<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 June 30, 1998 

                                      OR 

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

               or the transition period from ______ to _______ 
                        Commission file number 0-27302
                                     
                      ___________________________________


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


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


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


                                (978) 275-6100
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  X    No____
                                        ---                              
The number of shares outstanding of the issuer's Common Stock as of

          Class                         Outstanding at June 30, 1998
          -----                         ----------------------------

     Common Stock, $.01 par value                   6,840,934
<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 June 30, 1998

                                       OR

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

                   or the transition period from ______  to _______
                   Commission file number  0-27302
 

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


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


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


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


                                (978) 275-6100
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes   [ X ]   No  [   ]

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

                   Class               Outstanding at June 30, 1998
                   -----               ----------------------------

      Common Stock, $.01 par value                7,165,801

<PAGE>
 
                           SPACETEC IMC CORPORATION

                               TABLE OF CONTENTS


PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

<TABLE>
<CAPTION>
<S>                                                                                                      <C> 
          Condensed consolidated balance sheets as of June 30, 1998 and
          April 30, 1998.............................................................................     3

          Condensed consolidated statements of comprehensive income for the three months
          ended June 30, 1998 and 1997...............................................................     4

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

          Notes to condensed consolidated financial statements.......................................     6

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of
Operations...........................................................................................     9

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings-None
Item 2.   Changes in Securities and Use of Proceeds..................................................    17
Item 3.   Defaults upon Senior Securities-None
Item 4.   Submission of Matters to a Vote of Security Holders-None
Item 5.   Other Information..........................................................................    18
Item 6.   Exhibits and Reports on Form 8-K...........................................................    18

SIGNATURES...........................................................................................    19
</TABLE> 

                                       2

<PAGE>
 
ITEM I.  FINANCIAL STATEMENTS

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


<TABLE> 
<CAPTION> 
                                                                                JUNE 30,                         MARCH 31,
                                                                                  1998                             1998
                                                                        ------------------------        -------------------------
                                                                              (UNAUDITED)                        (NOTE)
<S>                                                                     <C>                             <C> 
ASSETS                                                                  

Current assets:                                                         
   Cash and cash equivalents                                                   $            620                 $            490
   Securities available-for-sale                                                          6,748                            8,536
   Accounts receivable, net                                                               2,241                            2,069
   Inventories                                                                              685                              687
   Prepaid expenses                                                                         136                              176
   Due from employees and officer                                                             2                               32
                                                                        ------------------------        -------------------------
               Total current assets                                                      10,432                           11,990
                                                                        
                                                                        
Furniture and equipment, net                                                                668                              765
Intangible assets, net                                                                      143                              216
Software development costs, net                                                               -                                -
Other assets                                                                                 28                               28
                                                                        ------------------------        -------------------------
                                                                                            839                            1,009
                                                                        ------------------------        -------------------------
Total assets                                                                   $         11,271                 $         12,999
                                                                        ========================        =========================
                                                                        
LIABILITIES AND SHAREHOLDERS' EQUITY 
Current liabilities:               
   Accounts payable and accrued expenses                                       $          1,610                 $          1,498
   Deferred revenue                                                                          18                               12
                                                                        ------------------------        -------------------------
               Total current liabilities                                                  1,628                            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 6,840,934 shares issued and outstanding at       
         March 31, 1998 and June 30, 1998, respectively                                      68                               71
    Additional paid-in capital                                                           16,006                           16,780
    Deferred compensation                                                                   (50)                             (50)
    Unrealized gain on available-for-sale securities                                          3                                5
    Accumulated deficit                                                                  (6,380)                          (5,303)
    Cumulative translation adjustment                                                        (4)                             (14)
                                                                        ------------------------        -------------------------
          Total shareholders' equity                                                      9,643                           11,489
                                                                        ------------------------        -------------------------
Total liabilities and shareholders' equity                                     $         11,271                 $         12,999
                                                                        ========================        =========================
</TABLE> 


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


     SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       3
<PAGE>
 
                            Spacetec IMC Corporation
           Condensed Consolidated Statements of Comprehensive Income
                                   (Unaudited)
                      (in thousands, except per share data)


