<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K
    FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
    [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED EFFECTIVE OCTOBER 7, 1996]

For the fiscal year ended     March 31, 1997

                                      OR

    [_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ________ to _____________

                        Commission File Number: 0-27302
                           SPACETEC IMC CORPORATION
            (Exact name of registrant as specified in its charter)
                            ----------------------
<TABLE>
    <S>                                    <C>                                <C>       
         Massachusetts                                   3577                     04-3116697
    (State or other jurisdiction           (Primary Standard Industrial          (I.R.S. Employer
    of incorporation or organization)      Classification Code Number)        Identification Number)
</TABLE>

   The Boott Mill, 100 Foot of John Street, Lowell, Massachusetts 01852-1126
          (Address of principal executive offices including zip code)

                                (508) 275-6100
             (Registrant's telephone number, including area code)
                            ----------------------

Securities registered pursuant to Section 12 (b) of the Act:
                                                    Name of each exchange
                  Title of each class                on which registered
                  -------------------                ------------------- 

                         None                               None
Securities registered pursuant to Section 12 (g) of the Act:
                         Common Stock, $.01 Par Value

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______

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].

The approximate aggregate market value of voting stock held by non-affiliates of
the registrant as of June 20, 1997 was: $17,368,713.

There were 7,266,508 shares of registrant's Common Stock outstanding as of June
20, 1997.

                      DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the Registrant for the
Registrant's 1997 Annual Meeting of Shareholders to be held in September 1997
which definitive proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant's fiscal year of March
31, 1997, are incorporated by reference into Part III of this Form 10-K.

                                       
<PAGE>
 
                                    PART I
                               ITEM 1. BUSINESS

General

     Spacetec IMC Corporation ("Spacetec IMC" or the "Company") was incorporated
in Massachusetts in April 1991. The Company's principal executive offices are
located at The Boott Mill, 100 Foot of John Street, Lowell Massachusetts,
01852-1126. The Company's main telephone number is (508) 275-6100.

     Spacetec IMC is a leading provider of three-dimensional ("3D") interactive
motion control technology comprised of 3D input hardware controllers and 3D
software for use with 3D graphical applications used on workstations, personal
computers ("PCs") and video game console systems. Unlike traditional one
dimensional ("1D") and two dimensional ("2D") input controllers, such as
keyboards, gamepads, mice, trackballs and joysticks, the Company's products are
designed to enable a user to intuitively manipulate 3D graphical images in real
time, as if the user were moving actual objects or moving through actual scenes
in the real world. Through its technology and products, the Company provides
what it considers the most robust and cost competitive interactive motion
control capability available commercially today.

     The Company believes, and industry trends appear to verify, that 3D
functionality is becoming increasingly prevalent on a broader range of
platforms. More powerful and faster microprocessors have become available on a
low-cost basis, resulting in a significant increase in the number of computers
capable of taking advantage of 3D graphics beyond the traditional high-end
graphics terminals and workstations. These include personal computers in the
work environment and at home, and consumer electronics systems such as console
games systems. At the same time, 3D graphics is becoming a standard technology
or gaining broader acceptance in many markets, including the CAD/CAM/CAE fields,
the digital media content creation field with 3D animation, graphic arts,
simulation and visualization functionality and now in browser and authoring
applications for the Internet.


Industry Background

     The "user interface", which defines how a user interacts with computers,
has evolved dramatically over the past two decades. From the reliance on
computer punch cards, to the use of text-based key-stroke commands, to the
current use of mouse-operated, 2D graphical user interfaces ("GUIs", such as the
Apple Macintosh or Microsoft Windows operating systems), each evolutionary step
has increased the user's ease of interaction with the computer. As a result, the
practical use of computers has been enhanced, helping to significantly increase
the penetration of computers into business and the home.

     It is widely believed that 3D graphics will transform the face of today's
popular two-dimensional computing to a more intuitive 3D environment. 3D
graphics can create user interfaces that have a "real world" look and feel,
resulting in interactive environments that are familiar to users from their
everyday lives. This will make the use of a computer more intuitive and
practical for a broader group of users, and offer software developers increased
design options for their applications.

                                       2
<PAGE>
 
Company Strategy

     The Company views itself as a leading 3D enabling technology company and as
such its primary strategy is to leverage its technology and technological
competencies into the key application markets through strategic alliances and
partnerships. This involves:

     Industrial Sector Dominance - Consolidating Dominance in the Industrial
Market. Although an industry leader in the industrial sector, the Company's
products have yet to penetrate a dominant portion of the CAD/CAM/CAE and
industrial multimedia markets. The Company therefore plans to continue to build
on its industry leading position for industrial 3D motion control technology by
leveraging its existing major end-use customers and original equipment 
manufacturer ("OEM"), value added reseller ("VAR") and independent software 
vendor ("ISV") relationships and establishing key new relationships for evolving
market opportunities.

     Penetrating Mass Markets - Bundling and OEM Distributions in the Consumer
Markets. The Company's strategy for achieving large-scale penetration of
consumer markets is to establish bundling, OEM and specialized distribution
relationships with leading manufacturers of hardware platforms and software
vendors. The Company is at various stages of discussions with a number of these
companies.

     Software Initiative - Capitalizing on Motion Control Capability. The
Company is also in the process of adding core technology and consolidating its
specialized interactive 3D motion control software and software modules into a
comprehensive developers' toolkit and library to facilitate the addition of
high-performance interactive and pre-defined motion control to software
applications (including games, 3D graphics and multimedia applications and CAD
packages). This process is designed to result in software revenues independent
of hardware sales.

     Based on the strengths of its patented and proprietary technologies and
products, the Company's mission is to be the supplier of choice of 3D graphic
and digital media user interface solutions.


Products

Hardware Products

The Company's hardware products include three classes of motion controllers:

     Consumer Products. Spacetec IMC aggressively entered the consumer
electronics market for the Christmas 1996 season with the introduction of the
SpaceOrb 360 RealLife 3D Game Controller. With the SpaceOrb 360, gamers
experience an entirely new way to move in 3D. They can now "strafe, pitch, yaw
or roll" with six degrees of freedom at 1,024 levels of speed. The SpaceOrb 360
is compatible with nearly 25 of today's hottest 3D games, including Quake,
Descent, DOOM, MDK, Redneck Rampage, Duke Nukem 3D, and all Windows 95 games.

     Furthermore, the Company has commenced a design effort to develop
equivalent desktop 3D controllers targeted at the "edutainment" and 3D Internet
markets. This effort includes designs for OEM licensing arrangements.

                                       3
<PAGE>
 
     Professional Products. A mid-range 3D controller, the SpaceController is
targeted at the emerging 3D animation and multimedia markets and also for the
lower-end PC CAD market running on DOS, Windows, Windows 95 and MacIntosh
platforms. Support for these applications is provided through the SpaceWare
RealLife 3D interface software or the specific SpaceWare plug-in modules
mentioned below.

     Industrial Products. The Spaceball 2003 and Spaceball 3003 graphics
controllers for Unix-based workstations and high-end Windows NT-based PCs have
become industry leaders in CAD/CAM/CAE applications. Through the use of these
products, designers and engineers can pan, zoom and rotate 3D models as smoothly
and easily as if they were holding them in their hands. The Company believes
that the ability to manipulate 3D models faster with more accuracy can result in
productivity increases of 25-40% or more. With end use customers that include
most of the large Fortune 1000 manufacturing companies, such as General Motors,
General Electric, General Dynamics, Chrysler, Eastman Kodak, Daimler Benz, Honda
Motors and Motorola, the Spaceball line is the largest selling and most widely
used product in this market. Spaceball products are also sold on an OEM basis by
Hewlett-Packard, IBM Corporation, and Digital Equipment.

Software Products

The Company's current software products include:

     SpaceWare AniMotion. Motion Picture Animators have a growing need to create
more sophisticated, life-like 3D animation in a timely manner. To put the
ultimate in intuitive 3D interactive motion control capabilities in the hands of
animators, Spacetec IMC has created SpaceWare AniMotion, an advanced 3D
interactive motion control solution for use with 3D Studio MAX, the industry
leader in animation software. By incorporating SpaceWare AniMotion with the
Spaceball SpaceController, animators can dynamically move objects, cameras or
lights, to create sophisticated 3D animations more effectively and faster than
ever before.

     SpaceWare 3D-I Always. Spacetec IMC's critically acclaimed SpaceWare 3D-I
Always add-on application for AutoCAD lets users dynamically rotate, pan and
zoom actual AutoCAD 3D models right within their active AutoCAD viewport.

     As mentioned earlier, the Company is also in the process of adding core
technology and consolidating its specialized interactive 3D motion control
software and software modules into a comprehensive developers' toolkit and
library to facilitate the addition of high-performance interactive and
pre-defined motion control to software applications (including games, 3D
graphics and multimedia applications and CAD packages).

     The Company's plans to develop and commence shipments of new hardware and
software products are forward-looking statements. The timing and completion of
such plans depends on numerous factors, including the continued technical
development of such products; the successful transition of the prototype
products to volume production; and the successful development of sufficient
market demand for such products. There can be no assurance that any new product

                                       4
<PAGE>
 
introduction will occur as planned, or that such introduction will prove to be
of financial benefit to the Company.

Markets

     The Company's marketing focus is divided into two broad business sectors as
follows:

The Industrial Sector Business:

     The Industrial Sector Business comprises the CAD/CAM/CAE,
visualization/simulation, medical imaging, and emerging professional digital
media and content creation markets supported on UNIX and Windows NT workstation
and Windows 95 PC platforms.


     The CAD/CAM/CAE Market.

          Although this market segment generally consists of all CAD
     applications including electronic design and A/E/C (architectural
     engineering and construction), the Company focuses on the mechanical
     design, manufacturing, and analysis segments where 3D technology is well
     accepted and has shown continuous growth.

          In this market segment, the combination of increased hardware
     performance and advancements in 3D technologies is accelerating the use and
     adoption of solids modeling and 3D design tools. The release of several new
     Windows NT based applications in this field is also contributing to
     widening the market potential. The aerospace, automotive and major
     manufacturing industries have adopted real-time interactive 3D graphics as
     a standard technology approach providing an expanding on-going core
     business for the Company.

          The Company serves this market with its Spaceball 2003 and 3003 and
     SpaceWare interface software customized to the leading CAD/CAM/CAE
     applications, including Parametric Technology Corporation's Pro/Engineer,
     IBM/Dassault Systems' CATIA, EDS's Unigraphics, SDRC's I-DEAS Master
     Series, SolidWorks' SolidWorks 97, Computervision's CADDS5, Matra
     Datavision's Euclid3 and Strim100, Hewlett-Packard's CoCreate, and Baystate
     Technologies CADKEY 97. The Company also markets a plug-in application,
     3D-I Always for AutoCAD and the AutoCAD Mechanical Desktop applications.

          Major industrial end-users of the Company's products include BMW,
     Chrysler, Eastman Kodak, Ford, General Dynamics, General Electric, General
     Motors, Jaguar, John Deere, Lockheed-Martin, McDonnell Douglas, Motorola,
     Opel, Pratt & Whitney Aircraft, Rockwell, Saab, Siemens, 3M, Toyota, TRW,
     Volvo, Whirlpool, and Yamaha.

     The Professional Digital Media (Multimedia) Market.

          The Digital Media market spans a broad spectrum of market segments
     where end-users create 3D digital content. This market includes game
     developers, film, video and broadcast television animators, industrial
     designers, architectural designers, and 3D graphic and promotional artists.
     The interest in and application of interactive and pre-determined 3D motion
     in application content creation is spawning the need for additional and
     improved 3D enabling tools and technologies.

                                       5
<PAGE>
 
          SpaceWare AniMotion for 3D Studio MAX was the Company's initial entry
     into this market. Similar and enhanced functionality is expected to be
     added to other popular 3D modeling and rendering applications to further
     encourage the introduction of advanced levels of 3D motion control.

