881468--3/16/2006--SPATIALIGHT

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We are confronted by serious liquidity concerns. Certain of the holders of the Senior Secured Convertible Notes issued by us in November 2004 have made claims of default. We are currently manufacturing and shipping our LCoS Sets in limited commercial quantities, but difficulties in manufacturing our products in larger quantities will make it difficult to meet customer demands and our operating results could be significantly harmed by such difficulties. Although we have commenced producing products in our manufacturing facility in South Korea, which serves as our principal facility for manufacturing our microdisplay products, we may encounter difficulties in conducting our manufacturing operations and difficulties in maintaining our quality controls over the manufacturing and production processes, any of which would be likely to cause significant harm to our business. We are largely dependent on one customer, LG Electronics, for our future revenues, and failure to expand our customer base or receive additional orders from our existing customer base will make us vulnerable to substantial loss of potential revenues. We are the subject of an investigation by the staff of the SEC regarding the circumstances surrounding our filing of certain consents of the independent registered accounting firm BDO Seidman, LLP without requisite authorization. We may be subject to lawsuits relating to our use of a registration statement that did not contain an authorized consent of BDO Seidman LLP. The obligations arising from our Senior Secured Convertible Notes restrict our future financing alternatives and may result in financial difficulties for us in the future. We have a history of losses and may incur losses in the future and therefore cannot assure you that we will achieve profitability. We are subject to lengthy development periods and product acceptance cycles, which may significantly harm our business. We incur substantial operational and research and development costs in connection with products and technologies that may not be successful. Geopolitical conditions or potential military conflicts between allies, the United States and South Korea, and North Korea may negatively impact our business. If the high definition television market does not continue to develop and if other potential markets for our products do not materialize, then our business will likely be significantly harmed. If our products do not become widely accepted by our customers or the end-users, our business could be significantly harmed. We cannot assure you that we will obtain additional purchase orders from our current or prospective customers, or, if we do, that such orders will generate significant revenues. If our customers' products are not successful, our business would be materially harmed. The high definition television industry is highly competitive, which may result in lost sales or lower gross margins. Fluctuations in the exchange rate of the United States dollar and foreign currencies could have a material adverse effect on our financial performance and profitability. Our operating results are subject to significant fluctuations. The market price of our common shares is highly volatile. By further increasing the number of our common shares that may be sold into the market, any future offerings of our common shares, or securities convertible into or exercisable for our common shares, could cause the market price of our common shares to decrease significantly, even if our business operations are performing well. Our common shares may not be liquid. If we lose our key personnel or are unable to attract and retain additional personnel, our ability to compete could be harmed. Our future success depends on our ability to protect our proprietary technology and our registered intellectual property. The material weaknesses identified by our management and our independent registered public accounting firm with respect to our material internal control systems, processes and procedures may have a materially negative impact on our business. Political, economic and regulatory risks associated with international operations may limit our ability to do business abroad. We do not pay cash dividends.

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881468--3/16/2006--SPATIALIGHT_INC