<TABLE> 
<CAPTION> 
                                                                          THREE MONTHS ENDED
                                                                               JUNE 30
                                                                     1998                      1997
                                                              ------------------        -----------------
<S>                                                           <C>                       <C> 
Revenues                                                      $           1,887         $          2,083
Cost of revenues                                                            673                      662
                                                              ------------------        -----------------
                                                                          1,214                    1,421

Operating expenses:
   Selling and marketing                                                  1,087                    1,054
   Research and development                                                 818                      862
   General and administrative                                               507                      368
                                                              ------------------        -----------------
         Total operating expenses                                         2,412                    2,284
                                                              ------------------        -----------------

Loss from operations                                                     (1,198)                    (863)

       Interest income                                                     (121)                    (139)
                                                              ------------------        -----------------

Net loss                                                                 (1,077)                    (724)
Unrealized gain on available-for-sale securities                              2                        9
                                                              ------------------        -----------------
Comprehensive income (loss)                                   $           1,075         $            715       
                                                              ==================        =================


Basic and Diluted Loss Per Share:                                       $ (0.16)                 $ (0.10)
                                                              ==================        =================


Weighted average common shares outstanding                                6,880                    7,238
                                                              ==================        =================
</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> 
                                                                                                 THREE MONTHS ENDED
                                                                                                       JUNE 30
                                                                                            1998                     1997
                                                                                      ------------------       -----------------
<S>                                                                                   <C>                      <C> 
OPERATING ACTIVITIES
Net loss                                                                              $          (1,077)               $ (724)
Adjustments to reconcile net loss to net cash
   used in operating activities:
   Depreciation and amortization                                                                    156                     195
   Loss on disposal of assets                                                                        83                     471
Changes in operating assets and liabilities:
   Accounts receivable, net                                                                        (171)                    471
   Inventories                                                                                        2                     299
   Prepaid expenses and other assets                                                                 40                      34
   Due from employees and officer                                                                    30                      (3)
   Income taxes receivable                                                                            -                      85
   Accounts payable and accrued expenses                                                            112                     (62)
   Deferred revenue                                                                                   6                     (10)
                                                                                      ------------------       -----------------
Net cash used in operating activities                                                              (819)                    756
Investing activities
Net sales of securities available-for-sale                                                        1,786                     204
Purchase of furniture and equipment                                                                 (70)                   (187)
                                                                                      ------------------       -----------------
Net cash provided by investing activities                                                         1,716                      17
Financing activities
Proceeds from exercise of stock options                                                              73                       7
Stock repurchase                                                                                   (850)                   (294)
                                                                                      ------------------       -----------------
Net cash used in financing activities                                                              (777)                   (287)
                                                                                      ------------------       -----------------

Currency translation effect on cash                                                                  10                       -

Net increase in cash and cash equivalents                                                           130                      15
Cash and cash equivalents at beginning of period                                                    490                     170
                                                                                      ------------------       -----------------
Cash and cash equivalents at end of period                                            $             620        $            185
                                                                                      ==================       =================

Supplemental disclosure of cash flow information:
   Income taxes paid                                                                                  -        $              4
                                                                                      ==================       =================

Non-cash investing and financing activities:
  Unrealized gain on available-for-sale securities                                    $               3        $             55
                                                                                      ==================       =================
</TABLE> 

    See accompanying notes to condensed consolidated financial statements.