The Consumer Sector Business:

          The Company believes that the consumer market will continue to present
an important opportunity for future sales of the Company's products. 3D graphics
on PC's, and other entertainment systems have become a standard feature, with an
installed base in the U.S. alone of almost 22 million 3D capable PCs, and over
7.5 million 3D console systems (32 and 64 bit). The Company is targeting these
platforms as specific software market segments which will introduce interactive
3D graphics into their product offerings. In the shorter term this is specific
to the games and "edutainment" titles segment.

     PC-Based Games.

          The Company believes that the introduction of several very successful
     3D game titles such as Quake and Duke Nukem in 1996, has reinforced the
     demand for enhanced 3D interactive motion control in the PC game
     marketplace. The Company began shipping its SpaceOrb 360 Real-Life 3D game
     controller into the retail channel in September 1996.

          Optimized SpaceOrb 360 support has been integrated in over 25 leading
     3D games titles to date and several more minor titles, with support
     commitments from developers for in excess of a further 50 new titles
     scheduled for release in 1997. These include Action, Adventure/Role Play
     Games and Simulation segments, which collectively represent a significant
     quantity of PC games sold annually. Current major titles supported include
     Quake, Duke Nukem, MDK, Redneck Rampage, Jedi Knight and X-Wing vs. Tie
     Fighter with new game support expected for titles such as Turok and SimCity
     3000.

     Console Games and Entertainment.

          The Company entered into an exclusive licensing, strategic 
     development, manufacturing and marketing agreement with ASCII Entertainment
     in 1996 to bring its Real-Life 3D controller technology to the Sony
     Playstation. This product is being developed and manufactured under
     contract to ASCII Entertainment by the Company, and is targeted for release
     for the Christmas 1997 season. This controller is designed to address
     consumer demand for enhanced 3D interactive motion control for the latest
     3D games released for the console marketplace. Like the PC Market, target
     titles for console systems include the Action, Adventure/Role Play Games
     and Simulation segment, which are becoming the majority of titles on this
     platform.

          Discussions are also continuing with other leading vendors serving the
     console game market to bring the Real-Life 3D controller technology to
     other console systems platforms 

                                       6
<PAGE>
 
     such as the Nintendo 64 advanced game system. There can be no assurance
     that such discussions will result in the Company entering into a definitive
     agreement with any such companies or that any such agreement entered into
     will prove to be of financial benefit to the Company.

Other Potential Opportunities.

     The Company has also begun an initiative to establish co-development
arrangements for its core 3D motion control input hardware and software
technologies in the 3D educational, "edutainment" and creative software markets.
In 1996 it has been reported that as much as 11% of the retail dollars, or $500
million, spent on PC consumer software was devoted to educational titles. The
Company is currently developing core software technology that will make it
easier and therefore decrease the time and expense of creating software titles
with enhanced 3D motion and advanced 3D interactivity. Although this may
represent a good opportunity for the Company to expand its product and customer
base, there can be no assurance that such initiatives will result in a
significant expansion of business.


Sales and Marketing

     The Company has organized its sales and marketing force into two distinct
groups to separately address the industrial market and the consumer market. It
has recently opened a sales office in Germany. The Company also has a
distribution and market development arrangement with Sumisho Electronic Devices
Corporation, a wholly owned subsidiary of Sumitomo Corporation, for the
development of all its business in Japan.

     The Company sells its 3D workstation controller systems to industrial OEMs,
VARs and major end-use manufacturers, particularly in the aerospace, automotive
and consumer products fields. The Company has OEM product distribution
agreements with IBM, Hewlett-Packard, and Digital Equipment Corporation and
distribution agreements with Electronic Data Systems Corporation, Sun Express,
Accel Graphics as well as other VARs. In addition, the Company sells directly to
large end-users in automotive, aerospace and other manufacturing industries
through a major accounts and regional sales force.

     The Company serves the consumer marketplace through a tiered channels
approach: (i) sales through retail stores in the USA direct to major accounts
and through wholesale distribution in the USA and overseas; (ii) sales of
turnkey product or core components to OEMs; and (iii) technology licensing and
component sales to primary manufacturers of system hardware platforms and
peripheral accessories. These include PC and console game systems manufacturers
or third party providers.


Research and Development

     The Company's research and development efforts consist of enhancing the
features and performance of its core 3D motion control technologies and applying
these enhancements to existing products and the development of new products. The
Company's research and development functions are divided into hardware
development and software development groups. The software development group is
further divided into high-end systems, consumer products, and core technology
teams.

                                       7
<PAGE>
 
     The overall goals of the hardware development group are to continually
enhance the performance, functionality, built-in features and ease-of-use
characteristics of the Company's unique and patented 3D motion control and
sensing core technologies, while reducing the cost of manufacturing of key
components. These enhancements are designed to allow the production of such
components that allow scale-ability, especially reduction in size, enhanced
reliability and broadening the use, all at progressively lower costs of
manufacturing.

     The hardware development group is also focused on providing expertise and
engineering services in the implementation of the Company's core hardware input
technologies for the production of 3D controller products both for proprietary
brands and vendor lines. This group is, accordingly, involved in the design and
development of a range of new controller products, including the introduction of
a Universal Serial Bus ("USB") solution, for various market segments and
strategic partners and it is anticipated that requirements in this area will
increase.

     The overall goals of the software development group are to enhance the
features, functionality and extensibility of the Company's proprietary SpaceWare
Real-Life 3D motion control software as a body of compelling core 3D enabling
technologies.

     This includes ensuring: i) the development and provision of basic
user-friendly driver level support for the Company's Real-Life 3D controllers
for the growing array of 3D applications emerging on all popular operating
systems; ii) the development and provision of toolkits, and a technical support
infra-structure that allows ease of integration and porting of basic 3D motion
control capabilities in 3D application environments; iii) the development and
provision of appropriate add-ons and plug-in software that enhances interactive
3D motion control capabilities of 3D development applications; and iv) the
combining of the above technologies and other specialized interactive 3D motion
control software and software modules into a comprehensive developers' toolkit
and library to facilitate the incorporation of high-performance enhanced
interactive and pre-defined motion to third-party software applications
(including games, multimedia titles, presentation applications, digital media
content creation, CAD/CAM/CAE, visualization and simulation packages).

     There can be no assurance that the Company will successfully complete the
development efforts described above or that these product developments will
achieve market acceptance.


Patents and Proprietary Rights

     The Company relies on a combination of patents, copyrights and trade
secrets to establish and protect its proprietary rights.

     The Company has received eleven patents in the United States, Canada,
Australia, Japan, and certain European countries covering its core technology
relating to the PowerSensor. The Company further has one issued United States
patent and three pending United States patent applications, as well as five
pending international patent applications, covering input sensing technology not
yet incorporated into the Company's products. The Company has provided a
paid-up, perpetual, irrevocable, royalty-free license for the Spaceball input
hardware technology to a company in Australia, Spatial Systems Limited ("SSL"),
to manufacture and distribute products exclusively in 

                                       8
<PAGE>
 
Australia and New Zealand. This arrangement was made in the acquisition of the
original core hardware technology.

     The status of patents involves complex legal and factual questions and the
breadth of claims allowed is uncertain. Accordingly, there can be no assurance
that patent applications filed by the Company will result in patents being
issued or that its patents, and any patents that may be issued to it in the
future, will afford protection against competitors with similar technology. In
addition, patent applications filed in foreign countries are subject to laws,
rules and procedures which differ from those of the United States, and thus
there can be no assurance that foreign patent applications related to issued
United States patents will issue. Furthermore, if these patent applications
issue, some foreign countries provide significantly less patent protection than
the United States.

     No assurances can be given that patents issued to the Company will not be
infringed upon or designed around by others or that others will not obtain
patents that the Company would need to license or design around. If existing or
future patents containing broad claims are upheld by the courts, the holders of
such patents could require companies to obtain licenses. Furthermore, although
the Company believes that its products and other proprietary rights do not
infringe the proprietary rights of third parties, there can be no assurance that
other third parties will not assert infringement claims against the Company or
that such claims will not be successful. If the Company is found to be
infringing third party patents, there can be no assurance that licenses that
might be required for the Company's products would be available on reasonable
terms, if at all.

     The Company's SpaceWare Real-Life 3D software is protected by copyright
laws, which offer only limited protection for the Company's software. However,
because the software development industry is characterized by rapid
technological change, the Company believes that factors such as the technical
know-how in the interactive 3D motion control field, technological and creative
skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
important to establishing and maintaining a technology leadership position than
the various legal protections available for its software.

     In addition to the protection afforded by patent registrations and
copyright laws, each employee of the Company and consultants to the Company have
executed a proprietary information agreement designed to protect the trade
secrets of the Company, inventions created in the course of employment with the
Company and other proprietary information of the Company.


Manufacturing

     The Company contracts its hardware manufacturing requirements to outside
sources and expects to continue to do so in the future. The Company's production
engineering and manufacturing staff are responsible for establishing and
managing all manufacturing procedures and processes, and for procurement,
production planning, quality assurance and quality control of all of the
Company's products.

     The Company currently uses several United States contractors and an
overseas contractor in the People's Republic of China, for its primary
manufacturing requirements. Final functional testing, calibration and quality
control, as well as final packing and shipping for its industrial products, are
performed by the Company. For its consumer products, all these functions are
provided on a turnkey basis for the Company according to strict ISO 9002
standards. Generally, standard parts and components are used in the
manufacturing of the Company's products with supplies sourced from 

                                       9
<PAGE>
 
multiple vendors. To date, the Company has been able to obtain adequate supplies
of all components in its products in a timely manner from existing sources.


Competition

     The markets for computer hardware and software are highly competitive and
are characterized by continual change and technological improvement. In the
input hardware field, the Company's products currently compete with traditional
1D and 2D input devices, such as the dial box, keyboard, gamepad, mouse,
trackball and joysticks and some pure 3D input devices. On the software side,
there is such a broad range of 3D enabling technologies, but few are closely
aligned with six-degrees-of-freedom ("6D") input hardware devices, which
provides a desirable area of focus for the Company.

     The Company recognizes that the market for 3D input devices and software
technologies is likely to become more competitive as the volume of 3D
applications increases, encouraging more companies to enter the market.

     There are currently several alternative input device technologies available
that provide various degrees of interactive 3D control capabilities. These
devices range from the traditional 1D dial box, keyboard and gamepad and 2D
mouse, trackball and joysticks that provide interactive 3D motion control with
1, 2 or at most 3 degrees of freedom at a time, to somewhat specialized 3D
devices, including head positioning trackers and products marketed under the
names Flying Mouse, the Bird and the DataGlove. Motion control with the 1D and
2D devices tends to require a great deal of finger or hand dexterity and is
somewhat robotic in nature, while the specialized 3D devices are either
difficult to use or have a difficult software interface. In comparison, the
Company believes its six-degrees-of-freedom (`6D") input device technology, once
learned, allows life-like intuitive 3D motion control.

     Logitech Corporation, a leading mouse manufacturer, has introduced a
product similar in functionality to the Company's Spaceball product line for the
industrial market and is showing a prototype desktop product for the consumer
market, using technology licensed from a German company. This technology
operates on a different design approach but achieves a similar end result. The
Logitech products are yet to find broad acceptance or be supported in as many
applications or with as many software titles as is afforded the Company's
Spaceball line of products by the proprietary SpaceWare software.

     The Company currently competes principally on the basis of product
performance, the breadth of product compatibility with existing 3D applications,
the speed with which software is developed for new 3D applications, company
reputation, relationships with distributors and quality of professional
services. To the extent that the Company aims to broaden its penetration of
consumer sector business, the Company anticipates that it will compete on the
basis of price in addition to these other factors.

     While the Company believes it compares favorably with any competition from
a performance and functionality basis, and the value that it provides through
its superior technology, there can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business and results of operations.

