<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                                   FORM 10-Q

           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
                        SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended September 30, 1998

                                      OR

         ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                     or the transition period from __to __
                        Commission file number 0-27302

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



                           Spacetec IMC Corporation
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


      Massachusetts                                        04-3116697
--------------------------------------------------------------------------------
(State or other jurisdiction of                    (IRS Employer Identification 
incorporation or organization)                     No.)


The Boott Mills, 100 Foot of John Street, Lowell, Massachusetts         01852
--------------------------------------------------------------------------------
(Address of principal executive offices)                           (Zip Code)
 
 
                                (978) 275-6100
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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___
                                        -      

The number of shares outstanding of the issuer's Common Stock as of

                 Class                     Outstanding at September 30, 1998
                 -----                     ---------------------------------
     Common Stock, $.01 par value                    6,841,534
<PAGE>
 
                           SPACETEC IMC CORPORATION

                               TABLE OF CONTENTS

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

Item 1. Financial Statements (Unaudited)
 
        Condensed consolidated balance sheets as of September 30, 1998 and
        March 3l, 1998.........................................................................  3

        Condensed consolidated statements of operations for the three months and
        six months ended September 30, 1998 and 1997...........................................  4

        Condensed consolidated statements of cash flows for the six months 
        ended September 30, 1998 and 1997......................................................  5

        Notes to condensed consolidated financial statements...................................  6
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.....................................................................................  9
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................  20

PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings-None
Item 2. Changes in Securities and Use of Proceeds-Not Applicable
Item 3. Defaults upon Senior Securities-None
Item 4. Submission of Matters to a Vote of Security Holders-None
Item 5. Other Information......................................................................  20
Item 6. Exhibits...............................................................................  20


SIGNATURES.....................................................................................  21
</TABLE>

                                       2
<PAGE>
 
ITEM 1. FINANCIAL STATEMENTS


                           Spacetec IMC Corporation
                     Condensed Consolidated Balance Sheets
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                      September 30              March 31
                                                                          1998                    1998
                                                                      ------------              -------- 
                                                                      (Unaudited)                (Note)
<S>                                                                   <C>                       <C>
ASSETS
 
Current assets
   Cash and cash equivalents                                          $      666                $    490 
   Securities available-for-sale                                           5,557                   8,536 
   Accounts receivable, net                                                2,037                   2,069 
   Inventories                                                               536                     687 
   Prepaid expenses                                                          183                     176 
   Due from employees and officer                                              4                      32 
                                                                      ------------              --------  
        Total current assets                                               8,983                  11,990 

Furniture and equipment, net                                                 638                     765 
Intangible assets, net                                                       142                     216 
Other assets                                                                  29                      28 
                                                                      ------------              --------  
                                                                             809                   1,009                 
                                                                      ------------              --------  
Total assets                                                          $    9,792                $ 12,999 
                                                                      ============              ========  
                                                                                                         
LIABILITIES AND SHAREHOLDERS' EQUITY                                                                     
Current liabilities:                                                                                     
  Accounts payable and accrued expenses                               $    1,276                $  1,498 
  Deferred revenue                                                             -                      12 
                                                                      ------------              --------  
       Total current liabilities                                           1,276                   1,510 
                                                                                                         
                                                                                                         
Shareholders' equity:                                                                                    
   Preferred stock, $.01 per value; 1,000,000 shares authorized;                                         
       no shares issued or outstanding                                                                   
Common stock, $.01 par value; 20,000,000 shares authorized;                                              
       7,142,742 and 6,841,534 shares issued and outstanding at                                         
       March 31, 1998 and September 30, 1998, respectively                    68                      71 
 Additional paid-in capital                                               16,007                  16,780 
 Deferred compensation                                                       (50)                    (50)
 Unrealized gain on available-for-sale securities                              3                       5 
 Accumulated deficit                                                      (7,556)                 (5,303)
 Cumulative translation adjustment                                            44                     (14) 
                                                                      ------------              --------  
    Total shareholders' equity                                             8,516                  11,489
                                                                      ------------              --------  
Total liabilities and shareholders' equity                            $    9,792                $ 12,999
                                                                      ============              ========  
</TABLE>

Note: The balance sheet at March 31, 1998 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.


    SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       3
<PAGE>
 
                           SPACETEC IMC CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE> 
<CAPTION> 
                                                      Three Months Ended                       Six Months Ended      
                                                         September 30                            September 30        
                                                     1998              1997               1998                1997         
                                                 ------------      ------------        ------------        -----------            
<S>                                              <C>               <C>                 <C>                 <C>         
Revenues                                             $ 1,436           $ 1,816             $ 3,323            $ 3,899  
Cost of revenues                                         280               487                 953              1,149  
                                                 ------------      ------------        ------------        ----------- 
                                                       1,156             1,329               2,370              2,750  
                                                                                                                       
Operating expenses:                                                                                                    
   Selling and marketing                                 951             1,019               2,038              2,073  
   Research and development                              589               873               1,407              1,735  
   General and administrative                            885               442               1,392                810  
                                                 ------------      ------------        ------------        ----------- 
              Total operating expenses                 2,425             2,334               4,837              4,618  
                                                 ------------      ------------        ------------        ----------- 
                                                                                                                       
Loss from operations                                  (1,269)           (1,005)             (2,467)            (1,868) 
                                                                                                                       
       Interest income                                    94               142                 215                281  
                                                 ------------      ------------        ------------        ----------- 
                                                                                                                       
Loss before income taxes                              (1,175)             (863)             (2,252)            (1,587) 
                                                                                                                       
Income tax benefit                                         -                 -                   -                  -  
                                                 ------------      ------------        ------------        ----------- 
Net loss                                            $ (1,175)           $ (863)           $ (2,252)          $ (1,587)
                                                 ============      ============        ============        =========== 
                                                                                                                       
Net loss per share - Basic                          $  (0.17)           $(0.12)           $  (0.33)          $  (0.22)
                                                 ============      ============        ============        =========== 
                                                                                                                      
Weighted average common shares  
  outstanding - Basic                                  6,842             7,191               6,841              7,214 
                                                 ============      ============        ============        ===========
</TABLE> 

    See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>
 
                           Spacetec IMC Corporation

                Condensed Consolidated Statements of Cash Flows
                                  (Unaudited)
                                (in thousands)

<TABLE>
<CAPTION>
                                                                     SIX MONTHS ENDED
                                                                       SEPTEMBER 30
                                                                  1998              1997
                                                                --------          --------
<S>                                                             <C>               <C>
OPERATING ACTIVITIES
Net loss                                                        $ (2,252)         $ (1,587)
Adjustments to reconcile net loss to net cash
 used in operating activities:
 Depreciation and amortization                                       273               412
 Loss on disposal of assets                                           84                 -
Changes in operating assets and liabilities:
 Accounts receivable, net                                             32               472
 Inventories                                                         152               413
 Prepaid expenses and other assets                                    (8)               95
 Due from employees and officer                                       30                15
 Income taxes receivable                                               -               121
 Accounts payable and accrued expenses                              (223)             (432)
 Deferred revenue                                                    (12)              (10)
                                                                --------          --------
Net cash used in operating activities                             (1,924)             (501)
INVESTING ACTIVITIES:
Net sales of securities available-for-sale                         2,977             1,225
Purchase of furniture and equipment                                 (158)             (263)
Purchase of intangible assets                                          -                (3)
Software development costs
                                                                --------          --------
Net cash provided by investing activities                          2,819               959
FINANCING ACTIVITIES
Proceeds from exercise of stock options                               73                10
Stock repurchase                                                    (850)             (323)
Additional offering costs                                              -                 -
                                                                --------          --------
Net cash used in financing activities                               (777)             (313)
                                                                --------          --------
Currency translation effect on cash                                   58                 -
Net increase in cash and cash equivalents                            176               145
Cash and cash equivalents at beginning of period                     490               170
                                                                --------          --------
Cash and cash equivalents at end of period                      $    666          $    315
                                                                ========          ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 Income taxes paid                                                                $      5
                                                                ========          ========

NON-CASH INVESTING AND FINANCING ACTIVITIES:
 Unrealized gain on available-for-sale securities               $      3          $     12
                                                                ========          ========
</TABLE>

    See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
                             SPACETEC IMC CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                 (IN THOUSANDS)

1.  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments consisting
of normal recurring adjustments necessary for a fair presentation of the
financial condition, results of operations, and cash flows for the periods
presented have been included.  Operating results for the six month period ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended March 31, 1999.  The Company suggests that these
interim condensed consolidated financial statements be read in conjunction with
the consolidated financial statements and footnotes thereto, included in the
Company's annual report on Form 10-K for the year ended March 31, 1998.

2.  INVENTORIES

Inventories consist of the following:


<TABLE>
<CAPTION>
                                    SEPTEMBER 30           MARCH 31    
                                       1998                  1998         
                                    -------------------------------        
        <S>                         <C>                    <C>  
        MATERIALS                   $204                       $425         
        WORK-IN-PROCESS               72                         77         
        FINISHED GOODS               260                        185         
                                    -------------------------------         
                                    $536                       $687         
                                    ===============================          
</TABLE>
                                                                                

3.  LOSS PER COMMON SHARE

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128).  FAS 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share.  Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities.  Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share.  All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.

