<PAGE>   1


                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
--------------------------------------------------------------------------------
                                   FORM 10-KSB

[X]     Annual report under Section 13 or 14(d) of the Securities Exchange Act
        of 1934 for the fiscal year ended December 31, 2000.

[ ]     Transition report under Section 13 or 15(d) of the Securities Exchange
        Act of 1934 for the transition period from _________ to ____________

                        Commission File Number: 000-19828

--------------------------------------------------------------------------------

                                SPATIALIGHT, INC.
                 (Name of Small Business Issuer in its Charter)

                 NEW YORK                                   16-1363082
        (State or other jurisdiction                      (I.R.S. Employer
        of incorporation or organization)                Identification No.)

            9 Commercial Blvd., Suite 200, Novato, California 94949
            -------------------------------------------------------
                    (Address of principal executive offices)

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

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

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

        Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
Yes [X] No [ ]

        Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

        Issuer's revenues for the year ended December 31, 2000 aggregated
$65,650.

        The aggregate market value for the Issuer's voting stock held by
non-affiliates of the Issuer based upon the $1.7344 per share closing sale price
of the Common Stock on April 6, 2001 as reported on the Nasdaq SmallCap Market,
was approximately $35,456,155. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding common stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

        As of April 6, 2001, Registrant had 20,783,229 shares of Common Stock
outstanding.

        Transitional Small Business Disclosure Format (check one):

                      Yes [ ]           No [X]


                                       1
<PAGE>   2


                                SPATIALIGHT, INC.
                            FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                Page
                                                                                ----
                                        PART  I

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

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

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

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

                                     PART II

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

    ITEM 6    Management's Discussion and Analysis
              Or Plan of Operation.............................................. 8

    ITEM 7    Financial Statements.............................................. 19

    ITEM 8    Changes in and Disagreements with Accountants
              On Accounting and Financial Disclosure............................ 35

                                    PART III

    ITEM 9    Directors, Executive Officers, Promoters and Control
              Persons; Compliance with Section 16(a) of the Exchange Act........ 35

    ITEM 10   Executive Compensation............................................ 37

    ITEM 11   Security Ownership of Certain Beneficial Owners and Management.... 39

    ITEM 12   Certain Relationships and Related Transactions.................... 40

    ITEM 13   Exhibits and Reports on Form 8-K.................................. 40
</TABLE>


                                       2
<PAGE>   3


                                     PART I

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

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

        We develop and supply microdisplays that provide high resolution images
suitable for applications such as rear projection computer monitors, high
definition television and video projectors, and potential applications such as
those used in wireless communication devices, portable games and digital
assistants. Our microdisplays are designed for use in end products of original
equipment manufacturers (OEMs) and therefore we work closely with prospective
customers to incorporate our microdisplays into their final products. Because
our microdisplays can be manufactured using existing silicon and liquid crystal
processes, we contract with existing manufacturers for the production of our
silicon and the assembly of the final display modules. We have patents covering
parts of our designs; however the key designs of the circuitry in the silicon,
drive electronics, and liquid crystal assembly techniques are proprietary.

        Our microdisplays are high-resolution liquid crystal displays. They are
constructed with a silicon chip, a layer of liquid crystals and a glass cover
plate, in contrast to the more common construction of liquid crystals sandwiched
between two glass plates. These displays are also known as and commonly referred
to as Liquid Crystal Displays (LCD), Active Matrix Liquid Crystal Displays
(AMLCD), Liquid Crystal on Silicon (LCOS), and Spatial Light Modulators (SLM).

        Our microdisplays measure approximately 3/4" diagonally, contain large
arrays of pixels and therefore can provide more content at a lower cost than
currently available displays. The image on a microdisplay can be projected onto
a screen or other surface for individual or group viewing or used in a portable
application that is viewed through a magnifying device similar to a viewfinder.
Potential microdisplay applications include: large-screen rear-projection
television systems, in both standard television format (NTSC) and High
Definition Television (HDTV) formats; large-screen rear-projection computer
monitors in a variety of resolutions; video projectors for presentations;
head-mounted displays which are used for virtual reality systems, defense,
aerospace and gaming applications; and other potential applications such as
point of purchase displays, optical computing, data storage and holographic
imaging systems.

        Our technology uses liquid crystals and silicon chips. An advantage of
these materials is that processes for working with them are already known, so we
can move from prototypes to production more quickly than competing technologies
offering comparable quality. By using existing manufacturing processes we
believe we will be able to obtain economies of scale.

        We are a corporation organized under the laws of the State of New York,
incorporated in 1989. Our executive offices are located at 9 Commercial
Boulevard, Suite 200, Novato, California 94949.


                                       3
<PAGE>   4


TECHNOLOGY AND PRODUCTS UNDER DEVELOPMENT

        As of December 31, 2000 we were shipping prototype quantities of our
display, a 1,280 x 1,024 array of pixels (a total of 1,310,720 pixels). The
technology underlying our display products utilizes the well-known and
documented manipulation of liquid crystals. A typical liquid crystal display, as
might be found in a notebook computer, basically consists (along with other
associated materials and processes) of liquid crystal material sandwiched
between two pieces of glass, polarizers, color filters, a data signal and a
light source. As the data signal is applied across the sandwich of the liquid
crystals, the electric field created by this data signal causes the liquid
crystals to twist and untwist. This twisting, combined with the polarizers,
makes each pixel change from opaque to transparent, thereby controlling either
the transmission or reflection of light from each pixel.

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

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

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

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


                                       4
<PAGE>   5


        Although we have produced displays based upon our technology, we have
not yet had our display incorporated into any commercial end use application.
Delays in development may result in our introduction of our displays later than
anticipated, which may have a material adverse effect on both our financial and
competitive position. Moreover, we may never be successful in developing or
manufacturing a commercially viable display. In addition, our displays may not
be technically or commercially successful, we may not obtain suppliers or
manufacturers for adequate quantities of our displays, or we may not reach
commercially acceptable cost levels on a timely basis.

MARKETING, SALES AND DISTRIBUTION

Application and Markets

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

        Our strategy is to focus our abilities on original equipment design
(OED) of LCOS microdisplays, and to work closely with OEMs to market end
products utilizing our displays. We are therefore dependent upon these OEMs for
the manufacturing and marketing of end products. As of December 31, 2000, no end
products exist using our display, and there can be no assurance that any OEM
will develop or market a product incorporating our display.

        We are attempting to form alliances with corporate partners for the
marketing and distribution of products incorporating our microdisplays. We may
not be successful in forming and maintaining such alliances and our partners may
not devote adequate resources to successfully market and distribute these
anticipated products. We may not be able to enter into satisfactory agreements
and our marketing partners may not be successful in gaining market acceptance
for these anticipated products.

Manufacturing and Supply

        We currently contract with manufacturers for the production of our
silicon and assembly of our prototype displays. Our facility in Novato,
California contains a Class 1000 "clean room" which is designed principally for
research and development, prototype and pre-production assembly of our
microdisplays. We recognize the need for strict quality control of our
microdisplays manufactured in both our facility and our contract-manufacturing
partners. We perform product testing of our prototype display, analyze the
results and take actions to refine the manufacturing process or enhance product
design. We are developing statistical quality control procedures for our
contract manufacturers, in which continual quantitative measurements of critical
parameters are used as a feedback mechanism to improve the manufacturing
process.

        We are working with one foundry for the production of our silicon,
United Microelectronics Corp. (UMC) in Taiwan. The supply of silicon from this
supplier does fluctuate, and we may be subject to problems of availability. We
have also engaged the services of Varitronix Limited in Hong Kong for the final
assembly process of our displays.

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


                                       5
<PAGE>   6


COMPETITION

        Microdisplays are a subset of the display market. This display market
subset consists of 1) reflective microdisplays produced on silicon backplanes,
2) transmissive microdisplays and 3) emissive microdisplays. The reflective
microdisplay competition includes companies such as Aurora, Colorado
MicroDisplay, Digital Reflection, Displaytech, Hitachi, Hughes/JVC, inVisio,
Microdisplay, and Three-Five Systems. These companies are all producing
different forms of a liquid crystal display on a silicon backplane. Competitors
in the reflective microdisplay market, although not using liquid crystals in the
display are Texas Instruments which is producing a micro-mechanical structure of
moving mirrors on a silicon backplane, and Silicon Light Machines which is
producing a deformable grating on a silicon backplane.

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

PATENTS AND INTELLECTUAL PROPERTY

        Our ability to compete effectively with other companies will depend, in
part, on our ability to maintain the proprietary nature of our technologies. We
have been awarded six U.S. Patents and have other patent applications pending.
There can be no assurance as to the degree of protection offered by these
patents or as to the likelihood that pending patents will be issued. Our
competitors, in both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may seek to apply for and obtain patents that will
prevent, limit or interfere with our ability to make and sell our products or
intentionally infringe upon our patents.

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

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


                                       6
<PAGE>   7

RESEARCH AND DEVELOPMENT

        We incurred research and development expenses of approximately $3.3
million in 2000 and $2.0 million in 1999. Research and development expenses are
those costs incurred for personnel and experimental materials for the design and
development of new products. We believe that the development of new products
will be required to allow us to compete effectively and to achieve future
revenues. We currently have 18 full-time employees whose duties include research
and development. We intend to continue our product development programs,
focusing on increasing the display specifications including resolution, color,
and manufacturing processes. We believe that such developments will be required
to exploit future markets.

