<PAGE>

                                          
                      U.S. SECURITIES AND EXCHANGE COMMISSION
                                          
                               Washington, D.C. 20549
                                          
                                    FORM 10-QSB
                                          
(Mark One)

[X]  Quarterly Report under Section 13 or 15(d) of the Securities and Exchange
     Act of 1934

          For the quarterly period ended September 30, 1998

[ ]  Transition report under Section 13 or 15(d) of the Exchange Act

          For the transition period from _________________  to  ______________

                          Commission File Number 000-19828
                                                 ---------
                                          
                                          
                                 SPATIALIGHT, INC.
                                 ----------------
         (Exact name of small business issuer as specified in its charter)
                                          
                                          
                                          
            NEW YORK                                      16-1363082
            --------                                      ----------
 (State or other jurisdiction of              (IRS Employer Identification No.)
  Incorporation or organization)


                    8-C COMMERCIAL BLVD., NOVATO, CA 94949-6125
                    -------------------------------------------
                      (Address of principal executive offices)
                                          
                                          
                                   (415) 883-1693
                                   --------------
                            (Issuer's telephone number)
                                          
                                          
     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 [  ]     No [X]


                       APPLICABLE ONLY TO CORPORATE ISSUERS:

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 11,282,501 shares of common
stock as of October 23, 1998.

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


<PAGE>

                                          
                                          
                          SPATIALIGHT, INC. AND SUBSIDIARIES
                                          
                          Quarterly Report on Form 10-QSB
                      For the Quarter Ended September 30, 1998
                                          

Table of Contents

PART I              FINANCIAL INFORMATION

     Item 1.        Condensed Consolidated Financial Statements (unaudited)

                    Consolidated Balance Sheets dated
                    September 30, 1998 and December 31, 1997 . . . . . . . .3

                    Consolidated Statements of Operations
                    for the Three and Nine Months Ended
                    September 30, 1998 and 1997. . . . . . . . . . . . . . .4

                    Consolidated Statements of Cash Flows
                    for the Nine Months Ended September 30, 1998 & 1997. . .5

                    Notes to Condensed Consolidated Financial Statements . .6

     Item 2.        Management's Discussion and Analysis
                    of Financial Condition and Results of Operations . . . .8

PART II             OTHER INFORMATION

     Item 2.        Changes in Securities. . . . . . . . . . . . . . . . . 13

     Item 6.        (a) Exhibits and Reports on Form 8-K . . . . . . . . . 13



<PAGE>

PART I.   FINANCIAL INFORMATION
Item 1.   Condensed Consolidated Financial Statements (Unaudited)

                          SPATIALIGHT, INC. AND SUBSIDIARIES
                        Condensed Consolidated Balance Sheets
                                     (Unaudited)

<TABLE>
<CAPTION>

                                                                         September 30,                  December 31,
                                                                              1998                          1997
                                                                         -------------                  ------------
<S>                                                                      <C>                            <C>
ASSETS
Current assets
   Cash and cash equivalents                                               $155,079                      $415,624 
   Accounts receivable                                                            0                         3,383 
   Inventories                                                               15,000                        15,000 
   Prepaid expenses and other                                                20,250                        27,253 
                                                                       ------------                   -----------
                                    Total current assets                    190,329                       461,260 

Property and equipment, net                                                 197,448                       217,984 
Other assets                                                                 22,832                        27,701 
                                                                       ------------                   -----------
                                            Total assets                   $410,609                      $706,945 
                                                                       ------------                   -----------
                                                                       ------------                   -----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
   Accounts payable                                                        $598,791                      $796,660 
   Short term notes payable                                               2,286,786                       932,479 
   Accrued expenses and other current liabilities                            29,735                       127,835 
                                                                       ------------                   -----------
                               Total current liabilities                  2,915,312                     1,856,974 

Non-current liabilities
   Long term capital lease obligations                                       32,905                        53,480 
                                                                       ------------                   -----------
                                       Total liabilities                  2,948,217                     1,910,454 