                                       10
<PAGE>
 
Employees

     As of March 31, 1997, the Company had 68 full-time employees and 0
part-time employees, of whom 32 were engaged in research and development, 24 in
sales and marketing, 8 in administration and finance and 4 in manufacturing
control. The Company's employees are not covered by a collective bargaining
agreement. The Company has never experienced employment-related work stoppages
and believes that it has satisfactory employee relations.

ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT

     The current executive officers of the Company are as follows:
<TABLE> 
<CAPTION> 

Name                                     Age           Position
----                                     ---           --------
<S>                                      <C>           <C> 
Dennis T. Gain............................54           Director, President, Chief Executive
                                                       Officer and Chairman of the Board

Neil M. Rossen............................51           Chief Financial Officer,  
                                                       Senior Vice President of Finance

A. Lorne Grant............................52           Senior Vice President, Software
                                                       Division

John A. Hilton............................37           Senior Vice President, Chief
                                                       Technology Officer - Hardware

James J. Wick.............................36           Senior Vice President, Chief
                                                       Technology Officer - Software

Joyce A. Ouellette........................39           Senior Vice President of Sales and
                                                       Marketing
</TABLE> 

     Each officer's term of office extends until the first meeting of the Board
of Directors following the next annual meeting of stockholders and until a
successor is elected and qualified.

     Dennis T. Gain has been a director of the Company and has served as
President and Chief Executive Officer of the Company since its incorporation in
1991. Prior to joining the Company, Mr. Gain was President of Focus North
America since 1989 and President of Woolrest North America from 1986 until 1989.
Mr. Gain is also a director and stockholder of Spatial Systems Ltd. which is an
Australian public company that is a shareholder of the Company. Mr. Gain has a
B.E. degree and Post Graduate Associate degree in Metallurgy from the University
of Otago, New Zealand and a B. Comm. degree in Finance from the University of
Auckland, New Zealand.

     Neil M. Rossen has served as Senior Vice President and Chief Financial
Officer since November 1996. Mr. Rossen previously held senior financial and
operational positions with Northern Telecom Inc. in Europe from 1978 through
1982, and senior financial positions with Data General Corporation both in
Europe and the United States from 1982 until 1989. Between 1990 

                                       11
<PAGE>
 
and 1992, Mr. Rossen was the Vice President of Marketing and Sales of PAGG
Corporation, a contract manufacturer. From 1993 through 1996, Mr. Rossen was an
investor in and officer of a privately held interconnect company. Mr. Rossen
holds a Bachelor of Commerce degree from the University of Cape Town, and
qualified as a Chartered Accountant (S.A.).

                                       12
<PAGE>
 
     A. Lorne Grant has served as Senior Vice President since March 1997. Prior
to joining the Company, Mr. Grant served as Chief Executive Officer of Nexus
Integrated Services Corporation from 1990 through 1995. From 1982 through 1989,
Mr. Grant was Chief Executive Officer for Sytron Corporation, which, under his
direction, became the world-wide standard in archival software.

     John A. Hilton has served as Senior Vice President of the Company since its
incorporation in 1991. Mr. Hilton was a director of the Company from April 1991
through January 1994. Prior to joining the Company, Mr. Hilton was Vice
President of Research and Development of Spatial Systems Ltd. since 1988, where
he developed the core technology used in the Company's advanced 3D-I products.
Mr. Hilton holds a B.S. degree in Computer Science, and B.E. and M.E. degrees in
mechanical engineering from the University of Sydney, Australia.

     James J. Wick has served as Senior Vice President since September 1995 and
Vice President of Software Engineering since April 1993 and prior to that, was
the Company's Director of SpaceWare Development and Engineering Services since
its incorporation in 1991. Prior to joining the Company, he was a Regional
Support Manager of Spatial Systems Ltd. since June 1989. Prior to joining
Spatial Systems Ltd., Mr. Wick was Manager of Graphics Development at Polygen
Corporation. Mr. Wick holds a B.S. degree in Applied Computer Science from the
University of Wisconsin.

     Joyce A. Ouellette has served as Senior Vice President of Sales and
Marketing since September 1995 and as Vice President of Sales and Marketing -
Commercial Markets since June 1993. Prior to that, Ms. Ouellette was the
Company's Director of Strategic Sales and Director of Channel marketing since
incorporation. Prior to 1991, Ms. Ouellette was the Marketing Manager at Spatial
Systems Ltd. since July 1990. Prior to joining Spatial Systems Ltd., Ms.
Ouellette was Marketing Manager for Digital Techniques Inc. since mid-1989 and
held various industry marketing positions at Prime Computer, Inc. from 1985
through 1989. Ms. Ouellette holds a B.S. degree in Business from North Adams
State College.


ITEM 2. PROPERTIES

     The Company's corporate offices are located in an approximately 33,300
square foot facility in Lowell, Massachusetts. The Company occupies the Lowell
facility under a sublease which terminates on July 3, 2000, subject to two
successive one year renewal terms at the option of the Company. The Company
believes that its existing facilities, together with additional office space
available to it pursuant to an option under its Lowell lease, are sufficient to
meet its requirements for the near term.

ITEM 3. LEGAL PROCEEDINGS

     As of March 31, 1997, the Company is not party to any legal proceedings
and is not aware of any material threatened litigation.

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

     None.

                                       13
<PAGE>
 
                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS


     The Company's Common Stock commenced trading on December 6, 1995 on the
Nasdaq National Market under the symbol "SIMC". As of June 20, 1997 there were
143 holders of record of the Company's Common Stock.

     The following table sets forth for the fiscal periods indicated, the range
of high and low closing prices for the Company's Common Stock on the Nasdaq
National Market.

<TABLE> 
<CAPTION> 
                                                       HIGH           LOW
                                                                   
     Year Ended March 31, 1996                                     
     <S>                                               <C>            <C> 
     Third Quarter (beginning December 6, 1995)        $12 3/4        $11 1/4
     Fourth Quarter                                    $17 1/4        $10 1/4
                                                                   
     Year Ended March 31, 1997                                     
                                                                   
     First Quarter                                     $20 1/4        $14 1/4
     Second Quarter                                    $14 5/8        $ 8
     Third Quarter                                     $12 1/8        $ 4
     Fourth Quarter                                    $ 6 3/8        $ 3 1/4

</TABLE> 


     The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain all future
earnings, if any, to fund the development and growth of its business and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future.

                                       14
<PAGE>
 
Item 6. Selected Consolidated Financial Data

                      Summary Consolidated Financial Data
                     (In Thousands, Except Per Share Data)
<TABLE> 
<CAPTION> 

                                                                      Fiscal Year Ended March 31
                                                  ------------------------------------------------------------------
                                                     1997          1996          1995          1994          1993
                                                  ------------------------------------------------------------------
<S>                                               <C>           <C>           <C>           <C>           <C> 
STATEMENTS OF OPERATIONS:                       
Revenues ...................................       $  9,075      $ 8,132       $5,536        $3,198        $1,920
Income (loss) from operations ..............         (4,948)         705          686           467           256
Net income (loss) ..........................         (3,722)         628          526           327           182
Net income (loss) per share ................       $  (0.51)     $  0.10       $ 0.09        $ 0.07        $ 0.07
Weighted average shares outstanding ........          7,283        6,562        6,004         4,680         2,545

BALANCE SHEET DATA:
Working Capital ............................         13,622       17,503        2,142         2,357           823
Total assets ...............................         16,602       21,108        4,507         3,342         1,195
Long term liabilities, less current portion             --           320          220            99           255
Total shareholders' equity .................         15,260       19,301        3,339         2,667           703

</TABLE> 

                                       15
<PAGE>
 
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations

         The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors regarding forward-looking statements. In this context, the
discussion in this Item contains forward-looking statements which involve a
certain degree of risk and uncertainty, including statements relating to
liquidity and capital resources. Factors that could cause or contribute to the
actualization of such forward looking statements include, but are not limited
to, the market acceptance of and the demand for the Company's products, the
development of technology and manufacturing capabilities, the expanded presence
in the consumer market, the impact of competitive products on the Company's
profitability and the Company's dependence upon third party suppliers.

Overview

     The Company was incorporated in April 1991 to develop and market advanced
3D interactive motion control hardware and software products for the industrial
CAD/CAM/CAE workstation market. Historically, the Company has generated revenues
from sales of bundled hardware and software, and such sales are dependent upon
prior incorporation of the Company's enabling software into 3D applications
developed by ISVs. Product revenues generated by the incorporation of the
Company's software into a specific ISV application may lag six to eighteen
months after the incorporation activity is completed. The Company also generates
revenues from maintenance services, although historically these revenues have
been immaterial. In fiscal 1995, the Company launched its first hardware and
software products aimed at the industrial PC marketplace. Early in fiscal 1996,
the Company began marketing its first stand-alone software product for the PC
CAD marketplace, and commenced limited test-marketing of its first consumer
product, targeted at PC games. In late fiscal 1996, the Company began marketing
the ergonomically improved, cost reduced version of the consumer product to the
OEM marketplace as the initial step in its goal of achieving long-term growth in
the consumer sector. The Company commenced shipments of its new game controller
into the consumer market in the third quarter of fiscal 1997.

     For reasons of manufacturing and volume efficiencies, the Company contracts
all of its hardware manufacturing to outside sources. Primary manufacturing of
its products had previously been through multiple domestic contract
manufacturers, with final functional testing and quality control performed by
the Company. Late in fiscal 1996, the Company began directing its manufacturing
to offshore contract manufacturers to reduce the cost of goods through high
volume manufacturing.

     Research and development comprises both hardware and software activities.
Hardware development has focused on creating products utilizing the Company's
core hardware technology, but designed for specific end-use markets, and
engineering these components to reduce manufacturing costs. This has resulted in
products for the workstation, PC and consumer markets, and significant cost
reductions in the core technology. In fiscal 1996, the Company began
sampling its new low-cost Eclipse-1 ASIC chip for use in its own proprietary
controllers. The Eclipse-1 ASIC chip is incorporated into the SpaceOrb 360,
which began shipping to customers during fiscal 1997.

                                       16
<PAGE>
 
The primary activity in software development has been to create specialized 3D
motion control software and software tools to enable the Company's products to
be integrated into specific application software. Software development
activities have increased as the number of 3D applications into which the
Company's software has been integrated has increased, and upon entering the
professional PC multimedia animation market and consumer multimedia 
"edutainment" market with 3D interactive software programs.

Results Of Operations

Comparison Of Fiscal Year Ended March 31, 1997 to the Fiscal Year Ended March
31, 1996

     Revenues. Revenues increased 11.6% to $9,075,000 for the fiscal year ended
March 31, 1997 ("1997 Fiscal Year") from $8,132,000 for the fiscal year ended
March 31, 1996 ("1996 Fiscal Year"). The increase in revenues is attributable to
the Company's launch of the SpaceOrb 360 RealLife 3D ("SpaceOrb 360") game
controller into the consumer market. This was the first year that the Company
sold a consumer product. Although the SpaceOrb 360 enjoys widespread acceptance
in the early-adopter, hard core gamer market, sales to the mass market have
lagged due to delays in customer acceptance of the product. The Company was
unable to clearly differentiate its product from other lower priced computer
control devices. As a result, management has implemented a strategy of forming
strategic partnerships to more effectively penetrate the consumer market

     Sales to the industrial market for the 1997 Fiscal Year were negatively
impacted by slower than expected sales to both domestic and international CAD
and multimedia customers. The Spaceball 3003 ("3003"), a new lower priced input
device for workstation based 3D CAD applications, negatively impacted sales of
the higher priced Spaceball 2003 ("2003"). The Company's expectations that the
lower cost 3003 would encourage bundling by OEM customers and increase unit
sales sufficiently to offset any negative price impact were not met.

