<PAGE>

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

[X]      Annual report under Section 13 of 14(d) of the Securities Exchange 
         Act of 1934 for the fiscal year ended December 31, 1998.

[ ]      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.)

               8-C Commercial Blvd., Novato, California 94949-6125
               ---------------------------------------------------
                        (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, 1998 aggregated $29,750

     The aggregate market value for the Issuer's voting stock held by 
non-affiliates of the Issuer based upon the $2.1875 per share closing sale 
price of the Common Stock on March 10, 1999 as reported on the OTC Bulletin 
Board, was approximately $16,327,399. Shares of Common Stock held by each 
officer and director and by each person who owns 5% or more of the 
outstanding common stock have been excluded in that such persons may be 
deemed to be affiliates. This determination of affiliate status is not 
necessarily a conclusive determination for other purposes.

         As of March 10, 1999, Registrant had 11,555,554 shares of Common 
Stock outstanding.

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

<PAGE>

                                SPATIALIGHT, INC.
                            FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                          Page
<S>                        <C>                                                                            <C>
                                                 PART  I


         ITEM 1            Description of Business...........................................................3

         ITEM 2            Description of Property...........................................................6

         ITEM 3            Legal Proceedings.................................................................6

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

                                                 PART II

         ITEM 5            Market for Common Equity and Related
                           Stockholder Matters...............................................................7

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

         ITEM 7            Financial Statements..............................................................12

         ITEM 8            Changes in and Disagreements with Accountants
                           On Accounting and Financial Disclosure............................................24

                                                 PART III

         ITEM 9            Directors, Executive Officers, Promoters and Control
                           Persons; Compliance with Section 16(a) of the Exchange Act........................24

         ITEM 10           Executive Compensation............................................................25

         ITEM 11           Security Ownership of Certain Beneficial Owners and Management....................27

         ITEM 12           Certain Relationships and Related Transactions....................................28

         ITEM 13           Exhibits and Reports on Form 8-K..................................................28
</TABLE>


                                       2

<PAGE>



                                     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", "INTERESTS," AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING 
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, 
INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED HEREIN, AND IN PARTICULAR, 
THOSE CONTAINED IN "ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" UNDER THE CAPTION "BUSINESS 
RISKS AND UNCERTAINTIES," THAT COULD CAUSE ACTUAL RESULTS TO DIFFER 
MATERIALLY FROM THOSE PROJECTED. READERS ARE CAUTIONED NOT TO PLACE UNDUE 
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE 
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT 
OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE NEEDED TO 
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE 
OCCURRENCE OF UNANTICIPATED EVENTS.

ITEM 1.  DESCRIPTION OF BUSINESS

INTRODUCTION

         SpatiaLight, Inc. and Subsidiary ("SpatiaLight" or the "Company) is 
in the business of designing and commercializing miniature, high-resolution 
active matrix liquid crystal displays mounted directly on silicon chips. 
These displays are also known as and commonly referred to as Liquid Crystal 
Displays ("LCD"), Active Matrix Liquid Crystal Displays ("AMLCD"), Liquid 
Crystal on Silicon ("LCOS"), and Spatial Light Modulators ("SLM"). These 
displays are designed in a manner that can potentially provide 
high-resolution images suitable for computer, video and other applications 
while utilizing the existing manufacturing processes of typical silicon and 
liquid crystal displays to obtain economies of scale and thereby reduce 
costs. To date, the Company has only sold sample quantities of its displays 
to customers who are evaluating the displays for use in their products.

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

         The address and telephone number of the Company's principal 
executive offices are 8-C Commercial Boulevard, Novato, California 94949, 
(415) 883-1693. The Company was organized under the laws of the State of New 
York in 1989 under the name of "Sayett Acquisition Company, Inc."; it 
subsequently changed its name to Sayett Group, Inc. and, in June 1996, 
changed its name again to SpatiaLight, Inc. The Company has a wholly owned 
subsidiary named Spatialight of California, Inc.

TECHNOLOGY AND PRODUCTS UNDER DEVELOPMENT

         The Company's current technology is a third generation 0.9-inch 
diagonal display, with a 1,024 X 768 array of pixels (a total of 786,432 
pixels). This product is now shipping in the form of developer kits, which 
are designed to assist other companies to evaluate the display for inclusion 
in their products. The Company is also now developing its fourth generation 
display, a 1,280 X 1,024 array of pixels (a total of 1,310,720 pixels), and 
expects to have limited quantities for evaluation in the second quarter of 
1999. The Company's displays are based upon both patented and proprietary 
technology for using liquid crystals directly on the surface of a silicon 
chip.

         The technology underlying the Company's 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 

                                       3

<PAGE>

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, the Company designs integrated circuits, which 
control the pixels and 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 LCDs, the images produced are inherently black 
and white (opaque or transmissive). 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 -- color filters, 2 -- sequential color systems, 
and 3 --optically combining different colors of light. The Company believes 
its displays can be adapted for use in all of these types of color display 
processes.

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

         If the Company is successful in the development of a commercially 
viable display, the Company's ability to compete will depend in part upon the 
consistency of the display, the quality and delivery, as well as pricing, 
technical capability and servicing, in addition to factors within and outside 
its control, including the success and timing of product distribution and 
customer support. The Company's competitors may succeed in developing 
technologies and products that are equally or more efficient than any which 
are being developed by the Company or that will render the Company's 
technology, displays and other products obsolete and non-competitive.

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

APPLICATIONS AND MARKETS

         The Company plans to focus on selling its displays to third parties 
for use in their end product applications. The Company believes that its 
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. The 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 the Company. The Company 
therefore plans to establish relationships with companies in these markets 
and to work with these companies to incorporate current and future displays 
into their products. In some instances, especially high volume applications, 
the Company will also custom design a display to fit a specific 
manufacturer's need for a specific product. The Company will also consider 
licensing large manufacturers who have the ability and desire to manufacture 
the Company's displays for use in their products.

         The Company does not currently plan, nor does the Company currently
have the financial resources to develop or market any end products utilizing the
Company's displays. Therefore, the Company will be 

                                       4

<PAGE>

completely dependent upon independent third parties for the development, 
manufacturing and marketing of such products. No such products exist today 
using the Company's display, and the Company does not have commitments from 
any third party for such development, manufacturing or marketing. There can 
be no assurance that any third party will develop or market a product 
incorporating the Company's display.

MARKETING, SALES AND DISTRIBUTION

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

MANUFACTURING AND SUPPLY

         The Company currently contracts with manufacturers, and is in 
discussions with additional manufacturers to produce its display devices. The 
Company's facility is designed principally for research and development and 
small-scale assembly and inventory storage. Currently, prior to shipment, 
Company personnel conduct final assembly and testing of the initial 
quantities of these displays.

         Any termination of a manufacturing or supply contract could have a 
material adverse effect on the Company's ability to meet its anticipated 
commitments to customers while the Company identifies and qualifies 
replacement manufacturers. The Company could become dependent on any 
manufacturer and any termination or cancellation of the Company's agreement 
with the manufacturer could adversely affect the Company's ability to 
manufacture its products. In anticipation of such an event, the Company plans 
to establish an alternative manufacturing relationship.

COMPETITION

         The Company has positioned itself as part of a subset of the display 
market. This display market subset consists of reflective micro-displays 
produced on silicon backplanes. The competition includes companies such as 
IBM, Three-Five Systems, Hughes JVC, Kopin, S-Vision, Colorado MicroDisplay, 
Microdisplay, Siliscape and Displaytech who also are producing some form of 
LCD on a silicon backplane, as well as companies such as Texas Instruments 
which is producing a micro-mechanical structure of moving mirrors on a 
silicon backplane, National Semiconductor which is producing displays using a 
polymer dispersed material, and Silicon Light Machines which is producing a 
deformable grating on a silicon backplane.

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

PATENTS AND INTELLECTUAL PROPERTY

         The Company's ability to compete effectively with other companies will
depend, in part, on the ability of the Company to maintain the proprietary
nature of its technologies. The Company has been awarded four U.S. Patents and
has 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. The Company's competitors, in 

                                       5

<PAGE>

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 the Company's ability to make and sell its 
products or intentionally infringe the Company's patents.

