<PAGE>

                                  UNITED STATES
                       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 June 30, 1999

[ ]  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)


                9 COMMERCIAL BLVD., SUITE 200, NOVATO, CA 94949
                   (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 [X]     No [ ]


                       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: 12,840,145 shares of
common stock as of August 11, 1999.

     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 June 30, 1999


                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                     <C>
PART I         FINANCIAL INFORMATION

     Item 1.   Condensed Consolidated Financial Statements (unaudited)

               Condensed Consolidated Balance Sheets dated
               June 30, 1999 and December 31, 1998.......................................3

               Condensed Consolidated Statements of Operations
               for the Three and Six Months Ended
               June 30, 1999 and 1998....................................................4

               Condensed Consolidated Statements of Cash Flows
               for the Six Months Ended June 30, 1999 and 1998...........................5

               Notes to Condensed Consolidated Financial Statements......................6

     Item 2.   Management's Discussion and Analysis
               of Financial Condition and Results of Operations..........................9


PART II        OTHER INFORMATION

     Item 1.   Legal Proceedings........................................................14

     Item 2.   Changes in Securities....................................................14

     Item 4.   Submission of Matters to a Vote of Security Holders......................14

     Item 6.   Exhibits and Reports on Form 8-K.........................................15
</TABLE>


<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                  June 30,          December 31,
                                                                    1999                1998
                                                               ---------------------------------
<S>                                                            <C>                  <C>
ASSETS

Current assets
   Cash and cash equivalents                                   $    334,696             470,086
   Accounts receivable                                               18,000              30,492
   Inventories                                                       45,725              18,296
   Other                                                             15,346                   0
                                                               -------------        ------------
      Total current assets                                          413,767             518,874

Property and equipment, net                                         343,724             221,498
Other                                                                36,730             187,204
                                                               -------------        ------------

      Total assets                                             $    794,221             927,576
                                                               -------------        ------------
                                                               -------------        ------------

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
   Accounts payable                                            $    543,218             466,031
   Accrued expenses and other current liabilities                    97,987              96,693
   Convertible Secured notes payable                              3,365,257           3,337,508
                                                               -------------        ------------
      Total current liabilities                                   4,006,462           3,900,232

Capital lease obligations, net of current portion                    11,844              25,420
                                                               -------------        ------------
      Total liabilities                                           4,018,306           3,925,652

Commitments and contingencies

Stockholders' deficit Common stock, $.01 par value:
      40,000,000 shares authorized; issued and
      outstanding 12,834,572 at June 30, 1999
      and 11,413,501 at December 31, 1998                           128,346             114,135
Additional paid-in capital                                       12,878,276          10,854,938
Accumulated deficit                                             (16,230,707)        (13,967,149)
                                                               -------------        ------------
      Total stockholders' deficit                                (3,224,085)         (2,998,076)

Total liabilities and stockholders' deficit                    $    794,221             927,576
                                                               -------------        ------------
                                                               -------------        ------------
</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                    Six Months Ended
                                                                 June 30,                             June 30,
                                                          1999              1998               1999               1998
                                                      ------------       -----------        -----------       -----------
<S>                                                   <C>                <C>                <C>               <C>
Net revenues                                          $    10,000                 0             41,500                 0

Cost of sales                                               1,368                 0              5,473                 0
                                                      ------------       -----------        -----------       -----------
          Gross Profit                                      8,632                 0             36,027                 0

   Selling, general and administrative expenses           884,454           411,163          1,422,731           874,412
   Research and development expenses                      413,316           338,002            773,385           844,090
                                                      ------------       -----------        -----------       -----------
          Total operating expenses                      1,297,770           749,165          2,196,116         1,718,502

          Operating loss                               (1,289,138)         (749,165)        (2,160,089)       (1,718,502)

Other income (expenses)

   Interest income                                          4,698             2,640              7,989             6,322
   Interest and other expense                             (59,960)          (32,321)          (109,858)          (55,349)
                                                      ------------       -----------        -----------       -----------
          Total other income (expenses)                   (55,262)          (29,681)          (101,869)          (49,027)
                                                      ------------       -----------        -----------       -----------

   Loss from operations before income taxes            (1,344,400)         (778,846)        (2,261,958)       (1,767,529)

Income taxes                                                1,600             2,665              1,600             2,665
                                                      ------------       -----------        -----------       -----------

