SPATIALIGHT INC, 10KSB/A, 1997-04-24

SPATIALIGHT INC
10KSB/A, 1997-04-24
PHOTOGRAPHIC EQUIPMENT & SUPPLIES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A

/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR

/ / 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
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SPATIALIGHT, INC.

(Name of Small Business Issuer in its Charter)

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

8-C COMMERCIAL BLVD., NOVATO, CALIFORNIA 94949-5759
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(Address of principal executive offices)

415-883-1693
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(Issuer's telephone number)
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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, 1996 aggregated $176,100.

The aggregate market value for the Issuer's voting stock held by
non-affiliates of the Issuer based upon the $1.0938 per share closing sale price
of the Common Stock on March 21, 1997 as reported on the NASDAQ SmallCap Market,
was approximately $4,354,693.43. 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 5, 1997, Registrant had 8,533,191 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

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SPATIALIGHT, INC.
FORM 10-KSB/A ANNUAL REPORT
TABLE OF CONTENTS

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PAGE
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PART I

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

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

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

ITEM 4 Submission of Matters to a Vote of Security Holders............................................. 8

PART II

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

ITEM 6 Management's Discussion and Analysis or Plan of Operation....................................... 9

ITEM 7 Financial Statements............................................................................ 13

ITEM 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 25

PART III

ITEM 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of
the Exchange Act................................................................................ 26

ITEM 10 Executive Compensation.......................................................................... 28

ITEM 11 Security Ownership of Certain Beneficial Owners and Management.................................. 29

ITEM 12 Certain Relationships and Related Transactions.................................................. 31

ITEM 13 Exhibits and Reports on Form 8-K................................................................ 31
</TABLE>

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ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

Spatialight, Inc. ("Spatialight" or the "Company") is in the business of
designing, producing and commercializing miniature, high-resolution active
matrix liquid crystal displays ("LCDs"), also known as spatial light modulators
("SLMs") for computer and video display applications. SLMs are designed in a
manner that can potentially provide high quality images at a significant
reduction in costs over other types of computer and video displays currently
available in the market. The SLMs are designed to be capable of handling
computer and video output at very high speeds, clarity and contrast. The
Company's first SLM product is a .75" diagonal, 704 x 512 pixel, two-dimensional
array on 20 micron centers which is manufactured domestically in very limited
quantities. To date, the Company has sold only small volumes of its first SLM
product to customers involved in the research and development of applications
for this technology, including computer monitors, head-mounted displays, optical
computing and other projection applications.

The Company has identified a number of potential applications and markets
for products based on its SLM technology, including light-weight computer
projection systems, large computer monitors and head-mounted displays for use in
defense and aerospace applications and for computer training and gaming devices.
In addition, the Company believes that its SLM products may have application in
optical computing systems and in high-speed, large-capacity optical data storage
systems 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. Spatialight, Inc. holds 80% of the outstanding stock of Spatialight of
California. Prior to 1996, Spatialight, Inc. operated subsidiaries that were in
the businesses of manufacturing populated circuit boards and manufacturing LCD
projection equipment. Both of these businesses were sold in 1995 and are
accounted for as discontinued operations. See "Management's Discussion and
Analysis" and Notes to Consolidated Financial Statements--Note 5. Unless the
context requires otherwise, all references herein to Spatialight or the Company
refer collectively to Spatialight, Inc., Spatialight of California and their
wholly owned subsidiaries.

TECHNOLOGY AND PRODUCTS UNDER DEVELOPMENT

The Company's only currently available product is a .75" diagonal, 704 x 512
pixel, two-dimensional array on 20 micron centers. This product is manufactured
in very small quantities domestically. The Company currently has under
development a 1024 x 768 pixel SLM product, which it anticipates will be
commercially available in limited quantities for evaluation and development uses
in mid 1997. The Company's SLMs are based on an advanced, proprietary technology
for using liquid crystal directly over the surface of a silicon chip to convert
reflected external light into high-resolution images.

The technology underlying the Company's SLM products relies on the
manipulation of liquid crystal. A liquid crystal display ("LCD") consists of
liquid crystal material between two pieces of glass, and associated polarizers.
Rotating the polarization of the molecules in the liquid crystal changes the
liquid crystal medium from opaque to transparent and can thereby control the
transmission of light. The liquid crystal material has long tubular molecules
with a natural twist. The molecules untwist in response to an applied electric
field. As the molecules untwist, light can pass through the liquid crystal and
its glass encasement. Commonly available projection panels generally use
super-twisted nematic ("STN") LCDs. Molecules in STN LCDs have a high degree of
twist and are very responsive to an applied electric field. The Company's SLMs
are designed to use the STN molecules by encasing them directly at the surface
of an integrated circuit on a silicon chip. The chip generates the polarizing
electric fields which can be

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controlled by and therefore display a signal from a computer, cable television,
a video cassette recorder or other type of high information content source. The
chip has a substrate manufactured with complimentary metal oxide semiconductor
.8 micron processes that enables high-speed processing of computer and video
output with high contrast and resolution. Display glass is applied to the
surface of the silicon chip with a "spin on" technology to improve flatness.
Improved flatness should enhance display quality and increase display size
capability by reducing defects that would otherwise be magnified, and help
maintain light efficiency to reduce power use.

The Company's SLMs are being designed to compete with other technologies
that produce color LCDs. Additive color techniques require each dot or picture
element ("pixel") on the display screen to be divided into three sub-pixels. A
color filter is applied to each sub-pixel, causing each subpixel to transmit
red, green or blue light. The viewer's eye combines the colored light from the
three sub-pixels to create the perception of the full spectrum of colors.
Additive technologies, also referred to as "color filtered" technologies,
include both passive and active matrix approaches. To date, active matrix has
been most commonly accomplished through the use of thin film transistor
technology ("TFT"), in which a transistor is placed on the glass substrate at
each sub-pixel location and is used to control that sub-pixel. TFT displays are
currently manufactured in commercial quantities by Japanese manufacturers and
are relatively expensive. Further, TFT technology relies on the display being
relatively small, because manufacturing costs and the costs of applying the
display increase dramatically with size.

The Company believes that the technology underlying its SLM products may
provide certain advantages over TFT or other display products or technologies.
The Company's 704 x 512 product offers gray scaling at 256 levels per pixel. The
Company's SLMs are expected to ultimately cost less to manufacture than
comparable TFT displays because of the fundamental chip technology and the
placement of the pixel format directly onto a silicon wafer. Further, Company
testing indicates that its SLMs are capable of being approximately 100 times as
light efficient as currently available TFT displays. The Company's 1024 x 768
product under development has a 90% fill factor with 20 micron pixel pitch.

Although the Company has demonstrated SLM devices based on its core
technology, and recently entered into a contract to produce an engineering
prototype of a consumer product for mass production, the Company has not yet
produced any prototype SLM products with quality and resolution sufficient to
satisfy commercial end-use applications. Delays in development may result in the
Company's introduction of its products later than anticipated, which may have an
adverse effect on both the Company's financial and competitive position.
Moreover, there can be no assurance that the Company will ever be successful in
developing or manufacturing a commercially viable SLM device or any of its
proposed display products. In addition, there is no assurance that an SLM device
or any of the Company's display products will be technically or commercially
successful or that the Company will be able to manufacture or obtain a supplier
for adequate quantities of its SLM devices or any of its display products at
commercially acceptable cost levels or on a timely basis.

