<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
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                                 FORM 10-KSB/A
                                AMENDMENT NO. 2


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

[ ]    TRANSITION REPORT UNDER SECTION 13 or 15(d) of the SECURITIES EXCHANGE
       Act of 1934
       For the transition period from                to

                        Commission File Number: 000-19828

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                                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.)

             9 Commercial Blvd., Suite 200, 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. [ ]

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

     The aggregate market value for the Issuer's voting stock held by
non-affiliates of the Issuer, based upon the $3.75 per share closing sale price
of the Common Stock on March 20, 2002 as reported on the Nasdaq SmallCap Market,
was approximately $57,310,706. 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 March 20, 2002, Registrant had 25,855,217 shares of Common Stock
outstanding.

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


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                                     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 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

                                        Fiscal 2000
                                        -----------
                                     High           Low
                                     ----           ---

    First Quarter                   10.12           5.62
    Second Quarter                   7.12           3.31
    Third Quarter                    4.12           1.12
    Fourth Quarter                   3.59           1.00


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

         As of March 20, 2002, there were approximately 477 holders of record of
our common shares and the closing price per share was $3.75 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 and 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

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

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

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

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

         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.


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ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

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

OVERVIEW

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

         As of December 31, 2001, we had an accumulated deficit of $39,729,909.
We have realized significant losses in the past and expect that these losses
will continue until we start to receive significant revenues from the sale of
our products. We generated limited revenues and no profits from operations
during


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<PAGE>


2001. The ramp up in manufacturing and commercialization of our displays will
require substantial expenditures during 2002. Consequently, we may continue to
operate at a loss during 2002 and there can be no assurance that our business
will operate on a profitable basis thereafter.

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

RESULTS OF OPERATIONS

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

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

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

         Stock-based general and administrative expenses. Stock-based general
and administrative expenses were $2,938,062 and $1,162,902 in 2001 and 2000,
respectively. The amounts incurred in 2001 and 2000 relate to common stock,
stock options and warrants issued in exchange for services. The increase in 2001
relates primarily to expenses associated with repricing of warrants to induce
conversion valued at $142,000, and common stock granted as employee compensation
valued at $740,000, neither of which had a comparable expense in 2000. In
addition, options granted by the Board of Directors to an executive officer and
a director in October 2000 were approved by the shareholders in June 2001,
resulting in a 2001 expense totaling $1,655,000 due to increases in the common
share price between the original grant date and the final measurement date.
These increases were partially offset by a non-recurring charge of $962,000 in
2000, related to reinstatement of options to a former employee pursuant to a
settlement agreement with such former employee.

         Research and development expenses. Research and development expense
decreased from $3,344,547 to $2,426,590 or 27%, from 2000 to 2001. This decrease
was due primarily to extensive wafer


                                       10
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processing in 2000 resulting in a reduced need for wafers in 2001, as well as
more efficient development processes implemented in 2001.

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

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

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

         In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and For Long-Lived
Assets to Be Disposed Of". The statement retains the previously existing
accounting requirements related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as



                                       11
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held for sale. Management does not expect this statement to have a material
impact on the Company's financial position or results of operations upon
adoption on January 1, 2002.

                                  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. For the fiscal years ended December 31, 2001 and 2000, we have
incurred net losses of $9,911,727 and $7,833,869, respectively. In addition, we
had an accumulated deficit of $39,729,909 as of December 31, 2001. We may incur
additional losses as we continue spending for research and development and other
business activities. As a result, we will need to generate substantial sales to
support our cost structure before we can begin to recoup our operating losses
and accumulated deficit and achieve profitability.

IF WE ARE UNABLE TO OBTAIN FURTHER FINANCING OR GENERATE REQUIRED WORKING
CAPITAL OUR ABILITY TO OPERATE COULD SUFFER OR CEASE. OUR AUDITORS HAVE ISSUED A
REPORT ON OUR FINANCIAL STATEMENTS WHICH CONTAINS AN EXPLANATORY PARAGRAPH
REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.

         Our operations to date have consumed substantial amounts of cash and
will continue to require substantial amounts of capital in the future. In order
to remain competitive, we must continue to make significant investments
essential to our ability to operate profitably, including investments in further
research and development, equipment, facilities and production activities.
Although our financial condition and liquidity have been strengthened through
the exercise of warrants and private purchases of our common shares, we may
still require additional financing to provide for our required capital
expenditures. 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 display units in their products. This requires us to invest
significant amounts of time and capital in designing display units before we can
be assured that we will generate any significant sales to our customers or even
recover our investment. If we fail to recover our investment from such display
units, it could seriously harm our financial condition. In addition, the length
of time our products may be successfully received by our customers could be
limited by the acceptance of new technologies developed by our customers.

