SPATIALIGHT INC, 10KSB40, 1999-03-31

SPATIALIGHT INC
10KSB40, 1999-03-31
PHOTOGRAPHIC EQUIPMENT & SUPPLIES

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

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

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

Commission File Number: 000-19828
- --------------------------------------------------------------------------------
SPATIALIGHT, INC.
(Name of Small Business Issuer in its Charter)

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

8-C Commercial Blvd., Novato, California 94949-6125
---------------------------------------------------
(Address of principal executive
offices)

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

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

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

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

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

Issuer's revenues for the year ended December 31, 1998 aggregated $29,750

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

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

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

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SPATIALIGHT, INC.
FORM 10-KSB ANNUAL REPORT

TABLE OF CONTENTS

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

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

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

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

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

PART II

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

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

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

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

PART III

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

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

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

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

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

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PART I

THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES AND EXCHANGE ACT OF 1934,
AS AMENDED, AND IS SUBJECT TO THE SAFE HARBOR PROVISIONS CREATED BY THAT
STATUTE. IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS,"
"FUTURE", "INTERESTS," AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED HEREIN, AND IN PARTICULAR,
THOSE CONTAINED IN "ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" UNDER THE CAPTION "BUSINESS
RISKS AND UNCERTAINTIES," THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT
OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE NEEDED TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

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

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

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

TECHNOLOGY AND PRODUCTS UNDER DEVELOPMENT

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

The technology underlying the Company's display products utilizes the
well-known and documented manipulation of liquid crystals. A typical liquid
crystal display, as might be found in a notebook computer, basically consists
(along with other associated materials and processes) of liquid crystal material
sandwiched between two pieces of glass, polarizers, color filters, a data signal
and a light source. As the data signal is applied

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across the sandwich of the liquid crystals, the electric field created by
this data signal causes the liquid crystals to twist and untwist. This
twisting, combined with the polarizers, makes each pixel change from opaque
to transparent, thereby controlling either the transmission or reflection of
light from each pixel.

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

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

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

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

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

APPLICATIONS AND MARKETS

The Company plans to focus on selling its displays to third parties
for use in their end product applications. The Company believes that its
displays can be incorporated into a wide variety of products such as
rear-projection televisions, rear-projection computer monitors, video
projectors, and head mounted displays. The ability to design end products for
any of these markets, as well as the ability to sell and distribute in these
diverse markets is beyond the current resources of the Company. The Company
therefore plans to establish relationships with companies in these markets
and to work with these companies to incorporate current and future displays
into their products. In some instances, especially high volume applications,
the Company will also custom design a display to fit a specific
manufacturer's need for a specific product. The Company will also consider
licensing large manufacturers who have the ability and desire to manufacture
the Company's displays for use in their products.

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

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

MARKETING, SALES AND DISTRIBUTION

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

MANUFACTURING AND SUPPLY

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

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

COMPETITION

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

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

PATENTS AND INTELLECTUAL PROPERTY

The Company's ability to compete effectively with other companies will
depend, in part, on the ability of the Company to maintain the proprietary
nature of its technologies. The Company has been awarded four U.S. Patents and
has other patent applications pending. There can be no assurance as to the
degree of protection offered by these patents or as to the likelihood that
pending patents will be issued. The Company's competitors, in

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both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make and sell its
products or intentionally infringe the Company's patents.

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

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

RESEARCH AND DEVELOPMENT

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

EMPLOYEES

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

ITEM 2. DESCRIPTION OF PROPERTY

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

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

PART II

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

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

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

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

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

As of March 10, 1999, there were approximately 283 holders of record
of the common shares of the Company. The common stock represents the only
class of securities outstanding as of this filing. Because many of such
shares are held by brokers and institutions on behalf of stockholders, the
Company is unable to estimate the total number of stockholders represented by
these record holders.

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

<PAGE>

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

GENERAL

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

BUSINESS RISKS AND UNCERTAINTIES

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

<PAGE>

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

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

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

<PAGE>

ITEM 7. FINANCIAL STATEMENTS

INDEPENDENT AUDITORS' REPORT

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

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

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

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

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

See accompanying notes to consolidated financial statements.

13
<PAGE>

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

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

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

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

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

Other income (expense):

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

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

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

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

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

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

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

See accompanying notes to consolidated financial statements.

<PAGE>

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

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

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

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

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

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

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

Issuance of warrants 231,035 231,035

Issuance of stock options 7,070 7,070

Common stock subscribed 163,258 163,258

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

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

See accompanying notes to consolidated financial statements.

<PAGE>

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

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

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

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

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

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

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

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

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

See accompanying notes to consolidated financial statements.

<PAGE>

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

1. DESCRIPTION OF BUSINESS

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

2. GOING CONCERN UNCERTAINTY

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

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

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

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

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

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

<PAGE>

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

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

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

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

PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost
while repairs and maintenance costs are expensed in the period
incurred. Depreciation and amortization of property and equipment is
calculated on a straight-line basis over the estimated useful lives of
the assets, generally 3 to 5 years.

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

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

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

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

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

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

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

<PAGE>

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

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

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

4. ISSUANCE OF COMMON STOCK AND WARRANTS

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

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

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

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

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

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

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

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

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

<PAGE>

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

5. NOTES PAYABLE

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

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

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

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

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

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

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

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

6. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
1998 1997
---------------------- ---------------------

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

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

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

<PAGE>

7. INCOME TAXES

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

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

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

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

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

8. STOCKHOLDERS' EQUITY

STOCK OPTION PLAN -- The Company has various Stock Option Plans
primarily for employees and directors. The Plans authorize the issuance
of options to purchase up to 2,010,000 shares of the Company's Common
Stock. The Plans provide for options which may be issued as
nonqualified or qualified incentive stock options under Section 422A of
the Internal Revenue Code of 1986, as amended.