The electronic imaging display industry has undergone rapid and significant
technological change. The Company expects the technology to continue to develop
rapidly, and the Company's success will depend significantly on its ability to
attain and maintain a competitive position. Rapid technological development may
result in actual and proposed 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 SLM device, the Company's ability to
compete will depend in part upon the consistency of product quality and
delivery, as well as pricing, technical capability and servicing, in addition to
factors within and outside its control, including the success and timing of
product introductions by the Company and its competitors, product performance
and price, product distribution and customer support. There can be no assurance
that the Company's competitors will not succeed in developing technologies and
products that are equally or more effective than any which are being developed
by the Company or that will render the Company's technology, SLM devices or
display and other products obsolete and non-competitive.

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APPLICATIONS AND MARKETS

The Company believes that current and future SLM products may be
incorporated into a wide variety of monitors, projectors and other light
engines. The Company also believes that suppliers and manufacturers of display
products may desire to license the Company's technology for use in such end
products. The Company does not plan, nor does it have the financial resources,
to develop or market any end products itself. Therefore, the Company will be
completely dependent upon independent third parties for the development,
manufacturing and marketing of such products. No such products exist today, and
the Company does not have commitments from any third party for such development,
manufacturing or marketing. There can be no assurance that any third party will
develop or market a product incorporating the Company's SLM's. If not, there
will be no market for the Company's SLM's. However, the Company has entered into
a development project with Packard Bell Electronics with the goal of
incorporating the Company's SLMs into Packard Bell's monitor products in the
future. The Company has also established informal arrangements with suppliers of
light engine components, including lamps, screen materials and lenses. The
Company believes these relationships are important to its ability to succeed
because they can enable the Company to demonstrate potential application
solutions to customers. The failure to establish relationships with suppliers of
light engine components and other manufacturers could make it more difficult for
the Company to gain market acceptance for its products. To encourage
manufacturers to design products that integrate the Company's SLMs, the Company
intends to offer prototypes at low cost for evaluation and design into products.
However, because many manufacturers are unfamiliar with reflective technology
displays, and because of their limited supply, the Company may experience
difficulty in convincing manufacturers to use its SLMs.

MARKETING, SALES AND DISTRIBUTION

The Company's SLMs are available directly from the Company or through the
Company's principal distributor, Meadowlark Optics. The Company has a
non-exclusive distribution agreement with Meadowlark to market the Company's
SLMs in low volumes primarily to large corporate research departments and
university research labs. Currently available SLMs, including necessary
electronics, have a per unit retail list price of $20,000.

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

MANUFACTURING AND SUPPLY

The Company currently engages outside manufacturers to produce its SLM
devices, and the Company has no experience manufacturing SLM devices or display
products. The Company's facility is designed principally for research and
development and small-scale assembly and inventory storage. Final assembly and
testing of the SLM product is conducted by Company personnel prior to shipment.
The Company has established supplier relationships with both a low volume and a
high volume LCD filling processor. The Company does not have a written contract
with either such supplier, and accordingly, either of them may discontinue
providing LCD components to the Company at any time. Any such termination of
supply could have a material adverse effect on the Company's ability to meet its
commitments to customers while the Company identified and qualified a
replacement supplier. The Company is negotiating with several manufacturers for
establishment of full-scale integrated manufacturing capacity for its SLM
devices and has reached an agreement with one manufacturer for fabrication of
silicon wafers. However, no decision

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has been made by any such manufacturer to establish such a capability and there
can be no assurance that any of them will do so. In the event any such
manufacturer establishes a full-scale integrated manufacturing capability, the
Company could become dependent on such manufacturer for the manufacture of SLM
devices. The termination or cancellation of the Company's agreement with the
manufacturer could adversely affect the Company's ability to manufacture its
products. In such event, the Company could be required to establish an
alternative manufacturing relationship or establish its own manufacturing
capability. There can be no assurance that the Company would be able to
establish such a relationship on acceptable terms or develop its own
manufacturing capability. In any event the time required to establish such a
substitute relationship or capability could substantially delay the
commercialization of the Company's SLM devices and display products, which, in
turn, could have a substantial adverse impact on the Company's results of
operations and financial condition.

COMPETITION

The active matrix LCD market has been dominated by Japanese manufacturers
such as Sharp, Hitachi, Seiko-Epson, Sanyo and Toshiba (in partnership with
IBM). These manufacturers, however, have concentrated on larger format, eight to
ten inch displays used in portable computers. Other companies such as Kopin
Corporation, OIS Ovonics, Texas Instruments and Motif (a Motorola and InFocus
Systems joint venture) have attempted to design and produce small format LCDs
and SLMs with comparable functionality to that of the Company's SLMs. No
attempts at commercialization of the small format display devices have been
successful to date.

The electronic imaging display industry has been characterized by rapid and
significant technological advances. There can be no assurance that the Company's
SLM devices and display products will be reflective of such advances or that the
Company will have sufficient funds to invest in new technologies or products or
processes. A number of companies in the United States assemble workstation
monitors using LCDs and cathode-ray tubes ("CRTs") purchased from Japan. A
number of Japanese companies build monitors around their LCDs and CRTs.

Korean companies are also entering the LCD and CRT monitor market.
Development of improved high-definition LCDs and CRTs continues to receive
significant attention by these and other companies. Although the Company
believes that its SLM products have the capability to improve LCD performance
beyond that of commercially available LCD- and CRT-based display products, there
is no assurance that manufacturers of LCDs or CRTs will not develop further
improvements of LCD or CRT technology that would eliminate or diminish the
Company's anticipated advantage. In addition, numerous competitors have
substantially greater financial, technical and other resources than the Company.
The Company may 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. Although the Company has been awarded or has filed
applications for several patents in the United States, 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. Furthermore, the Company has not yet
applied for or obtained any foreign patents. There can be no assurance that
competitors, in both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make and sell its
products or intentionally infringe the Company's patents. The defense and
prosecution of patent suits is both costly and time-consuming, even if the
outcome is favorable to the Company. This is particularly true in foreign
countries. In addition, there is an inherent unpredictability regarding
obtaining and enforcing patents in foreign countries. An adverse outcome in the
defense of a patent suit could

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subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties, or require the Company to
cease selling its products. The Company also relies on unpatented proprietary
technology and there can be no assurance that others may not independently
develop the same or similar technology or otherwise obtain access to the
Company's proprietary technology. To protect its rights in these areas, the
Company requires all employees and most 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.

RESEARCH AND DEVELOPMENT

The Company incurred research and development expenses of approximately
$265,000 in 1996 and $509,766 in 1995. Research and development expenses
represent costs incurred, primarily personnel related, for the design and
development of new products and the redesign of existing 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 enhancement and development programs, focusing
on increasing the display size and finalizing field sequential color
capabilities and liquid crystal filling manufacturing processes. The Company
believes that such enhancements and new products will be required to exploit
future markets for large screen monitors, high definition television and head
mount displays.

EMPLOYEES

As of December 31, 1996, the Company had 11 full-time and 4 part-time
employees. Employment is divided among two functional areas with 12 in
engineering 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.

The Company is dependent upon its key scientific and management personnel,
including its Chief Executive Officer, William Hollis, and its Vice President,
Dean Irwin. The Company does not maintain key-man life insurance on Messrs.
Hollis or Irwin. In 1996, the Company entered into a three-year employment
agreement with Mr. Hollis and a two-year employment agreement with Mr. Irwin.
Both agreements are terminable by the Company for cause. The loss of the
services of one or more key individuals may have a material adverse impact on
the Company. The Company's success will also depend on its ability to attract
and retain other highly qualified scientific, marketing, manufacturing and other
key management personnel. The Company faces competition for such personnel and
there can be no assurance that the Company will be able to attract or retain
such personnel.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's headquarters are located at 8-C Commercial Drive, Novato,
California. Approximately 4,000 square feet of office space is leased through
April 1997. The Company anticipates that this lease will be extended for another
12 months. The Company believes that its current facilities will be sufficient
for its needs for at least the next year.

