<PAGE>
 
FORM 10-Q
---------

                       SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

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

                For the quarterly period ended December 31, 1996

                                       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 Mill, 100 Foot of John Street,  Lowell, Massachusetts      01852
----------------------------------------------------------------------------
(Address of principal executive offices)                         (Zip Code)


                                (508) 970-0330
---------------------------------------------------------------------------
             (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 each of the issuer's classes of common stock
as of

              Class                          Outstanding at December 31, 1996
              -----                          --------------------------------
      Common Stock, $.01 par value                       7,266,508

                                       1
<PAGE>
 
                            SPACETEC IMC CORPORATION

                               TABLE OF CONTENTS


PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

        Condensed consolidated balance sheets as of December 31, 1996 and
        March 31, 1996..................................................... 3
 
        Condensed consolidated statements of operations for the three and 
        nine months ended December 31, 1996 and 1995....................... 4

        Condensed consolidated statements of cash flows for the nine months
        ended December 31, 1996 and 1995................................... 5

        Notes to consolidated condensed financial statements as of
        December 31, 1996.................................................. 6

Item 2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 7

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings-None
Item 2. Changes in Securities-None
Item 3. Defaults upon Senior Securities-None
Item 4. Submission of Matters to a Vote of Security Holders-None
Item 5. Other Information-None
Item 6. Exhibits and Reports on Form 8-K.................................. 12

SIGNATURES................................................................ 13

                                       2
<PAGE>
 
Item I. Financial Statements

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

<TABLE>
<CAPTION>
                                                        DECEMBER 31   MARCH 31
                                                           1996         1996
                                                        -----------  ----------
                                                        (UNAUDITED)    (NOTE)
<S>                                                     <C>           <C>
ASSETS
Current assets:
   Cash and cash equivalents                            $     764     $     417
   Securities available-for-sale                           10,854        15,620
   Accounts receivable, net                                 2,366         2,112
   Inventories                                              1,946           409
   Prepaid expenses                                         1,108           332
   Deferred income taxes                                      100           100
                                                        ---------     ---------
       Total current assets                                17,138        18,990

Furniture and equipment, net                                1,032           870
Intangible assets, net                                        550           516
Software development costs, net                               455           695
Other assets                                                   27            37
                                                        ---------     ---------
                                                            2,064         2,118
                                                        ---------     ---------
       Total assets                                     $  19,202     $  21,108
                                                        =========     =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses                $   2,326     $   1,475
   Deferred revenue                                            84            12
                                                        ---------     ---------
       Total current liabilities                            2,410         1,487

Deferred income taxes                                         320           320

Shareholders' equity:
   Preferred stock, $.01 par value; 1,000,000 shares
     authorized at September 30, and March 31, 1996             -            -
   Common stock, voting $.01 par value; 20,000,000
     authorized shares; 7,366,508 and 7,240,908 shares
     issued and outstanding at December 31, and March
     31, 1996, respectively                                    74            72
   Additional paid-in capital                              17,919        17,540
   Retained earnings (accumulated deficit)                   (765)        1,689
   Treasure stock, at cost; 100,000 shares                   (756)  
                                                        ---------     ---------
        Total shareholders' equity                         16,472        19,301
                                                        ---------     ---------
Total liabilities and shareholders' equity              $  19,202     $  21,108
                                                        =========     =========
</TABLE>

Note: The balance sheet at March 31, 1996 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     NINE MONTHS ENDED
                                                                                   DECEMBER 31           DECEMBER 31
                                                                                 1996       1995       1996       1995
                                                                                -------    -------    -------    -------
<S>                                                                          <C>         <C>       <C>        <C>
Revenues                                                                        $ 2,685    $ 2,047    $ 7,051    $ 5,863
Cost of revenues                                                                  1,755        551      3,427      1,547
                                                                                -------    -------    -------    -------
                                                                                    930      1,496      3,624      4,316

Operating expenses:
   Selling and marketing                                                          2,116        625      3,910      1,810
   Research and development                                                         938        509      2,091      1,346
   General and administrative                                                       377        146      1,053        524
                                                                                -------    -------    -------    -------
              Total operating expenses                                            3,431      1,280      7,054      3,680
                                                                                -------    -------    -------    -------

Income (loss) from operations                                                    (2,501)       216     (3,430)       636

   Interest income                                                                 (145)       (58)      (513)       (76)
                                                                                -------    -------    -------    -------
Income (loss) before income taxes                                                (2,356)       274     (2,917)       712