          Net loss                                    $(1,346,000)         (781,511)        (2,263,558)       (1,770,194)
                                                      ------------       -----------        -----------       -----------
                                                      ------------       -----------        -----------       -----------

Basic and diluted loss per share applicable to
common shareholders                                   $     (0.11)            (0.07)             (0.19)            (0.17)
                                                      ------------       -----------        -----------       -----------
                                                      ------------       -----------        -----------       -----------
Weighted average shares used in computing
 net loss per share                                    11,991,284        11,085,143         11,739,692        10,389,065
                                                      ------------       -----------        -----------       -----------
                                                      ------------       -----------        -----------       -----------
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                      4
<PAGE>

                      SPATIALIGHT, INC. AND SUBSIDIARIES
          Condensed Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
                                                                                         Six Months Ended
                                                                                             June 30,
                                                                                 1999                       1998
                                                                             ---------------------------------------
<S>                                                                          <C>                         <C>
Cash flows from operating activities:
Net loss                                                                     $(2,263,558)                (1,770,194)
Adjustments to reconcile net loss to net cash provided by (used in)
   operating activities:
   Depreciation and amortization                                                  56,715                     40,645
   Non cash stock issuance costs                                                       0                    183,815
   Non cash compensation for salaries and consulting                             564,082                          0
   Changes in operating assets and liabilities:
      Accounts receivable                                                         12,492                          0
      Inventories                                                                (27,429)                         0
      Prepaid expenses and other current assets                                  (15,346)                     4,504
      Other assets                                                               150,474                     (9,386)
      Accounts payable                                                            77,187                    182,194
      Accrued expenses and other current liabilities                              26,528                     87,456
                                                                             ------------                -----------
         Net cash used in operating activities                                (1,418,855)                (1,280,966)

Cash flows from investing activities:
   Purchase of property and equipment                                           (178,941)                   (17,849)
                                                                             ------------                -----------

         Net cash used in investing activities                                  (178,941)                   (17,849)

Cash flows from financing activities:
   Payments on capital lease obligations                                         (13,576)                   (12,645)
   Payments on convertible secured notes payable                                       0                   (250,000)
   Proceeds from issuance of convertible secured notes payable                   590,876                  1,171,957
   Repayment from note receivable                                                 63,490                          0
   Proceeds from sale of warrants                                                616,250                          0
   Proceeds from exercise of warrants and options                                205,366                          0
                                                                             ------------                -----------
         Net cash provided by financing activities                             1,462,406                    909,312

Net decrease in cash and cash equivalents                                       (135,390)                  (389,503)

Cash and cash equivalents at beginning of period                                 470,086                    415,624
                                                                             ------------                -----------

Cash and cash equivalents at end of period                                   $   334,696                     26,121
                                                                             ------------                -----------
                                                                             ------------                -----------

Supplemental disclosure of cash flow information:
   Income taxes paid during the period                                       $     1,600                      1,600
                                                                             ------------                -----------
   Interest paid during the period                                           $     4,529                     16,849
                                                                             ------------                -----------
Non cash financing activities:
   Conversion of convertible secured notes payable
     and accrued interest thereon to common stock                            $   626,617                          0
                                                                             ------------                -----------
   Common stock issued to extinguish accounts payable                        $    31,262                          0
                                                                             ------------                -----------
   Common stock issued to extinguish notes payable                           $   112,666                          0
                                                                             ------------                -----------
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                      5

<PAGE>

SPATIALIGHT, INC. AND SUBSIDIARIES
             Notes to Condensed Consolidated Financial Statements

1.       Business Description

SpatiaLight, Inc. and Subsidiaries ("SpatiaLight" or the "Company") are in the
business of designing and commercializing miniature, high-resolution active
matrix liquid crystal displays mounted directly on silicon chips. 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 are designed in a manner that can potentially provide
high-resolution images suitable for computer, video and other applications
while utilizing the existing manufacturing processes of typical silicon and
liquid crystal displays to obtain economies of scale and thereby reduce
costs. To date, the Company has only sold sample quantities of its displays
to customers who are evaluating the displays for use in their products.

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 future 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, data storage and holographic imaging
systems.

The address and telephone number of the Company's principal executive offices
are 9 Commercial Boulevard, Suite 200, Novato, California 94949, (415)
883-1693. The Company was organized under the laws of the State of New York
in 1989 under the name of "Sayett Acquisition Company, Inc."; it subsequently
changed is name to Sayett Group and in June 1996 changed its name to
SpatiaLight, Inc. The Company has a wholly owned subsidiary named SpatiaLight
of California, Inc.

