<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                                   FORM 10-Q

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

               For the quarterly period ended December 31, 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

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



                                  Labtec Inc.
--------------------------------------------------------------------------------
            (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)


                           Spacetec IMC Corporation
--------------------------------------------------------------------------------
                                  Former Name

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 December 31, 1998
-------------------------------          -----------------------------------
  Common Stock, $.01 par value                        6,846,993
<PAGE>
 
                                  LABTEC INC.

                               TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

   Condensed consolidated balance sheets as of December 31, 1998 
   and March 3l, 1998............................................... 3

   Condensed consolidated statements of operations for the three 
   months and nine months ended December 31, 1998 and 1997.......... 4

   Condensed consolidated statements of cash flows for the nine 
   months ended December 31, 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

PART II. OTHER INFORMATION

Item 5. Other Information.......................................... 20
Item 6. Exhibits................................................... 20


SIGNATURES......................................................... 21

                                       2
<PAGE>
 
ITEM 1. FINANCIAL STATEMENTS


                                  Labtec Inc.
                     Condensed Consolidated Balance Sheets
                (in thousands, except share and per share data)

<TABLE> 
<CAPTION> 

                                                                    December 31,     March 31, 
                                                                       1998            1998
                                                                    ------------    -----------     
                                                                    (Unaudited)        (Note)
<S>                                                               <C>              <C>
Assets

Current assets:
 Cash and cash equivalents                                          $       753     $       490
 Securities available-for-sale                                            5,175           8,536
 Accounts receivable, net                                                 1,416           2,069
 Inventories                                                                537             687  
 Prepaid expenses                                                           153             176
 Due from employees and officer                                              11              32  
                                                                    -----------     -----------     
     Total current assets                                                 8,045          11,990


Furniture and equipment, net                                                532             765
Intangible assets, net                                                      993             216
Other assets                                                                 29              28 
                                                                    -----------     -----------     
                                                                          1,554           1,009
                                                                    -----------     -----------     
Total assets                                                        $     9,599     $    12,999  
                                                                    ===========     =========== 
Liabilities and Shareholders' equity
Current liabilities:
 Accounts payable and accrued expenses                              $     1,237     $     1,498   
 Deferred revenue                                                             -              12
                                                                    -----------     -----------     
     Total current liabilities                                            1,237           1,510


Shareholders' equity:
 Preferred stock, $.01 par 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 6,846,993 shares issued and outstanding at 
  March 31, 1998 and December 31, 1998 respectively                          68              71
Additional paid-in capital                                               16,020          16,780
Deferred compensation                                                       (50)            (50)
Unrealized gain on available-for-sale securities                              -               5
Accumulated deficit                                                      (7,720)         (5,303)
Cumulative translation adjustment                                            44             (14)
                                                                    -----------     -----------     
     Total shareholders' equity                                           8,362          11,489
                                                                    -----------     -----------     

Total liabilities and shareholders' equity                          $     9,599     $    12,999
                                                                    ===========     =========== 

</TABLE> 

    See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>
 
                                  Labtec Inc.
                Condensed Consolidated Statements of Operations
                                  (Unaudited)
                (in thousands, except share and per share data)

<TABLE> 
<CAPTION> 
                                                           Three Months Ended          Nine Months Ended
                                                              December 31,                December 31,
                                                           1998          1997          1998         1997
                                                        -----------  -----------    ----------   ----------
<S>                                                    <C>           <C>            <C>          <C>                         
Revenues                                                $     1,895  $     2,488    $    5,218   $    6,387
Cost of revenues                                                433        1,146         1,385        2,295
                                                        -----------  -----------    ----------   ----------
                                                              1,462        1,342         3,833        4,092

Operating expenses:
 Selling and marketing                                          860        1,009         2,899        3,082
 Research and development                                       455          747         1,861        2,482
 General and administrative                                     378          543         1,772        1,353
                                                        -----------  -----------    ----------   ----------
     Total operating expenses                                 1,693        2,299         6,532        6,917
                                                        -----------  -----------    ----------   ----------

Loss from operations                                           (231)        (957)       (2,699)      (2,825)

  Interest income                                                69          146           283          427 
                                                        -----------  -----------    ----------   ----------

Loss before income taxes                                       (162)        (811)       (2,416)      (2,398)

Income tax benefit                                                -            -             -            -
                                                        -----------  -----------    ----------   ----------
Net loss                                                $      (162) $      (811)   $   (2,416)  $   (2,398) 
                                                        ===========  ===========    ==========   ==========

Net loss per share - Basic                              $     (0.02) $     (0.11)   $    (0.35)  $    (0.33)
                                                        ===========  ===========    ==========   ==========