EMPLOYEES

        As of December 31, 2000, the Company had 23 full-time employees.
Full-time employment is divided among two functional areas with 18 in research
and development and 5 in finance and administration. Employees are not
represented by any collective bargaining organizations. We consider our
relations with our employees to be good.


ITEM 2. DESCRIPTION OF PROPERTY

        Our headquarters are located at 9 Commercial Boulevard, Suite 200,
Novato, California. SpatiaLight occupies approximately 15,000 square feet of
office space at this location bound by a three-year lease through April 2002
with two options for additional one-year extensions.

ITEM 3. LEGAL PROCEEDINGS

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

        Tony Romano and Magellin Entertainment, Inc. (Plaintiffs) filed an
action against us in San Francisco Superior Court on January 10, 2000. Former
Director Michael Burney and Director Robert Olins were also named. On December
15, 2000 the Settlement Agreement and Mutual General Release was signed and
payment of an immaterial settlement fee was made to Plaintiffs.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted by us to a vote of our security holders during
the fourth quarter of fiscal 2000.


                                       7
<PAGE>   8


                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

        Trading in our common stock has been conducted on the Nasdaq SmallCap
Market since May 24, 2000. The common stock was previously listed on the
over-the-counter Bulletin Board. Because we are traded on the SmallCap Market,
our securities may be less liquid, receive less coverage by security analysts
and news media, and generate lower prices than might otherwise be obtained.

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

                                HDTV COMMON STOCK

<TABLE>
<CAPTION>
                                     2000
                               -----------------
                               High          Low
                               ----          ---
<S>                           <C>            <C>
   First Quarter              10.12          5.62
   Second Quarter              7.12          3.31
   Third Quarter               4.12          1.12
   Fourth Quarter              3.59          1.00
</TABLE>

<TABLE>
<CAPTION>
                                     1999
                               -----------------
                               High          Low
                               ----          ---
<S>                           <C>            <C>
   First Quarter               3.25          1.34
   Second Quarter              5.65          2.00
   Third Quarter               3.75          2.50
   Fourth Quarter              6.19          2.47
</TABLE>


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

        As of April 6, 2001 there were approximately 463 holders of record of
the common shares of SpatiaLight and the price per share of our common stock was
$1.7344. The common stock represents the only class of securities outstanding as
of this filing. Because many of such shares are held by brokers and institutions
on behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these record holders.

        To date, we have not paid a dividend on our common stock. The payment of
future dividends is subject to our earnings and financial position and such
other factors, including contractual restrictions, as the Board of Directors may
deem relevant and it is unlikely that dividends will be paid in the foreseeable
future.

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

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


                                       8
<PAGE>   9


OVERVIEW

        We design microdisplays that provide high resolution images suitable for
applications such as rear projection computer monitors, high definition
television and video projectors, and potential applications such as use in
wireless communication devices, portable games and digital assistants. Our
revenues through December 31, 2000 have been derived from the sales of our
developer kits.

        During 2000 we experienced negative cash flows and net operating losses.
Our operations were funded in 2000 by the exercise of warrants and by
convertible securities, which are secured by substantially all of our assets. In
the fourth quarter of 1999 management executed a plan to financially secure our
operations during 2000 with two courses of action.

        The first course of action was implemented in November 1999 when we
filed two S-3 Registration Statements with the Securities and Exchange
Commission (SEC). These were declared effective on December 7, 1999. These
prospectuses relate to the offer and sale of up to 2,543,515 shares of our
common stock issuable upon exercise of warrants, with exercise prices ranging
from $0.50 to $2.8125 per share, issued to investors from June 19, 1997 to
September 15, 1999. As of December 31, 2000 we have received $3,988,512 from the
exercise of these warrants for which we have issued 1,813,515 shares of common
stock. In addition, we have received $985,711 upon the exercise of other
warrants and employee stock options.

        The second course of action was also implemented in November 1999. This
was the conversion of $2,612,500 ($1,612,500 of which was with a group
associated with Steven F. Tripp, a director of SpatiaLight) of the then existing
convertible securities into common stock. A subsequent closing of a new
convertible debt financing in December 1999 for $2,875,000 was with a group
associated with Steven F. Tripp, a Director of Spatialight. We received
$1,437,500 in December 1999. The second installment of $1,437,500 was to be
received upon the achievement of certain performance targets. It was received in
November 2000 prior to reaching these performance targets, in exchange for
reducing the conversion price of the second installment from $3.50 to $2.25.

        As of December 31, 2000, we have received a total of $6,863,512 from
these warrants and convertible notes.

LIQUIDITY AND CAPITAL RESOURCES

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

        As of December 31, 2000, the Company had $1,035,957 in cash and cash
equivalents, a decrease of $200,652 from the December 31, 1999 amount of
$1,236,609. Our net working capital deficit at December 31, 2000 was $2,061,234,
as compared to net working capital of $319,331 at December 31, 1999. The
increase in working capital deficit was primarily due to the reclassification of
convertible notes from non-current to current liabilities, and the additional
debt financing discussed above, which was used to fund our operating expenses.

        During 2000 we had negative cash flow from operations, resulting in the
need to fund ongoing operations from financing activities. Net cash used by
operating activities totaled $6,073,605 and $3,572,094 in 2000 and 1999,
respectively. Net cash provided by financing activities was $6,397,699 and
$4,571,059 in 2000 and 1999 respectively, principally resulting from the
issuance of convertible notes and the exercise of warrants and options.


                                       9
<PAGE>   10

        As of December 31, 2000, we had an accumulated deficit of $29,818,182.
We have realized significant losses in the past and expect that these losses
will continue until we start production and realize sales from this production.
We generated limited revenues and no profits from operations during 2000. The
development and commercialization of our displays will require substantial
expenditures during 2001. Consequently, we may continue to operate at a loss
during 2001 and there can be no assurance that our business will operate on a
profitable basis.

        We anticipate receiving funds from warrant exercises throughout 2001
from warrant holders affiliated with certain Board members. If we are
successful, these proceeds, along with our existing cash balances, will be
sufficient to meet our presently projected cash and working capital requirements
(which relate primarily to research, development and production) for the next 12
months.

RESULTS OF OPERATIONS

        Revenues. Our total revenues were $65,650 and $62,000 in 2000 and 1999
respectively. Revenues in both 2000 and 1999 were the result of sales of our
display developer kits. Revenue from the sales of developer kits are not
indicative of the revenue we expect to realize on sales of our displays produced
in quantity. Developer kits have a higher unit price than mass produced displays
as they are custom made and require additional parts which are not required for
displays sold in quantity.

        Cost of Revenues. Cost of revenues are the product costs associated with
the manufacture of display developer kits. Costs of revenues were $16,625 and
$10,945 in 2000 and 1999, respectively. Gross margins associated with the sales
of developer kits are higher and not indicative of the gross margins we expect
to realize on sales of our displays produced in quantity. Developer kits have a
higher unit cost than mass produced displays as they are custom made, require
additional parts and they require additional time and effort spent with the
customer.

        Selling, general and administrative expenses. Selling, general and
administrative expenses were $2,785,737 and $2,084,273 in 2000 and 1999,
respectively. The increase of 34% from 1999 levels is primarily due to an
increase in software consulting, legal expenses, employment expenses, office
expenses and investment banking.

        Stock-based general and administrative expenses. Stock-based general and
administrative expenses were $1,162,902 and $1,935,504 in 2000 and 1999,
respectively. The amounts incurred relate to the valuation of common stock,
stock options, and warrants issued in exchange for consulting services provided
to us. The amounts incurred in 1999 enabled us to obtain the necessary capital
resources to support working capital and development needs in 2000. The amounts
incurred in 2000 relate to stock and warrants issued in exchange for services,
and the cost associated with the reinstatement of certain employee stock
options.

        Research and development expenses. Research and development expense
increased from $1,955,170 to $3,344,547 or 71%, from 1999 to 2000. This increase
was due primarily to employment-related expenses and the development of displays
including parts, materials, wafer processing and additional consulting services.

        Interest income. Interest income was $87,427 and $10,303 in 2000 and
1999, respectively. The 748% increase in interest income in 2000 was due to
higher average cash balances during 2000 than during 1999.

        Interest expense. There was no significant change in interest expense
from 1999 to 2000. This is consistent with the average loan balances for the two
years.

        Stock-based interest expense. Stock-based interest expense of $561,346
and $1,389,585 in 2000 and 1999, respectively, relates to the valuation of the
beneficial conversion feature of interest converted and convertible into equity
based on the intrinsic value of the conversion feature and the value of a change
in the conversion price granted in exchange for a waiver of covenants for
certain convertible noteholders.


                                       10
<PAGE>   11


        Loss from operations before income taxes. Losses from operations before
income taxes were $7,832,269 and $7,407,486 in 2000 and 1999, respectively. This
decrease is due primarily to a decrease of approximately $1.6 million of
stock-based interest and general expenses. This decrease was offset by an
increase of approximately $2.0 million in general and administrative and
research and development expenses incurred in association with our ongoing
transition from a focus on research and development to a focus on manufacturing
and sales.

RECENT ACCOUNTING PRONOUNCEMENTS


In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize
all derivative contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged assets or
liabilities that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain and loss is recognized in income in the period of
change. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, Accounting for Derivative Instruments and Hedging
Activities -- An Amendment of FASB Statement No. 133, which addressed certain
implementation issues of SFAS No. 133.

Historically, we have not entered into derivative contracts either to hedge
existing risks or for speculative purposes. Accordingly, we do not expect the
adoption of the new standard to have a material impact on our financial
position, results of operations, or cash flows.