Commitments and contingencies

Stockholders' equity
   Common stock, $.01 par value:
      20,000,000 shares authorized; issued and
      outstanding 11,282,501 at September 30, 1998
      and 9,201,111 at December 31, 1997                                    112,824                        92,011 
Additional paid-in capital                                               10,385,001                     9,451,835 
Accumulated deficit                                                     (13,035,433)                  (10,747,355)
                                                                       ------------                   -----------
                              Total stockholders' equity                 (2,537,608)                   (1,203,509)

Total liabilities and stockholders' equity                                 $410,609                      $706,945 
                                                                       ------------                   -----------
                                                                       ------------                   -----------
</TABLE>

See accompanying notes to condensed consolidated financial statements

                                       3

<PAGE>


                          SPATIALIGHT, INC. AND SUBSIDIARIES
                   Condensed Consolidated Statements of Operations
                                     (Unaudited)

<TABLE>
<CAPTION>

                                                                  Three Months Ended                      Nine Months Ended
                                                                     September 30,                          September 30,
                                                                1998               1997                1998                1997
                                                           -------------       ------------        ------------        ----------

<S>                                                         <C>                <C>                 <C>                  <C>
Revenues
   Contract revenues                                                   $0           $325,000                  $0           $325,000
   Sales                                                                0                  0                   0                  0
                                                            -------------       ------------        ------------        -----------

          Total revenues                                                0            325,000                   0            325,000

Cost of sales                                                           0                  0                   0                  0
                                                            -------------       ------------        ------------        -----------
          Gross profit                                                  0            325,000                   0            325,000

   Selling, general and administrative expenses                   214,915            257,619           1,089,328          1,209,116
   Research and development expenses                              261,094            364,525           1,105,184            910,875
                                                            -------------       ------------        ------------        -----------
                            Total operating expenses              476,009            622,144           2,194,512          2,119,991
          Operating loss                                         (476,009)          (297,144)         (2,194,512)        (1,794,991)

Other income (expenses)

   Interest income                                                    352                121               6,674             12,505
   Other income (expense)                                         (42,227)            (5,883)            (98,640)             2,920
                                                            -------------       ------------        ------------        -----------
          Total other income (expenses)                           (41,875)            (5,762)            (91,966)            15,425
                                                            -------------       ------------        ------------        -----------

   Loss from operations before income taxes                      (517,884)          (302,906)         (2,286,478)        (1,779,566)

Income taxes                                                            0               (463)              1,600              2,860 
                                                            -------------       ------------        ------------        -----------

          Net loss                                               (517,884)          (302,443)         (2,288,078)        (1,782,426)
                                                            -------------       ------------        ------------        -----------
                                                            -------------       ------------        ------------        -----------

Net loss per share                                                  (0.05)             (0.04)              (0.21)             (0.21)
                                                            -------------       ------------        ------------        -----------
                                                            -------------       ------------        ------------        -----------

Shares used in computing net loss per share                    11,282,501          8,547,191          10,686,900          8,539,310
                                                            -------------       ------------        ------------        -----------
                                                            -------------       ------------        ------------        -----------

</TABLE>

See accompanying notes to condensed consolidated financial statements

                                       4

<PAGE>

                          SPATIALIGHT, INC. AND SUBSIDIARIES
                    Condensed Consolidated Statements of Cash Flow
                                     (Unaudited)

<TABLE>
<CAPTION>

                                                                                               Nine Months Ended
                                                                                                  September 30,
                                                                                    1998                            1997
                                                                                ------------                     -----------
<S>                                                                             <C>                            <C>
Cash flows from operating activities:

Net loss                                                                        ($2,288,078)                    ($1,782,426)
Adjustments to reconcile net loss to net cash 
   used by operating activities:

   Depreciation and amortization                                                     59,972                          46,697  
   Non cash stock issuance costs                                                    183,815                               0
   Non cash litigation settlement                                                         0                         300,000
   Non cash compensation                                                                  0                          21,251