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

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

RESEARCH AND DEVELOPMENT

         The Company incurred research and development expenses of 
approximately $1,509,510 in 1998 and $1,857,670 in 1997. Research and 
development expenses are those costs incurred for personnel and experimental 
materials for the design and development of new products. The Company 
believes that the development of new products will be required to allow it to 
compete effectively and to achieve future revenues. The Company currently has 
11 full-time employees whose duties include research and development. The 
Company intends to continue its product development programs, focusing on 
increasing the display specifications including resolution, color, and 
manufacturing processes. The Company believes that such developments will be 
required to exploit future markets.

EMPLOYEES

         As of December 31, 1998, the Company had 14 full-time and 3 
part-time employees. Full-time employment is divided among two functional 
areas with 11 in research and development and 3 in finance and 
administration. Employees are not represented by any collective bargaining 
organizations. The Company considers its relations with its employees to be 
good.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company's headquarters are located at 8-C Commercial Boulevard 
and 5 Commercial Boulevard, Novato, California. The Company leases 
approximately 6,800 square feet of office space at these locations on a month 
to month basis. The Company anticipates that it will be consolidating its two 
facilities at one location with expansion capability in the near future.

ITEM 3.  LEGAL PROCEEDINGS

         Other than as set forth below, the Company is 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 its business. While the 
outcome of such ordinary course proceedings cannot be predicted with 
certainty, the Company believes that the resolution of such current or future 
ordinary course matters individually or in the aggregate will not have a 
material adverse effect on the Company's business, financial condition and 
results of operations.

         On July 30, 1998, L. John Loomis, the Company's former President and
Chief Operating Officer, filed a Complaint in the Superior Court of Marin
County, California (Case No. 174538) against the Company, the Company's CEO,
Treasurer, and Director, Michael Burney, and directors Robert Olins and Lawrence
Matteson. 

                                       6

<PAGE>

The Complaint alleged wrongful discharge, breach of contract, breach of the 
covenant of good faith and fair dealing, violation of California Labor Code 
Section 201 and defamation by the defendants in connection with the 
separation of Mr. Loomis' employment with the Company on June 24, 1998. Mr. 
Loomis' complaint seeks unspecified general and compensatory damages, 
punitive damages and attorney's fees. The Company, along with the other 
defendants, intends to continue defending against these claims. Mr. Loomis 
subsequently filed a first amended complaint seeking substantially the same 
relief and the Company has filed a cross-complaint against Mr. Loomis.

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

         No matters were submitted to a vote of the security holders during 
the Company's fourth quarter.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The common stock of the Company was traded in the over-the-counter 
market since the Company's initial public offering on February 5, 1992. Until 
April 1, 1997 the common stock was listed on the NASDAQ SmallCap Market under 
the symbol "SLHT". NASDAQ delisted the Company from the NASDAQ SmallCap 
Market effective April 2, 1997 because the Company did not meet the 
requirements for continued listing. Trading in the Company's common stock 
after April 2, 1997 has been conducted on NASD's "Electronic Bulletin Board". 
As a result of the delisting, the liquidity of the Company's securities may 
be impaired, not only in the numbers of securities which could be bought and 
sold, but also through delays in the timing of transactions, reduction in 
security analysts' and news media coverage of the Company, and lower prices 
for the Company's securities than might otherwise be obtained. In November 
1997 the Company changed its stock symbol to "HDTV".

         The following table sets forth, for the calendar quarters indicated, 
the range of high and low quotations for the common stock, as reported by the 
National Association of Securities Dealers Automated Quotation System.        

                                        HDTV Common Stock
<TABLE>
<CAPTION>
                                                         1998                            1997
                                                 High            Low             High             Low
                                           --------------- --------------- ---------------- ---------------
<S>                                        <C>             <C>             <C>              <C>
    First Quarter (January-March)                1.00           0.25             1.72            0.19
    Second Quarter (April-June)                  1.09           0.33             1.69            0.75
    Third Quarter (July-September)               0.85           0.41             1.30            0.75
    Fourth Quarter (October-December)            1.93           0.44             1.42            0.63
</TABLE>

         For a recent reported quotation for the Company's common stock, see 
the cover page of this Form 10-KSB. The quotations listed above reflect 
inter-dealer prices, without retail mark-up, markdown or commission and may 
not represent actual transactions.

         As of March 10, 1999, there were approximately 283 holders of record 
of the common shares of the Company. 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, the 
Company is unable to estimate the total number of stockholders represented by 
these record holders.

         To date, the Company has not paid a dividend on its common stock. 
The payment of future dividends is subject to the Company's 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.

                                       7

<PAGE>

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

GENERAL

         The Company's operations are constrained by an insufficient amount 
of working capital. The Company continues to experience negative cash flows 
and net operating losses. The Company's operations in recent months have been 
funded by loans and by a series of convertible securities, which are secured 
by substantially all the assets of the Company. The Company continues its 
efforts to locate sources of additional financing. There can be no assurance 
that additional loans or any other financing will be available to the 
Company. For this reason, there is uncertainty whether the Company can 
continue as a going concern. See Note 2 of Notes to Consolidated Financial 
Statements.

LIQUIDITY AND CAPITAL RESOURCES

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

         The Company is experiencing negative cash flow from operations, 
resulting in the need to fund ongoing operations from financing activities. 
The future existence and profitability of the Company is dependent upon its 
ability to obtain additional funds to finance operations and expand 
operations in an effort to achieve profitability from operations. The 
Company's business may not ultimately generate sufficient revenue to fund the 
Company's operations on a continuing basis. The matters discussed below, 
among others, may indicate that the Company will be unable to continue as a 
going concern for a reasonable period of time.

         As of December 31, 1998, the Company had $470,086 in cash and cash 
equivalents. Accounts receivable at December 31, 1998 totaled $30,492 and 
represented primarily amounts due on developer kits shipped in the fourth 
quarter. The Company's net working capital at December 31, 1998 was 
approximately ($3,381,358).

         Net cash used by operating activities totaled $3,133,269 and 
$1,677,037 in 1998 and 1997, respectively. Net cash that was provided by 
investing and financing activities in 1998 were $3,274,043 and $976,555 in 
1997, principally resulting from the issuance of convertible debentures. 
Subsequent to year-end, an additional $250,000 of convertible securities was 
issued.

         As of December 31, 1998, the Company had an accumulated deficit of 
$13,967,149. The Company has realized significant losses in the past and 
expects that these losses will continue at least through 1999. It is likely 
that the Company will have quarterly and annual losses in 1999 and beyond. 
The Company has generated limited revenues and no profits from operations. 
The development, commercialization and marketing of the Company's products 
will require substantial expenditures for the foreseeable future. 
Consequently, the Company may continue to operate at a loss for the 
foreseeable future and there can be no assurance that the Company's business 
will operate on a profitable basis.

         NET REVENUES. The Company's net revenues were $29,750 and $325,000 
in 1998 and 1997 respectively. Revenues in 1998 are comprised of sales of a 
small number of developer kits of the Company's displays, while those in 1997 
are revenues from a non-recurring engineering contract.

                                       8

<PAGE>

         OPERATING EXPENSES. Operating expenses during 1998 and 1997 were 
$3,070,457 and $3,652,522 respectively. The decrease in operating expenses 
from 1997 to 1998 was principally due to two non-recurring expenses in 1997, 
a litigation settlement expense of $300,000 as well as the acquisition cost 
of $421,376 of the remaining minority interest of SpatiaLight of California, 
Inc. ("SOC").

         Costs of sales represent product costs associated with the 
production of display developer kits. Costs of sales were $4,104 and $0 in 
1998 and 1997, respectively. There were no product sales in 1997.

