed  in a  Schedule  13G  by  named
         shareholder.
(3)      Based  solely  upon  information  filed  in a  Schedule  13G  by  named
         shareholder.
(4)      Includes  175,000 shares  subject to outstanding  stock options held by
         Mr.  Tripp that are  exercisable  as of  December  31,  2002 and 50,000
         shares  subject  to options  not  exercisable  within 60 days.  142,857
         shares   issuable   upon   conversion  of  principal  and  interest  of
         convertible  notes held by the Steven F. Tripp Trust are not  included.
         Steven F. Tripp a Director of the  Company,  beneficiary  of the Trust,
         does not have voting or dispositive power over these shares.
(5)      Includes  360,000 shares subject to options not  exercisable  within 60
         days.
(6)      Includes  300,000 shares subject to options  exercisable as of December
         31, 2002 and 25,000 shares subject to options not exercisable within 60
         days.
(7)      Includes  208,334 shares subject to options  exercisable as of December
         31, 2002.
(8)      Includes  12,500 shares  subject to options  exercisable as of December
         31, 2002 and 62,500 shares subject to options not exercisable within 60
         days.


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

         On September 20, 2002,  the due date was extended until March 31, 2004.
Accordingly,  the  remaining  unamortized  discount  at the  extension  date  of
$198,000 is being amortized through March 31, 2004, resulting in a new effective
interest  rate of 17% per  annum  when  compared  to the  outstanding  principle
balances. The notes have been reclassified as long term.

         In 2002,  the Company  issued  178,992  shares of common stock upon the
conversion of interest.  Of these shares, 36,432 were issued upon the conversion
of accrued  interest of $128,243 for the fourth  quarter of 2001.  The remaining
142,560  shares were issued in exchange for interest of $563,157  which includes
additional  stock-based  interest  expense  of  $491,877  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,
2002, the carrying value of the Argyle notes totals  $1,023,000,  which includes
the principal balance of $1,188,000, less the unamortized discount of $165,000.

                                       48
<PAGE>


Alabama Group Notes:

         In December  1999, the Company  received  $1,437,500 in cash and issued
notes in that amount to a group of investors (the Alabama Group), which includes
a trust for the benefit of Steven F. Tripp, a Director of the Company. Mr. Tripp
is not the  trustee  of this  trust and has no power to vote or  dispose  of the
Common Shares of the Company or any other securities held by that trust.  Marcia
K. Tripp, Steven F. Tripp's mother, is the trustee of this trust and directs and
is responsible for all of the investment decisions of this trust. In the opinion
of the Company,  no other  investor in the Alabama  Group is an affiliate of the
Company and Mr. Tripp is not an  affiliate of any other  investor in the Alabama
Group.  The notes accrue interest at a contractual rate of 6% per annum, and are
secured by  substantially  all the assets of the  Company.  This  portion of the
notes is  convertible  into shares of the  Company's  common  stock at $3.50 per
share.  Upon issuance of the notes, the Company also issued warrants to purchase
821,429 shares of common stock.  The warrants were exercised on June 28, 2002 at
$3.50 per share. 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% per annum interest rate,
resulted in an  effective  interest  rate of 70% per annum when  compared to the
outstanding principal balances.

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

         On June 15,  2001  the due date of both  tranches  was  extended  until
December 31, 2002. On the extension date, the excess $255,000 aggregate value of
the common  shares  receivable  upon  conversion  of the notes based on the then
current market price of $2.65 per share, over the aggregate conversion price for
the notes  convertible  at $2.25 per share,  was recorded as additional  paid-in
capital.  The resulting  $255,000 discount to the debt, along with the remaining
unamortized discount for the first tranche, was being amortized through December
31, 2002. The effective  interest rate for financial  statement  purposes due to
these  discounts  differs  from the  actual  contractual  interest  received  or
receivable by the holders of the Alabama  Group Notes.  These  discounts,  along
with the  contractual 6% per annum  interest  rate,  resulted in a new effective
interest  rate upon  extension  of 25% per annum as of the  extension  date when
compared to the outstanding  principal balances.  On September 20, 2002, the due
date of both tranches was extended until March 31, 2004. On the extension  date,
the  excess  $58,000  aggregate  value  of the  common  shares  receivable  upon
conversion  of the notes  based on the then  current  market  price of $2.34 per
share over the aggregate conversion price for the notes convertible at $2.25 per
share, was recorded as additional  paid-in-capital.  Accordingly,  the remaining
unamortized  discount  at the  extension  date  of  $194,195  including  the new
discount of $58,000 is being amortized through March 31, 2004 resulting in a new
effective  interest rate of 10.5% per annum when  compared with the  outstanding
principal  balances.  The notes have been reclassified as long term. At December
31, 2002, the carrying value of the Alabama Group notes totals $3,184,232, which
includes principal balance of $2,875,000 plus accrued interest of $471,061,  net
of unamortized discounts of $161,829.

                                       49
<PAGE>

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.

*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, 2002
(SEC File No. 000-19828).

                                      50
<PAGE>

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, 2002.

Item 14. Controls and Procedures.

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

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

         Internal Controls.  In accordance with SEC requirements,  the CEO notes
that,  since  the date of the  Controls  Evaluation  to the date of this  Annual
Report,  there have been no significant changes in Internal Controls or in other
factors  that could significantly affect Internal Controls. During 2002, we were
advised  by  our  independent public accountants of a  "reportable condition" in
our  system of internal controls, resulting in large part because we do not have
a  full  time,  qualified  on-site Chief Financial Officer or similar accounting
officer. The Company acknowledges this condition, which has been reported to our
audit committee, and is in the process of addressing this need concurrently with
the increase in our operations as a result of the expected ramp-up for sales and
production  activity.

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

                                       51
<PAGE>



         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 14th day of April 2003.

                                         SPATIALIGHT, INC.

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


In  accordance  with  the Exchange Act, this report has been signed below by the
following  persons  on behalf of the Registrant and in the capacities and on the
dates  indicated.


<TABLE>
<CAPTION>
<S>                               <C>                                     <C>
     SIGNATURE                   TITLE                                     DATE
     ---------                   -----                                     ----

/s/LAWRENCE  J.  MATTESON     Director                                    April 14, 2003
-------------------------
Lawrence  J.  Matteson



/s/ROBERT  A.  OLINS         Director, Acting Chief Executive Officer     April 14, 2003
-------------------------    and Principal Financial Officer
Robert A. Olins


/s/STEVEN  F.  TRIPP          Director                                    April 14, 2003
--------------------
Steven  F.  Tripp


/s/CLAUDE  PIAGET              Director                                   April 14, 2003
-----------------
Claude  Piaget

</TABLE>
                                       52
<PAGE>



                                  CERTIFICATION
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.

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

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

     b) evaluated the effectiveness of the registrant's disclosure controls and
     procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

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

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

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

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

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

Date: April 14, 2003

                                        /s/  ROBERT  A.  OLINS
                                        -------------------
                                        Robert  A.  Olins
                                        Acting Chief  Executive  Officer  and
                                        Principal  Financial  Officer





                                       53

<PAGE>