   Changes in assets and liabilities: 
      Accounts receivable                                                             3,383                         (61,979)
      Inventories                                                                         0                          60,401
      Prepaid expenses and other current assets                                       7,003                        (105,753)
      Other assets                                                                    4,869                         (10,063)
      Accounts payable                                                              (73,019)                        397,198
      Current portion capital lease obligation                                         (110)                              0
      Accrued expenses and other current liabilities                                 (4,000)                         (8,218)
                                                                             ---------------                ---------------
                           Net cash used by operating activities                 (2,106,165)                     (1,142,892)

Cash flows from investing activities:
   Capital expenditures                                                             (39,436)                       (128,323)
                                                                             ---------------                ---------------
                           Net cash used by investing activities                    (39,436)                       (128,323)

Cash flows from financing activities:

   Long term capital lease obligation                                               (19,251)                              0
   Draw on bank line of credit                                                            0                         250,000
   Paydown of notes payable                                                        (250,000)                              0
   Proceeds from short-term notes payable                                         2,154,307                          50,000
   Common stock issuance costs                                                            0                          (9,402)
                                                                             ---------------                ---------------
                       Net cash provided by financing activities                  1,885,056                         290,598

Net decrease cash equivalents                                                      (260,545)                       (980,617)

Cash at beginning of period                                                         415,624                       1,324,398
                                                                             ---------------                ---------------
Cash at end of period                                                              $155,079                        $343,781
                                                                             ---------------                ---------------
                                                                             ---------------                ---------------
</TABLE>

See accompanying notes to condensed consolidated financial statements

                                       5

<PAGE>

SPATIALIGHT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
                                          
(1)  Basis of Presentation
     
     The accompanying unaudited condensed consolidated financial statements have
     been prepared in accordance with the instructions to Form 10-QSB but do not
     include all information and footnotes necessary for a fair presentation of
     financial condition, results of operations and cash flows in conformity
     with generally accepted accounting principles.  In the opinion of
     management of SpatiaLight, Inc. ("SpatiaLight" or "the Company"), the
     interim condensed consolidated financial statements included herewith
     contain all adjustments (consisting of normal recurring accruals and
     adjustments) necessary for a fair presentation of the Company's financial
     condition as of September 30, 1998 and the results of its operations for
     the three months and nine months ended September 30, 1998 and 1997.  The
     unaudited interim condensed consolidated financial statements should be
     read in conjunction with the Company's Annual Report on Form 10-KSB/A,
     which contains the unaudited financial statements and notes thereto,
     together with Management's Discussion and Analysis, for the years ended
     December 31, 1997 and 1996.
     
(2)  Going Concern Uncertainty

     The Company's operations are severely constrained by its lack of financing
     and inadequate working capital.  The Company continues to experience
     negative cash flows and net operating losses.  The Company's operations in
     recent months have been funded by a series of loans, the majority of which
     are secured by substantially all the assets of the Company.  Some of these
     loans have been provided by a company affiliated with a Director of the
     Company.  These loan amounts have been adequate for the Company to meet
     payroll and certain other imperative obligations, but various accounts
     payable and other obligations are past due.  The Company continues its
     efforts to locate sources of financing.  There can be no assurance that
     additional loans, or any other financing, will be available to the Company.
     FOR THIS REASON, THERE IS SIGNIFICANT UNCERTAINTY WHETHER THE COMPANY CAN
     CONTINUE AS A GOING CONCERN.
     