ITEM 3. LEGAL PROCEEDINGS.

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2,135,000 shares of common stock in the Company, and were demanding a refund by
January 17, 1997 of the purchase price of such shares, or $1,783,125, plus
interest. The alleged ground for rescission is the fact that the Company's
registration statement on Form S-3 pertaining to the resale of such shares was
not declared effective by the SEC on or before December 31, 1996. Subsequently,
by letter dated February 3, 1997, counsel for the Investors notified the Company
that Jalcanto, Ltd. had retracted its demand for rescission, with reservation of
all rights. The letter reiterated the rescission demand on behalf of Sabotini,
Ltd., and the request that the Company return approximately $892,000.

On February 5, 1997, the Company was served notice that it has been sued by
each of the Investors in the Superior Court of the State of California for the
County of Marin. Each Investor filed a complaint for breach of contract,
specific performance and indemnification relating to the alleged failure to
timely complete the contractually required registration statement. In addition,
each complaint requests that the court issue a preliminary and permanent
injunction against future issuances of shares of the Company's common stock or
securities convertible into common stock without the Investor's consent. The
complaint filed by Sabotini Ltd. also requests rescission and the return of the
full purchase price of its shares (approximately $892,000). On February 26,
1997, a hearing was held with respect to Sabotini's application for a writ to
attach the Company's funds in the amount of $920,000 to ensure enforceability of
any eventual judgment in Sabotini's favor. By order dated February 28, 1997, the
court denied the application for the writ without prejudice.

The Company intends to defend itself vigorously in both actions and believes
that it is not probable that Sabotini will prevail in rescinding its Purchase
Agreement. The Company may be required to expend substantial funds and
management resources in connection with the defense and any settlement or
judgment; accordingly, the ultimate resolution of this litigation may have a
material adverse effect on the Company's business and financial condition taken
as a whole.

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 has been 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". NASD delisted the Company from the Nasdaq SmallCap Market
effective April 2, 1997 because the Company does not meet the $2,000,000 minimum
total asset requirement for continued listing. Trading in the Company's common
stock after April 2, 1997 has been conducted in the over-the-counter market in
the so-called "pink sheets" or the NASD's "OTC 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.

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.

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SLHT--COMMON STOCK

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1996 1995
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HIGH BID LOW BID HIGH BID
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First Quarter (January - March)........................................... 11/2 7/32 31/4
Second Quarter (April - June)............................................. 15/8 5/8 2
Third Quarter (July - September).......................................... 11/4 11/16 17/8
Fourth Quarter (October - December)....................................... 7/8 13/32 1

LOW BID
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First Quarter (January - March)........................................... 13/8
Second Quarter (April - June)............................................. 11/4
Third Quarter (July - September).......................................... 11/4
Fourth Quarter (October - December)....................................... 9/16
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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, mark-down or commission and may not represent
actual transactions.

As of March 21, 1997, there were approximately 2,900 holders of record of
the Common Shares of the Company. The common stock represents the only class of
securities outstanding as of this filing.

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.

During 1996, the Company sold securities in private placement transactions
as follows. On July 11, 1996 the Company sold 1,585,000 shares of its common
stock at a price of $1.125 per share in cash, and concurrently issued warrants
to purchase an additional 1,585,000 shares of the Company's common stock (the
"Warrants"). The shares were sold and the Warrants were acquired on identical
terms and in identical amounts by Sabotini, Ltd. and Jalcanto, Ltd., each of
which are Isle of Man corporations (the "Investors"). The Warrants are
exercisable at any time prior to July 15, 2001, at an exercise price of $1.00
per share before July 15, 1997, $1.25 per share though July 1999 and $1.50 per
share thereafter. On November 11, 1996, the Investors approved certain
amendments to the Company's covenants under their original share purchase
agreements, and the Company agreed to reprice the July 11, 1996 sale of common
stock from $1.125 per share to $0.8352 per share. As a result, the Company
issued an additional 550,000 shares of its common stock, evenly divided between
the two Investors.

No underwriter took part in the sale of stock to the Investors, and there
were no underwriting discounts or commissions; however the Company paid certain
finders fees in connection with the transaction. Net proceeds received by the
Company relating to the placement were $1,525,237. In making this private
placement of securities, the Company claimed the exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended, pertaining to
transactions not involving a public offering. In claiming this exemption, the
Company relied upon factual information provided in representations by each
Investor concerning its financial position, sophistication and suitability as a
participant in such an exempt transaction.

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

The statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. Actual results, events or performance may differ materially from
those anticipated in these forward-looking statements as a result of a variety
of factors, including those discussed throughout "Item 1--Description of
Business" and elsewhere in this Annual Report on Form 10-KSB/A. 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 occurance of unanticipated events.

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NET SALES. The Company's net sales were $176,100 and $95,857 in 1996 and
1995 respectively. These amounts are comprised of sales of a small number of
units of the Company's initial SLM device.

OPERATING EXPENSES. Operating expenses during 1996 and 1995 were $1,403,412
and $2,522,457, respectively. The substantial decrease in operating expenses
from 1995 to 1996 was principally due to the write off of goodwill in 1995.

Costs of sales represent product costs associated with the production of
prototype SLMs. Costs of sale were $141,290 and $32,786 in 1996 and 1995,
respectively. The increase was due to the higher volume of SLM sales and high
costs associated with the production of prototype units during 1996. Cost of
sales was 80% of sales for 1996, and more than 100% of sales during the third
and fourth quarters of 1996 because of the low volume of sales, primarily
reflecting prototype and custom applications.

Selling, general and administrative costs were $763,575 and $503,940 in 1996
and 1995, respectively. The increase of 52% from 1995 levels reflects the
Company's initial investment in marketing the SLMs as it continued the
transition from research and development company to an operating company. Also
as a result of this transition, research and development expenses in the year
ended December 31, 1996 were $265,142, which represents a 48% decrease from
research and development expenses of $509,766 in the year ended December 31,
1995.

On December 29, 1995 the Company sold Sayett Technology, Inc. (STI), a
wholly owned subsidiary, to former management members of the Company for
$300,000 in the form of a note receivable. In 1996, the Company received $51,526
in cash and $15,069 in furniture and fixtures toward payment of this note
receivable. In the third quarter of 1996 the Company wrote down the note by
$121,702 based on their assessment of collectability. After further discussions
with the purchasers of STI in December 1996 and January 1997 regarding their
ability to repay the note, the Company concluded that collectibility of the
remaining balance was unlikely. As a result, the Company wrote off the remaining
balance of $111,703 in the fourth quarter of 1996.

The 1995 goodwill write-off resulted from the impairment of goodwill
associated with the purchase of a majority interest in Spatialight of California
during the first quarter of 1995. At the time of purchase, it was anticipated
that the sales of SLMs from Spatialight of California would continue to increase
during the remainder of 1995 as production processes and component
specifications were finalized for commercialization. While the sales performance
of Spatialight of California showed substantial improvement during the second
and third quarters of 1995, the Company was unable to continue selling its
products to one of its major customers. As a result, the sales performance of
Spatialight of California declined to zero in the fourth quarter of 1995. This
decline, coupled with the sale of Sayett Technology, a subsidiary of the Company
focused on manufacturing LCD projection equipment, and the resultant diminished
prospects that vertical integration would be available for Spatialight of
California within the group of companies controlled by the Company led the
Company to conclude that such goodwill was substantially impaired.

OTHER INCOME (EXPENSES) Losses in investee companies was $424,714 in 1995.
The losses in 1995 resulted from the write-off of the Company's entire
investment in InterVision Systems, Inc. The Company purchased a 40% interest in
InterVision, a producer of head-mounted displays utilizing a wearable computer,
in 1994. Due to losses incurred by InterVision through the period ended December
31, 1995, the Company's investment was totally impaired. Although InterVision
continues to operate, funded principally by a government grant, the Company does
not anticipate that its investment will be recovered.