2.       Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB of
item 310(b) of Regulation S-B. Accordingly they do not include all of the
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,
the interim condensed consolidated financial statements included herewith
contain all adjustments (consisting of normal recurring accruals and
adjustments) necessary for their fair presentation. The unaudited interim
condensed consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-KSB, which contains the audited
financial statements and notes thereto, together with the Management's
Discussion and Analysis, for the years ended December 31, 1998 and 1997.

3.       Going Concern Uncertainty

The Company's operations are constrained by an insufficient amount of 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 convertible securities, which are secured by substantially all the assets
of the Company and warrants. The Company continues its efforts to locate
sources of additional financing. There can be no assurance that additional
financing will be available to the Company. For this reason, there is
uncertainty whether the Company can continue as a going concern.


                                       6
<PAGE>

The accompanying 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 $2,263,558 in the
six months ended June 30, 1999. Additionally, as of June 30, 1999, the
Company's accumulated deficit totaled $16,230,707. 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 are dependent
upon future events. These events include obtaining adequate financing to
fulfill its development activities; successful launching of the commercial
production and distribution of its products and achieving a level of sales
adequate to support the Company's cost structure. These matters, among
others, may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.

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.

In an effort to improve operating performance, the Company has been and will
be implementing certain programs and strategies in 1999. These strategies
include:

-    Raising additional capital.

-    Outsourcing of all manufacturing activities, which will be monitored by
     the Company's staff.

-    Developing strategic alliances with potential customers and/or licensing of
     the Company's technology.

-    Development contracts with customers to customize the Company's displays
     for use in their products.

4.       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 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. Excluded from the
computation of diluted loss per share as of June 30, 1999, are options and
warrants to acquire 1,987,500 and 3,692,000 shares of common stock,
respectively, and 6,175,255 common share equivalents relating to convertible
secured notes, from the assumed exercise of such instruments because their
effects would be antidilutive. The weighted average exercise price as of June
30, 1999 for the options, warrants and common share equivalents is $0.70,
$1.38, and $0.65, respectively.

5.       Short Term Notes Payable

Short term convertible notes payable at June 30, 1999, consist of short-term
convertible securities totaling $3,365,257 including accrued interest. The
securities accrue interest at 6% and are due on December 31, 1999. The
securities are convertible into the Company's common stock at $.50 to $.75
per share and are secured by substantially all the assets of the Company.
During the quarter ended June 30, 1999 $626,617 of short-term convertible
notes including accrued interest thereon, were converted to 809,548 shares of
common stock.

                                       7
<PAGE>

6.       Issuance of Common Stock

During the second quarter of 1999 the Company issued 428,200 and 7,500 shares
of common stock upon the exercise of warrants and options, respectively.
Total cash received was $205,366. During the second quarter of 1999, the
Company issued 809,548 shares of common stock upon the conversion of
convertible secured notes payable and accrued interest thereon totaling
$626,617. In addition, 148,783 shares of common stock were issued in exchange
for accounts payable and extinguishment of debt. No gain or loss was
recognized on this transaction.

During the second quarter of 1999, the Company granted Class A, Class B and
Class C Warrants, with exercise prices of $1.50, $2.00 and $2.50,
respectively. The Class A Warrant is immediately exercisable and allows the
holder to purchase 100,000 shares of the Company's common stock at an
exercise price of $1.50 per share, which expires on November 15, 2000. Upon
exercise of the Class A Warrant, a Class B Warrant will be issued by the
Company to purchase 100,000 shares of the Company's common stock at an
exercise price of $2.00 per share which is exercisable from the date the
Class A Warrant is exercised and expires on November 15, 2001. Upon exercise
of the Class B Warrant a Class C Warrant will be issued by the Company to
purchase 100,000 shares of the Company's common stock at an exercise price of
$2.50 per share which is exercisable from the date the Class B Warrant is
exercised and expires on November 15, 2002. The Warrants, which are
immediately vested, are in exchange for services rendered during the quarter
in advising the Company as to feasible capital structures and assisting in
identifying appropriate capital sources. The Company determined the fair
value of the Class A, Class B and Class C Warrants on the grant date and
recorded the value of approximately $400,000 as consulting expense in the
quarter ended June 30, 1999. The Company made a preliminary estimate in
determining the fair value of the Warrants using the Black Scholes option
pricing model with the following assumptions: a stock volatility of 62%, an
expected life of six months and a risk free rate of 5.2%. No dividends are
expected for the term of the Warrants. The Company is in the process of
obtaining an independent valuation of the Warrants. As a result, there may be
a difference between the Company's preliminary estimate of value and the
independent valuation. Any significant difference will be accounted for on a
prospective basis. 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.