Weighted average common shares outstanding - Basic            6,847        7,199         6,855        7,209
                                                        ===========  ===========    ==========   ==========

</TABLE> 

See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>
 
                                 Labtec Inc. 
                Condensed Consolidated Statements of Cash Flows
                                  (Unaudited)
                                (in thousands)

<TABLE> 
<CAPTION> 
                                                                     Nine months ended
                                                                        December 31,
                                                                     1998         1997
                                                                   ---------    ---------
<S>                                                                <C>         <C>
Operating activities
Net loss                                                           $  (2,416)   $  (2,398)
Adjustments to reconcile net loss to net cash
 used in operating activities:
 Depreciation and amortization                                           390          615 
 Loss on disposal of assets                                               84          232
Changes in operating assets and liabilities:
 Accounts receivable, net                                                653          242
 Inventories                                                             150          999
 Prepaid expenses and other assets                                        22          110
 Due from employees and officer                                           21           13 
 Income taxes receivable                                                   -          110
 Accounts payable and accrued expenses                                  (262)        (285)                               
 Deferred revenue                                                        (12)         (63)       
                                                                   ---------    ---------
Net cash used in operating activities                                 (1,370)        (425)              

Investing activities                    
Net sales of securities available-for-sale                             3,356        1,084
Purchase of furniture and equipment                                     (157)        (274)
Purchase of intangible assets                                           (861)          (3)
                                                                   ---------    ---------
Net cash provided by investing activities                              2,338          807
Financing activities
Proceeds from exercise of stock options                                   87           10
Stock repurchase                                                        (850)        (323)
Additional offering costs                                                  -            -
                                                                   ---------    ---------
Net cash used in financing activities                                   (763)        (313)
                                                                   ---------    ---------

Currency translation effect on cash                                       58            -

Net increase in cash and cash equivalents                                263           69
Cash and cash equivalents at beginning of period                         490          170
                                                                   ---------    ---------
Cash and cash equivalents at end of period                         $     753    $     239
                                                                   =========    =========

Supplemental disclosure of cash flow information:
 Income taxes paid                                                              $       5
                                                                   =========    =========

Non-cash investing and financing activities:
 Unrealized gain on available-for-sale securities                  $       -    $      12
                                                                   =========    =========

</TABLE> 

    See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
                                 LABTEC INC. 
             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 nine month period ended
December 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended March 31, 1999. These interim condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements, including the summary of significant accounting policies
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> 
                       DECEMBER 31,   MARCH 31,
                          1998          1998
                          -----         -----
 <S>                <C>             <C>
 MATERIALS                $ 219         $ 425
 WORK-IN-PROCESS            108            77
 FINISHED GOODS             210           185
                          -----         -----
                          $ 537         $ 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" (SFAS 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 SFAS 128 requirements.

                                       6
<PAGE>
 
                                 LABTEC INC. 
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

4. OPEN MOTION SPIN-OFF

As Labtec Inc. (formerly known as Spacetec IMC Corporation, the "Company")
decided to focus its efforts on developing and growing its core 3D controller
and related software business, management determined that it did 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 became exercisable on January 1, 1999 and expires on May
31, 1999, if not previously 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. MERGER WITH LABTEC INC.

On February 17, 1999, a wholly-owned subsidiary of the Company merged into
Labtec Inc., a Delaware corporation ("Old Labtec"), and the Company changed its
name to Labtec Inc. The Company remains a publicly-traded company following the
merger. On the same date, the Company also effected a one-for-three reverse
split of its common stock. Pursuant to the merger, the Company issued
approximately 13.9 million pre-reverse split shares of its common stock to Old
Labtec stockholders, who also received a pro-rata portion (based on their
proportionate equity interests in Old Labtec) of principal and interest payments
to be made under a promissory note issued by the Company in the principal amount
of $1.065 million.

6. 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 third quarter and first nine months of fiscal
1999, total comprehensive loss amounted to $162 and $2,416, respectively, and
$811 and $2,398 for the corresponding fiscal 1998 periods. 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>
 
                                  LABTEC INC.
                    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 made 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 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.

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997

Revenues:

Revenues decreased 23.8% to $1,895,000 for the three months ended December 31,
1998 ("current quarter") from $2,488,000 for the three months ended December 31,
1997 ("prior quarter"). For the nine months ended December 31, 1998 ("current
nine month period"), revenues decreased 18.3% to $5,218,000 from $6,387,000 for
the nine months ended December 31, 1997 ("prior nine month period"). The
decrease in revenues was mainly attributable to a decrease in orders from the
automotive sector as a result of a General Motors strike and a reduction in 
sales to non-core customers due to credit concerns.