In December 1999, the Securities and Exchange Commission (SEC) staff released
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which provides interpretive guidance on the recognition,
presentation, and disclosure of revenue in financial statements. SAB 101 must be
applied to financial statements no later than the quarter ended September 30,
2000. There was no material impact from the application of SAB 101 on our
financial position, results of operations, or cash flows.

In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of Accounting Principles Board
Opinion No. 25 for (a) the definition of an employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
became effective July 2, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. There was no
material impact from the application of FIN 44 on our financial position,
results of operations, or cash flows.


                                       11
<PAGE>   12


                                  RISK FACTORS

IF WE ARE UNABLE TO OBTAIN FURTHER FUNDING, OUR ABILITY TO OPERATE COULD SUFFER

        In the event that we are unable to obtain further funding, or the costs
of development and operations prove greater than anticipated, we may be required
to curtail our operations or seek alternative financing arrangements. Additional
financing may not be available to us on favorable terms or at all. If we have
insufficient funds or are unable to raise additional funds, we may be required
to delay, reduce or cease certain of our programs. This would materially and
adversely affect our business. Our auditors have included an uncertainty
paragraph in their opinion on our financial statements suggesting that
substantial doubt exists about our ability to continue as a going concern. Also,
refer to Management's Discussion of Financial Condition and Results of
Operations.

WE ARE SUBJECT TO LENGTHY DEVELOPMENT PERIODS AND PRODUCT ACCEPTANCE CYCLES.

        Our business model requires us to develop microdisplays that perform
better than existing technologies, contract with one or more third-party
manufacturers to manufacture our prototypes in bulk, and sell the resulting
displays to original equipment manufacturers that will then incorporate it into
their products. OEMs make the determination during their product development
programs whether or not to incorporate our display modules in their products.
This requires us to invest significant amounts of time and capital in designing
display modules well before our customers introduce their products incorporating
these displays and before we can be sure that we will generate any significant
sales to our customers or even recover our investment. Even if a product is
successful for a short period, competition from other sellers could limit the
length of time it is successful.

WE ARE INCURRING SUBSTANTIAL RESEARCH AND DEVELOPMENT COSTS.

        We currently have over ten engineers based in California working on
prototype microdisplays. This staffing creates significant research and
development costs that may not be recouped. We have sold our current prototypes
to a number of companies that have indicated they may be willing to incorporate
them into products if they could buy such displays in volume. As we begin the
process of working with third parties to manufacture our designs in volume, we
are continuing to use our engineers to develop subsequent generations of our
microdisplays. As a result, our overhead is expected to increase.

WE MAY EXPERIENCE DIFFICULTIES MASS-PRODUCING MICRODISPLAYS.

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

        We currently obtain silicon backplanes from the Far East. Some Asian
countries are subject to earthquakes and typhoons. Unless we obtain a second
source, any disruption or termination of our silicon manufacturing operations in
Taiwan or air transportation with the Far East could adversely affect our
operations.

        Our silicon backplanes are assembled in Hong Kong with electronic
components to create microdisplays. Because our assembly contract is relatively
new we anticipate that technical issues in the manufacturing process will need
to be resolved. The design and manufacture of LCDs and display modules are
highly complex processes that are sensitive to a wide variety of factors,
including the level of contaminants in the manufacturing environment, impurities
in the materials used, and the performance of personnel and equipment. Contract
manufacturers do not guarantee their manufacturing yields. In addition,


                                       12
<PAGE>   13

the complexity of manufacturing processes will increase along with increases in
the sophistication of our display modules. Low manufacturing yields or delivery
problems could adversely affect our operating results.

A MARKET FOR OUR PRODUCTS MAY NOT DEVELOP.

        Various target markets for our micro-displays, including projectors,
monitors, high-definition televisions, and portable micro-displays, are
uncertain, may be slow to develop, or could utilize competing technologies.
High-definition television has only recently become available to consumers, and
widespread market acceptance is uncertain. In addition, the commercial success
of the portable microdisplay market is uncertain. Gaining acceptance in this
market may prove difficult because of the radically different approach of
microdisplays to the presentation of information. In order for us to succeed,
not only must we sell to those manufacturers that produce end-product
microdisplays that are better and less expensive than the alternatives they
would otherwise use, but also, the manufacturers themselves must develop
products that are successful commercially. Our failure to sell to manufacturers
or the failure of the ultimate target markets to develop as we expect will
impede our anticipated growth.

OUR DISPLAYS MAY NOT SUCCEED COMMERCIALLY.

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

        -   superior technologies developed by our competitors;

        -   price considerations;

        -   lack of anticipated or actual market demand for the products; and

        -   difficulties in inducing companies to begin using our product.

WE DO NOT HAVE LONG-TERM PURCHASE COMMITMENTS FROM OUR PROSPECTIVE CUSTOMERS.

        Our prospective customers have not yet provided us with firm or
long-term volume purchase commitments. Although we have begun to negotiate with
our customers, we currently do not have any contracts with our customers.
Because we have no firm, long-term volume purchase commitments we do not have
clear order lead times or basis for inventory allocations. In addition, our
prospective customers can cancel purchase commitments or reduce or delay orders
at any time. The cancellation, delay, or reduction of customer commitments could
result in our holding excess and obsolete inventory or having unabsorbed
manufacturing overhead. Our sales to customers in the electronics industry,
which is subject to severe competitive pressures, rapid technological change,
and product obsolescence, increases our inventory and overhead risks.

WE DEPEND ON THE MARKET ACCEPTANCE OF THE PRODUCTS OF OUR CUSTOMERS.

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

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

        -   maintain customer satisfaction with our design and manufacturing
            services;


                                       13
<PAGE>   14

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

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

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

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

WE FACE INTENSE COMPETITION.

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

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

        -   our success in designing and manufacturing new display technologies;

        -   our ability to address the needs of customers;

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

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

        -   the quality of our customer services;

        -   the efficiency of our production sources;

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

        -   products or technologies introduced by our competitors.

THE ELECTRONICS INDUSTRY IS CYCLICAL.

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


                                       14
<PAGE>   15


WE MUST FINANCE THE GROWTH OF OUR BUSINESS AND THE DEVELOPMENT OF NEW PRODUCTS.

        To remain competitive, we must continue to make significant investments
in research and development, equipment and facilities. Our failure to generate
sales to offset our costs would adversely affect our ability to continue
operating.

        We anticipate the need for additional equity or debt financing to
provide for the capital expenditures required to maintain our research and
development and to move to production. We cannot predict the timing or amount of
any such capital requirements at this time. If such financing is not available
on satisfactory terms, we may be unable to expand our business at the rate
desired and our operating results may suffer. Equity financing could result in
additional dilution to existing stockholders. Debt financing increases expenses,
must be repaid regardless of operating results, and is secured against our
assets, potentially leaving fewer resources available to equity holders.

OUR OPERATING RESULTS ARE NEGATIVE AND SUBJECT TO FLUCTUATIONS.

        We have not achieved profits in the past five years and have experienced
cash shortages. We will need to achieve substantial sales to support our cost
structure before we can begin to recoup our operating losses and accumulated
deficit. Any progress toward profitability may not be steady and may be subject
to significant periodic or seasonal quarterly fluctuations due to factors
including the following:

        -   introductions of displays and market acceptance of new or new
            generations of displays;

        -   timing of expenditures in anticipation of future orders;

        -   changes in our cost structure;

        -   availability of labor and components;

        -   pricing and availability of competitive products and services;

        -   the timing of orders;

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

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

        -   changes or anticipated changes in economic conditions.


                                       15
<PAGE>   16

THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.

        The market price of our common stock has been extremely volatile,
reflecting reported losses, receipt of additional financing and changes of
management. Other companies have found similar volatility correlates with class
action securities law suits. The trading price of our common stock in the future
could continue to be subject to wide fluctuations in response to various
factors, including the following:

        -   quarterly variations in our operating results;

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

        -   public announcements regarding our business developments;

        -   changes in analysts' estimates of our financial performance;

        -   general conditions in the electronics industry; and

        -   worldwide economic and financial conditions.

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

OUR COMMON STOCK MAY NOT BE LIQUID.

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

SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON
STOCK.

        Many of our outstanding shares are freely tradable without restrictions
or further registration. Sales of substantial amounts of common stock by our
stockholders, or even the potential for such sales, may affect the market price
of our common stock and could impair our ability to raise capital through the
sale of our equity securities.

WE DEPEND ON KEY PERSONNEL.

        Our development and operations depend substantially on the efforts and
abilities of our senior management and technical personnel. The competition for
qualified management and technical personnel is intense. The loss of services of
one or more of our key employees or the inability to add key personnel could
have a material adverse affect on us.

WE MUST PROTECT OUR INTELLECTUAL PROPERTY.

        We believe that our continued success depends in part on protecting our
proprietary technology. Third parties could claim that we are infringing on
their patents or other intellectual property rights. In the event that a third
party alleges that we are infringing on its rights, we may not be able to obtain
licenses on commercially reasonable terms from that third party, if at all, or
that third party may commence litigation against us. The failure to obtain
necessary licenses or other rights or the institution of litigation arising out
of such claims could materially and adversely affect us.


                                       16
<PAGE>   17


        We rely on a combination of patent law, trade secret law, attempts to
limit disclosure of our confidential information and contractual provisions to
protect our intellectual property. Trade secret laws and contractual provisions
afford only limited protection. We face risks associated with our intellectual
property, including the following:

        -   pending patent applications may not be issued;

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

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

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

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

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

WE FACE RISKS ASSOCIATED WITH INTERNATIONAL TRADE AND CURRENCY EXCHANGE.