WE INCUR SUBSTANTIAL RESEARCH AND DEVELOPMENT COSTS IN CONNECTION WITH
TECHNOLOGIES THAT MAY NOT BE SUCCESSFUL.

         We currently have seventeen engineering personnel based in California
working on microdisplays. This staffing creates significant research and
development costs that may not be recouped. Even if our current microdisplays
become accepted or successful, due to the rapid technological change in our
industry, we must continue to use, and may increase in number, our engineering
personnel to develop future generations of our microdisplays. As a result, we
expect to continue incurring significant research and development costs.


                                       12
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TO DATE, WE HAVE ONLY MANUFACTURED MICRODISPLAYS IN LIMITED COMMERCIAL
QUANTITIES AND DIFFICULTIES MASS-PRODUCING OUR MICRODISPLAYS MAY CAUSE US TO BE
UNABLE TO MEET CUSTOMER DEMANDS AND OUR OPERATING RESULTS COULD BE SIGNIFICANTLY
HARMED.

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

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

         Our microdisplays are assembled by combining the silicon backplanes
with electronic components. The design and manufacture of liquid crystal
displays and display units are highly complex processes that are sensitive to a
wide variety of factors, including the level of contaminants in the
manufacturing environment, impurities in the materials used, and the performance
of personnel and equipment. We have working arrangements with several liquid
crystal display fabricators to manufacture our products. We also have working
arrangements with the manufacturer of the light engines and lamps required in
the assembly of our microdisplay units. We have recently 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, the
Company is not aware that any of those manufacturers have known shortages of
critical material.

         Because the manufacture of our display units involves highly complex
processes and technical problems may arise, such liquid crystal display
fabricators do not guarantee their manufacturing yields of our products.
Problems in mass-production or lower than expected manufacturing yields could
significantly harm our business and operating results. In addition, the
complexity of our manufacturing processes will increase as the sophistication of
our display units increases.


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

         Various target markets for our microdisplays, including projectors,
monitors, high-definition televisions, and portable microdisplays, are
uncertain, may be slow to develop or could utilize competing technologies.
High-definition television has only recently become available to consumers, and
widespread market acceptance is uncertain. In addition, the commercial success
of the portable microdisplay market is uncertain. Gaining acceptance in this
market may prove difficult because microdisplays offer a radically different
approach to the presentation of information than current products provide. 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 that are commercially successful. Our
failure to sell our microdisplays to such manufacturers or the failure of the
ultimate target markets to develop as we expect will negatively affect our
anticipated growth.

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

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

         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.


                                       13
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WE DO NOT HAVE FIRM PURCHASE ORDERS FROM OUR CUSTOMERS AND CANNOT ASSURE YOU WE
WILL OBTAIN THEM OR, IF WE DO, THAT THEY WILL GENERATE SIGNIFICANT REVENUES.

         During the past six months, we entered into five agreements with six
original equipment manufacturers in China to sell our display units. All of
these agreements require that we supply prototypes of our display units and that
they meet technical criteria satisfactory to each of such prospective customers.
If these tests of our display units satisfy these prospective customers, three
of these agreements require such customers to place purchase orders for
designated quantities of our display units. The remaining agreements indicate
that under such circumstances the parties will negotiate such purchase orders.
Three of these agreements provide for one or more specific periods for the
testing of our display units; the fourth agreement leaves open the number of
"months" for testing of prototypes; and the fifth agreement is silent on the
matter. Three of these agreements also have clauses which prohibit these
prospective customers from working with any of our competitors during the
testing periods.

         The testing of our display units by certain of these prospective
customers commenced after these agreements were signed. The Company has recently
been advised by certain of these prospective customers that they are satisfied
with the results of the testing of the prototypes under their agreements with
the Company and that they are prepared to negotiate final terms of purchase
orders for our microdisplay units in the near future. Similar to all agreements
for the sale of technology products to foreign customers, these agreements are
subject to various other contingencies and, by reason of these contingencies, we
cannot assure that they will result in significant revenues, if any, to us as of
this date.