     Revenues from software and other licensing agreements for the 1997 Fiscal
Year represent sales of Panacea software products, as well as licensing of core
hardware and software technology. A significant portion of the licensing
revenues for the year include one time licensing payments.

     Two customers represented 17.0% and 14.8% of the Company's revenues for the
1997 Fiscal Year as compared with two customers representing 24.3% and 9.8% of
sales for the 1996 Fiscal Year. Export sales, all of which are denominated in
U.S. dollars, decreased 18.8% to $2,364,000 for the 1997 Fiscal Year from
$2,913,000 for the 1996 Fiscal Year. In the industrial sector, export sales are
expected to increase at a faster rate than the domestic market.

     Gross Profit. Gross profit, representing revenues less cost of revenues
(including costs of materials, costs of manufacturing overhead, royalties and
amortization of capitalized software), decreased 21.4% to $4,639,000 for the
1997 Fiscal Year from $5,903,000 for the 1996 Fiscal Year and represented 51.1%
and 72.6% of revenues, respectively. Gross profit declined mainly due to write-
offs of capitalized software and a write down of inventory to net realizable
value. The Company completed an evaluation of the projected revenue stream
associated with inventory components related to the SpaceOrb 360 and capitalized
software, which indicated that the recoverability of the costs of these assets
was uncertain. Therefore, the Company recognized a $329,000 charge for the write
down of its capitalized software and a $600,000 charge for the write down of its
inventory.

                                       17
<PAGE>
 
     The gross profit was further impacted by the introduction of the SpaceOrb
360, which has significantly lower gross margins than the industrial market
products.

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

     Selling and Marketing Expenses. Selling and marketing expenses, which
include personnel costs, advertising and marketing costs, sales commissions and
trade show expenses, increased 82.4% to $4,945,000 for the 1997 Fiscal Year from
$2,711,000 for the 1996 Fiscal Year and represented 54.5% and 33.3% of revenues,
respectively. The increase is primarily due to costs incurred in connection with
the initial marketing program for the SpaceOrb 360, including extensive non-
recurring television advertising and promotion expenses in excess of $1,000,000.
Additional personnel and recruiting costs associated with an expansion of the
sales and marketing infrastructure were also incurred during the year.
Management anticipates selling and marketing expenses to decline as a percentage
of revenues in the fiscal year ending March 31, 1998 ("1998 Fiscal Year"), due
to cost containment programs implemented during the 1997 Fiscal Year. The
Statement concerning the Company's expectations regarding the level of sales and
marketing expenses is a forward looking statement. Such expenses may vary from
expectations due to timing of marketing programs and other factors.

     General and Administrative Expenses. General and administrative expenses,
which include the costs of the Company's corporate finance, human resources and
administrative functions, increased 114.9% to $1,726,000 for the 1997 Fiscal
Year from $803,000 for the 1996 Fiscal Year, and represented 19.0% and 9.9% of
sales respectively. The increase is associated with increased personnel costs to
expand the administrative infrastructure as well as increases in professional
fees and filing fees due to additional reporting requirements consequent upon
becoming a public company.

     Research and Development Expenses. Research and development expenses, which
consist primarily of personnel and equipment costs required to conduct the
Company's software and hardware development and engineering efforts, increased
73.2% to $2,916,000 for the 1997 Fiscal Year from $1,684,000 for the 1996 Fiscal
Year and represented 32.1% and 20.7% of revenues, respectively. The increase
reflects significant investments in personnel and consultants necessary to
expand software product development efforts, particularly in the Consumer,
Multimedia and PC CAD markets, and engineering efforts designed to lower the
cost of manufacturing of the Company's hardware components. Capitalized software
costs amounted to $224,000 for the 1997 Fiscal Year in comparison to $425,000
for the 1996 Fiscal Year. The Company plans to continue expansion of software
products for the consumer and the industrial marketplaces, as well as to
commence development of specialized 3D interactive motion control stand alone
software for licensing and revenue generation that is independent of the
Company's hardware products. As such, management expects that research and
development expenses will continue to increase in the 1998 Fiscal Year.

     Provision for Income Taxes. The current federal tax benefit represents
taxes receivable arising primarily from the carryback of the fiscal 1997 loss to
the three previous years and other refunds.

                                       18
<PAGE>
 
Comparison Of Fiscal Year Ended March 31, 1996 to the Fiscal Year Ended March
31, 1995

     Revenues. Revenues increased 46.9% to $8,132,000 in the 1996 Fiscal Year
from $5,536,000 for the fiscal year ended March 31, 1995 ("1995 Fiscal Year").
This growth represented increased sales to new and existing customers in the
domestic marketplace as well as increased sales to international customers. The
Company had two customers representing 24.3% and 9.8% of the Company's revenues
for the 1996 Fiscal Year as compared to two customers representing 24.3% and
16.8% of sales for the 1995 Fiscal Year. Export sales increased 67.8% to
$2,913,000 for the 1996 Fiscal Year from $1,736,000 for the 1995 Fiscal Year.
Increased revenues reflect, among other factors, the overall growth in the
market for 3D software, greater market availability due to the release of new
applications in which the Company's software is incorporated, and wider
acceptance of the Company's products by end-users.

     Gross Profit. Gross profit, representing revenues less cost of revenues
(including costs of materials, costs of manufacturing overhead, royalties and
amortization of capitalized software), increased 42.8% to $5,903,000 for the
1996 Fiscal Year from $4,133,000 for the 1995 Fiscal Year and represented 72.6%
and 74.7% of revenues, respectively. The increase in gross profit was primarily
due to increases in revenues, as well as reductions in the cost of materials and
savings resulting from efficiencies in manufacturing operations. The decrease in
gross profit as a percentage of revenues was primarily due to amortization of
capitalized software expense amounting to $136,000 for the 1996 Fiscal Year
versus $33,000 for the 1995 Fiscal Year.

     Selling and Marketing Expenses. Selling and marketing expenses, which
include personnel costs, advertising costs, sales commissions and trade show
expenses, increased 57.3% to $2,711,000 for the 1996 Fiscal Year from $1,723,000
for the 1995 Fiscal Year and represented 33.3% and 31.1% of revenues,
respectively. During the year the Company added major new distribution
agreements with Digital Equipment Corporation and Sun Express, and continued to
increase the number of VARs, especially for the PC CAD and multimedia
marketplace. The increase in expenses reflect, among other factors, the
expansion of activities in existing markets, investments in market development
and sales and marketing infrastructure necessary to penetrate new markets,
especially the PC CAD, multimedia and consumer markets.

     General and Administrative Expenses. General and administrative expenses,
which include the costs of the Company's corporate, finance, human resources and
administrative functions, decreased 3.7% to $803,000 for the 1996 Fiscal Year
from $834,000 for the 1995 Fiscal Year, and represented 9.9% and 15.1% of sales
respectively. This reduction reflects increasing economies of scale in
administrative infrastructure, the reduction of non-recurring financial
consulting expenses, and the reduction of legal expenses due to non-recurring
costs associated with the settlement of a lawsuit.

     Research and Development Expenses. Research and development expenses, which
consist primarily of personnel and equipment costs required to conduct the
Company's software and engineering development efforts, increased 89.2% to
$1,684,000 for the 1996 Fiscal Year from $890,000 for the 1995 Fiscal Year and
represented 20.7% and 16.1% of revenues, respectively. The increase in expenses
reflect investments in the personnel necessary to expand software product
development, and engineering efforts designed to lower the cost of manufacturing
the Company's hardware componentry. Capitalized software costs amounted to
$425,000 for the 1996 Fiscal Year in comparison to $269,000 for the 1995 Fiscal
Year.

                                       19
<PAGE>
 
     Provision for Income Taxes. The Company's effective tax rate was 36.1% for
the 1996 Fiscal Year versus 31.9% for the 1995 Fiscal Year. The tax rate was
below the statutory rate in both years due to tax benefits resulting from
research and development credits, which were eliminated at the federal level at
the end of June 1995. The Company utilized all carryforwards related to the
research and development credit in 1996.

                                       20
<PAGE>
 
Quarterly Operating Results

     The following tables set forth certain consolidated quarterly financial
information of the Company, for the 1996 Fiscal Year and 1997 Fiscal Year. This
information has been derived from the quarterly financial statements of the
Company which are unaudited but which, in the opinion of management, have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that management
considers necessary for a fair presentation. This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere herein.
<TABLE> 
<CAPTION> 
                                                                       Three Month Period Ended
                                           ------------------------------------------------------------------------------
                                           June 30    Sept 30   Dec 31    Mar 31    June 30    Sept 30    Dec 31   Mar 31
                                             1995       1995      1995      1996      1996       1996      1996      1997
                                           -------    -------   ------    ------    -------    -------    ------   ------
                                                                      (in thousands except per share data)
<S>                                        <C>        <C>       <C>       <C>       <C>        <C>        <C>      <C> 
Revenues ............................      $1,786     $2,030    $2,047    $2,269    $ 1,852    $ 2,514    $ 2,685  $ 2,024

Gross Profit ........................       1,391      1,429     1,496     1,587      1,291      1,403        930    1,015

Income (loss)  from operations ......         225        195       216        69       (339)      (590)    (2,501)  (1,518)

Net income (loss) ...................      $  151     $  134    $  178    $  165    $   (93)   $  (269)   $(2,092) $(1,268)

Net income (loss) per common share...      $ 0.03     $ 0.02    $ 0.03    $ 0.02    $ (0.01)   $ (0.04)   $ (0.29) $ (0.17)

</TABLE> 

     The Company expects that it will continue to experience fluctuations in its
quarterly operating revenues and gross profit. This variability has been caused
by factors such as the timing of new product introductions and upgrades, the
timing of significant orders, the mix of products sold, and the mix of OEM and
direct sales to end-users.

                                       21
<PAGE>
 
Liquidity And Capital Resources

     To date, the Company has funded its operations and capital expenditures
primarily through cash generated from operations and the proceeds of equity
financing arrangements. As of March 31, 1997 the Company had cash and cash
equivalents and available-for-sale securities of $10,229,000 and working capital
of $13,622,000 versus $16,037,000 and $17,503,000, respectively at March 31,
1996. The Company has no outstanding line of credit or other indebtedness for
borrowed money.

     The Company used $4,408,000 to fund operating activities in the current
year versus $451,000 provided by operations in the prior year. The use of funds
is primarily attributable to the net loss of $3,722,000, the increase in
inventory of $1,309,000, and the increase in income taxes receivable, totaling
$438,000. Inventory levels were high as a result of significant purchases made
in order to have the necessary anticipated quantities of the new SpaceOrb 360
ready for shipment for the holiday season. The increase in income taxes
receivable reflects applications made to the Internal Revenue Service for
refunds resulting from the carryback of the 1997 Fiscal Year net operating loss
to the three previous years.

     Net cash provided to the Company through investing activities totaled
$4,536,000 during the 1997 Fiscal Year. The increase is attributable to net
proceeds in the amount of $5,607,000, generated from sales of the Company's
available-for-sale securities. The increase was offset by $676,000 for purchases
of furniture and equipment, (primarily computer equipment and additional
investments in tools and dies for high volume, low cost manufacturing of the
Company's hardware components), $171,000 expenditures for intangible assets
(primarily patents) and software development costs totaling $224,000. The
Company anticipates that capital expenditures for the 1998 Fiscal Year will
exceed capital expenditures for the 1997 Fiscal Year, but it has no commitments
or specific plans for any significant purchases. The Company expects that
purchases of computers and related equipment will be required upon the hiring of
additional research and development staff.