Interest income was $63,776 and $63,427 in 1996 and 1995, respectively.
Interest income in 1996 was principally due to interest on the proceeds of a
private placement of the Company's common stock in July 1996.

Other expenses were $13,252 and $2,705 in 1996 and 1995, respectively. The
increase from 1995 resulted principally from expenses incurred in moving the
Company's headquarters to California.

10
<PAGE>
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations were
$1,178,738 and $2,791,990 in 1996 and 1995, respectively. The Company
anticipates that losses from continuing operations will increase during 1997.

DISCONTINUED OPERATIONS. Total losses from discontinued operations were
$1,863,393 in 1995. During 1995, the Company sold Surmotech, Inc., a wholly
owned subsidiary which focused on manufacturing populated circuit boards, for
$188,000 in cash. During 1995, the Company also sold Sayett Technology, Inc., a
wholly owned subsidiary which focused on developing and manufacturing electronic
presentation systems, for a $300,000 note receivable.

The consistent, recurring losses sustained by both companies prompted the
Company to make the sales. The operating results of the two entities have been
combined and reported as "losses from discontinued operations, net of income
tax." Net sales from the discontinued operations in the year ended December 31,
1995 were approximately $5,462,000.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1996, the Company had $1,324,398 in cash and cash
equivalents. Accounts receivable at December 31, 1996 totaled $40,201 and
represented primarily amounts due on SLMs shipped in the fourth quarter. The
Company's net working capital at December 31, 1996 was approximately $1,249,000.

Net cash used by operating activities totaled $904,354 and $36,252 in 1996
and 1995, respectively. Net cash provided by investing and financing activities
in 1996 was approximately $1,550,000, principally resulting from a private
placement of the Company's common stock. Net cash used by investing and
financing activities in 1995 was approximately $423,000, principally resulting
from capital expenditures and purchase of an equity investment in InterVision
Systems, Inc.

As of December 31, 1996, the Company had an accumulated deficit of
$7,464,081. The Company has realized significant losses in the past and expects
that these losses will continue at least through 1997. It is likely that the
Company will have quarterly and annual losses in 1997 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.

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. No assurance can be given that the
Company's business will ultimately generate sufficient revenue to fund the
Company's operations on a continuing basis. The matters discussed above, among
others, may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.

Most of the Company's revenue to date has been derived from research and
development contracts and limited sales of its SLM devices. Although the Company
has demonstrated SLM devices based on its core technology, the Company has not
yet produced any prototype SLM products with quality and resolution sufficient
to satisfy commercial end-use applications. The Company recently entered into a
contract to produce an engineering prototype of a consumer product for mass
production. However, 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 its products later than anticipated, which may have an
adverse effect on both the Company's financial and competitive position.
Moreover, there can be no assurance that the Company will ever be successful in
developing or manufacturing a commercially viable SLM device or any of its

11
<PAGE>
proposed display products. In addition, there is no assurance that an SLM device
or any of the Company's display products will be technically or commercially
successful or that the Company will be able to manufacturer adequate quantities
of its SLM devices or any of its display products at commercially acceptable
cost levels or on a timely basis.

By letter dated January 13, 1997, counsel for Jalcanto, Ltd. and Sabotini,
Ltd. (the "Investors") notified the Company that these Investors were electing
to rescind the Share Purchase Agreements dated July 10, 1996, as amended (the
"Purchase Agreements"), under which on July 11, 1996 the Investors purchased a
total of 2,135,000 shares of common stock in the Company, and were demanding a
refund by January 17, 1997 of the purchase price of such shares, or $1,783,125,
plus interest. The alleged ground for rescission is the fact that the Company's
registration statement on Form S-3 pertaining to the resale of such shares was
not declared effective by the SEC on or before December 31, 1996. Subsequently,
by letter dated February 3, 1997, counsel for the Investors notified the Company
that Jalcanto, Ltd. had retracted its demand for rescission, with reservation of
all rights. The letter reiterated the rescission demand on behalf of Sabotini,
Ltd., and the request that the Company return approximately $892,000.

12
<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, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of 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 Spatialight, Inc. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their 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
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. As discussed in Note 4, to the
consolidated financial statements, the Company is the defendant in litigation
brought by shareholders who purchased common stock in 1996. 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.

Deloitte & Touche LLP
San Francisco, California
March 21, 1997

13
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents....................... $ 1,324,398 $ 678,300
Accounts receivable............................. 40,021 --
Note receivable, net............................ -- 81,451
Inventories..................................... 75,401 --
Prepaid expenses and other...................... 11,911 5,804
----------- -----------
Total current assets.......................... 1,451,731 765,555
----------- -----------
Property and equipment, net....................... 68,817 51,795
Other assets...................................... 12,877 --
Note receivable--noncurrent....................... -- 218,549
----------- -----------
TOTAL ASSETS...................................... $ 1,533,425 $ 1,035,899
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accrued expenses and other current
liabilities................................... $ 108,581 $ 52,108
Accounts payable................................ 94,554 --
----------- -----------
Total current liabilities..................... 203,135 52,108
----------- -----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 20,000,000 shares
authorized; issued and outstanding 8,533,191
shares in 1996 and 6,398,191 shares in 1995... 79,832 63,532
Additional paid-in capital...................... 8,714,539 7,205,602
Accumulated deficit............................. (7,464,081) (6,285,343)
----------- -----------
Total stockholders' equity.................... 1,330,290 983,791
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 1,533,425 $ 1,035,899
----------- -----------
----------- -----------
</TABLE>

See notes to consolidated financial statements.

14
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
NET SALES......................................................................... $ 176,100 $ 95,857

OPERATING EXPENSES:
Cost of sales................................................................... 141,290 32,786
Selling, general and administrative expenses.................................... 763,575 503,940
Research and development expenses............................................... 265,142 509,766
Write-down of note receivable................................................... (233,405) --
Goodwill write-off.............................................................. -- 1,475,965
------------- -------------
Total operating expenses...................................................... 1,403,412 2,522,457
------------- -------------
OPERATING LOSS.................................................................... (1,227,312) (2,426,600)
------------- -------------

OTHER (EXPENSE) INCOME:
Interest income................................................................. 63,776 63,427
Other expenses.................................................................. (13,252) (2,705)
Losses in investee companies.................................................... -- (424,714)
------------- -------------
Total other income (expense).................................................. 50,524 (363,992)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES............................... (1,176,788) (2,790,592)
INCOME TAXES...................................................................... (1,950) (1,398)
------------- -------------
LOSS FROM CONTINUING OPERATIONS................................................... (1,178,738) (2,791,990)

DISCONTINUED OPERATIONS:
Losses from operations of discontinued subsidiaries, net of income taxes........ -- (1,796,757)
Loss on disposal of discontinued subsidiaries, net of income taxes.............. -- (66,636)
------------- -------------
NET LOSS.......................................................................... $ (1,178,738) $ (4,655,383)
------------- -------------

NET LOSS PER SHARE:
From continuing operations...................................................... $ (0.16) $ (0.44)
From operations of discontinued subsidiaries.................................... -- (0.28)
From disposal of discontinued subsidiaries...................................... $ -- (0.01)
------------- -------------
NET LOSS PER SHARE................................................................ $ (0.16) $ (0.73)
------------- -------------
------------- -------------
Shares used in computing net loss per share....................................... 7,230,630 6,312,283
------------- -------------
------------- -------------
</TABLE>

See notes to consolidated financial statements.