         Selling, general and administrative costs were $1,560,947 and 
$1,794,852 in 1998 and 1997, respectively. The decrease of 13% from 1997 
levels is due primarily to non-recurring legal fees in 1997. Research and 
development costs decreased $348,160, or 19%, from 1997 to 1998. The decrease 
was due primarily to the acquisition of SOC in 1997.

         Interest income was $6,786 and $18,821 in 1998 and 1997, 
respectively. The decrease in interest income in 1998 was principally due to 
lack of investments during the year.

         LOSS FROM OPERATIONS.  Losses from operations were $3,180,940 and 
$3,320,887 in 1998 and 1997, respectively.

BUSINESS RISKS AND UNCERTAINTIES

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

         Delays in development may result in the Company's introduction of 
products later than anticipated, which may have an adverse effect on both the 
Company's financial and competitive position. Moreover, the Company may never 
be successful in developing or manufacturing a commercially viable display. 
In addition, the display may never be technically or commercially successful 
and the Company may not be able to manufacture adequate quantities of its 
displays at commercially acceptable cost levels or on a timely basis.

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

         If the Company is successful in the development of a commercially 
viable display, the Company's abilities to compete will depend in part upon 
the consistency of the display, the quality and delivery, as well as pricing, 
technical capability and servicing, in addition to factors within and outside 
its control, including the success and timing of product distribution and 
customer support. The Company's competitors may not succeed in developing 
technologies and products that are equally or more efficient than any which 
are being developed by the Company or that will render the Company's 
technology, displays and other products obsolete and non-competitive.

         The Company's displays may not be representative of the rapid and 
significant technological advances which have characterized the micro-display 
market or that the Company will have sufficient funds to invest in new 
technologies or products or processes. Although the Company believes that its 
displays have specifications and capabilities which equal or exceed that of 
commercially available LCD and Cathode Ray Tube ("CRT" or 

                                       9


<PAGE>

"Television") based display products, the manufacturers of these products may 
develop further improvements of their existing technology that would 
eliminate or diminish the Company's anticipated advantage.

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

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

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

         Any termination of a contract could have a material adverse effect 
on the Company's ability to meet its anticipated commitments to customers 
while the Company identifies and qualifies replacement manufacturers. The 
Company could become dependent on any manufacturer and any termination or 
cancellation of the Company's agreement with the manufacturer could adversely 
affect the Company's ability to manufacture its products. In anticipation of 
such an event, the Company plans to establish an alternative manufacturing 
relationship.

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

         The Company also relies on unpatented proprietary technology and 
there can be no assurance that others may not independently develop the same 
or similar technology or otherwise obtain access to the Company's proprietary 
technology. To protect its rights in these areas, the Company requires all 
employees and technology consultants, advisors and collaborators to enter 
into confidentiality agreements. There can be no assurance, however, that 
these agreements will provide meaningful protection for the Company's trade 
secrets, know-how or other proprietary information in the event of any 
unauthorized use, misappropriation or disclosure of such trade secrets, 
know-how or other proprietary information. To date, the Company has no 
experience in enforcing its confidentiality agreements.

         DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon its key 
management and scientific personnel including its Chief Executive Officer and 
Treasurer, Michael H. Burney, President, Fred R. Hammett, and Vice President 
of Engineering/Manufacturing, Miles L. Scott. The Company's success depends 
on its ability to attract and retain highly qualified scientific, marketing, 
manufacturing, financial and other key management personnel. The Company 
faces competition for such personnel and there can be no assurance that the 
Company will be able to attract or retain such personnel.

         YEAR 2000 RISKS. As is true for most companies, the Year 2000 
computer issue creates a risk for SpatiaLight. If systems do not correctly 
recognize date information when the year changes to 2000, there could be an 
adverse impact on the Company's operations. The risk for SpatiaLight exists 
in two areas: systems used by the Company to run its business and systems 
used by the Company's suppliers. The Company is currently evaluating its 
exposure in both of these areas. The Company is not aware of any potential 
problems that could exist with its potential products.

                                       10

<PAGE>

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

         SpatiaLight is also in the process of contacting its critical 
suppliers to determine that the suppliers' operations and the products and 
services they provide are Year 2000 compliant. Where practicable, SpatiaLight 
will attempt to mitigate its risks with respect to the failure of suppliers 
to be Year 2000 ready. In the event that suppliers are not Year 2000 
compliant, the Company will seek alternative sources of supplies. However, 
such failures remain a possibility and could have an adverse impact on the 
Company's results of operations or financial condition. The Company believes 
its potential products are Year 2000 compliant.

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

                                       11

<PAGE>

ITEM 7.     FINANCIAL STATEMENTS

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
SpatiaLight, Inc. and Subsidiary:

         We have audited the accompanying consolidated balance sheets of 
SpatiaLight, Inc. and subsidiary (the "Company") as of December 31, 1998 and 
1997, and the related consolidated statements of operations, stockholders' 
capital deficiency, and cash flows for the years then ended. These financial 
statements are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these financial statements based 
on our audits.

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

         In our opinion, such consolidated financial statements present 
fairly, in all material respects, the financial position of the Company at 
December 31, 1998 and 1997, and the results of its operations and its cash 
flows for the years then ended in conformity with generally accepted 
accounting principles.

         The accompanying consolidated financial statements have been 
prepared assuming that the Company will continue as a going concern. As 
discussed in Note 2 to the consolidated financial statements, successful 
completion of the Company's development program and ultimately, the 
attainment of profitable operations, is dependent on future events including 
obtaining adequate financing, successful launching of the commercial 
production and distribution of its products and achieving a level of sales 
adequate to support the Company's cost structure. As further discussed in 
Note 2 to the consolidated financial statements, the Company's recurring 
operating losses and its accumulated deficit raise substantial doubt about 
its ability to continue as a going concern. Management's plans concerning 
these matters are also described in Note 2. The consolidated financial 
statements do not include any adjustments that might result from the outcome 
of these uncertainties.

/s/ Deloitte & Touche LLP
San Francisco, California
March 24, 1999

                                       12

<PAGE>

SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                1998              1997
                                                                          -----------------  ----------------
<S>                                                                       <C>                <C>
ASSETS

Current assets:
  Cash and cash equivalents                                                   $    470,086      $    415,624
  Accounts receivable, net of allowances from doubtful
    accounts of $0 and $0 in 1998 and 1997 respectively                             30,492                 0
  Inventories                                                                       18,296                 0
  Other                                                                                  0             7,253
                                                                          -----------------  ----------------
          Total current assets                                                     518,874           422,877

Property and equipment, net                                                        221,498           217,984
Other                                                                              187,204            53,261
                                                                          -----------------  ----------------

               Total assets                                                   $    927,576      $    694,122
                                                                          -----------------  ----------------
                                                                          -----------------  ----------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable                                                            $    466,031      $    794,397
  Short term notes payable                                                       3,337,508           932,479
  Accrued expenses and other liabilities                                            96,693           127,835
                                                                          -----------------  ----------------
        Total current liabilities                                                3,900,232         1,854,711

Noncurrent liabilities:
  Long term capital lease obligations                                               25,420            53,480
                                                                          -----------------  ----------------
               Total liabilities                                                 3,925,652         1,908,191

Stockholders' equity (deficit):
  Common stock, $.01 par value:
     20,000,000 shares authorized; 11,413,501 and
     9,201,111 shares issued and outstanding in
     1998 and 1997, respectively                                                   114,135            92,011
Additional paid-in capital                                                      10,854,938         9,477,395
Accumulated deficit                                                            (13,967,149)      (10,783,475)
                                                                          -----------------  ----------------
        Total stockholders' equity (deficit)                                    (2,998,076)       (1,214,069)
                                                                          -----------------  ----------------

Total liabilities and stockholders' equity (deficit)                          $    927,576      $    694,122
                                                                          -----------------------------------
                                                                          -----------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.