     Financing activities used $375,000 of net cash in the current year
primarily as a result of the Company repurchasing common stock. The cost was
offset by the proceeds received on the exercise of employee stock options

     The Company believes existing cash and investment securities together with
future anticipated funds from operations, will satisfy its projected working
capital and other cash requirements through the end of its fiscal year ending
March 31, 1998. Substantial funds will be required to continue software and
hardware development, as well as to develop the sales and marketing
infrastructure, distribution channels and market awareness in the PC Multimedia
and Consumer marketplaces. The Company believes the level of financial resources
available to it is an important competitive factor in its industry and may seek
additional capital prior to the end of that period. In addition, the Company may
consider potential acquisitions of technologies and businesses complementary to
the Company's business. There are no present agreements or commitments with
respect to any such acquisition; however, any such transaction may affect the
Company's 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 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 

                                       22
<PAGE>
 
additional financing will be available on acceptable terms or at all. If
additional funds are raised by issuing equity securities, further dilution to
the existing stockholders may result. If adequate funds are not available, the
Company's business would be materially adversely affected, and, as a result, the
Company may be required to curtail its operations significantly.

                                       23
<PAGE>
 
Item 8. Financial Statements And Supplementary Data

                         INDEX TO FINANCIAL STATEMENTS

<TABLE> 
<CAPTION> 
                                                                         Page(s)
                                                                         -------
<S>                                                                      <C> 
Report of Independent Auditors..........................................   25

Consolidated Balance Sheets as of March 31, 1997 and 1996...............   26

Consolidated Statements of Operations for the years ended March 31, 
    1997, 1996, and 1995................................................   27

Consolidated Statements of Shareholders' Equity for the years ended 
    March 31, 1997, 1996, and 1995......................................   28

Consolidated Statements of Cash Flows for the years ended March 31, 
    1997, 1996, and 1995 ...............................................   30

Notes to Consolidated Financial Statements..............................   31

</TABLE> 

                                       24
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Shareholders
Spacetec IMC Corporation


We have audited the accompanying consolidated balance sheets of Spacetec IMC
Corporation as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. Our audits also included the 
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Spacetec IMC Corporation at March 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.


                                                 Ernst & Young LLP

Boston, Massachusetts
May 22, 1997

                                       25
<PAGE>
                           SPACETEC IMC CORPORATION
                          CONSOLIDATED BALANCE SHEETS

                (in thousands, except share and per share data)
<TABLE> 
<CAPTION> 
                                                                                                      March 31
                                                                                      -----------------------------------------
                                                                                             1997                  1996
                                                                                      -------------------    ------------------
                                                 ASSETS
<S>                                                                                      <C>                    <C> 
Current assets:
   Cash and cash equivalents                                                             $           170        $          417
   Securities available-for-sale                                                                  10,059                15,620
   Accounts receivable, less allowance for doubtful accounts of $75 and $80
          at March 31, 1997 and 1996, respectively                                                 2,285                 2,112
   Inventories                                                                                     1,718                   409
   Prepaid expenses                                                                                  275                   260
   Receivable from employees and officer                                                              19                    72
   Income taxes receivable                                                                           438                     -
   Deferred income taxes                                                                               -                   100
                                                                                      -------------------    ------------------
               Total current assets                                                               14,964                18,990


Furniture and equipment, net of accumulated depreciation of $569 and $373                            964                   870
    at March 31, 1997 and 1996, respectively
Intangible assets, net of accumulated amortization of $535 and $303                                  382                   516
    at March 31, 1997 and 1996, respectively
Software development costs, net of accumulated amortization of $312 and $172                         265                   695
    at March 31, 1997 and 1996, respectively
Other assets                                                                                          27                    37
                                                                                      -------------------    ------------------
                                                                                                   1,638                 2,118
                                                                                      -------------------    ------------------
Total assets                                                                              $       16,602          $     21,108
                                                                                      ===================    ==================

                                  LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
   Accounts payable and accrued expenses                                                  $        1,267         $       1,475
   Deferred revenue                                                                                   75                    12
                                                                                      -------------------    ------------------
               Total current liabilities                                                           1,342                 1,487

Deferred income taxes                                                                                                          
                                                                                                     -                     320 

Shareholders' equity:
    Preferred stock, $.01 par value; 1,000,000 shares authorized                                     -                     -
    Common stock, $.01 par value; 20,000,000 authorized shares; 7,366,508
         and 7,240,908 shares issued and outstanding at March 31, 1997
         and 1996, respectively                                                                       74                    72
    Additional paid-in capital                                                                    17,969                17,540
    Deferred compensation                                                                            (40)                  -
    Unrealized gain on available-for-sale securities                                                  46                   -
    Retained earnings (accumulated deficit)                                                       (2,033)                1,689
    Treasury stock, at cost; 100,000 shares                                                         (756)                  -
                                                                                     -------------------    ------------------
          Total shareholders' equity                                                              15,260                19,301
                                                                                     -------------------      ------------------
Total liabilities and shareholders' equity                                              $         16,602         $      21,108
                                                                                     ===================      ==================

</TABLE> 
                             See accompanying notes.

                                      26
<PAGE>

                           SPACETEC IMC CORPORATION
                     CONSOLIDATED STATEMENT OF OPERATIONS

                     (in thousands, except per share data)
<TABLE> 
<CAPTION> 
                                                                 Year Ended March 31
                                                  ------------------------------------------------
                                                      1997              1996              1995
                                                  ------------      ------------      ------------ 
<S>                                               <C>               <C>               <C> 
Revenues                                          $     9,075       $     8,132       $     5,536
Cost of revenues                                        4,436             2,229             1,403
                                                  ------------      ------------      ------------ 
   Gross profit                                         4,639             5,903             4,133
Operating expenses:                                                                  
   Selling and marketing                                4,945             2,711             1,723
   Research and development                             2,916             1,684               890
   General and administrative                           1,726               803               834
                                                  ------------      ------------      ------------ 
      Total operating expenses                          9,587             5,198             3,447
                                                  ------------      ------------      ------------ 
Income (loss) from operations                          (4,948)              705               686
   Interest income                                       (632)             (278)              (95)
   Interest expense                                       -                 -                   9
                                                  ------------      ------------      ------------ 
Income (loss) before income taxes                      (4,316)              983               772
                                                                                     
Income tax provision (benefit)                           (594)              355               246
                                                  ------------      ------------      ------------ 
Net income (loss)                                 $    (3,722)      $       628       $       526
                                                  ============      ============      ============ 
                                                                                     
Net income (loss) per share                       $     (0.51)      $      0.10       $      0.09
                                                  ============      ============      ============ 
                                                                                     
Weighted average common shares outstanding              7,283             6,562             6,004
                                                  ============      ============      ============ 
</TABLE> 

                            See accompanying notes.

                                      27
<PAGE>
                            SPACETEC IMC CORPORATION
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                       (in thousands, except share data)


<TABLE> 
<CAPTION> 
                                                                 Series A                  Series B          
                                                              Preferred Stock           Preferred Stock       
                                                         -------------------------  -----------------------   
                                                             Shares       Amount       Shares      Amount    
                                                         -------------------------  -----------------------   
<S>                                                          <C>          <C>         <C>          <C> 
Balance at March 31, 1994                                    1,100,001    $  110      813,953      $   81    
    Issuance of Series A Preferred Stock upon
           exercise of options                                 162,000        16          -           -
    Issuance of Class B Common Stock upon                                                 -           -     
           exercise of options                                     -         -            -           -
    Repurchase and retirement of Common Stock                      -         -            -           -
    Issuance of Common Stock in exchange for                                              
           shares of Panacea, Inc.                                 -         -            -           -
    Net income                                                     -         -            -           -
                                                         -------------------------  -----------------------   
Balance at March 31, 1995                                    1,262,001       126      813,953          81    
    Issuance of Common Stock upon public           
           offering, net of underwriters' discount 
           and other offering costs of $1,916                      -         -            -           -    
    Conversion of Preferred Stock and Class B
           Common Stock upon public offering                (1,262,001)     (126)    (813,953)        (81)    
    Net Income                                                     -         -            -           -    
                                                         -------------------------  -----------------------   
Balance at March 31, 1996                                          -         -            -           -
    Issuance of Common Stock upon exercise
           of options                                              -         -            -           -                
    Payments to repurchase Common Stock                            -         -            -           -
    Additional offering costs                                      -         -            -           -
    Issuance of stock options                                      -         -            -           -
    Amortization of deferred compensation                          -         -            -           -
    Unrealized gain on available-for-sale                          -         -            -           -  
           securities                                              -         -            -           -   
    Net loss                                                       -         -            -           -    
                                                         -------------------------  -----------------------   
Balance at March 31, 1997                                          -      $  -            -        $  -    
                                                         =========================  =======================   
</TABLE> 
<TABLE> 
<CAPTION> 
                                                                                            Class B          
                                                                Common Stock              Common Stock       
                                                         -------------------------  -----------------------   
                                                             Shares       Amount       Shares      Amount    
                                                         -------------------------  -----------------------   
<S>                                                           <C>         <C>          <C>         <C> 
Balance at March 31, 1994                                     525,000     $    5       350,000     $   97
    Issuance of Series A Preferred Stock upon
           exercise of options                                    -          -             -          -
    Issuance of Class B Common Stock upon
           exercise of options                                    -          -          45,000         17
    Repurchase and retirement of Common Stock                  (1,000)       -             -          -
    Issuance of Common Stock in exchange for
           shares of Panacea, Inc.                             50,000          1           -          -
    Net income                                                    -          -             -          -
                                                          ----------------------- ------------------------
Balance at March 31, 1995                                     574,000          6       395,000        114
    Issuance of Common Stock upon public
           offering, net of underwriters' discount
           and other offering costs of $1,916               1,725,000         17           -          -
    Conversion of Preferred Stock and Class B
           Common Stock upon public offering                4,941,908         49      (395,000)      (114)
    Net Income                                                    -          -             -          -
                                                          ----------------------- ------------------------
Balance at March 31, 1996                                   7,240,908         72           -          -
    Issuance of Common Stock upon exercise
           of options                                         125,600          2           -          -
    Payments to repurchase Common Stock                           -          -             -          -
    Additional offering costs                                     -          -             -          -
    Issuance of stock options                                     -          -             -          -
    Amortization of deferred compensation                         -          -             -          -
    Unrealized gain on available-for-sale                         -          -             -          -
           securities                                             -          -             -          -
    Net loss                                                      -          -             -          -
                                                          ----------------------- ------------------------
Balance at March 31, 1997                                   7,366,508     $   74           -       $  -
                                                          ======================= ========================
</TABLE> 


                            See accompanying notes

                                      28
<PAGE>

                           SPACETEC IMC CORPORATION
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                       (in thousands, except share data)
<TABLE> 
<CAPTION> 
                                                                                                                 Retained
                                                                 Additional                    Unrealized        Earnings   
                                                                  Paid-in      Deferred          Gain on       (Accumulated 
                                                                  Capital    Compensation      Investments       Deficit)   
                                                                 ----------  ------------      -----------     ------------
<S>                                                              <C>         <C>               <C>             <C> 
Balance at March 31, 1994                                        $  1,839     $     -           $     -         $    535    
  Issuance of Series A Preferred Stock upon
    exercise of options                                                42           -                 -               -    
  Issuance of Class B Common Stock upon
    exercise of options                                                -            -                 -               -    
  Repurchase and retirement of Common Stock                            -            -                 -               -    
  Issuance of Common Stock in exchange for shares of
    Panacea, Inc.                                                      70           -                 -               -    
  Net income                                                           -            -                 -              526    
                                                                 ---------   ----------        ---------       ----------  
Balance at March 31, 1995                                           1,951           -                 -            1,061    
  Issuance of Common Stock upon public offering, net of                                                                    
    underwriters' discount and other offering costs of 
    $1,916                                                         15,317           -                 -               -    
  Conversion of Preferred Stock and Class B Common                                                                         
    Stock upon public offering                                        272           -                 -               -    
  Net Income                                                           -            -                 -              628    
                                                                 ---------   ----------        ---------       ----------  
Balance at March 31, 1996                                          17,540           -                 -            1,689    
  Issuance of Common Stock upon exercise of options                   384           -                 -               -    
  Payments to repurchase Common Stock                                  -            -                 -               -    
  Additional offering costs                                            (5)          -                 -               -    
  Issuance of stock options                                            50          (50)               -               -    
  Amortization of deferred compensation                                -            10                -               -    
  Unrealized gain on available-for-sale securities                     -            -                 46              -    
  Net loss                                                             -            -                 -           (3,722)          
                                                                 ---------   ----------        ---------       ----------  
Balance at March 31, 1997                                        $ 17,969     $    (40)         $     46        $ (2,033)    
                                                                 =========   ==========        =========       ==========   