7.       Segment Reporting

In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
was adopted by the Company in 1998. SFAS No. 131 requires companies to report
financial and descriptive information about its reportable operating
segments, including segment profit or loss, certain specific revenue and
expense items and segment assets, as well as information about the revenues
derived from the Company's products and services, the countries in which the
Company earns revenue and holds assets, and major customers.

SpatiaLight, Inc.'s chief operating decision-maker is the Chief Executive
Officer (CEO). The CEO reviews financial information for purposes of making
operating decisions and assessing financial performance. The financial
information reviewed by the CEO is identical to the information presented in
the accompanying statements of operations and we have no foreign operations.
Therefore the Company operates in a single reportable segment for purposes of
applying SFAS 131.

8.       Comprehensive Income

In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income" which the Company adopted in 1998. SFAS 130
established standards for reporting and displaying comprehensive income and
its components in a full set of general-purpose financial statements. There
are no differences between net loss and comprehensive loss for any of the
periods presented.

9.       Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" as amended by
SFAS 137.

                                       8
<PAGE>

The Company does not anticipate that SFAS 133 will have a material impact on
its financial statements.

10.      Legal Proceedings

On June 21, 1999, the Company settled a complaint filed in the Superior Court
of Marin County, California (Case No. 174538) filed by L. John Loomis the
Company's former President and Chief Operating Officer against the Company,
the Company's CEO, Treasurer, and Director, Michael Burney, and Directors
Robert Olins and Larry Matteson. The complaint alleged wrongful discharge,
breach of contract, breach of the covenant of good faith and fair dealing,
violation of California Labor Code Section 201 and defamation by the
defendants in the connection with the separation of Mr. Loomis' employment
with the Company on June 24, 1998. The terms of the settlement are
confidential.

11.     Subsequent Events

On July 2, 1999, the Company granted Class A, Class B and Class C Warrants,
with exercise prices of $1.50, $2.00 and $2.50, respectively. The Class A
Warrant is immediately exercisable and allows the holder to purchase 100,000
shares of the Company's common stock at an exercise price of $1.50 per share,
which expires on November 15, 2000. Upon exercise of the Class A Warrant, a
Class B Warrant will be issued by the Company to purchase 100,000 shares of
the Company's common stock at an exercise price of $2.00 per share which is
exercisable from the date the Class A Warrant is exercised and expires on
November 15, 2001. Upon exercise of the Class B Warrant a Class C Warrant
will be issued by the Company to purchase 100,000 shares of the Company's
common stock at an exercise price of $2.50 per share which is exercisable
from the date the Class B Warrant is exercised and expires on November 15,
2002. The Warrants, which are immediately vested, are in exchange for
services rendered during the third quarter in advising the Company as to
feasible capital structures and assisting in identifying appropriate capital
sources. The Company determined the fair value of the Class A, Class B and
Class C Warrants on the grant date and recorded the value of approximately
$485,000 as consulting expense in the quarter ended September 30, 1999. The
Company made a preliminary estimate in determining the fair value of the
Warrants using the Black Scholes option pricing model with the following
assumptions: a stock volatility of 62%, an expected life of six months and a
risk free rate of 5.2%. No dividends are expected for the term of the
Warrants. The Company is in the process of obtaining an independent valuation
of the Warrants. As a result, there may be a difference between the Company's
preliminary estimate of value and the independent valuation. Any significant
difference will be accounted for on a prospective basis. 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 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.

THIS FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 21E OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS
AMENDED, AND ARE SUBJECT TO THE SAFE HARBOR PROVISIONS CREATED BY THAT
STATUTE. IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS,"
"FUTURE," "INTERESTS," AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED HEREIN, AND IN PARTICULAR,
THOSE CONTAINED IN THIS ITEM 2 AS WELL AS THOSE DISCUSSED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-KSB AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON MARCH 31, 1999. 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 RESULTS
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.