                                       13
<PAGE>


SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND  1997

<TABLE>
<CAPTION>
                                                                                        1998             1997
                                                                                   ---------------  ----------------
<S>                                                                                <C>              <C>
Revenues:
  Sales                                                                               $    29,750       $         0
  Contract revenues                                                                             0           325,000
                                                                                   ---------------  ----------------
               Total revenues                                                              29,750           325,000

Cost of sales                                                                               4,104                 0
                                                                                   ---------------  ----------------
          Gross profit                                                                     25,646           325,000

  Selling, general and administrative expenses                                          1,560,947         1,794,852
  Research and development expenses                                                     1,509,510         1,857,670
                                                                                   ---------------  ----------------
             Total operating expenses                                                   3,070,457         3,652,522

             Operating loss                                                            (3,044,811)       (3,327,522)

Other income (expense):

  Interest income                                                                           6,786            18,821
  Interest and other expenses                                                            (142,915)          (12,186)
                                                                                   ---------------  ----------------

             Total other expense                                                         (136,129)            6,635
                                                                                   ---------------  ----------------

  Loss from operations before income taxes                                             (3,180,940)       (3,320,887)

Income taxes (benefit)                                                                      2,734            (1,493)
                                                                                   ---------------  ----------------

               Net loss                                                               $(3,183,674)      $(3,319,394)
                                                                                   ---------------  ----------------
                                                                                   ---------------  ----------------

Net loss per share - basic and diluted                                                     ($0.34)           ($0.38)

Weighted Average shares used in computing net loss per share
-basic and diluted                                                                      9,450,926         8,675,416
                                                                                   ---------------  ----------------
                                                                                   ---------------  ----------------
</TABLE>


See accompanying notes to consolidated financial statements.

                                       14


<PAGE>



SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                        ADDITIONAL          ACCUMULATED            TOTAL 
                                                                         PAID-IN             (DEFICIT)          STOCKHOLDERS'  
                                             COMMON STOCK                CAPITAL                                   EQUITY
                                        SHARES           AMOUNT 
<S>                                     <C>              <C>            <C>               <C>               <C>
Balance January 1, 1997                 8,533,191          $85,332        $ 8,709,039       $ (7,464,081)            $ 1,330,290

Issuance of common stock, net             667,920            6,679            442,796                  --                449,475

Issuance of warrants                           --               --            325,560                  --                325,560

Net loss                                       --               --                 --         (3,319,394)             (3,319,394)
                                     -------------   --------------  -----------------  ------------------  ---------------------

Balance December 31, 1997               9,201,111           92,011          9,477,395        (10,783,475)             (1,214,069)
                                     -------------   --------------  -----------------  ------------------  ---------------------

Issuance of common stock                2,212,390           22,124            976,180                                    998,304

Issuance of warrants                                                          231,035                                    231,035

Issuance of stock options                                                       7,070                                      7,070

Common stock subscribed                                                       163,258                                    163,258

Net loss                                                                                      (3,183,674)             (3,183,674)
                                     -------------   --------------  -----------------  ------------------  ---------------------

Balance December 31, 1998              11,413,501         $114,135        $10,854,938       $(13,967,149)            $(2,998,076)
                                     -------------   --------------  -----------------  ------------------  ---------------------
                                     -------------   --------------  -----------------  ------------------  ---------------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       15

<PAGE>


SPATIALIGHT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                            1998            1997
                                                                                      --------------- ----------------
<S>                                                                                   <C>             <C>
Cash flows from operating activities:

Net loss                                                                               $ (3,183,674)    $ (3,319,394)

Adjustments to reconcile net loss to net cash used by operating activities:
Non-cash items:
    Depreciation and amortization                                                             82,798           59,126
    Acquisition of minority interest of SOC in exchange for common stock                           0          421,376
    Common stock issued as compensation to employees                                          21,500           21,251
    Common stock issued as payment for services                                              250,058           16,250
    Warrants issued with convertible securities & loan extensions                            231,035           25,560
    Legal claim settled with warrant issuance settlement                                           0          300,000
Changes in assets and liabilities:
     Accounts receivable                                                                    (30,492)           40,021
     Inventories                                                                            (18,296)           75,401
     Prepaid expenses and other current assets                                                 7,253            4,658
     Other assets                                                                          (133,943)         (40,384)
     Accounts payable                                                                      (328,366)          699,844
     Accrued expenses and other current liabilities                                         (31,142)           19,254
                                                                                      --------------- ----------------
                             Net cash used by operating activities                       (3,133,269)      (1,677,037)

Cash flows from investing activities:
    Capital expenditures                                                                    (86,312)        (208,292)
                                                                                      --------------- ----------------
                             Net cash used by investing activities                          (86,312)        (208,292)

Cash flows from financing activities:
    Common stock issuance costs                                                                    0          (9,402)
    Common stock and options issued in lieu of cash                                          897,074                0
    Long term capital lease obligation                                                      (28,060)           53,479
    Issuance of notes payable                                                              2,405,029          932,478
                                                                                      --------------- ----------------
                         Net cash provided by financing activities                         3,274,043          976,555

Net (decrease) increase cash and cash equivalents                                             54,462        (908,774)

Cash and cash equivalents, beginning of year                                                 415,624        1,324,398
                                                                                      --------------- ----------------
Cash and cash equivalents, end of year                                                      $470,086         $415,624
                                                                                      --------------- ----------------
                                                                                      --------------- ----------------

Supplemental disclosure of cash flow information:
    Cash paid for interest                                                                    50,150           13,223
    Cash paid for taxes                                                                        2,665            3,887
Supplemental disclosure of non cash investing and financing activities:
Common stock issued in conjunction with acquisition of
   remaining minority interest of SOC                                                             0           421,376
    Common stock issued as compensation to employees                                          21,500           21,251
    Common stock issued as payment for services                                              250,058           16,250
    Legal claim settled with warrant issuance settlement                                           0          300,000
    Warrants issued with convertible securities & loan extensions                            231,035           25,560
Common stock issued upon conversion of securities                                            733,816                0
Common stock subscribed                                                                      163,258                0
</TABLE>

See accompanying notes to consolidated financial statements.

                                       16

<PAGE>

SPATIALIGHT, INC. AND SUBSIDIARY
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997

1.       DESCRIPTION OF BUSINESS

         SpatiaLight, Inc. and its subsidiary (the "Company") develops, designs,
         and markets miniature high-resolution active matrix liquid crystal
         displays for computer, video, and other applications.

2.       GOING CONCERN UNCERTAINTY

         The Company's operations are constrained by an insufficient amount of
         working capital. The Company continues to experience negative cash
         flows and net operating losses. The Company's operations in recent
         months have been funded by loans by and convertible securities, which
         are secured by substantially all the assets of the Company. The Company
         continues its efforts to locate sources of additional financing. There
         can be no assurance that additional loans or any other financing will
         be available to the Company. For this reason, there is uncertainty
         whether the Company can continue as a going concern.

         The accompanying consolidated financial statements have been 
         prepared assuming that the Company will continue as a going concern. 
         This contemplates the realization of assets and the satisfaction of 
         liabilities in the normal course of business. The Company incurred 
         significant operating losses in each of the last five fiscal years 
         and incurred a net loss in fiscal 1998 of $3,183,674. Additionally, 
         as of December 31, 1998 the Company's accumulated deficit totaled 
         $13,967,149. The Company has generated limited revenues to date and 
         the development, commercialization and marketing of the Company's 
         products will require substantial expenditures in the foreseeable 
         future. The successful completion of the Company's development 
         program and ultimately, the attainment of profitable operations, is 
         dependent upon future events. These events include obtaining 
         adequate financing to fulfill its development activities, successful 
         launching of the commercial production and distribution of its 
         products and achieving a level of sales adequate to support the 
         Company's cost structure. These matters, among others, may indicate 
         that the Company will be unable to continue as a going concern for a 
         reasonable period of time.

         The consolidated financial statements do not include any adjustments
         relating to the recoverability and classification of recorded asset
         amounts or the amounts and classification of liabilities that might be
         necessary should the Company be unable to continue as a going concern.

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

             -   Raising additional capital.
             -   Outsourcing of all manufacturing activities, which will 
                 be monitored by Company's staff.
             -   Developing strategic alliances with potential customers and/or 
                 licensing of the Company's technology.
             -   Development contracts with customers to customize the Company's
                 displays for use in their products.