<CAPTION> 
                                                                                           
                                                                        Treasury Stock         Total    
                                                                  ------------------------  Shareholders' 
                                                                     Shares        Amount      Equity
                                                                  ------------------------  ------------
<S>                                                               <C>            <C>        <C> 
Balance at March 31, 1994                                                -       $    -      $  2,667
  Issuance of Series A Preferred Stock upon
    exercise of options                                                  -            -            58
  Issuance of Class B Common Stock upon
    exercise of options                                                  -            -            17
  Repurchase and retirement of Common Stock                              -            -            -
  Issuance of Common Stock in exchange for shares of
    Panacea, Inc.                                                        -            -            71
  Net income
                                                                         -            -           526
                                                                  ------------------------  ----------
Balance at March 31, 1995                                                -            -         3,339
  Issuance of Common Stock upon public offering, net of 
    underwriters' discount and other offering costs of 
    $1,916                                                               -            -        15,334
  Conversion of Preferred Stock and Class B Common 
    Stock upon public offering                                           -            -            -
  Net Income                                                             -            -           628
                                                                  ------------------------  ----------
Balance at March 31, 1996                                                -            -        19,301
  Issuance of Common Stock upon exercise of options                      -            -           386
  Payments to repurchase Common Stock                              (100,000)        (756)        (756)
  Additional offering costs                                              -            -            (5)
  Issuance of stock options                                              -            -            -
  Amortization of deferred compensation                                  -            -            10
  Unrealized gain on available-for-sale securities                       -            -            46
  Net loss                                                               -            -        (3,722)
                                                                  ------------------------  ----------
Balance at March 31, 1997                                          (100,000)     $  (756)    $ 15,260
                                                                  ========================  ==========

</TABLE> 
                            See accompanying notes

                                      29
<PAGE>
                            SPACETEC IMC CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)

<TABLE> 
<CAPTION> 
                                                                                         Year Ended March 31
                                                                       -------------------------------------------------- 
                                                                             1997              1996             1995
                                                                       --------------    ---------------    -------------
<S>                                                                    <C>               <C>                <C>     
Operating activities                                                                            
Net income (loss)                                                      $       (3,722)   $           628    $         526
Adjustments to reconcile net income (loss) to net cash provided                                                   
   by (used in) operating activities:                                                                             
   Depreciation and amortization                                                1,063                557              189
   Deferred income taxes                                                         (220)                50               90
   Loss on disposal of assets                                                     488                  -                -
Changes in operating assets and liabilities:                                                                      
   Accounts receivable, net                                                      (173)              (840)            (436)
   Inventories                                                                 (1,309)              (215)             (59)
   Prepaid expenses and other assets                                               (5)              (221)             (57)
   Due from employees and officer                                                  53                (67)               1 
   Income taxes receivable                                                       (438)                 -                -    
   Accounts payable and accrued expenses                                         (208)               598              130 
   Deferred revenue                                                                63                (39)              51 
                                                                       --------------    ---------------    -------------
Net cash provided by (used in) operating activities                            (4,408)               451              435
Investing activities                                                                                             
Net change in securities available-for-sale                                     5,607            (14,120)            (500)
Purchase of furniture and equipment                                              (676)              (633)            (255) 
Purchase of intangible assets                                                    (171)              (129)            (452)  
Software development costs                                                       (224)              (425)            (269)  
                                                                       --------------    ---------------    -------------
Net cash provided by (used in) investing activities                             4,536            (15,307)          (1,476)
Financing activities                                                                                              
Proceeds from issuance of common stock, net of costs                                -             15,334                -
Proceeds from issuance of Class B Common Stock                                      -                  -               17 
Proceeds from issuance of Preferred stock                                           -                  -               58 
Proceeds from exercise of stock options                                           386                  -                - 
Stock repurchase                                                                 (756)                 -                -  
Additional offering costs                                                          (5)                 -                -  
Repayment of line of credit                                                         -                (65)               -
Repayment of capital lease obligation                                               -                 (3)              (5) 
                                                                       --------------    ---------------    -------------
Net cash provided by (used in) financing activities                              (375)            15,266               70
                                                                       --------------    ---------------    -------------
Net increase in cash and cash equivalents                                        (247)               410             (971)
Cash and cash equivalents at beginning of period                                  417                  7              978
                                                                       --------------    ---------------    -------------
Cash and cash equivalents at end of period                             $          170    $           417    $           7
                                                                       ==============    ===============    =============

Supplemental disclosure of cash flow information:     
   Income taxes paid                                                   $          336    $           220    $         242
                                                                       ==============    ===============    =============
   Interest paid                                                       $            -    $            15    $           9
                                                                       ==============    ===============    =============

Noncash investing and financing activities:                                                   
   Acquisition of Panacea, Inc. for common stock                                                            $          71
                                                                                                            =============
   Adjustment of Pancea Inc. purchase price                                              $            48
                                                                                         ===============                 
   Unrealized gain on available-for-sale securities                    $           46
                                                                       ==============    

</TABLE> 
                             See accompanying notes.

                                      30

<PAGE>
 
                           Spacetec IMC Corporation
                  Notes to Consolidated Financial Statements
                      Years Ended March 31, 1997 and 1996


1.  Basis of Presentation

Description Of Business

Spacetec IMC Corporation (the "Company") is a Massachusetts corporation,
organized in April 1991. The Company manufactures and markets real time three
dimensional ("3D") interactive motion control ("IMC") input hardware controllers
and integration software for the industrial CAD/CAM/CAE and consumer markets in
the domestic and international arenas.

Principles Of Consolidation

The consolidated financial statements include the accounts of the Company and
through March 1996, its wholly-owned subsidiary, Panacea, Inc. ("Panacea"). Upon
consolidation, all significant intercompany accounts have been eliminated.
Panacea was merged into the Company on March 22, 1996.

Risks And Uncertainties

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make significant estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions by
management affect the Company's allowance for doubtful accounts, reserve for
inventory obsolescence and certain accrued expenses. Actual results could differ
from those estimates.

2.  Significant Accounting Policies

Cash Equivalents and Securities Available-for-Sale

The Company considers all highly liquid financial instruments with a maturity at
the date of acquisition of three months or less to be cash equivalents. At March
31, 1997 and 1996, these securities consist principally of commercial paper and
debt securities maturing within one year or less. Given the short-term nature of
these investments and their availability for use in the Company's current
operations, these amounts are classified as "available-for-sale". Available-for-
sale securities are carried at fair market value and unrealized gains and losses
are reported as a separate component of shareholders' equity. Unrealized gains
included in shareholders' equity totaled $46,000 at March 31, 1997. At 
March 31, 1996, the fair market value of these investments approximated cost.

                                       31
<PAGE>
 
                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)


2.  Significant Accounting Policies - (Continued)

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents, securities
available-for-sale and trade receivables. Cash equivalents and securities
available-for-sale consist of temporary investments in money market funds with
maturity dates of three months or less when purchased, commercial paper and debt
securities with maturity dates of one year or less when purchased, and have
limited credit exposure.

Concentrations of credit risk with respect to trade receivables arise as a
significant portion of the Company's customer base is comprised of high
technology manufacturers. The Company had two customers representing
approximately 17% and 15% of 1997 sales, two customers representing
approximately 24% and 10% of 1996 sales and two customers representing
approximately 24% and 17% of 1995 sales. Although the Company's exposure to
credit risk associated with nonpayment by high technology manufacturers is
affected by conditions or occurrences within the high technology industry, trade
receivables from the high technology manufacturers were current at 
March 31, 1997. The Company's write-offs related to the collection of trade
accounts receivable amounted to $76,000 and $27,000 in 1997 and 1996,
respectively, and were immaterial in 1995.

Inventories

Inventories are stated at the lower of cost or market value. Cost is determined
using the first in, first out (FIFO) method.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets. The useful lives of furniture and equipment range from three to
seven years. Leasehold improvements are stated at cost and amortized over the
remaining life of the building lease.

Intangible Assets

Intangible assets consist of acquired technology, patents, license and
non-compete agreements. Acquired technology and patents are amortized on a
straight-line basis over three to five years. Non-compete agreements pertain to
payments in fiscal 1995 of $325,000 to certain former employees of Panacea.
Remaining amounts related to non-compete agreements are being amortized over the
terms of the respective agreements, which are five years.

Management periodically reviews the Company's intangible assets for impairment
based on an assessment of future operations to ensure that they are
appropriately valued.

                                       32
<PAGE>
 
                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)

2.  Significant Accounting Policies - (Continued)

Revenue Recognition

The Company accounts for software revenue in accordance with Statement of
Position 91-1, Software Revenue Recognition, issued by the American Institute of
Certified Public Accountants. Specifically, revenue from licenses to end-users
is recognized upon product shipment, provided post-sale vendor obligations are
insignificant. If vendor obligations are significant, revenue is deferred until
the obligations are fulfilled. Revenue from maintenance agreements is recognized
ratably over the term of the agreement.

The Company provides customers with a twelve month warranty from the date of
sale. Estimated warranty obligations are provided at the time of sale of the
Company's products based on historical and anticipated warranty costs. Warranty
costs during 1997, 1996 and 1995 were immaterial.

Research And Development Costs

Research and development costs are expensed as incurred. Software development
costs incurred after the establishment of technological feasibility and until
the product is available for general release are capitalized, provided
recoverability is reasonably assured.

Technological feasibility is defined as the establishment of a working prototype
or a detail program design. Amortization of software development costs is the
greater of the amount computed using (i) the ratio of current gross revenues to
the total of current and anticipated future gross revenues of each product or
(ii) the straight-line method over the expected useful life of the product,
which generally does not exceed three years. Amortization of software
development costs in 1997, 1996 and 1995 was approximately $654,000, $136,000
and $33,000, respectively, and is included in cost of sales. In 1997, management
determined that the recoverability of certain costs associated with the
capitalized software was uncertain and recorded a charge of $329,000 for the
write down of the software. This amount is included in amortization expense for
the year ended March 31, 1997.

Income Taxes

The Company provides for income taxes under the liability method prescribed by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred income taxes are recognized for the future
tax consequences of differences between the tax and financial accounting of
assets and liabilities at each year end. Deferred income taxes are based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to effect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

                                       33
<PAGE>
 
                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)


2.  Significant Accounting Policies - (Continued)

Stock-based Compensation

The Company has adopted the disclosure provisions only of Financial Accounting
Standards No. 123, "Accounting For Stock-based Compensation" ("FAS 123") and
will continue to account for its stock option plans in accordance with the
provisions of APB 25, Accounting for Stock issued to Employees. In certain
cases, options issued to non-employees are accounted for under FAS 123, and
compensation expense has been recognized.

Net Income/Loss Per Share

Net income/loss per share is computed using the weighted average number of
common shares and equivalents outstanding during each period. Common stock
equivalents are excluded from the computation when their effect is
anti-dilutive.

Recent Accounting Pronouncements

In February 1997, the Financial Accounting Standards Board issued Statement of 
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").  
SFAS 128 is effective for financial statements issued for periods ending after 
December 15, 1997, including interim periods and earlier application is not 
permitted.  The pro forma effect of adopting SFAS 128 for the period ending 
March 31, 1997 and 1996 is not material.