                                       6
<PAGE>
 
                           SPACETEC IMC CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

4. OPEN MOTION SPIN-OFF

As the Company decided to focus its efforts on developing and growing its core
3D controller and related software business, management has determined that it
does not wish to pursue certain other technology that the Company has developed.
Consequently, on June 5, 1998, the Company transferred certain 3D software
technology and computer equipment having a net book value of approximately
$50,000 to 3D Open Motion, LLC (the "LLC"). The LLC was established by the
former CEO and current director of the Company, who is majority owner of the
LLC. The Company received a 20% non-voting interest in the LLC. Additionally,
the LLC provided the Company with an option to obtain favorable pricing for
commercial products developed by the LLC at a 50% discount on the most favorable
terms offered to any other customer. This option becomes exercisable on January
1, 1999 and expires on May 31, 1999 if not exercised. To exercise the option the
Company must pay $250,000 to the LLC. If the option is exercised the Company's
favorable pricing terms would extend through June 2003.

In conjunction with this agreement, the former CEO contributed 291,667 shares of
stock of Spacetec IMC Corporation to the LLC as his initial investment in the
LLC. The Company has repurchased these shares from the LLC at a price of $2.40
per share, which represented a discount of approximately 20% from the fair
market value of the shares on June 3, 1998, the date of the repurchase

5. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements for periods beginning after December 15, 1997.
Comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources. Examples of items to be included in comprehensive income
which are excluded from net income include cumulative translation adjustments
resulting from consolidation of foreign subsidiaries' financial statements and
unrealized gains and losses on available-for-sale securities. Reclassification
of financial statements for earlier periods for comparative purposes is
required. The Company has adopted SFAS 130 beginning in its fiscal year 1999 and
does not expect such adoption to have a material effect on its consolidated
financial statements. During the second quarter and first six months of fiscal
1999, total comprehensive loss amounted to $1,125 and $2,194, respectively, and
$854 and $1,621 for the corresponding fiscal 1998 periods, respectively. The
difference between total comprehensive loss and net loss is attributable to
cumulative translation adjustments and unrealized gains and losses on available-
for-sale securities.

                                       7
<PAGE>
 
                            SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


From time to time, Spacetec IMC through its management may make forward-looking
public statements, such as statements concerning then expected future revenues
or earnings or concerning projected plans, performance, product development and
commercialization as well as other estimates relating to future operations.
Forward-looking statements may be in reports filed under the Securities Exchange
Act of 1934, as amended, in press releases or in oral statements made with the
approval of an authorized executive officer. The words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933, as enacted by the Private Securities
Litigation Reform Act of 1995.

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997

Revenues:

Revenues decreased 20.9% to $1,436,000 for the three months ended September 30,
1998 ("current quarter") from $1,816,000 for the three months ended September
30, 1997 ("prior quarter"). For the six months ended September 30, 1998
("current six month period"), revenues decreased 14.8% to $3,323,000 from
$3,899,000 for the six months ended September 30, 1997 ("prior six month
period"). The decrease in revenues is mainly attributable to a decrease in
orders from the automotive sector as a result of a General Motors strike and a
short-term delay in the start of the ASCII release to the Sphere 360 controller
for the Sony Play Station.

Mechanical CAD [M-CAD] and multimedia sales for the current six-month period
decreased 23.5% to $2.6 million from $3.4 million in the comparable period of 
the prior year. During the current quarter of 1999, Mechanical CAD [M-CAD] and
multimedia sales were $1.4 million compared with $1.7 million in the same period
in fiscal year 1998. The decrease in revenues is mainly attributable to a
decrease in orders from the automotive sector as a result of a General Motors
strike and a short-term delay in the start of the ASCII release of the Sphere
360 controller for the Sony Play Station. The Company did not record any
software and licensing revenues for the first quarter of 1999, compared with
$97,000 for the first quarter of fiscal 1998. Consumer sector revenues of the
SpaceOrb 360 3D game controller and other consumer related revenue totaled
$17,000 for the current quarter of fiscal 1999, down from $81,000 for the prior
quarter.

During the current six-month period, more emphasis was placed on the industrial
business as evidenced by orders received from accounts such as Carrier,
Chrysler, Ingersol Rand and Sony. The Company seeks to achieve a balance between
various business units consisting of OEM's corporate accounts and resellers. In
the coming quarters expects to continue discussions with potential partners to
assist in capitalizing on its technology. However, there is no assurance that
such relationships, if established, will be able to generate substantial
revenue.

                                       8
<PAGE>
 
                           SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Gross Profit:

The Company's gross profit is arrived at after the costs of materials,
manufacturing overhead, royalties, and amortization of capitalized software are
subtracted from revenues. Gross profit decreased 13.8% to $2,370,000 in the
current six-month period from $2,750,000 in the prior six-month period, and
represented 71.3% of current six-month period revenues versus 70.5% of prior
year six-month period revenues. As the Company continues to shift its sales mix
from direct to OEM and general distribution channels for its industrial and
consumer products, it is expected that the gross profit percentage experienced
by the Company may decline. The Company's expectations regarding the decline in
gross profit percentage is a forward-looking statement. There can be no
assurance that such decreases in gross profit will not be greater than
anticipated.