         In addition, even if our display units are successful and meet or
exceed the customer's technical criteria, we may have problems implementing
volume production of our display units. As a result of these contingencies, we
do not have firm purchase orders for our 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 commitments or reduce or delay orders thereby
increasing our inventory and overhead risks. Therefore, we cannot assure you
that these agreements may result in significant revenues, if any, to us.

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

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

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

         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;


                                       14
<PAGE>


         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.

OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

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

         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


                                       15
<PAGE>

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.

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:

                                       16

<PAGE>

         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.

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.

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.



                                       17

<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, 2001 and 2000 and the related statements of operations,
stockholders' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

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

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



/s/ BDO Seidman, LLP

San Francisco, California

February 6, 2002


                                       18
<PAGE>


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

<TABLE>
<CAPTION>
                                                                         2001                 2000
                                                                   -----------------    ------------------
<S>                                                                <C>                  <C>
ASSETS

Current assets
  Cash and cash equivalents                                               $2,728,134            $1,035,957
  Accounts receivable                                                              -                 2,500
  Prepaids and other current assets                                          105,158               159,534
                                                                   -----------------     -----------------
          Total current assets                                             2,833,292             1,197,991

Property and equipment, net                                                  607,066               570,585
Other assets                                                                  47,644                31,954
                                                                   -----------------     -----------------
               Total assets                                               $3,488,002            $1,800,530
                                                                   =================     =================

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
  Accounts payable                                                          $394,028              $347,104
  Short-term convertible notes                                             3,137,284             2,782,453
  Accrued expenses and other current liabilities                             170,036               129,668
                                                                   -----------------     -----------------
        Total current liabilities                                          3,701,348             3,259,225
Noncurrent liabilities
  Long term capital lease obligations                                              -                 4,483
                                                                   -----------------     -----------------
               Total liabilities                                           3,701,348             3,263,708
                                                                   -----------------     -----------------

Commitments

Stockholders' deficit:
  Common stock, $.01 par value:
     40,000,000 shares authorized;
     25,811,786 and 20,273,229 shares issued and outstanding
     at 2001 and 2000                                                        258,118               202,732
Additional paid-in capital                                                41,911,879            28,152,272
Notes and stock subscription receivable                                  (2,653,434)                     -
Accumulated deficit                                                     (39,729,909)          (29,818,182)
                                                                   -----------------     -----------------
        Total stockholders' deficit                                        (213,346)           (1,463,178)
                                                                   -----------------     -----------------
Total liabilities and stockholders' deficit                               $3,488,002            $1,800,530
                                                                   =================     =================
</TABLE>


See accompanying notes to financial statements.

                                       19

<PAGE>



SPATIALIGHT, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 and 2000

<TABLE>
<CAPTION>

                                                                                December 31,
                                                                   ----------------------------------
                                                                       2001                   2000
                                                                   -------------          -----------


<S>                                                                 <C>                  <C>
Revenues                                                                 $10,000              $65,650
Cost of revenues                                                           1,000               16,625
                                                                    ------------          -----------
          Gross profit                                                     9,000               49,025

Selling, general and administrative expenses:
   General and administrative expenses                                 2,489,442            2,785,737
   Stock-based general and administrative expenses                     2,938,062            1,162,902
                                                                    ------------          -----------
          Total general and administrative expenses                    5,427,504            3,948,639

   Research and development expenses                                   2,426,590            3,344,547
                                                                    ------------          -----------
          Total operating expenses                                     7,854,094            7,293,186
                                                                    ------------          -----------
          Operating loss                                              (7,845,094)          (7,244,161)
                                                                    ------------          -----------
Other income (expenses):

  Interest expense:
          Interest expense                                              (268,905)            (114,189)
          Stock-based interest expense                                (1,824,864)            (561,346)
                                                                    ------------          -----------
           Total interest expense                                     (2,093,769)            (675,535)

   Interest and other income                                              34,369               87,427
                                                                    ------------          -----------
          Total other income (expenses)                               (2,059,400)            (588,108)
                                                                    ------------          -----------
   Loss before income taxes                                           (9,904,494)          (7,832,269)

Income tax expense                                                         7,233                1,600
                                                                    ------------          -----------
          Net loss                                                    (9,911,727)          (7,833,869)