        Political and economic conditions abroad may adversely affect the
foreign manufacture and sale of our displays. Protectionist trade legislation in
either the United States or foreign countries, such as a change in the current
tariff structures, export or import compliance laws, or other trade policies,
could adversely affect our ability to manufacture or sell displays in foreign
markets and to purchase materials or equipment from foreign suppliers.

SHORTAGES OF COMPONENTS AND MATERIALS MAY DELAY OR REDUCE OUR SALES AND INCREASE
OUR COSTS.

        Our inability to obtain sufficient quantities of components and other
materials necessary to produce our displays could result in reduced or delayed
sales or lost orders. Any delay in or loss of sales could adversely impact our
operating results. We obtain many of the materials we use in the manufacture of
our displays from a limited number of foreign suppliers, particularly suppliers
located in the Far East, and we do not have long-term supply contracts with any
of them. As a result, we are subject to economic instability and currency
fluctuations in these countries as well as to increased costs, supply
interruptions, and difficulties in obtaining materials. Our prospective
customers may also encounter difficulties or increased costs in obtaining from
others the materials necessary to produce their products into which our product
solutions are incorporated.

WE MUST EFFECTIVELY MANAGE OUR GROWTH.

        The failure to manage our growth effectively could adversely affect our
operations. Our ability to manage our planned growth effectively will require us
to:

        -   enhance our operational, financial, and management systems;

        -   expand our facilities and equipment; and

        -   successfully hire, train, and motivate additional employees,
            including technical staff.

        As we expand our overhead and selling expenses will increase. We also
may be required to increase staffing and purchase capital equipment. Customers,
however, generally do not commit to firm production schedules for more than a
short time in advance. Any increase in expenditures in anticipation of future
sales that do not materialize would adversely affect our profitability.


                                       17
<PAGE>   18

WE COULD BE LIABLE IN CONNECTION WITH PRODUCT LIABILITY CLAIMS.

        Product liability claims may be asserted against us in the event that
the use of our products, or products which incorporate our products, are alleged
to cause injury or other adverse effects. Our product liability insurance may
not be adequate to protect us against potential claims. As a result, a
successful claim against us could materially affect our financial stability. In
addition, our reputation may be affected by product liability claims regardless
of the merit or eventual outcome of the claim.

WE DO NOT PAY CASH DIVIDENDS.

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


                                       18
<PAGE>   19

ITEM 7. FINANCIAL STATEMENTS


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
SpatiaLight, Inc.
Novato, California

We have audited the accompanying consolidated balance sheet of SpatiaLight, Inc.
and Subsidiary as of December 31, 2000 and the related consolidated statement of
operations, stockholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

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

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sustained recurring losses from operations
and has net capital deficiencies and negative working capital at December 31,
2000. These conditions raise substantial doubt about the ability of the Company
to continue as a going concern. Management's plans as to these matters are also
discussed in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

                              /s/ BDO Seidman, LLP

San Francisco, California

March 30, 2001


                                       19
<PAGE>   20


                        REPORT OF INDEPENDENT ACCOUNTANTS


                                      KPMG


                          Independent Auditors' Report

The Board of Directors and Stockholders

SpatiaLight, Inc.:

We have audited the accompanying consolidated balance sheet of SpatiaLight, Inc.
and Subsidiary as of December 31, 1999, and the related consolidated statements
of operations, stockholders' equity (deficit) and comprehensive income, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SpatiaLight, Inc.
and Subsidiary as of December 31, 1999 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.



                                  /s/ KPMG LLP

San Francisco, California

March 25, 2000


                                       20
<PAGE>   21


SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
<TABLE>
<CAPTION>
                                                                     2000               1999
                                                                 ------------       ------------
<S>                                                              <C>                <C>
ASSETS

Current assets
  Cash and cash equivalents                                      $  1,035,957       $  1,236,609
  Accounts receivable                                                   2,500                  0
  Inventories                                                               0              5,036
  Other current assets                                                159,534             93,417
                                                                 ------------       ------------
          Total current assets                                      1,197,991          1,335,062

Property and equipment, net                                           570,585            321,853
Other assets                                                           31,954             22,670
                                                                 ------------       ------------

               Total assets                                      $  1,800,530       $  1,679,585
                                                                 ============       ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities
  Accounts payable                                               $    347,104       $    286,741
  Convertible notes and accrued interest                            2,742,925                  0
  Accrued expenses and other current liabilities                      169,196            728,990
                                                                 ------------       ------------
        Total current liabilities                                   3,259,225          1,015,731

Noncurrent liabilities
  Convertible notes                                                         0          1,216,337
  Long term capital lease obligations                                   4,483              9,605
                                                                 ------------       ------------
               Total liabilities                                    3,263,708          2,241,673

Commitments and contigencies

Stockholders' equity (deficit):
  Common stock, $.01 par value:
     40,000,000 shares authorized;
    20,273,229 and 16,635,818 shares issued and outstanding
     in 2000 and 1999                                                 202,732            166,359
Additional paid-in capital                                         28,152,272         20,649,563
Accumulated deficit                                               (29,818,182)       (21,378,010)
                                                                 ------------       ------------
        Total stockholders' deficit                                (1,463,178)          (562,088)
                                                                 ------------       ------------
Total liabilities and stockholders' deficit                      $  1,800,530       $  1,679,585
                                                                 ============       ============
</TABLE>


See accompanying notes to consolidated financial statements.


                                       21
<PAGE>   22



SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                                                 2000               1999
                                                                             ------------       ------------
<S>                                                                          <C>                <C>
Revenues                                                                     $     65,650       $     62,000

Cost of revenues                                                                   16,625             10,945
                                                                             ------------       ------------
               Gross profits                                                       49,025             51,055

  Selling, general and administrative expenses
(including stock-based expense of $1,162,902
  in 2000 and $1,935,170 in 1999)                                               3,948,639          4,019,777

  Research and development expenses                                             3,344,547          1,955,170
                                                                             ------------       ------------
             Total operating expenses                                           7,293,186          5,974,947

             Operating loss                                                    (7,244,161)        (5,923,892)

Other income (expense):

  Interest income                                                                  87,427             10,303
  Interest and other expense
(including stock-based expense of $561,346
in 2000 and $1,389,585 in 1999)                                                  (675,535)        (1,493,897)
                                                                             ------------       ------------
             Total other expense                                                 (588,108)        (1,483,594)
                                                                             ------------       ------------
  Loss from operations before income taxes                                     (7,832,269)        (7,407,486)

Income tax expense                                                                  1,600              3,375
                                                                             ------------       ------------
               Net loss                                                        (7,833,869)        (7,410,861)

Incentive warrants issued (See note 2)                                           (606,303)                 0
                                                                             ------------       ------------
Net loss applicable to common shareholders                                   $ (8,440,172)      $ (7,410,861)
                                                                             ============       ============
Net loss per share available to common shareholders - basic and diluted      $      (0.44)      $      (0.57)
                                                                             ============       ============
Weighted average shares used in computing
  net loss per share - basic and diluted                                       19,178,639         12,964,597
                                                                             ============       ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       22
<PAGE>   23


SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  (DEFICIT)

<TABLE>
<CAPTION>
                                                                                                                        TOTAL
                                                                                   ADDITIONAL                        STOCKHOLDERS'
                                                         COMMON STOCK               PAID-IN         ACCUMULATED        EQUITY
                                                     SHARES          AMOUNT         CAPITAL          (DEFICIT)        (DEFICIT)
                                                   ----------      ----------      ----------       ----------       ----------
<S>                                                <C>             <C>             <C>              <C>              <C>
Balance January 1, 1999                            11,413,501      $  114,135      $10,854,938      ($13,967,149)    ($2,998,076)

Issuance of common stock                              223,287           2,233         106,668                -          108,901

Sale of warrants                                            -               -       2,013,046                -        2,013,046

Net loss                                                    -               -               -       (7,410,861)      (7,410,861)

Conversion of notes                                 3,674,991          36,750       2,575,750                -        2,612,500

Conversion of interest on notes                       247,626           2,477       1,173,736                -        1,176,213

Issuance of warrants-convertible notes                      -               -       1,437,500                -        1,437,500

Issuance of warrants-consulting services                    -               -       1,077,036                -        1,077,036

Issuance of Class A, B and C warrants-                      -               -         861,736                -          861,736
   consulting services

Exercise of stock options and warrants              1,076,413          10,764         549,153                -          559,917
                                                   ----------      ----------      ----------       ----------       ----------

Balance December 31, 1999                          16,635,818         166,359      20,649,563       (21,378,010)       (562,088)

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

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

Net loss                                                    -               -               -       (7,833,869)      (7,833,869)

Exercise of stock options and warrants              3,466,012          34,660       4,939,563                -        4,974,223

Issuance of options and warrants - consulting               -               -       1,147,902                -        1,147,902
services and other stock-based compensation

Incentive warrants                                          -               -         606,303         (606,303)               -
                                                   ----------      ----------      ----------       ----------       ----------
                                                   20,273,229      $  202,732      $28,152,272      ($29,818,182)    ($1,463,178)
                                                   ==========      ==========      ==========       ==========       ==========
</TABLE>

        YEARS ENDED DECEMBER 31, 2000 AND 1999

See accompanying notes to consolidated financial statements.