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

1.  BASIS OF PRESENTATION

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

2.  INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                             JUNE 30               MARCH 31
                                               1998                  1998
                                            --------------------------------
               <S>                          <C>                    <C>
               MATERIALS                          359                 $ 425
               WORK-IN-PROCESS                     26                    77
               FINISHED GOODS                     300                   185
                                            --------------------------------
                                                $ 685                 $ 687
                                            ================================
</TABLE>


3.  LOSS PER COMMON SHARE

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

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

3. LOSS PER COMMON SHARE - (CONTINUED)

The following table sets forth the computation of basic and diluted loss per
share:

<TABLE>
<CAPTION>
                                                     Three months ended
                                                           June 30
                                                --------------------------------
                                                   1998               1997
                                                --------------------------------
 
(IN THOUSANDS, EXCEPT PER SHARE DATA)
 
Numerator:
<S>                                             <C>                 <C>
Net loss                                        $ (1,077)           $ (724)
                                                ================================
 
Denominator:
Denominator for basic and diluted loss   per
 share - weighted average shares
 outstanding                                       6,880             7,238
                                                ================================ 
 
 
Basic and diluted loss per share                $  (0.16)           $(0.10)
                                                ================================
</TABLE>

4. OPEN MOTION SPIN-OFF

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

                                       7
<PAGE>
 
                            SPACETEC IMC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

4. OPEN MOTION SPIN-OFF   (CONTINUED)

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.

5. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30,1998 AND JUNE 30, 1997

Revenues:

Revenues decreased 9.4% to $1,887,000 for the three months ended June 30, 1998
("current quarter") from $2,083,000 for the three months ended June 30, 1997
("prior quarter"). The decrease in revenues is mainly attributable to a
reduction in the sales to the consumer retail channel.

During the first fiscal quarter of 1999, Mechanical CAD [M-CAD] and multimedia
sales were $1.8 million compared  with $1.7 million in the same period in fiscal
year 1998.  The Company did not record any software and licensing revenues for
the first quarter of 1999, compared with $97,000 for the first quarter of fiscal
1998.  Consumer sector revenues of the SpaceOrb 360 3D game controller and other
consumer related revenue totaled $81,000 for the first quarter of fiscal 1999,
down from $251,000 for the first quarter of fiscal year 1998.  This decrease
reflects the shift in sales focus from direct retail channels to establishing
Original Equipment Manufacturer ("OEM") and strategic alliance partnerships in
the consumer business.

During the quarter, more emphasis was placed on the industrial and consumer
hard-goods sectors of the economy as evidenced by orders received from accounts
such as Carrier, Chrysler, Ingersol Rand and Sony.  The Company seeks to achieve
a balance between various business units consisting of OEMs' 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 will be
established or, if established, will be able to generate substantial revenue.

Gross Profit:

The Company's gross profit is arrived at after the costs of materials,
manufacturing overhead, royalties, and amortization of capitalized software are
subtracted from revenues.  Gross profit decreased 14.6% to $1,214,000 in the
current quarter from $1,421,000 in the prior quarter, and represented 64.3% of
current quarter revenues versus 68.2% of prior quarter revenues.  A lower gross
profit as a percent to sales is the result of the beginning of the ASCII Sphere
360 3-D / 2-D program, an OEM program targeting the game controller
console market.

As the Company continues to shift its sales mix from direct to OEM channels for
its industrial and consumer products, it is expected that the gross profit
percentage experienced by the Company will decline.  The Company's expectations
regarding the decline in gross profit percentage is a forward-looking statement.
There can be no assurance that such decreases in gross profit will not be
greater than anticipated.

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

Selling and Marketing Expenses:

Selling and marketing expenses, which include personnel costs, advertising and
marketing costs, sales commissions and trade show expenses, increased 3.1% to
$1,087,000 in the current quarter from $1,054,000 in the prior quarter, and
represented 57.6% of current quarter revenues, up from 50.6% of prior quarter
revenues. Most of the increase was related to an increase in sales personnel in
Texas and the United Kingdom.

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 5.1% to $818,000 in the current
quarter versus $862,000 in the prior quarter.  These expenses represent 43.3% of
current quarter revenues and 41.4% of prior quarter revenues.  The decrease in
the current quarter expense reflects lower labor costs and a reduction in
expenditures relating to hardware design related to the Open Motion spin-off as
of June 5, 1998.  The Company anticipates that R & D expenses will decline
because of the departure of the Open Motion staff and related expenses.   The
Company's expectations regarding the decline in R & D costs is a forward-looking
statement.  There can be no assurances that such decreases in expenses will be
realized.