Incentive warrants issued                                                      -             (606,303)
                                                                    ------------          -----------
Net loss attributable to common shareholders                        $ (9,911,727)         $(8,440,172)
                                                                    ============          ===========

Net loss per share attributable to common
   shareholders- basic and diluted                                       $(0.46)              $(0.44)
                                                                    ============          ===========
Weighted average shares used in computing
 net loss per share- basic and diluted                                21,469,960           19,178,639
                                                                    ============          ===========
</TABLE>

See accompanying notes to financial statements





                                       20
<PAGE>


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


<TABLE>
<CAPTION>
                                                                                                                           TOTAL
                                                                     ADDITIONAL                                            STOCK-
                                                COMMON STOCK          PAID-IN          NOTES             ACCUMULATED      HOLDERS'
                                          SHARES          AMOUNT      CAPITAL       RECEIVABLE            (DEFICIT)       DEFICIT
                                         ------------------------------------------------------------------------------------------

<S>                                      <C>            <C>          <C>            <C>               <C>             <C>
Balance January 1, 2000                  16,635,818     $166,359     $20,649,563    $         -       $ (21,378,010)   $  (562,088)

Conversion of interest on notes             169,092        1,690         793,964              -                   -        795,654

Issuance of common stock                      2,307           23          14,977              -                   -         15,000

Exercise of stock                         3,466,012       34,660       4,939,563              -                   -      4,974,223
  options and warrants
Issuance of options and                           -            -       1,147,902              -                   -      1,147,902
  warrants for services
Incentive warrants                                -            -         606,303              -            (606,303)             -

Net loss                                          -            -                              -          (7,833,869)    (7,833,869)
                                         ------------------------------------------------------------------------------------------
Balance December 31, 2000                20,273,229      202,732      28,152,272              -         (29,818,182)    (1,463,178)

Sale of common stock under
  private stock purchase agreements       2,437,304       24,374       4,503,293     (3,480,021)                  -      1,047,646

Conversion of notes and accrued interest    275,120        2,751         527,635              -                   -        530,386

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

Issuance of stock, stock options and
    warrants for services                    21,889          219         402,508              -                   -        402,727

Issuance of stock and options
    to employees and directors              200,000        2,000       2,533,335              -                   -      2,535,335

Exercise of stock options and warrants    2,604,244       26,042       4,349,836       (492,708)                  -      3,883,170

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

Net loss                                          -            -               -              -          (9,911,727)    (9,911,727)
                                         ------------------------------------------------------------------------------------------
                                         25,811,786     $258,118     $41,911,879   $ (2,653,434)      $ (39,729,909)   $  (213,346)
                                         ==========================================================================================
</TABLE>
See accompanying notes to financial statements

                                       21
<PAGE>


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

<TABLE>
<CAPTION>

Cash flows from operating activities:                                                     2001              2000
                                                                                      -------------      ------------
<S>                                                                                    <C>               <C>
Net loss                                                                               $ (9,911,727)     $ (7,833,869)
Adjustments to reconcile net loss to net cash used by operating activities:

  Depreciation and amortization                                                             290,293           218,176
  Stock-based general and administrative expense                                          2,938,062         1,162,902
  Stock-based interest expense                                                            1,824,864           561,346
  Other                                                                                           -            57,838
  Changes in operating assets and liabilities:
     Accounts receivable                                                                      2,500            (2,500)
     Inventories                                                                                  -             5,036
     Prepaid and other current assets                                                        54,376           (66,117)
     Accounts payable                                                                        46,924            60,363
     Accrued expenses and other current liabilities                                         294,359          (227,496)
     Other assets                                                                           (15,690)           (9,284)
                                                                                       ------------      ------------
                                             Net cash used in operating activities       (4,476,039)       (6,073,605)
                                                                                       ------------      ------------
Cash flows from investing activities:
  Purchase of property and equipment                                                       (326,774)         (524,746)
                                                                                       ------------      ------------
                                             Net cash used in investing activities         (326,774)         (524,746)
                                                                                       ------------      ------------
Cash flows from financing activities:
  Payments on capital lease obligations                                                      (5,121)          (14,024)
  Proceeds from issuance of convertible notes with warrants attached                              -         1,437,500
  Proceeds from issuance of convertible notes                                               250,000                 -
  Payments on notes receivable from shareholders                                          1,319,295                 -
  Proceeds from sales of stock                                                            1,047,646                 -
  Proceeds from exercise of warrants and options                                          3,883,170         4,974,223
                                                                                       ------------      ------------
                                         Net cash provided by financing activities        6,494,990         6,397,699
                                                                                       ------------      ------------
Net increase (decrease) in cash                                                           1,692,177          (200,652)