Selling and Marketing Expenses:

Selling and marketing expenses, which include personnel costs, advertising and
marketing costs, sales commissions and trade show expenses, decreased 1.7% to
$2,038,000 in the current six month period from $2,073,000 in the comparable
period of the prior year, and represented 61.3% of current six-month period
revenues, up from 53.2% of revenues in the comparable period of the prior year.
Current quarter selling and marketing expenses decreased 6.7% to $951,000 down
fronm $1,019,000 in the prior quarter. Action has been taken by the Company to
further reduce these selling and marketing expenses to restore profitability.
This action included a reduction in both direct and indirect selling and
marketing staff as well as a decline in general selling and marketing expenses.
The Company anticipates that efficiencies may ensue in this area as a result of
a proposed merger with Labtec, Inc.

Research and Development Expenses:

Research and development expenses, which consist primarily of personnel and
equipment costs required to conduct the Company's software and hardware
development and engineering efforts, decreased 18.9% to $1,407,000 in the
current six-month period versus $1,735,000 in the comparable period of the prior
year. These expenses represent 42.3% of current six-month period revenues and
44.5% of revenues in the comparable period of the prior year. Current quarter
research and development expenses declined 32.5% to $589,000 in the current
quarter, down from $873,000 in the prior quarter. The decrease in those expenses
reflect the spin-off of the Open Motion technology, and the related staff
reduction and decreased expenditures in hardware design. Further reduction in
expenses in this area are anticipated in November as further reductions in the
workforce are undertaken.

General and Administrative Expenses:

General and administrative expenses, which include the costs of the Company's
finance, human resources and administrative functions increased 71.9% to
$1,392,000 in the current six-month period versus $810,000 in the comparable
period of the prior year. These expenses represented 41.9% of current six-month
period revenues compared with 20.8% of revenues in the comparable period of the 
prior year. In the current quarter, general and administrative expenses
increased 50% to $885,000, up from $442,000 in the prior quarter.

                                       9
<PAGE>
 
                           SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

The increase in expense in the current quarter and current six month period is
mainly the result of the following one-time expenses totally approximately
$643,000 related to: accounting, legal, and administration fees related to Open
Motion spin-off and the Labtec, Inc. merger as well as other legal and
administrative expenses incurred in pursuing various strategic relationships
during the period; consulting fees related to the installation and
implementation of a new enterprise-wide accounting system; and severance costs
associated with the former Chief Executive Officer, Ray Boelig, and other
employees terminated during the quarter ended September 30, 1998. In addition,
the Company incurred consulting fees for George Rea, Acting Chief Executive
Officer, and consulting fees for the Acting Controller.

The anticipated merger with Labtec, Inc. is expected to result in the
discontinuance of some of these significant non-recurring expenses. In addition,
the Company anticipates a reduction of up to 25% of general and administrative
expenses associated with the planned reduction in facilities costs,
consolidation of several remote sales offices, and the lowered administrative
costs associated with a reduced workforce.

Provision for Income Taxes:

As the Company has recognized losses in the current fiscal year, it has not
recorded a provision for income taxes. The benefit attributable to carryback of
losses to prior six-month periods was fully utilized during the fiscal year
ended March 31, 1997. The Company has unbenefited federal net operating loss
carryforwards of approximately $4,300,000.

Year 2000 Compliance. 

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field.  As a result, in less than
two years, computer systems and/or software used by many companies may need to
be upgraded to comply with such "Year 2000 or Y2K" requirements.  Significant
uncertainty exists in the software industry concerning the potential effects
associated with the Year 200 issue.

The Company in its ordinary course of business tests and evaluates its own
products.  Since the Company's products do not use any date related processing
in the hardware or driver software, the products are Y2K compliant, meaning that
the use or occurrence of dates on or after January 1, 2000 and the occurrence of
leap years will not materially affect the performance of the Company's products.
As the company's products are intended to be used in conjunction with other
hardware and applications through third party suppliers, there can be no
assurances that users of the Company's products will not experience Y2K problems
as a result of the integration of the Company's products with non-compliant Y2K
products of such third party suppliers.  In addition, in certain circumstances,
the Company has warranted that the use or occurrence of dates on or after
January 1, 2000 will not adversely affect the performance of the Company's
products with respect to its lack of any date related processing the hardware or
driver software.  If any of these customers experience Y2K problems, such
customers could assert claims for damages against the Company.

                                       10
<PAGE>
 
The Company is in the process of forming a Y2K committee that will review the
Y2K status of the Company's software and systems used in its internal business
processes.  This committee will also obtain the appropriate assurances of
compliance from the manufacturers of these products or, in the event that such
assurances cannot be obtained, will provide for the modification or replacement
of all non-compliant products.  Management has verified that its accounting
software is Year 2000 compliant.

The Company is in the process of contacting its critical suppliers and major
customers to determine whether the products obtained by the Company from such
vendors or sold by the customer to third parties are Y2K compliant.  The
Company's suppliers and customers are under no contractual obligation to provide
such information to the Company.  The Company intends to continue its efforts to
monitor the Y2K compliance of suppliers and major customers.