Mechanical CAD [M-CAD] and multimedia sales for the current nine-month period
decreased 26.3% to $4.2 million from $5.7 million in the comparable period of
the prior year. During the current quarter of 1999, Mechanical CAD [M-CAD] and
multimedia sales were $1.6 million compared with $2.3 million in the same period
in fiscal year 1998. The decrease in revenues was mainly attributable to a
reduction in sales to non-core customers due to credit concerns. Consumer sector
revenues of the SpaceOrb 360 3D game controller and other consumer related
revenue totaled $250,000 for the current quarter of fiscal 1999, up from
$172,000 for the prior year corresponding quarter. The consumer sales in this
quarter were mainly attributable to the ASCII release of the sphere 360
controller for the Sony Playstation.

During the current nine-month period, more emphasis was placed on the industrial
business as evidenced by orders received from accounts such as Hewlett-Packard,
Unigraphics Solutions, IBM, and 1st Data Solutions GmbH. The Company seeks to
achieve a balance between various business units consisting of OEM's corporate
accounts and resellers. In the coming quarters the Company 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>

Gross Profit:

The Company's gross profit is arrived at after the costs of materials,
manufacturing overhead and royalties are subtracted from revenues. Gross profit
increased 8.9% to $1,462,000 in the current three-month period from $1,342,000
in the prior three-month period, and represented 77.2% of current three-month
period revenues versus 53.9% of prior year three-month period revenues. Gross
profit increased 6.3% to 3,833,000 in the current nine-month period from
$4,092,000 in the prior nine-month period. The increase in gross profit was
mainly attributable to reductions in overhead and staffing. The Company expects
that the gross profit percentage will remain at current levels for several
quarters. The Company's expectations regarding the stabilization in gross profit
percentage is a forward-looking statement. There can be no assurance that the
gross profit will not be less 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 5.9% to
$2,899,000 in the current nine month period from $3,082,000 in the comparable
period of the prior year, and represented 55.6% of current nine-month period
revenues, up from 48.3% of revenues in the comparable period of the prior year.
Current quarter selling and marketing expenses decreased 14.8% to $860,000 in
the current quarter, down from $1,009,000 in the prior year's corresponding
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, closure of
two remote sales offices, 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 the merger with Old Labtec. This is a forward-looking statement. There
can be no assurances that expenses will decrease as a result of the merger with
Old Labtec.

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 25.0% to $1,861,000 in the
current nine-month period versus $2,482,000 in the comparable period of the
prior year. These expenses represent 35.7% of current nine-month period revenues
and 38.9% of revenues in the comparable period of the prior year. Current
quarter research and development expenses declined 39.1% to $455,000 in the
current quarter, down from $747,000 in the prior quarter. The decrease in those
expenses reflect the spin-off of the Open Motion technology, and the related
staff reductions and decreased expenditures in hardware design. Further decline
in expenses in this area were related to reductions in the workforce in
November.

General and Administrative Expenses:

General and administrative expenses, which include the costs of the Company's
finance, human resources and administrative functions increased 31.0% to
$1,772,000 in the current nine-month period versus $1,353,000 in the comparable
period of the prior year. These expenses represented 34.0% of current nine-month
period revenues compared with 21.2% of revenues in the comparable period of the
prior year. The period from April 1, 1998 to December 31, 1998 included the
following one-time expenses totaling approximately $643,000 related to:
accounting, legal, and administration fees related to Open Motion spin-off and
the Old Labtec 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 and in November 1998.

In the current quarter, general and administrative expenses decreased 30.4% to
$378,000, down from $543,000 in the prior year's corresponding quarter. This
decrease was reflective of reductions in the workforce and overhead in November.
The Company anticipates that efficiency may ensue in this area as a result of
the merger with Old Labtec. This is a forward-looking statement. There can be no
assurances that expenses will decrease as a result of the merger with Old
Labtec.

                                       9
<PAGE>


The merger with Old Labtec is expected to result in the discontinuance of some
of these significant non-recurring expenses. In addition, the Company
anticipates a further reductions in general and administrative expenses
associated with the lowered facilities costs, consolidation of several remote
sales offices, and the lowered administrative costs associated with a reduced
workforce. The foregoing is a forward-looking statement. There can be no
assurances that costs may not be higher than anticipated.

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 nine-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. Because of the merger with Old 
Labtec, the Company will suffer a change in control for tax purposes and
accordingly will not be able to fully utilize all of the net operating loss
carryforward in any one year.