     The accompanying unaudited condensed consolidated financial statements have
     been prepared assuming that the Company will continue as a going concern.
     This contemplates the realization of assets and the satisfaction of
     liabilities in the normal course of business.  The Company incurred
     significant operating losses in each of the last five fiscal years and
     incurred a net loss of $2,288,078 in the nine months of 1998. 
     Additionally, as of September 30, 1998 the Company's accumulated deficit
     totaled $13,035,433.  The Company has generated limited revenues to date
     and the development, commercialization and marketing of the Company's
     products will require substantial expenditures in the foreseeable future.
     The successful completion of the Company's development program and
     ultimately, the attainment of profitable operations, is dependent upon
     future events.  These events include obtaining adequate financing to
     fulfill its development activities, successful commercialization and
     distribution of its displays, and achieving a level of sales adequate to
     support the Company's cost structure.  The matters discussed above, among
     others, indicate that it is likely that the Company will be unable to
     continue as a going concern after a reasonable period of time.


                                       6

<PAGE>

     
     The condensed consolidated financial statements do not include any
     adjustments relating to the recoverability and classification of recorded
     asset amounts or the amounts and classification of liabilities that might
     be necessary should the Company be unable to continue as a going concern.
     
     Effective July 1, 1998, the Company's Chairman and Chief Executive Officer
     announced his retirement from the Company and resignation from its Board of
     Directors.  In addition, effective June 24, 1998, L. John Loomis, the
     Company's President and Chief Operating Officer, is no longer employed by
     the Company and, effective July 31, 1998, resigned from the Board of
     Directors.  In response to this change in management, the Company has
     formed an Executive Committee, consisting of three Board members, to assist
     in the day to day operation of the Company. (See Dependence on Key
     Personnel)
     
     In an effort to improve operating performance, the Company has been and
     will be implementing certain programs and strategies in 1998 and 1999. 
     These strategies include:
     
     -    Raising of additional capital
     -    Construction of engineering models to demonstrate proof of technology
          for OEM's
     -    Outsourcing of all manufacturing activities, which will be monitored
          by the Company's staff
     -    Developing strategic arrangements with potential customers to share
          development costs and/or licensing of the Company's technology.

     The Company's continuation as a going concern is dependent upon its ability
     to generate sufficient cash flow to meet its obligations on a timely basis,
     to obtain additional financing, and ultimately to attain successful
     operations.  Management is continuing its efforts to obtain additional
     funds so that the Company can meet its obligations and sustain its
     operations.
     
(3)  Earnings per share

     In February 1997, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards No. 128, "Earnings per share" (SFAS 128).
     The Company was required to adopt SFAS 128 in the fourth quarter of fiscal
     1997 and has not restated earnings per share (EPS) data for prior periods
     to conform with SFAS 128.  The Company will restate earnings per share for
     1997 in 1998 audited financials.
     
     SFAS 128 replaces current EPS reporting requirements and requires a dual
     presentation of basic and diluted EPS.  Basic EPS excludes dilution and is
     computed by dividing net income (loss) by the weighted average of common
     shares outstanding for the period.  Diluted EPS reflects the potential
     dilution that could occur if securities or other contracts to issue common
     stock were exercised or converted into common stock.
     
     Because the Company has experienced continuous net losses, basic EPS and
     diluted EPS are not significantly different than primary and fully diluted
     EPS currently reported for the periods.

                                       7

<PAGE>

(4)  Short term notes payable

     Short term notes payable at September 30, 1998 consist of the following:
     
Short term notes of $164,389 including accrued interest. The borrowings were
made to provide working capital, and accrue interest at a 10% per annum. Notes
totaling  $110,112 were due on September 1, 1998. The Company is in default on
the notes due in September 1998 and is negotiating to extend the dates. A note
in the amount of $54,278 has been extended indefinitely in exchange for warrants
to buy shares of the Company's common stock.

Convertible secured notes of $2,122,397 including accrued interest. The notes
accrue interest at 6% per annum and are convertible at $.50 and $.75 per share.
The notes mature December 31, 1998 or December 31, 1999, if the Company
exercises its option to extend the maturity date. The notes are secured by
substantially all the assets of the Company.


Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations

     The statements in "Management's Discussion and Analysis of Financial
     Condition and Results of Operations" that relate to future plans, events
     or performance are forward-looking statements that involve risks and
     uncertainties.  Action results, events or performance may differ materially
     from those anticipated in these forward-looking statements as result of a
     variety of factors.  Readers are cautioned not to place undue reliance on
     these forward-looking statements, which speak only as of the date hereof.
     The Company undertakes no obligation to publicly release the result of any
     revisions to these forward looking statements that may be needed to reflect
     events or circumstances after the date hereof or to reflect the occurrence
     of unanticipated events.

GENERAL

     The Company's operations are severely constrained by its lack of financing
     and inadequate working capital. The Company continues to experience
     negative cash flows and net operating losses. The Company's operations in
     recent months have been funded by a series of loans, the majority of which
     are secured by substantially all the assets of the Company. Some of these
     loans have been provided by a company affiliated with a Director of the
     Company. These loan amounts have been adequate for the Company to meet
     payroll and certain other imperative obligations, but various accounts
     payable and other obligations are past due. The Company is in default
     under certain of the loans made to finance its operations, and is
     negotiating to extend the due dates. The Company continues its efforts to
     locate sources of financing. There can be no assurance that additional
     loans or any other financing will be available to the Company. FOR THIS
     REASON, THERE IS SIGNIFICANT UNCERTAINTY WHETHER THE COMPANY CAN CONTINUE
     AS A GOING CONCERN. See Note 2 of Notes to Condensed Consolidated
     Financial Statements.

OVERVIEW

     SpatiaLight is developing and commercializing a miniature, proprietary,
     high-resolution active matrix liquid crystal display ("AMLCD") which is
     also known as a Spatial Light Modulator ("SLM"). The Company's SLM is
     designed to be the essential component in high-resolution, projected
     display systems which may be produced at lower costs than current or
     anticipated 


                                       8

<PAGE>

     projection systems. The Company has produced prototype SLM's in small
     volume, which have been made available to potential customers. Potential
     applications of this technology include projection computer monitors
     and televisions; head mounted displays, optical computing, holographic
     data storage and other display applications. The Company has made
     only limited sales of prototype units to date, and there can be no
     assurance that the Company will ever be able to commercialize its
     technology.

RESULTS OF OPERATIONS

     SpatiaLight reported no revenue for the nine months ended September 30,
     1998. The Company is continuing to develop its technological capabilities
     and believes that significant sales of its Spatial Light Modulator product
     will be required in order for the Company to continue to meet its financial
     obligations and operating plans. Any lack of significant sales would have
     a material adverse affect upon the financial condition of the Company, and
     could cause the Company to cease operations.

     Selling, general and administrative expenses decreased by $119,788 or 10%
     for the nine months ended September 30, 1998 as compared to the nine months
     ended September 30, 1997. The decrease was due to a reduction in spending
     as a result of limited cash flow.

     Research and development expenses increased by $194,309 or 21% for the nine
     months ended September 30, 1998 as compared to the nine months ended
     September 30, 1997, and by $103,431 for the three months ended September
     30, 1998 compared to the three months ended September 30, 1997. Research
     and development expenses represent costs incurred, primarily personnel
     related, for the design and development of new products. The Company
     believes that the development of new products will be required to allow it
     to compete effectively and to achieve future revenues. The Company
     currently has 11 full time employees whose duties include research and
     development. The Company intends to continue its development programs,
     focusing on increasing the display size, capabilities and final
     manufacturing processes. The Company believes that such developments will
     be required to exploit future markets for large screen projection monitors,
     high definition televisions and head-mounted displays.

NET LOSS

     As a result of the above factors the Company recorded a net loss of
     $2,288,078 or $.21 per share for the nine months ended September 30, 1998
     and a net loss of $517,884 or $.05 per share for three months ended
     September 30, 1998. While the Company is taking steps to improve its
     performance, there can be no assurance that the attempts by management at
     product development will be successful. Any delay in effecting operational
     performance improvement by the Company or in the further development of the
     SLM by the Company may have a material adverse impact on the financial
     condition of the Company. 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

     Net cash used by operating activities totaled $2,106,165 for the nine
     months ended September 30, 1998 as a result of selling, general, and
     administrative expenses and research and development expenses incurred
     during the period.