Based on the information available to date, the Company believes it will be able
to complete its Y2K compliance review and make all necessary modifications prior
to the end of 1999.  The Company is prioritizing its efforts to focus on any Y2K
discrepancies found that would impact its operations.  Nevertheless,
particularly to the extent the Company is relying on the products of other
vendors to resolve Y2K issues, there can be no assurances that the Company will
not experience delays in implementing such changes.  If key systems, or a
significant number of systems were to fail as a result of Y2K problems, or the
Company were to experience delays implementing Y2K compliant software products,
the Company could incur substantial costs and disruption of its business, which
could potentially have a material effect on the Company's business and results
of operations.  In addition, as the Company purchases many critical components
from single or sole source suppliers, failure of any such vendor to adequately
address issues related to the Y2K problem may have a material adverse effect on
the Company's business, financial condition and results of operations.

To date the Company has not required a complete and separate budget for
investigating and remedying issues related to Y2K compliance whether involving
the Company's own products or the software or systems used in its internal
operations.  However, the cost of these Y2K initiatives is not expected to be
material to the Company's results of operations or financial position.
Additionally, the Company has not developed a contingency plan related to Y2K.
There can be no assurances that the Company's resources spent on investigating
and remedying Y2K compliance issues, or that lack of a contingency plan related
to Y2K, will not have a material adverse effect on the Company's business,
financial condition and results of operations.

                                       11
<PAGE>
 
                            SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1998 the Company had cash and cash equivalents and
securities available for sale of $6,223,000 and working capital of $7,707,000
versus $9,026,000 and $10,480,000, respectively, at March 31, 1998.

Operating activities of the Company absorbed $1,924,000 of cash in the current
six-month period as compared to $501,000 in the comparable period of the prior
year. The use of funds in the current six-month period was primarily due to the
net loss of $2,252,000. A decrease in accounts payable and accrued expenses from
$1,493,000 at March 31, 1998, to $1,276,000 on September 30, 1998, used $223,000
in cash. Inventory levels decreased in the current six month period from
$687,000 at March 31, 1998 to $536,000 at September 30, 1998.

Net cash provided to the Company in the current six month period from investing
activities totaled $2,819,000 versus $959,000 in the comparable period of the
prior year. The primary reason for the increase was the sale of securities to
fund stock repurchases and operating expenses. Additionally, expenditures for
furniture and equipment were reduced ($158,000 in the current six month period
versus $263,000 in the prior six month period.)

Financing activities used $777,000 of net cash in the current six month period,
primarily as a result of the Company repurchasing $700,000 worth of its stock as
part of the Open Motion spinoff, and an additional $150,000 worth of common
stock in a periodic, open market purchase program. The amount paid for the
repurchase of stock was partially offset by the proceeds from the exercise of
employee stock options.

The Company believes that its existing cash and investment securities together
with future anticipated funds from operations, will satisfy its projected
working capital and other cash requirements through the end of its fiscal year
ending March 31, 1999. The Company anticipates that additional funds will be
required to continue software and hardware development, as well as to develop
the sales and marketing infrastructure, distribution channel and market
awareness of the Company's products. 

The Company's capital requirements will depend on many factors, including the
rate at which the Company can develop its products, the market acceptance of
such products, and the levels of promotion and advertising required to launch
such products and attain a competitive position in the marketplace. Changes in
technology or growth in revenues beyond currently established capabilities will
also require further investment. To the extent that the Company's current
financial resources are insufficient to fund the Company's operating
requirements, it may be necessary for the Company to seek additional funding
through public or private financing. There can be no assurance that additional
financing will be available on acceptable terms or at all. If additional funds
are raised by issuing equity securities, further dilution to the existing
stockholders will result. If adequate funds are not available, the Company's
business would be materially adversely affected, and, as a result, the Company
may be required to curtail its

                                       12
<PAGE>
 
                            SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

operations significantly. There can be no assurance that the Company's cash flow
from operations will be adequate to find its long-term working capital
requirements, or that it will be able if necessary, to obtain equity financing
an favorable terms (if at all).

RISK FACTORS

     From time to time. Spacetec IMC through its management may make forward-
looking public statements, such as statements concerning ten expected future
revenues or earnings or concerning projected plans, performance, product
development and commercialization as well as other estimates relating to
future operations. Forward-looking statements may be in reports filed under the
Securities Exchange Act of 1934, as amended, in press releases or in oral
statements made with the approval of an authorized executive officer. The words
or phrases "will likely result," are expected to, "will continue." is
anticipated," "estimate,"or similar expressions are intended to identify'
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934 and Section 27A of the Securities Act of 1933, as enacted
by the Private Securities Litigation Reform Act of 1995.

     The Company wishes to caution readers not to place undue reliance on these
forward-looking statements which speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors Listed
below, as well as other factors not currently identified by management, could
affect the Company's financial or other performance and could cause the
Company's actual results for fixture periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.