Cash at beginning of period                                                               1,035,957         1,236,609
                                                                                       ------------      ------------
Cash at end of period                                                                  $  2,728,134      $  1,035,957
                                                                                       ============      ============
Supplemental disclosure of cash flow information:

  Income taxes paid during the period                                                  $      7,233      $      1,600
                                                                                       ------------      ------------
  Interest paid during the period                                                      $     15,551      $     14,133
                                                                                       ------------      ------------
Non cash financing activities:

   Common stock issued upon conversion of notes and interest                           $    530,386      $    795,654
   Warrants issued to incent the exercise of certain warrants                          $          -      $    606,303
   Sale of stock for stock subscription                                                $  3,567,521      $          -
   Exercise of warrants in exchange for notes receivable                               $    492,708      $          -
   Discount on convertible notes due to beneficial conversion feature                  $  1,443,000      $          -
</TABLE>

See accompanying notes to consolidated financial statements.


                                       22

<PAGE>


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

1.       DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

         Going Concern - Through December 31, 2001, the Company had sustained
recurring losses from operations and, at December 31, 2001, had a net capital
deficiency and a net working capital deficiency. These conditions raise
substantial doubt about the ability of the Company to continue as a going
concern. During fiscal 2002, the Company expects to meet its working capital and
other cash requirements with cash derived from the exercise of warrants held by
existing investors associated with two of the Company's directors. The Company's
continued existence is dependent upon its ability to successfully market and
sell its products. However, there can be no assurance that the Company's efforts
will be successful. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

         Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires that management make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

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

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

                                       23
<PAGE>


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

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

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

         Research and Development - Research and development costs are charged
to expense when incurred.

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

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

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

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

         Recently Issued Accounting Standards - In June 2001, the Financial
Accounting Standards Board finalized FASB Statements No. 141, Business
Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS
142). SFAS 141 requires the use of the purchase method of accounting and
prohibits

                                       24
<PAGE>

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

the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS 142 that the Company reclassify the carrying amounts of any intangible
assets and goodwill based on the criteria in SFAS 141.

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

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

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

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

2.       ISSUANCE OF SECURITIES

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

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

         On April 18, 2001 the Company issued warrants to purchase 607,143
shares of common stock at an exercise price of $1.75 to a group of investors
associated with Steven F. Tripp, a Director of the Company. 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.



                                       25
<PAGE>


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

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

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

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

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

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

         During 2001, 200,000 shares of stock valued at $740,000 were issued to
an employee as compensation for services rendered. Other expenses related to the
extension of certain employee stock options and the valuation of other employee
and director options totaled $140,163, included in stock-based general and
administrative expenses in the accompanying statements of operations. Of this
amount, $49,360 related to employee related charges and $90,803 related to
officer and director related charges.

Sales of Stock Under Private Stock Purchase Agreements in 2001

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

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

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

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

Note and Interest Conversions in 2001

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



                                       26
<PAGE>


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

         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.



                                       27

<PAGE>



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

Year 2000 Transactions

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

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

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

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

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


                                       28
<PAGE>


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


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

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

                   WARRANT ACTIVITY IS SUMMARIZED AS FOLLOWS

<TABLE>
<CAPTION>
                                              2001                               2000
                                 --------------------------------    ----------------------------
                                    Shares           Weighted          Shares         Weighted
                                                     Average                          Average
                                                     Exercise                         Exercise
                                                      Price                            Price
                                 --------------    --------------    -------------   ------------
<S>                                 <C>                 <C>            <C>             <C>
Balance, beginning of year           3,868,512          $2.94           6,704,712       $2.10
Granted                                707,143           1.81             320,815        6.13
Exercised                           (1,987,143)          2.21          (3,157,015)       1.48
                                             -              -                   -           -
                                   -----------          -----         -----------       -----
Balance, end of year                 2,588,512          $3.19           3,868,512       $2.94
                                   ===========          =====         ===========       =====
</TABLE>


The warrants exercised include some cashless exercises, resulting in 12,199 and
6,003 fewer shares actually issued in 2001 and 2000, respectively.