15
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------------ --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1995..................... 6,043,648 $ 59,986 $ 6,411,425 $ (1,629,960) $ 4,841,451
Issuance of common stock.................... 354,543 3,546 794,177 797,723
Net loss.................................... -- -- -- (4,655,383) (4,655,383)
------------ --------- ------------ ------------- -------------
Balance December 31, 1995................... 6,398,191 63,532 7,205,602 (6,285,343) 983,791
------------ --------- ------------ ------------- -------------
Issuance of common stock, net............... 2,135,000 16,300 1,508,937 -- 1,525,237
Net loss.................................... -- -- -- (1,178,738) (1,178,738)
------------ --------- ------------ ------------- -------------
Balance December 31, 1996................... $ 8,533,191 $ 79,832 $ 8,714,539 $ (7,464,081) $ 1,330,290
------------ --------- ------------ ------------- -------------
------------ --------- ------------ ------------- -------------
</TABLE>

See notes to financial statements.

16
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................................................... $ (1,178,738) $ (4,655,383)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization................................................... 24,358 357,690
Losses in investee companies.................................................... -- 424,714
Goodwill write-off.............................................................. -- 1,475,965
Write-down of note receivable................................................... 233,405 --
Loss on disposal of discontinued subsidiaries................................... -- (41,791)
Changes in assets and liabilities:
Investments (trading securities).............................................. -- 571,714
Accounts receivable........................................................... (40,021) 1,012,020
Inventories................................................................... (75,401) 1,481,842
Other receivables............................................................. -- 124,763
Prepaid expenses and other current assets..................................... (6,107) 89,001
Other assets.................................................................. (12,877) 65,072
Accounts payable.............................................................. 94,554 (592,032)
Accrued expenses and other current liabilities................................ 56,473 (166,897)
Product warranty.............................................................. -- (182,930)
------------- -------------
Net cash used by operating activities....................................... (904,354) (36,252)
------------- -------------

INVESTING ACTIVITIES:
Purchase of short-term investments................................................ (1,172,900)
Proceeds from sales of short-term investments..................................... 1,172,900
Capital expenditures.............................................................. (26,311) (212,831)
Purchase of equity investment..................................................... -- (375,000)
Payments received on notes receivable............................................. 51,526 --
Net proceeds from acquisitions/disposals.......................................... -- 164,352
------------- -------------
Net cash provided (used) by investing activities............................ 25,215 (423,479)
------------- -------------

FINANCING ACTIVITIES:
Proceeds from the sales of common stock, net of issuance costs.................... 1,525,237 --
------------- -------------
Net cash provided by financing activities................................... 1,525,237 --
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ 646,098 (459,731)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........................................ 678,300 1,138,031
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR.............................................. $ 1,324,398 $ 678,300
------------- -------------
------------- -------------

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Furniture received as payment on notes receivable................................. $ 15,069
-------------
Debentures in SOC converted to common stock of SOC................................ $ 466,105
-------------
Common stock issued in conjunction with acquisition of SOC........................ $ 797,723
-------------
</TABLE>

See notes to consolidated financial statements.

17
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1996 AND 1995

1. DESCRIPTION OF BUSINESS

Spatialight, Inc. and its subsidiary (the Company) develops, designs,
manufactures, and markets high content information display system components for
the optical computing, computer monitoring/projection, holography, and
multimedia industries.

2. GOING CONCERN UNCERTAINTY

The Company incurred significant operating losses in each of the last five
fiscal years and incurred a net loss in fiscal 1996 of $1,178,438. Additionally,
as of December 31, 1996 the Company's accumulated deficit totaled $7,464,081.
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. Cost of sales was 80% of
sales for 1996, and more than 100% of sales during the third and fourth quarters
of 1996 because of the low volume of sales, primarily representing prototype and
custom applications.

The successful completion of the Company's development program and
ultimately, the attainment of profitable operations, is dependent upon future
events. These events include the 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. The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
These matters discussed above, 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 1997. These strategies
include:

- Raising of additional capital.

- Outsourcing of all manufacturing activities, which will be monitored by
Company's manufacturing/ quality control engineering staff.

- Developing strategic arrangements with potential customers to share
development costs and/or licensing of the Company's technology.

- Construction of engineering models to demonstrate proof of technology for
OEM's.

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

18
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of Spatialight, Inc. (SI), and its majority-owned subsidiary
Spatialight of California (SOC). All inter-company accounts and transactions
have been eliminated in consolidation.

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

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.

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."

NET LOSS PER COMMON SHARE--Net loss per common share for 1996 and 1995 is
based on the weighted average number of common shares outstanding during the
year; stock options and warrants were not included since their effect would be
anti-dilutive.

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

CASH EQUIVALENTS--Cash equivalents include money market securities stated at
cost, which approximate market value, purchased with original maturities of
three months or less.

STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."

4. ISSUANCE OF COMMON STOCK AND RELATED LITIGATION

On July 11, 1996 the Company sold 1,585,000 shares of its common stock to a
private investor group at $1.125 per share, or $1,783,125 in gross proceeds. In
conjunction with the sale of common stock, the Company also issued warrants to
purchase an additional 1,585,000 shares of the Company's common stock,
exercisable at any time prior to July 15, 2001, at an exercise price of $1.00
per share before July 15, 1997, $1.25 through July 1999 and $1.50 thereafter.
Net proceeds received by the Company related to this placement were $1,525,237.

On November 11, 1996, in connection with the approval by the above-mentioned
investors of a future additional offering of common stock (relating to the
Company's planned stock for stock exchange to acquire the remaining 20% of
common shares of SOC owned by the original owners), the Company entered into an
Amendment Agreement which repriced the July 11, 1996 sale of common stock from
$1.125 per share to $.8352 per share and issued an additional 550,000 shares to
the investors.

19
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

4. ISSUANCE OF COMMON STOCK AND RELATED LITIGATION (CONTINUED)

On February 5, 1997, the Company was served notice that it has been sued by
each of the Investors in the Superior Court of the State of California for the
County of Marin. Each Investor filed a complaint for breach of contract,
specific performance and indemnification relating to the alleged failure to
timely complete the contractually required registration statement. In addition,
each complaint requests that the court issue a preliminary and permanent
injunction against future issuances of shares of the Company's common stock or
securities convertible into common stock without the Investor's consent. The
complaint filed by Sabotini Ltd. also requests rescission and the return of the
full purchase price of its shares (approximtely $892,000). On February 26, 1997,
a hearing was held with respect to Sabotini's application for a writ to attach
the Company's funds in the amount of $920,000 to ensure enforceability of any
eventual judgment in Sabotini's favor. By order dated February 28, 1997, the
court denied the application for the writ without prejudice.

The Company intends to defend itself vigorously in both actions and believes
that it is not probable that the Sabotini will prevail in rescinding its
Purchase Agreement. The Company may be required to expend substantial funds and
management resources in connection with the defense and any settlement or
judgment; accordingly, the ultimate resolution of this litigation may have a
material adverse effect on the Company's business and financial condition taken
as a whole. No provision for any loss that may result from resolution of this
uncertainty has been made in the accompanying consolidated financial statements.

5. DISCONTINUED OPERATIONS

On July 1, 1995 the Company sold Surmotech, Inc., a wholly owned subsidiary,
for $188,000 in cash.

On December 29, 1995 the Company sold Sayett Technology, Inc., (STI) a
wholly owned subsidiary, to former management members of the Company for
$300,000 in the form of a note receivable. In 1996, the Company received $51,526
in cash and $15,069 in furniture and fixtures. In the third quarter of 1996 the
Company wrote down the note by $121,702 based on their assessment of
collectibility. After further discussions with the purchasers of STI in December
1996 and January 1997 regarding their ability to repay the note, the Company
concluded that collectibility of the remaining balance was unlikely. As a
result, the Company wrote off the remaining balance of $111,703 in the fourth
quarter of 1996.