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

<PAGE>

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

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

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

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

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

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

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

Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro
forma net loss and loss per share had the Company adopted the fair
value method as of the beginning of fiscal 1995. Under SFAS 123, the
fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time
to exercise, which greatly affect the calculated values.

The Company's calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Expected life 36 months in 1998 and 36 months in 1997. Stock
volatility, 112% in 1998 and 113% in 1997. Risk free rates of 5.18% in
1998 and 6.08% in 1997. No dividends are expected for the term of the
options. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1998 and 1997 awards had been amortized to
expense over the vesting period of the awards, proforma net loss would
have been as follows:

<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
---------------------- ---------------------
<S> <C> <C>
Net loss, as reported $(3,183,674) $(3,319,394)
Pro forma net loss (3,325,463) (3,486,637)

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

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

<PAGE>

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

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

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

9. SEGMENT INFORMATION AND MAJOR CUSTOMERS

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

10. COMMITMENTS AND CONTINGENCIES

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

11. CERTAIN TRANSACTIONS

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

12. LEGAL PROCEEDINGS

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

<PAGE>

13. SUBSEQUENT EVENTS

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

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

None

PART III

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

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

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

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

DESCRIPTION OF BUSINESS EXPERIENCE.

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

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

<PAGE>

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

LAWRENCE J. MATTESON, Director, served as Chairman of the Board from
May 23, 1995 to June 20, 1997. He has been a Director since October 1991 and
currently he is an executive professor of business policy at the William E.
Simon Graduate School of Business Administration, University of Rochester.
Mr. Matteson was Senior Vice President and General Manager, Electronic
Imaging for Kodak until December 1, 1991. Mr. Matteson began his career with
Kodak in 1965 as a research engineer and has worked at Kodak in various
positions continuously from that date until December 1, 1991. He holds
degrees in engineering and an MBA from the University of Rochester Graduate
School of Business.

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

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

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by the Company
for the fiscal year ended December 1998 to the Company's Chief Executive
Officer and other executive officers of the Company who received total salary
and bonuses in excess of $100,000 during 1998.

SUMMARY COMPENSATION TABLE

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

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

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

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

<PAGE>

OPTIONS EXERCISES AND FISCAL YEAR-END VALUES

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

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

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

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

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

EMPLOYMENT CONTRACTS.

None

<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of the Company's capital stock, as of March 10, 1999,
(i) by each person who is known by the Company to own beneficially more than
5% of the Company's capital stock, (ii) by each of the executive officers
mentioned in the tables under "Executive Compensation" and by each of the
Company's directors, and (iii) by all officers and directors as a group.

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

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

<PAGE>

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

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

(3) Based solely upon information filed in a Schedule 13D by the named
shareholder. To the Company's knowledge, Shaun F. Cairns and Paul A.
Bell are the sole directors of the named shareholder. As such, Mr.
Cairns and/or Mr. Bell may be deemed to be the beneficial owner(s) of
the shares of the Company's Common Stock held by the named shareholder.
Includes 992,500 shares subject to warrants exercisable within 60 days
of March 10, 1999.

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

(5) Based solely upon information filed in a Schedule 13D by the named
shareholder. To the Company's knowledge, Shaun F. Cairns and Paul A.
Bell are the sole directors of the named shareholder. As such, Mr.
Cairns and/or Mr. Bell may be deemed to be the beneficial owner(s) of
the shares of the Company's Common Stock held by the named shareholder.
Includes 200,000 shares subject to warrants exercisable within 60 days
of March 10, 1999.

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

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

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

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

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

<PAGE>

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

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

<PAGE>

In accordance with section 13 or 15(d) with the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 30th day of
March 1999.

SPATIALIGHT, INC.

By: /s/ Michael H. Burney
Michael H. Burney
Chief Executive Officer, Treasurer,
Secretary, and Director (PRINCIPAL EXECUTIVE
OFFICER)

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

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

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

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

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

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

<PAGE>

Exhibit 21.1

SUBSIDIARIES OF THE COMPANY

1. Spatialight of California, Inc., a California corporation does
business as SpatiaLight of California, Inc.

<PAGE>

Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the following Registration
Statement of SpatiaLight, Inc. and subsidiary of our report dated March 24,
1998 (which expresses an unqualified opinion and includes an explanatory
paragraph relating to substantial doubt about the Company's ability to
continue as a going concern) appearing in the Annual Report on Form 10-KSB of
SpatiaLight, Inc. and subsidiary for the year ended December 31, 1998:

Registration Statement No. 33-82410 on Form S-8

San Francisco, California
March 26, 1999

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 470,086
<SECURITIES> 0
<RECEIVABLES> 30,492
<ALLOWANCES> 0
<INVENTORY> 18,296
<CURRENT-ASSETS> 0
<PP&E> 457,838
<DEPRECIATION> 236,340
<TOTAL-ASSETS> 927,576
<CURRENT-LIABILITIES> 3,900,232
<BONDS> 0
0
0
<COMMON> 114,135
<OTHER-SE> 10,854,938
<TOTAL-LIABILITY-AND-EQUITY> 927,576
<SALES> 29,750
<TOTAL-REVENUES> 29,750
<CGS> 4,104
<TOTAL-COSTS> 3,070,457
<OTHER-EXPENSES> 136,129
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,180,940
<INCOME-TAX> 2,734
<INCOME-CONTINUING> 3,183,674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,183,674
<EPS-PRIMARY> .34
<EPS-DILUTED> .34

</TABLE>