                                       23
<PAGE>   24



SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                    2000              1999
                                                                                 -----------       -----------
<S>                                                                              <C>               <C>
Cash flows from operating activities:

Net loss                                                                         $(7,833,869)      $(7,410,861)

Adjustments to reconcile net loss to net cash used by operating activities:

  Depreciation and amortization                                                      218,176           296,465
  Stock-based general and administrative expense                                   1,162,902         1,935,504
  Stock-based interest expense                                                       561,346         1,389,585
  Other                                                                               57,838                 -
  Changes in operating assets and liabilities:
     Accounts receivable                                                              (2,500)           30,492
     Inventories                                                                       5,036            13,260
     Other assets                                                                    (75,401)          (93,417)
     Accounts payable                                                                 60,363          (179,290)
     Accrued expenses and other current liabilities                                 (227,496)          446,168
                                                                                 -----------       -----------

                Net cash used by operating activities                             (6,073,605)       (3,572,094)

Cash flows from investing activities:
  Purchase of property and equipment                                                (524,746)         (232,442)
                                                                                 -----------       -----------

                Net cash used in investing activities                               (524,746)         (232,442)

Cash flows from financing activities:
  Payments on capital lease obligations                                              (14,024)          (30,281)
  Proceeds from issuance of convertible notes with warrants attached               1,437,500         1,437,500
  Proceeds from issuance of convertible notes                                              -           590,876
  Proceeds from sales of warrants                                                          -         2,013,046
  Proceeds from exercise of warrants and options                                   4,974,223           559,918
                                                                                 -----------       -----------

                Net cash provided by financing activities                          6,397,699         4,571,059

Net increase (decrease) in cash                                                     (200,652)          766,523

Cash at beginning of period                                                        1,236,609           470,086
                                                                                 -----------       -----------
Cash at end of period                                                            $ 1,035,957       $ 1,236,609
                                                                                 ===========       ===========
Supplemental disclosure of cash flow information:


  Income taxes paid during the period                                            $     1,600       $     1,600
                                                                                 -----------       -----------
  Interest paid during the period                                                $   100,503       $     7,579
                                                                                 -----------       -----------
Non cash financing activities:

  Common stock issued upon conversion of notes and interest                      $   795,654       $ 2,612,500
  Warrants issued to induce the exercise of certain warrants                     $   606,303               $ -
</TABLE>
See accompanying notes to consolidated financial statements


                                       24
<PAGE>   25


                         SPATIALIGHT INC. AND SUBSIDIARY
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                             DECEMBER 2000 AND 1999

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Description of Business - SpatiaLight, Inc. (SpatiaLight or the Company)
and its subsidiary SpatiaLight of California, Inc. (SOC) are in the business of
designing high-resolution microdisplays, which measure _ inch in diagonal and
basically consist of liquid crystals and a glass cover on top of a silicon chip.
These displays are also known as and commonly referred to as Liquid Crystal
Displays (LCD), Active Matrix Liquid Crystal Displays (AMLCD), Liquid Crystal on
Silicon (LCOS), and Spatial Light Modulators (SLM). These displays are designed
in a manner that can provide high-resolution images suitable for applications
such as computer monitors, high definition television, video projectors 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's principal executive offices are located in Novato,
California. The Company was organized under the laws of the State of New York in
1989.

        Going Concern -- Through December 31, 2000, the Company had sustained
recurring losses from operations and, at December 31, 2000, had a net capital
deficiency and a net working capital deficiency. These conditions raise
substantial doubt about the ability of the Company to continue as a going
concern. During fiscal 2001, the Company expects to meet its working capital and
other cash requirements with cash derived from the exercise of warrants held by
existing investors affiliated with two of the Company's directors. The Company's
continued existence is dependent upon its ability to successfully market and
sell its products. However, there can be no assurance that the Company's efforts
will be successful. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

        Principles of Consolidation -- The consolidated financial statements
include the accounts of SpatiaLight, Inc. (SI), and its wholly owned subsidiary
SpatiaLight of California, Inc. (SOC). All inter-company accounts and
transactions have been eliminated upon consolidation.

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

        Cash Equivalents -- Cash equivalents include money market securities
stated at cost, which approximate market value.

        Inventories -- Inventories in 1999 are stated at the lower of cost or
market and consist primarily of developer kits and their components.

        Property and Equipment -- Property and equipment are recorded at cost
while repairs and maintenance costs are expensed in the period incurred.
Depreciation and amortization of property and equipment is calculated on a
straight-line basis over the estimated useful lives of the assets, generally
three years for computer equipment and building improvements and seven years for
office furniture and equipment.

        Revenue Recognition -- Revenue is generally recognized at the time that
product is shipped provided that collectability is probable.

            Income Taxes -- The Company utilizes the asset and liability method
of accounting for income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences


                                       25
<PAGE>   26


                         SPATIALIGHT INC. AND SUBSIDIARY
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 2000 AND 1999 (Continued)

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

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

        Financial Instruments -- The Company's financial instruments include
cash and cash equivalents and debt. At December 31, 2000 and 1999 the fair
values of cash and cash equivalents and debt issued without equity components
approximated their financial statement carrying amounts. For certain debt issued
with equity instruments attached, little or no value has been assigned to the
debt and the fair value of the debt on a stand-alone basis is not easily
determinable.

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

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

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

        Recently Issued Accounting Standards -- In June 1998, the FASB issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged assets or liabilities that are attributable to the hedged
risk or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain and loss is
recognized in income in the period of change. In June 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities -Deferral
of the Effective Date of FASB Statement No. 133, which amends SFAS No. 133 to be
effective for all fiscal quarters of all fiscal years



                                       26
<PAGE>   27


                         SPATIALIGHT INC. AND SUBSIDIARY
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 2000 AND 1999 (Continued)


beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
Accounting for Derivative Instruments and Hedging Activities -- An Amendment of
FASB Statement No. 133, which addressed certain implementation issues of SFAS
No. 133. Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect the adoption of the new standard to have a material
impact on the Company's financial position, results of operations, or cash
flows.

      In December 1999, the Securities and Exchange Commission (SEC) staff
released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements, which provides interpretive guidance on the recognition,
presentation, and disclosure of revenue in financial statements. SAB 101 must be
applied to financial statements no later than the quarter ended September 30,
2000. There was no material impact from the application of SAB 101 on the
Company's financial position, results of operations, or cash flows.

        In March 2000, the FASB issued Interpretation No. 44 (FIN 44),
Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion No. 25 for (a) the definition of an employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
became effective July 2, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. FIN 44 did not
have a material impact on the Company's financial position, results of
operations, or cash flows.

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

2. ISSUANCE OF SECURITIES

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

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

        During the first quarter of 2000, the Company issued 1,899,015 shares of
common stock upon the exercise of the previously issued warrants. Net cash
proceeds received were $4,178,793. During 2000, the Company issued an additional
1,279,600 and 317,300 shares of common stock upon the exercise of other warrants
and employee stock options, respectively. Total cash received was $795,430. In
addition, 2,307 shares of stock valued at $15,000 were issued in exchange for
services. 169,092 shares of stock were issued upon the conversion of accrued
interest of $795,654, which includes additional deemed interest of $711,108 due
to beneficial conversion features of the underlying notes.


                                       27
<PAGE>   28

                         SPATIALIGHT INC. AND SUBSIDIARY
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 2000 AND 1999 (Continued)

        In December 1999, the Company issued warrants to purchase 821,429 shares
of common stock in conjunction with the issuance of $2,875,000 of convertible
notes to a group of investors associated with Steven F. Tripp, a Director of the
Company. These convertible notes bear an interest rate of 6%, were originally
all convertible into common stock at $3.50 per share, and are due on June 30,
2001. The Company received the first installment of $1,437,500 in December 1999.
The second installment of $1,437,500 was to be received upon the achievement of
certain performance targets. It was received in November 2000, prior to reaching
these performance requirements, in exchange for reducing the conversion price of
the second installment from $3.50 to $2.25.

        The warrants attached to the above referenced notes were all issued in
December 1999. They are exercisable at any time by the lenders until June 30,
2002 at an exercise price of $3.50 per share. None of these warrants have been
exercised as of December 31, 2000. A value of $1,437,500 was assigned to the
warrants using the Black-Scholes option-pricing model and the following
assumptions; stock price $6.00, exercise price $3.50, contractual term 2.5
years, volatility 114%, risk-free interest rate 6% and a dividend yield of 0.
The total cash received from the issuance of the notes of $1,437,500 under this
model was less than the value associated with the warrants at the time of
issuance. Therefore, a value of $1,437,500 has been assigned to the warrants as
a discount on the notes. This amount is being recognized as interest expense
over the term of the note at an annual rate of approximately 1,230%. Interest
expense related to this discount was insignificant in 1999, was $3,615 in 2000
and will be $1,433,885 in 2001.

        During 1999 the Company sold warrants to purchase 2,315,283 shares of
the Company's common stock and received cash of $2,013,046. The purchase price
of the warrants ranged from $.67 to $1.07 with exercise prices ranging from
$1.87 to $2.81. If all the warrants are exercised, the aggregate proceeds will
be approximately $4,377,000.

        During 1999, the Company issued warrants to purchase 693,000 shares of
common stock in exchange for services rendered to the Company. These warrants
have exercise prices ranging from $0.83 to $3.50. A value of $1,077,036 was
assigned to the warrants, using the Black-Scholes option-pricing model and the
following assumptions: volatility 114%, risk free interest rate 6.0%, a dividend
yield of 0, contractual terms of 1.25 to 3.0 years and the stock price on the
dates of each issuance. This expense was recorded as stock-based general and
administrative expense.