         The 2001 exercises include 120,000 shares repriced from $2.00 to $1.75
prior to exercise and 600,000 shares repriced from $3.50 to $2.50 prior to
exercise.

3.   NOTES PAYABLE

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

         A convertible note totaling $414,216, inclusive of accrued interest and
net of a discount of $792,000 issued to Argyle Capital Management Corporation
("Argyle"), a company affiliated with Robert A. Olins, Acting Chief Executive
Officer, Secretary, Treasurer and a Director of the Company. The outstanding
principal as of December 31, 2001 is $1,188,000, and accrues interest at 6%.
Both principal and interest are convertible into the Company's common shares at
$.50 per share. On May 23, 2001 the due date was extended until December 31,
2002. On the extension date, 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 discount to the debt arising from the beneficial
conversion feature is being amortized over the life of the extended note. For
the years ended December 31, 2001 and 2000, additional stock-based interest
expense of approximately $285,000 and $548,000, respectively, was recorded due
to the beneficial conversion feature of the accrued interest, representing the
excess value of the common shares potentially receivable upon conversion of the
accrued interest, based on average prices during the period, over the aggregate
conversion price for such shares. The note is secured by substantially all the
assets of the Company.

         Convertible notes totaling $2,613,042 inclusive of accrued interest and
net of a discount of $544,733, issued to a group of investors associated with
Steven F. Tripp, a Director of the Company (the "Alabama Group"). The
outstanding principal balance as of December 31, 2001 is $2,875,000 and accrues
interest at 6%. Of the total amount of the notes, $1,437,500 is convertible into
shares of the Company's common stock at $3.50 per share; the remaining
$1,437,500 is convertible at $2.25 per share. On June 15, 2001 the due date was
extended until December 31, 2002. On the extension date, the $255,000 excess
aggregate value based on the then current market price of $2.65 per share of the
common shares receivable upon conversion of the notes, over the aggregate
conversion price for the common shares convertible at $2.25 per share was
recorded as additional paid-in capital. The resulting discount to the debt
arising from the beneficial conversion feature is being amortized over the life
of the extended note.


                                       29
<PAGE>


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


Activity in notes payable for 2001 and 2000 follows:

<TABLE>
<CAPTION>

                                                                              (PAYMENT) OR
DEBT PRINCIPAL:                      BALANCE AT DEC.    ADDITION OR NEW         DISCOUNT       CONVERSION TO    BALANCE AT
                                         31, 2000           DISCOUNT          AMORTIZATION         EQUITY      DEC. 31, 2001
                                    ------------------------------------------------------------------------------------------
<S>                                  <C>                  <C>                     <C>           <C>              <C>
Alabama Group                        $    2,875,000       $           -           $        -    $         -      $  2,875,000
Alabama Group Discount                   (1,433,885)           (255,000)           1,144,111              -          (544,774)
Argyle                                    1,188,000                   -                    -              -         1,188,000
Argyle discount                                   -          (1,188,000)             396,000              -          (792,000)
Convertible Note                                  -             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
Convertible Note -  6%                            -              11,125              (11,125)             -                 -
Beneficial interest                          39,528             284,753                    -       (214,254)          110,027
                                     --------------       -------------           ----------    -----------      ------------
               Total                        153,338             549,231              (11,125)      (280,386)          411,058
                                     --------------       -------------           ----------    -----------      ------------
TOTAL SHORT-TERM CONVERTIBLE NOTES   $    2,782,453       $    (643,769)          $1,528,986    $  (530,386)     $  3,137,284
                                     ==============       =============           ==========    ===========      ============
</TABLE>

<TABLE>
<CAPTION>


                                                                              (PAYMENT) OR
DEBT PRINCIPAL:                      BALANCE AT DEC.    ADDITION OR NEW         DISCOUNT       CONVERSION TO    BALANCE AT
                                         31, 1999           DISCOUNT          AMORTIZATION         EQUITY      DEC. 31, 2000
                                   -----------------------------------------------------------------------------------------
<S>                                 <C>                  <C>                     <C>            <C>            <C>
Alabama Group                       $    1,437,500       $   1,437,500           $     -        $       -      $  2,875,000
Alabama Group Discount                  (1,437,500)                  -             3,615                -        (1,433,885)
Argyle                                   1,188,000                   -                 -                -         1,188,000
Argyle discount                                  -                   -                 -                -                 -
                                                 -                   -                 -                                  -
                                    --------------       -------------           -------        ---------      ------------
              Total                      1,188,000           1,437,500             3,615                -         2,629,115
                                    --------------       -------------           -------        ---------      ------------