                                       13
<PAGE>
 
                           SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events
which may cause management to re-evaluate such forward-looking statements.

     In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
of the Company made by or on behalf of the Company.

     Risks Relating to the Proposed Merger with Labtec. Inc. The Company
recently announced a proposed merger with Labtec, Inc. Acquisitions Involve a
number of operating risks that could materially adversely affect the Company's
results of operations, including the diversion of management's attention to
assimilate the operations, products and personnel of the acquired companies, the
amortization of acquired intangible assets, and the potential loss of key
employees of the acquired companies. There can be no assurance that the Company
will be able to manage this merger successfully, or that the Company will be
able to integrate the operations products, or personnel gained through this
merger without a material adverse effect on the Company's business, financial
condition and results of operations.

     Uncertainties Relating to Integration of Operations.  The Company and
Labtec believe that the merger will result in long-term strategic benefits.
However, the realization of these benefits will depend on whether management can
integrate the operation of the two companies in an efficient and effective 
manner. Among other things, the two companies must integrate the respective
companies' products, technologies, management information systems, distribution
channels and key personnel. Furthermore, the combined companies must coordinate
the sales, marketing and research development efforts. The difficulties
integrating the two companies may be increased by the need to coordinate
organizations with distinct cultures and widely dispersed operations. The
Company and a majority of its employees are located in Massachusetts while
Labtec and a majority of its employees are located in Washington State. The
effective integration of various operations will depend on the ability of the
combined companies to attract and retain key management, sales, marketing and
research and development personnel. The integration of operations following the
merger will require significant attention of management and thus may distract
attention from the day-to-day operations of the two companies.

                                       14
<PAGE>
 
                            SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


     Failure to Achieve Beneficial Synergies.  Spacetec has entered into the
merger agreement with the expectation that the merger will result in beneficial
synergies.  Achieving these anticipated synergies will depend on a number of
factors including, without limitation, the successful integration of the
combined operations and general and industry-specific economic factors.  In
particular, since the Company's retail marketing efforts have been less
successful than expected, the combined company intends to utilize Labtec's
established distribution channels to bolster sales of  Spacetec's products.
Even if Spacetec and Labtec are able to integrate their distribution channels
and other operations, and economic conditions remain stable, the anticipated
synergies still may not be achieved.

     Attraction and Retention of Key Employees. In recent months, three
executive officers of the Company have resigned. These officers include Dennis
Gain, the Company's founder, principal stockholder and former President and
Chief Executive Officer, Neil Rossen, the Company's Vice President and Chief
Financial Officer, and more recently, Ray Boelig, the Company's former Vice
President, and its President, and Chief Operating Officer. The Company has not
currently found replacements to fill the vacancies caused by these departures,
except that the Company recently appointed a director, George Rea, to serve as
Acting Chief Executive Officer, and a consultant to serve as Acting Controller.
The Company needs to fill the positions of chief executive officer and a senior
financial officer as expeditiously as possible ad is currently recruiting
candidates. While these positions remain unfilled, the business and operations
of the Company could be materially adversely effected by the lack of permanent
chief executive officer and a senior financial officer. The loss of the services
of one or more key employees could have a material adverse effect an the
Company. The Company believes that its future success will be affected by its
ability to attract and retain skilled technical, managerial and marketing
personnel. Although the Company has not experienced difficulty to dare, there
can be no assurance that the Company will be successful in attracting or
retaining the personnel it requires to continue to grow and operate profitably.

     Fluctuations in Results of Operations. The Company's results of operations
have varied significantly in the past and may vary significantly in the future,
on a quarterly and annual basis as a result of a variety of factors, many of
which are outside the Company's control.

                                       15
<PAGE>
 
                            SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     Future Capital Needs. The Company's capital requirements will depend on
many factors, including the rate at which the Company can develop its products,
the market acceptance of such products, the levels of promotion and advertising
required to launch such products and. attain a competitive position in the
marketplace, the response of competitors-to the products based an the Company's
technology. and capital necessary for potential acquisitions, Changes in
technology or a growth of sales beyond currently established capabilities will
also require further investment, To the extent that internally generated funds
are insufficient to fund the Company's operating requirements, it may be
necessary for the Company to seek additional funding through public or private
financing. There can be a assurance that additional financing will be available
an acceptable terms or at all. If additional funds are raised by issuing equity
securities, further dilution to the existing shareholders will result. if
adequate funds are not available, the Company's business would be materially
adversely affected, and, as a result, the Company may be required to curtail its
operations significantly.

     Developing Market. During the fiscal year 1997, the Company began to market
its products designed for the consumer marketplace. The Company has bad little
experience in marketing its products to consumers, The entry into the consumer
market has created considerable risks for the Company, some of which axe outside
of the Company's control.