3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         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 in consolidation.

                                       17

<PAGE>




SPATIALIGHT, SPATIALIGHT, INC. AND SUBSIDIARY
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997

         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, purchased with original
         maturities of three months or less.

         INVENTORIES -- Inventories are stated at the lower of cost or market,
         cost being determined on a first-in, first-out (FIFO) basis.

         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 3 to 5 years.

         REVENUE RECOGNITION -- Revenue is generally recognized at the time
         product is shipped, or when engineering projects are completed.

         INCOME TAXES -- The Company uses the asset and liability method to
         account for income taxes, in accordance with Statement of Financial
         Accounting Standards No. 109, "Accounting for Income Taxes."

         RESEARCH AND DEVELOPMENT -- Research and development costs are charged
         to expense when incurred.

         CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
         subject the Company to concentration of credit risk consist of trade
         receivables. The Company's credit risk is mitigated by the Company's
         credit evaluation process and the reasonably short collection term. The
         Company does not require collateral or other security to support
         accounts receivable.

         FINANCIAL INSTRUMENTS -- The Company's financial instruments include
         cash and cash equivalents, and debt. At December 31, 1998 and 1997, the
         fair values of these instruments approximated their financial statement
         carrying amounts.

         STOCK-BASED COMPENSATION -- The Company accounts for its employee stock
         option plan in accordance with the provisions of Accounting Principles
         Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
         Accordingly, no accounting recognition is given to stock options
         granted at fair market value until they are exercised. Upon exercise,
         the net proceeds are credited to stockholders' equity (deficit).

         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 costs to sell.

                                       18

<PAGE>



         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 1997, the Financial
         Accounting Standards Board (FASB) issued Statement of Financial
         Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
         which requires an enterprise to report, by major components and as a
         single total, the change in its net assets during the period from
         nonowner sources; and SFAS No. 131, "Disclosures About Segments of an
         Enterprise and Related Information," which establishes annual and
         interim reporting standards for an enterprise's business segments and
         related disclosures about its products, services, geographic areas and
         major customers. The Company had no comprehensive income items to
         report for either of the two years in the period ended December 31,
         1998. The Company currently operates one reportable segment under SFAS
         No. 131. Adoption of these statements in 1998 did not impact the
         Company's financial position, results of operations or cash flows.

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
         Instruments and Hedging Activities," which defines derivatives,
         requires that all derivatives be carried at fair value, and provides
         for hedge accounting when certain conditions are met. SFAS No. 133 is
         effective for the Company in fiscal 2000. Although the Company has not
         fully assessed the implications of SFAS No. 133, the Company does not
         believe that adoption of this statement will have a material impact on
         the Company's financial position or results of operation.

4.       ISSUANCE OF COMMON STOCK AND WARRANTS

         In June 1997 the Company issued 400,000 warrants to purchase the 
         Company's common stock at an exercise price of $1.00 per share. The 
         warrants expire in 2000 and were issued to settle litigation. The 
         Company recorded a legal expense of $300,000 as a result of this 
         issuance.

         In July 1997 the Company issued 14,000 shares of common stock as
         compensation to employees. The issuance was recorded as $21,251 to
         salary expense.

         In October 1997, the Company issued 25,000 shares of common stock
         in exchange for consulting services of $16,250. The Company recorded 
         this transaction as consulting expense.

         In October 1997, the Company acquired the 20% of SpatiaLight of
         California, Inc. which it did not previously own, in exchange for
         629,000 shares of the Company's common stock. The acquisition was
         recorded as research and development expense.

         In January 1998 the Company issued 115,000 shares of common stock for
         consulting services performed and accrued in 1997. The value of these
         services totaled approximately $95,000.

         In March 1998 the Company issued 249,700 shares of common stock in
         exchange for the extinguishment of approximately $125,000 of accounts
         payable from 1997. Also in March 1998, convertible securities of
         $350,750 were converted into 958,105 shares of common stock at an 
         exercise price of $0.34 per share in accordance with the terms of 
         the original agreement. Expenses of $116,408 were recorded on the 
         conversion.

         In April 1998 convertible securities of $199,250 were converted into 
         758,505 shares of common stock at an exercise price of $0.26 per 
         share in accordance with the terms of the original agreement. The 
         Company recorded an expense of $67,408 upon the conversion.

         In October 1998, the Company issued 20,000 warrants with an exercise 
         price of $1.50 per share in exchange for legal services. The 
         warrants expire in the year 2000 and the Company recorded an expense 
         of $6,932 as a result of this transaction.

         In November 1998, the Company issued 86,000 shares of common stock as
         compensation to employees. The issuance was recorded as $21,500 of
         salary expense. In addition 45,000 shares of common stock were issued
         to vendors for consulting expenses at a value of $22,825.

                                       19

<PAGE>


SPATIALIGHT, SPATIALIGHT, INC. AND SUBSIDIARY
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998 AND 1997

5.       NOTES PAYABLE

         Short-term notes payable at December 31, 1997 consist of the following:

         Short-term notes totaling $232,479, including accrued interest. The 
         borrowings were made to provide working capital and accrued interest 
         at 10-12% per annum. In conjunction with the notes issuance, the 
         Company issued 21,000 warrants to purchase the Company's common 
         stock at an average exercise price of $0.86 per share. Of the total, 
         $151,556 was due in February 1998 and was extended during 1998 in 
         exchange for 84,000 additional warrants to purchase the Company's 
         common stock at an average exercise price of $0.61 per share and 
         which expire during the years 2000 and 2001. The remaining $80,293 
         was due upon demand and subsequently extended to March 1998.

         A line of credit agreement for $250,000 with a bank under which the
         Company could borrow up to an amount equal to the Certificate of
         Deposit on deposit for the line of credit. The purpose of the line of
         credit was to facilitate working capital. Under terms of the credit
         agreement, interest is accrued at the greater of Prime or the
         certificate of deposit interest rate plus 2 percent. The line of credit
         expired on June 8, 1998.

         A convertible debenture with a principal amount of $450,000 was 
         issued in December 1997 to a purchaser outside the United States in 
         conjunction with a private placement. The debenture had a two year 
         term, carried a 3% interest rate and was convertible into the 
         Company's common stock at 120% of the five day average closing bid 
         price for the common stock at the issuance date or, if lower, 75% of 
         the five day average closing bid price of the stock at the time the 
         debt was converted. The debenture was recorded in short-term 
         liabilities and subsequently converted in March of 1998. As part of 
         the issuance of this debenture the Company issued 45,000 warrants to 
         purchase the Company's common stock at an exercise price of $0.84. 
         The warrants expire in 2002.

         Short-term notes payable at December 31, 1998 consist of the following:

         A short-term note of $55,556, including accrued interest. The borrowing
         was made to provide working capital, and accrues interest at 10% per
         annum. The note was due on February 27, 1998 and has been extended
         indefinitely in exchange for 8,000 warrants to purchase the Company's 
         common stock at an exercise price of $0.83 per share. The warrants 
         expire in 2000.

         Short-term convertible notes totaling approximately $3,281,952 were 
         issued during 1998. The notes accrue interest at 6% and were 
         originally due on December 31, 1998. Accrued interest of 
         approximately $24,000 was paid in cash in exchange for extending the 
         notes to December 31, 1999. The notes are convertible into the 
         Company's common stock at $.50 to $.75 per share and are secured by 
         substantially all the assets of the Company. As part of the note 
         issuance costs, the Company issued 360,000 warrants to purchase the 
         Company's common stock at an average exercise price of $2.00 and the 
         warrants expire at various times in the years 2000, 2001 and 2002.

         In November 1998, the Company issued 300,000 warrants with an 
         average exercise price of $2.00 per share in exchange for consulting 
         services. The warrants expire at various times in the years 2000, 
         2001 and 2002.