Reclassifications

Certain amounts in prior year financial statements have been reclassified to
conform with current classifications.

3.  Acquisition

On January 1, 1995, the Company issued 50,000 shares of its Common Stock to a
former shareholder of Panacea in exchange for all outstanding shares of Panacea.
This transaction has been accounted for as a purchase. The fair value of the
issued shares totaled $71,000 and has been allocated to the fair market value of
the assets acquired and liabilities assumed with any excess applied to goodwill
(approximately $71,000). The results of operations of Panacea have been included
in the consolidated financial statements from the date of acquisition. 

4.  Inventories

Inventories consist of the following:
<TABLE> 
<CAPTION> 
                                                 March 31,
                                         1997               1996
                                    --------------------------------
                                               (in thousands)
<S>                                     <C>                 <C> 
Materials                               $1,133              $150
Work-in-process                             31               136
Finished goods                             554               123
                                    --------------------------------
                                        $1,718              $409
                                    ================================
</TABLE> 

                                       34

<PAGE>
 
                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)

5.  Accounts Payable And Accrued Expenses

Accounts payable and accrued expenses consist of the following:
<TABLE> 
<CAPTION> 
                                                    March 31
                                         -----------------------------
                                            1997               1996
                                         -----------------------------
                                                 (in thousands)
<S>                                         <C>               <C> 
Trade payables                              $1,055            $1,124
Commission and royalties                       130               247
Accrued compensation                            27                 -
Income taxes                                     -                80
Other                                           55                24
                                         -----------------------------
                                            $1,267            $1,475
                                         =============================
</TABLE> 

6.  Commitments

Operating Leases

The Company leases office equipment and certain office space under various
agreements which expire through the fiscal year 2001. The agreement pertaining
to office space is subject to rent escalation clauses. Future minimum lease
payments under these noncancelable operating lease agreements are as follows:
<TABLE> 
              <S>                                  <C> 
              Year
              ----
              1998                                    $ 266,000
              1999                                      283,000
              2000                                      282,000
              2001                                       71,000
                                                   ---------------

                                                      $ 902,000
                                                   ===============
</TABLE> 

Total rent expense for the years ended March 31, 1997, 1996 and 1995 amounted to
approximately $272,000, $136,000 and $79,000, respectively.

Royalty Agreements

In May 1991, the Company entered into a royalty agreement (the "Agreement") with
a shareholder of the Company. Pursuant to the Agreement, the Company is obliged
to pay one-half of one percent (0.5%) of all net revenues received by the
Company with respect to technology covered by certain existing patents which
relate to the Company's hardware products. The Agreement will remain in effect
until the last of such patents expire.

                                       35

<PAGE>
 
                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)


6.  Commitments - (Continued)

Pursuant to the acquisition of Panacea (Note 3), the Company is obligated to pay
royalties on net revenues received from the sales of certain of the Company's
products which contain purchased technology. Royalties are paid at fifteen
dollars per five hundred seats sold on one product and at eight percent (8%) of
net revenues for another product.

The Company incurred royalty expenses of approximately $74,000, $67,000 and
$24,000 under these agreements in fiscal years 1997, 1996 and 1995,
respectively.

7.  Segment Information And Export Sales

The Company operates in one industry segment: the manufacturing and marketing of
real time 3D IMC hardware input controllers and integration software for the
industrial CAD/CAM/CAE and consumer electronics market. Export sales, all of
which are denominated in U.S. dollars, totaled approximately 26%, 36% and 31% of
total sales, for the years ended March 31, 1997, 1996 and 1995, respectively.

8.  Income Taxes

The provision for income taxes consists of the following:
<TABLE> 
<CAPTION> 
                                       Years ended March 31
                            -------------------------------------------
                                 1997           1996          1995
                            -------------------------------------------
                                   Deferred Method          Liability
                                                            Method
                                            (in thousands)
<S>                               <C>           <C>           <C>   
Currently payable:
   Federal                        $(318)        $265          $132
   State                            (56)          40            24
                            -------------------------------------------
                                   (374)          305           156
Deferred:
   Federal                         (187)          42            68
   State                            (33)           8            22
                            -------------------------------------------
                                   (220)          50            90
                            -------------------------------------------
                                  $(594)        $355          $246
                            ===========================================
</TABLE> 

                                       36
<PAGE>
 
                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)

8.  Income Taxes - (Continued)

A reconciliation of the federal statutory rate to the effective income tax rate
follows:
<TABLE> 
<CAPTION> 
                                                Years ended March 31
                                         ------------------------------------
                                            1997        1996       1995
                                         ------------------------------------
<S>                                        <C>          <C>       <C> 
Tax at federal statutory rate              (34.0)%      34.0%     34.0%
State taxes, net of federal benefit         (6.0)        6.3       6.3
Research and development credits            (4.1)       (4.7)     (8.4)
Other, net                                   (.1)         .5        -
Increase in valuation allowance             30.4          -         -
                                         ------------------------------------
                                         
                                           (13.8)%      36.1%     31.9%
                                         ====================================
</TABLE> 

Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE> 
<CAPTION> 
                                                         March 31
                                             --------------------------------
                                                    1997          1996
                                             --------------------------------
                                                       (in thousands)
<S>                                                 <C>           <C> 
Deferred tax assets:
   Net operating loss carryforward                  $ 568         $ -
   R&D credit carryforward                            367           -
   Inventory obsolescence reserve                     290          31
   Allowance for doubtful accounts                     59          32
   Accrued vacation                                    19          37
   Deferred revenue                                    30           -
   Uniform capitalization                               5          16
   Covenant not to compete                             48          31
   Other                                               (3)          3
   Valuation allowance                             (1,156)          -
                                             --------------------------------
                                                      227         150

Deferred tax liabilities:
   Software development costs                        (132)       (274)
   Patents                                            (50)        (79)
   Tax over book depreciation                         (45)        (17)
                                             --------------------------------
   Total deferred tax liabilities                    (227)       (370)
                                             --------------------------------
                                                    $   -       $(220)
                                             ================================
</TABLE> 

                                       37
<PAGE>
 
                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)


9.  Related Party Transactions

During the fiscal years 1997, 1996, and 1995, the Company sold its products to
Spatial Systems, Limited, a shareholder of the Company whose Chairman is also a
Director of the Company. Sales to Spatial Systems Limited for the years ended
March 31, 1997, 1996, and 1995, amounted to approximately $278,000, $140,000,
and $110,000, respectively. Accounts receivable at March 31, 1997, 1996 and 1995
from Spatial Systems Limited were approximately $149,000, $79,000 and $28,000,
respectively.

10. Capital Stock

On March 31, 1995, the Board of Directors approved a two-for-one stock split in
the form of a dividend to Class A Common shareholders on record on March 31,
1995. In September 1995, the Board of Directors approved an amendment to the
Company's Articles of Organization to (i) authorize 8,500,000 shares of Common
Stock, $0.01 par value ("Common Stock"); (ii) convert each outstanding share of
Class A Common to a share of Common Stock; (iii) eliminate the authorized shares
of Class A Common and (iv) to provide for the automatic conversion of each share
of nonvoting Class B Common Stock to two shares of Common Stock and eliminate
the authorized shares of Class B Common Stock upon the Company's initial public
offering. All references to capital stock, shares and per share amounts have
been restated to retroactively reflect the stock split and terms of the
amendment. Also in September 1995, the Company's Board of Directors approved a
restatement and further amendment to the articles of organization to replace the
authorized capital stock with 20,000,000 shares of Common Stock, $0.01 par value
and 1,000,000 shares of preferred stock, $0.01 par value, effective upon the
closing of the Company's initial public offering. Both amendments were approved
by the Company's shareholders on October 6, 1995 with the first becoming
effective on October 12, 1995, and the second on December 6, 1995.

As a result, with the closing date of the Company's initial public offering in 
Decmeber 1995, each share of the Company's Series A Preferred Stock and 
Series B Preferred Stock automatically converted into two shares of the
Company's Common Stock and the authorized shares associated with the Series A
and B Preferred Stock were eliminated. (Net proceeds of the public offering,
after deduction of $1,916,000 for underwriters' fees and other offering costs,
amounted to $15,334,000.)

                                       38
<PAGE>
 
                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)


10. Capital Stock - (Continued)

In July 1996, the Board of Directors authorized the repurchase, from time to
time, of up to 100,000 shares of the Company's Common Stock. Repurchases under
this program were completed in December 1996 at a cost of $756,000. 

11. Stock Options

On December 4, 1996, the Board of Directors of the Company adopted, subject to
shareholder approval, the Amended and Restated 1995 Director Stock Option Plan
(the "Director Plan)" in which all directors who are not employees of the
Company (the "Eligible Directors") participate. The Company has reserved 225,000
shares of Common Stock for issuance under the Director Plan. Upon initial
election to the Board of Directors, each new Eligible Director is to be granted
an option to purchase 10,000 shares of Common Stock. On each December 31st
thereafter, any eligible director serving as such on that date will be granted
options ("Annual Options") to purchase 10,000 shares. Options become exercisable
with respect to 3,000 shares on the date of grant, 3,000 shares on the second
anniversary of the date of grant and 4,000 shares on the third anniversary of
the date of grant, if the optionholder is a member of the Board at the opening
of business on that date. The options have a term of ten years and an exercise
price equal to the fair market value of the Common Stock on the date of grant.
In addition to the Annual Options, the Director Plan allowed for the grant of
20,000 options to each of two current directors and 14,000 options to a third
director ("Initial Options"). The Initial Options become exercisable with
respect to 30% on the date of grant, 30% on the second anniversary of the date
of grant, and 40% on the third anniversary of the date of grant.

The Company's Amended and Restated 1993 Stock Option Plan (the "1993 Plan") was
readopted by the Board of Directors on September 29, 1995. The 1993 Plan
authorized the grant of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended ("ISOs") and non-qualified
stock options. The 1993 Plan allows for the purchase of an aggregate of
1,600,000 shares (subject to adjustment for stock splits and similar capital
changes) of common stock to employees of the Company and, in the case of
non-qualified stock options, to consultants of the Company or any Affiliate (as
defined in the 1993 Plan) capable of contributing to the Company's performance.
The Board of Directors has appointed the Compensation Committee to administer
the Plan.

The purchase price per share of stock deliverable upon the exercise of a stock
option is determined by the Compensation Committee provided that the exercise
price for ISOs shall not be less than the fair market value of the stock on the
date of grant. Each option granted under the Plan is exercisable either in full
or in installments as set forth in each recipient's option agreement. Incentive
stock options generally vest over a five-year period. All options expire ten
years after the date of grant.

                                       39
<PAGE>
 
                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)

11. Stock Options - (Continued)

Pursuant to the requirements of FAS 123, the following are the pro forma net
income or loss and net income or loss per share for the years ended March 31,
1997 and 1996, as if the compensation expense for the options plans had been
determined based on the fair value at the grant date for grants during fiscal
years 1997 and 1996, consistent with the provisions of FAS 123:
<TABLE> 
<CAPTION> 
                                                     1997                                   1996
                                      ----------------------------------     ----------------------------------
                                         As Reported       Pro Forma           As Reported        Pro Forma
                                      ----------------- ----------------     ---------------- -----------------
<S>                                        <C>              <C>                     <C>               <C> 
Net income (loss) (in 000's)........       $(3,722)         $(4,335)                 $628               $86
Net income (loss) per share.........        $(0.51)          $(0.60)                $0.10             $0.01
</TABLE> 

The fair value of options granted under the Company's stock option plans was
estimated using the Black-Scholes multiple option model with the following
assumptions:
<TABLE> 
<CAPTION> 
                                                       1997           1996
                                                ---------------- ---------------
<S>                                              <C>              <C> 
Expected term in years (from vest
       date)................................         1.0              1.0
Volatility..................................        70.0%            70.0%
Interest rate...............................      5.92%-6.30%     4.63%-6.27%
</TABLE> 

The Company has never declared nor paid dividends on any of its capital stock
and does not expect to in the foreseeable future.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

The effects on 1997 and 1996 pro forma net income or loss per share of expensing
the estimated fair value of stock options are not necessarily representative of
the effects on reporting the results

                                       40
<PAGE>
 
                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)


11.  Stock Options - (Continued)

of operations for future years as the periods presented include only one and two
years of option grants under the Company's plans.