        Also during 1999, the Company issued 1,076,413 shares of common stock
upon the exercise of its stock options and warrants. A total of 268,700 employee
stock options, which vested during 1997 and 1998, were exercised at grant prices
ranging from $0.25 to $0.81. In addition, 779,000 warrants were exercised at
prices ranging from $0.50 to $0.83. These warrants were originally issued in
1997 and 1998. Total cash received from the exercise of these options and
warrants was $165,457 and $394,460, respectively. In addition, two warrants
totaling 53,000 shares, issued during 1997 and 1998 were exercised under a
"cashless" provision of the warrant resulting in a net issuance of 28,713 shares
of common stock.

        In addition, in 1999, 39,973 shares of common stock were issued to
satisfy $108,901 of payables to employees and vendors.

        During each of the first three quarters of 1999 and the last quarter of
1998, the Company issued tranches of 100,000 Class A, 100,000 Class B and
100,000 Class C warrants to a consultant with exercises prices of $1.50, $2.00,
and $2.50, respectively. The Class A warrant was immediately exercisable and
allowed the holder to purchase shares of the Company's common stock at an
exercise price of $1.50 per share. All four tranches of the Class A warrants
were exercised in the first quarter of 2000 and 400,000 shares of common stock
were issued. Upon exercise of the Class A warrant, Class B warrants were issued
by the Company to purchase shares of the Company's common stock at an exercise
price of $2.00 per share. The Class B warrant is exercisable from the date the
Class A warrant was exercised until November 15, 2001. In the first quarter of
2000, 100,000 shares of common stock were issued upon the exercise of one
tranche of


                                       28
<PAGE>   29

                        SPATIALIGHT INC. AND SUBSIDIARY
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 2000 AND 1999 (Continued)

Class B warrants. Upon exercise of the Class B warrant, Class C warrants were
issued by the Company to purchase shares of the Company's common stock at an
exercise price of $2.50 per share. The Class C warrant will be exercisable from
the date the Class B warrant is exercised until November 15, 2002. The warrants
issued to the consultant are fully vested and were issued in exchange for
services rendered during the quarters for advising the Company as to feasible
capital structures and assisting in identifying appropriate capital sources. An
independent valuation firm has determined the fair values of the Class A, Class
B and Class C warrants issued on each of the issue dates and the Company has
recorded the total fair value of $861,736 as consulting expense.

3. NOTES PAYABLE

        Convertible notes at December 31, 2000 consist of the following:

        A note from Argyle Capital Management Corporation, a company affiliated
with Robert Olins, a Director, Acting CEO, Secretary and Treasurer of the
Company. The outstanding principal as of December 31, 2000 is $1,188,000. The
note accrues interest at 6% and both principal and interest are convertible at
$0.50 per share and are secured by substantially all assets of the Company. The
note was originally due on December 31, 1999 and has been extended until June
30, 2001 under the same terms. In November 2000, accrued interest of $84,546 was
converted into 169,092 shares of common stock. Accrued stock-based interest of
$711,108 resulting from the beneficial conversion feature was reclassified to
additional paid in capital upon the conversion. In September 1999, the
accumulated interest was converted into 240,886 shares of the Company's common
stock. The Company valued this stock based upon a market price of $2.70, and
recorded a stock-based interest expense of $601,957 in 1999. In addition, the
Company has assumed that the accrued interest for November and December 2000
will be converted into 24,056 shares of common stock. Using the average closing
price for the months of November and December for the Company's common stock of
$2.14 to value such shares, the Company has accrued additional stock-based
interest expense of $51,516.

        Short-term convertible notes totaling $3,281,952 were issued during 1998
of which $1,612,500 was with a group of investors associated with Steven F.
Tripp, a Director of the Company. The notes accrued interest at 6% and had a
maturity date of December 31, 1999. The notes were convertible into the
Company's common stock at $0.50 and $0.75 per share. Of the total convertible
notes, $2,012,500 of the notes originally were convertible into the Company's
common stock at $0.75 per share. In September 1999 the Company agreed to reduce
the conversion price of these notes from $0.75 to $0.70 resulting in additional
stock-based interest expense of $509,834. The reduction in conversion price was
done in exchange for a waiver of certain covenants of these convertible notes.
The notes were secured by substantially all of the assets of the Company. In
February 1999, the Company issued additional notes of $590,876 to the existing
short-term note holders under the same terms and conditions in exchange for
cash. In November 1999, the note holders converted these notes and the 1998
notes totaling $2,021,624 plus accrued interest into 3,922,617 shares of common
stock. Total principal and interest converted was $2,612,500 and $1,176,213,
respectively.

4.      PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                        2000              1999
                                   ------------      ------------
<S>                                <C>               <C>
Office furniture and fixtures      $    353,717      $    165,319
Machinery and equipment                 729,871           464,627
Building and improvements                73,600            60,334
                                   ------------      ------------
                                      1,157,188           690,280

Less accumulated depreciation           586,603           368,427
                                   ------------      ------------
                                   $    570,585      $    321,853
                                   ============      ============
</TABLE>


                                       29
<PAGE>   30


                         SPATIALIGHT INC. AND SUBSIDIARY
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 2000 AND 1999 (Continued)

        The Company incurred depreciation expense of $218,176 and $132,087 for
the years ended December 31, 2000 and 1999, respectively.

        Included in fixed assets at December 31, 2000 and 1999 is equipment
acquired under capital leases of $133,640 with accumulated depreciation of
$117,519 and $92,364, respectively.

        The following is a summary of the future lease obligations as of
December 31, 2000:


<TABLE>
<CAPTION>
    Year ended December 31:                                             Capital       Operating
                                                                      ----------      ----------
<S>                                                                   <C>             <C>
    2001                                                              $    6,431      $  311,567
    2002                                                                   4,824          87,306
                                                                      ----------      ----------

Total minimum lease payments                                              11,255      $  398,873
                                                                      ----------      ----------
Less amount representing interest                                          1,651
                                                                      ----------
Present value of net minimum capital lease payments                        9,604

Less current installments under capital leases                             5,121
                                                                      ----------
Obligations under capital leases, excluding current installments      $    4,483
                                                                      ==========
</TABLE>

        Rent expense related to operating leases for the years ended December
31, 2000 and 1999 was $252,785 and $202,465, respectively.

5. INCOME TAXES

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


<TABLE>
<CAPTION>
                                    Current           Deferred           Total
                                  ------------      ------------      ------------
<S>                               <C>               <C>               <C>
Year ended December 31, 2000
Federal                           $          0                 0                 0
State                                    1,600                 0             1,600
                                  ------------      ------------      ------------

Total                                    1,600                 0             1,600

Year ended December 31, 1999
Federal                           $          0                 0                 0
State                                    3,375                 0             3,375
                                  ------------      ------------      ------------

Total                                    3,375                 0             3,375
</TABLE>



                                       30
<PAGE>   31

                         SPATIALIGHT INC. AND SUBSIDIARY
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 2000 AND 1999 (Continued)


Income tax expense (benefit) differed from the amounts computed by applying the
U.S. federal income tax rate of 34% to pretax losses from operations as a result
of the following:

<TABLE>
<CAPTION>
                                                               2000               1999
                                                          ------------       ------------
<S>                                                       <C>                <C>
Computed "expected" tax expense (benefit)                 $ (2,663,514)      $ (2,599,108)
Permanent differences                                         (482,404)          (533,736)
Losses for which no benefit has been recognized              3,145,918          3,132,844
State tax expense, net of federal income tax benefit             1,600              3,375
                                                          ------------       ------------
Total tax expense (benefit)                               $      1,600       $      3,375
                                                          ============       ============
</TABLE>


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

<TABLE>
<CAPTION>
                                                              2000               1999
                                                          ------------       ------------
<S>                                                       <C>                <C>
Deferred tax assets:

    Net operating loss carryforwards                      $ 10,170,507       $  7,469,178
    Equity investment losses                                    99,865             99,865
    Accrued expenses                                            15,997             27,952
    Research and development credits                           998,524            486,762
    Other                                                            0             45,311
    Options and warrants                                       457,210                  -
                                                          ------------       ------------
           Gross deferred tax assets                        11,742,083          8,129,068
           Valuation allowance                             (11,742,083)        (8,129,068)
                                                          ------------       ------------
    Net deferred tax assets                                          0                  0
                                                          ------------       ------------
Deferred tax liabilities
        Gross deferred tax liabilities                               0                  0
                                                          ------------       ------------
        Net deferred tax assets (liabilities)             $          0       $          0
                                                          ============       ============
</TABLE>


        The valuation allowance for deferred tax assets as of December 31, 2000
was $11,742,083. The net change in the total valuation allowance was $ 3,613,015
and $2,914,022 for the years ending December 31, 2000 and 1999, respectively. As
of December 31, 2000, the Company had net-operating loss carryforwards of
approximately $25,700,000 for federal and $24,700,000 for state tax purposes,
respectively, which expire in varying amounts from 2005 for federal and have
already begun to expire for state. In addition, as of December 31, 2000, the
Company had research and development carryforwards of approximately $536,000 for
federal, which will begin to expire in 2008 and $463,000 for state tax purposes,
which will carryforward indefinitely.

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

        Deferred tax assets resulting from net operating losses attributable to
stock option exercises and warrant issuances will result in a $1,318,000 credit
to additional paid-in capital when realized.


                                       31
<PAGE>   32

                         SPATIALIGHT INC. AND SUBSIDIARY
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 2000 AND 1999 (Continued)

6. STOCKHOLDERS' EQUITY

        Stock Option Plans -- The Company has four Stock Option Plans (the
Plans) primarily for employees, consultants and directors. The Plans authorize
the issuance of options to purchase up to 4,000,000 shares of the Company's
common stock. The Plans provide for options which may be issued as nonqualified
or qualified incentive stock options under Section 422A of the Internal Revenue
Code of 1986, as amended.