As a result of the aforementioned sales, the Company is reporting the
results of the two subsidiaries as discontinued operations for the period ended
December 31, 1995 in the consolidated financial statements. Net sales from
discontinued operations were $5,462,000 in 1995.

20
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

6. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Office furniture and fixtures................................................... $ 94,885 $ 57,513
Machinery and equipment......................................................... 62,263 58,255
---------- ----------
157,148 115,768
Less accumulated depreciation and amortization.................................. 88,331 63,973
---------- ----------
$ 68,817 $ 51,795
---------- ----------
---------- ----------
</TABLE>

7. INVESTMENT IN SUBSIDIARY

In November 1992, the Company entered into a Subscription and Stock Purchase
Agreement (the Agreement) with SOC (formerly WAH-III Technology Corp.) a
development stage company that develops, designs and manufactures electronic
display products, including a small, high content liquid crystal display (LCD).
Through the Agreement and subsequent amendments, the Company purchased and held,
as of December 31, 1994, notes receivable totaling $1,078,105. Additionally, the
Company made advances to SOC under a line of credit agreement totaling $200,000
as of December 31, 1994.

On January 1, 1995, the Company converted its note receivable from SOC and
received 2,703,427 shares of SOC common stock which increased its ownership of
SOC to approximately 68%. On February 7, 1995, the Company exchanged 354,543
shares of its common stock for 531,815 shares of SOC common stock, which further
increased its ownership to approximately 80.3%. The note receivable conversion
and exchange of shares in 1995 gave rise to a difference between the Company's
investment and the underlying equity in the net assets of SOC. This excess of
purchase price over the net assets acquired ("goodwill") totaled $1,475,965. The
Company wrote off the $1,475,965 of goodwill in December 1995, based in part on
a comparison of the Company's best estimate of the undiscounted cash flows of
SOC to the carrying value of the goodwill.

The operating results of SOC have been included in the Company's
consolidated financial statements since January 1, 1995. The absence of a
minority interest balance on the consolidated balance sheet as of December 31,
1996 and 1995 is due to a deficiency in SOC's net assets due to its recurring
losses. Additionally, losses applicable to the minority interest have been
charged against the Company's interest, as there is no obligation of the
minority interest to make good such losses.

8. LOSS IN INVESTEE COMPANY

On March 26, 1994, the Company acquired 40% of the common stock of
InterVision Systems, Inc. (ISI), a newly formed Delaware Corporation that
produces head-mounted displays utilizing a wearable computer, for $1,350,000.
The Company accounted for this investment using the equity method of accounting
which required that the original investment be recorded at cost and adjusted by
the Company's share of undistributed earnings or losses of ISI. ISI generated a
loss of approximately $925,286 for the period ended December 31, 1994. The
Company lost an additional $424,714 for the nine months ended September 30,
1995, indicating that the Company's investment was and continued to be
significantly impaired. The Company measured the impairment of its investment by
recording 100% of the loss

21
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

8. LOSS IN INVESTEE COMPANY (CONTINUED)
generated by ISI in the consolidated financial statements since the Company
essentially provided 100% of ISI's capitalization and therefore, had all the
capital-at-risk. As of December 31, 1995 Company's investment has been totally
written-off.

9. INCOME TAXES

The income tax provision including the effect of continuing and discontinued
operations in the accompanying consolidated statements of operations is as
follows:

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Current payable, primarily state taxes............................................. $ (1,950) $ (1,398)
--------- ---------
--------- ---------
</TABLE>

The income tax provision differs from those computed using the statutory
federal tax rate of 34%, due to the following:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Benefit at statutory federal rate............................................. $ 400,771 $ 948,801
State benefit (taxes)......................................................... 36,175 (1,398)
Tax loss and credit carryforwards due to sale of subsidiaries generating those
tax attributes.............................................................. (116,891) --
Increase in valuation allowance............................................... (327,677) (948,801)
Other......................................................................... 5,672 --
----------- -----------
$ (1,950) $ (1,398)
----------- -----------
----------- -----------
</TABLE>

The net deferred tax assets (liabilities) as of December 31, 1996 and 1995
are as follows:

<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CURRENT:
Inventory reserves........................................................ $ -- $ --
Bad debt reserves......................................................... 79,358 --
Warranty liability........................................................ -- --
Other..................................................................... 17,261 --
Valuation allowance....................................................... (96,619) --
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
NONCURRENT:
Depreciation and amortization............................................. $ (3,397) $ --
Equity in losses of investees............................................. 1,168,908 1,168,908
State taxes, net.......................................................... 337,277 222,905
Operating loss carryforwards.............................................. 1,584,608 1,515,752
Federal tax credit........................................................ 51,227 --
Less valuation allowance.................................................. (3,138,623) (2,907,565)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>

22
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

9. INCOME TAXES (CONTINUED)
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
established a 100% valuation allowance at December 31, 1996 and 1995 due to
uncertainty of realizing future tax benefits from its net operating loss
carryforwards and other deferred tax assets.

As discussed in Note 5, the Company sold two subsidiaries during 1995. Any
tax benefits arising from the disposal of these subsidiaries were completely
offset by an increase in the Company's valuation allowance.

At December 31, 1996, the Company had net operating loss ("NOL")
carryforwards of approximately $4,700,000, available to offset United States
taxable income. The NOL carryforwards will expire from 2005 to 2011.

Income taxes (refunded) paid in 1996 and 1995 totaled $5,330 and $(1,912)
respectively.

10. 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 1,010,000 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 915,000 shares of common stock to employees at prices
not less than the fair market value at the date of grant for incentive stock
options and 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
exercisable 50% in year one and 50% in year two.

Under the 1993 Non-Employee Directors' Stock Option Plan non-employee
directors of the Company are granted options to purchase 10,000 shares of common
stock at the fair market value at the date of grant each year that such person
remains a director of the Company. These options expire 10 years from the date
of grant and become fully exercisable after 2 years. The total number of shares
authorized under the plan is 95,000.

Options under the Plans are granted at the discretion of the Board of
Directors. All options granted through 1996 have been granted at fair market
value.

23
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

10. STOCKHOLDERS' EQUITY (CONTINUED)
The following is a status of the options under the Plans and a summary of
the changes in options outstanding during 1996 and 1995:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
----------- ---------------
<S> <C> <C>
Outstanding, January 1, 1995....................................... 443,500 $ 2.82
Options granted.................................................... 195,300 1.62
Options cancelled.................................................. (428,800) 2.82
-----------
Outstanding, December 31, 1995..................................... 210,000 2.42
Options granted.................................................... 165,000 1.06
Options canceled................................................... (10,000) 1.19
-----------
Outstanding, December 31, 1996..................................... 365,000 $ 1.84
-----------
-----------
</TABLE>

Options exercisable as of December 31, 1996 and 1995 totaled approximately
170,000 and 125,000 options at a weighted average exercise price of $1.81 and
$2.79 respectively.

Additional information regarding options outstanding as of December 31, 1996
is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
- -------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$2.00-$3.13 140,000 6.2 $ 2.82 140,000 $ 2.82
$1.00-$2.00 160,000 8.9 $ 1.38 30,000 $ 1.69
$0.875-$1.00 65,000 9.2 $ 0.88 $ 0.88
----------- -----------
365,000 170,000
----------- -----------
----------- -----------
</TABLE>

At December 31, 1996, 605,000 shares and 40,000 shares were available for
future grants under the Employee Stock Option Plan and Non-Employee Directors
Plan, respectively.