General and Administrative Expenses:

General and administrative expenses, which include the costs of the Company's
finance, human resources and administrative functions increased 37.8% to
$507,000 in the current quarter versus $368,000 in the prior quarter.  These
expenses represented 26.9% of current quarter revenues compared with 17.7% of
prior quarter revenues.

The increase in expense in the current quarter and current year is mainly the
result of increases in accounting, legal, and administration fees related to
Open Motion spin-off.  In addition, during the current quarter, the Company
incurred consulting fees related to the installation and implementation of a new
company-wide accounting system.  Management anticipates that general and
administrative expenses will decline as a percent of sales for the year ended
March 31, 1999. The Company's expectations regarding the decline in G & A
expenses is a forward-looking statement.  There can be no assurances that
expenses will not be greater than anticipated or that revenues will not be less
than expected.

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

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 years was fully utilized during the fiscal year ended March 31,
1997.  The Company has unbenefited federal net operating loss carryforwards of
approximately $4,300,000.

Year 2000 Compliance:

The Company's 3D controller products do not use any date related processing in
the hardware or driver software.  Consequently, the Company has determined that
it has no exposure to contingencies related to the Year 2000 for the products it
has sold.  The Company has in-turn obtained assurance from its vendors that the
hardware and software that is used in its day-to-day business activities (i.e.
accounting software) is Year 2000 compliant.  Based upon representations
received to date, the Company believes that its business, financial condition
and results of operations will not be materially adversely affected by any
failure of third-party software.  However, there can be no assurance that the
Company's customers and vendors will not be affected by the Year 2000 and that
the failure of its customers and vendors to become compliant for the Year 2000,
will not have an adverse effect on the Company's business and operations.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1998 the Company had cash and cash equivalents and securities
available for sale of $7,368,000 and working capital of $8,804,000 versus
$9,026,000  and $10,480,000, respectively, at March 31, 1998.

Operating activities of the Company absorbed $819,000 of cash in the current
quarter as compared to $756,000 in the prior quarter. The use of funds in the
current quarter was primarily due to the net loss of $1,077,000. An increase in
accounts receivable from $2,069,000 at March 31, 1998, to $2,241,000 on June 30,
1998, used $171,000 in cash. Inventory levels were relatively stable throughout
the quarter ended June 30, 1998. A timing difference in accounts payable at the
end of the quarter provided $112,000 in cash.

Net cash provided to the Company in the quarter ended June 30, 1998 from
investing activities totaled $1,786,000 versus $204,000 in the quarter ended
June 30, 1997.  The primary reason for the increase was the sale of  securities
to fund stock repurchases and operating expenses.  Additionally, expenditures
for furniture and equipment were reduced ($70,000 in the quarter ended June 30,
1998 versus $187,000 in the prior quarter.)

Financing activities used $777,000 of net cash in the quarter ended June 30,
1998, primarily as a result of the Company repurchasing $700,000 worth of its
Common Stock as part of the Open Motion spin-off, 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.

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

The Company believes that its existing cash and investment securities together
with future anticipated funds from operations, will satisfy its projected
working capital and other cash requirements through the end of its fiscal year
ending March 31, 1999.  Substantial, additional 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 of the
Company's products.  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.

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

RISK FACTORS

     From time to time, Spacetec IMC through its management may make forward-
looking public statements, such as statements concerning then expected future
revenues or earnings or concerning projected plans, performance, product
development and commercialization as well as other estimates relating to future
operations.  Forward-looking statements may be in reports filed under the
Securities Exchange Act of 1934, as amended, in press releases or in oral
statements made with the approval of an authorized executive officer.  The words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar 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 future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.

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

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

     In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
of the Company made by or on behalf of the Company. The following discussion of 
the Company's risk factors should be read in conjunction with the financial 
statements and related notes thereto set forth elsewhere in this report and in 
the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 
1998.

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

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

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

     Developing Market.   During the fiscal year 1997, the Company began to
market its products designed for the consumer marketplace.  The Company has 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 into 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.