Income tax provision (benefit)                                                     (264)        96       (463)       249
                                                                                -------    -------    -------    -------
Net income (loss)                                                               $(2,092)   $   178    $(2,454)   $   463
                                                                                =======    =======    =======    =======

Net income (loss) per share                                                     $ (0.29)   $  0.03    $ (0.34)   $  0.08
                                                                                =======    =======    =======    =======

Weighted average common shares outstanding                                        7,276      6,459      7,268      6,165
                                                                                =======    =======    =======    =======

</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>
                                                                                                   NINE MONTHS ENDED
                                                                                                      DECEMBER 31
                                                                                                    1996        1995
                                                                                                  --------    --------
<S>                                                                                            <C>         <C>
OPERATING ACTIVITIES
Net income (loss)                                                                               $ (2,454)   $    463
Adjustments to reconcile net income (loss) to net cash provided
   by (used in) operating activities:
   Depreciation and amortization                                                                     736         605
   Loss on disposal of assets                                                                        283
Changes in operating assets and liabilities:
   Accounts receivable, net                                                                         (254)       (373)
   Inventories                                                                                    (1,537)        (79)
   Prepaid expenses and other assets                                                                (766)       (616)
   Accounts payable and accrued expenses                                                             851          44
   Deferred revenue                                                                                   72         (43)
                                                                                                --------    --------
Net cash provided by (used in) operating activities                                               (3,069)          1
INVESTING ACTIVITIES
Net sales of securities available-for-sale                                                         4,766         700
Purchase of furniture and equipment                                                                 (582)       (251)
Purchase of intangible assets                                                                       (169)        (53)
Software development costs                                                                          (224)       (247)
                                                                                                --------    --------
Net cash provided by investing activities                                                          3,791         149
FINANCING ACTIVITIES
Proceeds from issuance of common stock                                                              --        13,546
Proceeds from exercise of stock options                                                              386        --
Stock repurchase                                                                                    (756)       --
Additional offering costs                                                                             (5)       --
Repayment of line of credit                                                                         --           (65)
Repayment of capital lease obligation                                                               --            (3)
                                                                                                --------    --------
Net cash provided by (used in) financing activities                                                 (375)     13,478
                                                                                                --------    --------
Net increase in cash and cash equivalents                                                            347      13,628
Cash and cash equivalents at beginning of period                                                     417           7
                                                                                                --------    --------
Cash and cash equivalents at end of period                                                      $    764    $ 13,635
                                                                                                ========    ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Income taxes paid                                                                            $    278    $    159
                                                                                                ========    ========
   Interest paid                                                                                $   --      $      3
                                                                                                ========    ========

</TABLE>
     See accompanying notes to condensed consolidated financial statements.
                                      

                                       5
<PAGE>
 
             NOTES TO CONSOLIDATED CONDENSED 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 accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
December 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended March 31, 1997.  The Company suggests that these
interim consolidated condensed 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, 1996.


2.  INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>
 
                                      DECEMBER 31  MARCH 31 
                                         1996        1996   
                                    ----------------------- 
                                                            
                    <S>                <C>          <C>     
                    MATERIALS               $  215     $ 190
                    WORK-IN-PROCESS            567       116
                    FINISHED GOODS           1,164       103
                                     -----------------------
                                            $1,946     $ 409
                                     ======================= 
 
</TABLE>

                                       6
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995

REVENUES:

Revenues increased 31.2% to $2,685,000 for the three months ended December 31,
1996 ("current quarter") from $2,047,000 for the three months ended December 31,
1995 ("prior quarter").  For the nine months ended December 31, 1996 ("current
year"), revenues increased 20.3% to $7,051,000 from $5,863,000 for the nine
months ended December 31, 1995 ("prior year").  Export sales, all of which are
denominated in U.S. dollars, decreased 24.5% and 15.1% to $581,000 and
$1,733,000 in the current quarter and current year from $770,000 and $2,041,000
in the prior quarter and prior year, respectively.

Sales to the Industrial market for the current quarter and the current year
were negatively impacted by slower than expected sales to both domestic and
international CAD and Multimedia customers.  As previously reported, the
Spaceball 3003 ("3003"), a new, lower priced input device for workstation-based
3D CAD applications, affected the sales of the higher priced Spaceball 2003
("2003").  The Company had expected that the lower cost 3003 would encourage
bundling by the Company's OEM customers and increase unit sales enough to offset
the negative price impact.  This transition has not proceeded in line with
expectations.