The following is a discussion and analysis of the consolidated financial
condition of the Company as of June 30, 1999, and the results of operations
for the Company for the three months and six months ended June 30, 1999 and
1998. The following should be read in conjunction with the unaudited
consolidated financial statements and related notes appearing elsewhere
herein.

GENERAL

The Company's operations are constrained by an insufficient amount of working
capital. The Company continues to experience negative cash flows and net
operating expenses. The Company's operations in


                                       9
<PAGE>

recent months have been funded by a series of convertible securities, which
are secured by substantially all the assets of the Company and warrants. The
Company continues its efforts to locate sources of additional financing.
There can be no assurance that additional financing will be available to the
Company. For this reason, there is uncertainty whether the Company can
continue as a going concern. See Note 3 of Notes to Condensed Consolidated
Financial Statements.

OVERVIEW

SpatiaLight is developing and commercializing a miniature, high-resolution
active matrix liquid crystal display. The Company's display is designed to be
the essential component in high-resolution, projected display systems which
may be produced at lower costs than current or anticipated projection
systems. The Company has produced development kits, 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 imaging and other display applications. The
Company has made only limited sales to date, and there can be no assurance
that the Company will ever be able to commercialize its technology.

LIQUIDITY AND CAPITAL RESOURCES

Most of the Company's revenues to date have been derived from limited sales
of its displays. Although the Company is producing displays worthy of
advanced characterization in anticipation of mass production, the Company has
not yet completed its goal of mass production. Further development and
testing will be necessary before this product or the Company's other proposed
products will be available for commercial end-use applications. Delays in
development may result in the Company's introduction of products later than
anticipated, which may have an adverse effect on both the Company's financial
and competitive position. Moreover, the Company may never be successful in
developing or manufacturing a commercially viable display. In addition, the
display may never be technically or commercially successful and the Company
may never be able to manufacture adequate quantities of its displays at
commercially acceptable cost levels or on a timely basis.

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 operations and expand operations in an
effort to achieve profitability from operations. The Company's business may
not ultimately generate sufficient revenue to fund the Company's operations
on a continuing basis. The matters discussed below, among others, may
indicate that the Company will be unable to continue as a going concern for a
reasonable period of time.

As of June 30, 1999, the Company has $334,696 in cash and cash equivalents.
Accounts receivable at June 30, 1999 totaled $18,000 and represented
primarily amounts due on developer kits shipped in the second quarter. The
Company's net working capital at June 30, 1999 was negative $3,592,695.

Net cash used by operating activities totaled $1,418,855 and $1,280,966 for
the six months ended June 30, 1999 and 1998, respectively. Cash was used
primarily to fund the operating loss.

Net cash provided by financing activities in the six months ended June 30,
1999 was $1,462,406, as compared to $909,312 for the six months ended June
30, 1998. Cash was provided primarily from proceeds from the issuance of
convertible secured notes payable and the sale of options and warrants.

                                       10
<PAGE>

As of June 30, 1999, the Company had an accumulated deficit of $16,230,707.
The Company has realized significant losses in the past and expects that
these losses will continue at least through 1999. It is likely that the
Company will have quarterly and annual losses in 1999 and beyond. The Company
has generated limited revenues and no profits from operations. The
development, commercialization and marketing of the Company's products will
require substantial expenditures for the foreseeable future. Consequently,
the Company may continue to operate at a loss for the foreseeable future and
there can be no assurance that the Company's business will operate on a
profitable basis.

RESULTS OF OPERATIONS

Total revenues were $41,500 for the six months ended June 30, 1999, and
$10,000 for the three months ended June 30, 1999. This is due to sales of
developer kits in the first and second quarter of 1999. There were no sales
in the first two quarters of 1998.

Cost of sales represents product costs associated with the production of
display developer kits. Cost of sales was $5,473 for the six months ended
June 30, 1999 and $1,368 for the three months ended June 30, 1999. There were
no product sales in the first and second quarters of 1998.

Selling, general and administrative costs were $1,422,731 and $874,412 in the
six months ended June 30, 1999 and 1998, respectively. Selling, general and
administrative costs were $884,454 and $411,163 in the three months ended
June 30, 1999 and 1998, respectively. These increases were due primarily to
the cost associated with warrants issued in exchange for services in advising
the Company as to feasible capital structures and assisting in identifying
appropriate capital sources. See Note 6 for details of these instruments.