6.       PROPERTY AND EQUIPMENT

         Property and equipment as of December 31 consist of the following:

<TABLE>
<CAPTION>
                                                                 1998                      1997
                                                         ----------------------    ---------------------
                                                                                                                                   
<S>                                                      <C>                       <C>
              Office furniture and fixtures                   $ 97,119                  $ 96,333
              Machinery and equipment                          360,719                   275,193
                                                         ----------------------    ---------------------
                                                               457,838                   371,526

              Less accumulated depreciation                    236,340                   153,542
                                                         ----------------------    ---------------------
                                                              $221,498                  $217,984
                                                         ----------------------    ---------------------
                                                         ----------------------    ---------------------
</TABLE>

         Included in office furniture and fixtures at December 31, 1998 and 1997
         is equipment acquired under capital leases of $25,558 and $25,558,
         respectively with accumulated depreciation of $8,159 and $3,626,
         respectively. The Company incurred depreciation expense of $82,798 and
         $65,211 at December 31, 1998 and 1997, respectively.

                                       20

<PAGE>

7.       INCOME TAXES

         The company's net deferred tax assets at December 31, are comprised 
         of the following:

<TABLE>
<CAPTION>
                                                                                1998                      1997
                                                                        ----------------------    ---------------------
<S>                                                                     <C>                       <C>
         Deferred Tax Assets:
              Net Operating Loss Carryforwards                                3,996,850                 2,832,103
              Equity Investment Losses                                          537,764                   537,764
              Accrued Expenses                                                  119,503                   119,503
              Research and Development Credits                                  338,790                   184,180
              Other                                                             222,139                   120,618
                                                                        ----------------------    ---------------------
         Total Deferred Tax Assets                                            5,215,046                 3,794,168
                                                                        ----------------------    ---------------------
         Valuation allowance                                                 (5,215,046)               (3,794,168)
              Net                                                                     0                         0
                                                                        ----------------------    ---------------------
                                                                        ----------------------    ---------------------
</TABLE>

         No tax benefit has been recorded because of the net operating losses 
         incurred and full valuation allowance provided. A valuation 
         allowance is provided when it is more likely than not that some 
         portion of the deferred tax assets will be realized. The company 
         established a 100% valuation allowance at December 31, 1998 and 1997 
         due to the uncertainty of realizing future tax benefits from its net 
         operating loss carryforwards and other deferred tax assets.

         As of December 31, 1998 and 1997, the Company has net operating losses
         of approximately $10,300,000 and $7,400,000 for federal and $8,300,000
         and $5,400,000 for state tax purposes, respectively, which begin to
         expire in 2006 for federal and have already begun to expire for state.
         In addition, as of December 31, 1998 and 1997, the Company has research
         and development credit carryforwards of approximately $217,000 and
         $129,000 for federal and $122,000 and $55,000 for state tax purposes,
         which will not expire. Approximately $1,400,000 and $1,200,000 of the
         federal and California net operating loss carryforwards, respectively,
         will be subject to annual limitations in future taxable periods.

         Internal Revenue Code Section 382 places a limitation (the "Section 382
         Limitation") on the amount of taxable income which can be offset by net
         operating loss ("NOL") carryforwards after a change in control
         (generally greater than 50% change in ownership) of a loss corporation.
         California has similar rules. Generally, after a control change, a loss
         corporation cannot deduct NOL carryforwards in excess of the Section
         382 Limitation. Due to these "change in ownership" provisions,
         utilization of the NOL and tax credits carryforwards may be subject to
         an annual limitation regarding their utilization against taxable income
         in future periods.

8.       STOCKHOLDERS' EQUITY

         STOCK OPTION PLAN -- The Company has various Stock Option Plans
         primarily for employees and directors. The Plans authorize the issuance
         of options to purchase up to 2,010,000 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.

                                       21

<PAGE>

         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.

         Options under the Plans are granted at the discretion of the Board of
         Directors/Compensation Committee. All options granted through 1998 have
         been granted at fair market value.

         On February 25, 1997 the Company repriced the exercise price and
         extended the vesting period of 365,000 outstanding options (originally
         granted from $0.875 to $3.13) to $0.625

         The following is a status of the options under the Plans and a summary
         of the changes in options outstanding during 1998 and 1997:

<TABLE>
<CAPTION>
                                                          NUMBER OF SHARES    WEIGHTED AVERAGE
                                                                                    PRICE
                                                         ----------------------------------------
<S>                                                      <C>                  <C>
                   Outstanding January 1, 1997                        10,000       $3.00
                   Options granted                                 1,345,000       $0.79
                   Options canceled                                        0           -
                                                         --------------------      -----

                   Outstanding, December 31, 1997                  1,355,000       $0.80
                   Options granted                                 1,620,000       $0.58
                   Options canceled                               -1,320,000       $0.67
                                                         --------------------      -----

                   Outstanding, December 31, 1998                  1,655,000       $0.69
                                                         --------------------      -----
                                                         --------------------      -----
</TABLE>

         Statement of Financial Accounting Standards No. 123, Accounting for
         Stock-Based Compensation, (SFAS 123) requires the disclosure of pro
         forma net loss and loss per share had the Company adopted the fair
         value method as of the beginning of fiscal 1995. Under SFAS 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.

         The Company's calculations were made using the Black-Scholes
         option-pricing model with the following weighted average assumptions:
         Expected life 36 months in 1998 and 36 months in 1997. Stock
         volatility, 112% in 1998 and 113% in 1997. Risk free rates of 5.18% in
         1998 and 6.08% in 1997. 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 1998 and 1997 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,
                                                                          1998                      1997
                                                                ----------------------    ---------------------
<S>                                                             <C>                       <C>
         Net loss, as reported                                           $(3,183,674)             $(3,319,394)
         Pro forma net loss                                               (3,325,463)              (3,486,637)

         Net loss per share -- basic and diluted                              $(0.34)                  $(0.38)
         Pro forma net loss per share -- basic and diluted                     (0.35)                   (0.40)
</TABLE>

         Options exercisable as of December 31, 1998 and 1997 totaled
         approximately 257,500 and 10,000 options at a weighted average exercise
         price of $0.65 and $3.00 respectively.

                                       22

<PAGE>




         Additional information regarding options outstanding as of December 31,
1998 is as follows:

<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING       OPTIONS EXERCISABLE
                                              -------------------       -------------------
                                              Weighted
                                              Average       Weighted                Weighted
                                              Remaining     Average                 Average
         Range of           Outstanding at    Contractual   Exercise    Number      Exercise
         Exercisable Prices December 31, 1998 Life (Yrs.)   Price       Exercisable Price
         ---------------------------------------------------------------------------------------
<S>                         <C>               <C>           <C>         <C>         <C>
         $3.00                         10,000    4.5           $3.00         10,000       $3.00
         $0.25-$0.81                1,645,000    9.1           $0.65        257,500       $0.65
                            ------------------                          ------------
                                    1,655,000                               267,500
                            ------------------                          ------------
                            ------------------                          ------------
</TABLE>


         At December 31, 1998, 350,000 shares and 5,000 shares were available
         for future grants under the Employee Stock Option Plan and Non-Employee
         Directors' Plan, respectively.

9.       SEGMENT INFORMATION AND MAJOR CUSTOMERS

         The Company operates a single business segment and the Company's
         revenue for 1998 consisted of sales of developer kits. The Company's
         revenue for 1997 of $325,000 represented a single contract for
         engineering services.

10.      COMMITMENTS AND CONTINGENCIES

         The Company has various operating lease arrangements for equipment and
         office space. Total rent expense under operating leases amounted to
         approximately $68,000 and $60,000 in 1998 and 1997, respectively. The
         office leases are on a month-to-month basis.

11.      CERTAIN TRANSACTIONS

         From December 1997 through July 1998 Argyle Capital Management
         Corporation, a company affiliated with Robert Olins, a Director of the
         Company, purchased Convertible Secured Notes of the Company in the
         outstanding principle amount $1,188,000. These Convertible Secured
         Notes accrue interest at 6% and are convertible $0.50 per share.