During September 1996, the Company commenced shipments of the new SpaceOrb 360
RealLife 3D ("SpaceOrb 360") game controller to the Consumer market.  Sales to
the Consumer market for the current quarter and current year of the SpaceOrb 360
have been disappointing.  Despite widespread acceptance in the early-adopter,
hard core, gamer market, there were lower than expected sales of the SpaceOrb
360 in the mass market mainly due to delays in customer acceptance of the
product as the Company was unable to differentiate it from other lower priced,
computer control devices.  As a result, management has accelerated its strategy
to form strategic partnerships in order to more effectively penetrate the
consumer market.

Sales from software and other licensing agreements for the current quarter and
the current year represent revenues of the Panacea software products, as well as
licensing of core hardware and software technology.  In the current year, the
Company entered into a binding agreement as to terms regarding an exclusive
licensing and manufacturing agreement with ASCII Entertainment Software, Inc.
("ASCII"), under which ASCII has licensed the Company's proprietary and patented
Spaceball PowerSensor and Eclipse-1 ASIC technologies for use in the development
and manufacture of an advanced 3D game controller for the Sony PlayStation.  A
significant portion of the licensing revenues for the current year include one
time licensing payments.

                                       7
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Gross Profit:

Gross profit, representing revenues less cost of revenues (including costs of
materials, costs of manufacturing overhead, royalties, and amortization of
capitalized software) decreased 37.8% and 16.0% to $930,000 and $3,624,000 in
the current quarter and current year from $1,496,000 and $4,316,000 in the prior
quarter and prior year, and represented 34.6% and 51.4% of current quarter and
current year revenues versus 73.1% and 73.6% of prior quarter and prior year
revenues, respectively.

The net realizable values of the Company's assets were reviewed as management
refined its strategic priorities.  As a consequence, an evaluation of the
projected revenue stream associated with inventory components related to the
SpaceOrb 360 and capitalized software indicated that the recoverability of the
costs of these assets was uncertain.  Therefore, the Company recognized a
$203,000 charge for the write down of its capitalized software and a $400,000
charge for the write down of its inventory in the current quarter.  The result
of these write downs was a sizable decline in gross profit as a percentage of
revenues for the current quarter.

The gross profit was further impacted by the introduction of the SpaceOrb 360,
which has significantly lower gross margins than the Industrial market products.

As the Company shifts its sales mix from direct to OEM channels for industrial
products, and increases the percentage of sales derived from consumer products
it is expected that the gross profit percentage will continue to be below
traditional levels.  The decline is expected to be partially offset by the
integration of a new PowerSensor technology which is anticipated to lower the
cost of manufacturing under volume production.  The Company's expectations
regarding the decline in gross profit percentage and decreases in production
costs are forward looking statements.  There can be no assurance that such
decreases in profit will not be greater than anticipated or that cost savings
will not be less than anticipated due to numerous factors, including
unanticipated development issues arising with respect to this new technology as
the Company initiates volume production.

Selling and Marketing Expenses:

Selling and marketing expenses, which include personnel costs, advertising
costs, sales commissions and trade show expenses, increased 238.6% and 116.0% to
$2,116,000 and $3,910,000 in the current quarter and current year from $625,000
and $1,810,000 in the prior quarter and prior year, and represented 78.8% and
55.5% of current quarter and current year revenues and 30.5% and 30.9% of prior
quarter and prior year revenues, respectively.  The increase is primarily due to
costs in the current quarter and current year incurred in connection with the
initial marketing program for the SpaceOrb 360, including extensive non-
recurring television advertising and promotion expenses totaling approximately
$1,000,000.  Additional personnel and recruiting costs associated with an
expansion of the sales and marketing infrastructure were also incurred during
the quarter.

                                       8
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



The Company expects selling and marketing expenses to continue to exceed 40% of
revenues during the fiscal year ending March 31, 1997 due to the increased
selling and marketing activity in existing markets, and investments in market
development and sales and marketing infrastructure necessary to penetrate new
markets, particularly the PC CAD, Multimedia and Consumer markets.  The
Company's expectations regarding the level of sales and marketing expenses is a
forward looking statement.  Such expenses may vary from expectations due to
timing of implementation of marketing programs and other factors.

General and Administrative Expenses:

General and administrative expenses, which include the costs of the Company's
finance, human resources and administrative functions increased 158.2% and
101.0% to $377,000 and $1,053,000 in the current quarter and current year from
$146,000 and $524,000 in the prior quarter and prior year, and represented 14.0%
and 14.9% of current quarter and current year revenues and 7.1% and 8.9% of
prior quarter and prior year revenues, respectively.  The increase is associated
with increased personnel costs in order to expand the administrative
infrastructure as well as an increase in professional fees and filing fees due
to additional reporting requirements resulting from becoming a public company.
Management anticipates that general and administrative expenses will stabilize
in the fourth quarter.