     As a result of the Company's efforts in penetrating this sales channel, the
gross margins have decreased as the Company has had to price its products at low
levels to penetrate this market.  The Company has noted that its sales to retail
channels have been significantly affected by seasonality primarily due to the
increased demand for 3D game and entertainment applications and related products
during the year-end holiday buying season.  Retail distributors have been
permitted to return inventory to the Company for credit against other

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


purchases on negotiated terms.  In addition, the Company has granted retail
distributors price protection clauses in agreements with the Company pursuant to
which the Company has been obligated to grant credits when the Company has
reduced selling prices on products previously purchased by the distributor.
Moreover, to the extent the Company generates significant sales to retail
distribution channels relative to its sales to OEMs, there is a greater risk of
increased product returns and warranty claims.  The Company has established
reserves for product returns and warranty claims based on its previous
experiences and future expectations.  There can be no assurance that these
reserves will be adequate or that product returns and warranty claims and price
protection adjustments will not have a material adverse effect on future
operating results.
 
     Reliance on 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 VARs 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.
 
     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

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

product opportunities, the timely completion of the development process, the
control and recoupment of development and production costs and acceptance by
customers of the Company's products.  There can be no assurance that the Company
will be successful in identifying, developing, manufacturing and marketing new
products in a timely and cost effective manner, that the Company's products will
be accepted in the marketplace, or that products or technologies developed by
others will not render the Company's products or technologies uncompetitive.

     Dependence on Relationships with Significant Customers.  The Company sells
substantially all of its products to and maintains strategic relationships with
original equipment manufactures ("OEMs") and value added resellers ("VARs").  As
a result, sales of the Company's products are dependent upon the continued
market acceptance of the service and product offerings of the Company's
customers.  Although the Company maintains contractual relationships with a
substantial number of 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 advances of others. The Company expects that
competition from existing competitors will increase and that new competitors
will enter the 3D motion control market. Many of the existing and potential
competitors have experienced management, larger technical staffs, more
established and larger marketing and sales organizations, better developed
distribution systems and significantly greater financial resources than the
Company. 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, non-disclosure 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.

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

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

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


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

PART II.  OTHER INFORMATION


ITEM 2:  CHANGES IN SECURITIES AND USE OF PROCEEDS

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

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

<TABLE>
<S>                                                 <C>
Cash and available-for-sale securities:                      $ 7,368
Purchases of machinery and equipment:                          1,509
Repurchase of the Company's Common Stock:                      1,291
Expenses incurred in connection with the           
acquisition of Spatial Systems, Ltd:                             150
Working capital:                                               4,409
                                                    ----------------
                                                   
Total                                                        $14,727
                                                    ================
</TABLE>

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

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


ITEM 5:  OTHER INFORMATION

In recent months, three executive officers of the Company have resigned. These
officers include Dennis Gain, the Company's founder, principal stockholder and
former President and Chief Executive Officer, Neil Rossen, the Company's Vice
President and Chief Financial Officer, and more recently, Ray Boelig, the
Company's former Vice President, and its President and Chief Operating Officer.
The Company has not currently found replacements to fill the vacancies caused by
these departures, except that the Company recently appointed a director, George
Rea, to serve as Acting Chief Executive Officer and a consultant to serve as
Acting Controller. The Company needs to fill the positions of chief executive
officer and a senior financial officer as expeditiously as possible and is
currently recruiting candidates. While these positions remain unfilled, the
business and operations of the Company could be materially adversely effected by
the lack of a permanent chief executive officer and a senior financial officer.
See "Risk Factors--Attraction and Retention of Key Employees."

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

During the quarter ended June 30, 1998, the Company filed with the Securities
and Exchange Commission a report on Form 8-K announcing the transfer of its Open
Motion technology to 3D Open Motion, LLC (the "LLC").  The LLC was established
by Dennis Gain, the former CEO and current director and a majority owner of the
LLC.

The following exhibits are included herein:

(27)   Financial Data Schedule


                                       18
<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)



 
By   /s/  George Rea                               August 19, 1998
     ---------------                               --------------- 
George Rea, Acting Chief Executive Officer               Date

                                       19