12.      LEGAL PROCEEDINGS

         On July 30, 1998, L. John Loomis, the Company's former President and 
         Chief Operating Officer, filed a Complaint in the Superior Court of 
         Marin County, California (Case No. 174538) against the Company, the 
         Company's CEO, Treasurer, and Director, Michael Burney, and 
         directors Robert Olins and Lawrence Matteson. The Complaint alleged 
         wrongful discharge, breach of contract, breach of the covenant of 
         good faith and fair dealing, violation of California Labor Code 
         Section 201 and defamation by the defendants in connection with the 
         separation of Mr. Loomis' employment with the Company on June 24, 
         1998. Mr. Loomis' complaint seeks unspecified general and 
         compensatory damages, punitive damages and attorney's fees. The 
         Company, along with the other defendants, intends to continue 
         defending against these claims. Mr. Loomis subsequently filed a 1st 
         amended complaint seeking substantially the same relief. The Company 
         has filed a cross-complaint against Mr. Loomis.


                                       23

<PAGE>

13.      SUBSEQUENT EVENTS

         Subsequent to year-end the Company issued an additional $250,000 of
         Convertible Secured Notes which accrue interest at 6% and are due
         December 31, 1999. The notes are convertible into the Company's Common
         stock at $0.75 per share and share the security of substantially all
         the assets of the Company with previous convertible note holders.


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

         None

                                   PART III


ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS and CONTROL PERSONS 
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

<TABLE>
<CAPTION>
                NAME                 AGE                            POSITION(S)
                ----                 ---                            -----------
<S>                                  <C>    <C>
      Michael H. Burney              46     Director, Chief Executive Officer, Treasurer, Secretary
      Fred R. Hammett                57     President
      Asa W. Lanum                   51     Director
      Lawrence J. Matteson           59     Director
      Robert A. Olins                42     Director
      Miles L. Scott                 48     Vice President Manufacturing/Engineering
</TABLE>

         All Directors serve for terms of one year and until their successors 
are duly elected. All officers serve at the discretion of the Board of 
Directors.

DESCRIPTION OF BUSINESS EXPERIENCE.

         MICHAEL H. BURNEY, Director, Chief Executive Officer, Treasurer and 
Secretary, is also the Founder, Chairman and CEO of Chronomotion Imaging, a 
private R & D company developing a patented process for producing Volumetric 
Visualizations using electronic holography. Mr. Burney was the Vice President 
Treasury for Packard Bell Electronics from 1990 to 1995 and he was a member 
of the General Management Consulting / Financial Services Group of Ernst & 
Young from 1987 to 1990. Mr. Burney has received 3 U.S. patents and 15 
international patents on the electronic holography process, which is the 
basis of Chronomotion's intellectual property. Mr. Burney received his BA 
from Pomona College and his MBA from University of Southern California.

         FRED R. HAMMETT, President, was previously with ExperTeam during 
1997 and 1998, which is an organization providing professional business 
resources to companies in growth or change phases. From 1996 to 1997 Mr. 
Hammett was President and Chief Operating Officer for Infinitron Research 
International, Inc. From 1994 to 1996 Mr. Hammett was Vice President, Sales 
and Marketing for UniCAD, Inc., and before that Regional Manager for Quad 
Design, a Viewlogic Company. In addition to his 18 years in marketing, sales 
and management positions at Hewlett Packard, he has worked with two 
successful turnarounds and four successful startups. Mr. Hammett attended the 
Electronic and Communications School of the US Air Force and studied 
economics and math at the University of New Mexico.


                                       24

<PAGE>

         ASA W. LANUM, Director, has served as a Director since February 6, 
1998. Mr. Lanum has been a principal of the CTO Group since February 1995. 
CTO Group is a consulting organization providing strategic marketing, product 
and technology advise to end users and systems vendors. Previously Mr. Lanum 
held the position of Senior Vice President, Chief Technology Officer for Open 
Vision Technologies from 1992 to January 1995.

         LAWRENCE J. MATTESON, Director, served as Chairman of the Board from 
May 23, 1995 to June 20, 1997. He has been a Director since October 1991 and 
currently he 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 1, 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 1, 1991. He holds 
degrees in engineering and an MBA from the University of Rochester Graduate 
School of Business.

         ROBERT A. OLINS, Director, has served as Director since February 20, 
1998. Mr. Olins has served as President of Argyle Capital Management 
Corporation during the past fourteen years. Argyle Capital Management 
Corporation is a private investment advisory company.

         MILES L. SCOTT, Vice President Manufacturing/Engineering, 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. Previous to 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.

ITEM 10. EXECUTIVE COMPENSATION

         The following table sets forth the compensation paid by the Company 
for the fiscal year ended December 1998 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 1998.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                SECURITIES UNDERLYING
                        NAME AND PRINCIPAL POSITION                   YEAR        SALARY           OPTIONS/SARS (#)
                        ---------------------------                   ----        ------         ---------------------
<S>                                                                   <C>         <C>            <C>
           Michael H. Burney, CEO, Treasurer/Secretary                1998         $63,654               525,000

           William E. Hollis, Former Chairman & CEO                   1998        $170,559               280,000
</TABLE>
                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                      (a)                  (b)               (c)                (d)                  (e)
                                        NUMBER OF     % OF TOTAL
                                        SECURITIES    OPTIONS/SARs
                                        UNDERLYING    GRANTED TO
                                       OPTIONS/SARs   EMPLOYEES IN        EXERCISE OR BASE      EXPIRATION
                     NAME              GRANTED (#)    FISCAL YEAR           PRICE ($/SH)           DATE
           -------------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>                 <C>                   <C>
           Michael H. Burney               500,000        31%                $0.75              11/06/08

           William E. Hollis                     0        0%                  0                    0
</TABLE>

                                       25

<PAGE>

OPTIONS EXERCISES AND FISCAL YEAR-END VALUES

         The following table sets forth information with respect to options 
to purchase common stock granted to the Company's named executive officers 
including: (i) the number of shares of common stock purchased upon exercise 
of options in the fiscal year ending December 31, 1998; (ii) the net value 
realized upon such exercise; (iii) the number of unexercised options 
outstanding at December 31, 1998; and (iv) the value of such unexercised 
options at December 31, 1998.

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                         DECEMBER 31, 1998 OPTION VALUES

<TABLE>
<CAPTION>
                                                                                                   VALUE OF
                                                                               NUMBER OF         UNEXERCISED
                                                                              UNEXERCISED        IN-THE-MONEY
                                                                            OPTIONS AT DEC.    OPTIONS AT DEC.
                                                   SHARES                    31, 1998 (#)        31, 1998 ($)
                                                ACQUIRED ON      VALUE       EXERCISABLE /      EXERCISABLE /
                          NAME                  EXERCISE (#)  REALIZED ($)   UNEXERCISABLE      UNEXERCISABLE
                          ----                  ------------  ------------   -------------      -------------
<S>                                             <C>           <C>          <C>                <C>
          Michael H. Burney                          0             0       17,500 / 507,500   $31,675 / 918,575

          William E. Hollis                          0             0          280,000 / 0        $506,800 / 0
</TABLE>

COMPENSATION OF DIRECTORS.  Non-management directors are paid $500.00 for 
each board meeting attended. Directors who are also full-time employees are 
not paid Directors' fees.

EMPLOYMENT CONTRACTS.