     Expansion is Retail Distribution Channels. The Company commenced retail
shipments of its SpaceOrb 360 during fiscal 1997. Retail distribution channel
sales bays required significantly greater marketing and sales expenditures and
post-sale support coats than the Company's industrial sector products.
Penetration of this market has depended upon building relationships with
distributors and retailers. An increasing number of vendors compete for access
to these distributors and retailers, which generally offer products of several
difFerent companies, including products competitive with the Company's products-
The Company has committed substantial resources to the penetration of this
distribution channel to date but has decided to develop its business in this
area through alliances with OEM, distributors, and major accounts.

     The Company is no longer involved in selling consumer products through
retail distribution channels. To the extent that it sells components and
products trough alliances wit partners for the consumer market, the Company
could be subject to the risk of product returns and warranty claims.

     Reliance an Third-Party Distribution Channels. The Company expects to
increase its product sales Through third-party distribution channels, including
original equipment manufacturers ("OBMs"), value-added resellers ("VARs"),
system integrators and distributors. Such OEMs and Y2K are not under the
control of the Company. Although these customers in turn sell to a wide variety
of end-users, the Company is subject not only to the risk that its customers
will discontinue selling and marketing its products, but also to the risk that
the end-users supplied by the Company's customers wilt alter their preferences
in a manner that has a material adverse effect on the Company's operations.
There can be no assurance that the Company will be able to retain its current
resellers or expand its distribution channels by entering into arrangements with
new resellers.

                                       16
<PAGE>
 
                           SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     Dependence on Relationships with Independent Software Vendors ("ISVs"). The
Company maintains relationships with Independent Software Vendors, which
incorporate the Company's enabling software into their 3D applications. As a
result, sales of the Company's products are dependent upon the continued market
acceptance of the product/application offerings of the ISVs. The ISVs are under
no contractual obligation to incorporate the Company's enabling software into
their products/applications. The incorporation of the Company's enabling
software can involve a substantial amount of time and money. Sales of the
Company's hardware products can lag from 6 to 18 months behind the actual
incorporation of the Company's enabling software into the ISV's application. Any
delay in the product development of an ISV or a decision by the ISV to
incorporate the enabling software of a competitor of the Company into its
products/applications would have a material adverse effect on the Company's
business, financial condition and results of operations.

     Rapid Technological Change; Dependence on New Product Development. The
electronics industry in general, and the markets for the Company's products in
particular, are characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions, short product life cycles and
significant competition. The introduction of products embodying new technologies
and the emergence of new industry standards present opportunities for current
and potential competitors of the Company to gain market share and can quickly
render the Company's products less attractive or obsolete and unmarketable. In
order to keep pace with this rapidly changing market environment, the Company
must continually develop and incorporate into its products new technological
advances and features desired by the marketplace at acceptable prices. The
successful development and commercialization of new products involves many
risks, including the identification of new product opportunities, the timely
completion of the development process, the control and recoupment of development
and production costs and acceptance by customers of the Company's products.
There can be no assurance that the Company will be successful in identifying,
developing, manufacturing and marketing new products in a timely and cost
effective manner, that the Company's products will be accepted in the
marketplace, or that products or technologies developed by others will not
render the Company's products or technologies uncompetitive.

     Dependence on Relationships with Significant Customers. The Company sells
substantially all of its products to and maintains strategic relationships with
original equipment manufactures ("OEMs") and value added resellers ("VARs"). As
a result, sales of the Company's products are dependent upon the continued
market acceptance of the service and product offerings of the Company's
customers. Although the Company maintains contractual relationships with a
substantial number of is customers, such contracts do not provide for minimum
purchase requirements nor do they contain provisions requiring the exclusive
purchase of the Company's products.

     Competition. The market for computer products is intensely competitive and
rapidly changing. The Company's products currently compete against established
products and no assurance can be given that the Company's products will not be
rendered obsolete by technological advance of others. The Company expects that
competition from existing competitors will increase and that new competitors
will enter the 3D-motion control market. Many of the existing and potential
competitors have experienced management, larger technical staffs, more
established and larger marketing and sales organizations, better developed
distribution systems and significantly greater financial resources than the
Company.

                                       17
<PAGE>
 
                           SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     The Company anticipates that its competitors will ultimately develop
hardware products based on technology that does not infringe an the patent
rights of the Company, which may provide capabilities similar or superior to
those of the Company's products. Increased competition could result in price
reductions and loss of market share for the Company. There can be no assurance
that the Company will be able to compete successfully or that competition will
not have a material adverse effect on the Company's business, operating result
and financial condition.

     Patents and Proprietary Technology. The Company's success is heavily
dependent upon its proprietary hardware and software technology. The Company
relies on a combination of patent, trade secret, copyright and trademark law,
software license agreements. nondisclosure agreements, and technical measures to
protect its rights pertaining to its products. Such protection may not preclude
competitors from developing products with features similar to the Company's
products. The Company's success will depend in part on its ability to obtain and
defend United States and foreign patent protection for its products and preserve
its trade secrets. There can be no assurance that the Company's issued patents,
or any future patents, will provide the Company with significant protection
against competitive products or otherwise be commercially valuable. Moreover,
there can be no assurance that any patents issued to or licensed by the Company
will not be infringed upon by others. In the case of infringement of the
Company's technologies, there can be no assurance that the Company would be
able to afford the expense of any litigation that may be necessary to enforce
its proprietary rights.