INTEREST:
Accrued Argyle 6%                           24,156              72,468                 -          (84,546)           12,078
Accrued Alabama 6%                           4,181              97,551                 -                -           101,732
Beneficial interest                        202,587             548,049                 -         (711,108)           39,528
                                    --------------       -------------           -------        ---------      ------------
              Total                        230,924             718,068                 -         (795,654)          153,338
                                    --------------       -------------           -------        ---------      ------------
TOTAL SHORT-TERM CONVERTIBLE NOTES  $    1,418,924       $   2,155,568            $3,615       $ (795,654)     $  2,782,453
                                    ==============       =============           =======       ==========      ============

</TABLE>


                                       30
<PAGE>





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

<TABLE>
<CAPTION>

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


4.  PROPERTY AND EQUIPMENT

    Property and equipment as of December 31, consists of the following:
<TABLE>
<CAPTION>

                                                                2001               2000
                                                            ------------        -----------
    <S>                                                      <C>                  <C>

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

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

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


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

<TABLE>
<CAPTION>

                                                                         Capital           Operating
                                                                        ---------         -----------
<S>                                                                      <C>                <C>
     Year ended December 31, 2002                                        $  4,823           $ 78,522
                                                                         --------           --------
       Total minimum lease payments                                         4,823             78,522
                                                                                            ========
       Less amount representing interest                                      340
                                                                         --------
       Present value of net minimum capital lease
         payments - all current                                          $  4,483
</TABLE>

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



                                       31
<PAGE>


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

5.   INCOME TAXES

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

<TABLE>
<CAPTION>

                                                  Current          Deferred           Total
                                               -----------        ----------        ---------
<S>                                               <C>                <C>             <C>
     Year ended December 31, 2001
     Federal                                      $     -            $   -           $     -
     State                                          7,233                -             7,233
                                                  -------            -----           -------
     Total                                        $ 7,233            $   -           $ 7,233
                                                  =======            =====           =======

     Year ended December 31, 2000
     Federal                                      $     -            $   -           $     -
     State                                          1,600                -             1,600
                                                  -------            -----           -------
     Total                                        $ 1,600            $   -           $ 1,600
                                                  =======            =====           =======
</TABLE>

     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>
                                                                               2001                     2000
                                                                          --------------           -------------
<S>                                                                         <C>                     <C>
      Computed "expected" tax benefit                                       $(3,369,988)            $(2,663,514)
                                                                            -----------             -----------

      Permanent differences                                                     813,818                (482,404)
      Losses for which no benefit has been recognized                         2,975,831               3,575,489
      State tax benefit, net of federal income tax effect                      (412,428)               (427,971)
                                                                            -----------             -----------
      Total tax expense                                                     $     7,233             $     1,600
                                                                            ===========             ===========
</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>
                                                                                 2001                     2000
                                                                            --------------           -------------
<S>                                                                         <C>                     <C>
      Deferred tax assets:
           Net operating loss carryforwards                                  $ 13,270,887              $10,170,507
           Equity investment losses                                                99,865                   99,865
           Accrued expenses                                                        22,184                   15,997
           Research and development credits                                     1,049,622                  998,524
           Options and warrants                                                   829,352                  457,210
                                                                             ------------             ------------
                    Gross deferred tax assets                                  15,271,910               11,742,083
                    Valuation allowance                                       (15,271,910)             (11,742,083)
                                                                             ------------             ------------
           Net deferred tax assets                                           $          -             $          -
                                                                             ============             ============
</TABLE>



                                       32

<PAGE>




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

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

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

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

6.       STOCKHOLDERS' EQUITY

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

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

         These options expire 10 years from the date of grant and become vested
and exercisable 50% at the end of year one and 50% at the end of year two.
Options under the Plan are granted at the discretion of the Board of
Directors/Compensation Committee. All options granted through 2001 have been
granted at fair market value.
         The following is a status of the options under the Plan and outside of
the Plan and a summary of the changes in options outstanding during 2001 and
2000:

<TABLE>
<CAPTION>

                                                 NUMBER OF SHARES    WEIGHTED AVERAGE PRICE
                                               --------------------  -----------------------
<S>                                                 <C>                       <C>
         Outstanding January 1, 2000                2,873,800                 $2.71
         Options granted under the plan               240,000                  2.72
         Options exercised                           (315,000)                  .57
         Options canceled                            (782,500)                 5.75
                                               --------------                 -----