ADDITIONAL STOCK PLAN INFORMATION

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, 10 years; stock volatility, 183% in
1996 and 183% in 1995; risk free interest rates, 6.89% in 1996 and 6.59% in
1995; and no dividends during the expected term. 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 1995 and 1996 awards had been

24
<PAGE>
SPATIALIGHT, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996 AND 1995

10. STOCKHOLDERS' EQUITY (CONTINUED)
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $4,714,233 ($.75 per share) in 1995 and $1,299,513 ($0.18 per
share) in 1996. However, the impact of outstanding non-vested stock options
granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1995 and 1996 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.

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

11. MAJOR CUSTOMERS

The Company had five customers during the year ended December 31, 1995. Two
of these customers accounted for 40% of the Company's sales.

12. COMMITMENTS AND CONTINGENCIES

The Company has various operating lease arrangements for equipment and
office space. Total rent expense under operating leases amounted to
approximately $32,000 and $35,000 in 1996 and 1995, respectively. The office
lease expires on April 30, 1997 and future minimum lease payments under non-
cancelable operating leases are $12,000. The Company expects the lease to be
renewed for one year.

CONTINGENT PAYMENT CONTRACTS--Prior to December 31, 1994, SOC entered into
certain contracts with service providers and with several employees to lease
space and obtain research, development, marketing, legal and other services.
These contracts provide for payments to these service providers and employees as
SOC achieves specified cumulative unit sales or revenue levels. There are no
required payments under the contracts if minimum cumulative unit sales or
revenue levels are not achieved. The contracts do not have expiration dates. As
of December 31, 1996 and 1995, services under these contracts have been provided
to the Company; however, no amounts have been accrued as a liability because
achievement of the minimum required cumulative unit sales or revenue levels is
not considered probable as of that date. As of December 31, 1996, the maximum
potential liability of the Company under these contracts is approximately
$1,100,000.

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

Not applicable

25
<PAGE>
PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS 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............... 44 Director

William E. Hollis............... 58 Director, Chief Executive Officer, President

Lawrence J. Matteson............ 57 Director

Thomas D. Stahl................. 48 Director

Edward J. Kelly................. 65 Director

L. John Loomis.................. 46 Senior Executive Vice President, Chief Operating Officer

Dean S. Irwin................... 34 Vice President & General Manager of Spatialight of California
</TABLE>

All directors serve for a term 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, has been Chairman & C.E.O. of Chronomotion
Imaging Applications, Inc. in Santa Monica, California since its founding in
1993. Mr. Burney was a Vice President with Packard Bell Electronics, Inc. in
West Lake Village, California from 1990 through 1995 and was a consultant for
Arthur Young & Company and Ernst & Young from 1987 through 1990. After receiving
a Bachelor of Arts from Pomona College in Claremont, California in 1975, Mr.
Burney received a Master of Business Administration in 1986 from the University
of Southern California at Los Angeles. Mr. Burney is the recipient of two U.S.
patents in association with his current company.

WILLIAM E. HOLLIS joined the Company in December 1994 as President and Chief
Executive Officer. During 1994, prior to joining the Company, Mr. Hollis was a
management consultant specializing in assisting small businesses to improve
operations. In December 1992 he joined PSC, Inc., a bar code scanner
manufacturer, as its Chief Financial Officer, leaving the company in January
1994. From September 1988, to November 1992, he served as Chief Financial
Officer and co-founder of AMTX, Inc., a spin-off of the Xerox Corporation. Prior
to AMTX, Mr.Hollis held various high level financial planning & analysis
positions at Xerox for 18 years. Mr. Hollis holds a B.S. degree from Drake
University.

LAWRENCE J. MATTESON has served as Chairman of the Board since May 23, 1995.
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 M.B.A. from the University of
Rochester Graduate School of Business.

THOMAS D. STAHL has served as a director since May 1996. Mr. Stahl's term as
director will expire at the 1997 annual meeting of the Company's shareholders
because Mr. Stahl is not standing for reelection. Mr. Stahl has served as
Executive Vice President and General Manager, Teleview Research, Inc. of San
Jose, California since July 1995. Mr. Stahl joined Teleview in September 1994 as
Vice President, Sales and

26
<PAGE>
Marketing. Mr. Stahl served as Director of Sales for OIS Imaging Systems, a
start-up manufacturer of flat panel displays from December 1990 to 1994. Mr.
Stahl has held various senior sales and management positions in the display
industry with start-up and large Forture companies including NCR and Xerox
Corporation. He is the holder of several patents and licenses related to display
technology. Mr. Stahl holds a B.A. degree from Ohio State University.

EDWARD J. KELLY retired as President and Chief Executive Officer of the
Company as of December 1, 1994 and was appointed as a member of the Board of
Directors at that time. Mr. Kelly's term as director will expire at the 1997
annual meeting of the Company's shareholders because Mr. Kelly is not standing
for reelection. Mr. Kelly joined the Company in May 1991 as a Director and
served until April of 1992 when he was elected as President and C.E.O. of the
Company, and President of Sayett Technology, Inc. Joining Eastman Kodak in June
1958, he held various managerial positions in engineering until his retirement
in 1990 when he was Manager of Equipment Development for the Professional
Photography Division. Mr. Kelly holds a B.S. degree in electrical engineering
from Tufts University and a M.B.A. degree from the University of Rochester
Graduate School of Business.

L. JOHN LOOMIS joined the Company in February 1997 as Chief Operating
Officer. Mr. Loomis supervises design engineering, manufacturing, and
production. From 1995 to 1997, Mr. Loomis was the Director, Creative and
Software Development for Compaq Computer Corporation. He created and managed the
Presario Platform Software Engineering group. Prior to Compaq, Mr. Loomis was
President and COO for Motion Works Corporation from 1994 to 1995. From 1992 to
to 1994, Mr. Loomis held the position of Director, Core Technologies and Chief
Architect for Open Vision Technologies, Inc. Mr. Loomis earned his undergraduate
business degree from the University of Wisconsin and completed the Presidential
MBA program at Pepperdine University.

DEAN S. IRWIN joined Spatialight of California in July 1993 and has led the
engineering department and product development efforts. Mr. Irwin has an
extensive background in electronics, software and optics used in the design and
manufacture of high technology products. Prior to joining Spatialight of
California he was the founder and Chief Scientist for D.I.R. Corp., which
developed products for commercial and government applications including
electronic systems for the U.S. Air Force & Department of Energy. Mr. Irwin also
worked in various engineering capacities for Acculase, Inc., GA Technologies,
Inc., Universal Voltronics Corp. and Borland International, and consulted to the
Plasma Research Center at M.I.T. and the Institute of Plasma Physics at Nagoya
University, Japan.

OTHER DIRECTORSHIPS. None of the Company's directors is a director of any
company with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, or of any company registered under
the Investment Company Act of 1940, as amended.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Based solely upon its
review of Forms 3 and 4 received by the Company during its fiscal year ended
December 31, 1996, and in reliance upon written representations regarding the
necessity to file Form 5, the Company has determined that, to the best of its
knowledge and belief, no officer, director, or shareholder required to file such
forms has failed to do so timely.