     In addition to seeking patent protection, in some cases the Company may
rely on contractual arrangements or trade secrets to protect its proprietary
technology. There can be no assurance that trade secrets will be developed and
maintained, that secrecy obligations will be honored, or that others will not
independently develop similar or superior technology. Disputes as to the
ownership of such information may arise if consultants, key employees, or other
third parties apply technological information independently developed by them or
by others to Company projects, and such disputes may not be resolved in favor of
the Company. Due to the importance of patent and trade secret protections and
the competitive nature of its industry, the Company may also be subject to
claims that its technologies infringe on the proprietary rights of other
companies. There can be no assurance that such claims will not arise, that the
Company will have sufficient resources to pursue any resulting litigation to a
final judgment, or that the Company will prevail in such litigation.

     Dependence on Contract Manufacturers, including Overseas Manufacturers. The
Company has and will continue to rely on outside vendors to manufacture hardware
devices among the Company's products. Although the Company's hardware devices
are relatively simple devices to manufacture, and the Company has not
encountered any delays in obtaining adequate products from its outside
contracting organizations, there can be no assurance that delays incurred or
quality problems caused by any of the contract manufacturing organizations will
not have a material adverse effect on the Company's ability to fill customer
orders. In 1996, the Company entered into a manufacturing contract with an
entity located in the People's Republic of China. The Company's reliance on
outside manufacturers involves several risks, including a potential inability to
obtain an adequate supply of required products, and reduced control over the
price, timeliness of delivery, reliability and quality of finished products.
Certain of the Company's contract manufacturers have relatively limited
financial and other resources. Any inability to obtain timely deliveries of
products and services having acceptable qualities or any other circumstance that
would require the Company to seek alternative sources

                                       18
<PAGE>
 
                           SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

of contract manufacturing services or to manufacture its own hardware devices
internally, could delay the Company's ability to ship its products. Any such
delay could damage relationships with customers and such delay could have a
material adverse effect on the Company.

     The use of a foreign manufacturer, in a country with an emerging commercial
base, subjects the Company to additional risks, including unexpected changes in
regulatory requirements and tariffs and difficulties in communications with
such foreign entity. Finally, the laws of certain countries do not protect the
Company's products and intellectual property rights to the same extent as do the
laws of the United States. There can be no assurance that these factors will not
have a material adverse effect on the Company. To the extent that such foreign
manufacturer fails to perform in accordance with its contract with the Company
or to the extent the Company has other claims against such manufacturer, it
may be difficult to enforce such claims in the Peoples Republic of China.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

PART II. OTHER INFORMATION

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

There were no sales of unregistered securities. The Company's S-1 registration
(File No. 33-98064) became effective on December 5, 1995. The net proceeds
received from the offering totaled $14,726,721 The Company has filed the Form
SR disclosing the sale of securities and use of proceeds through September 5,
1996. No information has changed, except for the use of proceeds.

The following table lists the use of proceeds (in thousands) from the effective
date of the registration (December 5, 1995) through September 30, 1998.

Cash and available-for-sale securities:              $ 6,223
Purchases of machinery and equipment:                  1,597
Repurchase of the Company's Common Stock:              1,291
Expenses incurred in connection with the             
acquisition of Spatial Systems, Ltd:                     150
Working capital:                                       5,466
                                                     -------
Total                                                $14,727
                                                     ------- 

None of these payments were made to directors or officers of the Company or
their associates, or to persons owning more than ten percent of any class of
equity securities of the Company, and to the affiliates of the Company.

                                      19

<PAGE>
 
                           SPACETEC IMC CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES--NONE

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NONE

ITEM 5.  OTHER INFORMATION

Proposals of stockholders intended for inclusion in the proxy statement to be
furnished to all stockholders entitled to vote at the next annual meeting of
stockholders of the Company must be received at the Company's principal
executive offices not later than February 22, 1999. The deadline for providing
timely notice to the Company of matters that stockholders otherwise desire to
introduce at the next annual meeting of stockholders of the Company is February
22, 1999. In order to curtail any controversy as to the date on which the
Company received a proposal, it is suggested that proponents submit their
proposals by Certified Mail, Return Receipt Requested.

The following exhibits are included herein;

(4.5) Consulting Agreement between the Company and George R. Rea

(27) Financial Data Schedule 

                                      20
<PAGE>
 
SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



Spacetec IMC Corporation
-------------------------------------
(Registrant)



By   /s/ George Rea                               November 16, 1998
   ----------------------------------             -------------------
George Rea, Acting Chief Executive Officer               Date

                                      21