         None

                                       26

<PAGE>

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 March 10, 1999, 
(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 (1)
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                              <C>
          Argyle Capital Management Corporation............                      2,533,158(2)                   18.0%
                   Robert A. Olins
                   14 East 82nd
                   New York, New York 10028
---------------------------------------------------------------------------------------------------------------------------
          Raymond L. Bauch.................................                       1,956,600                     16.9%
                   14 Office Drive Park, Suite 1
                   Palm Coast, FL 32137
---------------------------------------------------------------------------------------------------------------------------
          Sabotini, Ltd....................................                     2,060,000 (3)                   16.4%
                   C/O Wychwood Trust Ltd.
                   1 Castle St.
                   Castletown
                   Isle of Man, British Isles
---------------------------------------------------------------------------------------------------------------------------
          Steven Francis Tripp.............................                     2,151,600 (4)                   15.7%
                   Noteholder Representative
                   2021 Brook Highland Ridge
                   Birmingham, Alabama 35242
---------------------------------------------------------------------------------------------------------------------------
          Jalcanto, Ltd. ..................................                     1,267,500 (5)                   10.8%
                   C/O Wychwood Trust Ltd.
                   1 Castle St.
                   Castletown
                   Isle of Man, British Isles
---------------------------------------------------------------------------------------------------------------------------
          Michael H. Burney................................                       17,500(6)                       *
                   8-C Commercial Blvd.
                   Novato, CA  94949
---------------------------------------------------------------------------------------------------------------------------
          Fred R. Hammett..................................                           0                           *
                   8-C Commercial Blvd.
                   Novato, CA  94949
---------------------------------------------------------------------------------------------------------------------------
          Miles L. Scott...................................                           0                           *
                   8-C Commercial Blvd.
                   Novato, CA  94949
---------------------------------------------------------------------------------------------------------------------------
          Lawrence J. Matteson.............................                       17,500(7)                       *
                   8-C Commercial Blvd.
                   Novato, CA  94949
---------------------------------------------------------------------------------------------------------------------------
          Asa Lanum........................................                       12,500(8)                       *
                   8-C Commercial Blvd.
                   Novato, CA  94949
---------------------------------------------------------------------------------------------------------------------------
          All directors and officers as a group                                     60,000                        *
                   (6 persons).............................
---------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------
          * Represents less than 1%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       27

<PAGE>

(1)      Based upon a total of 11,555,554 shares outstanding as of March 10, 
         1999.

(2)      Includes 2,520,658 shares held by Argyle Capital Management
         Corporation, of which Mr. Olins is President and over which Mr. Olins
         exercises voting control. Also includes 12,500 shares subject to
         outstanding stock options held by Mr. Olins that are exercisable on or
         before May 10, 1999.

(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.
         Includes 992,500 shares subject to warrants exercisable within 60 days
         of March 10, 1999.

(4)      Based solely upon information filed on Schedule 13D by the named 
         shareholder on March 9, 1999, which amended the Schedule 13D filed 
         on November 25, 1998. These Schedule 13Ds were filed when certain 
         investors, who may be deemed to be a "Group" for purposes of Section 
         13(d)(3) of the Securities Exchange Act of 1934 purchased 
         Convertible Secured Notes of the Company that are convertible into 
         common stock of the Company within 60 days of March 10, 1999. To 
         date, none of these Convertible Secured Notes have been converted 
         into shares of common stock of the Company.

(5)      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.
         Includes 200,000 shares subject to warrants exercisable within 60 days
         of March 10, 1999.

(6)      Includes 17,500 shares subject to options exercisable within 60 days 
         of March 10, 1999.

(7)      Includes 17,500 shares subject to options exercisable within 60 days 
         of March 10, 1999.

(8)      Includes 12,500 shares subject to options exercisable within 60 days 
         of March 10, 1999.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         From December 1997 through July 1998 Argyle Capital Management
         Corporation, a company affiliated with Robert Olins, a Director of the
         Company, purchased Convertible Secured Notes of the Company in the
         outstanding principle amount $1,188,000. These Convertible Secured
         Notes accrue interest at 6% and are convertible $0.50 per share.

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

<TABLE>
<CAPTION>
               EXHIBIT #       DESCRIPTION
<S>                            <C>
                  3.1*         Certificate of Incorporation
                  3.2*         By-laws
                  4.5*         Form of Debenture
                  4.6*         Registration Rights Agreement
                  4.7*         Form of Convertible Secured Loan Agreement
                               (incorporated by reference to Exhibit 3 of the
                               Lenders' Schedule 13D, as filed with Commission
                               as of November 25, 1998)
                  4.8*         Form of Convertible Secured Note (incorporated by
                               reference to Exhibit 2 of the Lenders' Schedule
                               13D, as filed with the Commission as of November
                               25, 1998)
                  4.9*         Form of Security Agreement (incorporated by
                               reference to Exhibit 4 of the Lenders' Schedule
                               13D, as filed with the Commission as of November
                               25, 1998)
                  4.10*        Form of Intercreditor Agreement (incorporated by
                               reference to Exhibit 5 of the Lenders' Schedule
                               13D, as filed with the Commission as of November
                               25, 1998)
</TABLE>


                                       28

<PAGE>

<TABLE>
<S>                            <C>
                  4.11*        Form of Registration Rights Agreement
                               (incorporated by reference to Exhibit 6 in the
                               Lenders' Schedule 13D, as filed with the
                               Commission as of November 25, 1998)
                 10.1*#        1991 Stock Option Plan
                 10.2*#        Form of Officers and Directors Agreement
                 10.3*#        Employee Stock Option Plan
                 10.4*#        Director Stock Option Plan
                 10.5*         Agreement between Sayett Group, Inc.and 
                                        Intervision Systems, Inc. 
                                        Dated March 11, 1994
                 10.6*         Agreement and Plan of Reorganization, dated 
                                        January 26, 1995
                 10.7*         Sayett Group, Inc. and WAH III Technology 
                                       Subscription and Stock Purchase 
                                       Agreement, dated November 25, 1992
                 10.8*         Amendment to Subscription and Stock Purchase 
                                       Agreement, dated June 29, 1993
                 10.9*         Second Amendment to Subscription and Stock 
                                        Purchase Agreement, Dated April 27, 1994
                 10.10*        Stock Purchase Agreement, dated July 19, 1994
                 10.11*        Share Purchase Agreements dated July 10, 1996 
                                        between the Company and each of 
                                        Jalcanto, Ltd. and Sabotini, Ltd.
                 10.12*        Agreement and Warrant to Purchase 792,500 Common
                                        Shares of SpatiaLight, Inc. as issued 
                                        to each of Jalcanto, Ltd. and 
                                        Sabotini, Ltd.
                 10.13*        Amendment to Share Purchase Agreements dated 
                                        November 11, 1996 with each of 
                                        Jalcanto, Ltd. and Sabotini, Ltd.
                 10.14*#       Employment Agreement between the Company and 
                                        William E. Hollis dated July 1, 1996
                 10.15*#       Employment Agreement between the Company and 
                                        Dean S. Irwin dated July 1, 1996
                 10.16*        Distribution Agreement between SpatiaLight of 
                                        California, Inc. and Meadowlark Optics
                 10.17*#       Employment agreement between the Company and 
                                        L. John Loomis dated February 17, 1997
                 10.18*        Form of Securities Purchase Agreement
                 10.19*#       Revised Employment Agreement between the Company
                                        and William E. Hollis dated September 
                                        19, 1997
                 10.20*#       Revised Employment agreement between the 
                                        Company and L. John Loomis dated 
                                        September 19, 1997
                 10.21*#       Revised Employment Agreement between the Company
                                        and Dean S. Irwin dated September 
                                        19, 1997
                 21.1          Subsidiaries of the Company
                 23.1          Consent of Independent Public Accountants
                 27.1          Financial Data Schedule
                 99.1*         Press Release of SpatiaLight, Inc. dated 
                                        December 2, 1998.
</TABLE>

          #  Designates management contracts and compensatory plans.
          *  Previously filed.

                                       29


<PAGE>



         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 30th day of 
March 1999.

                                    SPATIALIGHT, INC.

                                    By: /s/ Michael H. Burney
                                    Michael H. Burney
                                    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/ Michael H. Burney       Chief Executive Officer,           March 30, 1999
------------------------    Treasurer, Secretary and
Michael H. Burney           Director (PRINCIPAL EXECUTIVE, FINANCIAL &
                            ACCOUNTING OFFICER)


/s/ Lawrence J. Matteson    Director                           March 30, 1999
------------------------   
Lawrence J. Matteson    


/s/ Robert A. Olins         Director                           March 30, 1999
------------------------
Robert A. Olins      


/s/ Asa W. Lanum            Director                           March 30, 1999
------------------------
Asa W. Lanum
</TABLE>

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