         Outstanding December 31, 2000              2,016,300                 $1.84
         Options granted under the plan               655,000                  2.20
         Options granted outside the plan           2,875,000                  3.77
         Options exercised                           (629,300)                  .70
         Options cancelled                           (292,500)                 2.68
                                               --------------                 -----
         Outstanding December 31, 2001              4,624,500                 $3.20
                                               ==============                 =====
</TABLE>

                                       33
<PAGE>


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

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

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

<TABLE>
<CAPTION>

                                                               2001             2000
                                                               ----             ----

<S>                                                           <C>               <C>
         Exercise price equals market price                   $1.53             $1.25
         Exercise price is less than market price             $2.42             $   -

</TABLE>

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

<TABLE>
<CAPTION>

                                                                                   OPTIONS
                               OPTIONS OUTSTANDING                                EXERCISABLE
         --------------------------------------------------------------   --------------------------
                                                Weighted
                                                 Average      Weighted                   Weighted
                                                Remaining      Average                    Average
              Range of       Outstanding at    Contractual    Exercise       Number      Exercise
          Exercise Prices   December 31, 2001  Life (Yrs.)      Price     Exercisable      Price
         --------------------------------------------------------------------------------------------

         <S>                     <C>              <C>        <C>           <C>            <C>
         $6.01 - 7.00                12,500         10.0      $    7.00            0       $   0.00
         $5.01 - 6.00               285,000          8.1      $    5.75      270,000       $   5.75
         $4.01 - 5.00             2,005,000          9.5      $    4.80       15,000       $   4.92
         $3.01 - 4.00                25,000          7.5      $    3.81       25,000       $   3.81
         $2.01 - 3.00               590,000          9.5      $    2.21       35,000       $   2.72
         $1.01 - 2.00             1,095,000          9.4      $    1.49      963,750       $   0.08
         $0.25 - 1.00               612,000          5.2      $    0.65      612,000       $   0.65
                            ------------------                            -------------
                                  4,624,500                                1,920,750
                            ==================                            =============
</TABLE>

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

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

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


                                       34
<PAGE>




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


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

    Pro forma net loss per share available to common
         shareholders - basic and diluted                            $      (0.59)          $      (0.59)
</TABLE>


         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>

                                                                                           2001            2000
                                                                                       ------------    -----------

<S>                                                                                      <C>             <C>
    Shares issuable under stock options                                                  4,624,500       2,016,300

    Shares issuable pursuant to warrants to purchase common shares                       2,588,512       3,868,512

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

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

7.       SEGMENT INFORMATION

         The Company's chief operating decision-maker is the Acting Chief
Executive Officer. The chief operating decision-maker reviews only financial
information prepared on a basis substantially consistent with the accompanying
financial statements of operations. Therefore, the Company has determined that
it operates in a single business segment. The Company's revenue for 2001 and
2000 consisted of sales of development kits. All assets are located in the
United States.

                                       35
<PAGE>



ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         On March 13, 2001, we dismissed KPMG LLP as our independent
accountants. The reports of KPMG on our financial statements for the last fiscal
year contained no adverse opinions or disclaimers of opinion, and were not
qualified or modified as to uncertainty, audit scope, or accounting principles.

         The decision to change accountants was approved by our Audit Committee.

         During the last fiscal year and through March 13, 2001, we had no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to KPMG's satisfaction, would have caused it to
make reference to the subject matter of the disagreement(s) in connection with
its report.

                  During the last fiscal year and through March 13, 2001, there
occurred no reportable events (as such term is defined in Item 304(a)(1)(v) of
Regulation S-K).

         We engaged BDO Seidman, LLP as our new independent accountants as of
March 13, 2001. We had not consulted with BDO Seidman prior to its engagement
regarding the application of accounting principles to a specified transaction,
either completed or proposed, the type of audit opinion that might be rendered
on our financial statements or any matter that was either the subject of a
disagreement or a reportable event (as such terms are defined in Item 304(a)(1)
of Regulation S-K).



                                       36
<PAGE>

         In accordance with section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Amendment No. 2 on Form 10-KSB/A to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
26th day of April, 2002.

                                  SPATIALIGHT, INC.

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




                                       43