                                       9

<PAGE>

     As of September 30, 1998 the Company had $155,079 in cash and cash
     equivalents. Net working capital was ($2,724,983).

     The Company is experiencing negative cash flow from operations resulting in
     the need to fund ongoing operations from financing activities. The future
     existence and profitability of the Company is dependent upon its ability to
     obtain additional funds to finance and expand operations in an effort to
     achieve profitability from operations. No assurance can be given that the
     Company's business will ultimately generate sufficient revenue to fund the
     Company's operations on a continuing basis. The matters discussed above,
     among others, indicate that the Company may be unable to continue as a
     going concern for a reasonable period of time.

BUSINESS RISKS

     Most of the Company's revenue to date has been derived from research and
     development contracts and limited sales of its SLM devices. Although the
     Company has demonstrated SLM devices based on it core technology, the
     Company has not yet produced any prototype SLM products with quality and
     resolution sufficient to satisfy commercial end-use applications. Further
     development and testing will be necessary before the Company's proposed
     displays would be available for commercial end-use applications. Delays in
     development may result in the Company's introduction of its displays later
     than anticipated, which may have an adverse effect on both the Company's
     financial and competitive position. Moreover, there can be no assurance
     that the Company will ever be successful in developing or manufacturing
     commercially viable SLM devices or any of its displays at commercially
     acceptable cost levels or on a timely basis.

     LACK OF SALES, MARKETING AND DISTRIBUTION EXPERIENCE. The Company
     currently employs no full time sales or marketing specialists. The Company
     intends to form alliances with corporate partners for the marketing and
     distribution of certain of its anticipated displays. There can be no
     assurance that the Company will be successful in forming and maintaining
     such alliances or that the Company's partners will devote adequate
     resources to successfully market and distribute these anticipated products.
     There can be no assurance that the Company will be able to attract and
     retain qualified marketing and sales personnel, that the Company will be
     able to enter into satisfactory agreements with marketing partners or that
     the Company or its marketing partners will be successful in gaining market
     acceptance for its anticipated products.

     NO ASSURANCES OF SUCCESSFUL MANUFACTURING. The Company has no experience
     manufacturing SLM devices. The Company's facility is designed principally
     for research and development, small-scale assembly and inventory storage,
     and the Company currently anticipates engaging outside manufacturers to
     produce its products utilizing its SLM devices in volume. The Company is
     negotiating with manufacturers to establish full scale integrated
     manufacturing capacity for its SLM devices and there can be no assurance
     that any of them will do so. In the event any such manufacturer
     establishes a volume full scale integrated manufacturing capability, the
     Company could become dependent on such manufacturer for the manufacture of
     SLM devices. The termination or cancellation of the Company's agreement
     with the manufacturer could adversely affect the Company's ability to sell
     its displays. In such event, the Company could be required to establish an
     alternative manufacturing relationship or establish its own manufacturing
     capability. There can be no assurance that the Company would be able to
     establish such a relationship on acceptable terms or develop its own
     manufacturing capability; in any event the time required to establish such
     a substitute relationship or capability could substantially delay the
     commercialization of the Company's 


                                       10


<PAGE>


     displays, which, in turn, could have substantial adverse impact on the 
     Company's results of operations and financial condition.

     PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's ability to
     compete effectively with other companies will depend, in part, on the
     ability of the Company to maintain the proprietary nature of its
     technologies. Although the Company has been awarded patents in the United
     States, there can be no assurance as the degree of protection offered by
     these patents or as to the likelihood that pending patents will be issued.
     Furthermore, the Company has not yet obtained any foreign patents. There
     can be no assurance that competitors, in both the United States and foreign
     countries, many of which have substantially greater resources and have made
     substantial investments in competing technologies, will not seek to apply
     for and obtain patents that will prevent, limit or interfere with the
     Company's ability to make and sell its products or intentionally infringe
     the Company's patents. The defense and prosecution of patent suits is both
     costly and time consuming, even if the outcome is favorable to the Company.
     This is particularly true in foreign countries. In addition, there is an
     inherent unpredictability regarding obtaining and enforcing patents in
     foreign countries. An adverse outcome in the defense of a patent suit
     could subject the Company to significant liabilities to third parties,
     require disputed rights to be licensed from third parties, or require the
     Company to cease selling its products. The Company also relies on
     proprietary technology and there can be no assurance that others may not
     independently develop the same or similar technology or otherwise obtain
     access to the Company's proprietary technology. To protect its rights in
     these areas, the Company requires all employees and technology consultants,
     advisors and collaborators to enter into confidentiality agreements. There
     can be no assurance, however, that these agreements will provide meaningful
     protection for the Company's trade secrets, know how or other proprietary
     information in the event of any unauthorized use, misappropriation or
     disclosure of such trade secrets, know how or other proprietary
     information. To date, the Company has no experience in enforcing its
     confidentiality agreements.

     RAPID TECHNOLOGICAL CHANGE; COMPETITION. The electronic imaging display
     industry has undergone rapid and significant technological change. The
     Company expects the technology to continue to develop rapidly, and the
     Company's success will depend significantly on its ability to maintain a
     competitive position. Rapid technological development may result in actual
     and proposed products or processes becoming obsolete before the Company
     recoups a signification portion of related research development,
     acquisition and commercialization costs. If the Company is successful in
     the development of a commercially viable SLM device, the Company's ability
     to compete will depend in part upon the consistency of display quality and
     delivery, as well as pricing, technical capability and servicing, in
     addition to factors within and outside its control, including the success
     and timing of product introductions by the Company and its partners,
     product performance and price, product distribution and customer support.
     There can be no assurance that the Company will succeed in developing
     technologies and products that are equally or more effective than any which
     are being developed by the Company's competitors. There can be no
     assurance that competitive processes will not render the Company's
     technology, obsolete and non competitive. In addition, numerous
     competitors have substantially greater financial, technical and other
     resources than the Company. The Company may face an aggressive, well
     financed competitive campaign that may include misappropriation of the
     Company's intellectual property or predatory pricing.

     DEPENDENCE ON KEY PERSONNEL. Effective July 1, 1998, the Company's
     Chairman and Chief Executive Officer William Hollis announced his
     retirement from the Company and resignation from its Board of 
     Directors. In addition, effective June 24, 1998, L. John Loomis, 


                                       11

<PAGE>


     the Company's President and Chief Operating Officer, is no longer employed
     by the Company and, effective July 31, 1998, Mr. Loomis resigned from
     the Board of Directors. 

     The Company has formed an Executive Committee, consisting of three Board
     members, Robert A. Olins, Lawrence J. Matteson, and Michael H. Burney to
     assist in the day to day operation of the Company. The Executive Committee
     immediately appointed Michael H. Burney as the Interim Chief Executive
     Officer, Treasurer and Secretary. The Executive Committee also appointed
     Fred R. Hammett as the Company's Interim President.

     The Company is utilizing the services of outside consultants in key
     technologic areas. The Company's continued success will depend on its
     ability to attract and retain highly qualified scientific, marketing,
     manufacturing and other key management personnel. The Company faces
     competition for such personnel and there can be no assurance that the
     Company will be able to attract or retain such personnel.

     DEPENDENCE ON THIRD PARTIES TO DEVELOP PRODUCTS INCORPORATING SLM. 
     The Company intends to develop its SLM devices to be a component for
     incorporation into finished products, which will be developed, manufactured
     and marketed by third parties. The Company does not plan, nor does it have
     the financial resources, to develop or market any such end products itself.
     Therefore, the Company will be completely dependent upon independent third
     parties for the development, manufacturing and marketing of such products.
     No such products exist today, and the Company does not have any commitments
     from any third party for such development, manufacturing or marketing.
     There can be no assurance that any third party will develop or market a
     product incorporating the Company's SLM's.
     