27
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

The following table sets forth the compensation paid for the years 1994,
1995 and 1996 to the Company's Chief Executive Officer and executive officers
who earned in excess of $100,000 in any one year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS(#)
- ------------------------------------------------------------------ --------- ---------- -----------------
<S> <C> <C> <C>
William E. Hollis, ............................................... 1996 $ 105,081 60,000
President & C.E.O. 1995 82,225 30,000
1994 6,323 30,000
</TABLE>

NOTE: Columnar information required by Item 402(a)(2) has been omitted for
categories where there has been no compensation awarded to, earned by or paid to
any of the named executives required to be reported in the table during 1994,
1995 or 1996.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------------------------------
(B) (C)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS (D)
UNDERLYING GRANTED TO EXERCISE OR
(A) OPTIONS/ SARS EMPLOYEES IN BASE PRICE (E)
NAME GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE
- --------------------------------------- ----------------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
William E. Hollis, .................... 60,000 36.36% $ 1.1875 April 16, 2006
President & CEO
</TABLE>

OPTION 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 Chief Officer including: (i) the
number of shares of common stock purchased upon exercise of options in the
fiscal year ending December 31, 1996; (ii) the net value realized upon such
exercise; (iii) the number of unexercised options outstanding at December 31,
1996; and (iv) the value of such unexercised options at December 31, 1996.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
DECEMBER 31, 1996 OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, AT DECEMBER 31,
ACQUIRED VALUE 1996 (#) 1996($)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- --------- --------------- ---------------------
<S> <C> <C> <C> <C>
William E. Hollis ....................... 0 0 45,000/75,000 $ 0/$0
President & CEO
</TABLE>

COMPENSATION OF DIRECTORS. Non-management directors are paid $500 for each
board meeting attended. Directors who are also full time employees are not paid
directors' fees.

EMPLOYMENT CONTRACTS. In 1996, the Company entered into a three-year
employment agreement with Mr. Hollis. The agreement is terminable by the Company
for cause.

28
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of April 16, 1997 the name and address of
each director and executive officer who owns shares of common stock and each
other person known by the Company to own beneficially more than 5% of the
Company's outstanding shares of common stock and the number of shares owned by
all directors and officers of the Company, as a group:

<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS(1)
- ---------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
Raymond L. Bauch ..................................................... 2,416,939(2) 27.0%
14 Office Drive Park, Suite 1
Palm Coast, FL 32137

Jalcanto, Ltd. ....................................................... 1,067,500(3) 11.9%
c/o Wynchwood Trust Ltd.
3 Castle St.
Castletown
Isle of Man, British Isles

Sabotini, Ltd ........................................................ 1,067,500(4) 11.9%
c/o Wynchwood Trust Ltd.
3 Castle St.
Castletown
Isle of Man, British Isles

William E. Hollis .................................................... 103,500(5) 1.5%
8-C Commercial Drive
Novato, CA 94949-6125

Edward J. Kelly ...................................................... 88,000(6) *
126 Wedgewood Drive
Penfield, NY 14528

Michael H. Burney .................................................... 10,000(7) *
424 9th Street
Santa Monica, CA 90402

Dean S. Irwin ........................................................ 10,000(8) *
8-C Commercial Drive
Novato, CA 94949-6125

Lawrence J. Matteson ................................................. 10,000(9) *
5 Hogan Court
Pittsford, NY 14534

L. John Loomis ....................................................... 0 *
8-C Commercial Drive
Novato, CA 94949-6125
</TABLE>

29
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS(1)
- ---------------------------------------------------------------------- -------------------- -------------
Thomas D. Stahl ...................................................... 0 *
c/o Spatialight, Inc.
8-C Commercial Drive
Novato, CA 94949-6125
<S> <C> <C>

All directors and officers as a group
(7 persons)......................................................... 221,500(10) 2.4%
</TABLE>

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

* Represents less than 1%.

(1) Based upon a total of 8,948,191 shares outstanding as of April 16, 1997.

(2) Includes 28,169 shares held by the Raymond L. Bauch Foundation over which
Mr. Bauch has certain voting and investment power. Mr. Bauch disclaims
beneficial ownership of such shares.

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

(4) Based solely upon information filed on 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.

(5) Includes 60,000 shares of Common Stock issuable upon exercise of outstanding
stock options within 60 days of April 16, 1997.

(6) Includes 80,000 shares of Common Stock issuable upon exercise of outstanding
stock options within 60 days of April 16, 1997.

(7) Includes 10,000 shares of Common Stock issuable upon exercise of outstanding
stock options within 60 days of April 16, 1997.

(8) Includes 10,000 shares of Common Stock issuable upon exercise of outstanding
stock options within 60 days of April 16, 1997.

(9) Includes 10,000 shares of Common Stock issuable upon exercise of outstanding
stock options within 60 days of April 16, 1997.

(10) Includes 170,000 shares of Common Stock issuable upon exercise of
outstanding stock options within 60 days of April 16, 1997.

30
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Other than as described under Item 5 above, there were no transactions
between the Company and other persons during 1996 of the type required to be
disclosed pursuant to Item 404 of Regulation S-B.

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

(a) The following exhibits are filed as part of this Form 10-KSB:

<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
- ------------ ------------------------------------------------------------------------------------------------
<C> <S>
3.1(6) Certificate of Incorporation

3.2(6) By-laws

10.1(1)* 1991 Stock Option Plan

10.2(1)* Form of Officers and Directors Agreement

10.3(1)* Employee Stock Option Plan

10.4(1)* Director Stock Option Plan

10.5(1) Agreement between Sayett Group, Inc. and InterVision Systems, Inc. dated March 11, 1994

10.6(2) Agreement and Plan of Reorganization, dated January 26, 1995

10.7(2) Sayett Group, Inc. and WAH-III Technology Subscription and Stock Purchase Agreement, dated
November 25, 1992

10.8(2) Amendment to Subscription and Stock Purchase Agreement, dated June 29, 1993

10.9(2) Second Amendment to Subscription and Stock Purchase Agreement, dated April 27, 1994

10.10(2) Stock Purchase Agreement, dated July 19, 1994

10.11(3) Share Purchase Agreements dated July 10, 1996 between the Company and each of Jalcanto, Ltd. and
Sabotini, Ltd.

10.12(4) Agreement and Warrant to Purchase 792,500 Common Shares of Spatialight, Inc. as issued to each
of Jalcanto, Ltd. and Sabotini, Ltd.

10.13(5) Amendment to Share Purchase Agreements dated November 11, 1996 with each of Jalcanto, Ltd. and
Sabotini, Ltd.

10.14(6)* Employment Agreement between the Company and William E. Hollis dated July 1, 1996

10.15(6)* Employment Agreement between the Company and Dean S. Irwin dated July 1, 1996

10.16(6) Distribution Agreement between Spatialight of California and Meadowlark Optics

10.17(6)* Employment agreement between the Company and L. John Loomis dated February 17, 1997

23.1(6) Consent of Independent Public Accountants

27.1(6) Financial Data Schedule
</TABLE>

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

* Designates management contracts and compensatory plans.

31
<PAGE>
(1) Incorporated by reference to the corresponding exhibit filed with the
Company's Registration Statement on Form S-1 filed February 13, 1992, as
amended.

(2) Incorporated by reference to the corresponding exhibit filed with the
Company's Current Report on Form 8-K filed February 7, 1995.

(3) Incorporated by reference to exhibit 10.32 filed with the Company's Current
Report on Form 8-KA filed September 24, 1996.

(4) Incorporated by reference to exhibit 4.5 filed with the Company's Current
Report on Form 8-KA filed September 24, 1996.

(5) Incorporated by reference to exhibit 10.33 filed with the Company's Current
Report on Form 8-KA filed November 11, 1996.

(6) Incorporated by reference to the corresponding exhibit filed with the
Company's Report on Form 10-KSB filed March 31, 1997.

(b) No Form 8-K was filed during the quarter ended December 31, 1996. A Form
8-KA was filed on November 11, 1996 reporting under Item 5, and amending a Form
8-K originally filed on July 23, 1996.

32
<PAGE>
SIGNATURES

In accordance with amended Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

SPATIALIGHT, INC.

By: /s/ WILLIAM E. HOLLIS
-----------------------------------------
William E. Hollis
PRESIDENT & CHIEF EXECUTIVE OFFICER CHIEF
FINANCIAL OFFICER AND CHIEF ACCOUNTING
OFFICER

Dated: April 24, 1997