Research and development costs were $773,385 and $844,090 in the six months
ended June 30, 1999 and 1998, respectively. Research and development costs
were $413,316 and $338,002 in the three months ended June 30, 1999 and 1998,
respectively. These increases were due primarily to an increase in parts,
materials and wafer processing.

Interest expense for the six months ended June 30, 1999 and 1998 was $109,858
and $55,349, respectively. Interest expense for the three months ended June
30, 1999 and 1998 was $59,960 and $32,321, respectively. The increase was due
to issuing additional convertible secured notes during the three months and
six months ended June 30, 1999, for which interest was accrued at 6%.

BUSINESS RISKS AND UNCERTAINTIES

USE OF DISPLAY PRODUCTS. Although the Company has produced displays based
upon its technology, the Company has not yet had its display incorporated
into any commercial end-use application. Delays in development may result in
the Company's introduction of its displays later than anticipated, which may
have a material adverse effect on both the Company's financial and
competitive position. Moreover, the Company may never be successful in
developing or manufacturing a commercially viable display or any of its
expected applications. In addition, displays or products that the Company may
develop may not be technically or commercially successful and the Company may
not be able to manufacture or obtain a supplier for adequate quantities of
its displays, or any of its display products at commercially acceptable cost
levels or on a timely basis.

Delays in development may result in the Company's introduction of products
later than anticipated, which may have an adverse effect on both the
Company's financial and competitive position. Moreover, the Company may never
be successful in developing or manufacturing a commercially viable


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<PAGE>

display. In addition, the display may never be technically or commercially
successful and the Company may not be able to manufacture adequate quantities
of its displays at commercially acceptable cost levels or on a timely basis.

HIGHLY COMPETITIVE MARKET.  The display industry has and continues to undergo
rapid and significant technological change. The Company expects display
technology to continue to develop rapidly, and the Company's success will
depend significantly on its ability to attain and maintain a competitive
position. Rapid technological development may result in actual and proposed
displays, products or processes becoming obsolete before the Company recoups
a significant portion of related research and development, acquisition and
commercialization costs.

If the Company is successful in the development of a commercially viable
display, the Company's abilities to compete will depend in part upon the
consistency of the display, the 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 distribution and
customer support. The Company's competitors may succeed in developing
technologies and products that are equally or more efficient than any which
are being developed by the Company or that will render the Company's
technology, displays and other products obsolete and non-competitive.

The Company's displays may not be representative of the rapid and significant
technological advances which have characterized the micro-display market. In
addition, the Company may not have sufficient funds to invest in new
technologies or products or processes. Although the Company believes that its
displays have specifications and capabilities which equal or exceed that of
commercially available LCD and Cathode Ray Tube ("CRT" or "Television") based
display products, the manufacturers of these products may develop further
improvements of their existing technology that would eliminate or diminish
the Company's anticipated advantage.

In addition, numerous competitors have substantially greater financial,
technical, marketing, distribution and other resources than the Company. The
Company may also face an aggressive, well financed competitive response that
may include misappropriation of the Company's intellectual property or
predatory pricing.

DEPENDENCE ON THIRD PARTIES.  The Company does not currently plan, nor does
the Company currently have the financial resources to develop or market any
end products utilizing the Company's displays. 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
using the Company's display, and the Company does not have commitments from
any third party for such development, or marketing. There can be no assurance
that any third party will develop or market a product incorporating the
Company's display.

The Company may not be successful in forming and maintaining such alliances
and the Company's partners may not devote adequate resources to successfully
market and distribute these anticipated products. The Company may not be able
to enter into satisfactory agreements with marketing partners, and the
Company or its marketing partners may not be successful in gaining market
acceptance for its anticipated products.

Any termination of a contract could have a material adverse effect on the
Company's ability to meet its anticipated commitments to customers while the
Company identifies and qualifies replacement manufacturers. The Company could
become dependent on any manufacturer and any termination or cancellation of the
Company's agreement with the manufacturer could adversely affect the Company's


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<PAGE>

ability to manufacture its products. In anticipation of such an event, the
Company plans to establish an alternative manufacturing relationship.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.  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 unpatented proprietary technology and there can be
no assurance that others may not independently develop the same or similar
technology or otherwise obtain access to 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.

DEPENDENCE ON KEY PERSONNEL.  The Company is dependent upon its key
management and scientific personnel including its Chief Executive Officer and
Treasurer, Michael H. Burney, President, Fred R. Hammett, and Vice President
of Engineering/Manufacturing, Miles L. Scott. The Company's success depends
on its ability to attract and retain highly qualified scientific, marketing,
manufacturing, financial 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.