     YEAR 2000 COMPLIANCE. As is true for most companies, the Year 2000 computer
     issue creates a risk for SpatiaLight. If systems do not correctly recognize
     date information when the year changes to 2000, there could be an adverse
     impact on the Company's operations. The risk for SpatiaLight exists in two
     areas: systems used by the Company to run its business and systems used by
     the Company's suppliers. The Company is currently evaluating its exposure
     in both of these areas. The Company is not aware of any potential problems
     that could exist with its potential products.

     SpatiaLight in the process of conducting a comprehensive inventory and
     evaluation of its systems, equipment and facilities. SpatiaLight has a
     project scheduled to replace or upgrade systems and equipment that are
     known to be Year 2000 non-compliant. The Company has not identified
     alternative remediation plans in the unlikely case that upgrade or
     replacement is not feasible. The Company will consider the need for such
     remediation plans as it continues to assess the Year 2000 risk. For the
     Year 2000 non-compliance issues identified to date, the cost of upgrade or
     remediation is not expected to be material to the Company's operating
     results. The Company expects to conclude its estimates of cost by the end
     of the calendar year. If implementation of replacement systems is delayed,
     or if significant new non-compliance issues are identified, the Company's
     results of operations or financial condition could be materially adversely
     affected.

     SpatiaLight is also in the process of contacting its critical suppliers to
     determine that the suppliers' operations and the products and services they
     provide are Year 2000 compliant. Where practicable, SpatiaLight will
     attempt to mitigate its risks with respect to the failure of suppliers
     to be Year 2000 ready. In the event that suppliers are not Year 2000
     compliant, the Company will seek alternative sources of supplies. 
     However, such failures remain a possibility

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     and could have an adverse impact on the Company's results of 
     operations or financial condition.

     The Company believes its potential products are Year 2000 compliant as
     none contain firmware or software with date information.
     

PART II.  OTHER INFORMATION

ITEM 2.   During the third quarter of 1998 the Company issued warrants to 
     purchase 8000 shares of the Company's common stock at an exercise 
     price of $.832. These warrants expire November 26, 2000 and were issued
     in consideration of the delay of enforcement of default conditions for
     certain loans to the Company. In issuing these securities the Company
     relied upon the exemption from the registration requirements of
     the Securities Act of 1933, as amended, provided by Section 4(2) thereof.
     
     During the third quarter of 1998, the Company issued warrants (Series A),
     to purchase 120,000 shares of the Company's common stock at an exercise
     price of $1.50 per share. These warrants expire August 31, 2000 and were
     issued in consideration for placement of convertible secured notes. Upon
     the exercise of the Series A warrants, an additional 120,000 warrants
     (Series B), exercisable at $2.00 per share, will be issued and will expire
     August 31, 2001. Upon the exercise of the Series B warrants, an additional
     120,000 warrants (Series C) will be issued at an exercise price of $2.50
     per share expiring August 31, 2002. In issuing these securities the Company
     relied upon the exemption from the registration requirements of the
     Securities Act of 1933, as amended, provided by Section 4(2) thereof.
     
     During the third quarter of 1998, the Company issued convertible notes in
     the aggregate principal amount of $75,000 to a company affiliated with a
     Director of the Company.  These notes are convertible into Common Shares at
     a conversion price of $0.50 per Common Share. In issuing these securities
     the Company relied upon the exemption from the registration requirements of
     the Securities Act of 1933, as amended, provided by Section 4(2) thereof.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits:
          27 Financial Data Schedule

     (b)  Reports on Form 8-K:

     No reports on Form 8-K were filed during the nine months ended September
     30, 1998.







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                                     SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                          Date:____________________________


                                          SpatiaLight, Inc.

                                          By:______________________________
                                                Michael H. Burney
                                                Chief Executive Officer 
                                                (Principal Executive, Financial
                                                And Accounting Officer)











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