        Under the 1991 and 1993 Employee Stock Option Plans, the Company may
grant options to purchase up to 1,915,000 shares of common stock to employees at
prices not less than 85% of fair market value for non-statutory stock options.
These options expire 10 years from the date of grant and become vested and
exercisable 50% in year one and 50% in year two.

        Under the 1993 Non-Employee Directors' Stock Option Plan non-employee
directors of the Company are granted options to purchase 25,000 shares of common
stock at the fair market value at the date of grant. These options expire 10
years from the date of grant and become vested and exercisable 50% in year one
and 50% in year two. The total number of shares authorized under the Plan is
85,000.

        Under the 1999 Stock Option Plan, the Company may grant options to
employees, consultants and directors of the Company to purchase up to 2,000,000
shares of the Company's common stock as either non-statutory stock options or
incentive stock options. These options expire 10 years from the date of grant
and become vested and exercisable 50% in year one and 50% in year two.

        Options under the Plans are granted at the discretion of the Board of
Directors/Compensation Committee. All options granted through 2000 have been
granted at fair market value.

        The following is a status of the options under the Plans and a summary
of the changes in options outstanding during 2000 and 1999:

<TABLE>
<CAPTION>
                                                            Weighted
                                   Number of Shares       Average Price
                                   ----------------      --------------
<S>                                <C>                   <C>
Outstanding, January 1, 1999             1,655,000       $         0.70
Options granted                          1,487,500       $         5.36
Options exercised                         (268,700)      $         0.62
Options canceled                                 0                    -
                                    --------------       --------------

Outstanding, December 31, 1999           2,873,800       $         2.71
                                    ==============       ==============

Outstanding January 1, 2000              2,873,800       $         2.71
Options granted                            240,000                 2.72
Options exercised                         (315,000)                 .57
Options canceled                          (782,500)                5.75
                                    --------------       --------------

Outstanding December 31, 2000            2,016,300       $         1.84
                                    ==============       ==============
</TABLE>

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


                                       32
<PAGE>   33

                         SPATIALIGHT INC. AND SUBSIDIARY
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 2000 AND 1999 (Continued)


        The Company's calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions: expected
life 24 months in 2000 and 1999, historical volatility 114% in 2000 and 1999,
and risk-free interest rates of 6% in 2000, 5.875% in 1999. No dividends are
expected for the term of the options. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they occur.
If the computed fair values of the 2000 and 1999 awards had been amortized to
expense over the vesting period of the awards, proforma net loss would have been
as follows:

<TABLE>
<CAPTION>
                                                        Years ended December 31,
                                                   -----------------------------------
                                                        2000                 1999
                                                   --------------       --------------
<S>                                                <C>                  <C>
Net loss available to common shareholders, as      $   (8,440,172)      $   (7,410,861)
reported
Pro forma net loss available to common                (11,404,941)          (7,831,425)
shareholders

Net loss per share available to common                       (.44)               (0.57)
shareholders -- basic and diluted
Pro forma net loss per share available to                    (.59)               (0.60)
common shareholders -- basic and diluted
</TABLE>

        Options exercisable as of December 31, 2000 and 1999 totaled
approximately 1,591,300 and 1,056,300 options at a weighted average exercise
price of $1.27 and $0.66 respectively.

        The weighted average fair value of options granted during 2000 and 1999
was $1.25 and $2.73, respectively.

        Additional information regarding options outstanding as of December 31,
2000 is as follows:


<TABLE>
<CAPTION>
                                                                          OPTIONS
             OPTIONS OUTSTANDING                                         EXERCISABLE
-------------------------------------------------      ------------------------------------------------
                                       Weighted
                                        Average         Weighted                           Weighted
  Range of          Outstanding        Remaining        Average                             Average
  Exercise          at December       Contractual       Exercise            Number          Exercise
   Prices            31, 2000         Life (Yrs.)        Price            Exercisable         Price
-------------      ------------      ------------      ------------      ------------      ------------
<S>                <C>               <C>               <C>               <C>               <C>
$5.01 -- 6.00           375,000               9.1              5.75           172,500              5.75
$4.01 -- 5.00            30,000               9.3              4.92                 0                 0
$3.01 -- 4.00            45,000               8.9              3.89            12,500              3.81
$2.01 -- 3.00            40,000               8.0              3.00            10,000              3.00
$1.01 -- 2.00           130,000              10.0              1.25                 0                 0
$0.25 -- 1.00         1,396,300               7.6               .69         1,396,300               .69
                   ============                                          ============
                      2,016,300                                             1,591,300
                   ============                                          ============
</TABLE>

        At December 31, 2000, 1,400,000 shares were available for future grants
under the Plans.

During 2000, as part of a settlement agreement the Company reinstated a grant of
500,000 options that had lapsed on termination of a former employee. The
options, with an exercise price of $0.75 and expiring in March 2001, resulted in
compensation expense of $962,125. The fair value was calculated using the Black-



                                       33
<PAGE>   34


                         SPATIALIGHT INC. AND SUBSIDIARY
               NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 2000 AND 1999 (Continued)

Scholes options pricing model and the following assumptions: stock price $2.63,
historical volatility 105%, risk free interest rate 6%, a dividend yield of
zero, and a contractual life of seven months. This expense was recorded in
stock-based general and administrative expense. These options were exercised in
the 1st quarter 2001.


        Diluted net loss per share

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

<TABLE>
<CAPTION>
                                                                      2000            1999
                                                                    ---------       ---------
<S>                                                                 <C>             <C>
Shares issuable under stock options                                 2,016,300       2,873,800

Shares issuable pursuant to warrants to purchase common stock       3,868,512       6,724,712

Shares of convertible notes on an "as if converted" basis           3,425,603       2,876,714
</TABLE>

        The weighted average exercise price of stock options outstanding was
$1.84 and $2.71 as of December 31, 2000 and 1999, respectively. The weighted
average exercise price of warrants was $3.11 and $2.22 as of December 31, 2000
and 1999, respectively.

7. SEGMENT INFORMATION

        The Company's chief operating decision-maker is the Chief Executive
Officer. The chief operating decision-maker reviews only financial information
prepared on a basis substantially consistent with the accompanying financial
statements of operations. Therefore, the Company has determined that it operates
in a single business segment. The Company's revenue for 2000 and 1999 consisted
of sales of developer kits. All assets are located in the United States.

8. LEGAL PROCEEDINGS

        Tony Romano and Magellin Entertainment, Inc. (Plaintiffs) filed an
action against the Company in San Francisco Superior Court on January 10, 2000.
Directors Michael Burney and Robert Olins were also named. On December 15, 2000
the Settlement Agreement and Mutual General Release was signed and payment of an
immaterial settlement fee was made to Plaintiffs.


                                       34
<PAGE>   35


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

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

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

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

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

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


                                    PART III


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

                 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

<TABLE>
<CAPTION>
                   NAME                   AGE                       POSITION(s)
                   ----                   ---                       -----------
<S>                                       <C>       <C>
            Lawrence J. Matteson           61       Director

            Robert A. Olins                44       Director, Acting Chief Executive Officer,
                                                    Treasurer, Secretary

            Miles L. Scott                 50       Vice President Manufacturing/Engineering

            Steven F. Tripp                32       Director
</TABLE>

        All Directors serve for terms of one year and until their successors are
duly elected. Miles L. Scott, Vice President Manufacturing and Engineering, has
an employment contract with the Company for a one-year period, which is
extendable for subsequent one-year periods at the option of the Company.


                                       35
<PAGE>   36


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

        ROBERT A. OLINS, Director since February 1998, Acting CEO, Secretary and
Treasurer since June 2000. Mr. Olins has served as President of Argyle Capital
Management Corporation during the past sixteen years. Argyle Capital Management
Corporation is a private investment advisory company.

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

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


                                       36
<PAGE>   37

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

        Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires directors, executive officers and persons who beneficially own more
than 10% of our Common Stock to file with the SEC initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities.
Executive officers, directors and greater than 10% shareholders are required by
SEC regulations to furnish us with copies of all Section 16(a) reports they
file. To our knowledge, based solely on a review of the copies of such reports
furnished to us for fiscal 2000, all executive officers, directors and greater
than 10% shareholders filed the required Section 16(a) reports in a timely
manner.

ITEM 10. EXECUTIVE COMPENSATION

        The following table sets forth the compensation paid by the Company for
the fiscal year ended December 2000 to the Company's Chief Executive Officer and
other executive officers of the Company who received total salary and bonuses in
excess of $100,000 during 2000.


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                SECURITIES
                                                                                                UNDERLYING
                                                                                                  OPTIONS/         ALL OTHER
         NAME AND PRINCIPAL POSITION                               YEAR         SALARY            SARS (#)        COMPENSATION
         ---------------------------                            ---------      ---------        ----------        ------------
<S>                                                             <C>            <C>              <C>               <C>
Robert A. Olins, Acting CEO, Treasurer, Secretary                    2000      $       0                 0                 0

Michael H. Burney, Former CEO, Treasurer, Secretary                  2000      $ 170,722                 0(3)      $ 107,461(2)
                                                                     1999      $ 200,000           500,000(1)

Fred R. Hammett, Former President                                    2000      $ 252,885                 0                 0
                                                                     1999        197,115           250,000(1)

Miles L. Scott, Vice President, Engineering/ Manufacturing           2000      $ 192,115                 0                 0
                                                                     1999        100,000           125,000(1)
</TABLE>


        (1) These stock option grants vest over a three-year period and are
            subject to the optionee meeting specific performance targets.
            Options granted to Mr. Burney were cancelled unvested in 2000 upon
            the termination of his employment contract. Options granted to Mr.
            Hammett were cancelled unvested in 2000 upon the non-renewal of his
            employment contract. Of the 125,000 granted to Mr. Scott, 41,667
            shares vested as of 12/31/00.