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
one year, 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 2000 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 Company believes its 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, however, 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 in the hardware or driver software. If any of these customers
experience Y2K problems, these 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 adverse 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>

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1998, the Company had cash and cash equivalents and
securities available for sale of $5,928,000 and working capital of $6,808,000
versus $9,026,000 and $10,480,000, respectively, at March 31, 1998.

Operating activities of the Company absorbed $1,620,000 of cash in the current
nine-month period as compared to $425,000 in the comparable period of the prior
year. The use of funds in the current nine-month period was primarily due to the
net loss of $2,416,000. A decrease in accounts payable and accrued expenses from
$1,498,000 at March 31, 1998, to $1,237,000 on December 31, 1998, used $261,000
in cash. Accounts Receivable decreased from $2,069,000 March 31, 1998, to
$1,416,000 on December 31, 1998, contributing $653,000 in cash during this
fiscal year because of increased collection efforts. Inventory levels decreased
in the current nine month period from $687,000 at March 31, 1998 to $537,000 at
December 31, 1998.

Net cash provided to the Company in the current nine month period from investing
activities totaled $2,588,000 versus $807,000 in the comparable period of the
prior year. The primary reason for the increase was the sale of marketable
securities to fund stock repurchases and operating expenses. The company has
accumulated $861,000 of capitalized expenses related to the merger with Old
Labtec during this quarter. Additionally, expenditures for furniture and
equipment were reduced ($157,000 in the current nine month period versus
$274,000 in the prior nine month period.)

Financing activities used $763,000 of net cash in the current nine 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 credit facilities, 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, 2000.

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


                                      12
<PAGE>
 
RISK FACTORS

  From time to time, the Company, through its management may make forward-
looking public statements in press releases or other communications, such as
statements concerning then expected future revenues or earnings or concerning
projected plans, performance, marketing initiatives, corporate alliances,
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.

  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, as amended, 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 Merger with Old Labtec. The Company recently merged with
Old Labtec. 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.

                                      13
<PAGE>
 
  Uncertainties Relating to Integration of Operations. The Company and Old
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 Old
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.

  Failure to Achieve Beneficial Synergies with Old Labtec. The Company has
merged with Old Labtec 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 Old Labtec's
established distribution channels to bolster sales of the Company's products.
Even if the Company and Old 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, Ray Boelig, the Company's former Vice President, and its President, and
Chief Operating Officer. Following the completion of the merger with Old Labtec,
Robert G. Wick was appointed as the Company's President, Marc J. Leder was
appointed as Co-Chairman, Senior Vice President and Chief Financial Officer, and
Rodger R. Krouse was appointed as Co-Chairman. 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 date, 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 and as a result of a variety of factors, many of
which are outside the Company's control.

                                      14
<PAGE>
 
  Future Capital Needs. The Company's capital requirements will depend on many
factors, including the rate at which the Company and Old Labtec can develop
their 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
on the Company's and Labtec's technologies, and capital necessary for potential
acquisitions, Changes in technologies 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 no assurance that additional
financing will be available on acceptable terms or at all. If additional funds
are raised by issuing the Company's 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 operations significantly.

  Developing Market. During the fiscal year 1997, the Company began to market
its products designed for the consumer marketplace. The Company has had little
experience in marketing its products to consumers. The entry into the consumer
market has created considerable risks for the Company, some of which are 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 have required significantly greater marketing and sales expenditures and
post-sale support costs 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 though alliances with 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 ("OEMs"), value-added resellers ("VARs"),
system integrators and distributors. Such OEMs and VAR's 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 will 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.

                                      15
<PAGE>
 
  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 recouping 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 noncompetitive.

  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 its 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 more 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.

                                      16
<PAGE>
 
  The Company anticipates that its competitors will ultimately develop
hardware products based on technology that does not infringe on 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 results
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

                                      17
<PAGE>
 
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, its business, financial condition and 
results of operations.

  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.


                                      18
<PAGE>
PART II. OTHER INFORMATION

ITEM 5.  OTHER INFORMATION

Attached hereto as Exhibit 99.1 and incorporated by reference herein in the
Company's press release dated February 17, 1999 announcing the approval by the
Company's stockholders of all matters relating to a previously announced merger,
including the change of the Company's name to Labtec Inc.

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)  Amended Consulting Agreement between the Company and George R. Rea
(4.6)  Consultant Agreement between the Company and American Asset Management.
(27.1) Financial Data Schedule
(99.1) Press Release

                                      19
<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.



Labtec Inc.
-------------------------------------
(Registrant)



By   /s/ Marc J. Leder                             February 22, 1999
   -----------------------------------            -------------------
   Marc J. Leder,                                         Date
   Senior Vice President, Finance,
   Chief Financial Officer
   and Treasurer   
                                      20