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, increased 84.3% and 55.3% to $938,000 and
$2,091,000 for the current quarter and current year from $509,000 and $1,346,000
in the prior quarter and prior year, and represented 34.9% and 29.7% of current
quarter and current year revenues and 24.9% and 23.0% of prior quarter and prior
year revenues, respectively. The increase reflects significant investments in
personnel and consultants necessary to expand the software product development
efforts, particularly in the Consumer, Multimedia and PC CAD market, and
engineering efforts designed to lower the cost of manufacturing the Company's
hardware components. The Company expects to increase its research and
development efforts throughout the next quarter.

Provision for Income Taxes:

The current federal tax benefit represents taxes receivable arising from the
carryback of the fiscal 1997 loss to the three previous years and refunds to be
received for the overpayment of both federal and state taxes, totaling $264,000
in fiscal years 1996 and 1995.  As of December 31, 1996, the Company has
utilized its entire benefit related to the carryback of the current year loss.

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



LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1996, the Company had cash and cash equivalents and
securities available for sale of $11,618,000 and working capital of $14,728,000
versus $16,037,000 and $17,503,000, respectively at March 31, 1996.

The Company used $3,069,000 to fund operating activities in the current year
versus $1,000 provided by operations in the prior year.   The use of funds is
primarily attributable to the net loss of $2,454,000, the increase in inventory
of $1,537,000, and the increase in prepaid expenses and other assets, totaling
$766,000.  Inventory levels were high as a result of significant purchases made
in order to have the necessary anticipated quantities of the new SpaceOrb 360
ready for shipment for the holiday season.  The increase in prepaid expenses and
other assets is due to refunds applied for from the Internal Revenue Service due
to overpayment of income taxes in prior years.

Net cash provided to the Company in the current year from investing activities
totaled $3,791,000 versus $149,000 in the prior year.  The primary reason for
the increase was an increase in proceeds from securities available for sale.
The increase was offset by increased expenditures for furniture and equipment
(primarily computer equipment and additional investments in tools and dies for
high volume, low cost manufacturing of the Company's hardware components) and
increased expenditures for intangible assets (primarily patents) and software
development costs.

Financing activities used $375,000 of net cash in the current year primarily as
a result of the Company repurchasing its stock.  This cost was 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, 1998.  Substantial funds will be required to continue software
and hardware development, as well as to develop the sales and marketing
infrastructure, distribution channels and market awareness to enter the PC
Multimedia and Consumer marketplaces.  The Company believes the level of
financial resources available to it is an important competitive factor in its
industry and may seek additional capital prior to the end of that period.  In
addition, the Company may consider potential acquisitions of technologies and
businesses complementary to the Company's business. There are not at present any
agreements or commitments with respect to any such acquisition; however, any
such transaction may affect the Company's future capital needs.

                                       10
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


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, and the amount of
capital necessary for potential acquisitions. 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 may 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.

SAFE HARBOR STATEMENT

 Statements which are not historical facts, including statements about our
confidence and strategies and our expectations about new and existing products,
technologies and opportunities, market and industry segment growth, demand and
acceptance of new and existing products, and return on investments in products
and markets are forward looking statements that involve risks and uncertainties.
These uncertainties include, but are not limited to, product demand and market
acceptance risks; the impact of competitive products and pricing; product
development, commercialization and technological delays or difficulties,
including delays or difficulties in developing, producing, testing and selling
new products and technologies; capacity and supply constraints or difficulties;
trade, legal, social, and economic risks, such as import, licensing, and trade
restrictions, including those affecting international trade; and other risks
detailed in the Company's Securities and Exchange Commission filings, including
Form 10-K for the fiscal year ended March 31, 1996.

                                       11
<PAGE>
 
PART II.  OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K

The Company did not file any reports on form 8-K during the three months ended
December 31, 1996.


The following exhibits are included herein:

(1)  Statement re: computation of earnings per share

(27) Financial Data Schedule

                                       12
<PAGE>
 
SIGNATURES

Pursuant to the requirements 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)



     /s/ Neil Rossen                    February 11, 1997
By__________________________________    _____________________
Neil Rossen-Chief Financial Officer,    Date
Senior Vice President of Finance

                                       13