YEAR 2000 RISKS.  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 prior to 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 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.


                                      13
<PAGE>

MARKET FOR COMMON STOCK.  Because the Company's securities are traded on the
NASD's "Electronic Bulletin Board", the liquidity of the Company's securities
could be impaired, not only in the numbers of securities which could be
bought and sold, but also through delays in the timing of transactions,
reduction in security analysts' and news media coverage of the Company, and
lower prices for the Company's securities than might otherwise be obtained.

PART II. OTHER INFORMATION

ITEM 1.  Legal Proceedings

On June 21, 1999, the Company settled a complaint filed in the Superior Court
of Marin County, California (Case No. 174538) filed by L. John Loomis the
Company's former President and Chief Operating Officer against the Company,
the Company's CEO, Treasurer, and Director, Michael Burney, and Directors
Robert Olins and Larry Matteson. The complaint alleged wrongful discharge,
breach of contract, breach of the covenant of good faith and fair dealing,
violation of California Labor Code section 201 and defamation by the
defendants in connection with the separation of Mr. Loomis' employment with
the Company on June 24, 1998. The terms of the settlement are confidential.

ITEM 2.  Change in Securities

During the second quarter of 1999, the Company granted Class A, Class B and
Class C Warrants, with exercise prices of $1.50, $2.00 and $2.50,
respectively. The Class A Warrant is immediately exercisable and allows the
holder to purchase 100,000 shares of the Company's common stock at an
exercise price of $1.50 per share, which expires on November 15, 2000. Upon
exercise of the Class A Warrant, a Class B Warrant will be issued by the
Company to purchase 100,000 shares of the Company's common stock at an
exercise price of $2.00 per share which is exercisable from the date the
Class A Warrant is exercised and expires on November 15, 2001. Upon exercise
of the Class B Warrant a Class C Warrant will be issued by the Company to
purchase 100,000 shares of the Company's common stock at an exercise price of
$2.50 per share which is exercisable from the date the Class B Warrant is
exercised and expires on November 15, 2002. The Warrants, which are
immediately vested, are in exchange for services rendered in advising the
Company as to feasible capital structures and assisting in identifying
appropriate capital sources. 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 4.  Submission of Matters to a Vote of Security Holders

At the Annual Meeting of Shareholders held June 21, 1999, the shareholders
approved the following proposals:

     PROPOSAL NO. 1  ELECTION OF DIRECTORS

                        Michael H. Burney
                        Robert A. Olins
                        Lawrence J. Matteson
                        Steven F. Tripp

     PROPOSAL NO. 2  AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION

                     Increase authorized shares of common stock from 20,000,000
                     to 40,000,000

     PROPOSAL NO. 3  APPROVAL OF ADOPTION OF 1999 STOCK OPTION PLAN

                     The 1999 Stock Option Plan replaces the1991 Stock Option
                     Plan, 1993 Non-Statutory Directors Stock Option Plan and
                     1993 Non-Statutory Employee Stock Option Plan (the "Prior
                     Plans").

                     SHARES SUBJECT TO PLAN.  A maximum of 4,000,000 of the
                     authorized but unissued or reacquired shares of Common
                     Stock of the Company may be issued under the 1999 Stock
                     Option Plan (the "Share Reserve"). However, the Share
                     Reserve, determined at any time, is reduced by the
                     number of shares (a) which remain subject to options
                     granted under the


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<PAGE>

                     Prior Plans or (b) were acquired upon exercise of such
                     option after the date on which the 1999 Option was
                     approved by the Board.



ITEM 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits:

         27 Financial Data Schedule

(b)      Report on Form 8-K:

         The Company filed 8-K Reports on May 21, 1999 and June 14, 1999.

         May 21, 1999 -- Item 4. Changes in Certifying Accountants.

         June 14, 1999 -- Item 4. Changes in Cerfifying Accountants.

         Each of the 8-K reports provided information pursuant to Item 4
         thereof.

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<PAGE>

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: August 16, 1999
                          ----------------------------------------------


                    SpatiaLight, Inc.



                    By: /s/ Michael H. Burney
                       -------------------------------------------------
                        Michael H. Burney
                        Chief Executive Officer
                        (Principal Executive, Financial and Accounting Officer)


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