The following table presents the combined activity of the 1993 Plan and the
Director Plan for the years ended March 31, 1997 and 1996:

<TABLE> 
<CAPTION> 
                                                               1997                                   1996
                                                -----------------------------------    -----------------------------------
                                                                     Weighted                                Weighted        
                                                                     Average                                 Average   
                                                                     Exercise                                Exercise
                                                       Shares         Price                   Shares          Price
                                                -----------------------------------    -----------------------------------
<S>                                                   <C>            <C>                     <C>             <C> 
Outstanding beginning of period............           873,050         $4.05                  183,000          $0.61
   Granted.................................           267,150          6.90                  708,550           4.97
   Canceled................................          (141,730)         5.83                  (18,500)          6.10
   Exercised...............................          (125,600)         3.07                     -               -
                                                -----------------------------------    -----------------------------------
Outstanding at end of year.................           872,870         $4.76                  873,050           $4.05
                                                ===================================    ===================================

Options exercisable at year end............           225,904         $3.47                  162,000           $2.58
                                                ===================================    ===================================

Available for grant at end of year                    826,530                                951,950
                                                =================                      =================

Weighted average fair value per share of
options granted during the year                                       $3.44                                    $2.61
                                                                 ==================                     ==================

</TABLE> 

                                       41
<PAGE>

                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)

 
11.  Stock Options - (Continued)

The following table presents weighted average price and life information for
significant option groups outstanding at March 31, 1997:

<TABLE> 
<CAPTION> 

                                         Options Outstanding                                 Options Exercisable
                   -----------------------------------------------------------      -------------------------------------
                                           Weighted              Weighted                                  Weighted        
                                           Average               Average                                   Average           
    Range of            Number             Remaining             Exercise                Number            Exercise
 Exercise Prices     Outstanding           Life (yrs)             Price                Exercisable          Price
------------------------------------------------------------                        -------------------------------------
 <S>                 <C>                   <C>                   <C>                   <C>                 <C> 
 $0.05-  $1.10           163,200                     6.17           $0.63                    77,600            $0.57
 $2.84-  $3.12           217,500                     7.32           $2.88                    68,700            $2.87
 $4.00-$11.00            492,170                     9.07           $6.98                    79,604            $6.81
                   --------------                                                   ---------------- 
                         872,870                                                            225,904
                   ==============                                                   ================ 

</TABLE> 

12.  Employee Stock Purchase Plan

In September 1995, the Company approved an Employee Stock Purchase Plan (the
"Purchase Plan") under which employees may purchase shares of Common Stock at a
discount from fair market value. There are 100,000 shares of Common Stock
reserved for issuance under the Purchase Plan. To date, there have been no
shares issued under the Plan. The Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Internal
Revenue Code. Rights to purchase Common Stock under the Purchase Plan are
granted at the discretion of the Compensation Committee, which determines the
frequency and duration of individual offerings under the Plan and the dates when
stock may purchased. Eligible employees participate voluntarily and may withdraw
from any offering at any time before stock is purchased. Participation
terminates automatically upon termination of employment. The purchase price per
share of Common Stock in an offering is 85% of the lesser of its fair market
value at the beginning of the offering period or on the applicable exercise date
and may be paid through payroll deductions, periodic lump sum payments or a
combination of both. The Purchase Plan terminates on September 29, 2005. The
first offering period commenced April 1, 1997.

                                       42
<PAGE>


                           Spacetec IMC Corporation
            Notes to Consolidated Financial Statements (continued)

 
13.  Subsequent Events

Stock Option Repricing

On April 11, 1997, the Board of Directors approved a repricing of all options
granted to current employees of the Company. Options meeting qualification were
repriced at $3.25 per share which equaled the fair market value of the Company's
Common Stock on that date.

Stock Repurchase

On May 15,1997, the Board of Directors authorized the repurchase of up to
1,000,000 shares of the Company's Common Stock.

                                       43
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

         None.

                                    PART III


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          The response to this item is contained in part under the caption
"Executive Officers of the Registrant" in Part I, Item 1A hereof and the
remainder is incorporated herein by reference from the discussion responsive
thereto under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement relating to its
Annual Meeting of Stockholders scheduled for September 1997 (the "Proxy
Statement").

ITEM 11.  EXECUTIVE COMPENSATION

         The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Share Ownership" in the Proxy
Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption, "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement.

                                       44
<PAGE>
 
                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(A)  1. FINANCIAL STATEMENTS

           The financial statements are listed under Item 8 of this report.

     2. FINANCIAL STATEMENT SCHEDULES

           Schedule II   Valuation and Qualifying Accounts

           All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been 
omitted.

     3. EXHIBITS

           The exhibits are listed below under Part IV, Item 14(c) of this
report.

(B)  REPORTS ON FORM 8-K

     No reports on Form 8-K were filed during the fourth quarter of fiscal 1997.


(C)      EXHIBITS

<TABLE> 
<CAPTION> 

Number             Footnote                      Description
--------------------------------------------------------------------------------
<S>                <C>                     <C> 
 3.1                     1                 Restated Articles of Organization.

 3.3                     2                 Restated By-Laws of Registrant.

 4.1                     3                 Specimen certificate for shares of
                                           Common Stock of the Registrant.

10.1                     3                 Amended and Restated Stock Option
                                           Plan.*

10.2                                       Amended and Restated 1995 Director 
                                           Stock Option Plan.* Filed herewith.

10.3                     3                 1995 Employee Stock Purchase Plan.*

10.4                     4                 Real Estate Lease Agreement between
                                           the Registrant and Wannalancit Office
                                           and Technology Center Trust dated
                                           April 19, 1991, as amended.

10.5                     5                 Sublease Agreement between the
                                           Registrant and TRC Environmental
                                           Corporation dated December 26, 1995.

10.6                     5                 Recognition, Non-Disturbance and
                                           Attornment Agreement between the
                                           Registrant and Historic Boott Mill
                                           Limited Partnership dated December
                                           26, 1995.

</TABLE> 

                                       45
<PAGE>
 

10.7                      3                 Royalty Agreement dated May 29, 1991
                                            between the Registrant and John A.
                                            Hilton.*

10.8                      3                 License Agreement dated May 29, 1991
                                            between the Registrant and Spatial
                                            Systems Ltd.

10.9                      3                 Form of indemnification agreement
                                            between the Registrant and each of
                                            its directors.

10.10                   3,6                 Resale Agreement dated as of May 1,
                                            1991 between the Registrant and
                                            Electronic Data Systems Corporation
                                            (as successor to McDonnell Douglas
                                            Corporation), as amended by
                                            Amendment No. 1 dated December 23,
                                            1993 and Amendment No. 2 dated
                                            October 6, 1994.

10.11                   3,6                 Distribution and Marketing Agreement
                                            dated April 28, 1994 between the
                                            Registrant and Sumisho Electronic
                                            Devices Corporation.

10.12                     3                 Adoption Agreement for Aetna Life
                                            Insurance and Annuity Company
                                            Standardized 401(k) Profit Sharing
                                            Plan and Trust (Spacetec IMC
                                            Corporation 401(k) Plan) dated June
                                            7, 1995.*

10.13                     3                 Form of Confidentiality and
                                            Inventions Agreement between the
                                            Registrant and its employees.

10.14                     3                 Form of Non-Disclosure Agreement
                                            between the Registrant and its
                                            consultants.

10.15                     3                 Guaranty by Dennis T. Gain dated
                                            April 19, 1991 of the Registrant
                                            under the real estate lease filed as
                                            Exhibit 10.4.

10.16                   5,6                 Basic Order Agreement between the
                                            Registrant and Digital Equipment
                                            Corporation dated March 19, 1996.

11.1                                        Statement Re: Computation of Per
                                            Share Earnings (Loss). Filed
                                            herewith.

21.1                                        Subsidiary of the Registrant. Filed
                                            herewith.

23.1                                        Consent of Ernst & Young LLP. Filed
                                            herewith.

27.1                                        Financial Data Schedule. Filed
                                            herewith.

99.1                                        Important Factors Regarding Forward-
                                            Looking Statements. Filed herewith.
--------------------------------


                                       46
<PAGE>
 
*   Identifies a management contract or compensatory plan or an agreement in
which an executive officer or director of the Company participates.

(1) Filed as Exhibit 3.2 to the Spacetec IMC Corporation Registration Statement
 on Form S-1 (Commission File No. 33-98064) and incorporated herein by
 reference.

(2) Filed as Exhibit 3.4 to the Spacetec IMC Corporation Registration Statement
 on Form S-1 (Commission File No. 33-98064) and incorporated herein by
 reference.

(3) Filed as an exhibit with the same number to the Spacetec IMC Corporation
 Registration Statement on Form S-1 (Commission File No. 33-98064) and
 incorporated herein by reference.

(4) Filed as Exhibit 10.5 to the Spacetec IMC Corporation Registration Statement
 on Form S-1 (Commission File No. 33-98064) and incorporated herein by
 reference.

(5) Filed as an exhibit with the same number to the Spacetec IMC Corporation
 Annual Report on Form 10-K for the fiscal year ended March 31, 1996 and
 incorporated herein by reference.

(6) Certain confidential material contained in the document has been omitted and
 filed separately with the Securities and Exchange Commission pursuant to Rule
 406 of the Securities Act of 1933, as amended, and Rule 24b-2 of the Securities
 Exchange Act of 1934, as amended.

                                       47
<PAGE>
 
                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on behalf of
the undersigned.


                            SPACETEC IMC CORPORATION



Dated:            June 27, 1997
                                                  By:/s/ Dennis T. Gain
                                                     -------------------------
                                                     Dennis T. Gain, President

<TABLE> 
<CAPTION> 


         Signature                          Title                                      Date
         ---------                          -----                                      ----

<S>                                <C>                                             <C> 
/s/ Dennis T. Gain                 President, Chief Executive Officer              June 27, 1997
------------------------------     and Chairman of the Board of           
Dennis T. Gain                     Directors (Principal Executive Officer) 
                                                                           

/s/ Neil M. Rossen                 Chief Financial Officer, Senior                 June 27, 1997
------------------------------     Vice President of Finance          
Neil M. Rossen                     (Principal Financial and Accounting 
                                   Officer)                            
                                                                       

/s/ Morton E. Goulder              Director                                        June 27, 1997
------------------------------
Morton E. Goulder

/s/ J. Grant Jagelman              Director                                        June 27, 1997
------------------------------      
J. Grant Jagelman

 /s/ Jerry H. Loyd                 Director                                        June 27, 1997
------------------------------          
Jerry H. Loyd

/s/ Patrick J. Sullivan            Director                                        June 27, 1997
------------------------------               
Patrick J. Sullivan

</TABLE> 

                                       48
<PAGE>
 
                           SPACETEC IMC CORPORATION
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                  Years ended March 31, 1997, 1996, and 1995
                                (in thousands)

<TABLE> 
<CAPTION> 

                            Balance at    Charge to                  Balance at
                            Beginning     Costs and                    End of
                            of Period     Expenses      Write-offs     Period   
                            ---------------------------------------------------

<S>                         <C>           <C>           <C>          <C> 
1997
Allowance for doubtful
accounts                       $80           $71           $76           $75

1996
Allowance for doubtful
accounts                       $10           $97           $27           $80

1995
Allowance for doubtful
accounts                       $ 7           $ 3           $ -           $10
</TABLE>