        (2) Under the terms of the settlement agreement, Mr. Burney received six
            months of severance in 2000 and will have received three months of
            severance in 2001.

        (3) Under the terms of his settlement agreement, 500,000 options
            granted to Mr. Burney in 1998 expired in June 2000 upon
            termination. Pursuant to an August settlement agreement, they were
            reinstated and subsequently exercised in the first quarter of 2001.


COMPENSATION OF DIRECTORS

        All Directors have waived their non-management Director's fee of $500.00
per board meeting.

EMPLOYMENT CONTRACTS

        On July 5, 2000, SpatiaLight, Inc. announced that Robert A. Olins had
been named acting CEO, Secretary and Treasurer of SpatiaLight, Inc., replacing
Michael H. Burney, who held the position for approximately two years. Mr. Olins
does not have an employment contract and the Board is actively seeking a
permanent CEO.

        The Board of Directors elected not to renew Fred R. Hammett's employment
agreement, which had a term of one year expiring on December 31, 2000.


                                       37
<PAGE>   38


        The Company is party to an employment agreement with Miles L. Scott to
serve as Vice President Engineering/Manufacturing, which is in effect through
December 31, 2001, with one-year extensions at the option of the Company. As
currently in effect, the agreement provides for a salary of $200,000 and a grant
of Incentive Stock Options to purchase 125,000 shares of common stock vesting
over a three-year period depending upon the achievement of certain performance
criteria.



                                       38
<PAGE>   39

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth certain information regarding the
beneficial ownership of the Company's capital stock, as of December 31, 2000
based upon a total of 20,273,229 shares outstanding, (i) by each person who is
known by the Company to own beneficially more than 5% of the Company's capital
stock, (ii) by each of the executive officers mentioned in the tables under
"Executive Compensation" and by each of the Company's directors, and (iii) by
all officers and directors as a group.

<TABLE>
<CAPTION>
            NAME AND ADDRESS                     AMOUNT AND NATURE OF       PERCENT OF
            BENEFICIAL OWNER                     BENEFICIAL OWNERSHIP         CLASS
            ----------------                     --------------------       ----------
<S>                                              <C>                        <C>
Argyle Capital Management Corporation .....          2,622,634(1)             10.36%
Robert A. Olins
14 East 82nd St
New York, New York 10028

Sabotini, Ltd. ............................          2,060,000(2)              9.22%
C/O Wychwood Trust Ltd.
1 Castle St
Castletown
Isle of Man, British Isles

Raymond L. Bauch ..........................          1,283,720                 5.96%
14 Office Drive Park, Suite 1
Palm Coast, FL 32137

Jalcanto, Ltd. ............................          1,267,500(3)              5.88%
C/O Wychwood Trust Ltd.
1 Castle St
Castletown
Isle of Man, British Isles

Michael H. Burney .........................            549,127(4)              2.58%
9 Commercial Blvd., Suite 200
Novato, CA 94949

Fred R. Hammett ...........................            155,000(5)                 *
9 Commercial Blvd., Suite 200
Novato, CA 94949

Miles L. Scott ............................            166,667(6)                 *
9 Commercial Blvd., Suite 200
Novato, CA 94949

Lawrence J. Matteson ......................            250,000(7)              1.20%
9 Commercial Blvd., Suite 200
Novato, CA 94949

Steven F. Tripp ...........................            320,710(8)              1.54%
9 Commercial Blvd., Suite 200
Novato, CA 94949

All directors and officers as a group
(6 persons) ...............................          3,384,167                12.37%
</TABLE>

*    Represents less than 1%


                                       39
<PAGE>   40


(1)     Includes 2,400,156 shares beneficially owned subject to conversion of
        principal and interest of convertible notes held by Argyle Capital
        Management Corporation, of which Mr. Olins is President and over which
        Mr. Olins exercises voting control. Also includes 25,000 shares subject
        to outstanding stock options held by Mr. Olins that are exercisable as
        of December 31, 2000.

(2)     Based solely upon information filed in a Schedule 13D by the named
        shareholder. To the Company's knowledge, Shaun F. Cairns and Paul A.
        Bell are the sole directors of the named shareholder. As such, Mr.
        Cairns and/or Mr. Bell may be deemed to be the beneficial owner(s) of
        the shares of the Company's Common Stock held by the named shareholder.

(3)     Based solely upon information filed in a Schedule 13D by the named
        shareholder. To the Company's knowledge, Shaun F. Cairns and Paul A.
        Bell are the sole directors of the named shareholder. As such, Mr.
        Cairns and/or Mr. Bell may be deemed to be the beneficial owner(s) of
        the shares of the Company's Common Stock held by the named shareholder.

(4)     Includes 500,000 shares subject to options exercisable as of December
        31, 2000.

(5)     Includes 155,000 shares subject to options exercisable as of December
        31, 2000.

(6)     Includes 166,667 shares subject to options exercisable as of December
        31, 2000.

(7)     Includes 250,000 shares subject to options exercisable as of December
        31, 2000.

(8)     Includes 165,353 shares beneficially owned subject to conversion of
        principal and interest of convertible notes held by Steven F. Tripp, a
        Director of the Company. Also includes 12,500 shares subject to
        outstanding stock options held by Mr. Tripp that are exercisable as of
        December 31, 2000.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        In various transactions in 1998 Argyle Capital Management Corporation, a
company affiliated with Robert Olins, a Director, Acting Chief Executive
Officer, Secretary and Treasurer of the Company, purchased convertible notes of
the Company in the outstanding principal amount of $1,188,000. These convertible
notes accrue interest at 6% and are convertible at $0.50 per share. These notes
were originally due on December 31, 1999 and have been extended until June 30,
2001 on the same terms.

        In December 1999, the Company issued warrants to purchase 821,429 shares
of common stock in conjunction with the issuance of $2,875,000 of convertible
notes to a group of investors associated with Steven F. Tripp, a Director of the
Company. These convertible notes bear an interest rate of 6%, were originally
all convertible into common stock at $3.50 per share, and are due on June 30,
2001. The Company received the first installment of $1,437,500 in December 1999.
The second installment of $1,437,500 was to be received upon the achievement of
certain performance targets. It was received in November 2000, prior to reaching
these performance requirements, in exchange for reducing the conversion price of
the second installment from $3.50 to $2.25.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>
             EXHIBIT #                      DESCRIPTION
             ---------                      -----------
<S>                      <C>
               3.1*      Amended and Restated Certificate of Incorporation

               3.2*      Bylaws

               10.1*     1991 Employee Stock Option Plan and Form of Stock
                         Option Agreement thereunder

               10.2*     1993 Nonstatutory Employee Stock Option Plan and Form
                         of Stock Option Agreement thereunder

               10.3*     1993 Nonstatutory Directors Stock Option Plan

               10.4*     1999 Stock Option Plan
</TABLE>


                                       40
<PAGE>   41


<TABLE>
<CAPTION>
             EXHIBIT #                      DESCRIPTION
             ---------                      -----------
<S>                      <C>
               10.9*     Form of Convertible Secured Loan Agreement, dated as of
                         December 1, 1999, between SpatiaLight, and the
                         twenty-two lenders listed on Exhibit A to such form

               10.10*    Form of Security Agreement, dated as of December 1,
                         1999, between SpatiaLight, and the twenty-two lenders
                         listed on Schedule A to such form

               10.11*    Form of Registration Rights Agreement, dated as of
                         December 1, 1999, between SpatiaLight, and the
                         twenty-two lenders listed on Exhibit A to such form

               10.12*    Form of Agreement and Warrant to Purchase Common
                         Shares, dated as of December 1, 1999, between
                         SpatiaLight, and the twenty-two lenders listed on the
                         Exhibit A of Convertible Secured Loan Agreement

               10.13*    Form of Convertible Secured Note, dated as of December
                         1, 1999, between SpatiaLight, and the twenty-two
                         lenders listed on Exhibit A of the Convertible Secured
                         Loan Agreement

               10.14*    Standard Office Lease, dated February 22, 1999, between
                         Dennis A. and Susan Johann Gilardi and SpatiaLight,
                         Inc.

               10.17*    Employment Agreement between the Company and Miles L.
                         Scott dated December 31, 1999

               10.18     Settlement Agreement between the Company and Michael
                         Burney dated August 23, 2000

               24.1*     Power of Attorney (included in the Signature Page
                         contained in Part II of the Registration Statement)
</TABLE>

*    Previously filed.


                         Reports on form 8-K:

                         None




                                       41
<PAGE>   42


        In accordance with section 13 or 15(d) with the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the 14th day of April 2000.

                     SPATIALIGHT, INC.

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

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

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

/s/LAWRENCE J. MATTESON               Director
------------------------------
Lawrence J. Matteson


/s/ROBERT A. OLINS                    Director, Acting Chief Executive Officer,
------------------------------        Treasurer, Secretary
Robert A. Olins                       (Principal Executive, Financial
                                      & Accounting Officer)


/s/STEVEN F. TRIPP                    Director
------------------------------
Steven F. Tripp
</TABLE>


                                       42